Entrepreneurship A Process Perspective - Chapter01

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entrepreneurship
2e
a process perspective
Robert A. Baron
Wellington Professor of Management, Lally School of Management & Technology, Rensselaer Polytechnic Institute, Troy, NY
Scott A. Shane
Professor of Economics and Entrepreneurship, Weatherhead School of Management, Case Western Reserve University, Cleveland, OH
Copyright 2008 Thomson Learning, Inc. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
Entrepreneurship: A Process Perspective, 2nd Edition Robert A. Baron and Scott A. Shane
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chapter 1
Entrepreneurship: A Field, an Activity, and a Way of Life

learning objectives
After reading this chapter, you should be able to:
1 2 3 4 5 6 7 8
Dene entrepreneurship as a eld of business. Explain why the activities of entrepreneurs are so important to the economies of their countries, and why entrepreneurship is an increasingly popular career choice. Describe the process perspective of entrepreneurship, and list the major phases of this process. Explain why entrepreneurship can be viewed as arising out of the intersection of enterprising people and opportunities. Understand why this text will both describe what entrepreneurs actually do and what, perhaps, they should do! Describe several issues and questions about entrepreneurship that are currently receiving greater attention in the eld (e.g., university-based technology transfer). Explain why certain sources of knowledge about entrepreneurship are more reliable and useful than others. Describe the nature of three basic means for obtaining knowledge about entrepreneurshipsystematic observation, the case method, and experimentation and the role of theory in the eld of entrepreneurship.

CHAPTER 1 Entrepreneurship: A Field, an Activity, and a Way of Life 3
Anyone who has invented a better mousetrap, or the contemporary equivalent, can expect to be harassed by strangers demanding that you read their unpublished manuscripts or undergo the humiliation of public speaking, usually on remote college campuses.
Barbara Ehrenreich (1985)
Why do we start with these examples of what might be termed non-earthshaking products? Because they illustrate several key points about entrepreneurship that we will make throughout this text. First, these entrepreneurs and their companies indicate that entrepreneurship is denitely a processa chain of events and activities that takes place over timesometimes, considerable periods of time. It begins with an idea for something newoften, a new product or service. But the idea is only the start: Unless the process continues
Courtesy, TissueKups
If you have ever been an entrepreneuror plan to become one in the futureyou will certainly come to appreciate the accuracy of these words. One of us has been an entrepreneur (Baron) and the other has worked closely with them for many years (Shane), so we know that many people seem to believe that entrepreneurs have extraordinary powersabilities that are almost magical in nature. This belief, in turn reects the widely held view that entrepreneurs are unusual people. Think about it for a moment. When we say the word entrepreneur, what names come to mind? Bill Gates? Michael Dell? Julie Aigner-Clark (founder of Baby Einstein)? Jeff Bezos (founder of Amazon.com)? Probably, because the fame of these entrepreneurs has spread around the globe. But in fact, entrepreneurship, as well describe it in this book, is denitely not restricted to this kind of awe-inspiring success in one of a handful of industries. On the contrary, the entrepreneurial spirit can be observed in much smaller companies and in an almost endless array of contexts. For instance, consider Lorraine Santoli. Growing tired of trying to nd a facial tissue while driving, she came up with a new ideaa cup that holds and dispenses tissues one at a time and that can t in the cup holders found in almost every vehicle (see Figure 1.1). The company she founded to develop this ideaTissueKups Inc.is now humming along with sales in the millions. High tech? No. Sexy? No. Effective and appealing to many potential customers? Something new that did not exist before? Yes! Or, for another example, consider Victoria Malmer who, like many millions of people in the United States and other countries, wanted to drink more liquids because doing so is good for personal health. Moreover, like many people, she wanted her beverages to have a avor she
liked. One solution is to carry around heavy bottles containing preferred drinks. But Ms. Malmer didnt like doing that, so she and her friend Paul Staunton came up with another idea: why not produce avorings in small containers that people can easily carry with them and add to any beverage to get the taste they like? The company they started to produce this and similar products Flavor2Gois now riding a wave of sharply rising sales.
Figure 1 . 1 From Small Inventions, Protable Companies

Sometimes Grow New products dont have to be dramatic to succeed. The TissueKup, created by Lorraine Santoli, is a good illustration of this fact. The device, which ts into the cup holders found in almost all vehicles, is useful to many drivers, and has found a large and ready market.

