entrepreneurship
a process perspective
2e
Robert A. Baron
Wellington Professor of Management, Lally School of Management & Technology, Rensselaer Polytechnic Institute,
Troy, NY
Scott A. Shane
Professor of Economics and Entrepreneurship, Weatherhead School of Management, Case Western Reserve University, Cleveland, OH
Entrepreneurship: A Process Perspective, 2nd Edition Robert A. Baron and Scott A. Shane
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chapter 1
l e a r n i n g o b j e c t i v e s
A f t e r r e a d i n g t h i s c h a p t e r , y o u s h o u l d b e a b l e t o :
1
Define entrepreneurship as a field of business.2
Explain why the activities of entrepreneurs are soimportant to the economies of their countries, and why entrepreneurship is an increasingly popular career choice.
3
Describe the process perspective ofentrepre-neurship, and list the major phases of this process.
4
Explain why entrepreneurship can be viewed asarising out of the intersection of enterprising people and opportunities.
5
Understand why this text will both describe whatentrepreneurs actually do and what, perhaps, they should do!
6
Describe several issues and questions aboutentre-preneurship that are currently receiving greater attention in the field (e.g., university-based technology transfer).
7
Explain why certain sources of knowledge aboutentrepreneurship are more reliable and useful than others.
8
Describe the nature of three basic means for obtainingknowledge about entrepreneurship—systematic observation, the case method, and experimentation— and the role of theory in the field of entrepreneurship.
Entrepreneurship: A Field,
an Activity, and a Way
of Life
Why do we start with these examples of what might be termed non-earth-shaking products? Because they illustrate several key points about entrepreneur-ship that we will make throughout this text. First, these entrepreneurs and their companies indicate that entrepreneurship is definitely a process—a chain of events and activities that takes place over time—sometimes, considerable periods of time. It begins with an idea for something new—often, a new product or service. But the idea is only the start: Unless the process continues
Anyone who has invented a better mousetrap, or the contemporary equivalent,
can expect to be harassed by strangers demanding that you read their unpublished
manuscripts or undergo the humiliation of public speaking, usually on remote
college campuses.
—Barbara Ehrenreich (1985)
If you have ever been an entrepreneur—or plan to become one in the future—you will certainly come to appreciate the accuracy of these words. One of us has been an entrepreneur (Baron) and the other has worked closely with them for many years (Shane), so we know that many people seem to believe that entrepreneurs have extraordinary powers—abilities that are almost magical in nature. This belief, in turn reflects the widely held view that entrepreneurs are unusual people. Think about it for a moment. When we say the word ‘‘entre-preneur,’’ what names come to mind? Bill Gates? Michael Dell? Julie Aigner-Clark (founder of ‘‘Baby Einstein’’)? Jeff Bezos (founder of Amazon.com)? Prob-ably, because the fame of these entrepreneurs has spread around the globe. But in fact, entrepreneurship, as we’ll describe it in this book, is definitely not restricted to this kind of awe-inspiring success in one of a handful of industries. On the contrary, the entrepreneurial spirit can be observed in much smaller companies and in an almost endless array of contexts. For instance, consider Lorraine Santoli. Growing tired of trying to find a facial tissue while driving, she came up with a new idea—a cup that holds and dispenses tissues one at a time and that can fit in the cup holders found in almost every vehicle (see Figure 1.1). The company she founded to develop this idea—TissueKups Inc.—is now humming along with sales in the millions. High tech? No. ‘‘Sexy’’? No. Effective and appealing to many potential customers? Something new that did not exist before? Yes!
Or, for another example, consider Victoria Malmer who, like many millions of people in the United States and other countries, wanted to drink more liquids because doing so is good for personal health. Moreover, like many people, she wanted her beverages to have a flavor she
liked. One solution is to carry around heavy bottles containing preferred drinks. But Ms. Malmer didn’t like doing that, so she and her friend Paul Staunton came up with another idea: why not produce flavorings in small containers that people can easily carry with them and add to any beverage to get the taste they like? The company they started to produce this and similar products— Flavor2Go—is now riding a wave of sharply rising sales.
Figure 1 . 1 From Small Inventions, Profitable Companies Sometimes Grow
New products don’t have to be dramatic to succeed. The TissueKup, created by Lorraine Santoli, is a good illustration of this fact. The device, which fits into the cup holders found in almost all vehicles, is useful to many drivers, and has found a large and ready market.
Courte
sy,
so that the idea is converted into reality (actually brought to market through a new business venture, licensing to existing companies, etc.), it is not entrepreneurship. Rather, it is just an exercise in creativity or idea generation. Second, these examples underscore the fact that being an entrepreneur does not necessarily involve starting a particular kind of company, working in a particular industry or sector (e.g., high-tech), or coming up with a dramatic new product. On the contrary, as we’ll see over and over again, the heart of the process involves bringing something new—something that is not now being produced or exploited by others—to the marketplace. We’ll have more to say about this, the heart of entrepreneurship, later; here, we simply want to break the mind-set with which many people enter their first course in entrepreneurship— an approach reflecting several major myths about entrepreneurship (e.g., it can’t occur without large amounts of capital, it must be based on new technology, must tap a really ‘‘hot’’ market, and so on). We’ll be discussing—and refuting—these and other false ideas throughout this book, so stay tuned for more about this point because our goal is to present an accurate picture of what entrepreneurship really is, rather than a repetition of what many people think it is.
Having clarified these important points, we now turn to several tasks that we want to accomplish in this initial chapter. First, we present a definition of entrepreneurship as an activity, a field of study in business, and a way of life. Next, we’ll offer a framework for understanding entrepreneurship as a process— one that unfolds over time. As we’ll soon see, this process is affected by many different factors, some relating to individuals (i.e., entrepreneurs), some to their relations with other people (e.g., partners, customers, venture capitalists), and some to society as a whole (e.g., government regulations, market conditions). A major theme of this book will be that all three kinds of factors (individual, group, societal) play an important role in every phase of the entrepreneurial process. As part of this discussion, we emphasize yet another key theme: At the heart of the entrepreneurial process lies the intersection of opportunities generated by changing economic, technological, and social conditions, as well as enterprising people capable of recognizing and actively exploiting them. This theme will be examined in more detail in Chapter 2, which focuses on the emergence of opportunities, and Chapter 3, which focuses on the cognitive foundations of entrepreneurship (e.g., where ideas for new products or services originate and how individuals actually perceive or recognize opportunities).
Third, we’ll comment briefly on current trends in the field of entrepreneur-ship—topics and questions that are receiving growing attention because they are increasingly recognized as playing an important role in the entrepreneurial process.
After that, we consider the question of how we know what we currently know about entrepreneurship—in other words, how the information presented in this book was obtained. We think this point is important because, in general, it is dangerous to accept any information as accurate without knowing something about its source and how it was obtained. Finally, we provide you with an overview of the contents of this book and a description of its special features. Now, to begin at the beginning, we offer a definition of entrepreneurship—a definition that will be reflected in the contents of every chapter.
