Chapter 1

The Nature and

Importance of
Entrepreneurs
Hisrich
Peters

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. Shepherd
 Ted Turner

1. What attributes of his

personality you can identify?
Explain it with examples.

2. What do you find inspirational

about his story?

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Nature and Development of
Entrepreneurship
 Entrepreneur – An individual who takes
initiative to bundle resources in
innovative ways and is willing to bear
the risk and/or uncertainty to act.
Or
 Entrepreneur – An individual who gather
resources to create an economic activity
while bearing different types of risks risks.

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Nature and Development of
Entrepreneurship
 Entrepreneurship is the process of creating
something new (1) with value of devoting the
necessary time and effort (2) assuming the
accompanying financial, psychic, and social
risks (3) and receiving the resulting rewards
of monetary and personal satisfaction and
independence (4).
 Being an entrepreneur today:
1. Involves creation process.
2. Requires devotion of time and effort.
3. Requires assumption of necessary risks.
4. Involves rewards of being an entrepreneur.
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Nature and Development of
Entrepreneurship
1. Involves creation process
 Creating something new of value to the
audience for which it is developed
 Audience could be:-
a. The market of buyers in the case of a business
innovation
b. The hospital’s administration in the case of a new
ERP software
c. Prospective students in the case of a new course or
even college of entrepreneurship

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Nature and Development of
Entrepreneurship
2. Requires devotion of time and effort.
 Only those going through the entrepreneurial
process appreciate the significant amount of
time and effort it takes to create something new
and make it operational

3. Requires assumption of necessary risks.

 Risks take a variety of forms, depending on the
effort of the entrepreneur, but usually center
around financial, psychological, and social areas.

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Nature and Development of
Entrepreneurship
4. Involves rewards of being an entrepreneur.
 Rewards include independence, followed by
personal satisfaction.
 Profit for entrepreneurs; the monetary reward
comes into play sometimes considered as
success.

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The Entrepreneurial Decision
Process
 Deciding to become an entrepreneur by
leaving present activity
 Millions of companies are formed despite recession,
inflation, high interest rates, lack of infrastructure,
economic uncertainty, and the high probability of failure.
 Although no one knows the exact number; just in united
states, roughly 1.1 to 1.9 million new companies form in
a year.
 The entrepreneurial decision process
entails a movement, from something to
something – a movement from a present
lifestyle to forming a new enterprise
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The Entrepreneurial Decision
Process
Change from present lifestyle Form new enterprise
Work environment Desirable
disruption 1. Cultural
2. Sub-cultural
3. Family
4. Teachers
5. Peers
Possible
1. Government
2. Background
3. Marketing
4. Role models
5. Financing
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The Entrepreneurial Decision
Process
 Change from present lifestyle
 The decision to leave a career or lifestyle is not an easy
one. It takes a great deal of energy and courage to
change and do something new and different.
1. Work environment (R&D and Marketing)
 While working in technology (research and development)
individuals develop new product ideas or processes and
often leave to form their own companies when these new
ideas are not accepted by their employers (R&D).
 Similarly, individuals in marketing become familiar with
the markets and customers unfilled wants and needs,
and they frequently leave to start new enterprises to fill
such needs (Marketing).

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The Entrepreneurial Decision
Process
2. Disruption (a negative force)
 A significant number of companies are formed by
individuals who have retired, who are relocated due to a
move by the other member in a dual career family, or
who have been fired.
 There is possibly no greater force than personal
dislocation to galvanize (shock into taking action) a
person’s will to act.