4 PART 1 Entrepreneurship: Who, What, Why?
so that the idea is converted into reality (actually brought to market through a new business venture, licensing to existing companies, etc.), it is not entrepreneurship. Rather, it is just an exercise in creativity or idea generation. Second, these examples underscore the fact that being an entrepreneur does not necessarily involve starting a particular kind of company, working in a particular industry or sector (e.g., high-tech), or coming up with a dramatic new product. On the contrary, as well see over and over again, the heart of the process involves bringing something newsomething that is not now being produced or exploited by othersto the marketplace. Well have more to say about this, the heart of entrepreneurship, later; here, we simply want to break the mind-set with which many people enter their rst course in entrepreneurship an approach reecting several major myths about entrepreneurship (e.g., it cant occur without large amounts of capital, it must be based on new technology, must tap a really hot market, and so on). Well be discussingand refutingthese and other false ideas throughout this book, so stay tuned for more about this point because our goal is to present an accurate picture of what entrepreneurship really is, rather than a repetition of what many people think it is. Having claried these important points, we now turn to several tasks that we want to accomplish in this initial chapter. First, we present a denition of entrepreneurship as an activity, a eld of study in business, and a way of life. Next, well offer a framework for understanding entrepreneurship as a process one that unfolds over time. As well soon see, this process is affected by many different factors, some relating to individuals (i.e., entrepreneurs), some to their relations with other people (e.g., partners, customers, venture capitalists), and some to society as a whole (e.g., government regulations, market conditions). A major theme of this book will be that all three kinds of factors (individual, group, societal) play an important role in every phase of the entrepreneurial process. As part of this discussion, we emphasize yet another key theme: At the heart of the entrepreneurial process lies the intersection of opportunities generated by changing economic, technological, and social conditions, as well as enterprising people capable of recognizing and actively exploiting them. This theme will be examined in more detail in Chapter 2, which focuses on the emergence of opportunities, and Chapter 3, which focuses on the cognitive foundations of entrepreneurship (e.g., where ideas for new products or services originate and how individuals actually perceive or recognize opportunities). Third, well comment briey on current trends in the eld of entrepreneurshiptopics and questions that are receiving growing attention because they are increasingly recognized as playing an important role in the entrepreneurial process. After that, we consider the question of how we know what we currently know about entrepreneurshipin other words, how the information presented in this book was obtained. We think this point is important because, in general, it is dangerous to accept any information as accurate without knowing something about its source and how it was obtained. Finally, we provide you with an overview of the contents of this book and a description of its special features. Now, to begin at the beginning, we offer a denition of entrepreneurshipa denition that will be reected in the contents of every chapter.
learning objective
Dene entrepreneurship as a eld of business.
The Field of Entrepreneurship: Its Nature and Roots

Denitions are always tricky, and for a eld as new as entrepreneurship, the task is even more complex. It is not surprising, then, that currently, there is no single agreed-upon denition of entrepreneurship either as a eld of study in business or as an activity in which people engage. Having said that, we should note that

a denition offered by Shane and Venkataraman1 has received increasing acceptance. Broadly paraphrased, their denition suggests the following: Entrepreneurship, as a eld of business, seeks to understand how opportunities to create something new (e.g., new products or services, new markets, new production processes or raw materials, new ways of organizing existing technologies) arise and are discovered or created by specic individuals, who then use various means to exploit or develop them, thus producing a wide range of effects. By implication, this denition suggests that entrepreneurship, as an activity carried out by specic individuals, involves the key actions we mentioned earlier (identifying an opportunity that is potentially valuable in the sense that it can be exploited in practical business terms and yield sustainable prots), and the activities involved in actually exploiting or developing this opportunity. In addition, as we note in a later section of this chapter, the process does not end with the launching of a new venture; it also involves being able to run a new business successfully after it comes into existence. We believe that this denition is a clear and useful one, and does indeed capture the essential nature of entrepreneurship. Although it helps to clarify many important questions, perhaps the most central of these is: Just what makes someone an entrepreneur? To see how the denition offered by Shane and Venkataraman helps signicantly in this respect, consider the following individuals. For each, ask yourself the following question: Is this person an entrepreneur?
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A woman who enjoys making appetizers for parties in her home, and who is often praised by her friends who tell her how delicious these are, starts a company to make and sell them. A university scientist engaged in basic research on the biochemistry of life, makes important discoveries that advance the frontiers of his eld; however, he has no interest in identifying practical uses of his discoveries and does not attempt to do so. After being downsized from his management level job, a middle-aged man discovers a special way of processing old tires to make edging for gardens (borders that keep different kinds of plants separate). A retired army ofcer purchases obsolete amphibious vehicles from the government and uses them to start a company that specializes in tours of remote wilderness areas. A man who has often forgotten the numbers needed to open combination locks comes up with a new idea: why not build a lock that uses letters instead of numbers? He enters the idea (which he previously patented) in a contest for new inventions, and wins. The retailer that runs the contest signs a contract with him to sell this new kind of lock at all of its 1,200 stores.
Which of these individuals are entrepreneurs? At rst glance, you might be tempted to conclude that only the last two are really entrepreneursonly they brought something new to market. We suggest, however, that all of these individuals with the exception of the university scientist are entrepreneurs. Why? Recall our denition: Entrepreneurship involves recognizing an opportunity to create something new. It does not have to be a new product or service; on the contrary, it can involve recognizing an opportunity to develop a new market, to use a new raw material, or to develop a new means of production, to mention just a few possibilities. According to this denition, the appetizerbaking woman is acting as an entrepreneur because she recognized a new marketone that will pay a premium price for appetizers that taste truly homemade. In fact, this is just what Nancy Mueller did when she started Nancys Quichea company she recently sold for several hundred million dollars.