The Field of Entrepreneurship:
Its Nature and Roots
Definitions are always tricky, and for a field as new as entrepreneurship, the task is even more complex. It is not surprising, then, that currently, there is no single agreed-upon definition of entrepreneurship either as a field of study in business or as an activity in which people engage. Having said that, we should note that
learning
objective
1
Define entrepreneurship as a field of business.
a definition offered by Shane and Venkataraman1has received increasing accep-tance. Broadly paraphrased, their definition suggests the following:
Entrepreneurship, as a field of business, seeks to understand how opportunities to create something new (e.g., new products or services, new markets, new production processes or raw materials, new ways of organizing existing technologies) arise and are discovered or created by specific individuals, who then use various means to exploit or develop them, thus producing a wide range of effects.
By implication, this definition suggests that entrepreneurship, as an activity carried out by specific individuals, involves the key actions we mentioned earlier (identifying an opportunity that is potentially valuable in the sense that it can be exploited in practical business terms and yield sustainable profits), and the activities involved in actually exploiting or developing this opportu-nity. In addition, as we note in a later section of this chapter, the process does not end with the launching of a new venture; it also involves being able to run a new business successfully after it comes into existence.
We believe that this definition is a clear and useful one, and does indeed capture the essential nature of entrepreneurship. Although it helps to clarify many important questions, perhaps the most central of these is: ‘‘Just what makes someone an entrepreneur?’’ To see how the definition offered by Shane and Venkataraman helps significantly in this respect, consider the following individuals. For each, ask yourself the following question: ‘‘Is this person an entrepreneur?’’
n A woman who enjoys making appetizers for parties in her home, and who is often praised by her friends who tell her how delicious these are, starts a company to make and sell them.
n A university scientist engaged in basic research on the biochemistry of life, makes important discoveries that advance the frontiers of his field; however, he has no interest in identifying practical uses of his discoveries and does not attempt to do so.
n After being ‘‘downsized’’ from his management level job, a middle-aged man discovers a special way of processing old tires to make edging for gardens (borders that keep different kinds of plants separate).
n A retired army officer purchases obsolete amphibious vehicles from the government and uses them to start a company that specializes in tours of remote wilderness areas.
n A man who has often forgotten the numbers needed to open combination locks comes up with a new idea: why not build a lock that uses letters instead of numbers? He enters the idea (which he previously patented) in a contest for new inventions, and wins. The retailer that runs the contest signs a contract with him to sell this new kind of lock at all of its 1,200 stores. Which of these individuals are entrepreneurs? At first glance, you might be tempted to conclude that only the last two are really entrepreneurs—only they brought something new to market. We suggest, however, that all of these individuals with the exception of the university scientist are entrepreneurs. Why? Recall our definition: Entrepreneurship involves recognizing an oppor-tunity to create something new. It does not have to be a new product or service; on the contrary, it can involve recognizing an opportunity to develop a new market, to use a new raw material, or to develop a new means of production, to mention just a few possibilities. According to this definition, the appetizer-baking woman is acting as an entrepreneur because she recognized a new market—one that will pay a premium price for appetizers that taste truly homemade. In fact, this is just what Nancy Mueller did when she started Nancy’s Quiche—a company she recently sold for several hundred million dollars.
Similarly, the downsized executive is using an existing ‘‘raw material’’— old tires—in a new way. This activity, too, qualifies as entrepreneurship. The retired Army officer and the inventor are also entrepreneurs: Both identified opportunities for new products or services, and both took active steps to exploit these ideas in ways that generate economic gains.
In contrast, the university scientist is not an entrepreneur according to our definition. Even though his research does add appreciably to human knowledge, the fact that he makes no effort to apply his discoveries to the development of new products, services, markets, or means of production, suggests that he not an entrepreneur. Certainly, he is playing a valuable role in society; but no, he is not an entrepreneur.
In fact, scientists often can be entrepreneurs. For instance, one of us (Baron) is privileged to teach, from time to time, with a Nobel-prize winning physicist, Ivar Giaever. Prof. Giaever used his scientific knowledge to develop a new product—one that can help physicians identify cancer cells not by looking at them through a microscope (what they typically do), but in terms of the electrical activity of the cells. Professor Giaever found that cancer cells and normal cells differ in this respect, and his product—which he patented—may well soon become a commercial as well as a scientific device. Whether it does or not, the fact that he has attempted to bring this new product to market makes him an entrepreneur as well as a world-class scientist.
In essence, then, entrepreneurship requires creating or recognizing a commercial application for something new. The new commercial application can take many different forms, but simply inventing a new technology, product, or service, or generating a new idea is not, in itself, enough. As shown in Figure 1.2, many inventions never result in actual products for the simple reason that they offer no commercial benefits (or, alternatively, no one can think of a marketable use for them), and so they cannot really serve as the basis for a profitable new business. In sum, we agree with Shane and Venkataraman Figure 1 . 2
Newness Is Not Enough!
As shown here, the fact that a product is new is not sufficient to assure that it will be developed and brought to market. We doubt, for instance, that the product shown here will ever really exist outside the cartoonists’
imagination.
and with other theorists2that entrepreneurship emerges out of the intersection of what might be termed inspiration and activation—recognizing opportunities for something new that people will want to own or use, and taking vigorous steps to convert these opportunities into viable, profitable businesses.
A Recent Extension and Clarification
The definition offered by Shane and Venkataraman appears to be a useful one and has gained widespread acceptance in the field of entrepreneurship. However, we should note that it has recently been extended and clarified by McMullen and Shepherd, two well-known researchers.3 They note that in essence, entrepreneurship involves two key phases or activities. In the first, individuals (potential entrepreneurs) use their existing knowledge and personal strategies for obtaining knowledge, to recognize that some oppor-tunity exists—an opporoppor-tunity that someone, not necessarily they, can develop. In the second phase, they evaluate this opportunity to determine whether they have the knowledge and skills needed to actually develop it. In other words, they try to determine whether the opportunity is one they can pursue by taking such actions as founding a new venture. In essence, this framework is fully consistent with the definition offered earlier, but it also helps to highlight the importance of individual motivation, skills, and knowledge in entrepre-neurial action, and the additional point—a very important one we’ll make again in Chapter 3—that recognizing an opportunity can be quite distinct from actually doing something about it.
Other additions to the framework have been offered as well. One of the most interesting, suggested by Sarasvathy,4proposes that we should focus not so much on who, why, and how specific persons identify particular opportunities, but rather on the barriers that prevent some persons from becoming entrepreneurs, and on how entrepreneurs create specific kinds of firms because these new businesses are the ‘‘tool’’ through which entrepre-neurs convert their ideas and skills into means of exploiting various opportunities. When added to the definition proposed by Shane and Venkataraman, these more recent suggestions truly enrich our basic under-standing of the process of entrepreneurship and how it unfolds.
