Entrepreneurship and Venture Initiation

This article will focus on the process of venture initiation as it relates to the entrepreneurial process. In order to understand the process of initiating a new venture, one has to understand the field of entrepreneurship and the role of the entrepreneur. Entrepreneurship has become an important trend in the United States economy, and many individuals have elected this field as a career of choice. The increase in technology and globalization has changed the way that business is conducted as well as how entrepreneurs are categorized. It is important to understand the environment in which the new concept will operate, and most scholars would suggest providing a conceptual and process framework. Therefore, potential entrepreneurs will need to study the industry in order to develop a strategy.

In order to understand the process of initiating a new venture, one has to understand the field of entrepreneurship and the role of the entrepreneur. Many entrepreneurship scholars agree that the entrepreneurial process is a function of three variables, which are characteristics of the founder(s), the environment, and the business opportunity (Timmons, 1999). Entrepreneurship has become an important part of the United States economy, and many individuals have elected this field as a career of choice. "Entrepreneurship is a phenomenon that continues to excite the imagination of students interested in entering careers in which they must adapt to rapidly changing environments, inventors looking for ways to commercialize their discoveries, government leaders attempting to undertake economic development, and CEOs of large firms seeking to remain competitive in a global marketplace" (Allen, 2006, p. 4). All entrepreneurs believe in the success of their dreams, and expect their ventures to take off and expand.

Entrepreneurs

Webster (1977) classifies the title "entrepreneur" into five different categories. He states that the distinctions between the different categories allow one to understand the different terminology in the field and practice.

Webster's Five Categories of Entrepreneur

The five different categories of entrepreneur include:

• The Cantillon Entrepreneur. Richard Cantillon introduced the term entrepreneur in the early eighteenth century to denote a person who is treated as one of the four factors of production (i.e., land, labor, capital, and the entrepreneur). The entrepreneur is considered the catalyst in the role of innovator, and is responsible for fueling growth in a capitalist economy. Entrepreneurs can be successful and make a profit when they have the ability to create an opportunity in which they have a temporary monopoly to change market products and processes before the competition has an opportunity to dilute industry profits. Many economists do not view the entrepreneur as a real person. Rather, the entrepreneur is seen as a "silent theoretical entity that makes a rational decision, strives for profit maximization as defined by the economists, and assumes managerial and other uninsurable risks in exchange for profits" (Kilby, 1971, p. 2).
• The Industry-Maker. Traditional management research views the entrepreneur as an industry-maker. Someone who builds the nation's economic system, is hard-working and willing to take risks, and invests personal assets. According to this school of thought, the entrepreneur establishes the foundation for an organization, and then builds it into an industry leader.
• The Administrative Entrepreneur. The entrepreneur role is viewed as an executive who establishes a new company, or a reorganization of an existing corporation, and becomes a permanent leader of the management team. Although there are similarities, there is a distinct difference between an industry-maker and an administrative entrepreneur. Administrative entrepreneurs are usually associated with an individual organization (e.g., Henry Ford), whereas industry makers are usually considered manipulators (e.g., Jack Welch) of an entire industry of a large segment of an industry.
• The Small Business Owner/Operator. During Webster's time, small business owners were perceived to be the local merchants, and were tied predominantly to the retail and wholesale industry. Many scholars believe that these vendors were limited in scope in regards to sales, geographical outreach, and profit potential. However, technology, particularly the Internet, has allowed service businesses as well as retail businesses to reach an international market.
• The Independent Entrepreneur. An individual who creates ventures from scratch, and who does not generally commit long-term managerial responsibilities to one venture. These individuals tend to be very creative and get a thrill from developing the business.

All five types can be seen in the system, but they have different roles. Some of the key distinctions between the groups can be reviewed in the table listed below.