Similarly, the downsized executive is using an existing raw material old tiresin a new way. This activity, too, qualies as entrepreneurship. The retired Army ofcer and the inventor are also entrepreneurs: Both identied opportunities for new products or services, and both took active steps to exploit these ideas in ways that generate economic gains. In contrast, the university scientist is not an entrepreneur according to our denition. Even though his research does add appreciably to human knowledge, the fact that he makes no effort to apply his discoveries to the development of new products, services, markets, or means of production, suggests that he not an entrepreneur. Certainly, he is playing a valuable role in society; but no, he is not an entrepreneur. In fact, scientists often can be entrepreneurs. For instance, one of us (Baron) is privileged to teach, from time to time, with a Nobel-prize winning physicist, Ivar Giaever. Prof. Giaever used his scientic knowledge to develop a new productone that can help physicians identify cancer cells not by looking at them through a microscope (what they typically do), but in terms of the electrical activity of the cells. Professor Giaever found that cancer cells and normal cells differ in this respect, and his productwhich he patentedmay well soon become a commercial as well as a scientic device. Whether it does or not, the fact that he has attempted to bring this new product to market makes him an entrepreneur as well as a world-class scientist. In essence, then, entrepreneurship requires creating or recognizing a commercial application for something new. The new commercial application can take many different forms, but simply inventing a new technology, product, or service, or generating a new idea is not, in itself, enough. As shown in Figure 1.2, many inventions never result in actual products for the simple reason that they offer no commercial benets (or, alternatively, no one can think of a marketable use for them), and so they cannot really serve as the basis for a protable new business. In sum, we agree with Shane and Venkataraman Figure 1 . 2
Newness Is Not Enough! As shown here, the fact that a product is new is not sufcient to assure that it will be developed and brought to market. We doubt, for instance, that the product shown here will ever really exist outside the cartoonists imagination.
Source: Universal Press Syndicate, September 4, 2001.

and with other theorists2 that entrepreneurship emerges out of the intersection of what might be termed inspiration and activationrecognizing opportunities for something new that people will want to own or use, and taking vigorous steps to convert these opportunities into viable, protable businesses.
A Recent Extension and Clarication

The denition offered by Shane and Venkataraman appears to be a useful one and has gained widespread acceptance in the eld of entrepreneurship. However, we should note that it has recently been extended and claried by McMullen and Shepherd, two well-known researchers.3 They note that in essence, entrepreneurship involves two key phases or activities. In the rst, individuals (potential entrepreneurs) use their existing knowledge and personal strategies for obtaining knowledge, to recognize that some opportunity existsan opportunity that someone, not necessarily they, can develop. In the second phase, they evaluate this opportunity to determine whether they have the knowledge and skills needed to actually develop it. In other words, they try to determine whether the opportunity is one they can pursue by taking such actions as founding a new venture. In essence, this framework is fully consistent with the denition offered earlier, but it also helps to highlight the importance of individual motivation, skills, and knowledge in entrepreneurial action, and the additional pointa very important one well make again in Chapter 3that recognizing an opportunity can be quite distinct from actually doing something about it. Other additions to the framework have been offered as well. One of the most interesting, suggested by Sarasvathy,4 proposes that we should focus not so much on who, why, and how specic persons identify particular opportunities, but rather on the barriers that prevent some persons from becoming entrepreneurs, and on how entrepreneurs create specic kinds of rms because these new businesses are the tool through which entrepreneurs convert their ideas and skills into means of exploiting various opportunities. When added to the denition proposed by Shane and Venkataraman, these more recent suggestions truly enrich our basic understanding of the process of entrepreneurship and how it unfolds.
A Note on Intrapreneurship
Before turning to other topics, we should note, briey, that recognizing opportunities for creating or developing something new can occur within existing organizations as well as outside them.5 In fact, many successful companies are deeply concerned with encouraging innovations and take active steps to provide an environment in which it can ourish.6 These companies work to develop a corporate culture that is receptive to new ideas rather than one that routinely rejects them, and provide concrete rewards for innovation.7 For instance, General Electric offers employees who come up with innovative ideas a share of the prots resulting from them. Although we cant say for certain that this policy increased innovation at GE, the company obtained more patents during recent decades than any other U.S. company; in fact, it holds more 51,000 in total! Individuals who act like entrepreneurs inside a company are often described as being intrapreneurspeople who create something new, but inside an existing company rather than through the route of founding a new venture. Unfortunately, they often face formidable barriers or obstacles, because not all organizations are as committed to innovation as General Electric. However, innovation is truly essential for gaining and sustaining competitive advantage, so it is something all organizations should seek.8 Although our focus will be rmly on entrepreneurs throughout this book, we do want to note that individuals can act entrepreneurially in several different contexts, including large, existing companies.

learning objective
Explain why the activities of entrepreneurs are so important to the economies of their countries, and why entrepreneurship is an increasingly popular career choice.
Entrepreneurship: An Engine of Economic Growth