A Note on Intrapreneurship
Before turning to other topics, we should note, briefly, that recognizing opportunities for creating or developing something new can occur within existing organizations as well as outside them.5 In fact, many successful companies are deeply concerned with encouraging innovations and take active steps to provide an environment in which it can flourish.6 These companies work to develop a corporate culture that is receptive to new ideas rather than one that routinely rejects them, and provide concrete rewards for innovation.7 For instance, General Electric offers employees who come up with innovative ideas a share of the profits resulting from them. Although we can’t say for certain that this policy increased innovation at GE, the company obtained more patents during recent decades than any other U.S. company; in fact, it holds more 51,000 in total! Individuals who act like entrepreneurs inside a company are often described as being intrapreneurs—people who create something new, but inside an existing company rather than through the route of founding a new venture. Unfortunately, they often face formidable barriers or obstacles, because not all organizations are as committed to innovation as General Electric. However, innovation is truly essential for gaining and sustaining competitive advantage, so it is something all organizations should seek.8 Although our focus will be firmly on entrepreneurs throughout this book, we do want to note that individuals can act entrepreneurially in several different contexts, including large, existing companies.
Entrepreneurship: An Engine of Economic Growth
When one of us (Robert Baron) began his career as a university professor (in 1968), courses such as this one simply did not exist. Now, in contrast, courses on entrepreneurship are offered by virtually every school of management or business and show a pattern of rapidly growing enrollments in recent years. Why? One reason is that such courses reflect parallel growth in the number of individuals choosing to become entrepreneurs—or at least to start their own businesses. Each year, more than 600,000 new businesses are launched in the United States alone, and this number almost doubled in the past two decades.9 Not all of these start-ups would meet our definition for involving entrepreneurship, but all of them—to the extent they are successful— contribute to economic growth. Consider the following facts:
n During the past two decades, large corporations in the United States have downsized (a kind word for ‘‘eliminated’’) more than 6 million jobs, yet unemployment fell to record-low levels—mainly as a result of new companies started by entrepreneurs.
n In recent years, more than 900,000 new start-up companies were founded in the United States (U.S. SBA, 1999, 2001).
n Currently, more than 10 million individuals are self-employed in the United States (U.S. SBA 1998, 2002)—about one in eight adults! And taken together, U.S. firms with fewer than 500 employees (many of which were started by entrepreneurs), account for 51 percent of private sector output, employ 51 percent of private sector workers, and constitute 99 percent of all employers (U.S. SBA, August 2001).
n Even though the number of new businesses started each year has increased steadily, the number started by women and minorities rose even more dramatically; for instance, the number of companies owned by minorities increased 168 percent between 1987 and 1997, to a total of 3.25 million businesses employing more than 4 million and generating $495 billion in revenues (U.S. SBA, 1999).
These statistics suggest that the activities of entrepreneurs have a truly major impact on the economies of their societies.
Even a casual glance backward at history suggests that entrepreneurs have always existed and always ‘‘made waves’’ in their societies: Vast fortunes were certainly amassed by entrepreneurs of the past such as John D. Rockefeller, Andrew Carnegie, and Cornelius Vanderbilt. Yet, more people than ever are pursuing, or considering, this role. For instance, look at Figure 1.3; it shows the number of franchises sold each year from 2000 to 2005. (Many people who want Figure 1 . 3
Interest in Entrepreneurship: On the Rise
As shown here, the number of franchises sold each year in the United States increased greatly. Because franchising is one means for individuals to become entre-preneurs (or, sometimes, to get ready to become entrepreneurs by gaining important kinds of experience), this trend reflects growing interest in entrepreneurship.
250,000 2000 2001 2002 2003 Year 2004 2005 274,000 291,000 310,000 342,000 338,000 351,000 290,000 310,000 330,000 350,000 370,000 270,000 Franchises Sold
The number of franchises sold rose sharply in recent years.
Source: Adapted from Entrepreneur Magazine, January 2005, p. 79.
learning
objective
2
Explain why the activities of entrepreneurs are so important to the economies of their countries, and why entrepre-neurship is an increasingly popular career choice.
to become entrepreneurs use franchises as a means of attaining this dream; see Chapter 8.) As you can see, the numbers are both amazing and rising rapidly. What factors are responsible for this trend? Many appear to be playing a role. First, the media are filled with glowing accounts of successful entrepreneurs such as Howard Schultz (Starbucks), Pierre Omidyar (eBay; see Figure 1.4), and Scott Cook (Intuit). As a result, the role of entrepreneur has taken on a positive and attractive aura. In an age when political and military heroes are few and far between, entrepreneurs, in a sense, become the new heroes and heroines, so it is far from surprising that growing number of individuals are choosing to pursue this kind of career.
Second, there has been a fundamental change in what has often been termed ‘‘the employment contract’’—the implicit understanding between employers and employees.10In the past, this implicit agreement suggested that as long as individuals performed their jobs well, they would be retained as employees. Now, in an era of downsizing and ‘‘rightsizing,’’ this agreement has been rewritten, with the result that many individuals feel little loyalty to their current employers. It is just one small step from such feelings to the conclusion, ‘‘I’d be better off working for myself!’’
A third factor is a change in basic values. In the past, job or career security was a dominant theme for many people: They wanted a secure job with steady increments in salary. Now, surveys indicate that young people, especially, prefer a more independent lifestyle—one that offers choice in place of certainty or predictability.11Together, these and many other factors combine to bolster the allure of becoming an entrepreneur and, as noted previously, translate into the creation of hundreds of thousands of new businesses employing millions of people. This trend is stronger in the United States than elsewhere, but seems to picking up steam around the world as government leaders in many countries recognize that entrepreneurs do matter—and matter greatly.
The Field of Entrepreneurship:
Foundations in Other Disciplines
Nothing, it has often been said, emerges out of a vacuum. And where the field of entrepreneurship is concerned, this is certainly true. Entrepreneurship, as a branch of business, has important roots in several older and more established fields—and with good reason. Consider, again, our definition of Figure 1 . 4 The Romance of Entrepreneurship
In a sense, entrepreneurs are the new heroes and heroines—they are often presented in flattering terms by the media. As a result, the appeal of becoming an entrepreneur increased greatly in recent years. Shown here are famous entrepreneurs of the past and present— Pierre Omidyar, J. D. Rockefeller, and Andrew Carnegie.
ß Matt Stroshane/Bloomberg News/Lando v ß Bet tmann/CORBIS ß Bettmann /CORBIS
entrepreneurship—a field of study that seeks to understand how opportunities to create new products or services, new markets, production processes, ways of organizing existing technologies, or raw materials arise and are discovered by specific individuals, who then use various means to develop them. This definition implies that in order to understand entrepreneurship as a process—and as an activity in which entrepreneurs engage—it is essential to consider (1) the economic, technological, and social conditions from which opportunities arise, (2) the people who recognize these opportunities (entrepreneurs), (3) the business techniques and legal structures they use to develop them, and (4) and the economic and social effects produced by such development. All of these elements play a role in entrepreneurship, and all must be taken into account if we are ever to fully understand this complex process. These elements, in turn, imply that the field of entrepreneurship is closely linked to older disciplines such as economics, behavioral science (psychology, cognitive science), and sociology. The findings and principles of these fields can shed much light on many aspects of entrepreneurship and provide valuable frameworks for understanding key questions addressed by the field—questions such as ‘‘How do opportunities arise?’’ (see Chapter 2), ‘‘Why do some individuals but not others recognize them?’’ (see Chapter 3), and ‘‘What factors influence the success of new ventures after they are launched?’’ (see Chapters 10, 11, and 12).