Allen's Modern Categories of Entrepreneur

Source: F. Webster. (1977). Entrepreneurs and ventures: An attempt at classification and clarification. The Academy of Management Review, 2, 55

Webster's work was written in the 1970s, and times have changed. As noted with the small business owner category, the increase in technology and globalization have changed the way that business is conducted as well as how entrepreneurs are categorized. Allen's categories (2006) are reflective of how business has been conducted in the twenty-first century. These categories include:

• The Home-Based Entrepreneur. Millions of people operate home-based businesses. Although many of these businesses start out as sole proprietors, many have grown to the point that they can compete against large, well-known businesses. Technology has made it possible for businesses to operate from any location, and home-based businesses are able to tap into resources via the Internet. Home-based businesses are usually the starting point for many businesses.
• The Cyber Entrepreneur. This type of entrepreneur enjoys the fact that he or she is able to run a full-fledged business without a brick-and-mortar location. Cyber entrepreneurs are able to process all of their business transactions with customers, suppliers, and strategic partners over the Internet. In addition, their businesses tend to be digital products and services that do not require a physical infrastructure (e.g., warehouse). Allen's 2012 edition of Launching New Ventures does not list the cyber entrepreneur as its own separate "path to entrepreneurship," as having an online component to one's business has become an essential part of entrepreneurship overall.
• The Serial Entrepreneur. These entrepreneurs, also called portfolio entrepreneurs, enjoy creating businesses, but they tend to have a desire to move on when the business is up and running. They are motivated by the hype of the pre-launch and start-up phases of the business, but do not have a desire to handle management responsibilities.
• The Traditional Entrepreneur. Traditional entrepreneurs are classic entrepreneurs. They start brick-and-mortar businesses and stick with them as they begin to prosper. Traditional entrepreneurs will be around as long as there is a need to build sustainable businesses, especially in industries such as food services, manufacturing, and retail.
• The Nonprofit Entrepreneur. Nonprofit entrepreneurs have a passion for work that involves socially responsible focuses such as education, religious, and charitable initiatives. Many seek their 501(c ) status so that they can solicit funding and donations from organizations and individuals who believe in their mission. Their businesses are allowed to make a profit as long as the profits are used for business purposes and not distributed to the owners of the company.
• The Corporate Venturer. Corporate venturers are individuals who seek out new ventures while working within established large organizations. Organizations create skunk works so that they have a unit to explore potential opportunities. Skunk works are autonomous groups that are given the mandate to find and develop new products for a company that may be outside of the organization's core competencies. However, many have found this a difficult task due to the bureaucratic structure of many large organizations. In order to be a successful corporate venturer, it is important that the following factors are present.

1. Senior management commitment. Commitment from the leaders is important to be successful.

• 2. Corporate interoperability. The work environment must support collaboration and provide the venturer access to the organization's resources.
• 3. Clearly defined stages and metrics. There need to be established timelines and due dates for each stage so that the organization can decide whether or not to continue to pursue the initiatives.
• 4. A high performance work team. Since these projects tend to be riskier, it is imperative that only the best employees are assigned to venture projects.
• 5. Spirit of entrepreneurship. Although success is the goal, failures may occur. Organizations must support the team as they explore the opportunities, even when efforts are failures.

Regardless of the type of entrepreneur, one objective is constant. Entrepreneurs enjoy seeing the fruition of their work. They enjoy creating and developing potential, whether it is from scratch or a restructure. Given the focus on technology, many entrepreneurs may be able to seek the assistance of venture capital organizations. The first venture capitalist firm was established in the 1940s with the purpose of providing financial and business support to entrepreneurs in exchange for repayment in capital gains. Venture capitalists tend to gravitate toward technology initiatives because of the potential for high returns. In addition, these organizations are interested in promoting their services nationally and internationally. Since the 1990s, venture capitalism has expanded to the global marketplace.

Application

New Venture Formation

"Since there is no consensus regarding the sequence of the identification of the idea/opportunity and the decision to initiate a new venture, there is no comprehensive process model of new venture formation" (Hunger, Korsching & Van Auken, 2002). There are different schools of thought concerning the process. Martin (1984) and Gartner (1989) state that the process commences when the entrepreneur decides to start a new business. This view is defined as decision driven because once a person decides to begin a venture, a venture opportunity is identified and the venture start-up is created. Another view (Wheelan & Hunger, 1992) suggests that recognition of a venture opportunity comes before deciding to start a new venture. This view supports the notion that an idea for a new venture leads to environmental evaluation to determine if a new venture opportunity is possible (Hunger, Korsching & Van Auken, 2002). The remainder of this section will highlight the process of the second view.

