Chapter

1
The Entrepreneurial
Mind: Crafting a
Personal
Entrepreneurial Strategy

McGraw-Hill/Irwin
New Venture Creation, 7/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-1
 Overview of Tonight
• Guest Speakers
• Discussion of New Venture Club
• Course Outline
• The Entrepreneur and Entrepreneurial Process

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Speakers

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 New Venture Club
• Purpose
• Organization
• Role

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 Course Outline
• Materials
• Timmons & Spinelli, New Venture Creation
• HBSP Case Packet
http://harvardbusinessonline.hbsp.harvard.edu/relay.jh
tml?name=cp&c=c66998
• HBR on Entrepreneurship (optional)

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 Course Assessment
• Case Presentation (20%)
• Feasibility Presentation (10%)
• Deal Structure (10%)
• Plan Presentation (10%)
• Business Plan Document (40%)
• Participation (10%)

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 Milestones
• Elevator Pitches (Week 4)
• Feasibility Presentations (Week 9)
• Business Plan Presentations (Weeks 15/16)

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 Entrepreneurship Defined

• Entrepreneurship—a way of thinking,

reasoning, and acting that is opportunity
obsessed, holistic in approach, and leadership
balanced

(This definition of entrepreneurship has evolved over the past two

decades from research at Babson College and the Harvard Business
School and has recently been enhanced by Stephen Spinelli, Jr., and
John H. Muller, Jr., Term Chair at Babson College.)

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 Entrepreneurship Results
• Value:
• Creation
• Enhancement
• Realization
• Renewal
• For:
• Owners
• Stakeholders
• All Participants

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 What is an entrepreneur?
• Two broad schools of thought
• Attributes
• An entrepreneur is someone who possesses attribute X
• Behavioral/functional
• An entrepreneur is someone who does Y
• So what are X and Y?

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 Attribute Approach
• Psychological Traits
• Intelligence, extraversion, locus of control, need for
achievement, social competence, creativity, risk-taking
• Demographics
• Social networks, age, marital status, parental influences,
work experience, education, income level, social status
• Are these attributes necessary?
• Founding vs. Success

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 Behavioral/Functional Approach
• Cantillon • One who works for uncertain wages
• Knight • One who buys factors at certain prices and
sells them in the future at uncertain prices
(1921)
• Schumpeter • One who creates new products, processes,
inputs, markets, or organizations (1911)
• One who is alert to profit opportunities
• Kirzner • One who creates a new venture
• Gartner • One who pursues opportunities
• Stevenson regardless of resources currently
controlled
• One who seeks to earn entrepreneurial
• Phelan profits

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Exhibit 1.2

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 The Entrepreneurial Mind in Action
• Successful entrepreneurs have a wide range of
personality types
• Research has considered genetics, family, education,
career experience, etc., but no psychological model of
entrepreneurship has been supported.
• Acquired skills are more important that specific
inherent traits

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Converging on the Entrepreneurial Mind

• Desirable and Acquirable Attitudes, Habits and

Behaviors
• Six Dominant Themes
1. Commitment and Determination
2. Leadership
3. Opportunity Obsession
4. Tolerance of Risk, Ambiguity and Uncertainty
5. Creativity, Self-Reliance, and Adaptability
6. Motivation to Excel

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Exhibit 1.3

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Exhibit 1.6

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Exhibit 1.7

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 Complications
• Intrapreneurs
• Social entrepreneurs
• Craft entrepreneurs
• Job substitutes versus high potential ventures

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 Leadership and Human Behavior
• No single psychological model of entrepreneurship has
been supported by research
• But, behavioral scientists, venture capitalists, investors,
and entrepreneurs agree the venture will depend a great
deal upon the talent and behavior of the lead
entrepreneur and his or her team
• Myths still exist about entrepreneurs and
entrepreneurship

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Exhibit 1.9 (Part 1)

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Exhibit 1.9 (Part 2)

