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Business Creation

Ten Factors for Entrepreneurial Success

Paul D. Reynolds

Business creation, or entrepreneurship, is a major source of national economic growth and adaptation as well as an important career choice for millions. In this insightful book, Paul D. Reynolds presents an overview of the major factors associated with contemporary business creation, reflecting representative samples of US early stage nascent ventures, and emphasizing the unique features of the two-fifths that achieve profitability.
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Paul D. Reynolds

On October 28, 2003 Harvard students could use “Facemash” to compare which photos of two undergraduates were “hot” or “not hot.” Developed as personal project by Mark Zuckerberg it was followed by several other efforts that led to the implementation of “Thefacebook” on February 4, 2004; this provided students a mechanism for internet based social interaction. A five person start-up team embellished the potential for interaction and expanded access to other universities, high schools and eventually anybody over 13 years old. When the first public offering was initiated in 2012, “Facebook” reported annual revenue of $5 billion, yearly profits of $53 million, one billion users, and 4,619 employees.1 Convinced that a properly designed website could provide an efficient and economical interface between citizens and government agencies, high school buddies Kaleil Tuzman and Tom Herman used seed money from Herman’s mother to implement “Govworks.com” to process parking tickets in May 1999. A four person start-up team led the website development and within 18 months “Govworks.com” raised $70 million to support 250 employees. Out maneuvered by competitors such as “ezgov. com,” unable to manage the complex technical issues, and confronted with a dramatic decline in stock market valuations of internet based initial public offerings, by January 2001 the remnants of the firm were sold for $12 million.

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Paul D. Reynolds

People that start successful businesses are among the most satisfied in the economy. The billionaire entrepreneurs featured in the media are clearly pleased with their success and attention, brimming with self-confidence and optimism. Perhaps even more significant is the growing body of research indicating that business owners and entrepreneurs are more satisfied with their work careers than wage and salary workers; this is true at all levels of occupational sophistication. Examples of the satisfaction from creating a profitable business are described below: Mary (26 years old) is very satisfied with the experience of working with four partners, three men (30, 53 and 38 years old) and one other woman (50 years old). All with five to 35 years of work experience and two who had been involved in three or more start-ups. They joined the effort with equal shares in a new pet boarding business and planned on maximizing growth by serving local customers. Noticing a strong demand for the service at the same time as an interest in business creation developed, the team began to develop the business idea. Six months later work began on a business plan, including defining the market to be served, creating financial projections, organizing the start-up team, and investing personal funds in the development of the business. After 12 months, promotion of the venture was initiated, capital assets were acquired, supplies were purchased (some with supplier credit), external funding was pursued, and the chief operating officer began to devote full-time to the business. After 24 months employees were hired and income was received from providing the services. By 40 months the monthly income covered recurring expenses and the salaries of the owner–management team. At last contact the firm had 23 employees and appeared to have a promising future. Mary, who had moved into the state three years before getting involved in business creation, has many reasons to be very satisfied with her life.

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Paul D. Reynolds

Who gets involved in business creation? Everybody. No one is excluded. Those involved include men and women of all ages, from all ethnic groups, and from all backgrounds. At any given time, about 16.3 million, 9.5 million men and 6.8 million women, are involved in trying to start a new business in the United States. As the typical start-up is a team effort, this is about 9.8 million business ventures. Two issues are relevant. The tendency of different individuals to get involved and the absolute number that are active. The bars in Figure 3.1 represent participation rates, number per 100, and the line the total counts, from 200,000 to 2.4 million. As shown by the bars, participation is about twice as high for men compared to women. The most active group are men 35 to 44 years old, about one in eight (12%) are active in business creation. The most active women are their age peers, but only one in 12 (8%) are involved. At the other extreme are those men and women 65 to 74 years old, where one in 35 (2.9%) are nascent entrepreneurs. While this is 4% of the total, it does represent hundreds of thousands of individuals.

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Paul D. Reynolds

The corporate world has been very restrictive so Barbara wants to develop her own practice as a career and executive coach. She likes helping people achieve their goals on a personal level. She can be more helpful if she can coordinate all her skills and methodologies. Barbara just completed an MA and gets a lot of positive feedback from those she helped. With a network of experienced colleagues there is access to a lot of expertise for difficult issues.1 George says he is too old to start a retirement plan and doesn’t want to be in a dark corner eating cat food and peeing on himself when he is 70. With several patents, including one for processing digital audio tapes that is unique and useful for those replacing VHS tapes, he sees a competitive advantage. George is starting Smith-Rogers Audio Productions to develop and market this hardware and promote musical talent.

