Entrepreneurial Life Cycle Stages

Introduction

Figure 10.1 Dropbox, founded by Drew Houston and Arash Ferdowsi, has realized unprecedented growth, as the company is valued in the billions of dollars.

Dropbox, a company founded in 2007 by Drew Houston and Arash Ferdowsi, has revolutionized the way consumers and businesses store and share electronic files. The idea came one day when Houston - on a commuter train - realized he left his thumb drive at home. This was not the first time he had forgotten that tiny electronic filing cabinet, and he was sure others forgot often as well. So he hit on an idea: storing his files on a "cloud" on the Internet that anyone could access from anywhere with any device. He wanted to manage file storage at faster speeds and in larger quantities than the few existing online storage systems, through an easy-to-use interface. Although Houston came up with the idea of cloud storage during his commute, cloud computing had been talked about in industry circles a few years prior.

Hopeful, he introduced his idea to Y Combinator, a venture capital firm in California that helps fund startups by hosting, training, and helping them define their pitches to investors. Even though they had rejected a business idea he'd presented earlier, they told him the new idea was promising and asked him to secure a co-founder before pitching. A co-founder would help to secure funding because it showed the idea had legitimacy, support, and the expertise of another person. Houston quickly found Ferdowsi, a fellow MIT student studying engineering and computer science. Together, they raised $1.2 million from investors, even though their prototype wasn't fully functional. They then hired developers and engineers who created a more functional version that worked across most computer operating systems.

Dropbox was soon using lean startup principles, which meant releasing an early version to early adopters. Houston had a difficult time explaining the product to initial users, so he developed a video with a quirky narration to entice them. The early product release was a hit: In one day, their customer base increased from 5,000 to 75,000 users, who could also provide them with feedback for subsequent versions.

Thanks to its massive success, Dropbox was valued at $10 billion in 2014. However, some analysts believed the number was inflated as Dropbox's competitors started gaining market share. The company continues to receive customer feedback to make the iterations necessary for better versions.

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Source: Michael Laverty and Chris Littel, https://openstax.org/books/entrepreneurship/pages/10-introduction
This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 License.

Launching the Imperfect Business: Lean Startup

Learning Objectives

By the end of this section, you will be able to:

• Describe how businesses use lean startup principles to develop products and test markets
• Identify how the build-measure-learn method helps companies understand what potential customers want in a product
• Determine what a minimum viable product (MVP) is and explain why companies don't need to have a perfect product to launch
• Explain why companies need to learn to construct a lean pitch to investors and potential customers
• Explain what pivoting is and when it is necessary for companies to undertake

As you can see from the Dropbox example, businesses can function without being perfect. The company initially provided a short video description of the Dropbox product without even having it coded to the actual program first. This way, they could test the idea and receive customer feedback without losing time or money on products that wouldn't work. If any changes were needed, they had the flexibility to make them because it was just an early prototype and no big investment on the product had been made yet. Many of the early changes were to the interface design that involved buttons and actions that could be taken, and storage capabilities that customers consistently gave feedback on.

New businesses need time to develop their identities, engage their target market, create and develop the right products, and sharpen their strategies. Startups don't have fully developed and proven business models like established companies do. A business's starting focus or idea may evolve into something else because the initial feedback from the prototype points in a different direction.

Houston (pictured in Figure 10.2) and Ferdowsi knew they did not have the perfect product, so they employed a system called lean startup, a methodology entrepreneurs use to help them innovate by continuously testing their products and getting feedback from customers in real time. This methodology calls for a product to be shared with early adopters in its beginning stages of development and gain immediate feedback. It ensures that people actually like a product and are willing to buy it. Tech companies primarily use this method because they have learned that too many years working on a product without measuring is highly risky, especially in a rapidly changing technological environment. Lean strategy, though, is applicable to almost every business and industry.

Even with Dropbox's reported $1 billion in revenue and 500-plus million users, Houston's journey still has its ups and downs. He learned that the CEO's job changes as the venture progresses because the company's needs vary across its lifecycle. The CEO has to shift focus, such as on building prototypes, testing users, exploring the best distribution channels, and managing cash flow. These hurdles need to be tackled when they arise. Let's take a closer look at lean startup, and how it got its own start.

Figure 10.2 Andrew Houston believes that, as a CEO, you must shift your focus as your business needs change.

Lean Startup

Author and entrepreneur Eric Ries developed the lean startup methodology after spending much time, effort, and money when his first tech company had to close down. Fortunately, Ries' frustration led him to study other successful companies and lean manufacturing programs, including the highly successful Toyota lean manufacturing process, which taught him how to be flexible and quick while building products. He learned that he didn't need to have a fully designed product resulting from years of development; instead, he could have something imperfect that worked without the bells and whistles, something that people could test and provide feedback on over time.

He advocated a step-by-step approach on how to maneuver a startup, how to change course if necessary, persevere, and accelerate its expansion. This is also called the build-measure-learn loop, which means that a prototype is built, or at least the idea is written down, it is then pitched to customers who provide feedback so the company learns what to keep and what to change, then it makes the changes to the prototype, and starts all over again, repeating the process until the prototype is good enough to go to market. Figure 10.3 illustrates this loop. Even after it hits the mass market, this loop can continue to be used to enhance the product.

Figure 10.3 The build-measure-learn loop is a framework that helps entrepreneurs develop their idea into a minimum viable product (MVP), measure its impact on people, and learn if there is a need to pivot (change) or persevere.

After his first startup proved unsuccessful, Ries created a second company called IMVU. IMVU is an avatar platform, or "metaverse," for people who want to shop for clothing, furniture, and accessories in an online community and keep their identity safe. Essentially, IMVU is a virtual reality world with an e-commerce engine, user-generated content, and 3-D characters. While Ries was building IMVU, he and his co-founders worked endless hours for six months to create a prototype of 3-D avatars that they later learned no one wanted. During their first month, they made a total of $300. The next month they made $400 after begging friends and family to try it.

After Ries saw their faithful first customers disappear, he and his co-founders decided to shift from feeling frustrated to talking to potential customers. They tested their product with teenagers and heavy users of technology, as well as with mainstream customers. The mainstream customers never knew what to do with the product. They thought it was too strange. But those that were more tech savvy and younger were happy to try it. They gave a lot of feedback that resulted in creating a better version of the avatar community.

The initial platform was designed as a minimum viable product (MVP), which is a very early prototype of a product. According to Ries, an MVP can be the bare minimum to help people understand what the product is about. A product doesn't even have to be built to be an MVP; instead, it can be represented in sketches, videos, and explanations of how it might look. MVPs also can include a basic version of the product, just like IMVU's website, which was not very good at first. The point is to have a basic product to show to potential users, with enough substance to elicit feedback on what people find useful and what attributes are important without having to invest a lot of money and time. There is no right or wrong type of MVP. It is up to the owner to decide how to showcase the idea and test it to find out what people like and don't like, and how to take the idea to the next level.

Through this MVP experience, Ries (shown in Figure 10.4) realized that his first platform had bugs and issues that could crash users' computers; however, in spite of the bugs, he was determined to get customer feedback without spending lots of cash or time. Once he and his co-founders had the low-quality platform running, they decided to charge a fee for the service. They would send dozens of changes to their loyal followers until they developed a product that would work for a larger customer base. These changes included adjustments such as adding new avatars, new avatar movements, choices of clothing, and new worlds for avatars to explore. IMVU pioneered this lean startup approach, which new ventures all over the world now use. Today, IMVU is a successful enterprise with over $55 million in revenue and 50 million users.

Figure 10.4 Eric Ries, third from left, speaks at a conference about the lean startup process he developed while creating his second business.

A lean startup begins with the first stage of building a basic product (MVP) that has only its core benefits and no extra features. Houston and his developers created a basic platform for early adopters to test. Early adopters are people who like to try new products as soon as they come out. They don't mind, for example, buggy software or cumbersome designs because they are innovators and like to test new things. Dropbox did not create a perfect product initially because the developers did not know what it would be until they got user feedback. After early signups and feedback on the first prototype, they were able to create the first version of the product. Later, they conducted iterations, or additions or changes to the version of the product, using customers' ideas and suggestions.

Zappos is another example of an MVP development project. Nick Swinmurn, creator of the online shoe company, launched the idea in 1998 by creating a bare bones website to sell shoes and measuring traffic to the site. The idea started after he took a trip to the mall and could not find shoes in the styles or colors he wanted. He figured other people had equally frustrating experiences. His first hypothesis was that people were interested in buying shoes online, so he asked Tony Hsieh, current CEO of Zappos, to invest in this new project. Hsieh provided half a million dollars to get the company started. Swinmurn then created a plain webpage that started with basic photos of shoes and their prices. Swinmurn also ran ad campaigns, measured web traffic, and adjusted the webpage. Instead of spending so much time in building a detailed plan about his business, this method helped him make quick adjustments to the product, the target market, and strategies using the build-measure-learn loop and starting with an MVP, just as Houston did.

Work It Out

Five Lean Principles

Go to the website http://theleanstartup.com/#principles and click on the link "Lean Startup Process In Detail".

• Pick one topic that interests you and write a one-page summary of the concept.
• Add an example to illustrate the topic.

Going deeper into this build stage, we can see that the steps take an entrepreneur through a cycle or loop that begins with defining the problem at hand and building the MVP to show potential consumers a sample of the product and see how they react. In many cases, selling this low-quality product can also help measure user reactions. Metrics, or measurements, are developed to test the product assumptions of the engineers who created it. The goal is to test the MVP with its target market by asking questions about the design, usability, core or bundle of benefits, and other attributes that enhance the customer experience.

For example, different design attributes can be measured by asking customers if they like a feature or set of features of the product they are testing. The number of likes or dislikes can be tallied, and comments can be collected on what additional features should be added or deleted. Once the feedback comes in, entrepreneurs can make changes. Then, they can move into the next stage, which is to measure whether the changes to the product based on the feedback are actually helping make progress.

