Alternative Forms of Credit Grow

Everywhere you look credit for small businesses and start-ups is tight.  The banks have tightened the availability of loans and the conditions they expect.  The ability of entrepreneurs to tap their home equity and their 401(k)s to invest has declined with the decline of the property and stock markets.  Informal investors, of the ‘friends, family and fools’ variety, have likewise been hit and are less able to help.  Angel investors are spreading their funds more thinly as a reaction to risk, investing less in each business, and venture capitalists have slowed their efforts focusing on husbanding existing investments to an exit.  If entrepreneurs can’t find funds to start and small businesses can’t find funds to expand then we face a serious investment crisis that will impact on job creation.  Uncertainty in markets may be holding back large corporations from creating new jobs but the ‘credit freeze’ is killing the job creation potential of entrepreneurs.

Most governments have acknowledged the problem.  In the US the Obama administration has expanded the Small Business Administration’s loan guarantee program and increased the percentage of the loan it is willing to underwrite.  Traditional approaches are failing.  In the case of the SBA loan program you still need the banks to play ball.  The combination of Federal bureaucracy and tougher underwriting standards has also made the loans difficult to apply for, slow and unwieldy, which is bad news.  The UK in contrast is debating a novel alternative.  A new form of ‘credit easing’ has been proposed.  A form of ‘quantitative easing’ (printing money to buy government bonds) credit easing, as proposed in the recent Conservative party’s conference, has two phases.  Phase one involves government purchases of corporate debt which is designed to drive down corporate debt yields and encourage investment by larger businesses.  In the second phase the government proposes using government funds to establish a corporate bonds market for small firms.  These corporate bonds then lend directly to small businesses thus sidestepping traditional lenders.  There is a lot of speculation about why this has been proposed in the UK.  But let’s imagine the default of one or more Mediterranean countries and the spillover effects that would endanger banks worldwide yet again.  Rather than using taxpayers’ funds to bailout the banks the proposed credit easing would enable the UK government to lend directly to corporations, small businesses and entrepreneurs.  This is an approach that would remove toxic banks from the equation.

Meanwhile market failure also leads to market innovation and there are now new ways for entrepreneurs to raise funds.  Crowdfunding is the new game in town here it allows entrepreneurs to raise small amounts of money from large numbers of people usually for specific projects.  Kickstarter has become popular with artists, musicians and filmmakers but has recently received attention from entrepreneurs.  It allows entrepreneurs to raise funds by pitching projects that offer rewards to investors.  Other sites include: Indiegogo which is open to all forms of projects and dominated by charities; Profounder which is specifically focused on helping start-ups launch private rounds of crowdfunding; and, Microventures which is an online-broker of deals between start-ups and angel investors.  Even in the social entrepreneurship space there is micro-lending site Kiva that focuses principally on helping communities through micro-loans to entrepreneurs.  Credit failure may be causing some real problems for entrepreneurs but it also seems to be driving innovation and creating entirely new forms of credit, such as, government secured bonds and crowdfunding.  So, perhaps creative destruction does work after all.

Myths and misconceptions in entrepreneurship

Just last week a colleague from the UK asked me to share with them a document I used for a training course on entrepreneurship education with the National Council for Graduate Entrepreneurship.  The paper was on the ‘Myths and Misconceptions of Entrepreneurship‘ which was written as collective exercise between a number of people (Luke Pittaway, Jason Cope, Ellie Hamilton, Frank Cave) at Lancaster University in 2001.  I thought it would be worthwhile to share these myths and misconceptions more widely via this blog:

‘Entrepreneurs are born and not made’

Much of the early research in entrepreneurship has focused on trait theory and the personality of the individual (Chell, 1985).  As a consequence, it is often assumed that individuals have certain inherent traits that predispose them to entrepreneurial activity. From this perspective, it is deemed possible to build a personality profile which identifies the entrepreneur. More recent research indicates that entrepreneurial skills, abilities, behaviours and perceptions are dynamic, and can change over time and through experience and learning (Cope, 2001).  People may display some of the classic traits such as need for achievement, risk bearing, creativity but these are not necessarily stable or static characteristics. Entrepreneurship can also be viewed as a social construction (Chell and Pittaway, 1998; Pittaway, 2000) occurring within and shaped by particular social, historical and cultural contexts.  In other words nobody really knows and there are many disagreements about it even in the academic research.