 The decision to start a new company occurs

when an individual perceives that forming a
new enterprise is both desirable and
possible.
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The Entrepreneurial Decision
Process
 Desirability of new venture formation
 Aspects of a once situation that make desirable to start a
new enterprise are culture, subculture, family, teachers
and peers

1. A culture that values an individual who successfully

creates a new business will spawn more venture
formation than one that does not. The American culture
places a high value on being a success and making
money – all aspects of entrepreneurship. (Culture)
2. Many subcultures that shape entrepreneurial value
systems operate within a cultural framework. For-
example; Boston (Massachusetts), Silicon Valley
(California), Denver (Colorado), Austin (Taxes) etc.
(Subculture)
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The Entrepreneurial Decision
Process
 Desirability of new venture formation

3. Studies of companies in a variety of industries

throughout the world indicate that a very high
percentage of the founders of companies had
fathers/mothers who valued independence. The
independence achieved by company owners,
professionals, artists, professors, or farmers permeates
their entire family life giving encouragement and value to
their children’s company-formation activity. (Family)
4. Encouragement to form a company is further stimulated
by teachers, who can significantly influence individuals to
regard entrepreneurship as desirable and viable career
path. (Teachers)
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The Entrepreneurial Decision
Process
 Desirability of new venture formation

5. Finally peers are very important in the decision to form a

company. An area with an entrepreneurial pool and a
meeting place where entrepreneurs and potential
entrepreneurs can discuss idea, problems, and solution
spawns more new companies than an area where these
are not available. (Peers)

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The Entrepreneurial Decision
Process
 Possibility of new venture formation
 Factors making possible to create a new venture are
government, background, marketing, role models,
financing.

1. The government contributes by providing the

infrastructure to help and support a new venture (e.g.
roads, communication, transportation system, utilities,
tax rate and economic stability). (Government)
2. Entrepreneur must have the necessary background.
Formal education and previous business experience give
the skills needed to form and manage a new enterprise.
(Background)

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The Entrepreneurial Decision
Process
 Possibility of new venture formation
3. Marketing also plays a critical role in forming a new
company. In addition to the presence of a market of
sufficient size, there must also be a level of marketing
know how to put together the best total package of
product, price, distribution (placement) and promotion
needed for successful product launch. (Marketing)
4. A role model can be one of the most powerful influences
in making company formation seem possible. To see
someone else succeed makes it easier to picture yourself
engaged in a similar activity. (Role models)
5. Finally financial resources must be readily available.
Although most of the start up money for any new
company comes from personal savings, credit, friends,
family and relatives, there is often need for addition seed
capital. (Financing) 1-16
Types of Start-ups

1. Lifestyle-firm: A small venture that supports the

owners and usually have little opportunities to
grow and expand

 A lifestyle firm is privately held and achieve modest

growth due to the nature of the business, the objectives
of the entrepreneur, and the limited money devoted to
research and development.
 This type of firm may grow after several years to 30-40
employees and have annual revenues of about $20
million

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Types of Start-ups

2. Foundation company: A type of company formed

from research and development that usually does
not go public.

 The foundation is created from research and

development and lays the foundation for a new business.
 This type of startup rarely goes public, it usually draw the
interest of private investors only, not the venture-capital
community.
 This firm can grow in 5-10 years from 40-400 employees
and from $10 million to $20 million in yearly revenues.

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Types of Start-ups

3. High-potential venture (These firms are also called

gazelles): A venture that has high growth
potential and therefore receives great investor
interest and are integral to the economic
development of an area.

 High-potential venture is the one that receives the

greatest investment interest and publicity. While the
company may start out like a foundation company, its
growth is far more rapid.
 After 5-10 years the company could employ around 500
employees with $20 million to $30 million in revenue.

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 Role of Entrepreneurship in
Economic Development
 The role of entrepreneurship in economic development
involves more than just increasing per capita output and
income; it involves initiating and constituting change in the
structure of business and society. This change is
accompanied by growth and increased output, which allows
more wealth to be divided within the various participants.

 Innovation is depicted as a key to economic development,

not only in developing new products (or services) for the
market but also in stimulating investment interest in the new
ventures being created.

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Defining Innovation

 Defining a New Innovation (Product or

Service)
 Newness can be:
 In the consumer concept.
 A change in the package or container.
 Slight changes or modifications in the appearance of
the product. (Industrial market)
 Companies also add products to their product
line that are already marketed by other
companies; products are new to the
manufacturer but not the consumer.