Along with a minimal product offering, Ries advocates using a minimal financial evaluation concept called innovation accounting to assess whether the changes made to the product are creating the desired results. This means that entrepreneurs should not look first to the basic financial measurements traditional to businesses - such as sales, profits, and return on investment - because these traditional measurements aren't the most relevant metrics at this stage. Instead, they should measure progress in a different way. Measurements may include testing assumptions about the business, attributes that customers like, sign-ups, and retention rates that can be separated into cohorts and tested, say weekly, as changes to the products are made.

During the learn stage, the entrepreneur uses the feedback obtained to assess the progress of the product in an objective manner. The entrepreneur makes changes to the MVP and starts the cycle over again until the process has reached a point where it either accelerates or needs to pivot.

As a learning component for the company, feedback is very important in the lean process. Feedback helps companies design better products and make iterations, or newer versions, which better serve the customer base. Companies will work with early adopters for a while before they expand their reach with a better product and entice more people to use it.

Entrepreneur In Action

General Electric Is Big and Lean

General Electric (GE) is a company that has been around for many years and boasts a tremendous portfolio of businesses under its parent company. Eric Ries managed to encourage this giant to take advantage of the lean startup movement by collaborating with him in a new program called Fast Works. This program was essentially created to imbue its product development method with the principles of lean innovation by training thousands of employees in the methodology and helping them develop desirable products at a faster pace.

For example, GE improved a turbine using the lean approach by asking for customer feedback. Many customers needed different features, such as improved reliability, better fuel efficiency, and faster operation. The team working on this project decided to use Fast Works to fulfill all of the customers' requests. This approach would allow them to shorten the development process and save the customers money. Three hundred members of the GE turbine team knew that this would be a difficult task given their locations around the world and the processes involved in approvals, so they got to work. Some focused on streamlining the approval process, while some worked on bottlenecks and encouraged low-level engineers to make difficult decisions without asking upper management. These two changes allowed them to pivot quickly, while gathering feedback and making changes to the turbine effectively. After using FastWorks, the team reduced development time by a quarter - from four to three years. They saved $5 million dollars in fuel per year for their customers, while increasing their revenues by $6 million per year.

Iterating, Pitching, and Pivoting

Many companies invest significant time and effort on projects that seem like great ideas in theory but flop when taken to market. The lean startup method is a new way to develop and manage products that people want in a shorter period of time. Companies are able to learn from customer discovery and validation that the offer or value of the product is not working and needs to be enhanced or changed.

After Ries experienced his first business loss, he recognized the problem of companies devoting time and money on projects rejected by consumers, and he wanted to identify a solution. As he started his new company's avatar community, he enabled his teams to put the product through iterations - those small changes to the current version of a product to make it better fit consumer needs. At this phase, and using lessons from his first failure, he strove to create a bare-bones version of a product that worked well enough to provide core value to the customer, garner customer feedback, and make small adaptations around what users considered most essential. This allowed IMVU to enhance the product in a way that brought the company, step by step, closer to providing the best value.

One iteration that proved enormously successful was adjusting how the avatar moved through its virtual reality world. The original avatars didn't have the ability to walk around like they do in, say, popular multiplayer video games. Even though he knew this was a disadvantage, he sent the version to early adopters and asked for feedback. Customers responded that the lack of movement suggested the software was low quality. Reluctant to make the major tech investment for this movement, Ries and his team decided to try a very small iteration as an alternative: They made the avatar disappear from its starting point and reappear in its new location. Customers responded positively, seeing this as superior to what existed and as a high- quality variation. The quick and low-cost iteration turned out to be the best path to success.

In addition, while this process is ongoing, the entrepreneur is constantly pitching the idea to potential consumers and investors. Pitching can be intimidating for entrepreneurs, as they can get nervous speaking in front of people. However, pitching can be as important as building the right product for the right target: It needs to be practiced and mastered.

Pitching is the verbal delivery of an idea or business plan, and a request to a group of investors, customers, or potential business partners by an entrepreneur (Telling Your Entrepreneurial Story and Pitching the Idea). As an entrepreneur, knowing how to pitch your business concept to investors is one of the keys to success. However, if you're using the learn startup approach, your pitch likely needs to be quite different from a regular pitch.

The lean pitch requires the presenter to craft an exciting and well-developed story about the company, its product, and what makes the product unique, with enough detail to show that the company is more than a story in the presenter's mind. The lean approach is customer centric and tries to solve customers' problems and resolve issues, and it measures its product over and over again until it is right. The story must show the process of understanding their customers as well as their problems and issues. Then, there must be an explanation of iterations, design tests, and learning from customer feedback that demonstrates the customer-centric approach. Experiments, data, and insights are shared to show the company's progress. As you recall from Telling Your Entrepreneurial Story and Pitching the Idea, using a regular pitch approach, the presenter gives all of the details of the product and the future launch. This traditional pitch asks for an investment without having tested assumptions or having much data or experiments to show that the idea will work. Increasingly, successful lean pitching requires the presenters to have some sort of validation of their business model because this shows more truth to the vision. Many investors look for companies that have some time invested and a seed customer base under their belt. They are particularly interested in those who know their sales numbers, their costs, their sales projections, and have a track record of increased sales, customers, and profit. Table 10.1 shows a step-by-step approach to pitching to investors and potential partners.

Lean Startup Pitching

Step	Tips
1. Tell an exciting story that quickly moves into tangible results	Don't do a sales pitch; be yourself by being open and authentic. Craft an exciting and well-designed story to capture your audience and introduce this as a business that is already up and running so investors know from the beginning that you are using lean startup techniques.
2. Describe the problem and solution at hand and what makes you unique.	Clearly define the problem you are solving and how you are already solving the problem with the best tested/measured solution.
3. Describe the target market and how it will benefit from the product.	Show that you understand your potential customer because you have gotten customer feedback. Give examples of early product development and share key customer feedback that helped you enhance or incorporate new benefits. Demonstrate the product, focusing on the benefits, not the features.
4. State your position with facts and achieved results.	Show additional tests, experiments, customer feedback, and anything that can back your claims. Show actual data and insights collected, emphasizing validated facts and assumptions you have made. Describe early challenges and how you adapted without giving up.
5. Be simple	Don't use jargon. Speak as if you were explaining it to a stranger sitting next to you in a coffee shop.
6. Show current progress	Show what you have accomplished in sales/profit so far.
7. Finish with the ask	Close up your pitch by identifying what you are seeking. If you are looking for an investment, a partnership, a new member to join you, or an advisor, finish with the ask.

Table 10.1

After carefully going through the build-measure-learn loop, there comes a point where the company either accelerates or realizes it's time to pivot. Pivoting is a crucial and often difficult change done to test a hypothesis regarding the basic product, its growth potential, and business model. Once the product has been tested and retested for changes in consumer behavior, or any metric that the company sets itself to attain, if it's not attaining growth, then the next step is to pivot instead of continuing down the current path.

This is a time for tough decisions: Should you continue working on the business, product, or project - or should you change? Is the company making progress toward its goals, or do the strategies need major adjustments? While measurable data, such as attribute likes and dislikes, or number of sign ups, are gathered during the measure stage, the lean startup process also has a component that is creative, intuitive, and visionary. Knowing when to change cannot be determined solely through number crunching. It also requires human judgment, which, when coupled with the build-measure-learn formula, can lift a company out of mediocrity.

Work It Out

Ten Ways to Pivot

Read this article from Forbes.com to see more examples of the kinds of pivots entrepreneurs can make: https://www.forbes.com/sites/martinzwilling/2011/09/16/top-10-ways-entrepreneurs-pivot-a-lean-startup/#3286d2422d2b.

• Which one(s) would be best for your current business project? Why?
• What product features would you have in place to ensure future growth without investing too much?

If a business is not growing, it is shrinking or stagnating. A pivot, just like in basketball, requires one foot down on the ground, and the other moving. This means that you keep what you have learned from customers as your grounding foot but test out a different direction in which to move. Here are examples of famous pivots:

• Twitter transformed into a social media giant from a company called Odeo, a broadcast platform that was initially created to transmit video, sound, and podcasts. However, Apple beat them by launching iTunes podcasting, and it didn't make sense for the founders of the company to pursue that path, so they decided to create Twitter instead.
• PayPal (formerly Confinity) allowed people to send electronic payments or "beam" payments from their Palm Pilots (first personal digital assistants created by Palm Computing) as well as from other devices. At that time, PayPal users registered a card number, downloaded the beam application, and were able to make transfer payments from one device to another. As technology changed, it merged with X.com to become the preferred payment method on Ebay, helping the company go mainstream.
• Avon was created by a traveling book salesman who would add perfumes to his sales as perks for his woman customers. Eventually, he realized that women were more interested in the perfumes than the books, so he started a new business from a small office in New York.
• Fab.com, a design e-commerce website, was initially called Fabulis, and it started as a social media site to connect gay men. After the social media site failed, the co-founders took it into a new direction by selling their design picks for the best home goods, accessories, and clothing for everyone.

Work It Out

The Market for Experiences

Since the 2009 recession, people have spent more on experiences like travel and dining, rather than goods. Instead of owning many products, people, especially Millennials and Gen Zers, are transforming many industries. They prefer to travel by Uber and have an Airbnb experience where places and people are more important than things. They would rather freelance than work for a corporation and are more likely to try new foods and entertainment instead of accumulating possessions. This market trend has led many large retailers to downsize or close all together. Smaller retailers have been hurt as well. However, online retailers, home stores, and grocery chains have remained largely immune to the changes in buying habits.

• If you were a specialty retailer that focused on selling sports clothing and gear, and had several regional stores around the country, how would you pivot your business to avoid slowing sales?
• Create a step-by-step list of your main strategies and how each would help avoid closing down your business.