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Paul D. Reynolds

Business creation is inherently a social activity. The persistent myth of the solo economic gunslinger—taking on all comers in a competitive shootout—is just that, a myth. Few activities require more human contacts with customers, partners and employees, suppliers, supportive family and mentors, financiers, regulators and, to some extent, competitors. The start-up team and these social networks may be involved in close social relationships. There are two ways to consider the start-up teams working with nascent ventures. The size and structure of start-up teams experienced by 16 million nascent entrepreneurs is presented in Figure 5.1, reflecting adjustments to compensate for different amounts of time in the start-up process.

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Paul D. Reynolds

Entrepreneurial ventures offering new things, such as ride-sharing or cheap online access to movies, get a lot of attention. But the vast majority of start-ups enter established markets with substantial competition. This provides a major dilemma for nascent entrepreneurs. Established firms are not eager to share customers. Knowing how to manage a firm as a successful competitor is one of the critical components for success. There are several ways to develop this expertise. One is to work in the industry in which the new firm will compete. Another is to take classes, seminars, or workshops to develop expertise in how to implement and manage a new firm. A third option is to get help and assistance from the large variety of agencies and services currently available for those creating new businesses. All these strategies for developing entrepreneurial skills have a positive effect. Virtually all, over 99%, of nascent ventures can be assigned to an existing economic sector. This is a strong indicator that they will have competitors, businesses that were the basis for defining these market sectors. The proportion of these start-ups in each sector are compared with existing businesses in Table 6.1. Counts of existing businesses come from two sources. One provides a count of sole proprietorships based on individual federal tax returns. The other a count of firms with employees based on federal social security payments. There are some variations in the proportions in each sector. For example, there are more firms with employees (8% of the total) in food services (restaurants) than sole proprietorships (1%); it is hard to be a one-person restaurant.

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Paul D. Reynolds

How do nascent entrepreneurs create a business? They do things! Popular start-up activities are summarized in Table 7.1. They are ordered by the proportion of nascent ventures where they have been initiated. The rightmost column indicates those that occurred in the first month of the start-up process. While many more start-up activities could be added, these are many of the most common and important.1 Some activities are clearly more popular than others. Everybody gives serious thought to their nascent venture; it is reported by all those active in business creation. But serious thought is not action, and many talk the talk but don’t even take the first steps to walk the walk. Hence, it is more useful to focus on what is done to create a new firm. These activities, however, vary in character. Some are a one-time event, such as establishing a business phone number or registration with a government agency, while others are a continuous activity, such as developing financial projections or promotion of the products, which may be adjusted as additional information becomes available. For this reason, the focus is on tracking initiation of a start-up activity, not when it is completed.

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Paul D. Reynolds

Asked about the major problems they confront, entrepreneurs respond as follows: Early on it was hard for Jason to get partners or investors to take his internet business seriously.1 Getting permits and approvals to provide fuel service for Hobart’s River Marina has taken some time. The main supplier is a Caribbean oil company and they operate on different timetables.2 There is a lack of capital to promote wooden pens for deer and moose. A human-interest television news show on Pens and Puzzles had a spot that improved Christmas sales.3 I found a place for a Ralph’s Pretty Good Groceries and got some people to help fix it up but after 3 weeks they never came back; then there were problems with the electricity.4 Martin started by getting a business license for his publishing company. Then he started getting calls before he was ready to deliver the product. Martin is now trying to complete the first project so he can accept new clients.5 Margaret is still working full-time and starting a bee keeping operation was demanding more money and time than she expected; it is hard to grow the business when you are short on resources.6 When asked about their major challenges, almost two-fifths (38%) of the nascent entrepreneurs mention operational issues and a third (33%) mention obtaining financial support, as shown in Table 8.1. Third on the list is attracting customers, which includes dealing effectively with the competition, mentioned by one quarter (26%). Only one in 33 (3%) expect personal or family issues as a major complication at the beginning of the process. None mentions the potential attraction of other career opportunities. The overwhelming focus is on problems related to establishing the nascent venture.

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Paul D. Reynolds

Starting a firm requires some personal investments. Start-up teams expect to invest time and money in a nascent venture before it will be profitable. While every start-up reflects a unique business idea and the social and economic context may vary widely, it is useful to consider the range of investments reported by those in the start-up process. The range of contributions of time and money is considered in relation to outcomes, followed by a discussion of factors that may affect the amount of the investments. While the amounts for individual ventures may be modest, the total annual investments for ten million start-ups being initiated by eighteen million nascent entrepreneurs in 2016 is considerable: about three and a half million work years and $200 billion.1 How much work is required to start a new firm? The average time invested in those ventures that reach profitability is about 1,500 person-hours, or 38 person-weeks of full-time work, presented in the top panel of Figure 9.1. But the distribution is very skewed. About half take less than 560 person-hours, the median value. A small proportion take considerable investments. About one in 11 (9%) absorb over 4,000 person-hours and the maximum in this cohort is 22,800 person-hours, over ten years of full-time work.