When one of us (Robert Baron) began his career as a university professor (in 1968), courses such as this one simply did not exist. Now, in contrast, courses on entrepreneurship are offered by virtually every school of management or business and show a pattern of rapidly growing enrollments in recent years. Why? One reason is that such courses reect parallel growth in the number of individuals choosing to become entrepreneursor at least to start their own businesses. Each year, more than 600,000 new businesses are launched in the United States alone, and this number almost doubled in the past two decades.9 Not all of these start-ups would meet our denition for involving entrepreneurship, but all of themto the extent they are successful contribute to economic growth. Consider the following facts:
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During the past two decades, large corporations in the United States have downsized (a kind word for eliminated) more than 6 million jobs, yet unemployment fell to record-low levelsmainly as a result of new companies started by entrepreneurs. In recent years, more than 900,000 new start-up companies were founded in the United States (U.S. SBA, 1999, 2001). Currently, more than 10 million individuals are self-employed in the United States (U.S. SBA 1998, 2002)about one in eight adults! And taken together, U.S. rms with fewer than 500 employees (many of which were started by entrepreneurs), account for 51 percent of private sector output, employ 51 percent of private sector workers, and constitute 99 percent of all employers (U.S. SBA, August 2001). Even though the number of new businesses started each year has increased steadily, the number started by women and minorities rose even more dramatically; for instance, the number of companies owned by minorities increased 168 percent between 1987 and 1997, to a total of 3.25 million businesses employing more than 4 million and generating $495 billion in revenues (U.S. SBA, 1999).
These statistics suggest that the activities of entrepreneurs have a truly major impact on the economies of their societies. Even a casual glance backward at history suggests that entrepreneurs have always existed and always made waves in their societies: Vast fortunes were certainly amassed by entrepreneurs of the past such as John D. Rockefeller, Andrew Carnegie, and Cornelius Vanderbilt. Yet, more people than ever are pursuing, or considering, this role. For instance, look at Figure 1.3; it shows the number of franchises sold each year from 2000 to 2005. (Many people who want Figure 1 . 3
Interest in Entrepreneurship: On the Rise As shown here, the number of franchises sold each year in the United States increased greatly. Because franchising is one means for individuals to become entrepreneurs (or, sometimes, to get ready to become entrepreneurs by gaining important kinds of experience), this trend reects growing interest in entrepreneurship.
370,000 350,000 Franchises Sold 330,000 310,000 290,000
The number of franchises sold rose sharply in recent years. 342,000 338,000
351,000
310,000 291,000 274,000
270,000 250,000
2000
2001
2002 Year
2003
2004
2005
Source: Adapted from Entrepreneur Magazine, January 2005, p. 79.

Matt Stroshane/Bloomberg News/Landov
Figure 1 . 4 The Romance of Entrepreneurship

In a sense, entrepreneurs are the new heroes and heroinesthey are often presented in attering terms by the media. As a result, the appeal of becoming an entrepreneur increased greatly in recent years. Shown here are famous entrepreneurs of the past and present Pierre Omidyar, J. D. Rockefeller, and Andrew Carnegie.
to become entrepreneurs use franchises as a means of attaining this dream; see Chapter 8.) As you can see, the numbers are both amazing and rising rapidly. What factors are responsible for this trend? Many appear to be playing a role. First, the media are lled with glowing accounts of successful entrepreneurs such as Howard Schultz (Starbucks), Pierre Omidyar (eBay; see Figure 1.4), and Scott Cook (Intuit). As a result, the role of entrepreneur has taken on a positive and attractive aura. In an age when political and military heroes are few and far between, entrepreneurs, in a sense, become the new heroes and heroines, so it is far from surprising that growing number of individuals are choosing to pursue this kind of career. Second, there has been a fundamental change in what has often been termed the employment contractthe implicit understanding between employers and employees.10 In the past, this implicit agreement suggested that as long as individuals performed their jobs well, they would be retained as employees. Now, in an era of downsizing and rightsizing, this agreement has been rewritten, with the result that many individuals feel little loyalty to their current employers. It is just one small step from such feelings to the conclusion, Id be better off working for myself! A third factor is a change in basic values. In the past, job or career security was a dominant theme for many people: They wanted a secure job with steady increments in salary. Now, surveys indicate that young people, especially, prefer a more independent lifestyleone that offers choice in place of certainty or predictability.11 Together, these and many other factors combine to bolster the allure of becoming an entrepreneur and, as noted previously, translate into the creation of hundreds of thousands of new businesses employing millions of people. This trend is stronger in the United States than elsewhere, but seems to picking up steam around the world as government leaders in many countries recognize that entrepreneurs do matterand matter greatly.
The Field of Entrepreneurship: Foundations in Other Disciplines

Nothing, it has often been said, emerges out of a vacuum. And where the eld of entrepreneurship is concerned, this is certainly true. Entrepreneurship, as a branch of business, has important roots in several older and more established eldsand with good reason. Consider, again, our denition of
Bettmann/CORBIS
Bettmann/CORBIS

entrepreneurshipa eld of study that seeks to understand how opportunities to create new products or services, new markets, production processes, ways of organizing existing technologies, or raw materials arise and are discovered by specic individuals, who then use various means to develop them. This denition implies that in order to understand entrepreneurship as a processand as an activity in which entrepreneurs engageit is essential to consider (1) the economic, technological, and social conditions from which opportunities arise, (2) the people who recognize these opportunities (entrepreneurs), (3) the business techniques and legal structures they use to develop them, and (4) and the economic and social effects produced by such development. All of these elements play a role in entrepreneurship, and all must be taken into account if we are ever to fully understand this complex process. These elements, in turn, imply that the eld of entrepreneurship is closely linked to older disciplines such as economics, behavioral science (psychology, cognitive science), and sociology. The ndings and principles of these elds can shed much light on many aspects of entrepreneurship and provide valuable frameworks for understanding key questions addressed by the eldquestions such as How do opportunities arise? (see Chapter 2), Why do some individuals but not others recognize them? (see Chapter 3), and What factors inuence the success of new ventures after they are launched? (see Chapters 10, 11, and 12). Admittedly, these questions are somewhat abstract, so perhaps a concrete example will be helpful. Consider the rapid growth of one successful high-tech company: Expedia.com. Expedia is an online travel service that allows users to book ights, hotel rooms, and rental cars from any computer with access to the Internet. The companys growth has been swift, so it seems clear that its founders recognized an excellent opportunity and went on to exploit it well. But now consider the following question: Could Expedia.com have been launched 10 years ago? The answer is Almost certainly no. And the reason it could not is straightforward: technological, economic, and social forces had not yet generated the opportunity that the founders of Expedia.com recognized. From a technological point of view, an online travel service could not exist until many millions of people had access to the Internet, and until software capable of integrating the schedules of dozens of airlines and the rates of thousands of hotels existed. From an economic point of view, such a service could not be viable until a safe and reliable way of making payments over the Internet existed and unless airlines and hotels were willing to pay commissions to an Internet company instead of, or in addition to, traditional travel agents. Finally, from a social perspective, an online travel service could not exist and prosper until large numbers of people had enough condence in online information and transactions to entrust their travel plans to it, and until large numbers of people became aware of the fact that travelers on the same ights often paid hugely different fares (see Figure 1.5). In sum, the opportunity for founding Expedia.com did not always exist; rather, it emergedand became available for discovery by specic individualsout of a combination of many factors, economic, technological, and social. In a similar manner, the disciplines of economics, behavioral science, and sociology can help to provide answers to other basic questions addressed by the eld of entrepreneurship, questions such as: Why do some individuals but not others recognize opportunities? Why are some entrepreneurs so much more successful than others? and Why are some means for developing opportunities more effective than others? Clearly, then, the eld of entre preneurship does not exist in an intellectual vacuum; rather, its roots rest rmly in several older disciplines that, together, provide it with a rm foundation for understanding one of the most complexand importantbusiness processes in existence. One nal comment: Are some of these disciplines more useful than others in our efforts to understand entrepreneurship as a process? In other words, should we focus primarily on economic factors, on factors relating to entrepreneurs, or on factors relating to society as a whole in our efforts to

