Entrepreneurship and Small Business Development – GradSchoolPapers.com

Entrepreneurship and Small Business Development
Presentation
Find out how many slides / how long we have – 7 minutes / whats the layout of the slide i.e. only a few words and illustrations? Do we define what is a high growth company i.e. what is a gazelle or
unicorn? Gazelles as they are fast moving in short period of times and have annual growth of 20% in sales such as google – Unicorns with start ups with a value of 1 billion dollars before IPO
(initial public offering where you take company to stock market), they were myths until recently such as Uber/Airbnb they have value of more than 1 billion dollars and private.
1. What traits and motivations of entrepreneurs are beneficial to creating a high-
growth company?
Traits are split into 4 – opportunism / proactivity / creativity / vision with flair. There is an ability to live with uncertainty and take greater risks, need for independence and
achievement. These 4 are for high growth companies.
Successful Entrepreneurs create their own opportunity, links with proactivity. Can make complicated connections and connecting fields of knowledge that seem not to be related / bringing in
new perspectives to solve issues which is linked to creativity. Elon Musk?
Ability to live with uncertainty and take greater risks / need for independence / need for achievement are supported by motivations for entrepreneurs.
Motivations – antecedent influences e.g family(much more likely if in the family) /gender(women have a lower rate of entrepreneurs as they have harder route to finance and so hard to
succeed) / ethnicity / education (dropped out of school and no qualifications ISN’T always the case such as high tech companies and high growth companies, owners have good education – Elon Musk was
interested in computer science from a young age / pg 41 ‘Musk bringing model rockets to school’, studied at queens uni kingston, uni of Pennsylvania on scholarship as pg51’Ive league school opening
additional doors’ shows opportunism from young age / Musk had dual degrees) / religion / national culture (some countries are more individualistic such as USA, you do a lot for yourself AND low
uncertainty avoidance where in the USA the risk isn’t great if you go for entrepreneurship). – Situational factors such as unemployment or immigration / economic opportunity. Link Elon Musk to any
one of these motivations.
Page 44 ‘Musk fostered an intense interest in Silicon Valley’ so much so that he left South Africa for good to go to Canada as his route to the states.
Page 52’As the weekend approached he would turn his house into a nightclub.’ Rented a 10 man house at Uni of Pennsylvania and on the weekend turned into a nightclub, he was proactive and creative
from a young age. Page 53’ I was paying my own way through college and could make an entire months rent in one night.’
Page 54’I really like computer games, but if i made really great computer games, how much effect would that have on the world?’ This shows the Musk had a bigger vision at a young age, to impact the
world in a positive manner that he willingly gave up pursuing his dream in the gaming industry, even though he had a gaming internship under his belt. Page 55’ I like to make technologies real that
i think are important for the future.’ This was his vision with flair, he really did want to shape the future.
Zip2 Musk first start up – getting businesses on the internet Page 61 ‘Musk often explained the concept through Pizza saying everyone deserved to know the location of their closest pizza parlour
and turn by turn directions on how to get there.’ This links back to traits as the ideas was creative and original. He struck a deal with Navteq, a GPS company and got the tech for free –
proactive.
Page 93’He always works from a different understanding of reality from the rest of us. Musk’s goals can sound absurd in the moment, he certainly believes in them, and when given enough time, tends
to achieve them.’ Shows entrepreneurial characteristics such as being creative and having a vision that nobody else can see, and with this can create a high growth company such as X.com.
Page 113’The company would gain an edge over the competition by building better and cheaper engines.’ Shows here that not only was Musk creative with SpaxeX, but he did it extremely well and
successfully.
Page 115 Pete Worden a retired airforce general describes Musk ‘ He was a visionary who really understood the rocket technology.’ Not only is there vision with flair but Musk has the knowledge and
the creativity to support his vision.
Creativity – Page 165’Tesla had produced the fastest, most beautiful electric car the world had ever seen almost from thin air.’
Page 215’SpaceX can undercut its US competitors – Boeing, Lockheed Martin, Orbital Sciences on price by ridiculous margin.’ Link back to traits.
SpaceX keeps 90% of its operations within the firm to save money and gain competitive adv, Page 227’Cost savings for homemade radio are dramatic, dropping from between $50-100k for industrial grade
equipment used by aerospace companies to $5k for SpaceX’s unit.’
Page 228 ‘SpaceX has transferred some of its equipment and techniques to Tesla so Tesla can make lighter stronger cars.’
Page 295 ‘Like Steve Jobs before him, Musk is able to think up things that consumers did not even know they wanted.’
Page 257 ‘Dragon 2 will be able to land anywhere on Earth that SpaceX wants by using the SuperDraco engines and thrusters to come to a gentle stop to the ground.’ Meaning reusing spaceships and
saving more costs.