Admittedly, these questions are somewhat abstract, so perhaps a concrete example will be helpful. Consider the rapid growth of one successful high-tech company: Expedia.com. Expedia is an online travel service that allows users to book flights, hotel rooms, and rental cars from any computer with access to the Internet. The company’s growth has been swift, so it seems clear that its founders recognized an excellent opportunity and went on to exploit it well. But now consider the following question: Could Expedia.com have been launched 10 years ago? The answer is ‘‘Almost certainly no.’’ And the reason it could not is straightforward: technological, economic, and social forces had not yet generated the opportunity that the founders of Expedia.com recognized. From a technological point of view, an online travel service could not exist until many millions of people had access to the Internet, and until software capable of integrating the schedules of dozens of airlines and the rates of thousands of hotels existed. From an economic point of view, such a service could not be viable until a safe and reliable way of making payments over the Internet existed and unless airlines and hotels were willing to pay commissions to an Internet company instead of, or in addition to, traditional travel agents. Finally, from a social perspective, an online travel service could not exist and prosper until large numbers of people had enough confidence in online information and transactions to entrust their travel plans to it, and until large numbers of people became aware of the fact that travelers on the same flights often paid hugely different fares (see Figure 1.5). In sum, the opportunity for founding Expedia.com did not always exist; rather, it emerged—and became available for discovery by specific individuals—out of a combination of many factors, economic, technological, and social.
In a similar manner, the disciplines of economics, behavioral science, and sociology can help to provide answers to other basic questions addressed by the field of entrepreneurship, questions such as: ‘‘Why do some individuals but not others recognize opportunities?’’ ‘‘Why are some entrepreneurs so much more successful than others?’’ and ‘‘Why are some means for developing opportunities more effective than others?’’ Clearly, then, the field of entre preneurship does not exist in an intellectual vacuum; rather, its roots rest firmly in several older disciplines that, together, provide it with a firm foundation for understanding one of the most complex—and important—business processes in existence.
One final comment: Are some of these disciplines more useful than others in our efforts to understand entrepreneurship as a process? In other words, should we focus primarily on economic factors, on factors relating to entrepreneurs, or on factors relating to society as a whole in our efforts to
understand the entrepreneurial process? This issue has sometimes been debated in the context of a distinction found in several other branches of management: macro versus micro approaches.12 Macro approaches take a ‘‘top-down’’ perspective, seeking to understand how and why new ventures are founded, and why they succeed or fail, by focusing largely on what are often termed environmental factors—economic, financial, industry, and political variables. Presumably, these factors, which are largely beyond the direct control of individuals, shape the behavior and decisions of individual entrepreneurs, so understanding their impact is crucial. In contrast, micro approaches take a ‘‘bottom-up’’ perspective, seeking to understand the entrepreneurial process by focusing primarily on the behavior and thoughts of individuals or groups of individuals (e.g., founding partners). Presumably, it is the way in which individuals behave that is the key to understanding the entrepreneurial process. Is either view more accurate or more useful than the other? Absolutely not. We believe that full understanding of entrepreneurship can only be gained through careful consideration of both perspectives. In fact, we agree strongly with one colleague who recently noted that a key defining aspect of entrepreneurship is that it involves efforts to understand how micro factors (e.g., the ideas, thoughts, and actions of individuals) interface with environmental factors (technology, life cycle of a given industry, economic conditions, etc.).13 In other words, a central question in the field of entrepreneurship is: ‘‘How are the motives, ideas, and intentions of individual entrepreneurs and the environmental conditions they face (e.g., conditions in specific markets of industries) reflected in the kind of companies they start?’’ In essence, the two approaches are complementary, and both are needed to gain a full understanding of entrepreneurial process. For this reason, both will be represented throughout this book.
What Entrepreneurs Do Versus What, Perhaps,
They Should Do: Where Research-Based
Principles Meet Actual Practice
As we mentioned earlier, one of us (Baron) has been an entrepreneur; in fact, he has started and run two different companies. These experiences were, by and large, very good ones, but when Prof. Baron thinks about them, he often ponders this thought: ‘‘How great it would have been to have had the knowledge in this
Figure 1 . 5
Opportunities Often Emerge from Change
In recent years, increasing numbers of persons have become aware of the fact that people on the same flights or staying in the same hotels often pay different rates. This awareness was one factor that created the opportunity
Expedia.com and similar companies have exploited. Copyri ght 2003 Expedia, Inc. All rights rese rved.
book when he started those companies!’’ Looking back, he now realizes that he made virtually every mistake that lies in wait for unsuspecting entrepreneurs– mistakes that experienced ones generally avoid. From choosing a partner (not well!) to signing a licensing agreement (too favorable to the large company that licensed Prof. Baron’s technology), he made one serious error after another. Despite this, both companies survived and were profitable, but how well might they have done if he had known how to avoid these mistakes?
We’ll never know, but it seems possible that the answer is that these companies would have been much more successful. We mention these personal experiences here because they illustrate what we think is the real and lasting value of this book—one reason you may want to keep it on your bookshelf in the years ahead. In the pages that follow, we don’t simply describe what entrepreneurs do—how they recognize opportunities, obtain financing, start companies to exploit these opportunities, and so on. In addition, we will also try to indicate what, perhaps, they should be doing during each phase of the entrepreneurial process. In other words, we will try to tread the fine line between actual practice—what goes on in the hectic and turbulent world entrepreneurs face each day—and steps that, according to the findings of careful research, would be helpful to them in their efforts to start and run successful new ventures. For this reason, we’ll cover many practices and activities that entrepreneurs do not always recognize and adopt but which, we believe, can be highly beneficial. For instance, research findings suggest that entrepreneurs who engage in such activities as performing a careful feasibility analysis (a preliminary evaluation of a business idea to determine whether it seems worth pursuing; see Chapter 3), developing clear business models (a company’s plans for how it will compete, use its resources, deal with customers, and generate profits; see Chapter 7), and engaging in careful competitor analysis (detailed analysis of a company’s competitors, as an initial step in planning how to gain competitive advantages over them; see Chapter 4) are more likely to succeed than those who do not.14 Sad to say, Professor Baron did not perform these activities when he started his own companies, and he is now convinced that not doing so had negative consequences for the success of these new ventures.
