Organisational (corporate

Risk-taking

Entrepreneurs must be willing to take risks in order to see results. Often the risk they take involves investing their own savings in a new business.

LEARNER PROFILE

Risk-takers

Entrepreneurs take calculated risks hoping for great rewards.

A good example is the founder of Dropbox,

Drew Houston. Houston was a student at MIT and was fed up with carrying lots of USB sticks and having to email documents to himself to use of different computers. He came up with an idea for a solution and after some setbacks managed to apply to the startup hub YCominator and started Dropbox in 2007. A few years later he was contacted directly by Steve Jobs at Apply to say the market for Dropbox would be taken over by the iCloud service, but Houston refused to sell to Apple. The company he built is now worth over $1 billion.

Find examples of famous businesses which became a success a few years after their set-up.

Did the entrepreneurs behind these businesses take any risks? How did the risk-taking attitude of the entrepreneurs contribute to the success of the businesses? Discuss in class. Challenge 2: Is there a market for my product? Many people say that they want to work for themselves. However, many fail to become entrepreneurs because they are unable to identify a market opportunity (i.e., a product or service) that is sufficiently in demand for the business to make a profit. The original idea for most new businesses usually comes from one of the following sources: • own skills or hobbies, e.g., dressmaking or car bodywork repairs • previous employment experience, e.g., hairdressing • conferences and exhibitions which offer a wide range of new business start-up ideas using franchising, e.g., fast-food restaurants

• small-budget market research. The internet allows any user to browse directories to see how many businesses of specific types there are in the local area. This low-cost research might indicate gaps in local markets that the entrepreneur could fill and make a profit. Challenge 3: Do I have sufficient capital? Once an entrepreneur has decided on the business idea or opportunity, the next task is to raise the necessary capital. This will come from various sources, but the business owner/entrepreneur will almost certainly have to use some of their own savings to set up the business. Friends and family might also provide financial support. Banks may provide finance by way of a loan or an overdraft facility, but they will want to check the business plan carefully. Venture capitalists may be prepared to invest if the business idea is novel, offers significant profit potential and can be legally protected by a patent so that the idea cannot be copied. Government grants might be available, perhaps as part of a policy to reduce unemployment by encouraging people to set up new businesses. In an International Labour Organization (ILO) survey of new business start-ups, entrepreneurs said that the main difficulty they faced was getting finance. Why is obtaining finance such a major problem for entrepreneurs? • Lack of sufficient own finance – many entrepreneurs have limited personal savings, especially if they are setting up their own business because they have been made redundant. • Lack of awareness of the financial support and grants available. • Lack of any trading record to present to banks as evidence of past business success − a trading record can give a bank more confidence when deciding whether to lend money for a new venture. • A poorly produced business plan that fails to convince potential investors of the chances that the business will succeed. A lack of capital to run dayto-day business affairs is the single most common reason that businesses fail to survive in the first year. Capital is needed for day-to-day cash, in order to hold stock, and to allow the business to give SAMPLE trade credit to customers who then become debtors. Without sufficient working capital, the business may be unable to buy more stock or pay suppliers or offer credit to important customers.

Challenge 4: Where should I locate my business?

A suitable location is vital if the start-up business intends to sell directly to consumers. This raises the problem of costs. Perhaps the most important consideration when choosing the location for a new business is the need to minimise fixed costs. When finance is limited, it is very important to try to keep the break-even level of output as low as possible. Break-even is the output level where enough revenue is earned to cover all costs. This will greatly increase the chances of survival. Most entrepreneurs start their business by operating from their home. This has the advantage of keeping costs low, but there are drawbacks: • The entrepreneur’s home may not be close to the area with the biggest market potential. • It lacks status – a business with its own prestigious premises tends to generate confidence. • It may cause family tensions. • It may be difficult to separate private life from working life. If operating the business from home is not possible then the location and cost of new premises will have a big impact on the likely success of the business. New businesses that offer a consumer service need to consider location carefully. For example, a website designer could operate from home quite effectively, as communication with customers will be by electronic means. However, a hairdresser may need to consider obtaining premises in an area with the biggest number of potential customers. An alternative would be to visit customers in their own homes – this way, the entrepreneur may avoid the costs of buying or renting their own premises. Challenge 5: How do I build a customer base? In order to survive, a new enterprise must establish itself in the market and build up customer numbers as quickly as possible. The long-term strength of the business will depend on encouraging customers to return to purchase products again and again. Many small businesses try to encourage this by offering a better service than their larger and better-funded competitors. This might include:

• personal customer service • knowledgeable pre- and after-sales service • fulfilling one-off customer requests that larger firms may be reluctant to provide for. Challenge 6: How do I compete effectively? This is nearly always a problem for new enterprises unless the business idea is unique. Often a newly created business will experience competition from more established businesses that have more resources and market knowledge. The entrepreneur may have to offer better customer service to overcome the cost and pricing advantages of bigger businesses. Challenge 7: Must I keep accurate business records? Accurate records are vital in order to pay taxes and bills and chase up debtors. Many entrepreneurs fail to pay sufficient attention to this. They either believe it is less important than actually meeting customers’ needs, or they think they can remember everything, which is impossible. For example, the owner of a new, busy florist’s shop will not be able to remember all of the following: • when the next delivery of fresh flowers is due to arrive • whether the flowers for last week’s big wedding have been paid for • if the money received from an important customer has been paid into the bank • how many hours the shop assistant worked last week. Challenge 8: Do I have the necessary management skills? Most entrepreneurs have had some form of work experience, but not necessarily at a management level. They may not have gained experience of: • leadership skills • cash handling and cash management skills • planning and coordinating skills • decision-making skills SAMPLE • communication skills • marketing, promotion and selling skills.