In this model, starting a new venture takes place prior to the business opening its doors. Much time, energy, and research is placed in determining whether to pursue an idea. Initiation of a new ventan opportunity and the testing of the business concept arising out of the opportunity (Allen, 2003). The tests are conducted through a series of analytical tools, which are considered a feasibility analysis.

Entrepreneurial Environment

One of the factors that affects the direction in which the new venture initiation process begins is the environment in which the new concept will exist. According to Allen (2003), the environment includes:

1. The industry in which a business operates;
2. The market the business serves;
3. The state of the national and international economy; and
4. The people and businesses with which the business will interact (p. 75).

It is important to understand the environment in which the new concept will operate, and most scholars suggest providing a conceptual and process framework. Industries constantly change. Therefore, potential entrepreneurs will need to study the industry in order to develop a strategy. It has been suggested that Porter's "Five Forces" framework can be used to outline the process for exploring a new venture.

Five Areas for Competitive Environmental Analysis

This model lists five key areas that potential entrepreneurs should evaluate when analyzing the competitive environment. The five forces are threat of entry, the power of buyers, the power of suppliers, the threat of substitutes, and competitive rivalry.

1. Threat of entry. Some barriers to entry may be so high that their presence will discourage entrepreneurs from attempting to enter. Some of these barriers include:

2. Economies of Scale. A new venture usually cannot achieve the same economies of scale as established businesses in the industry. One option would be to form alliances with other small firms to share resources in order to compete.

3. Brand Loyalty. New ventures may have to face customer loyalty to current products and services in the industry. As a result, entrepreneurs will need to spend a significant amount of money on marketing campaigns in order to get a foot in the door.

4. Capital Requirements. Upfront costs can be staggering. Therefore, entrepreneurs may need to outsource some services in order to keep costs down.

5. Switching Costs for the Buyer. New ventures will have to spend time and money convincing customers that the new product is worth switching to.

6. Access to Distribution Channels. Entrepreneurs must convince distribution channels that their product or service is worth distributing.

7. Proprietary Factors. New ventures may need patents in order to get started, and the holders of the patents may purposely withhold access in order to keep the new venture out of the market.

8. Government Regulations. The government can impose licensing requirements, high taxes, and/or zoning restrictions on new ventures.

9. Industry Hostility. Some industries have well-established firms that are hostile to new entrants.

10. Power of Buyers. If buyers have bargaining power, it may be difficult for a new venture to gain access and grow.

11. Power of Suppliers. Suppliers can raise prices or change the quality of a product that they supply in order to maintain control in the industry. Depending on the number of suppliers, it may not be advantageous for entrepreneurs to pursue certain ventures.

12. Threat of Substitutes. A new venture must be able to compete against products and services in its own industry as well as potential substitutes in other industries.

13. Petitive Rivalry. A highly competitive industry may reduce profits and the rate of return on investments. As a result, many organizations may resort to price wars and competitive advertising campaigns. Entrepreneurs will need to identify these potential rivalries in the proposed markets to determine the feasibility of entering the market.

Once a competitive analysis has been conducted and the position is still favorable, the entrepreneur can move to the next step in the process -- developing and testing the business concept.

Issues

Joint Ventures

New venture firms tend to pick out joint ventures in order to expand internationally. International joint ventures (IJVs) represent a form of alliance that has increased in popularity over the years (Inkpen & Crossan, 1995). From a new venture perspective, IJVs allow small organizations an opportunity to pool their resources together in order to launch new ventures with an international scope. Small ventures have grown at a phenomenal rate. Unfortunately, research on multinational enterprises has often focused on the large established organizations. However, small ventures have earned their right to be key players in the global economy.

If an entrepreneur decides to enter the foreign market, the first attempt is often as a joint venture. Many entrepreneurs spend a large amount of time building networks so that they can provide necessary supplies for the new venture. These resources tend to be located across the border. In addition, they need to promote themselves as players in the international market. Entrepreneurs realize that it is important that the right partnerships and alliances be formed if they desire their product or service to obtain the necessary backing in order to survive.