In short, after reading this book and making the concepts and ideas it presents your own, you will, we firmly believe, be much better prepared to meet the challenges of starting a new venture than was true for Prof. Baron— and perhaps a majority of all first-time entrepreneurs. So no, we definitely do not have all the answers, at least not perfect or complete ones; the field of entrepreneurship is still too young for that. But we can offer advice for actions and procedures that will help tip the balance in your favor as an entrepreneur. So please read on; the new ventures that benefit will be your own!
K E Y
P O I N T S
n Entrepreneurship, as a field of business, seeks
to understand how opportunities to create something new (new products or services, new markets, new production processes or raw materials, new ways of organizing existing technologies) arise and are discovered or created by specific individuals, who then use various means to exploit or develop them, thus producing a wide range of effects.
n In recent years, the allure of entrepreneurship
has increased, with the result that more people than ever before are choosing this activity as a career.
n Entrepreneurship, as a branch of business,
has important roots in economics, behavioral science, and sociology.
n The field of entrepreneurship recognizes that
both the micro perspective (which focuses on the behavior and thoughts of individuals) and the macro perspective (which focuses pri-marily on environmental factors) are important for obtaining a full understanding of the entrepreneurial process.
n This book will do more than describe what
entrepreneurs do (common practice); it will go further and describe actions and procedures entrepreneurs can perform to increase the likelihood that their companies will succeed.
Entrepreneurship: A Process
Perspective
Now that we have offered a working definition of entrepreneurship, highlighted its importance, and briefly described its roots in related disciplines, we will turn to another key task: suggesting a framework for understanding it as a process. This will be a guiding theme for the remainder of this book, so it is important that we present it clearly and that you understand fully what it implies.
The view that entrepreneurship is a process rather than a single event is certainly not new or unique to this text; on the contrary, there is a growing consensus in the field that viewing entrepreneurship as a process which unfolds over time and which moves through distinct but closely interrelated phases is both useful and accurate.15Further, there is general agreement that the key phases in this process are as follows:
n Recognition of an Opportunity:The entrepreneurial process often begins when one or more individuals recognize an opportunity—the potential to create something new (new products or services, new markets, new production processes, new raw materials, new ways of organizing existing technologies, etc.) that has emerged from a complex pattern of changing conditions—changes in knowledge, technology, economic, political, social, and demographic conditions.16 Opportunities have the potential to generate economic value (i.e., profit) and are viewed as desirable in the society in which they occur (i.e., development of the opportunity is consistent with existing legal and moral standards, and would, therefore, not be blocked or constrained by these standards).
We will examine the emergence of opportunities in Chapter 2 and the cognitive roots of entrepreneurship in Chapter 3, but for the moment, we want to emphasize just one point: in a sense, there really is nothing ‘‘entirely new under the sun.’’ Ideas do not emerge out of a void; on the contrary, they almost always consist of a novel combination of elements that already exist. What is new is the combination and the recognition of links or connections between the various elements of which the ideas are composed. To take a striking example from history, Alexander Graham Bell did not invent the telephone out of sheer creative genius. Rather, he combined component ideas that already existed and had been generated by other people (e.g., electric batteries, basic research on the nature of sound, etc.) in a new way and invented a product that revolutionized human communication.
Similar argument holds for recognizing opportunities. The oppor-tunities themselves often emerge from changes in economic, technological, governmental, and social factors. When entrepreneurs notice links or connections between these changes (i.e., when they notice patterns in these changes), ideas for new ventures may quickly follow. For instance, consider Bill and Cheryl Brown, who recently started The Second Time Around, Inc., a company that helps people getting married for the second (or third or fourth) time plan their weddings (see Figure 1.6).17 The company experienced tremendous growth because, in essence, its competitors—existing wedding services—focus entirely on young people getting married for the first time. Bill and Cheryl Brown noticed, however, that several recent trends converge to suggest the need for a company like theirs. First, the number of people getting married who have been married before has increased dramatically. Second, because these individuals tend to be older than people marrying for the first time, they often have greater financial resources. Another, and seemingly unrelated trend is that
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Describe the process perspective of entre-preneurship, and list the major phases of this process.
older people in many societies seem increasingly willing to ‘‘indulge’’ themselves—they do not want to miss out on experiences simply because they are in their forties or fifties instead of their twenties and thirties. At first glance, these trends and events might seem to be unrelated, but when considered together, a striking pattern emerges: Millions of people in the United States who need help planning their second or third wedding. The idea for Second Time Around was suggested by this emergent pattern, and the company provides a clear illustration of how diverse events and trends can combine to produce a new and potentially profitable business opportunity. n Deciding to Proceed and Assembling the Essential Resources: Having an idea for a new product or service or recognizing an opportunity is only, of course, the first step in the process. At that point, an initial decision to proceed—to do something active about the idea or opportunity—is required. As Shane, Locke, and Collins suggest, the entrepreneurial process occurs because specific individuals make this decision and act upon it.18So, in their view, understanding entrepreneurs’ motives is crucial to comprehending the entire process. Deciding to start a business is one thing; actually doing so is quite another, and would-be entrepreneurs quickly discover that they must assemble a wide array of required resources: basic information (about markets, competitors, environmental and legal issues), human resources (partners, initial employees), and financial resources. Gathering these resources is one of the most crucial phases of the entrepreneurial process, and unless it is completed successfully, opportunities, no matter how attractive, or ideas for new products and services, no matter how good, ‘‘die on the vine,’’ so to speak. It is at this stage, and especially when seeking financial backing, that entrepreneurs typically prepare a formal business plan—a detailed description of how they plan to develop their new venture. (Assembly of required resources will be covered in Chapters 4–8.)
n Launching a New Venture:Once the required resources are assembled, the new venture can actually be launched. Doing so involves a wide range of actions and decisions: choosing the legal form of the new venture, developing the new product or service, establishing the roles of the top management team, and so on. Sadly, many new entrepreneurs do not fully grasp the complexities of starting a new venture, and as we will note in later chapters, this can burden them with problems that could, in fact, have been avoided. (The issues involved in actually launching a new venture will be covered in Chapters 8–11).
n Building Success and Managing Growth:Although moving from an idea to an actual, going concern represents major progress, it is just the start of another key phase in the entrepreneurial process: running the new venture and building it into a growing, profitable business. Many entrepreneurs recognize that this phase requires additional financial resources. However, in our experience, a smaller proportion fully recognizes the importance of two key factors in the process: developing effective strategies for encouraging and managing growth, and management issues relating to growth (e.g., being able to attract, motivate, and retain high-quality employees; building effective relationships among founders of the new venture). We cover both of these aspects of building growth in Chapters 12 and 13.
n Harvesting the Rewards: In this final phase, founders choose an exit strategy that allows them to harvest the rewards they have earned through their time, effort, and talents. Individual entrepreneurs must choose
Cou rtesy, Twice is Nice Encore Bridal Creations LLC Figure 1 . 6
‘‘Connecting the Dots’’ To Recognize New Business Opportunities
Opportunities for new ventures often emerge out of changes in a wide range of economic, technological, governmental, and social factors. Even though these trends and changes may seem, at first glance, to be unrelated, successful entrepreneurs perceive meaningful patterns that point to potentially profitable business opportunities. This was certainly true for Bill and Cheryl Brown who recognized the fact that millions of people in the United States who are getting married for the second or third time might need the help of a wedding service specifically focused on their needs. The company they founded, The Second Time Around, has been highly successful.
carefully among the many ways of reaping the benefits of successful entrepreneurship (see Chapter 14) so as to maximize the benefits they gain from, in many cases, years of sacrifice and commitment.