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Innovation

 Types of Innovation
 Breakthrough
 Breakthrough – New products with some technological
change e.g. Virtual 3D technology, android, blockchain,
telephone, alkaline batteries, Artificial Intelligence
 Fewest number of innovations.
 Establishes the platform on which future innovations in
an area are developed.
 Should be protected by patents, trademarks, and
copyrights.

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Innovation (cont.)

 Technological
 Technological – New products with significant
technological advancement e.g. Nokia 3310 to Nokia
Lumia or cassettes to CD’s, CRT to LED
 Occurs more frequently; not at the same level of
breakthrough inventions.
 Offers advancements in the product/market area.
 Needs to be protected.

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Innovation (cont.)

 Ordinary
 Ordinary - New products with little change e.g. Smart
Phone series S3, S4, S5
 Occurs most frequently.
 Extends a technological innovation into a better
product or service or one that has a different market
appeal.
 Usually come from market analysis and pull, not
technology push.

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 Role of Entrepreneurship in
Economic Development
 Product-evolution process – is the Process
through which innovation is developed and
commercialized (see Figure 1.1).
 Iterative synthesis - The intersection of
knowledge and social need that starts the
product development process (III). Iterative
synthesis often fails to evolve into a marketable
innovation and is where the entrepreneur needs
to concentrate his/her efforts such as:-
 Expertise in this area
 Matching the technology with the appropriate market
and making the needed adjustments

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Figure 1.1 - Product Evolution

I. Recognition of social needs

II. Initiation of technological innovation
III. Iterative synthesis leading to invention
IV. Development phase
V. Industrial phase
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 Role of Entrepreneurship in
Economic Development
 Regardless of the level of uniqueness or
technology, each innovation evolves into and
develops towards commercialization through one
of three mechanisms.
 Entrepreneurship:
 Government as an innovator: a government active in
commercializing technology e.g. JF-17 (Dubai-show)
 Intrapreneurship: Entrepreneurship within an existing
organisation. In the present era of hyper-competition, the
need for new products and the intrapreneurial spirit have
become so great that more and more companies are
developing an intrapreneurial environment, often in the
form of strategic business unit (SBU’s).

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 Story of the week....................

WhatsApp's Brian Acton and Jan Koum (Photo: Robert Gallagher for Forbes)
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 Story of the week....................
 Facebook just made two more Silicon Valley entrepreneurs into
billionaires (News).
 On Wednesday (Feb 19, 2014), the Silicon Valley (Menlo Park, Calif.) -
based company announced a record $19 billion for messaging service
WhatsApp, instantly taking its cofounders Jan Koum and Brian Acton into
the realm of 10-figure fortunes. FORBES estimates that Koum held about
a 45% stake in the company, while Acton’s stake was over 20%.
 In a filing with the Securities and Exchange Commission, Facebook said it
would be paying for the deal with nearly 184 million shares, $4 billion in
cash and nearly 46 million restricted stock units (RSUs), valuing the
acquisition at over $19 billion. After disregarding the RSUs, which are not
immediately exercisable, and assessing taxes, FORBES estimates that
Koum is worth $6.8 billion while Acton is worth at least $3 billion as of
Facebook’s closing share price on Wednesday
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 Story of the week....................

 Koum was born and raised in a small village outside of Kiev,

Ukraine, the only child of a housewife and a construction
manager.
 His house had no hot water, and his parents rarely talked on the
phone in case it was tapped by the state.
 At 16, Koum and his mother immigrated to Mountain View
(California), a result of the troubling political and anti-
Semitic environment, and got a small two-bedroom apartment
through government assistance. His dad never made it over.
 Koum’s mother took up babysitting and Koum swept the floor of
a grocery store to help make ends meet. When his mother was
diagnosed with cancer, they lived off her disability allowance.
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 Story of the week....................