Cost efficiency Page 275’Tesla would make up for its lack of r&d money by hiring smart people, who could outwork and outthink the third parties.’
Tesla created networks of charging stations Page 301’Musk insisted that Tesla owners would soon be able to travel across the US without spending a penny on fuel.’
External sources:
Passion for work, or love of one’s work, has been identified in a qualitative analysis by Locke (2000) as a core characteristic of great wealth creators, such as Michael Bloomberg, Bill Gates, Ken
Iverson (Nucor), and Mary Kay Ash (Mary Kay). These entrepre- neurs confronted opportunity and challenges with fervor and ardor. Their enthusiasm for a type of business—their zeal for work—was so
intense that they worked through financial barriers (Gates and Iverson) and challenges to their new products and their new ways of marketing (Ash). Smilor (1997) suggested that passion is “per-
haps the most observed phenomenon of the entrepreneurial pro- cess” (p. 342), and Bird (1989) noted that entrepreneurial behavior is “passionate, full of emotional energy, drive, and spirit” (pp.
7– 8). This links to opportunism, by being enthusiastic and taking the risk and confronting challenges.
Tenacity has been identified consistently as an archetypical entrepreneurship
trait because the business start-up process involves confrontation of formidable barriers to market entry.
Entrepreneurs have visions of the companies they want to build that include images of growing businesses.communication of the vision is as important as vision content alone for motivating high
venture performance. Entrepreneurs may communicate their vision through their behav- ior (Bandura, 1986); however, an entrepreneur’s vision can inspire more directly through speeches, pep talks,
and written presenta- tions (Tichy & Devanna, 1986). Communicated vision may help align entrepreneur–employee goals. Links back into vision with flair.
Reference: The Relationship of Entrepreneurial Traits, Skill, and Motivation to Subsequent Venture Growth
J. Robert Baum and Edwin A. Locke
2. Answer the two related sub-questions:
a. What types of finance are available to high-growth firms (i.e. the gazelles or unicorns)?
Do we need to state pros and cons of each type of finance?
Bank Loans (more for small or medium sized firms which are already established and don’t intend to grow) where term is fixed and can be matched to companies investment. Company need to have
good cash flow(does firm have enough customers or physical asset) to pay interest and meet capital repayments and this loan is secured agains business or personal assets. High growth firms may not
have these personal assets to secure against the loan. (shows why this finance isn’t always available to high growth firms).
Gov grants which are usually free and given out at EU, national and regional levels but long and complicated application procedures.
Private equity – equity capital not quoted on stock market. – Venture capital which is a subset of private equity investments that support pre-launch, launch and early stage development
phases and typically large amounts of £2mil plus.
Business angels invest smaller amounts normally up to £1mil and operate in less formal ways that venture capitalists. Business angels use own money and normally successful entrepreneurs.
Venture capitalists access to more funds. Both VCs and BAs are available to business with growth opportunities and they get a share in the business but no interest or capital repayments and
they may offer support and access to network of business contacts…unlike banks with loans and overdrafts. Banks interested in cash flow via stock controls and firms needs to repay interest and VCs
interested in return rather than security and pay attention to quality and experience of entrepreneur.
Crowdfunding – entrepreneurs raise small amount of capital from late numbers of ppl and since 2009 11.7 million ppl have used this platform to back a project and $2.6bil has been pledged.
Initial public offering which is the first sale of companies share to public leading to stock market listing also know as flotation. Difficult running public company as managing short term
goals of shareholders vs long term goals of company / volatile stock prices Elon Musk argues stock price and performance of company not linked/ slower decision making.
External sources:
Interestingly, contrary to the current prominence given to sources of entrepreneurial finance from business angels or venture capitalists, internal finance in the shape of retained earnings and
debt funding are the most frequently used financing options for high growth companies (Vanacker and Manigart, 2010).
The most common type of finance applied for is a bank loan (40% of firms in the sample). Forty-nine percent of HGFs apply for bank loans, compared to 39% of other firms (this difference is
statistically significant). The second most common form of finance is bank overdrafts, which 26% of firms apply for. However, in this case HGFs are significantly less likely to apply (18% compared
to 27%). As bank loans tend to be offered on cheaper interest rates than overdrafts, this suggests that HGFs may in fact have access to less expensive capital than other firms. It may also reflect
the greater reliance of other firms on working capital, rather than growth finance.
Significantly, venture capital seems to be used by a very small proportion of HGFs with just 4.8% attempting to access venture capital. The figure for the overall SME population was 1%. This
suggests that while more significant for HG-SMEs, sources of equity finance are not a dominant form of funding for most HGFs, despite the perception within the policy community (Brown et al, 2014).