One additional comment: We do not mean to imply here that entrepreneurship can be readily divided into neat and easily distinguished phases. In fact, the process is far too complex for that to be true. But the activities just described do tend to unfold over time in an orderly sequence, with idea generation or opportunity recognition occurring first, an active decision to proceed, next, and so on. We believe that viewing entrepreneurship in this manner offers several benefits. First, it helps avoid a static view of entrepreneurship—one that sees it as a specific act (launching of a new venture) that occurs and is then complete. Such a view ignores the fact that entrepreneurs face an ever-changing array of tasks and challenges, and that they often think and feel differently about these tasks and challenges as they change and unfold.
Second, viewing entrepreneurship as an ongoing process draws attention to the key activities entrepreneurs must perform as they proceed with their efforts to convert ideas for new products or services into successful businesses. How well entrepreneurs perform these activities is often more central to their success than their personal characteristics or background—although, of course, these are important, too.19 Attention to the tasks entrepreneurs perform, in turn, gives us a good handle on identifying the skills, knowledge, and characteristics they need to function effectively in this role. So from this angle, too, a process perspective is useful. Finally, viewing entrepreneurship as a process suggests very strongly that different factors may affect it at different points in time, and that the effects or importance of specific factors may well change over the course of new venture creation. For example, consider the question of whether entrepreneurs are more ‘‘risk prone’’ than other people—a question that has received a great deal of attention in recent years. Some research findings suggest that entrepreneurs are indeed ‘‘riskier’’ than other people,20 while other findings from equally careful research point to the opposite conclusion—that entrepreneurs are less willing to take risks than other groups, such as managers.21How can both findings be true? One possibility is that whether entrepreneurs are more or less risk-prone than other people depends on which phase of the entrepreneurial process we are considering. For instance, early on, entrepreneurs must, almost by definition, be relatively willing to accept risk: If they were not, they would never give up secure jobs to start new ventures. But later on, once they have launched a new venture and must pay bills, meet payrolls, and manage limited resources, they may shift toward becoming much less accepting of risk. In essence, entrepreneurs’ behavior—and the role of risk in their decisions and strategies—may change considerably over the entrepreneurial process. Recent findings suggest that as this logic suggests, the impact of many factors on entrepreneurs’ behavior and success does indeed change over the course of new venture creation.22 An overview of the major phases of new venture creation is shown in Figure 1.7; please examine it carefully, because it provides a basic framework for understanding much of what follows in later chapters.
Levels of Analysis: Micro Versus Macro Revisited
Until recently, considerable disagreement existed in the field of entrepreneur-ship over the following question: In studying the entrepreneurial process, should we focus primarily on the entrepreneur (e.g., this person’s skills, abilities, talents, motives, traits—and perhaps, as we’ll explain in a later section, even biological or genetic factors23), or primarily on the economic, technological, and societal context in which the entrepreneur operates (economic and market conditions, government policy, etc.)? As you can
guess from our earlier comments on the macro/micro issue, we view this question as largely irrelevant. We believe that at every stage of the entrepreneurial process, individual-level (i.e., micro) variables, group or interpersonal-level variables, and societal-level (macro) variables all play a role (please refer again to Figure 1.7.)
For instance, consider the question of opportunity recognition. Certainly, this crucial process occurs in the minds of specific individuals and must, therefore, reflect the impact of individual-level variables such as the existing knowledge structures and the unique life histories of these individuals. But nothing that has to do with people—not even basic aspects of cognition— occurs in a social vacuum. The kind of ideas people generate reflect the times in which they live, the current state of technological knowledge, and many other aspects of the societies. Further, other people with whom the entrepre-neur has contact—friends, associates, or even figures in the mass media—often suggest the basis of an idea for a new product or service. For instance, recent findings indicate that entrepreneurs who have a mentor—an older and more experienced person with whom they work and who influences their career— tend to recognize more opportunities than entrepreneurs who do not enjoy the benefits of having a mentor.24In short, all three levels of analysis (individual, group, societal) are relevant and must be considered in order to understand idea generation fully.
Here’s another example of the importance of considering both micro and macro factors (individual-level, group-level, and societal-level variables) in our efforts to understand entrepreneurship: Why do some individuals, but not others, choose to become entrepreneurs? Again, all three categories of variables play a role. With respect to individual factors, some individuals have higher energy, are more willing to accept risk, and have greater self-confidence (self-efficacy) and greater tolerance for stress than others; those high on these dimensions—and especially self-efficacy25—are probably more likely to choose the entrepreneurial role.26 Direct evidence for the role of individual-level factors in choosing to become an entrepreneur is provided by many studies. Among these studies, one of the most unusual27compared the levels of testosterone shown by male MBA students who had previously started new ventures and those who had not. Results indicated that those who had previously chosen to become entrepreneurs had higher levels of this male
Idea for New Product or Service and/or Opportunity Recognition
Individual-Level Variables (skills, motives, characteristics of entrepreneurs)
Group-Level Variables (ideas, input from others; effectiveness in interactions with venture capitalists, customers, potential employees)
Societal-Level Variables (government policies, economic conditions, technology)
Initial Decision to Proceed
Assembling the Required Resources (information, financial, people-related, etc.)
Actual Launch of New Venture Building a Successful Business Harvesting the Rewards (exit by founders) Time
All phases are influenced by these three levels of variables
Figure 1 . 7 Entrepreneurship as a Process: Some Key Phases
The entrepreneurial process unfolds over time and moves through a number of different phases. Events and outcomes during each phase are affected by many individual-level, group-level, and societal-level factors.
hormone! Further evidence suggested that this difference stemmed from a greater tendency toward risk on the part of the entrepreneurs, at least early in the process.
The Possible Role of Genetic and Other Biological Factors:
The ‘‘Micro’’ Perspective Carried to the Limit
The findings we just described, surprising as they may be, are actually related to a suggestion you may well find even more provocative—the idea that genetic or biological factors, too, may play a role in entrepreneurship! How can this be? The authors who propose this idea28note that genetic factors have been found to play a role in several tendencies and predispositions that have been found, in turn, to be closely related to entrepreneurship. For instance, a genetic component is a factor in how individuals’ brains react to high levels of risk; some people find such conditions more pleasant or acceptable than others because, in part, they have genetically inherited tendencies to respond positively or negatively to risk. Some enjoy it, while others dislike it, which, in part, reflects differences in how their brains function.