Figure 1 . 5
Opportunities Often Emerge from Change In recent years, increasing numbers of persons have become aware of the fact that people on the same ights or staying in the same hotels often pay different rates. This awareness was one factor that created the opportunity Expedia.com and similar companies have exploited.
understand the entrepreneurial process? This issue has sometimes been debated in the context of a distinction found in several other branches of management: macro versus micro approaches.12 Macro approaches take a top-down perspective, seeking to understand how and why new ventures are founded, and why they succeed or fail, by focusing largely on what are often termed environmental factorseconomic, nancial, industry, and political variables. Presumably, these factors, which are largely beyond the direct control of individuals, shape the behavior and decisions of individual entrepreneurs, so understanding their impact is crucial. In contrast, micro approaches take a bottom-up perspective, seeking to understand the entrepreneurial process by focusing primarily on the behavior and thoughts of individuals or groups of individuals (e.g., founding partners). Presumably, it is the way in which individuals behave that is the key to understanding the entrepreneurial process. Is either view more accurate or more useful than the other? Absolutely not. We believe that full understanding of entrepreneurship can only be gained through careful consideration of both perspectives. In fact, we agree strongly with one colleague who recently noted that a key dening aspect of entrepreneurship is that it involves efforts to understand how micro factors (e.g., the ideas, thoughts, and actions of individuals) interface with environmental factors (technology, life cycle of a given industry, economic conditions, etc.).13 In other words, a central question in the eld of entrepreneurship is: How are the motives, ideas, and intentions of individual entrepreneurs and the environmental conditions they face (e.g., conditions in specic markets of industries) reected in the kind of companies they start? In essence, the two approaches are complementary, and both are needed to gain a full understanding of entrepreneurial process. For this reason, both will be represented throughout this book.
What Entrepreneurs Do Versus What, Perhaps, They Should Do: Where Research-Based Principles Meet Actual Practice
As we mentioned earlier, one of us (Baron) has been an entrepreneur; in fact, he has started and run two different companies. These experiences were, by and large, very good ones, but when Prof. Baron thinks about them, he often ponders this thought: How great it would have been to have had the knowledge in this
Copyright 2003 Expedia, Inc. All rights reserved.

book when he started those companies! Looking back, he now realizes that he made virtually every mistake that lies in wait for unsuspecting entrepreneurs mistakes that experienced ones generally avoid. From choosing a partner (not well!) to signing a licensing agreement (too favorable to the large company that licensed Prof. Barons technology), he made one serious error after another. Despite this, both companies survived and were protable, but how well might they have done if he had known how to avoid these mistakes? Well never know, but it seems possible that the answer is that these companies would have been much more successful. We mention these personal experiences here because they illustrate what we think is the real and lasting value of this bookone reason you may want to keep it on your bookshelf in the years ahead. In the pages that follow, we dont simply describe what entrepreneurs dohow they recognize opportunities, obtain nancing, start companies to exploit these opportunities, and so on. In addition, we will also try to indicate what, perhaps, they should be doing during each phase of the entrepreneurial process. In other words, we will try to tread the ne line between actual practicewhat goes on in the hectic and turbulent world entrepreneurs face each dayand steps that, according to the ndings of careful research, would be helpful to them in their efforts to start and run successful new ventures. For this reason, well cover many practices and activities that entrepreneurs do not always recognize and adopt but which, we believe, can be highly benecial. For instance, research ndings suggest that entrepreneurs who engage in such activities as performing a careful feasibility analysis (a preliminary evaluation of a business idea to determine whether it seems worth pursuing; see Chapter 3), developing clear business models (a companys plans for how it will compete, use its resources, deal with customers, and generate prots; see Chapter 7), and engaging in careful competitor analysis (detailed analysis of a companys competitors, as an initial step in planning how to gain competitive advantages over them; see Chapter 4) are more likely to succeed than those who do not.14 Sad to say, Professor Baron did not perform these activities when he started his own companies, and he is now convinced that not doing so had negative consequences for the success of these new ventures. In short, after reading this book and making the concepts and ideas it presents your own, you will, we rmly believe, be much better prepared to meet the challenges of starting a new venture than was true for Prof. Baron and perhaps a majority of all rst-time entrepreneurs. So no, we denitely do not have all the answers, at least not perfect or complete ones; the eld of entrepreneurship is still too young for that. But we can offer advice for actions and procedures that will help tip the balance in your favor as an entrepreneur. So please read on; the new ventures that benet will be your own!
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KEY POINTS
Entrepreneurship, as a eld of business, seeks to understand how opportunities to create something new (new products or services, new markets, new production processes or raw materials, new ways of organizing existing technologies) arise and are discovered or created by specic individuals, who then use various means to exploit or develop them, thus producing a wide range of effects. In recent years, the allure of entrepreneurship has increased, with the result that more people than ever before are choosing this activity as a career.
Entrepreneurship, as a branch of business, has important roots in economics, behavioral science, and sociology. The eld of entrepreneurship recognizes that both the micro perspective (which focuses on the behavior and thoughts of individuals) and the macro perspective (which focuses primarily on environmental factors) are important for obtaining a full understanding of the entrepreneurial process. This book will do more than describe what entrepreneurs do (common practice); it will go further and describe actions and procedures entrepreneurs can perform to increase the likelihood that their companies will succeed.