You may wonder, how many times can a company pivot? Ries likes to use a runway analogy: You must measure how long you have until your company can achieve its goals, and whether you fail to lift (burn through all your cash resources) or have a liftoff (generate sales, sign ups, add new customers). The runway can be calculated by taking the amount of cash that is in the bank and dividing that by how much is being spent or drained on that balance. So if your company has $550,000 in the bank, and it drains or burns $50,000 per month, then you have a projected time of 11 months (550,000/50,000). A way to slow down the cash drain - and to extend the runway - is to cut some costs or ask investors for additional cash.

There are also different types of pivots for different needs. Table 10.2 shows ten pivots an entrepreneur can make according to feedback.

Types of Pivots

Pivot Strategy	Description
Zoom-in	A product's single feature becomes a whole product.
Zoom-out	This is the reverse of zoom-in. A single feature is not enough for a customer, so the product needs added features.
Customer segment	There is a need to change the customer segment, as the one studied is not representative of who will buy the product at a larger scale.
Customer need	Feedback from customers shows that the problem solved is not important. The product needs to be repositioned, or a new product needs to be created to solve a real problem.
Platform	A change from an application to a platform or the other way around is needed. Startups usually begin with what is called a "killer app" for their platform, which later becomes a way for third parties to create their own products.
Business architecture	This is a change from high margin, low volume to low margin, high volume. This happens in business-to-business (B2B) and business-to-customer (B2C), respectively.
Value capture	These are changes in monetization or capturing value (raising capital).
Engine of growth	A startup changes its engine of growth (sticky, paid, or viral paid growth models for revenue). Usually, the company requires a change in the way it collects revenue.
Channel	Distribution channels are changed when the product requires faster or broader alternatives to reach consumers. The Internet has become a great disruptor of channels.
Technology	Sometimes achieving a solution that serves an existing customer through cheaper means occurs when other technology is used (new production equipment, new software, etc.). This is more common with established businesses.

Table 10.2 Eric Ries outlines these ten pivot strategies in The Lean Startup.

Entrepreneur In Action

Nintendo

Nintendo could have gone sour in the gaming world had it not made a fateful pivot at a stark time. Created in 1889 (surprising, right?) in Kyoto, Japan, Nintendo manufactured "hanafuda," or flower cards (pictured in Figure 10.5) (a) used to play card games. It was humming along until the card game industry started to decline in the 1960s. Fusajiro Yamauchi, founder of Nintendo, tried to move into other markets by also providing hotel and taxi services. These pivots proved unsuccessful choices, and Nintendo almost closed its doors. However, it continued to manufacture its cards, which now had a plastic coating, and, thanks to a deal with Disney, had moved into the character cards market.

Still, the company hobbled along until, thankfully, one of the line assembly engineers created a device that would reboot sales. He designed a toy called the Ultra Hand, which children could manipulate to reach objects far and away. After successfully selling a million units, the company rebranded itself as Nintendo Games and entered the growing toy market.

Their foray into video games found its first success with the release of the Color TV Block Breaker game in 1977 (pictured in Figure 10.5 (b)). In 1981, when technology was changing the gaming industry, Nintendo created Donkey Kong, and later in the 1980s, Mario Brothers. Thanks to this great pivot, Nintendo is now worth over $22 billion and continues to thrive as one of the top gaming companies in the world.

Figure 10.5 Nintendo started as a small company that created (a) Hanafuda cards and (b) the Color TV Block Breaker. Today Nintendo is one of the largest companies in the gaming industry valued at over $22 billion.

Why Early Failure Can Lead to Success Later

Learning Objectives

By the end of this section, students will be able to:

• Determine several reasons for business failure and explore strategies to overcome them
• Understand the root of fear of failure
• Learn to spot signs of fear of failure and take steps to overcome it

Your goal in your venture is to achieve success - ideally, fairly quickly - but most successful entrepreneurs experience some failures along the way. While these setbacks can be discouraging, they provide lessons and experiences that can lead to eventual success. Whether a new business is a retail store, restaurant, hair salon, consulting company, tech firm, or manufacturing plant, the truth is that many businesses fail within the first couple of years. According to Bloomberg, only 20 percent of new businesses find success within their first eighteen months. Data from entrepreneur.com and the Small Business Administration suggest that only 30 percent of new ventures succeed to the ten-year mark. For women and minorities, the percentages are even lower. Success and longevity are possible, of course, but it takes a lot of work, and sometimes it takes a second or third try.

Entrepreneurs recognize that failure is part of the success of being a business owner. Business failure is the ending of a business due to the lack of goal attainment, which can mean low levels of revenue and profits, or not meeting investors' expectations. Business failure can result in the loss of assets - such as revenue, equipment, and capital - and can cause trauma for the business owner. However, these failures often help entrepreneurs improve the outcomes for their next business, as they have now learned valuable lessons that can be applied to new projects.

As Jack Ma, billionaire founder of Alibaba (the biggest and most profitable online retailer in China) said, "No matter what one does, regardless of failure or success, the experience is a form of success in itself". Ma experienced many failures - including being rejected from job opportunities and universities he wanted to attend, and having his pitch rejected by all but one person in a room full of friends. But he persevered, founded Alibaba, learned as he went, and today runs China's largest online retailer with almost $24 billion in revenue.

Another company, Quirky, launched by Ben Kaufman in 2009, was an initial failure. Quirky was a platform that allowed inventors to submit their ideas to a panel of Quirky experts who would then manufacture the product at a low price and sell it to different markets. Initially, Quirky gained $185 million in funding and had support partnerships from Amazon, Bed Bath & Beyond, and Best Buy. Thousands of people flocked to the site and submitted their inventions to get seen and voted on. Unfortunately, Quirky struggled to sell many of the products at a sustainable profit margin and filed for bankruptcy in 2015 after investors stopped funding the venture. Fortunately, one of its businesses, the smart-home business section, was spun off and sold as Wink in September 2017. The company was rebooted by a new set of entrepreneurs with a better business model.

Common Contributors to Failure

There are some common reasons for failure that often combine to end a business. However, there are often ways to prevent these failures from happening. CB Insights, a company that mines and analyzes data for companies and uses machine learning to help them answer complicated strategic questions, researched the factors that contributed to the failures of 101 startups. Figure 10.6 shows some of the main factors they identified in their research.

Figure 10.6 Startups that falter identify some common obstacles to success.

In the following discussion, we expand on some of these reasons for failure and offer advice on how to avoid them. Considering the following failures will give you an idea of what may go wrong in a business but will also help you spot and correct them before you launch.

Marketing Failure

Some of the most common failures result from marketing missteps.

• Lack of differentiation of product or service. Creating or running a company with a me-too mentality and without a clear unique selling proposition or difference from other established businesses can be detrimental. Answering questions such as "Why should customers leave other companies to buy my product?" "What is a benefit I provide that no one else does?" and "If I open a yogurt parlor in a commercial area, what will help my business differentiate itself from all the other yogurt, ice cream, dessert, and fast food places?" can help create ways to be special rather than a me-too business. This also needs to be defined in your mission, within your products and their benefits, and a clearly defined competitive advantage that can be translated into a superior value proposition. The chapters on Entrepreneurial Marketing and Sales and Identifying Entrepreneurial Opportunity discuss competitive advantages and value propositions in more detail.
• Missing the right customer. Not reaching the target market can lead to failure. Perhaps for your travel tour business, you targeted single people ages 18–34 who like to experience travel in a different way, but maybe your true target - the people who want to book your tours - are couples with children and those 50 and over. You would have sent out marketing communications to the wrong age group. Or, the right message is not being conveyed and your positioning is off, preventing you from connecting with your true consumer. Conducting market research as discussed in Entrepreneurial Marketing and Sales and testing your communication with various targets can help better define your customer.

Management Failure

These are some typical management challenges that can prove detrimental.

• Passion wanes or not the right business. Sometimes the reason a business fails is due to a simple reason: The founder has lost excitement over the business and is no longer interested in making it succeed. Other times, the problem may stem from not having the right focus or idea, which can come from a lack of awareness about trends in the market. Joel Delgado, a young entrepreneur who started El Paso's first escape room called El Paso Disaster Room 915 in 2015, developed this business with three of his friends right after college. Although the business was very well received by young people who wanted this new form of entertainment, a few years later, he decided to close down the business and pursue a career in teaching. His passion had waned. Sometimes, entrepreneurs get bored with their startup, but there are ways to keep the business exciting by changing the product offerings.
• Fighting founders. Not agreeing over the strategies and direction of a business can deter companies from moving forward. If the founders are not working together and disagree too much, this can help dissolve the business quickly. Differing points of view can be healthy for a business, as these can bring other complementing perspectives, but when conflict doesn't get resolved, it can be difficult to continue moving forward. Some business partners have found themselves ousted by their business partners because the relationships have suffered a deep strain. This happened to Steve Jobs in 1985 when he was let go by his own company. Often, it is difficult to assess when conflict will arise, so it is recommended that business partners work with people who have the same love for the business and its core values, even if they bring different strengths and temperaments to the table. This may reduce fights and sustain relationships. Having a contract in place that defines who is in charge of what part of the business, their compensation, and what happens if anyone departs, is a good way to ensure that the investment won't be lost if partners decide to part ways.
• Lack of planning. One of the surest roads to failure is to not have a business plan or marketing plan. Even using the lean startup method requires some sort of planning before embarking on the process. Planning helps business owners flesh out ideas and understand the business better. Following the business plan in Business Model and Plan and the marketing plan in Entrepreneurial Marketing and Sales can help solidify where the business is headed, whether its viable, and what resources are required to make it work. For example, imagine a business owner who opens a restaurant in an already-crowded market only to realize how much competition existed in the area. If the owner had researched and planned ahead, the venture could have been differentiated through the type of food offered, the location, or different promotional tactics to build clientele. Failure to plan in a situation like this can result in struggling to keep afloat and can lead to successive challenges. For example, the owner might raise prices to compensate for lower-than-expected revenue, but higher prices may drive away an already fragile customer base, and the venture may not be sustainable.

Financial Failure

Cash flow, debt, and capital are just some of the many financial factors that play a large role in startup success or failure.