One of the key research questions in this report is whether HGFs are able to access finance as easily as other firms. The analysis above (in particular, table 3.2) suggests that HGFs who apply for
finance find it no harder or easier to obtain than other firms. However, the relationship may be more complicated than simple statistics allow us to analyse. HGFs are likely to have particular
characteristics, such as a size or sector, and these characteristics themselves may confound
any relationship.
This survey done by LSE. Reference: Funding issues confronting high growth SMEs in the UK, Ross Brown and Neil Lee
Between £10,000 and £2m can realistically be raised from one angel, although more has been achieved
Sourcing angel investors might require more searching than finding venture capitalists (VCs), but private investors are more prepared to back an early stage business
Angels may be found through industry contacts, but a more structured approach is via business angel networks The process is less formal than with VCs – angels often know their sector well, and so
make instinctive decisions. You are likely to have a closer involvement with your investor as they look to add value to your business
It usually takes between three and eight months to raise finance, sometimes more G Owner-managers will often be expected to give up at least 20 per cent equity
Regional Venture Capital Funds provide ‘equity gap’ funding of up to £500,000
VCs back high-growth strategies, such as acquisitions; product or service launches; new premises; or national, European or global business expansion
An exit through flotation or trade sale is expected within three to five years
VENTURE CAPITAL
PROS
Some investors can add valuable skills and open doors for your business
Investors may provide follow-up funding as your business grows
CONS
An estimated 95-98 per cent of funding proposals are rejected by VCs
Medium-sized to large investments are more attractive than smaller investments
ANGEL FINANCE
PROS
Angels often invest smaller sums than VCs, so may suit newer businesses
As well as funds, they may be able to offer skills, contacts and experience
Investment occurs in most business sectors and at all stages of development G Can be quicker and less formal than venture capital investors
CONS
Angels invest in only a very small proportion of the investments they are presented with – more than 90 per cent of investment opportunities are rejected at the initial screening
Many angels expect close involvement with the business they invest in, which not all businesses find desirable
Reference: NO-NONSENSE GUIDE TO FINANCE FOR HIGH GROWTH COMPANIES
How did Elon Musk get finance for his high growth companies?
Page 62 ‘Errol Musk gave his sons $28k for this start up’ Zip2.
Page 66’Mohr Davidow invested $3mil into the company.’ Elon received this sum from a venture capitalist firm.
Page 86 ‘X.com raised $100mil from backers including Deutchse Bank and Goldman Sachs.’ X.com, later known as paypal was Elons online financial insatitiion, the first of its kind, wiring money to
one another and after the merger with paypal go even bigger. This invention of this displays creative and opportuntisic traits, exploiting a massive gap in the market. Here its also clear that the
site was funded by bank loans along with Elons own money.
For Tesla, Musk himself was the angel investor, investing into the concept of high speed electric cars Page 154 Tarpenning a founder of Tesla said ‘You need angel investors to have some belief and
it wasn’t a purely financial transaction for Musk.’ Due to Musk’s engineering knowledge and interest in electric cars, the 6.5million dollar investment made him the largest shareholder and
chairman, with a further 9million once the prototype was made and again with 12million more coupled with 40 million from other VCs Page 161.
Tesla was on the verge of bankruptcy and VCs cant construct debt deals so Musk bluffed to the investors. Page 209’ Musk told the investors he would take another loan from SpaceX and fund the entire
round himself – all $40million himself.’ This tactic worked and investors came through, hours before Tesla went bankrupt. This links back into entrepreneurial traits creating a high growth company,
showing Musk is creative in terms of getting finance. Link this back to business plan as this was Musk’s plan to receive finance via bluffing.
Page210 ‘NASA had backed SpaceX to become a supplier for the ISS(international space station). The company received $1.6billion as payment for twelve flights to the space station.’
Page 253 ‘SpaceX received $2.6 billion to develop their capsules and ferry people to the ISS by 2017.’ This from Nasa – link back to state?
Tesla IPO Page 291 raised $226 million, company’s shares shooting up 41%.
b. How does the business model or business plan of an entrepreneur contribute to an
entrepreneur’s access to finance or to the venture’s success?
Business plan writes down what business model is and gives numbers whereas the model is something we just discuss.
A business model is a way of creating and capturing value e.g how do you make money by supplying product / service.
Venture capitalists want a high profit margin when looking at a business model.
Business plan and access to finance – stakeholder uncertainty where banks provide fundings and evaluate business plans as require collaterals and good cash flow / VC invest for capital gain
so they will place great emphasis on product and opportunity / business angels invest own money and are more involved than VCs. VCs have contractual provisions which is giving certain amounts of
funding after meeting requirements or to protect against agency risk.