Entrepreneurship: A Process Perspective

Now that we have offered a working denition of entrepreneurship, highlighted its importance, and briey described its roots in related disciplines, we will turn to another key task: suggesting a framework for understanding it as a process. This will be a guiding theme for the remainder of this book, so it is important that we present it clearly and that you understand fully what it implies. The view that entrepreneurship is a process rather than a single event is certainly not new or unique to this text; on the contrary, there is a growing consensus in the eld that viewing entrepreneurship as a process which unfolds over time and which moves through distinct but closely interrelated phases is both useful and accurate.15 Further, there is general agreement that the key phases in this process are as follows:
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learning objective
Describe the process perspective of entrepreneurship, and list the major phases of this process.
Recognition of an Opportunity: The entrepreneurial process often begins when one or more individuals recognize an opportunitythe potential to create something new (new products or services, new markets, new production processes, new raw materials, new ways of organizing existing technologies, etc.) that has emerged from a complex pattern of changing conditionschanges in knowledge, technology, economic, political, social, and demographic conditions.16 Opportunities have the potential to generate economic value (i.e., prot) and are viewed as desirable in the society in which they occur (i.e., development of the opportunity is consistent with existing legal and moral standards, and would, therefore, not be blocked or constrained by these standards). We will examine the emergence of opportunities in Chapter 2 and the cognitive roots of entrepreneurship in Chapter 3, but for the moment, we want to emphasize just one point: in a sense, there really is nothing entirely new under the sun. Ideas do not emerge out of a void; on the contrary, they almost always consist of a novel combination of elements that already exist. What is new is the combination and the recognition of links or connections between the various elements of which the ideas are composed. To take a striking example from history, Alexander Graham Bell did not invent the telephone out of sheer creative genius. Rather, he combined component ideas that already existed and had been generated by other people (e.g., electric batteries, basic research on the nature of sound, etc.) in a new way and invented a product that revolutionized human communication. Similar argument holds for recognizing opportunities. The opportunities themselves often emerge from changes in economic, technological, governmental, and social factors. When entrepreneurs notice links or connections between these changes (i.e., when they notice patterns in these changes), ideas for new ventures may quickly follow. For instance, consider Bill and Cheryl Brown, who recently started The Second Time Around, Inc., a company that helps people getting married for the second (or third or fourth) time plan their weddings (see Figure 1.6).17 The company experienced tremendous growth because, in essence, its competitorsexisting wedding servicesfocus entirely on young people getting married for the rst time. Bill and Cheryl Brown noticed, however, that several recent trends converge to suggest the need for a company like theirs. First, the number of people getting married who have been married before has increased dramatically. Second, because these individuals tend to be older than people marrying for the rst time, they often have greater nancial resources. Another, and seemingly unrelated trend is that