• Lack of cash. Lacking cash to operate the business can trample its operations and lead to a quick decline. If there is no cash flow, it can also indicate that perhaps the business model is not working. For example, consider our fictional restaurant owner. A lack of customers means a lack of cash flowing in as revenue. Loans can provide some assistance while working to build the clientele, but loans can go only so far. If the business doesn't grow and develop a sustainable cash flow, its ability to operate will come to an end.
• Too much debt. Significant debt can hurt a business because it needs to pay back its lenders. In the previous example, if the restaurant owner takes on too much debt, it may struggle to pay it back due to its lack of cash flow.
• Lack of capital. Not having sufficient capital can deter the business from expanding or even from meeting customer demand. Having a clear business plan can help determine the financial requirements, which are the estimated sales and profits required for the successful attainment of goals. Financing for the business can come from an entrepreneur's own savings, bank loans, investors, and even friends and family. Having the right funding to start or grow a business can make or break the business. For instance, our restaurant owner would need enough capital to invest in kitchen equipment, appliances, and furniture to start the business. Undercapitalization in a startup could shut the business down before it even gets up and running. Once the business is running, ensuring that financial goals are met through metrics such as sales and profits can help prevent shortages of cash flow, which is essential to keeping a business alive.

Innovation Failure

Innovation can be tricky because it requires creativity, risk, and often some subjectivity, taking into consideration feelings and intuition in decision making. Lack of innovation and missteps in innovation can be obstacles to success.

• Lack of innovation or failing to change effectively. Companies that don't change their strategies, technology, or products run the risk of jeopardizing the business. Similarly, those that do change but not with the right adjustments risk failure. The build-measure-learn loop can help avoid these pitfalls by discerning what consumers really want and need by asking for their feedback.

Blockbuster, an instant hit out of the gates in the 1980s, failed to innovate, or pivot its business model, and went out of business. The video store revolutionized the media and movie industry by displaying empty boxes of its titles on shelves categorized by genre (the VHS tapes were kept behind the counter) and keeping late hours for night owls and last-minute weekenders wanting to catch a flick. Using a computer system to track videos as they were rented, most of its profit was made by the fees charged for late movie returns. In 1987, the company was bought by Wayne Huizenga, an American entrepreneur who owned several businesses in different industries and who developed Blockbuster into a successful business by modeling McDonald's approach. The enterprise grew from twenty locations to over 9,000 locations. Blockbuster was then acquired in 1993 by media giant Viacom in an intricate transaction. As streaming and related technology entered the market, Blockbuster failed to innovate by not making necessary pivots to its delivery of entertainment and so could not compete with new technology. Over the ensuing decade, it became more common to see Blockbuster stores with "store closing" banners, as shown in Figure 10.7, than it did to see a thriving store. There were other reasons why Blockbuster failed. Embedded with the lack of technology was the lack of fostering a culture of creativity from all of its employees, which hindered innovation. It lacked visionary leadership. It needed a culture of collaboration and teamwork to facilitate communication with stakeholders, such as employees, customers, and upper administration. Finally, it closed all but one of its stores in 2013. By then, Netflix had completely changed the landscape of digital streaming services and left Blockbuster without a ticket to the show.

Figure 10.7 Blockbuster failed to change its distribution channel to cater to new generations of movie watchers.

Are You Ready?

Proactively Considering Failure

Consider the list of reasons for failure presented in Figure 10.6. Come up with solutions to each of those reasons, focusing on a business of your choice.

• How would you avoid the failure?
• What strategies or goals can you have in place to avoid the pitfalls of failure?

Fear of Failure

Even the fear of failure can be enough to lead a business to fail. Fear can freeze entrepreneurs and force them into a corner instead of advancing their businesses; it can freeze them from reaching potential clients and being profitable. When companies struggle, the owners may experience many emotions, such as pain, grief, shame, humiliation, self-blame, anger, and hopelessness. Business failure is hard to separate from personal failure, as the business is often associated with the identity of the entrepreneur. Managing these emotions can help business owners heal and continue moving forward to their next business. Reaching out for help to a trusted mentor or therapist can help provide guidance in dealing with these feelings.

There are likewise many stories of entrepreneurs who, despite their fears, continued working toward their goal and were successful. They kept going, determined that fear would not run their lives. Tony Robbins, author and serial entrepreneur, says that people are afraid of failure because it is painful, and people try to avoid pain and suffering at all costs. "Failure," he says, "is the ultimate loss". But overcoming fear doesn't have to be painful if you understand it as a program or detrimental thinking running in your mind. People are hardwired to believe they are not good enough or can't do it. These patterns can be embedded in people's minds and can deter creativity and success. Some signs of fear of failure are listed in Table 10.3.

Signs of Fear of Failure

Believing you are not good enough, you don't belong, or you're not smart enough to be successful. Feeling that you have to be perfect in everything you do and have a need for approval. Not wanting to adapt or be flexible. Not wanting to take on difficult clients or projects. Feeling anxious about performing, leaving things for later, and not following through with plans.

Table 10.3 Fear can freeze up entrepreneurs. The important thing is to let go of old thinking patterns and adopt a positive outlook. It also helps to move forward despite fear and have mentors who can help deal with negative thoughts and emotions.

Fear of failure often stems from thoughts of inadequacy or a belief that you don't have the experience and skills necessary to succeed, that you're not smart enough, and so on. Thoughts like these can prevent a person from starting or advancing their business. Individuals with a high level of stress about failure tend to lack self-esteem, have anxiety, be perfectionists, and tend to avoid new or unfamiliar things at all costs.Fortunately, these traits and behaviors can be controlled and conquered.

Most entrepreneurs will tell you that, at some point, they had to fight their fears before they had any success.

Most entrepreneurs who succeed will tell you that behind every success there were many failures. Many people in general think that those who are great and successful were born that way. But that is simply not true.

Take Michael Jordan, for example. One of the most successful basketball players of all time, with five championship rings and thousands of points and assists, Jordan often said that he owed his success to failure. "I've missed more than 9,000 shots in my career. I've lost almost 300 games. Twenty-six times I've been trusted to take the game-winning shot and missed. I've failed over and over and over again in my life. And that is why I succeed". Michael Jordan, a kid who didn't make the varsity team in his high school, got his act together and propelled himself to stardom because he didn't give up when he failed. The same goes for entrepreneurs: Just because it didn't work the first time, it doesn't mean that they can't try again.

James Dyson, founder and inventor of the Dyson vacuum cleaner, had failed 5,126 times before he came up with his Dual Cyclone vacuum cleaner in 1993, fifteen years after he created the first version. When asked about how failure helped him, he said, "Failure is interesting - it's part of making progress. You never learn from success, but you do learn from failure. When I created the Dual Cyclone vacuum, I started out with a simple idea, and by the end, it got more audacious and interesting. I got to a place I never could have imagined because I learned what worked and didn't work". Dyson also says that he continuously embraces risk and failure, and allows his employees to explore that: "Nothing beats the thrill of invention. Letting people go out and try their ideas, getting them totally involved, and unleashing new thinking. They're not bound to any methodology - in fact, the stranger and riskier, the better".

Fear of Failure around the World

According to research, fear of failure is influenced by people's upbringing and cultural backgrounds. The Global Entrepreneurship Monitor (GEM), an organization that researches entrepreneurship around the world, has studied this topic. According to its 2018–2019 report, Americans are not as afraid to fail in business as people from many other countries are. This report includes those who would like to start a business but feel stuck because of fear of failure. Fear of failure is highest in Greece, Italy, Russia, and Cyprus, and lowest in Latin America and Africa. Usually, the fear is lowest in countries where there are few jobs and where people have to become entrepreneurial to survive.

What Can You Do?

GEM Data

Go to the Global Entrepreneurship Monitor at http://www.gemconsortium.org/ and look up the report on entrepreneurship for the United States. Compare it with two other countries.

• What are the differences and similarities between the countries?
• What can you do to address some of the factors in the US that hinder entrepreneurial development? What can be done to improve entrepreneurial conditions in the two other countries you examined?

GEM also reports that women are usually more afraid of failure than men and show less confidence in their abilities (Figure 10.8). The research also shows that women tend to open ventures in consumer industries, whereas male-driven startups are often in manufacturing and tech sectors, and men receive more capital and incentives to open those businesses. This can be attributed to the lack of women in science and tech industries. Other studies corroborate GEM's findings, showing that women are more afraid to start a business, they don't receive as much funding, and feel they have to prove themselves more than men to be taken seriously.

Figure 10.8 Research shows that women tend to be more afraid of failure and have less confidence in their abilities than men. Getting support from business organizations, programs, and mentors can help women build their self-assurance to begin or grow an enterprise.

What Failure Teaches You

Some would argue that, in reality, failure does not exist. There is only perceived failure, or obstacles that can become steps up the ladder to a better outcome. The importance in failing lies in learning how to get back up again. As Eric Ries dove into failure with his first company and felt the deep pain and disappointment of having to let go of an unsuccessful idea, he applied his lessons to create his new virtual reality company IMVU. IMVU then became a very successful experiment from which he derived the lean startup method. He was able to pinpoint his shortcomings and find ways to better himself and his performance. With his new company, he was able to get the product to market faster without it being perfect and ask for much-needed feedback from customers that he hadn't received before.

Converting Lessons Learned to Success

Most successful business owners will tell you that success didn't come to them easily. They had to persevere in pursuit of their goals to attain them. Converting their failures to lessons often led them to higher success than they had imagined. Entrepreneurs who can turn their obstacles into positive lessons can resurrect from failure.

Take Evan Williams, a visionary who launched a software tool to help users easily publish blogs. That venture, Blogger.com, was launched in 1999 and purchased by Google in 2003. The next year, Williams decided to establish Odeo, a platform for creating and sharing podcasts. Apple had been working on a similar platform and shared it earlier on iTunes to the demise of Odeo. Williams didn't want to go head to head with iTunes, as this could potentially destroy his company, so he found a way to go in a different direction and establish a new way of sharing status updates and other data. Williams took that failure, and with a few friends, co-founded Twitter. We all know how that worked out: Twitter is one of the most popular microblogging tech platforms.

