Starting a New Business
Chapter 2
A lot of people have ideas, but there are few who decide
to do something about them now. Not tomorrow. Not
next week. But today. The true entrepreneur is a doer,
not a dreamer.
SPOTLIGHT
Drew Houston of Dropbox
• Grew up in Acton, a suburb outside Boston, the oldest of three children of an
engineer father and a librarian mother.
• As an undergraduate student at MIT, he joined the Phi Delta Theta fraternity,
which he credits with helping him learn how to build a corporate culture. “My
first management experience was being rush chairman for my fraternity, and I learned a
bunch of things,” he shares. “You deal with a lot of the same broad questions — who do
we want to be as an organization, what kind of culture do we want, what kind of people
are we looking for? — that you do when you’re starting a company.”
• At M.I.T, like most students then, Drew worked on multiple desktops and a
laptop. He would often forget to keep his USB drive with him. When he shared
files with himself as email attachments, he found it difficult to keep track of
them. One day, his home desktop’s power supply exploded, destroying one of
his hard drives, for which he had no backup. He tried several solutions to store
his files, but wasn’t satisfied with anything he could find.
• On a bus one day from Boston to New York, Drew realized he had forgotten his
USB flash stick. Frustrated, he started coding something together for himself,
and then realized it could solve file storage problems for a lot of other people.
Learning Objectives
• This chapter will help you
• LO 2.1 Distinguish between necessity and
opportunity entrepreneurship
• LO 2.2 Understand the pros and cons of starting a
new business, and the two paths to business
ownership
• LO 2.3 Learn how to assess potential start-up ideas
• LO 2.4 Explain how to get started with a new
business
INTRODUCTION
1 Starting a business from scratch is difficult
and challenging because nothing is in place.
2 When starting a business from scratch,
there is high uncertainty as one has
absolutely no idea how things will turn it
out to be.
3 There are two major reasons for starting a
business: necessity (push) or opportunity
(pull).
Total Entrepreneurial
Activity
Necessity(TEA) =
4 Entrepreneurship
Opportunity (NE)
Entrepreneurship (OE + )
.
INTRODUCTION
• As a society moves from being a factor-driven
economy to an innovation-driven economy, the
relative proportion of opportunity-driven
entrepreneurship increases.
• A factor-driven economy is one that relies on
farming and raw-material extraction (e.g., forestry,
mining).
• An efficiency-driven economy is one where
manufacturing is the dominant sector, although
much of manufacturing activity there is not
technologically very cutting-edge.
• An innovation-driven economy is one where
cutting-edge high value-added manufacturing
sector exists along with high-end services sector.
Theory versus Practice
• Researchers – people who study entrepreneurship – make a big deal about
the distinction between necessity and opportunity entrepreneurship.
• In the real world, however, things are more ambiguous. Many (most?)
entrepreneurs start new firms because of a combination of push and pull.
• Consider Elena Colombo, who started Fire Features, to design and install
fire products.
• She was working as director of television commercials when 9/11
happened. Work started to dry up and she found herself trying to figure
out what she wanted to do.
• “Since I was a little girl, my dad and I would sit inside or outside in front of
a fire. It would calm me down, and we would figure out things together.”
• She wanted to build a fire on the beach in front of her cottage in Greenport
(NY), but the city frowned on fires.
• She used a garbage can and swimming-pool heater mechanism, hooked it
up to a gas-grill propane tank, and made a gas-fueled ‘comfort’ fire.
Starting a New Business
Advantages:
1 No carryover baggage, so they can mold the
new venture into the form that they see as
appropriate
2 Pride in creating something that did not exist
before and in accomplishing their goals
3 Deciding what the venture’s
capabilities and it will serve
Starting a New Business
Disadvantages:
1 There is no existing template onto which the
business may simply be overlaid
2 Difficult to make people aware of the new
business, especially when it is highly
competitive market with lots of sellers
3
Thousands of details, many of which are
difficult to foresee, such as where to find
motivated employees, whether to furnish
the accommodations properly or make do,
and how to choose the right suppliers.
Beepi was an online marketplace for used-cars, but it
failed. The company ran out of money.
When to do part-time?
1 You are new to 2 When you lack 3 When you want to
business and need to resources (time or hedge your bets
gain basic money) to pursue a
experience full-scale business
Part-Time Example
• Elissa Sloan of Austin, Texas
• Graduated from UT-Austin in 2008 in the midst of the financial crisis
• Started working as an indexer for the state, sorting and scanning
thousands of pieces of mail each day. Steady pay-check, 9-5 job.
She was even able to support her husband going back to school.
• As the economy recovered, she decided to pursue her passion for
photography. Started small, shooting family portraits and
engagements in her downtime. Then booked wedding assignments
on Craiglist.
• By 2011, the business was in good shape. Yet, she held her day job
while building the new business, shooting weddings on the
weekend and editing photos, posting her work on social media and
submitting it to wedding blogs at night. In 2012, her husband
finished his degree, and she quit her job to focus full-time on the
business.
“You can’t just wander off and try to figure it out. You have to have a plan…a safety net. Mine was having a steady
paycheck while I made plans to make a wedding-photography business.