Business Plan and venture’s success – creates common frame of reference for internal parties, useful when setting up company together and having to agree / complexity of business tasks is
beyond what is comprehensible by boundedly rationale individuals / complexity of business task and to cooperate with external parties / reducing uncertainty with respect to success of business and
mean of reducing behavioural uncertainty regarding true motivations and intentions of involved internal and external parties, adverse selection is prior to transaction or contract leads to
asymmetric info and moral hazard is post and occurs when one person take more risk as someone else bears the burden of those risk, to deal with this Banks specify collateral and VC contractual
provisions.
Elon Musk Business plan? How it helped him succeed and gain finance?
3. How do incubators, clusters and the State contribute to entrepreneurial success?
Incubator – organisation that creates a supportive environment that is conducive to the development of new firms. They provide starts up with shared office space / shared support services
to reduces overheads / professional business support and advice / network provision be in internal or external (all companies outside incubator that provide support for start ups on behalf of the
internal incubator).
Successful incubator – incubators maintain a spirit of entrepreneurship by enabling founders to retain significant shares of ownership / they offered preferred rates and terms from the best
service providers, allowing entrepreneurs to enjoy econ of scales / they offer preferential access to network of companies which is the main determinant of success.
Network incubator – have mechanism, to foster partnership amongst start up teams and other firms, facilitating a flow of knowledge and talent across companies and forging marketing and
technology relationships between them. This means start ups have to be related.This is how successful networked incubators work, by having a portfolio strategy. – They also combines best of two
worlds, the scale and scope of large corporations and entrepreneurship spirit of small firm. Connections help to recruit talent / expert advice / learn from other start ups. – Two critical
characteristics which are networking is institutionalised e.g. advisory board of external experts and the preferential access not preferential treatment, this is to maintain entrepreneurial drive.
Climate KIC accelerator / incubator is a large EU acceleration programmes focussed on climate impact by clean tech commercialisation. Many different locations which means start ups can
contact or gain more from others due to the franchising of the acceleration programme.
Adv of clusters – economies of agglomeration which is the benefit that firms obtain by locating near each other. Gives access to specialised inputs and employees / access to info with the
existence of repeated relationships and community ties fostering trust facilities/ complementary products for buyers and marketing complementaries / access to institutions and public goods with
education and training of employees and advice from experts / performance measurement and incentives with greater competition in clusters there is limited opportunistic behaviour due to repeated
interaction and the importance of reputation, so you need to be able to collaborate with others / larger markets for products / access to financial institutions as suppliers of funds are more
aligned with demands of companies in clusters / regional lock in – these adv attract more companies and region becomes larger and more successful and region gets locked in tech. Clusters attract
companies, expand and become valuable.
Cluster is successful when it doesn’t focus on one thing but in fact when they respond to the need of consumers.
Clusters and innovation, perceiving and responding to opportunities – perceive new buyers needs faster / perceive new tech, operating and delivery faster / flow of tacit knowledge and
unplanned interaction / rapidly source new components, service and machinery. From this is clear that the competitive pressure in a cluster is high.
Problems of clusters – too tech myopic and introspective / low investments in radically new tech / rising labour and property costs / increasing congestion. Detroit.
External sources:
More specifically, clusters facilitate new business formation and the growth of
successful start-ups by lowering the costs of entry (e.g. by providing ready access to
suppliers or low-cost access to specialized inputs, offering an environment in which the
costs of failure may be lower), enhancing opportunities for innovation-based entry (as a
stronger cluster environment will allow local entrepreneurs to develop and commercialize
new technologies more rapidly) and allowing start-up firms to leverage local resources to
expand new businesses more rapidly. Finally, strong clusters are often associated with
the presence of innovation-oriented local consumers, thus providing increased
opportunities for entry into differentiated market segments. As a result, entrepreneurship
is a particularly important channel for cluster-driven agglomeration, and may therefore be
crucial for the role of clusters in enhancing regional performance.
Reference: elgado, Mercedes, Michael E. Porter, and Scott Stern.
“Clusters and Entrepreneurship.” Journal of Economic
Geography 10.4 (2010) : 495 -518.
Elon Musk and clusters/incubators/the state?
He didn’t use gov or the state to fund his spaceX Falcon 1 rocket as it took too long, used his own money through the sale of Paypal after it went public, earned in excess of $100 million dollars.
Talk about Silicon Valley – link it into hub for investors, VCs funding for Musk’s high growth company.
Page 289’Jan 2010, department of energy struck a $465million loan agreement with Tesla.’

 
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