Kathryn Minshew, shown in Figure 10.9, also experienced failure but has learned from it. In 2010, she quit her job to create Pretty Young Professionals (PYP). She invested $25,000 of her own money to develop a networking platform for women who were smart and passionate about their careers. After a few months, she and the three other co-founders started to disagree on some issues, including their approach to advertising. As they hadn't completely formalized the ownership of PYP, two of the founders lost their investments, including Minshew. After experiencing the loss of her investment, her friendships, and the original idea, Minshew persevered with a new opportunity and established The Muse. This platform is similar to PYP but added job listings, workshops, and advice. Currently, the site has over 4 million users and is a major competitor of LinkedIn. Minshew didn't let her first disappointment prevent her from starting a new venture. She applied the lessons learned in building the original platform to the creation of a new one - with the right contracts and right people in place. Minshew now speaks at business conferences and events, sharing her mistakes and how she used them to lift herself up to launch a new venture properly. She hopes that her experience helps other entrepreneurs avoid the pitfalls she went through so they can be as successful.

Figure 10.9 Kathryn Minshew, co-founder of The Muse, used the lessons from her first business's failure and built a successful platform for professional networking.

Being able to learn from different types of failure is as important as experiencing success because you get to know your strengths and how to leverage them. Failures can be seen as stepping stones rather than embarrassments. Feeling comfortable takes practice. Table 10.4 shares several tips on dealing with these dynamics.

Tips for Converting Lessons to Successes

Let go of the fear of failure: It is not as bad as you think. Experiment with your business and try new things; take risks if necessary. Go for it, even if you're not ready. Listen to your gut. Ask for feedback, and don't be afraid to hear negative things. Be willing to change when things are not working out. Learn from others and be willing to ask for help.

Table 10.4

Coping with Fear

When coping with fear of failure, there are two strategies that entrepreneurs can use. The first way to reduce fear of failure is to modify your business strategy by changing the target outcomes for your business. Instead of aiming to make $50,000 in the first six months, you can be open to the idea of a leaner start, learning about your customers and how best to serve them. Learning/growth goals can be just as valuable as hitting a revenue target in terms of overall success and longevity. Also, if a goal is not met, don't consider it a total failure: Refocus and ask yourself what you learned from the experience and how to apply that knowledge to a revised goal. More than likely you will find this experience has enhanced your toolbox to help you make changes within the business or start a new one.

A second way to reduce high stress is to practice some sort of meditation or breathing exercise that can help lower the anxiety created by fearful thinking. Reaching out to a mentor, support group, therapist, or counselor can also help alleviate fearful thinking.

The Challenging Truth about Business Ownership

Learning Objectives

By the end of this section, you will be able to:

• Explain the pros and cons of business ownership before you launch
• Understand current trends in entrepreneurship in the US
• Determine the challenges women face in entrepreneurship and what resources they can use to overcome them
• Determine the challenges minority entrepreneurs face and resources available for them

People usually have different reasons for starting a business. Some of the reasons - other than the idea they've hit upon - include the freedom to set their own hours, spend more time with family, be their own boss, and make money. However, in many cases, they will probably work more than planned, be challenged to find the work-life balance, face fears and doubts, and perhaps struggle to make ends meet for the first few months or years. Prior to launch, they will need the support of family, friends, and mentors to understand the limitations of time and the pressures they face.

Pros and Cons of Business Ownership

Table 10.5 lists the positives and negatives that should be considered prior to opening a business and throughout its operation. Positives of entrepreneurship include having the freedom and independence to expand your skills and develop your own ideas. Instead of working for another organization on projects and ideas that are not your own, you get to serve people in a way that feels right for you. You also have the opportunity to make a profit and have a better lifestyle. Having the freedom to set your own schedule and work at your own pace can be very satisfying as well.

On the opposite side, those "freedoms" translate into being in charge of the business and the significant responsibility that entails. You must resolve issues that arise every day, such as dealing with employees, customers, production, marketing, and financing, among others. Most of the time, you wear many hats, especially during the venture's early lifecycle stages, and most entrepreneurs usually work more hours than anticipated. In addition, you must deal with losses and risk if things don't go well. The important thing to keep in mind is that all of the negative aspects have solutions and can even be prevented if planning, mentorship, and a good support system are in place, which can alleviate many of the stresses that entrepreneurs experience. Also, having attainable goals in creating awareness of the business, number of clients, and sales or profit can be beneficial in alleviating some of that pressure.

Pros and Cons of Business Ownership

Pros	Cons
Being autonomous, being your own boss, expanding ideas, enjoying creative freedom Lifestyle, making your own schedule, flexibility Satisfied with career Serving customers and employees Profit Being known in the community	Being in charge, resolving issues, hiring/firing employees, and wearing many hats Dealing with stress, time constraints, and management Lack of focus, loss of passion Customer and employee complaints Money/cash flow problems Must deal with losses and financial risk

Table 10.5

Entrepreneurship and Competition in the US

Entrepreneurs operate in an unbelievably competitive landscape. Although competition helps create better products and services, it also places many stresses on a business owner who must compete with new, more flexible businesses that may have lower prices and better products. As shown in Figure 10.10, the number of new establishments that are less than one year old has increased over the past two decades from 1994 to 2015. There was a dip during the 2009 recession, but the trend continued after 2011, and the number of businesses increased again. This means more competition for businesses that are already established.

Figure 10.10 The number of new businesses usually rises and falls with the economy. This graph shows that the number of new establishments has risen in recent years.

The number of jobs created by these young establishments has also decreased in this period, which affirms the likelihood that entrepreneurs are wearing many hats in their own businesses. Figure 10.11 charts this trend.

Figure 10.11 While the number of new business establishments has risen, the number of jobs and the survival of businesses (following) have decreased during the same period.

As you've learned, only about 20–30 percent of businesses succeed to the five- or ten-year mark. Figure 10.12 shows that only half of businesses survive to the five-year mark, and only 20 percent are sustained for two decades. Their failures may be due to a number of factors such as cash flow problems, lack of passion, lack of support, lack of innovation, difficulty adapting to new technologies or customer demand, and environmental factors that can influence a business as well, such as the economy, trends, regulations, or sociocultural changes. Therefore, it's important for entrepreneurs to research their internal as well as their external environments before launching. The chapters on Identifying Entrepreneurial Opportunity and Entrepreneurial Marketing and Sales take a look at such research, as it pertains to both the entrepreneur and the marketing environment respectively.

Figure 10.12 Survival rates of businesses from 1994–2015. This graph shows that as years go by, fewer businesses stay open.

Challenges of Business Ownership for Women

Challenges for business owners can be many. Female entrepreneurs, however, can face additional hardships. These can range from not being able to secure financing for their businesses, having a hard time breaking into an industry, and dealing with fears of starting and growing a business, and not being taken seriously.

Current research shows that the importance of female entrepreneurship is key to economic success. Women own 40 percent of the country's businesses, generating over $1.4 trillion in sales. Women entrepreneurs are closing the gender gap, as their ventures have grown substantially in the past few years. In the past two years, women entrepreneurship rates have gone up by 10 percent each year, compared to men's 5 percent growth. This surge has been spurred by increased available resources, including mentorship, funding, and programs to help women succeed. Nonetheless, there are still great challenges to overcome, as women move into the next generation of business ownership. Some of the main challenges are:

• Difficulty gaining entry in certain industries. Women have made great strides in business, but they still face many obstacles, especially in certain industries. Women tend to be underrepresented in specific areas, notably in the tech industry, where they run only 9 percent of businesses. Women tend to be underpaid in tech positions, they experience sexism, and they are often passed over for promotions, especially if they have families with young children. So, if there are no female role models, it is difficult for women to follow an entrepreneurial path that is already full of obstacles. Although young girls and women desire to study and expand their careers, historically, they have not been presented with the opportunities and encouragement to do so, especially in STEM. By the time they get into college, the number of women in these careers - which can be rich in entrepreneurial opportunities - is very small. However, more efforts are being made today to support young girls interested in scientific, technological, and mathematical careers.
• Lower sales and fewer employees. Women overall tend to struggle more to keep their businesses afloat, as they have fewer employees, less revenue, and less profit than male-owned businesses. Only 2 percent of female-owned businesses make over $1 million in sales. Male-owned businesses, on the other hand, are 3.5 times more likely to hit that revenue target. Some of the reasons why women experience this is because women may enter entrepreneurship part time, often striving to sustain a decent family work balance, which is difficult when children, especially young children, are part of the equation. This set-up usually includes one employee, who is the entrepreneur herself, and she may have attained her goals without wanting to make millions. Time, flexibility, and work-life balance can be reasons women become entrepreneurs, and they are happy with their goals of making some money while taking care of their family and household. Lack of experience in business or managing a family business, and lack of access to capital are also reasons for the lower metrics.
• Less access to capital. Regardless of their success and prowess, women still have a harder time securing funding for their businesses. A recent Kauffman Foundation survey determined that more than 72 percent of women don't have the access to capital they need. Nirupama Mallavarupu, founder of MobileArq says, "As a woman entrepreneur with a focus on helping non-profits and schools, it has been difficult to get investors. We have turned this around by pursuing customer acquisition organically and relying on direct revenues instead of investment growth". Women usually don't ask for funding, or if they do but are turned down, they turn to funding from family and friends. They are more likely to finance their ventures this way than men.
• Not taken seriously. Sometimes it's not that women don't have the opportunities, money, or mentorships to start a business: Sometimes, women are just not taken seriously. Research by Freshbooks Accounting and Software firm and Research Now asked 2,700 entrepreneurs about gender discrimination and the wage gap that exist today. Thirty percent of women pointed out that they are not taken seriously as business owners, as they must work harder than their male counterparts and have to charge less to get a client. Emily Harsh, owner of Heart Move Collective, comments in her blog, "Because I am in the fitness industry and female, I am often not taken seriously as a professional. I think the number one most important thing you can do as a woman fighting to pave your own path is to continually stay authentic".
• Resources. Fortunately, there are many resources that women can take advantage of. Organizations such as the Women's Business Center of the Small Business Administration, the National Association for Women Owners, the Female Entrepreneur Association, Ladies Who Launch, Minority Business Development Agency, the National Association of Professional Women, and the Women's Business Enterprise National Council strive to help women succeed in all industries by providing loans and programs that prepare them for a competitive landscape. Mentoring by other women has also proven to be effective in women's success in entrepreneurship. Having peers that can help and strong mentors can make a difference in the outcome of a business.