‘Entrepreneurship is synonymous with new venture creation’

Entrepreneurship is often seen as a set of activities involved in organization creation (Gartner, 1985).  From a more dynamic perspective, it is reasonable to argue that the study of entrepreneurship should encompass the entirety of the entrepreneurial experience, prior to, during and after start-up.  By focusing on new venture creation alone, the rich and complex process of how entrepreneurs negotiate the management of a growing enterprise or venture is largely ignored (Cope, 2001).  Forms of entrepreneurial activity have seen to occur in many contexts other than simply during venture creation and this is, therefore, just one perspective.

‘Entrepreneurship is all about making a fortune’

Entrepreneurship is often associated with making money and creating a personal fortune.  For some people, this may indeed be the case.  However, even in a business context the underlying motivations for any individual may be extremely complex and can include the need to: achieve independence/autonomy; be challenged; create something new; exploit an opportunity; influence others; or simply to make a living.  Money is often the mechanism through which individuals (and those around them) measure their success rather than an end in itself.

‘Entrepreneurship only takes place in a business context’

Entrepreneurship is often associated with wealth creation in a business context. However, the same sets of behaviors and activities may be found in a number of other contexts – public sector, voluntary sector and other non-profit organizations. There is growing interest, both politically and academically, in the notion of ‘social entrepreneurship’ and ‘social enterprise’.  The triggers for such activity and behavior may be different (for example, the response to a perceived social need or gap in provision).   It is not clear from the limited research to date whether there are significant contextual differences in terms of motivation, perceived rewards, use of networks, etc.  What is clear is that the sectoral boundaries between ‘public’, ‘private’ and ‘voluntary’ may become blurred.

Entrepreneurship is all about the cult of the individual’

Entrepreneurs are often portrayed as ‘heroes’ and entrepreneurial endeavor (particularly in Western societies) is associated with the expression of individualism.  Even where an individual is perceived to be leading entrepreneurial activity, this is not achieved without the involvement of others – who often occupy crucial roles within the organization.  Research in high growth firms in Silicon Valley, for example, indicates that a balanced team has an impact on long-term business growth and survival (Eisenhardt and Bird-Schoonhoven, 1990). In smaller firms the support network, the family and domestic partners are also viewed to have a significant impact on both the entrepreneur and the development of the small firm.  Entrepreneurial activity, therefore, is not always driven by individuals.

‘SMEs are a homogenous group’

Small businesses and owner-managers are often treated as a homogenous group, particularly for policy purposes.  This is, however, a gross over-simplification.   The SME sector is characterized by its diversity, e.g.:

  • Size – a micro-business employing less than 10 employees has a quite different dynamic to small and medium-sized enterprises employing 25-50 employees.
  • Industry sector – SMEs differ considerably between industry sectors depending upon their technology base and the dynamics of their market.
  • Owner-managers – differ in terms of their underlying business motivations, aspirations, experience and business strategies.

‘All owner-managers want to grow their business’ 

Western economies have institutionalized the concept of business growth, exemplified in the concept of GDP.   The SME sector is often heralded as the engine of economic growth (OECD, 1998).  As a consequence, much support for small businesses works on the assumption that all business owners wish to grow their business. Research evidence suggests that a desire for business growth amongst SMEs cannot be assumed (Gray, 1998).  Some owner-managers operate a business as a means of sustaining a particular lifestyle, whilst others wish to keep the business at a size that remains under their personal control.  Interestingly, some owner-managers actively pursue a strategy of business closure if they perceive this to be the best course of action.  The number of owner-managers that pursue substantial growth is only in the region of 15% (Carter et al, 2001).

‘Entrepreneurs are risk-takers’

It is a commonly held belief that entrepreneurs take risks.  However, research illustrates the complexity surrounding the concept of risk.  Some theorists argue that entrepreneurs are ‘moderate’ risk takers (Brockhaus, 1980; Gasse, 1982), whilst others suggest that entrepreneurs take ‘calculated’ risks (Timmons et al, 1985).  There are significant difficulties associated with any attempt to measure an entrepreneur’s risk-taking propensity, as the concept of risk is a subjective one. An observer may view the entrepreneur to be taking a risk whilst the entrepreneur might feel that he/she is actively trying to minimize the risk being taken (Chell et al, 1991).