Figure 1 . 6
Connecting the Dots To Recognize New Business Opportunities Opportunities for new ventures often emerge out of changes in a wide range of economic, technological, governmental, and social factors. Even though these trends and changes may seem, at rst glance, to be unrelated, successful entrepreneurs perceive meaningful patterns that point to potentially protable business opportunities. This was certainly true for Bill and Cheryl Brown who recognized the fact that millions of people in the United States who are getting married for the second or third time might need the help of a wedding service specically focused on their needs. The company they founded, The Second Time Around, has been highly successful.
older people in many societies seem increasingly willing to indulge themselvesthey do not want to miss out on experiences simply because they are in their forties or fties instead of their twenties and thirties. At rst glance, these trends and events might seem to be unrelated, but when considered together, a striking pattern emerges: Millions of people in the United States who need help planning their second or third wedding. The idea for Second Time Around was suggested by this emergent pattern, and the company provides a clear illustration of how diverse events and trends can combine to produce a new and potentially protable business opportunity. n Deciding to Proceed and Assembling the Essential Resources: Having an idea for a new product or service or recognizing an opportunity is only, of course, the rst step in the process. At that point, an initial decision to proceedto do something active about the idea or opportunityis required. As Shane, Locke, and Collins suggest, the entrepreneurial process occurs because specic individuals make this decision and act upon it.18 So, in their view, understanding entrepreneurs motives is crucial to comprehending the entire process. Deciding to start a business is one thing; actually doing so is quite another, and would-be entrepreneurs quickly discover that they must assemble a wide array of required resources: basic information (about markets, competitors, environmental and legal issues), human resources (partners, initial employees), and nancial resources. Gathering these resources is one of the most crucial phases of the entrepreneurial process, and unless it is completed successfully, opportunities, no matter how attractive, or ideas for new products and services, no matter how good, die on the vine, so to speak. It is at this stage, and especially when seeking nancial backing, that entrepreneurs typically prepare a formal business plana detailed description of how they plan to develop their new venture. (Assembly of required resources will be covered in Chapters 48.) Launching a New Venture: Once the required resources are assembled, the new venture can actually be launched. Doing so involves a wide range of actions and decisions: choosing the legal form of the new venture, developing the new product or service, establishing the roles of the top management team, and so on. Sadly, many new entrepreneurs do not fully grasp the complexities of starting a new venture, and as we will note in later chapters, this can burden them with problems that could, in fact, have been avoided. (The issues involved in actually launching a new venture will be covered in Chapters 811). Building Success and Managing Growth: Although moving from an idea to an actual, going concern represents major progress, it is just the start of another key phase in the entrepreneurial process: running the new venture and building it into a growing, protable business. Many entrepreneurs recognize that this phase requires additional nancial resources. However, in our experience, a smaller proportion fully recognizes the importance of two key factors in the process: developing effective strategies for encouraging and managing growth, and management issues relating to growth (e.g., being able to attract, motivate, and retain high-quality employees; building effective relationships among founders of the new venture). We cover both of these aspects of building growth in Chapters 12 and 13. Harvesting the Rewards: In this nal phase, founders choose an exit strategy that allows them to harvest the rewards they have earned through their time, effort, and talents. Individual entrepreneurs must choose
Courtesy, Twice is Nice Encore Bridal Creations LLC

carefully among the many ways of reaping the benets of successful entrepreneurship (see Chapter 14) so as to maximize the benets they gain from, in many cases, years of sacrice and commitment. One additional comment: We do not mean to imply here that entrepreneurship can be readily divided into neat and easily distinguished phases. In fact, the process is far too complex for that to be true. But the activities just described do tend to unfold over time in an orderly sequence, with idea generation or opportunity recognition occurring rst, an active decision to proceed, next, and so on. We believe that viewing entrepreneurship in this manner offers several benets. First, it helps avoid a static view of entrepreneurshipone that sees it as a specic act (launching of a new venture) that occurs and is then complete. Such a view ignores the fact that entrepreneurs face an everchanging array of tasks and challenges, and that they often think and feel differently about these tasks and challenges as they change and unfold. Second, viewing entrepreneurship as an ongoing process draws attention to the key activities entrepreneurs must perform as they proceed with their efforts to convert ideas for new products or services into successful businesses. How well entrepreneurs perform these activities is often more central to their success than their personal characteristics or backgroundalthough, of course, these are important, too.19 Attention to the tasks entrepreneurs perform, in turn, gives us a good handle on identifying the skills, knowledge, and characteristics they need to function effectively in this role. So from this angle, too, a process perspective is useful. Finally, viewing entrepreneurship as a process suggests very strongly that different factors may affect it at different points in time, and that the effects or importance of specic factors may well change over the course of new venture creation. For example, consider the question of whether entrepreneurs are more risk prone than other peoplea question that has received a great deal of attention in recent years. Some research ndings suggest that entrepreneurs are indeed riskier than other people,20 while other ndings from equally careful research point to the opposite conclusionthat entrepreneurs are less willing to take risks than other groups, such as managers.21 How can both ndings be true? One possibility is that whether entrepreneurs are more or less risk-prone than other people depends on which phase of the entrepreneurial process we are considering. For instance, early on, entrepreneurs must, almost by denition, be relatively willing to accept risk: If they were not, they would never give up secure jobs to start new ventures. But later on, once they have launched a new venture and must pay bills, meet payrolls, and manage limited resources, they may shift toward becoming much less accepting of risk. In essence, entrepreneurs behaviorand the role of risk in their decisions and strategiesmay change considerably over the entrepreneurial process. Recent ndings suggest that as this logic suggests, the impact of many factors on entrepreneurs behavior and success does indeed change over the course of new venture creation.22 An overview of the major phases of new venture creation is shown in Figure 1.7; please examine it carefully, because it provides a basic framework for understanding much of what follows in later chapters.
Levels of Analysis: Micro Versus Macro Revisited

Until recently, considerable disagreement existed in the eld of entrepreneurship over the following question: In studying the entrepreneurial process, should we focus primarily on the entrepreneur (e.g., this persons skills, abilities, talents, motives, traitsand perhaps, as well explain in a later section, even biological or genetic factors23), or primarily on the economic, technological, and societal context in which the entrepreneur operates (economic and market conditions, government policy, etc.)? As you can

