Entrepreneurship I. What is entrepreneurship? • Innovation and entrepreneurship

1. Entrepreneurship I. What is entrepreneurship? • Innovation and entrepreneurship • Effectual reasoning • Impact of entrepreneurship II. Social entrepreneurship • How it differs • What it can accomplish

2. Entrepreneur: someone who organizes and assumes the risk of a business in return for the profits May have have been introduced by Richard Cantillion (1697-1734), an Irish economist The term came into wider use after John Stuart Mill’s Principles of Political Economy (1848) It disappeared by the end of the nineteenth century This was due to assumptions of perfect information If businesspeople make decisions based on perfect information, there no risk! As these assumptions declined in importance, entrepreneurship made a come back

3. Entrepreneurship: uncovering opportunities to create value through innovation In the context of a value-added business, an entrepreneur is someone who identifies a market opportunity for products and/or services He or she creates a business organization to pursue the opportunity Entrepreneurs are rewarded for transforming knowledge into new products and bringing them to the market Entrepreneurship is important to the economy Job formation and the growth of capital

4. Entrepreneurs exploit the opportunities that change creates Could be in technology, consumer preferences, social norms, etc. The entrepreneur always searches for this type of change, responds to it, and exploits it as an opportunity (Drucker) Is often but not always driven by a profit motive For many, value creation occurs through wealth creation Under market discipline, shifting resources to economically productive uses

5. An entrepreneur seeks to attract resources in a competitive marketplace Capital, labor, equipment, etc. Doing so is a good indication that the venture is a more productive use of these resources than the alternatives Those who can pay the most for resources can put the them to higher valued uses, as determined in the marketplace Value is created when customers are willing to pay more than it costs to produce the good or service The profit generated is a good indicator of the value it has created

6. Key issues for entrepreneurs How opportunity can be recognized The process of committing to an opportunity Gaining control over the resources Use at each stage is limited Only that sufficient to generate new information and success is used before more is sought Managing a network of resources that may or may not be within a single hierarchy or organization The way in which participants will rewarded Entrepreneurs must commit quickly, but tentatively to be able to readjust as new information arises

7. Entrepreneurs are specialists at taking on risks They insure workers by buying their products (or their labor) for resale before consumers have indicated how much they are willing to pay for them Workers receive an assured income (in the short run) while the entrepreneur bears the risk caused by price fluctuations in consumer markets Risk v. uncertainty Risk: recurring events whose relative frequency is known from past experience Uncertainty: unique events whose probability can only be subjectively estimated www.econlib.org/library/Enc/Entrepreneurship.html

8. Risk v. uncertainty for entrepreneurs Risk: recurring events whose relative frequency is known from past experience Actuarial tables allow insurance companies to manage risk Uncertainty: unique events whose probability can only be subjectively estimated Changes affecting the marketing of consumer products are uncertain Entrepreneurs will move into industries where profits are high isotopecomics.com/communique/entrepreneur.gif

9. www.1000ventures.com/business_guide/crosscuttings/entrepreneur_main.htmlwww.1000ventures.com/business_guide/crosscuttings/entrepreneur_main.html

10. Innovation and entrepreneurship Schumpeter: entrepreneurs create new businesses by carrying out “new combinations” Introducing new products or processes Identifying new export markets or sources of supply Creating new types of organization Leads to structural changes in the economy “Creative destruction” means obsolescence Entrepreneurship contributes to economic growth and the business cycle This is a useful high level explanation

11. Key factors for entrepreneurs People: those participating or bringing recsoruces to the venture Their skills, attitudes, knowledge, contacts, goals, and values provide a resource mix that contributes to success Context: those elements outside the control of the entrepreneur that influence success or failure The economy, tax and regulatory structure, sociopolitical environment, employment levels, technology, and social movements (labor, religion and politics)