Other helpful tips to counteract the challenges facing women entrepreneurs include being assertive, being authentic, networking, and developing a thick skin for rejections and other challenges. Facebook COO Sheryl Sandberg, in her book Lean In, states that "being confident and believing in your own self-worth is necessary to achieving your potential" and she encourages women entrepreneurs to ask themselves: "What would you do if you weren't afraid?"

Women bring great qualities to entrepreneurship such as strong leadership, as well as management, time, multitasking, and listening skills. Women also have a collaborative approach to relationships that works well in many industries.

Challenges of Business Ownership for Minorities

Entrepreneurs from minority groups encounter additional challenges. Minority groups are a strong force in the economy of the country, yet they still experience additional challenges that sometimes prevent them from succeeding in their businesses. These can range from having lower capital access due to little credit history, small or nonexistent business networks, and lower business knowledge. According to the Census Bureau, minorities own about 29 percent of US businesses.

Hispanic people comprise 17 percent of the population and own approximately four million (13%) companies in the US with $661 billion in revenue. From 2007 to 2015, business revenue grew 88 percent for Hispanic people, which means that they have more power to employ more people to provide goods and services to a wider audience, and to purchase from other vendors. Given its growth and current size, this group is vital to the health of the economy. Unfortunately, research shows that if measured by financial outcomes, Hispanic people still struggle to succeed in business ventures due to a lack of funding, less managerial/business education, and lack of mentorship. A higher rate of foreign-born entrepreneurs can experience these challenges due to the lack of networks and financial history in the country.

Black people make up 14 percent of the total US population, and their businesses represent about 7 percent of total businesses. Although they are opening businesses faster than their White counterparts, their businesses, as well as Hispanic businesses, tend to have higher failure rates than White- and Asian-owned businesses. Similar to Hispanic people, Black people tend to lack funding, managerial/business education, and mentorship.

Asian Americans make up 5 percent of the population and own just over 4 percent of the businesses in the country. Although they are considered minorities, Asian Americans tend to be better educated and have more access to capital than Hispanic Americans and African Americans.

Organizations such as the Hispanic, Black, and Asian American Chambers, the Minority Business and Development Agency (MBDA), and the Small Business Administration (SBA) have developed programs to help minority entrepreneurs succeed in various ways. These organizations hold workshops once or twice a month to provide helpful information and business plan templates so owners work through their preparation to launch a venture. Chambers are also helpful in matching companies with banks for loans based on their needs and industries. The 8a certification is also facilitated by the Chambers and the MBDA, and provides disadvantaged businesses with an assistance program.

Disadvantaged businesses are those that are small, owned by someone economically disadvantaged (a person who has less than $250,000 in personal net worth, which includes assets such as cash, home, car, and real estate minus liabilities such as mortgages, credit card debt, and car and bank loans), with an owner demonstrating that the business can be successful. This program helps minority business owners access finances, mentors, counselors, and management assistance, among other resources. In addition to this support, some organizations, such as the SBA, provide certifications on various business topics on marketing, finance, accounting, management, and production that usually take the form of short classes for business owners to acquire business acumen. These programs help entrepreneurs gain needed knowledge, grow professionally, and connect with people as they go through their entrepreneurial journeys.

Managing, Following, and Adjusting the Initial Plan

Learning Objectives

By the end of this section, you will be able to:

• Explain the difference between a business plan and a lean plan
• Know how to develop a lean plan quickly and accurately
• Run the build-measure-learn loop

In this chapter, we've discussed how to start the imperfect business using the lean startup approach. We've looked at the build-measure-learn loop and how to test an MVP. We've also covered how to deal with fear of failure and how to overcome negative thinking. In addition, we've covered how minorities can tap into resources to help them be successful. Now it's time to build the lean plan to help you launch your venture.

As you must realize, having a lean plan is important to executing its process. A lean plan follows the path of lean methodology. It is a brief business plan shown to potential investors and employees that is a fast and effective way to set, manage, and evaluate goals and strategies in a business. Figure 10.13 shows its components.

Traditionally, a business plan requires a detailed document of the company's background, the target, objectives, financials, and marketing strategies. Developing this usually takes a long time, from a few months to a year, as you will see in Business Model and Plan. A full business plan requires robust information as it's developed for internal purposes, for banks or investors who need proof that the business is a good investment, and for other stakeholders. In contrast, a lean plan is short and includes only specific information, sufficient to go through the build-measure-learn loop. This plan is where you clarify initial ideas about the product to help you work through the loop and to share with potential investors and employees who need only so much information to decide on their role in the project.

Figure 10.13 The founders of a business create a lean plan to help them set expectations and goals.

Developing a Lean Plan

As mentioned earlier, a lean plan uses lean methodology. This type of planning begins by drafting a short living set of lists to guide you, meaning you can update it as you go. The plan shouldn't take months to develop; you can set it up in a few days. The plan focuses on the business core, so only important details about marketing, the business model, finances, the build-measure-learn loop, and the MVP are added to it.

The following is a list of basic procedures and details to include in a lean plan.

1. Write a short and simple document.
2. Test your MVP through the build-measure-learn loop.
3. Review your results.
4. Revise your plan.

Once these steps are complete, the entrepreneur can start or continue the venture.

Write a Short and Simple Document

This plan does not need to include an executive summary, a company background, or team information. It is literally a short pitch that you can use to share with investors and potential partners. Focus on what is important and include the following:

• Basic strategies for product, price, place, promotion; add people, physical environment, and process if it is a service
• Basic strategies for target market and positioning
• Day-to-day tactics, which include specific tasks or actions that will get an objective done
• A schedule with dates for acquiring needed licenses, launch date, and when to review and revise the plan
• A business model that details how you will make money
• A basic forecast of sales, costs, profit, and break-even analysis

This plan is just a bare bones list of things that need to get done and by whom. It also includes a timeline, a cost, and a reward. It is less like a traditional document and more a series of lists and bullet points. In this case, the entrepreneur is only writing down the essentials of the business to achieve the goal at hand. Later on, when a document is needed for outside stakeholders or bank loans, then a full plan can be developed with research and details about the market, the environment, trends, and strategies that are more fleshed out.

For example, an entrepreneur who is just opening a prosthetics company can start a lean plan by describing its main product, which can focus on creating custom prosthetics for children. Then it can add a basic price or range of prices for its basic product since it's a custom product, and it will probably vary in price from customer to customer. Another strategy to keep in the plan is where to conduct the business. A central location would probably be a good idea, especially close to doctors and hospitals. Finally, basic promotional strategies used in reaching out to this market, which can include speaking to children's hospitals and local doctors who can refer the patients to the company, can also be listed. In addition, the entrepreneur may decide to create a basic website, online ads, and simple brochures to give information to potential customers. Once all the strategies are laid out, then the timelines can be added from the inception until the launch date, which includes assignments for everyone who will be in charge of the activities in this new business. These can include an office manager, the prosthetist, and a marketer.

Next, the entrepreneur may detail how the money will be made. Will the new business charge the client directly for the product? How about accepting insurance and copayments? These are questions that need to be written down. Then a basic forecast of the market demand will help forecast sales, expenses, and profit.

Test Your MVP through the Build-Measure-Learn Loop

Once the lean plan has been put into place, the next step is to execute it and test the MVP through the build-measure-learn loop. Here is where the rubber will meet the road, and all the assumptions that were made in the plan will be tested in real life.

• Build your MVP.
• Test your idea by sharing it with potential customers.
• Measure results by talking to customers and recording feedback.
• Ask questions such as: Are we building a product people want? What benefits do we need to add? Is this our target market?
• Test different versions and cohorts of users.

In our example, the entrepreneur will have a chance to build the prosthetics and ask questions that will help create a better product over time. At this time, the entrepreneur might find out that the product can be expanded to include orthotics and not just prosthetics, and perhaps that adults can also be included in the market.

Review Your Results

This step should be done at least once a month, where customer feedback, marketing, and outcomes are thoroughly reviewed. This is a great opportunity for the entrepreneur to assess if goals have been met and identify areas for improvement. However, many times, you will encounter that reviewing results can stir resistance from employees (if there are any), as they may become tired of planning, having meetings about planning, and demonstrating results. The reviewing process can inspire some fear or negative feelings over concerns of being blamed, but as a leader, you must always assure them that this process helps them get better at what they do and gives them the information and tools necessary to make the changes that will steer the business onto a more successful path. This is about managing the results and not being deterred by them.

• Review customer feedback and go back to your plan to compare.
• Review target market, 7Ps of marketing, features, and benefits.
• Review numbers or outcomes, which may include sales, profit, customer signups, and even customer reactions to advertisements and product attributes.

In our example, if the prosthetics business is not bringing in enough customers to sustain it, then this is the opportunity to see where issues exist so changes can be made to the lean plan.

Are You Ready?

A Lean Scooter Plan

You are interested in opening a new electric scooter business in your small city, as there is no competition. You would like to enable your small town to have smart mobility that is environmentally conscious while reducing dependence on regular transportation such as buses and vehicles.

• Create a lean plan that details how you plan to start your business.