 By 18 Koum taught himself computer networking by

purchasing manuals from a used book store and returning
them when he was done. He joined a hacker group called
woowoo on the Efnet internet relay chat network, squirreled into
the servers of Silicon Graphics and chatted with Napster co-
founder Sean Fanning.
 He enrolled at San Jose State University and moonlighted (to
work at another job often at night) at Ernst & Young as a security
tester. In 1997, he found himself sitting across a desk from Acton,
Yahoo employee 44, to inspect the company’s advertising system.
 It turned out Koum liked Acton’s no-nonsense style. “Neither of
them has no ability to bullshit.
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 Story of the week....................

 Six months later Koum interviewed at Yahoo and got a job as an

infrastructure engineer. He was still at San Jose State University
when two weeks into his job at Yahoo, one of the company’s
servers broke. Yahoo cofounder David Filo called his mobile for
help. “I’m in class,” Koum answered discreetly. “What the hell
are you doing in class?” Filo said. “Get yourself into the office.”
Filo had a small team of server engineers and needed all the help
he could get. “I hated school anyway,” Koum says. He dropped
out.
 Over the next nine years the pair watched Yahoo go through
multiple ups and downs. Acton invested in the dotcom boom, and
lost millions in the 2000 bust.
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 Story of the week....................

 For all of Acton’s distaste for advertising now he was also deep in
it back then, getting pulled in to help launch Yahoo’s important
and much-delayed advertising platform Project Panama in 2006.
“Dealing with ads is depressing,” he says now. “You don’t make
anyone’s life better by making advertisements work better.” He
was emotionally drained. “I could see it on him in the hallways,”
says Koum, who wasn’t enjoying things either.
 In September 2007, Koum and Acton finally left Yahoo and took
a year to decompress, travelling around South America and
playing ultimate Frisbee.
 Both applied, and failed to work at Facebook.

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 Story of the week....................
 Koum was eating into his $400,000 in savings from Yahoo, and
drifting. Then in January 2009, he bought an iPhone and realized
that the seven-month old App Store was about to spawn a whole
new industry of apps.
 He visited the home of Alex Fishman, a Russian friend who
would invite the local Russian community to his place in West
San Jose for weekly pizza and movie nights. Up to 40 people
sometimes showed up. The two of them stood for hours talking
about Koum’s idea of an App over tea at Fishman’s kitchen
counter. “Jan was showing me his address book,” recalls
Fishman. ‘His thinking was it would be really cool to have
statuses next to individual names of the people.’ The statuses
would show if you were on a call, your battery was low, or you
were at the gym. 1-34
 Story of the week....................
 Koum could do the backend, but he needed an iPhone developer,
so Fishman introduced Koum to Igor Solomennikov, a developer
in Russia that he’d found on RentACoder.com.
 Koum almost immediately chose the name WhatsApp because it
sounded like “what’s up,” and a week later on his birthday, Feb.
24, 2009, he incorporated WhatsApp Inc. in California. The app
hadn’t even been written yet. Koum spent days creating the
backend code to synch his app with any phone number in the
world, poring over a Wikipedia entry that listed international
dialling prefixes — he spend many infuriating months updating it
for the hundreds of regional nuances.

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 Story of the week....................
 Help came from Apple when it launched push notifications in
June 2009, letting developers ping users when they weren’t
using an app. Jan updated WhatsApp so that each time you
changed your status — “Can’t talk, I’m at the gym” — it would
ping everyone in your network.
 Fishman’s Russian friends started using it to ping each other with
jokey custom statuses like, “I woke up late,” or “I’m on my way.”
“At some point it sort of became instant messaging,” says
Fishman. “We started using it as ‘Hey how are you?’ And then
someone would reply.” Jan watched the changing statuses on a
Mac Mini at his town house in Santa Clara, and realized he’d
inadvertently created a messaging service. “Being able to reach
somebody half way across the world instantly, on a device that is
always with you, was powerful,” says Koum. 1-36
 Story of the week....................
 The only other free texting service around at the time was
BlackBerry’s BBM, but that only worked among BlackBerries.
There was Google’s G-Talk and Skype, but WhatsApp was
unique in that the login was your own phone number. Koum
released WhatsApp 2.0 with a messaging component and
watched his active users suddenly swell to 250,000. He went to
see Acton, who was still unemployed and dabbling in another
start-up idea that wasn’t going anywhere.