12. Key factors for entrepreneurs The deal: the substance of the bargain that defines Who in a venture gives what Who gets what When deliveries and receipts will take place Each transaction delivers a bundle of values It is a mutually beneficial contractual relationship between the entrepreneur and all resource providers The capital raised is typically able to be used at the discretion of the entrepreneur There are typically conditions placed on this investment

13. The opportunity: any activity requiring the investment of scarce resources in hopes of a future return Different stakeholders may define “opportunity” differently What is critically important is how the entrepreneur frames the opportunity for potential investors and employees This is why the business plan is so important A critical factor that motivates joint action arises out of the creation of a shared definition of opportunity The issue here is the extent to which the entrepreneur’s vision will be compromised in the process

14. Two key determinants of whether or not a commercial entrepreneur will succeed Whether they know the industry in which they are seeking to garner resources and launch a new enterprise They must know key suppliers, customers, competitors, and the talent that they need to bring into their organization Whether they are known by others for their abilities They must also be recognized for their reputations and capabilities to gain the trust of others who will be willing to work with and invest in them These are issues of resource mobilization

15. New industries compete with established ones for labor, materials, and investment goods driving up the price of the resources The old industries cannot pass on higher costs because demand is switching to new products As old industries decline, new ones expand Imitators invest with optimistic profit expectations based on the innovator's initial success Overcapacity depresses profits and halts investment This leads to depression, and innovation stops Invention continues leading to a stock of unexploited inventions encouraging entrepreneurs to begin again

16. Entrepreneurs: specialists who use judgment to deal with novel and complex economic problems They may own the resources to which the problems are related or are stewards employed by the owners In times of major political, social, and environmental change, the number of problems requiring judgment increases and the demand for entrepreneurs rises as a result For supply to match demand, more people have to forgo other careers in order to become entrepreneurs They to do so for the higher expected pecuniary rewards associated with entrepreneurship

17. What do we know about entrepreneurs? Have an enthusiastic vision Vision is usually supported by interlocking set of ideas not available to the marketplace The blueprint to realize the vision is clear, but details may be incomplete, flexible, and evolving Promotes the vision with enthusiasm The driving force of an enterprise Takes initial responsibility to develop strategies Takes prudent risks Assess costs, market/customer needs and persuade others to join and help

18. www.hetemeel.com/haha/44336.Take+my+5+bucks+and+then+lose+50+more!+%20You+must+be+a+an+entrepreneur!.jpgwww.hetemeel.com/haha/44336.Take+my+5+bucks+and+then+lose+50+more!+%20You+must+be+a+an+entrepreneur!.jpg

19. Entrepreneurial reasoning is “effectual” Affordable loss: finding ways to reach the market with minimal expenditure of resources time, effort, and money Finding customers quickly by proximity, through social networks, professional connections Strategic partnerships Competitive analysis doesn’t make sense early on Obtaining pre-commitments from key stakeholders helps reduce uncertainty in the early stages Let the market come to them Sarasvaty, S. (2001). What makes entrepreneurs entrepreneurial?www.effectuation.org/ftp/effectua.pdf

20. Entrepreneurial reasoning is “effectual” Leveraging contingencies The ability to turn the unexpected into the profitable by leveraging contingencies that arise This is the core of effectual reasoning Not all surprises are bad and good or bad, surprises can be used as inputs into innovation This differentiates effectual from causal reasoning Causal reasoning: to the extent that we can predict the future, we can control it Effectual reasoning: to the extent that we can control the future, we do not need to predict it

21. Entrepreneurial reasoning is “effectual” The future is created by the strategies they put into practice Since the market is unpredictable, it can be shaped by their decisions and actions working with pre-committed stakeholders and customer-partners Existing market New market A bit more interesting Yawn! Existing product Almost there New product Suicide quadrant

22. Effectual logic does not assume pre-existent markets It assumes that the markets entrepreneurs create will be based on the people they are able to bring together Finding and leading the right people is the key to creating an enduring venture It begins with a given set of means and allows goals to emerge contingently over time Plans are made and unmade and revised and recast through action and interaction with others on a daily basis Problem: may lead to unintended consequences that are socially irresponsible