Part-time Precautions
75% of new ventures start on a part-time basis; Working
on your own business part-time after a regular job is
called moonlighting
Conflict-of-interest: what is best for the part-time venture is
1
different from what is best for the full-time job or when
outsiders are not sure when you are representing which firm
2 Poisoning the well: leaving a negative impression-
intentionally or unintentionally- among the customers or
suppliers of the existing employer
3 Cannibalizing: taking business away from the employer. It can
happen because people put in less hours into their existing job
when they are trying to start a part-time business or because they
are taking some sales from the current employer
Coming up with new business ideas
1 From your interests, 2 From talking with other 3 Using tools like
knowledge, and people SCAMPER
experience
SCAMPER
• Can you use the SCAMPER tool to
explain your idea?
SCAMPER
Imagine that you need to improve a simple thermal flask aimed at the morning commuter…
• Substitute: You could replace the metal cap with a plastic one to reduce heat loss. And perhaps there is a more environmentally-friendly manufacturing process you could use
instead, that would make the product more appealing to green-minded consumers.
• Combine: You could work with artists and designers to make the flasks more attractive and unique.
• Adapt: Flasks are similar in shape to telescopes, though much shorter. Explore how you could adapt the materials and design so that your flask could extend like an old-fashioned
spyglass to hold more liquid.
• Modify: The flask isn't especially easy or comfortable to hold. You could add a rubber sleeve to aid grip, or make the bottle thinner so that it can be held in one hand.
• Put to another use: So far, you've designed the flask around individual commuters, but there are many other groups of people who could also use the product. Take traveling
couples, for example. They won't want to carry a flask each, so think about redesigning the flask to include detachable compartments which can be used as mugs. Then two
people can share the drink from one flask.
• Eliminate: You could eliminate the handle on the side of the bottle so that it fits more easily into a work bag or backpack.
• Reverse: If you tried to do the exact opposite, you'd end up with a cold drink rather than a hot one! But this would be useful in summer months or hotter climates. So, explore
ways of keeping liquid cool in the flask instead of hot.
2 Is
• Innovation and Imitation
• Most small business ideas are a lot like the others in the industry, with the
caveat that they are not exactly like the others. The Panel Study of
Entrepreneurial Dynamics reveals that the vast majority of people starting
businesses plan to imitate existing businesses.
• What are the benefits of imitation?
• In practice, most imitative businesses are not an exact copy of an existing
business, so that it is more useful to consider degree of similarity (which
refers to the extent to which one venture- or its offering- is similar to another).
After idea, what?
• What do you do, after you have an idea for a business?
• Does it solve an existing customer problem? (Opportunity
discovery or Opportunity creation)
• If yes, is it a headache problem or a migraine problem?
• Beware that headache problems can become migraine
problems over time, and vice versa
• If no, do you have the resources to create a new need in
the market?
• Can you test your offering in the market at low cost to
yourself?
• Sending movies through the mail: How would you test it?
• What’s the feedback from the market?
From Idea to Value Statement to Customer Problem
Identification to Testing Customer Willingness to Buy to
Venture Opportunity
Our Start-Up Model
The value of the BRIE model lies in helping you deal with the biggest hurdle to starting a business: inertia (or
simple inaction)
Example
• “I knew from the beginning I wanted it to be a real
business,” says Elissa Sloan
• Studied darkroom photography in high school and was
confident that she had an eye for capturing details. Had
saved up enough to buy good equipment
• As soon as she started booking jobs, she registered with
the state and started collecting sales tax
• Named her business and set up a website
([Link]
the-scenes-in-2017/)
Things to keep in mind
• Bootstrapping refers to getting by with less, or arranging to borrow, rennet, or trade for
the resource. The emphasis on finding a no-cost or low-cost way to do something is a
popular approach during the startup phase and is part of the culture for most startups. It
helps deal with the undercapitalization challenge that plagues a large majority of
startups. Undercapitalization is the problem of running out of money before the business
becomes self-supporting.
• The second important activity is aggrandizing, which involves making the new
business look bigger, more substantial, and more capable than it really is. For a new
business, aggrandization can be important to achieve legitimacy with potential
customers and suppliers, but it can also undermine the trust others have in the firm and
its owner.
Example
• Arvind Raichur is founder of MrOwl, which lets people put together lists
of themed links and share them online.
• When he wanted to raise funds for the company, he wanted venture
capitalists to think it was a successful company.
• His observation was that there are hubs - small communities – in San
Francisco and Silicon Valley, where VCs live and look for live for lucrative
new opportunities.
• He hired almost three dozen people to wear company T-shirts and sent
them into spots where they might catch the eye of investors—and make
them think MrOwl was a hot property they should know about. They
frequented coffee shops and parks in Silicon Valley and San Francisco,
making sure not to be seen in the same location two days in a row.
The founder of MrOwl made the company look bigger than it was by paying people
to wear company shirts around town.
New Venture Creation in the U.S.
• Some experts are concerned that the • There is also concern that new technology-
startup rate in the U.S. is declining
based firms now account for a lower share
of employment than has been the case in
the past