‘Entrepreneurship cannot be taught’

Entrepreneurship courses are now being offered in a large number of US universities. ‘Two main types of course are evident: courses for entrepreneurship, and courses about entrepreneurship.’ (Levie, 1999; p4).  A common demarcation is that courses for entrepreneurship emphasize experiential learning and connection with entrepreneurs and entrepreneurial activity, whilst courses about entrepreneurship tend to be delivered in a more traditional manner – through lectures, textbooks and assessed through essay and exams.  These two different pedagogical approaches need not be mutually exclusive.  In teaching entrepreneurship, the subject can be approached from a functional, managerial perspective – studying the processes of start-up, sources of appropriate finance, forms of legal entity, the management of growth, exit strategies, etc.  Another underlying purpose may be to sensitize individuals to the contexts in which entrepreneurial activity may occur – for example, within small businesses, large corporations (termed corporate entrepreneurship or intrapreneurship), the public sector and voluntary organizations.   More broadly, there are interesting issues to be considered from social, historical, cultural and moral perspectives.

References:               

Brockhaus, R H (1980), ‘Risk taking propensity of the entrepreneur’, Academy of Management Journal, 23, 3, pp 509-520.

Carter, S et al (2001), ‘Barriers to Survival and Growth in UK Small Firms’, Report to the Federation of Small Businesses, London.

Chell, E (1985), ‘The entrepreneurial personality: a few ghosts laid to rest?’, International Small Business Journal, 3, 3,  pp. 43 – 54.

Chell, E and Pittaway, L (1988), ‘The social constructionism of entrepreneurship’, 21st ISBA National Small Firms Policy and Research Conference, Durham University Business School.

Cope, J (2001), ‘The entrepreneurial experience: towards a dynamic learning perspective of entrepreneurship’, PhD Thesis, Lancaster University. Lancaster.

Eisenhardt, K M, and Bird-Schoonhoven, C (1990), ‘Organizational growth: linking founding team, strategy, environment, and growth among US semiconductor ventures, 1978 – 1988′,  Administrative Science Quarterly, 35, pp. 504-529.

Gartner, W B (1985), ‘A conceptual framework for describing the phenomenon of new venture creation’, Academy of Management Review, 10, 4, pp 696-706.

Gasse, Y (1982), ‘Elaborations on the psychology of the entrepreneur’ in: Encyclopedia of Entrepreneurship, C A Kent, D L Sexton and K H Vesper (eds), Englewood Cliffs NJ: Prentice Hall.

Gray, C, (1998), Enterprise and Culture, London: Routledge.

Levie, J (1999), Entrepreneurship Education in Higher Education in England: a survey.  Survey commissioned by the Department for Employment and Education.

OECD (1998),  Fostering Entrepreneurship,  Paris: OECD.

Pittaway, L A (2000), ‘The social construction of entrepreneurial behaviour’, PhD Thesis, University of Newcastle. Newcastle-upon-Tyne.

Timmons, J A, Smollen, L E and Dingee, A L M (1985), New Venture Creation, Homewood, Illinois: Irwin.

In defense of the business plan

When anything becomes fashionable it is usually wise to be wary.  It currently seems fashionable to argue that the business plan is dead in entrepreneurship, that it has no real value for entrepreneurs and no real purpose in entrepreneurship education.  Two leaders in the entrepreneurship field are currently arguing this and beginning to get some traction.  First, Carl Schramm states in a recent column for Forbes: “Much of the how-to work is then focused on how to write a business plan and raise venture capital, which is bizarre given that (a) many successful entrepreneurs do neither, and (b) the business plan, despite its totemic status in academe, is far from the end of the entrepreneurial process and will probably change utterly during that process.  Secondly, Babson College has recently come out with research demonstrating that entrepreneurs rarely develop business plans and that business plans once developed do not represent the reality of running the business once it is up and running.

Now few people in entrepreneurship education would dispute that there is a need to shift from forms of education that teach knowledge to forms that teach skills and allow people to practice entrepreneurship as Schramm argued.  Nor would many disagree that we need to expand the methods of experiential education that are currently being used beyond purely the business plan.  Or disagree that the business plan only represents one aspect of the entrepreneurial process (the pre-start-up period) and that we need educational designs to cover other aspects.  To jump from this argument though to a general assumption that we should do away with educational practices that use business plans seems misplaced to me.  Business planning is one form of educational practice that is at the root of entrepreneurship education, it does provide some specific benefits, of course we should not rely quite so heavily on it as the principle method of experiential education, but that does not undermine its inherent value.