Similarly, genetic factors play a role in how people react to overcoming obstacles or to engaging in the same activities for a long period of time. These factors, too, have been found to be related to entrepreneurship: Entrepreneurs show greater persistence than most people in overcoming obstacles and in engaging in the same activity for long periods of time.29 Third, it is well established that genetic factors play a role in the development of specific skills or abilities. These skills and abilities, in turn, lead individuals to pursue different kinds of careers and to seek employment in different industries. For instance, people with high mathematical or quantitative abilities may choose to work in technical or scientific fields. Because these areas offer greater opportunity for engaging in entrepreneurship than other fields or industries, the likelihood that such individuals will become entrepreneurs is enhanced. So, through this indirect route, genetic factors can influence entrepreneurship. We could continue because several other factors found to play a role in entrepreneurship are ones that are determined, at least in part, by genetic factors.30
Please don’t misunderstand: There is no suggestion here that genetic factors directly lead individuals to become entrepreneurs. Rather, the basic idea is that genetic and biological factors predispose individuals to develop certain characteristics, skills, or preferences, which in turn lead them to be more or less attracted to the kind of activities entrepreneurs perform and the kinds of environments in which they operate (see Figure 1.8). This intriguing possibility is just now becoming the focus of careful research. Stay tuned: The findings promise to be both interesting and surprising.
Group-Level and Societal-Level Factors
Turning to group-level factors, it seems possible that individuals who receive encouragement from friends or family members and those who have been
Preference for Certain Kinds of Activities and Environments Entrepreneurship The Development of Various Predispositions Characteristics, Preferences Genetic Factors Development of Various Skills and Abilities
Source: Based on suggestions by Nicolaou and Shane, 2006; see note 23.
Figure 1 . 8
Are Entrepreneurs ‘‘Born’’? The Possible Role of Genetic Factors in Entreprneurship
Recently, it has been proposed that genetic factors may play a role in entrepreneurship. One mechanism through which genetics may exert such effects is indirect in nature. Genes have been found to strongly influence several characteristics— personal dispositions that have also been shown to increases the likelihood that people will become entrepreneurs. In essence, then, some individuals may be predisposed to become
entrepreneurs by their own genetic nature.
exposed to entrepreneurs in their own lives are more likely to proceed than ones who do not receive encouragement and have not been exposed to models of entrepreneurs. For instance, when Enron, a huge energy company based in Houston imploded as a result of a series of accounting scandals (October 2001), members of the local business community feared that a large number of highly talented people would leave the Houston area. To keep them around, they organized Resource Alliance Group, a company whose sole mission was that of helping former—and highly talented—Enron employees to become entrepreneurs. They succeeded to an amazing degree: Within just three months, they had helped 25 senior Enron employees to found new ventures. Just a few short years later, several of these companies became profitable and were adding good jobs to the Houston-area economy. So clearly, group-level (i.e., social) factors such as help and encouragement from others can play a key role in the entrepreneurial process.
Societal-level factors, too, are important. Individuals who come from certain social and economic backgrounds, or who live in countries where government policies are favorable to starting new ventures, are more likely to choose this role than individuals from other backgrounds or who live in other countries. We could continue with other examples, but by now, the main point should be clear: Individual-level, group-level, and societal-level factors influence every action and every decision taken by entrepreneurs during all phases of the entrepreneurial process. Taking note of this fact, we will employ all three levels of analysis throughout this text. Although this approach adds complexity to our discussions of many topics, it will also offer a more complete, accurate, and useful picture of what we know about the process of entrepreneurship and how, perhaps, it can be made to run more smoothly for entrepreneurs. If those are not the ultimate goals of any text, then we, as authors, researchers, and entrepreneurs, have no idea as to what they should be!
Entrepreneurship: The Intersection of Valuable
Opportunities and Enterprising Individuals
Several years ago, one of us (Robert Baron) had the honor of introducing a highly successful entrepreneur, Mukesh Chatter, at a banquet held in his honor. (Mr. Chatter was receiving the ‘‘Entrepreneur of the Year’’ award given annually by Prof. Baron’s university, and had just sold his company to Lucent Technologies for almost one billion dollars.) During his acceptance speech, Mr. Chatter made the following remarks:
Success comes from many sources. Yes, you have to recognize an opportu-nity. . . . But to recognize it, it has to be there in the first place—something must have changed so as to generate the opportunity. After that, you have to recognize it and be able to tell that it is a good one—something you can turn into a successful business. Luck definitely plays a role; you have to be in the right place at the right time and know the right people who can help you. But after that, it’s largely a matter of hard, mind-bending work; if you are not willing to put in the hours and give up lots of other things in your life, you won’t succeed—you won’t make it happen.
We view these remarks as highly insightful. In just a few sentences, Mr. Chatter captured another key theme in entrepreneurship—and this book. Briefly stated, this theme suggests that it is the intersection of valuable opportunities and enterprising individuals that is the essence of entrepreneur-ship. Opportunities, as Mr. Chatter pointed out, are generated by changing economic, technological, and social conditions; but nothing happens with respect to these opportunities until one or more energetic, highly motivated individuals recognizes them and the fact that they are worth pursuing. This is
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Explain why entrepreneurship can be viewed as arising out of the intersection of enterprising people and opportunities.
an important point: Opportunities vary greatly in their potential value, with the result that only some are worth pursuing. In other words, only for some opportunities is the ratio of risk-to-potential benefits sufficiently favorable to justify efforts to exploit them. As you have probably observed yourself, some business opportunities are superior to others. They occur in industries that are faster growing or ones in which customer needs are easier to identify or satisfy. Further, some opportunities are easier to protect against competition. In Chapter 2, we carefully examine the specific characteristics that make some opportunities more promising than others. The key point we wish to make here, however, should be obvious: At the very heart of entrepreneurship is a nexus (connection) between opportunities and people (see Figure 1.9). It is this connection or intersection that starts the process—and sometimes changes the world!
The Cutting Edge: Emerging
Issues and Questions
There can be no doubt that entrepreneurs encounter change on a daily basis when starting and running their new ventures. In fact, in a sense, change is what entrepreneurship is all about: creating something new—profitable new ventures—where none existed before, bringing new products and services to market, meeting new and emerging customer needs. As a field of study in business, entrepreneurship reflects this basic reality. Partly because it draws on several different existing disciplines (strategy, organizational behavior, cognitive science, etc.), and partly because it is still quite new, it is literally overflowing with interesting issues and questions. To provide you with a sense of the breadth this work, we’ll now highlight just a few of the topics that many researchers would view as ‘‘on the cutting edge’’—topics related to important aspects of the entrepreneurial process that have recently become the focus of increased attention and study.
Entrepreneurship New Business Opportunities Enterprising Individuals (people willing to accept risk, etc.)
Figure 1 . 9
Entrepreneurship: What Sometimes Happens When Enterprising Individuals Meet New Opportunities
What is the essential nature of entrepreneurship? Shane (2003) suggests that it occurs when individuals willing to assume some risk recognize new business opportunities—and decide to act on them.
