This page intentionally left blank Entrepreneurship Second Edition William Bygrave Babson College Andrew Zacharakis Babson College John Wiley & Sons, Inc. To Frederic C. Hamilton and John H. Muller, Jr., pioneers, entrepreneurs, and benefactors of Babson College. VICE PRESIDENT AND PUBLISHER GEORGE HOFFMAN EDITOR LISE JOHNSON EDITORIAL ASSISTANT SARAH VERNON MARKETING MANAGER KAROLINA ZARYCHTA PHOTO EDITOR HILARY NEWMAN DESIGNER RDC PUBLISHING GROUP SDN BHD PRODUCTION MANAGER JANIS SOO SENIOR PRODUCTION EDITOR JOYCE POH Cover image © panorios/iStockphoto This book was set in 10.5/12pt Adobe Garamond by Laserwords Private Limited and printed and bound by RR Donnelley. The cover was printed by RR Donnelley. This book is printed on acid free paper. Founded in 1807, John Wiley & Sons, Inc. has been a valued source of knowledge and understanding for more than 200 years, helping people around the world meet their needs and fulfill their aspirations. 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Upon completion of the review period, please return the evaluation copy to Wiley. Return instructions and a free of charge return shipping label are available at www.wiley.com/go/returnlabel. Outside of the United States, please contact your local representative. Library of Congress Cataloging-in-Publication Data Bygrave, William D., 1937- Entrepreneurship / William D. Bygrave. – 2nd ed. p. cm. Includes index. ISBN 978-0-470-45037-6 (pbk.) 1. New business enterprises. 2. Enterpreneurship. 3. Small business–Management. I. Zacharakis, Andrew. II. Title. HD62.5.B938 2010 658.421–dc22 2010027088 Printed in the United States of America 10987654321 CONTENTS Preface vii 3 Opportunity Recognition, Shaping, and Reshaping 83 1 The Power of Entrepreneurship 1 From Glimmer to Action: How Do I Come Up with a Good Idea? 84 Entrepreneurship and Small Business in the United Finding Your Passion 84 States 2 Idea Multiplication 85 Entrepreneurial Revolution 4 Is Your Idea an Opportunity? 89 Web: Three Revolutions Converge 8 The Customer 89 Entrepreneurship Revolution Strikes Gold 9 The Competition 100 Creative Destruction 11 Suppliers and Vendors 103 Causes of the Entrepreneurial Revolution 12 The Government 103 Changes in the Entrepreneurial Framework The Global Environment 104 Conditions 13 The Opportunity Checklist 104 Churning and Economic Growth 18 ‘‘I Don’t Have an Opportunity’’ 104 Global Entrepreneurship Monitor 19 Conclusion 106 Principal Findings from GEM 20 Your Opportunity Journal 107 Age 22 Web Exercise 107 Gender 23 Notes 107 Education 23 CASE:JIM POSS 110 Financing 25 Job Creation 25 4 Understanding Your Business Model and 21st-Century Economies: Anglo-Saxon or Social Developing Your Strategy 125 Models? 27 Conclusion 29 The Business Model 125 Your Opportunity Journal 30 The Revenue Model 126 Web Exercise 30 The Cost Model 128 Notes 30 The First-Mover Myth 130 CASE:MALINCHO 36 Formulating a Winning Strategy 132 The People Are What Matters 133 Entry Strategy 134 2 The Entrepreneurial Process 49 Growth Strategy 138 Conclusion 145 Critical Factors for Starting a New Enterprise 50 Your Opportunity Journal 146 Personal Attributes 52 Web Exercise 146 Environmental Factors 52 Notes 146 Other Sociological Factors 54 CASE:ADAM AIRCRAFT 149 Evaluating Opportunities for New Businesses 56 The Opportunity 57 5 Entrepreneurial Marketing 167 The Customer 58 The Timing 58 Why Marketing Is Critical for Entrepreneurs 168 The Entrepreneur and the Management Entrepreneurs Face Unique Marketing Challenges 168 Team 59 Acquiring Market Information 169 Resources 60 Marketing Strategy for Entrepreneurs 170 Determining Resource Needs and Acquiring Resources 60 Segmentation, Targeting, and Positioning 170 Startup Capital 62 The Marketing Mix 171 Profit Potential 64 Guerrilla Marketing 182 Ingredients for a Successful New Business 66 Marketing Skills for Managing Growth 184 Conclusion 68 Understanding and Listening to the Customer 184 Your Opportunity Journal 68 Building