For the person who actually starts his or her own business, the experience is filled with enthusiasm, frustration, anxiety, and hard work. There is a high failure rate due to such things as poor sales (lack of demand), intense competition, lack of capital, or lack of managerial ability. The financial and emotional risk can also be very high. What, then, causes a person to make this difficult decision?
Many individuals have difficulty bringing their ideas to the market and creating a new venture. Yet, entrepreneurship and the actual entrepreneurial decision have resulted in several million new businesses being started throughout the world, even in previously controlled economies such as those of China, Hungary, Poland, and Russia. While no one knows the exact number, in the United States (which leads the world in company creation) estimates indicate that from 1 to 2 million new companies have been created each year in recent years.
Indeed, millions of companies are created despite recession, inflation, high interest rates, lack of infrastructure, economic uncertainty, and the fear of failure. Each of these companies is created through a very personal human process that, although unique, has some characteristics common to all. Like all processes, the entrepreneurial decision entails a movement, from something to something – a movement from a present life-style to creating a new enterprise.
CHANGE FROM PRESENT LIFE-STYLE
The decision to leave a career or life-style is not an easy one. It takes a great deal of energy to change and to create something new. As a rule individuals tend to start businesses in areas where they worked before. Most of the new companies are created by individuals who worked in the field of research and development (R&D), and marketing. While working in technology, individuals develop new product ideas or processes. They quit their jobs to create their own companies when these new ideas are not accepted by their employers. Similarly, individuals in marketing have become familiar with the market and customers’ unfilled wants and needs, and they make a decision to start new enterprises to fill these needs.
Perhaps an even stronger incentive to overcome the inertia and leave a present life-style to create something new comes from a negative force – disruption. A significant number of companies are created by people:
1) who have retired;
2) who are relocated due to a move by the other member of the family (in most cases a husband may get a job in a new location);
3) who have been fired. (A study in one major city in the United States indicated that the number of new business listings in the Yellow Pages increased by 12 percent during a layoff period.);
4) who have received an educational degree. (For example, a person who is not promoted after receiving a degree may become frustrated and decide to leave and start a new company.)
What causes an individual to create a new company due to personal disruption? There are a lot of other occupations rather than an entrepreneur. The decision to start a new company occurs when a person perceives that creating a new enterprise is both desirable and possible.
DESIRABILITY OF NEW VENTURE CREATION
The perception that starting a new company is desirable results from an individual’s culture, subculture, family, teachers, and peers. In a country where an individual who successfully creates a new business is honored and respected – more companies will be created. For example, in the United States there has always been a high value on being one’s own boss, having individual opportunity, being a success, and making money – all aspects of entrepreneurship. Therefore, it is not surprising to find a high rate of company creation in the United States. On the other hand, in some countries successfully establishing a new business and making money are not as highly valued, and failure may be a disgrace. Countries with such cultures (national traditions) do not have as high a business creation rate.
No culture is totally for or against entrepreneurship. Many subcultures (local traditions) shape their own value systems. Even in the United States entrepreneurship is not supported and promoted in the same way. In supportive environments where creating a new company is one of the best occupations, more individuals actively create new enterprises.
In Moscow most of the new companies (about 40%) operate in trade, 30% operate in the field of R&D, all the rest operate in building, transport and other fields.
In addition to local traditions, family traditions are very important too. Studies of companies in a variety of industries throughout the world indicate that 50 to 70 percent of the founders of companies had fathers or mothers who had an independent occupation.
Encouragement to create a company is further gained from teachers in schools, who familiarize the students with entrepreneurship as one possible career path. Schools with courses in entrepreneurship and innovation tend to develop entrepreneurs. Taking the entrepreneurship course increases the probability for such students to become entrepreneurs. An area having a strong education base is almost always a prerequisite for entrepreneurial activity and company creation.
Finally, peers are very important in the decision to create a company. More new companies are created in an area with a meeting place where entrepreneurs and potential entrepreneurs can discuss ideas, problems, and solutions.
POSSIBILITY OF NEW VENTURE CREATION
However, to have a desire to become an entrepreneur is not enough. There must be possibilities. So the question is: What makes it possible to create a new company? Several factors may exist– government support, professional background, marketing experience, initial finances, and role models.
The government contributes by providing the infrastructure to support a new venture. When we speak about infrastructure, we mean roads, communication and transportation systems, utilities, and so on. It is no wonder that more companies are created in the United States because of highly developed infrastructure and economic stability compared with other countries. Even the U.S. tax rate for companies and individuals is less than in many countries. Countries that have high tax rate, particularly for individuals, can suppress company creation because a significant monetary gain cannot be achieved, but the financial, psychic, and social risks are still present.