Likewise few would disagree with the Babson research.  No business plan ever really represents what happens once the business is started and yes it is true a large number of entrepreneurs are successful without ever producing a plan.  But again this is not a good argument for getting rid of business planning altogether or for not using this form in entrepreneurship education.  Even when there is little connection between the original plan and reality the merits of planning for an entrepreneur have value and they deserve more recognition.  They include:

  • The planning process is a process of decision-making about whether the business is really attractive to the entrepreneur (i.e. whether it might warrant giving up paid work).
  • Going through business planning also helps build confidence that the entrepreneur is on to something unique that would be attractive to customers and investors.
  • It can be used as a process of consultation and team-building enabling proposed partners to iron out specific aspects of the venture, while building trust and developing their team’s work culture.
  • As well as building trust it enables the team to focus on the nature of the proposal helping them develop a shared vision of the future and how the entrepreneurs intend to exploit it.
  • The process of planning also allows entrepreneurs to test out assumptions and refine arguments.  As they write, reflect on and refine their arguments.
  • By allowing reflection and refinement it can also allow entrepreneurs to anticipate mistakes before they make them.   
  • The planning process is important for persuading people.  Not just investors, but prospective employees, suppliers and even customers can be more convinced about the prospects for a business once they have it validated in writing.
  • As a process it is also a way of becoming more informed about all aspects of the venture especially specific technical issues, which becomes important when discussing the venture with others, including prospective customers.
  • Finally, it allows entrepreneurs to set benchmarks and performance targets through which they can consider and measure the progress of the venture later.

These merits are above and beyond the fact that many stakeholders will require a business plan anyway, from investors, to prospective employees and partners, to suppliers and customers.  With all these merits considered there must be value in the use of business planning in entrepreneurship education.  Inevitably, it does depend on how it is structured and taught.  My research with Dr. Jason Cope published in Management Learning found a number of key benefits that enabled business planning to simulate some important aspects of entrepreneurial learning relevant to the start-up phase.  These included:

  • Simulating ambiguity and uncertainty: “The ability of the course to successfully simulate an entrepreneurial learning environment results from giving students the freedom and responsibility to take action, make decisions and actually do something — the result being that in doing they learn experientially. The data demonstrates that adding ambiguity into the course design and creating pressures in terms of timescales are also significant in replicating, to some extent, the challenges and difficulties associated with starting a new business. In this way, the course mirrors the action-oriented, ‘learn-as-you-go’ process of new venture creation (Gartner, 1988), which involves trial and error, experimentation and problem solving.”
  • Enabling social learning: “In simulating the social dimension of entrepreneurial learning the creation of a communal work context is a significant aspect. Participative mechanisms such as self-selecting venture teams, learning coaches and the venture panel offer opportunities for reflective practice and vicarious learning. Students not only work with, and learn from, each other but the learning coaches and venture panel are able to bring the course ‘to life’ by sharing their insights and experience.”
  • Appreciating emotional exposure and commitment:  “An unusual dimension is the emotional commitment and exposure that the students experience as a result of having to conceptualize and justify the creation of a new venture. Students are forced to take ownership over the idea and it is this significant investment of the self that engages students in a meaningful way with the process of NVP, thereby simulating the passion and enthusiasm experienced by entrepreneurs during start-up (Cope, 2001).”    

So yes Carl Schramm and Babson College might be right in some respects but let’s be careful to avoid throwing out the ‘baby with the bathwater’.  Business planning does have its role both for entrepreneurs and in entrepreneurship education.

Journal of Family Business Strategy

At the USASBE conference I found out about a new journal ‘Journal of Family Business Strategy’ edited by Joe Astrachan from the Cox Family Enterprise Center at Kennesaw State University (Georgia, USA); the journal is published by Elsevier.  It’s unclear whether there is room for another journal in this subject (we already have the Family Business Review) but if there is Joe and the Cox Family Enterprise Center will make it work.  The flier states that the journal will: “…publish theoretical and empirical research that contributes new knowledge and understanding to the field of family business.  The journal is international in scope and welcomes submissions that address all aspects of how family influences business and business influences family“.  A wide range if topics are invited.