Revise the Plan

Make changes to the plan as needed. Once metrics have been measured against results, marketing is tested and measured, and customer feedback is received, then it is time to revise the plan and make adjustments. This can take the form of adding a feature to the product, adding new products, changing promotional tactics, or communicating differently with customers and consultants.

If there aren't enough customers to sustain the prosthetic business, here is where the founders can make changes to correct course. It may be that customers are not aware of the business, or there aren't enough pediatric customers and perhaps adults can be added to the target market. Once the plan is revised and the resulting changes are made, the business can continue and the process of testing restarts. As you can see in Figure 10.14, this is a continuous process. It requires constant updating and cooperation from everyone involved in the business. Once the process is set up, then it is easier to maintain it and see it as necessary within the business that helps it grow.

Figure 10.14 The lean plan cycle for small businesses.

Tim Berry - entrepreneur, former Apple employee, writer, and now a lean startup guru - advises businesses on the art of lean planning, as he does not like long planning himself and has little patience for extensive plans and coding. For Berry, lean planning does not contain elaborate information and details that are unnecessary for the business to run. It is not a document per se, but an assortment of short bullet points, some lists, and tables. For Berry, the most important steps to lean planning are to have the following:

1. A lean strategy or plan in place
2. Execution of the plan (or run it like in the Figure 10.14)
3. Review of the results and check against milestones
4. Revision of the plan - change what didn't work and start the whole process again

Are You Ready?

Developing a Lean Plan

A local entrepreneur owns a print shop that has been in business for 20 years. The owner focuses mainly on printing business cards, flyers, posters, brochures, and banners for local businesses. They have noticed that sales have been declining for the past five years because promotions have been evolving into digital ads, social media, and other Internet marketing techniques rather than printed material. They will need to innovate if they want to stay in business.

Last week, the owner came to see one of your entrepreneurship professors to ask for a student or someone to help. Since you aced the class, your professor thinks that you can show the owner how to develop a lean plan, and they offer you an internship. You accept gladly and begin to work on the project.

• Develop a lean plan and explain to the owner how this can help them grow in the next three years.

Growth: Signs, Pains, and Cautions

Learning Objectives

By the end of this section, you will be able to:

• Determine the lifecycle of a business
• Identify strategies to manage the main needs of each lifecycle stage
• Explain how businesses grow and adapt to changes in their cycles

The work of the entrepreneur is not over after the launch of a business. There are constant changes to manage. Sustained business growth requires a company to improve profits by increasing its revenue, cutting costs, or both. Increasing profit yearly indicates improvement and helps secure financing from banks, attract and reward investors, support opportunities for opening new business locations, and helps reinvest those profits in research and development. As a business matures and stabilizes, so do its revenues and profits, sometimes holding the company stagnant if changes aren't made.

At the beginning of your startup, everything is new, exciting, and sometimes (or seems) less complex than it will be as the venture grows. Perhaps you have one or two employees, and you manage the operation's day-to-day activities. Managing the business is still within your power, and the structure of the business is fairly straightforward. Once the business takes off and encounters the challenges of development, such as hiring more employees to keep up with demand, adding new products, or expanding to new locations, you will need more resources and a different strategic approach to managing the business. You must be aware of these changes and steer the business in the right direction to continue its growth. As you begin to understand the signs of growth, you can correctly assess the challenge and come up with solutions. Going through these changes is what is called the business lifecycle, a process of five basic stages: starting a business, growth (expansion to new markets and products), maturity, decline, and death or rebirth, as Figure 10.15, shows.

Figure 10.15 Businesses go through cycles of birth, growth, maturity, decline, and rebirth or death. Knowing the cycle of your business and industry will help you to take the steps in the right direction.

Lifecycle Stages

As companies reach new lifecycle stages, owners need to be on the lookout for change indicators. These may include rapid (growth stage), leveled (maturity stage), or diminishing (decline stage) sales. Or they may include the inability to keep up with demand without investing in capital, equipment, software, or technology. Other signs may be a need to increase staff and hire top- or mid-level managers to oversee an expanding workforce, or the need to grow by updating the product, introducing new products, or adding new markets.

Startup/Birth Stage

This stage centers around acquiring the first batch of customers. Entrepreneurs are focused on being able to actually provide and deliver the product, grow their customer base, and have enough cash flow to keep up with demand. The major concern is to survive by at least breaking even. This stage is simple in terms of ownership because there are usually only a few employees, if any. The processes are often informal, and technology and systems can be minimal. The owner usually wears many hats to launch the operation.

For example, an advertising agency might start operations with the co-founders and perhaps one or two employees who work as art designers and/or account executives. At the beginning, the point is to gain clients and deliver the services and products promised - such as TV ads, radio commercials, print ads, or digital ads - while consulting and managing client accounts. The goal is to gain client trust and make sure clients are paying for the services rendered so the agency can pay its employees and vendors. Breaking even is the most basic goal, which means that costs are at least covered, but no profits are seen just yet. Many times, the owner or owners of the company will not take a paycheck for many months, sometimes years, to ensure the business takes off.

Growth Stage

The growth stage, when sales rise due to higher demand, is full of change. There are increases in sales, profits, additional market/product penetration, and an expansion of professional staff. There is usually an increase in cash coming in and going out. A key factor in this phase is to avoid cash strain by paying close attention to costs and ensuring the payment from customers of product and services provided by looking at running reports on costs and sales daily, weekly, and/or monthly. At this stage, systems such as databases and software systems that help keep track of customers and sales, as well as formal processes, need to be put in place for marketing, technology, production, and human resources. Owners must also decide whether to continue with current strategies, sell, or perhaps merge with another company to continue growing. The owner will usually hire managers with experience to take the company to the next level. At this time, owners may need to take out loans and use equity power or shares of the company as capital to leverage further growth. The chapter on Entrepreneurial Finance and Accounting discusses these strategies in more detail.

At this point in our advertising agency example, there are more clients being served; the company is expanding as it adds new clients to the roster and hires more employees to keep up with demand. Revenue is higher, but costs are increasing as well. Processes need to be put into place so employees know what their tasks are and how to do them. Software that handles operations, such as accounting and project management, are put into place because the number of people and processes are increasing. Sometimes, the growth is so unprecedented that perhaps a merger with another company is necessary to be able to provide all the services that clients need.

Maturity Stage

As the business continues, it could enter maturity, which means it has grown to the point where revenues and profits level off. There is adequate staff and more management engaged in maintaining operations. Systems are well developed in all departments and working efficiently, with larger financials and management. The key to remaining active and spurring new life into the business is to remain flexible and continue being a creative and entrepreneurial company. Apple offers a great example of a company that, although its size and power have grown tremendously, continues to innovate as if it were a small company. Other companies such as GE and Procter & Gamble, although they are big corporations with many resources, are now mature and well balanced because they have been in business for a long time. However, they too must continue to innovate and shift with trends, and this is where the lean startup methodology fits well in both small and large businesses because it allows them to be creative and entrepreneurial, regardless of size.

Decline Stage

At this stage, as industries change or business owners fail to keep their offerings relevant, decline is imminent. Sales wane, and a rebirth or death of the business can be expected.

For example, Sears, Payless, Victoria's Secret, and JCPenney have recently been hit by the new technological and fashion trends that are affecting brick-and-mortar retailers. The way customers shop has been shifting from spending time browsing and shopping in a physical store to adopting new technology to shop from computers and mobile devices. Today, Amazon and other online retailers have developed strategic ways to help customers shop for items they want at an affordable price from the comfort of their devices. Retailers must come up with new, experiential ways to engage the consumer. Interestingly, companies such as GoPro and Fitbit are also struggling with declining sales due to competition, lower demand for cameras, and pricing. GoPro and Fitbit are still good brands that can benefit from a buyout from a bigger company, so they could have a rebirth.

Rebirth or Death Stage

When there are big changes in the decline stage that the company doesn't evolve to meet, or the business owner doesn't retain passion, focus, or ability for the venture, the business will end. Blockbuster failed to embrace the new era of video streaming and closed its stores in 2013. Similarly, small retailers, restaurants, tech companies, and manufacturers that fail to innovate cannot sustain a business and usually dissolve.

That is not to say that a rebirth is not possible. If a business innovates and changes to embrace new technology and ideas, it may restart the lifecycle. Polaroid, a pioneer in the instant camera market, saw its demise in the 2000s when the photography industry started to shift toward digital products. The company went bankrupt in 2001 and was sold to several holding companies (controlling companies that buy a stake in the business but don't operate the business), which licensed the name Polaroid to various electronics manufacturers. Recently, the company entered into an agreement with a holding company that specializes in brand resurrection to develop photography products. These products include a new instant camera and the Polaroid Swing app that allows people to create moving GIF photographs, which are several pictures rotated in a way that show movements and resemble very short videos. Most recently, Polaroid has launched the camera OneStep+, which connects the camera to the phone through an app, allowing the photographer to use different filters and shoot and print instantaneously. This camera, along with other lines of Polaroid instant cameras, have helped resurrect the brand.

The Pain of Growth

Expanding a business usually entails some growing pains. Professional stressors can include figuring out how to serve the customer in the best way possible, produce the right product, create a great brand, sell the right amount, manage cash, delegate tasks to others, and ensure the right people and systems are in place. And of course there are the personal stressors of managing a healthy work/life balance and meeting the demands of the venture.

In 2011, Jessica Thompson, owner of Johnson Security in New York City, felt the strains of growth. She had expanded from sixty to seventy employees and expected to hire ten to twenty more that year. News of her unprecedented business growth had catapulted Johnson Security into higher sales, thanks to better assessment of prospects (potential customers) and better written contracts, but it also heightened her concerns. She had to hire more people. She had to create the infrastructure needed to support the new positions. She had to make sure her liability costs were based on estimates of working hours, because if the number of employees grew, so did her costs. Her visible and public success also made her a target of the New York State Department of Labor, which audited the company to make sure she had classified her workers correctly as W-2 workers instead of as contractors. The audit results were fine and her growth proved organic, but the stress was something she had to go through to succeed as a business owner.