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 Myth #1
• It takes a lot of money to finance a new business.
• Not true. The typical start-up only requires about $25,000
to get going. The successful entrepreneurs who don’t
believe the myth design their businesses to work with
little cash. They borrow instead of paying for things.
They rent instead of buy. And they turn fixed costs into
variable costs by, say, paying people commissions
instead of salaries.
• From Scott Shane “The Illusions of Entrepreneurship” 2008

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 Myth #2
• Venture capitalists are a good place to go for start-up
money.
• Not unless you start a computer or biotech company.
Computer hardware and software, semiconductors,
communication, and biotechnology account for 81 percent of
all venture capital dollars, and seventy-two percent of the
companies that got VC money over the past fifteen or so years.
• VCs only fund about 3,000 companies per year and only about
one quarter of those companies are in the seed or start-up
stage. In fact, the odds that a start-up company will get VC
money are about one in 4,000. That’s worse than the odds that
you will die from a fall in the shower.

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 Myth #3
• Most business angels are rich.
• If rich means being an accredited investor –a person with
a net worth of more than $1 million or an annual income
of $200,000 per year if single and $300,000 if married –
then the answer is “no.”
• Almost three quarters of the people who provide capital
to fund the start-ups of other people who are not friends,
neighbors, co-workers, or family don’t meet SEC
accreditation requirements.
• In fact, thirty-two percent have a household income of
$40,000 per year or less and seventeen percent have a
negative net worth.
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 Myth #4
• Start-ups can’t be financed with debt.
• Actually, debt is more common than equity. According to
the Federal Reserve’s Survey of Small Business Finances,
fifty-three percent of the financing of companies that are
two years old or younger comes from debt and only
forty-seven percent comes from equity. So a lot of
entrepreneurs out there are using debt rather than equity
to fund their companies.

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 Myth #5
• Banks don’t lend money to start-ups.
• This is another myth. Again, the Federal Reserve data
shows that banks account for sixteen percent of all the
financing provided to companies that are two years old
or younger.
• While sixteen percent might not seem that high, it is three
percent higher than the amount of money provided by
the next highest source – trade creditors – and is higher
than a bunch of other sources that everyone talks about
going to: friends and family, business angels, venture
capitalists, strategic investors, and government agencies.

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 Myth #6
• Most entrepreneurs start businesses in attractive
industries.
• Sadly, the opposite is true. Most entrepreneurs head right
for the worst industries for start-ups. The correlation
between the number of entrepreneurs starting businesses
in an industry and the number of companies failing in
the industry is 0.77. That means that most entrepreneurs
are picking industries in which they are most likely to
fail.

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 Myth #7
• The growth of a start-up depends more on an
entrepreneur’s talent than on the business he
chooses.
• Sorry to deflate some egos here, but the industry you
choose to start your company has a huge effect on the
odds that it will grow.
• The odds that you will make the Inc 500 are 840 times
higher if you start a computer company than if you start
a hotel or motel. There is nothing anyone has discovered
about the effects of entrepreneurial talent that has a
similar magnitude effect on the growth of new
businesses.
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 Myth #8
• Most entrepreneurs are successful financially.
• Sorry, this is another myth. Entrepreneurship creates a
lot of wealth, but it is very unevenly distributed.
• The typical profit of an owner-managed business is
$39,000 per year.
• Only the top ten percent of entrepreneurs earn more
money than employees.
• And the typical entrepreneur earns less money than he
otherwise would have earned working for someone else.

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 Myth #9
• Many start-ups achieve the sales growth projections
that equity investors are looking for.
• Not even close. Of the 590,000 or so new businesses with
at least one employee founded in this country every year,
data from the U.S. Census shows that less than 200 reach
the $100 million in sales in six years that venture
capitalists talk about looking for.
• About 500 firms reach the $50 million in sales that the
sophisticated angels, like the ones at Tech Coast Angels
and the Band of Angels talk about.
• In fact, only about 9,500 companies reach $5 million in
sales in that amount of time.
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 Myth #10
• Starting a business is easy.
• Actually it isn’t, and most people who begin the process
of starting a company fail to get one up and running.
Seven years after beginning the process of starting a
business, only one-third of people have a new company
with positive cash flow greater than the salary and
expenses of the owner for more than three consecutive
months.