Learn more   

Evolution of entrepreneurship theory

Here’s a major challenge.  You have 7000 words to explain the evolution of entrepreneurship thought from the early 18th Century to the present day and you have to explain it in such a way that it is knowledgeable while being accessible to undergraduate students.  That is no easy task.  It is also the draft chapter I just completed for a 3rd edition of Enterprise and Small Business, a great UK text book edited by Profs. Sara Carter and Dylan Jones-Evans (assuming my draft chapter is acceptable of course).  It did make me realize though how interesting the history of entrepreneurship thought is.  Read Full Paper at Center for Entrepreneurial Learning and Leadership’s Working Paper Series.

Here is an extract:

The Beginning

Most readers will notice that the word entrepreneur has a French origin.   Hoselitz (1960) suggests that it originated during the Middle Ages when the term entrepreneur was applied to “..the man in charge of the great architectural works: castles and fortifications, public buildings, abbeys and cathedrals” (Hoselitz, 1960, p. 237).  Remains of this interpretation can be found inscribed on the older public buildings in France.  Given the origins of the word it should not be surprising that the early thinkers were French economists.  In most entrepreneurship texts Cantillon is recognized as the first to use the term ‘entrepreneurship’ in an economic context (Hébert and Link, 1988; Binks and Vale, 1990).  His Essai Sur la Nature du Commerce en Général was published in 1732.  Cantillon introduced an economic system based on classes of actors and entrepreneurs are one of the three classes.  There are ‘landowners’ who are financially independent aristocracy.  ‘Hirelings’ and ‘entrepreneurs’ were viewed to be financially dependent on others.  Hirelings earned fixed incomes while entrepreneurs were “…set up with a capital to conduct their enterprise, or are undertakers of their own labour without capital, and they may be regarded as living off uncertainty” (Cantillon, 1931, p. 55).  For Cantillon individuals who purchased a good at a certain price, used that good to produce a product and then sold that product at an uncertain price could be considered ‘entrepreneurs’.  Risk and uncertainty play central parts in his theory of the economic system.  Successful entrepreneurs were those individuals who made better judgments about changes in the market and who coped with risk and uncertainty better than their counterparts.

Schumpeter

While much economic thought had focused on the role of the entrepreneur in economic systems before the 1920s many contemporary researchers trace the origins of modern thought in entrepreneurship back to Joseph Schumpeter’s work (1934; 1963).  Schumpeter’s theories of the economic system and the role of entrepreneurship within it have been widely discussed (MacDonald, 1971; Shionoya, 1992; 1997).  His principle contribution can be found in his book ‘The Theory of Economic Development’ and an article ‘The Fundamental Phenomenon of Economic Development’.  Schumpeter introduced a concept of entrepreneurship which is quite different from the others discussed so far.  His theory is focused on economic development and the role of the entrepreneur in the development process.  Schumpeter argues, somewhat contrary to the established thought of the time, that the important question in capitalism is not how it supports existing structures and markets but how it creates and destroys them.  In contemporary thought ‘creative destruction’ is now seen as one of the crucial functions of entrepreneurial activity within an economy.  The function of the entrepreneur in this new theory was the person who innovates or makes ‘new combinations’ of production possible.  The concept of ‘new combinations’ covered five potential cases:

  • The introduction of a new good or a new quality of a good;
  • The introduction of a new method of production;
  • The opening of a new market;
  • The development of a new source of supply or raw-materials or half manufactured goods;
  • The carrying out of a new organization of any industry (Kilby, 1971).

Read Full Paper at Center for Entrepreneurial Learning and Leadership’s Working Paper Series.

Prizes drive innovation and entrepreneurship

An interesting article in Slate Magazine was just passed on to me by Jim Williams the Chair of our Center Advisory Council.  The article ‘Prize winning policy’ notes that at the end of 111th Congress in December the America COMPETES Act went unnoticed.  The act changes the way the federal government supports private-sector R & D and they hope to do this through prizes.  As the article notes “So-called “inducement prizes” (as opposed to “recognition prizes,” like the Nobel or the MacArthur or the Pulitzer) make up a major part of the Obama administration’s grand strategy”. 

Such prizes have a long history and do appear to work. The British government in 1714 offered £20,000 measuring longitude at sea, Napoleon offered a prize for innovations in food preservation which led to the develop of canning and the $25,000 Orteig Prize encouraged Charles Lindbergh to make his trans-Atlantic flight.  The X prizes are the most recent private sector version, for example, the 1996 Ansari X Prize for advances in commercial spaceflight.

Read the full article here

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