New venture success is determined by the types of alliances an entrepreneur is able to establish and maintain with other organizations. Joint ventures are one way an organization can become a key player in the international arena. Trust is a key factor in making these types of relationships work. However, creating a new partnership can be risky. A joint venture involves creating a new entity, which has to handle increased liabilities while making a name for itself. These relationships may become unstable over time. Therefore, the rate of failure tends to be high for these types of alliances.

Given the negative consequences and attributes of international joint ventures, the prospects are still encouraging, especially for small venture initiatives. Small businesses still have a place in the global economy. As more organizations attempt to build partnerships in the international market, there will be opportunity for IJVs to grow and expand. Scholars are challenged to continue their research on how joint ventures are formed and the process they use to launch new ventures. These types of ventures usually emerge rather than develop as the product of a strategic planning process. As a result, IJVs are entities that provide an opportunity for further research and study of international entrepreneurship.

Conclusion

"Entrepreneurship is a phenomenon that continues to excite the imagination of students interested in entering careers in which they must adapt to rapidly changing environments, inventors looking for ways to commercialize their discoveries, government leaders attempting to undertake economic development, and CEOs of large firms seeking to remain competitive in a global marketplace" (Allen, 2006, p. 4). All entrepreneurs believe in the success of their dreams, and expect their ventures to take off and expand. Although many scholars have not attempted to distinguish the different types of entrepreneurs, Webster (1977), classifies the title into five different categories. He states that the distinctions between the different categories allow one to understand the different terminology in the field and practice. Webster's work was written in the 1970s, and times have changed. The increase in technology and globalization have changed the way that business is conducted as well as how entrepreneurs are categorized. Allen's categories (2006) are reflective of how business has been conducted in the twenty-first century.

The field of entrepreneurship continues to boom as more individuals consider developing their ideas and passions -- despite the estimate that 75 percent of all start-ups fail (Ghosh, as cited in Blank 2013, p. 66). Scholars have not reached a consensus regarding the best way to initiate a new venture creation. Depending on the personality and characteristics of an individual, he or she may elect to enter this field in a number of different ways. For example, the lean start-up business model, developed in the 2010s, lessens risk for new ventures by favoring experimentation and customer feedback over the more traditional big-plan approach (Blank 2013, p. 66). Carland, Carland, and Stewart (1996) believe it is the entrepreneur's vision that keeps the initiation process alive. A vision can initiate an opportunity that has not yet been created, and it can grow as a result of entrepreneurial drive. As long as an entrepreneur thinks about the vision, there is still an opportunity to initiate the venture.

Terms & Concepts

Administrative Entrepreneur: An executive who creates an organization, or reorganizes an existing company, and becomes a permanent leader of the organization's management team.

Business Enterprise: Organization that provides goods and services; involves finance, commerce, and industry.

Cantillon Entrepreneur: A silent theoretical entity that makes rational decisions, strives for profit maximization as defined by economists, and assumes managerial and other uninsurable risks in exchange for profits.

Decision Driven: Situation that is based upon a decision to do something as opposed to upon an idea or opportunity.

Entrepreneurship: A mindset or way of thinking that is opportunity-focused, innovative, and growth-oriented.

Entrepreneur: A person who assumes risk and management responsibility of the business enterprise.

Joint Venture: A partnership or conglomerate, formed often to share risk or expertise.

New Venture: An entrepreneurial effort, as in a new venture start-up.

Opportunity Driven: Situation that is based upon an idea or opportunity as opposed to a decision.

Small Business Owner: An individual who starts an operating entity within the business environment and has a limited number of employees. As a general rule, an enterprise with less than 500 employees is considered a small business, especially, if its owner(s) is involved in hands-on management.

Venture Initiation: A start-up enterprise that is innovative in nature; often involves a certain amount of risk.

Bibliography

Allen, K. (2003). Launching new ventures, 3rd ed. Boston, MA: Houghton Mifflin Company.

Allen, K. (2006). Launching new ventures, 4th ed. Boston, MA: Houghton Mifflin Company.

Allen, K. (2012). Launching new ventures, 6th ed. Mason, OH: South-Western.