Victor Clark of Clarke Inc., a consulting company, also knows a little about the pain of growth. When asked about his experience as a business owner, Clark said, "My biggest lesson would be ‘profit is an opinion, cash is a fact.'" He says that he struggled many times with cash flow because he disregarded his checking account and because of late receivables. His advice is to pay attention to the checking account, never do a job that makes you lose money, know your costs, and review your numbers every single month.

Strategies for Growth

What are some strategies for growth? Growth can mean increases in revenue and profits, and decreasing expenses. Here are various strategies that can help expand a business whether they are young or established companies.

Product Improvement

An inexpensive and easy way to increase sales of a new product can be done by enhancing a product. This can be in the form of updating the design, making it more durable, changing its size, adding a new feature, or increasing its quality. It is easier to enhance a product than to completely start from scratch.

Take appliances, for example. Rather than creating a new machine to wash clothes, Samsung continually adds features to its washing machines. Recently, the company changed its technology to high-efficiency (HE) technology to save water and energy, and included a separate feature that helps wash items by hand.

Usually, creative fragrance and perfume manufacturing companies can easily adjust their current fragrances by adding a new ingredient or scent instead of developing an entirely new fragrance. Artisanal perfume startups such as Phlur and Pinrose have recently developed their own lines of perfumes that are environmentally conscious, not tested on animals, and good for the body. Some of their perfumes now have new versions of their signature perfumes. In addition to improving their products, they also created new ones out of their original scents by adding them to body sprays, lotions, lip shimmer, and candles that smell exactly like the original.

Market Penetration

Market penetration entails selling more to current customers by showcasing new uses for an existing product. This is the least costly way to attract more customers from within the market. A great example is the versatility of the common pantry staple you see in Figure 10.16, baking soda. Until the 1920s, baking soda was used only as a leavening agent for baking. The mid-century emergence of convenience foods, including premade baked goods, meant a decrease in demand for the product as people baked less at home. To boost sales, Arm & Hammer explored its other uses and began to sell it as a deodorizer, detergent, remedy for heartburn, and as an additive to other products such as detergents, toothpaste, and cleansers.

Figure 10.16 Arm & Hammer penetrated the baking soda market by expanding uses for the product.

New Distribution Channels

Adding new distribution channels gives current customers more ways to purchase the product. For instance, the Internet has provided opportunities for companies to expand their reach by selling items online. Consider a bakery that, in addition to distributing its cookies in its store and through retailers, adds an online store. While a large number of companies have websites and apps that can sell directly to customers, entrepreneurs who don't want or have an e-commerce function on their site can use portals such as Etsy, Amazon, and Ebay. A jewelry maker, for instance, can sell items through one of these websites without having to pay someone to create or manage a website for their business. Other more conventional ways of using different distribution systems include making products available in retail stores, kiosks, or grocery stores. Take for instance California Pizza Kitchen. It originally existed solely as a restaurant chain but now has created frozen pizzas that we can purchase at the grocery store.

Product Line Extension

A business can extend its product line to appeal to different customers with different needs and budgets. It can start with a basic, no-frills product for the low-end consumer. Then, it can provide a higher quality, higher-price product with a few more features. A step higher would be a high-end product that is more luxurious or has additional benefits and capabilities that are higher priced. This strategy is often used with cameras, software, vehicles, and hotels. Tech companies will have their basic products and will increase their gadgets' quality and benefits to make them more luxurious and capture different markets along the way. Uber, for example, offers its basic riding service to everyone who requests a ride. Drivers can pick them up in any type of vehicle they own. An upgrade to this service is the new Uber Black service, which gives the customer the ability to request a luxury car or SUV. These vehicles must be newer than five years old, and they must be in excellent condition. This service is more expensive than regular rides, costing three or four times more than a ride in a regular vehicle.

Adding New Markets

Developing new markets is a riskier path to growth. A company that was catering to only local customers might open a second location in another town or region, or provide products online to reach distant clients in other cities, states, or countries.

Fast fashion companies have been at the forefront of this trend. These are retailers that design, manufacture, and distribute the product to customers quickly and cheaply by skipping the regular four seasons of the fashion year. Instead, they usually offer new designs every two or three weeks, and entice shoppers to purchase clothing at a faster rate. Retailer store Zara, (pictured in Figure 10.17), the fast fashion company from Spain, has seen unprecedented growth through expansion to other markets, for example.

Figure 10.17 Fast fashion company Zara has been successful at developing new markets.

Born Global Companies

As mentioned earlier, entering global markets is a common method of expanding a business. Some companies will turn to global expansion during a growth or mature cycle, and some companies will seek global markets from the start, as born global companies do. A born global company is one that has as its goal to serve the world with its products. Companies that have new products that have never been created before - today mostly technological and medical products - usually benefit from this kind of strategy. Other entertainment and consumer products can be thought of as global as well, especially when it's a new product category.

Red Bull is an example of a born global company that had its eyes set on the global stage, even before it started growing, because it had a new product that no other company had ever created. After Red Bull came up with its products, other companies followed suit, and a new product category of energy drinks was born. So far, the company has been around for 31 years, has more than 12,000 employees in 171 countries, and has sold more than 75 billion cans around the world. The success that this born global company has experienced can be attributed to its grassroots marketing approach on college campuses, the sponsoring of events (Figure 10.18 shows two examples), as well as a massive distribution approach that targets young people, extreme sports athletes, and professionals who need an energy boost.

Figure 10.18 Red Bull owes its success to its promotional efforts across the globe. The company has found success (a) targeting consumers interested in extreme sports, such as these spectators attending a cliff diving event in Massachusetts, and in sponsoring events like this (b) Motocross competition. 

Licensing, Franchising, Joint Ventures, Mergers, and Acquisitions

Other riskier ways to grow include the integration of outside ventures through licensing, mergers and acquisitions, joint ventures, and strategic alliances.

Licensing is a contract in which one enterprise gives permission to another entity to manufacture and sell its products for a royalty, which is a payment in exchange for the use of property or an asset, whether intellectual or physical that can be used to generate revenue. Some of the property that can be licensed can be in the form of a design, a copyright, an invention, a patent, or formula. Instead of investing directly in manufacturing and marketing additional items, many companies such as Disney, Mattel, NBA, and Warner Brothers lend their characters and copyrights to other companies to use on their merchandise. They then receive a royalty payment for their license.

Licensing can also occur in reverse: Small companies with a technology, medical solution, software, or product that cannot be manufactured by them can seek other companies to which they can license their intellectual property. The smaller company can also license from another company and create the product or service because that is its core competency.

Franchising is a form of licensing that allows the business (franchisor) to share its business model to expand the business through various distributors (franchisees) for a fee. In turn, the franchisor provides the training, marketing, know-how, management, and support to help the franchisee fulfill its sales objectives. Franchising is common in industries such as restaurants, automotive, hotel, cleaning, and home services, to name a few. Popularly known franchises are fast-food restaurants, such as Chick-Fil-A or McDonald's, which have quickly expanded in the US - and around the world in the case of McDonald's. Smaller local and national franchises include Fit4Mom, Mosquito Squad, Chocolate Factory, and Soccer Shots.

A joint venture is the creation of a new business in which two different enterprises share the expenses and profit to achieve certain goals of a project. This approach reduces the risk of investing directly in capital equipment, and it also allows them to share each other's knowledge and expertise. You can see this done with small businesses that collaborate to save money and help each other out.

Larger companies do this as well to leverage a particular advantage and reduce risks and costs. Google and NASA joined efforts to bring NASA's information about the weather, locations, and forecasting to the fingertips of people via a Google search. This joint venture proved fruitful, as they continue to collaborate on various projects including robotics and space exploration.

In mergers and acquisitions, two companies combine or one buys the majority stake of the other. The goal is to enhance profitability and reduce their risk by diversifying their portfolios, combining resources such as boards of directors, combining efforts to achieve efficiency (for example, being able to increase production and thereby reduce production costs), broadening market access, sharing technology, and increasing access to capital. Usually, mergers and acquisitions are conducted by larger companies such as Dow Chemical and DuPont, Anheuser-Busch InBev and SAB Miller, Heinz and Kraft, and CVS and Aetna, but smaller companies can also benefit if they both have an opportunity for synergy.

Strategic alliances are arrangements that two or more entities create to work on a project by sharing some of their strengths and resources, but not actually creating a new entity like in the case of a joint venture. In this alliance, both entities are still considered independent and only pool their resources to work on a specific project because it may be faster and more cost effective to work together. Both companies' assets remain separate. An example of this is Star Alliance, a strategic distribution alliance between many airlines such as United Airlines, Lufthansa, Air New Zealand, Turkish Airlines, Croatia Airlines, and 22 additional airlines, to connect customers all over the world through a shared booking system.

Pros and Cons of Growth Strategies

Each growth opportunity has pros and cons, which are outlined in Table 10.6.

Pros and Cons of Growth Strategies

Strategy	Pros	Cons
Product improvement	Improving performance, quality, and cost of product; can also add to sales and profits	Fails to deliver a benefit; can turn out to be a lost investment
New product development	Staying ahead of the competition, increasing sales/profit, going into new markets	Create products no one wants, make costly mistakes
Market penetration	Increase sales by adding new benefits to existing products	Mispositioning the product, which will miss communicating to the right market or by communicating benefits the target doesn't care for
New distribution channels	Reaching target market multiple times or reaching them at least once	More channels to keep track of and to manage
Product line extension	Cater to different markets and different budgets; educate consumers to want better, more expensive products	Fails to differentiate between products, cannibalization (decrease in sales due to introduction of new product by same company)
Adding new markets	Expanding customer reach, adding to sales and profit	More customers to take care of, not engaging them correctly
Seek global markets	Serve global markets, reach more customers, increase sales and profits	Dealing with more customers, mistakes in many areas could happen
Integration of businesses	Add new capabilities, synergy, take on more projects	Losing investment, losing project, not getting along well, breaking up

Table 10.6