The entrepreneur should also have the necessary professional background. An education and previous business experience give a potential entrepreneur the skills that are necessary to overcome all the difficulties in creating and managing a new enterprise.
Marketing experience also plays a critical role in creating a new company. The only presence of an idea to create a new product or service is not enough. For successful product launching to the market, there should also be a certain practical knowledge of marketing (so called know-how) necessary to choose the best total combination of product, price, distribution, and promotion. A company is more successful if there is a market demand rather than a demonstration of technological capabilities of the producer.
Financial resources are necessary for a new company creation. While most of the start-up money for any new company comes from personal savings, credit, friends, and relatives, there is often a need for additional start-up capital. Each new venture has a common trait – the need for risk capital. Risk-capital investors play an essential role in the development and growth of entrepreneurial activity. When start-up capital is readily available, more new companies create.
Finally, a role model (a live example of entrepreneurial success) can be one of the most powerful influences in making company creation seem possible. To see someone else succeed makes it easier to picture yourself engaged in a similar activity – of course, even more successfully. A frequent comment of entrepreneurs when asked about their motivations for starting their new venture is: “If that person could do it, so can I!”
TYPES OF START-UPS
So, the decision to create a new company is made. What types of companies there exist? While there are many classification systems, one that is most useful divides start-ups into three categories: life-style firms, foundation companies, and high-potential ventures.
A life-style (“home”) firm is a private enterprise. It usually achieves only modest growth due to the nature of the business, the objectives of the entrepreneur, and the limited money devoted to R&D. This type of firm may grow after several years to 30 or 40 employees and have annual revenues of about $2 million. A life-style firm exists primarily to support the owners and usually has little opportunity for significant growth and expansion.
The second type of start-up – the foundation company (innovation enterprise) – is created from R&D and lays the foundation for a new industry. This firm can grow in 5 to 10 years from 40 to 400 employees and from $10 million to $20 million in annual revenues. Since this type of start-up rarely goes public, it usually draws the interest of private investors only.
The third type of start-up – the high-potential venture – is the one that receives the greatest investment interest and publicity (investors are striving to invest money in it). While the company may start out like a foundation company, its growth is far more rapid. After 5 to 10 years the company could employ around 500 employees with $20 million to $30 million in annual revenues. The company usually shortly becomes a public limited company.
The creation of a new venture must be desirable and possible for an individual to change from a present life-style to a radically new one. It is not surprising that the type and number of new business creations vary greatly throughout any country.
THE FUTURE OF ENTREPRENEURSHIP
As evidenced by the many different definitions, the term entrepreneurship means different things to different people. However, in spite of the differences, there are some common aspects: risk taking, creativity, independence, and rewards. These common aspects are supposed to be the driving force behind the notion of entrepreneurship in the future. One thing is clear – the future for entrepreneurship appears to be bright. We are living in the age of the entrepreneur, with entrepreneurship endorsed by educational institutions, governmental units, society, and corporations. Entrepreneurial education has never been so important in terms of courses and academic research.
Various governments have also taken an increasing interest in promoting the growth of entrepreneurship. Individuals are encouraged to create new businesses and are provided such government support as tax incentives, buildings (space), roads, and a communication system – a strong government infrastructure – to facilitate this creation process. The encouragement by the federal and local governments is supposed to continue in the future as more lawmakers understand that new enterprises create jobs and increase the economic output in an area.
GLOSSARY:
frustration feelings of disappointment or dissatisfaction
inflation the condition in which prices keep rising esp. to an undesirable degree
interest rates the relation between the payment received by a lender of money and the amount of money lent, expressed as a percentage per period of time
infrastructure the system which supports the operation of a company
entails makes necessary
disruption change of job or life-style
Yellow Pages telephone directory that lists businesses according to the goods and services they offer
layoff period the stopping by a business of a worker’s employment at a time when there is little work
peer an equal in rank, age
utilities service to the public, such as gas, water, and electricity
annual revenues money received in the form of cash, checks, etc. during a year
goes public changes from being a private to a public limited company which can offer its shares to the public
Questions for discussion:
1. Give some reasons why an individual entrepreneur might succeed in bringing a product to the market where the government or a large corporation would fail.
2. Give some examples of each of the three types of start-up companies. Did any of your examples begin in one category and turn out to be something much smaller or larger than anticipated?
3. What do you think entrepreneurship will mean in the future?
Compiled by Vladimir Pavlov
The Moscow Institute of Business Administration