the Brand 185 Notes 68 Conclusion 185 CASE:ALISON BARNARD 70 Your Opportunity Journal 186 iv Contents Web Exercise 186 8 Building Your Pro-Forma Financial Statements 305 Appendix: Customer Interview 186 General Outline: It Needs to Be Tailored to Meet Your Common Mistakes 306 Research Needs 187 Financial Statement Overview 307 Notes 188 Building Your Pro-Forma Financial Statements 308 CASE:COLLEGE COACH 189 Build-Up Method 308 Revenue Projections 310 6 Building the Founding Team 199 Cost of Goods Sold 311 Operating Expenses 311 Power of the Team 200 Preliminary Income Statement 314 Where Do You Fit? 201 Comparable Method 315 How to Build a Powerful Team 205 Building Integrated Financial Statements 317 Bootstrapping: Building the Team Based on Income Statement 318 Stage-of-Venture Life 206 Balance Sheet 320 Compensation 208 Cash-Flow Statement 321 Equity 208 Putting It All Together 322 Salary 213 Conclusion 323 Other Compensation Considerations 213 Your Opportunity Journal 323 External Team Members 214 Web Exercise 324 Outside Investors 214 Notes 324 Lawyers 215 CASE:P’KOLINO FINANCIALS 325 Accountants 215 Board of Advisors 216 9 Financing Entrepreneurial Ventures Worldwide 337 Board of Directors 216 Keeping the Team Together 217 Entrepreneurial Financing for the World’s Poorest 338 Burnout 218 Microfinancing 338 Family Pressure 219 Microcredit for the Poorest of the Poor 339 Interpersonal Conflicts 219 Entrepreneurs and Informal Investors 340 Conclusion 220 Amount of Capital Needed to Start a Business 342 Your Opportunity Journal 220 Characteristics of Informal Investors 343 Web Exercise 220 Financial Returns on Informal Investment 345 Notes 221 Supply and Demand for Startup Financing 346 CASE:AJAY BAM 222 Venture Capital 347 Classic Venture Capital 347 Importance of Venture Capital in the U.S. Economy 350 7 The Business Planning Process 235 Mechanism of Venture Capital Investing 352 The Planning Process 237 Financial Returns on Venture Capital 354 The Story Model 239 Venture Capital in Europe 356 The Business Plan 240 Factors Affecting Availability of Financing 357 The Cover 240 Total Entrepreneurial Activity and Informal Executive Summary 240 Investing 357 Table of Contents 241 Factors Affecting Informal Investing 357 Industry, Customer, and Competitor Analysis 242 Factors Affecting Classic Venture Capital 357 Company and Product Description 246 Conclusion 358 Marketing Plan 246 Your Opportunity Journal 358 Operations Plan 250 Web Exercise 359 Development Plan 251 Notes 359 Team 252 CASE:DAYONE 361 Critical Risks 255 10 Raising Money for Starting and Growing Offering 256 Businesses 379 Financial Plan 256 Appendices 256 Jim Poss, BigBelly Solar 379 Types of Plans 257 Bootstrapping New Ventures 380 StylePointersfortheWrittenPlanandOral Valuation 381 Presentation 258 Earnings Capitalization Valuation 381 Conclusion 259 Present Value of Future Cash Flows 382 Your Opportunity Journal 259 Market-Comparable Valuation (Multiple of Web Exercise 259 Earnings) 382 Notes 260 Asset-Based Valuation 383 CASE:P’KOLINO 261 Example of Market-Comparable Valuation 383 Contents v Asset-Based Valuation Example 385 Obtaining ‘‘Financing’’ from Customer Prepayments 435 Financing a New Venture 386 Choosing the Right Mix of Short-Term Financing 436 Informal Investors 387 Traditional Bank Lending: Short-Term Bank Loans 436 Business Angels 388 Maturity of Loans 437 Searching for Business Angels 390 Interest Rates 437 Types of Business Angels 391 Collateral 438 Putting Together a Round of Angel Investment 392 Applying for a Bank Loan 439 Venture Capital 393 Restrictive Covenants 439 Candidates for Venture Capital 393 General Provisions 439 Ideal Candidates for Venture Capital 394 Routine Provisions 440 Actual Venture-Capital-Backed Companies 395 Specific Provisions 441 Dealing with Venture Capitalists 396 Equipment Financing 441 Negotiating the Deal 398 Obtaining Early Financing from External Sources 442 Follow-On Rounds of Venture Capital 398 SBA-Guaranteed