K E Y
P O I N T S
n Entrepreneurship is a process that unfolds
over time and moves through distinct but closely interrelated phases.
n The entrepreneurial process cannot be
div-ided into neat and easily distinguished stages, but in general, it involves generation of an idea for a new product or service and/or recogni-tion of an opportunity, assembling the re-sources needed to launch a new venture, launching the venture, running and growing the business, and harvesting the rewards.
n Individual, group, and societal factors
influ-ence all phases of the entrepreneurial pro-cess. Thus, there is no reason to choose between a ‘‘micro’’ and a ‘‘macro’’ approach to entrepreneurship; both perspectives are necessary.
n It is the nexus of valuable opportunities and
enterprising individuals that is the essence of entrepreneurship.
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Understand why this text will both describe what entrepreneurs ac-tually do and what, per-haps, they should do!
University-Based Technology Transfer: How
Universities Encourage Entrepreneurship
Universities are a prime source of new knowledge; in fact, providing it is one of their most important roles. This suggests that they might also serve as the source of ideas for new products, services, means of production, and so on. In fact, this idea is now widely accepted, with the result that many universities have established technology transfer offices charged with the task of helping to move scientific and technological discoveries by faculty from the laboratory to the marketplace. To encourage this process, legislation adopted in the United States (the Bayh-Dole Act) has made it possible for universities to own patents on inventions that were developed under federal research grants, which support the research of indivi- dual scientists or teams of scientists. Has this legislation encouraged patenting by universities, and hence the commercialization of technological and scientific breakthroughs? This and related questions have recently received growing attention from entrepreneurship researchers. Results are mixed: overall, the Bayh-Dole Act has not generated an increase in patenting by universities. However, it has encouraged patenting in fields or areas where licensing is an effective means of gaining new technical knowledge and generating revenue.31
Additional research on the role of universities in encouraging entrepreneurial activities suggests that both the quality of faculty (e.g., to what extent are they leaders in their field?) and the level of industry research funding received by a university are both important predictors of the number of start-up companies formed on the basis of the discoveries of faculty research.32 Overall, then, a growing body of evidence suggests that universities can indeed play an important role in encouraging entrepreneurship, with major benefits both to the universities and to society. It is not at all surprising, then, that studying this process is currently a topic of considerable interest in the field of entrepreneurship.
Incubators and Science Parks:
Helping New Ventures Grow
By now, you may be wondering about the following question: How, specifically, do advances achieved in scientific research conducted at universities find their way into start-up ventures? Licensing, in which the rights to patented inventions are granted to start-ups, is one important way. Another is through incubators and science parks, organizations focused on the mission of encouraging business growth in a specific region by combining and sharing knowledge. The number of such centers in North America is increasing rapidly, from only 12 in 1980 to more than 950 in 2002, and this number continues to rise. Most incubators are associated with universities, but in Asia and elsewhere, science parks sometimes stand alone and are not closely linked to a specific university. Both incubators and science parks are designed contribute to economic growth by nurturing young companies in a protected environment—one in which start-up ventures can rent space at favorable prices and benefit from the proximity of a large number of scientists and engineers on the university’s faculty (see Figure 1.10).33 In fact, many successful companies have come out of incubators and science parks. For instance, at Rensselaer Polytechnic Institute (RPI), the university where one of us (Baron) works, many businesses that are now highly profitable and are publicly traded on national stock markets were started in the university’s incubator. One such company, MapInfo, Inc., specializes in helping companies pinpoint locations for new branches, and in assisting governments to improve public safety and deal with security issues. A strong need for such services existed, and the founders of MapInfo recognized and exploited it.
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Describe several issues and questions about entrepreneur-ship that are currently receiving greater attention in the field (e.g., university-based technol-ogy transfer).
Research is currently being conducted to deter-mine the best ways for incubators and science parks to achieve their primary mission of helping to move advances in science and technology into useful products and services as quickly as possible.34 Incubators and science parks may well play an increasing role in the founding of many new ventures in the future, so again, it is far from surprising that studying them is another ‘‘cutting-edge’’ topic in entrepreneurship research.
Entrepreneurial Cognition:
A Look Inside the Mind
of the Entrepreneur
Are entrepreneurs a ‘‘breed apart’’—different from other people in important ways? Most people—including many entrepreneurs—believe that they are. Yet, early efforts to identify the characteristics or behaviors that make entrepreneurs unique generally yielded weak and inconsistent findings. Do these results mean that almost anyone can fill this role and start a successful new venture? Probably not; in fact, we feel that trying to understand entrepreneurship without understanding entrepreneurs is like trying to bake bread without yeast. Entrepreneurs are the active component and must, in one sense, be central to the entire process. But what is it about entrepreneurs that is crucial? Their motives? Skills? Abilities? Experience? Growing evidence suggests that all of these factors are important,35 but perhaps the most impressive research concerning entrepreneurs to date has focused on entrepreneurial cognition—how entrepreneurs think, reason, make decisions, and perform many other cognitive activities.36 Growing evidence suggests that entrepreneurs may indeed differ from other people with respect to many aspects of cognition. For instance, they may perceive risk differently—perhaps as more tolerable or not as great—may be more subject to some cognitive errors (e.g., a tendency to be overly optimistic), may be more capable of recognizing connections or patterns in seemingly unrelated events or trends (and hence, better at recognizing opportunities), and more likely to think long and hard about unexpected or surprising events or outcomes.37 Moreover, successful entrepreneurs, as compared to less successful ones, may have better mental frameworks for identifying good opportunities than other individuals—frameworks that are more complete and accurate—and take into account practical matters such as speed of revenue generation and solving customers’ problems.38
These possibilities are just the ‘‘tip of the iceberg’’ where the study of entrepreneurial cognition is concerned, but we hope the main point is clear: Insights into how entrepreneurs think about opportunities, markets, risk, competitors, their companies, and many other topics can greatly increase our understanding of how the entrepreneurial process unfolds. For this reason, entrepreneurial cognition, too, is a ‘‘cutting edge’’ topic in the field of entrepreneurship at the present time.
We should hasten to add that many other topics and issues are also receiving a great deal of attention at the present time. The ones we present here merely illustrate the broad range of diverse and intriguing issues that are currently in the forefront of entrepreneurship research. Needless to say, we’ll discuss these and many other cutting-edge topics in the remaining chapters of this book as consistent with our view that we should present not simply a description of what entrepreneurs do, but also guidelines for what they should do based on the most up-to-date knowledge of our field.
Figure 1 . 10
Incubators and Science Parks: Encouraging Economic Growth Through Entrepreneurship
All over the world, the number of incubators and science parks is increasing rapidly. These organizations seek to enhance regional or even national economic growth by providing start-up ventures with a protected environment—one in which they can benefit from reduced costs and the proximity of many scientists and engineers. Shown here is the incubator center at Rensselaer Polytechnic Institute—one of the first incubators in the United States—that continues to support start-up companies based on research by faculty or current and former students. Courte sy of Rob ert A. Baron