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 Story of the week....................
 The two sat at Acton’s kitchen table and started sending messages
to each other on WhatsApp, already with the famous double
check mark that showed another phone had received a message.
Acton realized he was looking at a potentially richer SMS
experience – and more effective than the so-called MMS
messages for sending photos and other media that often didn’t
work. “You had the whole open-ended bounty of the internet to
work with,” he says.
 In October Acton got five ex-Yahoo friends to invest $250,000 in
seed funding, and as a result was granted cofounder status and a
stake. He officially joined on Nov 1, 2009.

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 Story of the week....................
 The pair were getting flooded with emails from iPhone users,
excited by the prospect of international free texting and desperate
to “WhatsApp” their friends on Nokias and BlackBerries. With
Android just a blip on the radar, Koum hired an old friend who
lived in LA, Chris Peiffer to make the BlackBerry version of
WhatsApp. “I was skeptical,” Peiffer remembers. “People have
SMS, right?” Koum explained that people’s texts were actually
metered in different countries. “It stinks,” he told him. “It’s a
dead technology like a fax machine left over from the seventies,
sitting there as a cash cow for carriers.” Peiffer looked at the eye-
popping user growth and joined.

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 Story of the week....................
 With Koum and Acton working for free for the first few years,
their biggest early cost was sending verification texts to users.
 Today SMS verification runs the company about $500,000 a
month. The costs weren’t so steep back then, but high enough to
drain Koum’s bank account. Fortunately WhatsApp was
gradually bringing in revenue, roughly $5,000 a month by early
2010 and enough to cover the costs then. The founders
occasionally switched the app from “free” to “paid” so they
wouldn’t grow too fast. In Dec. 2009 they updated WhatsApp for
the iPhone to send photos, and were shocked to see user growth
increasing even when it had the $1 price tag. “You know, I think
we can actually stay paid,” Acton told Koum.

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 Story of the week....................
 By early 2011 WhatsApp was squarely in the top 20 of all apps in
the U.S. App Store.
 Venture capitalists didn’t need the press to tell them WhatsApp
was going viral. Koum and Acton were batting away all requests
to talk. Acton saw VC funding as a bailout. But Sequoia partner
Jim Goetz was persistent, spending eight months working his
contacts to get either founder to engage. He’d met with a dozen
other companies in the messaging space like Pinger, Tango and
Baluga, but it was clear WhatsApp was the leader, and to Goetz’s
surprise the start-up was already paying corporate income taxes:
“The only time i’ve seen that in my venture career"

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 Story of the week....................
 Goetz eventually sat down with Koum and Acton at the Red Rock
Cafe, answered a “barrage” of their questions and promised not to
push advertising models on them but act as a strategic advisor.
They eventually agreed to take $8 million from Sequoia.
 Two years later in Feb. 2013, when WhatsApp’s user base had
swelled to about 200 million active users and its staff to 50,
Acton and Koum agreed it was time to raise some more money.
“For insurance,” says Acton, who recalled that his mother, who
ran her own freight forwarding businesses, used to lose sleep
over making payroll. “You never want to be a position where you
can’t make payroll.” They decided to hold a second funding
round, in secret. Sequoia would invest another $50 million,
valuing WhatsApp at $1.5 billion.
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 Story of the week....................
 Now with an even bigger number in whatsapp bank account,
Acton went to a local landlord, interested in leasing a new three-
story building around the corner. The landlord didn’t know who
WhatsApp was, but the money talked. The new building is now
under construction, and WhatsApp will move in this summer as
its staff doubles to 100.
 In early February 2014, Koum zooms past the new building in his
Porsche on the way to a boxing class that he often misses, and is
now late for.

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