23. www.cartoonstock.com/newscartoons/cartoonists/mba/lowres/mban552l.jpgwww.cartoonstock.com/newscartoons/cartoonists/mba/lowres/mban552l.jpg

24. Impact of entrepreneurs In the United States, about 600,000 - 800,000 new small businesses are started each year Most succeed, many fail These businesses are the foundation for employment growth Firms of fewer than 20 employees generate the majority of net new jobs in the US These are ~98% of all businesses These new jobs are an immediate and significant boost to the economy www.publicforuminstitute.org/nde/entre/index.htm

25. Gazelles: “firms with revenue of at least $100,000 (initial year) and sustained 20% revenue growth over 4 consecutive years” (Birch) These contribute approximately 1 out of every 7 gross new jobs added to the economy each year 70% of gazelles are comprised of firms with fewer than 20 employees at the end of four years of rapid growth New economic theories suggest that the prevalence of small firms provide a constant tide of new ideas and experimentation This is vital to the health of the economy as a whole

26. Entrepreneurship I. What is entrepreneurship? • Innovation and entrepreneurship • Effectual reasoning • Impact of entrepreneurship II. Social entrepreneurship

27. II. Social entrepreneurship Social entrepreneurs are individuals with innovative solutions to pressing social problems The social mission is central to the innovation Profit is often not a main motivation They are ambitious and persistent, tackling major social issues and offering innovative solutions They make use of public and private sector resources to develop their ideas They seek wide-scale social change This can be through changing behavior or influencing policy www.ashoka.org/fellows/social_entrepreneur.cfm

28. Social entrepreneurs are change agents in the social sector - they: Adopt a mission to create and sustain social value (not just private value) Recognize and pursue new opportunities to serve that mission Engage in a process of continuous innovation, adaptation, and learning Act boldly without being limited by resources currently in hand Exhibit heightened accountability to the constituencies served and for the outcomes www.fuqua.duke.edu/centers/case/documents/dees_SE.pdf

29. Activity among social entrepreneurs is increasing 1987-1997: 31% increase in the number of new not-for- profits Compared to 26% for new businesses Social purpose commercial ventures Equal Exchange www.equalexchange.com Corporate social entrepreneurship Ben and Jerry’s: buy local, find minority owned businesses as suppliers, set up a foundation www.benjerry.com/

30. An overview of social entrepreneurship www.alphachimp.com/poptech/images/30_David-Bornstein.jpg

31. Social entrepreneurs operate in a different type of market The discipline of a competitive marketplace is missing Funding from donations, grants, foundations, NGOs, and governments Calculating the creation of social value is more difficult Factors Opportunity: a recognized social need, demand, or market failure usually means a sufficient market size Wider scope: financially self sustaining and those requiring subsidies Question is whether the necessary resources can be gathered

32. Factors Context: the economy (foundations are large investors), government regulatory activity, competition for scarce resources The impact on a social entrepreneur differs from that of a commercial entrepreneur This is because of the way the interaction of a social venture’s mission and performance measurement systems influences entrepreneurial behavior They can operate in a less hospitable context People and resources A wide and robust social network is important

33. Factors People and resources: who will be involved and what is needed There are problems of resource mobilization It is more difficult to hire and keep people in the organization More of a need for volunteers Deals: the arrangements between the entrepreneur and participants to secure resources (human, financial, tangible) Problem is arriving at a mutually agreed upon set of performance measures to demonstrate ROI

34. Austin (2006). Social and Commercial Entrepreneurship: Same, Different, or Both?, p 17

35. From USA Today Microloans www.usatoday.com/money/industries/technology/2005-11-03-social-entrepreneurship_x.htm

36. From SciDevNet Low-cost electrical grid www.scidev.net/News/index.cfm?fuseaction=readNews&itemid=1676&language=1