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 The Concept of Apprenticeship
• Shaping and Managing an Apprenticeship
• Windows of Apprenticeship
• The Concept of Apprenticeship: Acquiring the 50,000
Chunks
• Role Models
• Myths and Realities
• What Can Be Learned?
• Nexus Theory
• Experience meets opportunity
• MIT patent example
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Exhibit 1.8

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 A Word of Caution
• Leadership and achievement, • Values, ethics, honesty and
the heart of the entrepreneur, integrity
are not measured by IQ tests, • Goal-setting orientation
SATs, or GMAT scores and • Self-discipline
include:
• Frugality
• Leadership skills
• Resourcefulness
• Interpersonal skills
• Resiliency and capacity to
• Team building and team
playing handle adversity
• Creativity and ingenuity • Ability to seek, listen, and use
feedback
• Motivation
• Learning skills (versus • Reliability
knowledge) • Dependability
• Persistence and determination • Sense of humor
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 Personal Entrepreneurial Strategy
• Gather data both from yourself (past and present
profiles – start with EQ)
• Gather data from others (constructive feedback)
• Evaluate the data you have
• Think ahead
• Craft your personal entrepreneurial strategy

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 Reasons for Planning
• Planning helps the entrepreneur with the following:
• Managing the risks and uncertainties of the future
• Working smarter rather than harder
• Developing and updating a keener strategy by testing the
sensibility of his or her ideas and approaches with others
• Motivating
• Achieving “results orientation”
• Managing and coping with what is by nature a stressful role

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The Entrepreneurial Process

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 The Entrepreneurial Process
• It is opportunity driven
• It is driven by a lead entrepreneur and an entrepreneurial
team
• It is resource parsimonious and creative
• It depends on the fit and balance among these
• It is integrated and holistic

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Think Big for Higher Potential Ventures
• Don’t think too small
• Smaller often means higher failure odds
• Getting the odds in your favor
• Entrepreneurship should not be a job substitute
• Odds for survival, growth, and a higher level of
success, changes when the ventures reaches a size of
10-30 people with $2-$3 million in revenues

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Exhibit 3.3

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Exhibit 3.4

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The Timmons Model

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Exhibit 3.6

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 The Opportunity
• A good idea is not necessarily a good opportunity.
• For every 100 ideas presented to investors, usually fewer than 4
get funded.
• An investor has to be able to quickly evaluate whether potential
exists and to decide how much time and effort to invest.
• According to John Doerr, a successful venture capitalist, “There’s
never been a better time than now to start a business.”
• Underlying market demand drives the value creation potential.
• The greater the growth, size, durability, and robustness of the
gross and net margins and free cash flow, the greater the
opportunity.

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 Resources
• One of the most common misconceptions is that to
succeed, you first need to have all the resources in
place, especially the money.
• Money follows high potential opportunities conceived
of and led by a strong management team.
• Successful entrepreneurs devise creative and stingy
strategies to marshal and gain control of resources.
• Bootstrapping can create a significant competitive
advantage.
• Such strategies encourage a discipline of leanness,
where everyone knows that every dollar counts.
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 The Entrepreneurial Team
• The entrepreneurial team is a key ingredient in the
higher potential venture.
• Great teams are in short supply.
• The lead entrepreneur is central to the team as both a
player and a coach.
• Opportunity, team, and resources rarely match
• The entrepreneurial process is based on both logic and
trial and error.
• Some of the most successful investments ever were
turned down by numerous investors before the
founders received backing.
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 Case: R&R
• Prepare for discussion at start of Week 3

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