Arend, R. (2014). Entrepreneurship and dynamic capabilities: how firm age and size affect the 'capability enhancement-SME performance' relationship. Small Business Economics, 42(1), 33–57. Retrieved November 11, 2014, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=93503032&site=ehost-live

Blank, S. (2013). Why the lean start-up changes everything. Harvard Business Review, 91 (5), 63-72. Retrieved November 25, 2013 from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=87039866&site=ehost-live

Carland, J. A., Carland, J. W., & Stewart, W. H. (1996). Seeing what's not there: The enigma of entrepreneurship. Journal of Small Business Strategy, 7(1), 1-20.

Feld, B. (2013). Creating start-up communities. International Trade Forum, (1), 13-14. Retrieved November 25, 2013 from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=88215275&site=ehost-live

Gartner, W. (1989). Some suggestions for research on entrepreneurial traits and characteristics. Entrepreneurship Theory & Practice, 14(1), 27-37. Retrieved May 23, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=5332839&site=ehost-live

Hunger, J., Korsching, P., & Van Auken, H. (2002). The interaction of founder motivation and environmental context in new venture formation: Preliminary findings. Retrieved May 23, 2007, from http://www.public.iastate.edu/~jdhunger/EntWeb/BabsonPaper2002.doc

Inkpen, A. C., & Crossan, M. M. (1995). Believing is seeing: joint ventures and organization learning. Journal of Management Studies, 32(5), 595-618. Retrieved May 23, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=9512092709&site=ehost-live

Kilby, P. (1971). Entrepreneurship and economic development. New York: The Free Press.

Krzyzanowska, M., & Tkaczyk, J. (2013). Identifying competitors: Challenges for start-up firms. International Journal of Management Cases, 15 (4), 234-246. Retrieved November 25, 2013 from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=89544325&site=ehost-live

Martin, M. (1984). Managing technological innovation and entrepreneurship. Reston, VA: Reston Publishing.

The Role of Entrepreneurship in US Job Creation and Economic Dynamism. (2014). Journal of Economic Perspectives, 28(3), 3–24. Retrieved November 11, 2014, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=97270624&site=ehost-live

Porter, M. E. (1980). Competitive strategy. The Free Press.

Timmons, J. (1999). New venture creation: Entrepreneurship for the 21st century, 5th ed. Boston, MA: Irwin/McGraw Hill.

Webster, F. (1977). Entrepreneurs and ventures: An attempt at classification and clarification. The Academy of Management Review, 2(1), 54-61. Retrieved May 22, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=4409165&site=ehost-live

Wheelan, T. & Hunger, J. (1992). The usefulness of strategic management concepts to small businesses and entrepreneurial ventures. International Journal of Management, 9(4), 399-405.

Yu, J., Gilbert, B., & Oviatt, B. M. (2011). Effects of alliances, time, and network cohesion on the initiation of foreign sales by new ventures. Strategic Management Journal, 32 (4), 424-446. Retrieved November 25, 2013 from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=57983951&site=ehost-live

Suggested Reading

Allen, K. R. (2012). Launching new ventures: An entrepreneurial approach. 6th ed. Mason, OH: South-Western, Cengage Learning.

Barringer, B. R., & Ireland, R. D. (2012). Entrepreneurship: Successfully launching new ventures. 4th ed. Boston, MA: Pearson/Prentice Hall.

Harnish, V. (2014). Finding the Route to Growth. Fortune, 169(7), 45. Retrieved November 11, 2014, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=95887246&site=ehost-live

Herron, L., & Sapienza, H. (1992). The entrepreneur and the initiation of new venture launch activities. Entrepreneurship: Theory & Practice, 17(1), 49-55. Retrieved on May 23, 2007, from EBSCO Online Database Business Source Complete. http://search.ebsco-host.com/login.aspx?direct=true&db=bth&AN=9607032860&site=ehost-live

Osgood, W., & Wetzel Jr., W. (1977). A systems approach to venture initiation. Business Horizons, 20(5), 42-54. Retrieved May 23, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=4530157&site=ehost-live

Greenberger, D., & Sexton, D. (1988). An interactive model of new venture initiation. Journal of Small Business Management, 26(3), 1-7. Retrieved May 23, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohostcom/loginaspx?direct=true&db=bth&AN=5266476&site=ehost-live