Individual-Level Variables (skills, motives, characteristics of entrepreneurs) Group-Level Variables (ideas, input from others; effectiveness in interactions with venture capitalists, customers, potential employees) Societal-Level Variables (government policies, economic conditions, technology)
All phases are influenced by these three levels of variables
Idea for New Product or Service and/or Opportunity Recognition
Initial Decision to Proceed
Assembling the Required Resources (information, financial, people-related, etc.) Time
Actual Launch of New Venture
Building a Successful Business
Harvesting the Rewards (exit by founders)
Figure 1 . 7 Entrepreneurship as a Process: Some Key Phases The entrepreneurial process unfolds over time and moves through a number of different phases. Events and outcomes during each phase are affected by many individual-level, group-level, and societal-level factors. guess from our earlier comments on the macro/micro issue, we view this question as largely irrelevant. We believe that at every stage of the entrepreneurial process, individual-level (i.e., micro) variables, group or interpersonal-level variables, and societal-level (macro) variables all play a role (please refer again to Figure 1.7.) For instance, consider the question of opportunity recognition. Certainly, this crucial process occurs in the minds of specic individuals and must, therefore, reect the impact of individual-level variables such as the existing knowledge structures and the unique life histories of these individuals. But nothing that has to do with peoplenot even basic aspects of cognition occurs in a social vacuum. The kind of ideas people generate reect the times in which they live, the current state of technological knowledge, and many other aspects of the societies. Further, other people with whom the entrepreneur has contactfriends, associates, or even gures in the mass mediaoften suggest the basis of an idea for a new product or service. For instance, recent ndings indicate that entrepreneurs who have a mentoran older and more experienced person with whom they work and who inuences their career tend to recognize more opportunities than entrepreneurs who do not enjoy the benets of having a mentor.24 In short, all three levels of analysis (individual, group, societal) are relevant and must be considered in order to understand idea generation fully. Heres another example of the importance of considering both micro and macro factors (individual-level, group-level, and societal-level variables) in our efforts to understand entrepreneurship: Why do some individuals, but not others, choose to become entrepreneurs? Again, all three categories of variables play a role. With respect to individual factors, some individuals have higher energy, are more willing to accept risk, and have greater selfcondence (self-efcacy) and greater tolerance for stress than others; those high on these dimensionsand especially self-efcacy25are probably more likely to choose the entrepreneurial role.26 Direct evidence for the role of individual-level factors in choosing to become an entrepreneur is provided by many studies. Among these studies, one of the most unusual27 compared the levels of testosterone shown by male MBA students who had previously started new ventures and those who had not. Results indicated that those who had previously chosen to become entrepreneurs had higher levels of this male

hormone! Further evidence suggested that this difference stemmed from a greater tendency toward risk on the part of the entrepreneurs, at least early in the process.
The Possible Role of Genetic and Other Biological Factors: The Micro Perspective Carried to the Limit
The ndings we just described, surprising as they may be, are actually related to a suggestion you may well nd even more provocativethe idea that genetic or biological factors, too, may play a role in entrepreneurship! How can this be? The authors who propose this idea28 note that genetic factors have been found to play a role in several tendencies and predispositions that have been found, in turn, to be closely related to entrepreneurship. For instance, a genetic component is a factor in how individuals brains react to high levels of risk; some people nd such conditions more pleasant or acceptable than others because, in part, they have genetically inherited tendencies to respond positively or negatively to risk. Some enjoy it, while others dislike it, which, in part, reects differences in how their brains function. Similarly, genetic factors play a role in how people react to overcoming obstacles or to engaging in the same activities for a long period of time. These factors, too, have been found to be related to entrepreneurship: Entrepreneurs show greater persistence than most people in overcoming obstacles and in engaging in the same activity for long periods of time.29 Third, it is well established that genetic factors play a role in the development of specic skills or abilities. These skills and abilities, in turn, lead individuals to pursue different kinds of careers and to seek employment in different industries. For instance, people with high mathematical or quantitative abilities may choose to work in technical or scientic elds. Because these areas offer greater opportunity for engaging in entrepreneurship than other elds or industries, the likelihood that such individuals will become entrepreneurs is enhanced. So, through this indirect route, genetic factors can inuence entrepreneurship. We could continue because several other factors found to play a role in entrepreneurship are ones that are determined, at least in part, by genetic factors.30 Please dont misunderstand: There is no suggestion here that genetic factors directly lead individuals to become entrepreneurs. Rather, the basic idea is that genetic and biological factors predispose individuals to develop certain characteristics, skills, or preferences, which in turn lead them to be more or less attracted to the kind of activities entrepreneurs perform and the kinds of environments in which they operate (see Figure 1.8). This intriguing possibility is just now becoming the focus of careful research. Stay tuned: The ndings promise to be both interesting and surprising.
Group-Level and Societal-Level Factors

Turning to group-level factors, it seems possible that individuals who receive encouragement from friends or family members and those who have been
Figure 1 . 8
Are Entrepreneurs Born? The Possible Role of Genetic Factors in Entreprneurship Recently, it has been proposed that genetic factors may play a role in entrepreneurship. One mechanism through which genetics may exert such effects is indirect in nature. Genes have been found to strongly inuence several characteristics personal dispositions that have also been shown to increases the likelihood that people will become entrepreneurs. In essence, then, some individuals may be predisposed to become entrepreneurs by their own genetic nature.
The Development of Various Predispositions Characteristics, Preferences Genetic Factors Development of Various Skills and Abilities
Preference for Certain Kinds of Activities and Environments
Entrepreneurship
Source: Based on suggestions by Nicolaou and Shane, 2006; see note 23.

exposed to entrepreneurs in their own lives are more likely to proceed than ones who do not receive encouragement and have not been exposed to models of entrepreneurs. For instance, when Enron, a huge energy company based in Houston imploded as a result of a series of accounting scandals (October 2001), members of the local business community feared that a large number of highly talented people would leave the Houston area. To keep them around, they organized Resource Alliance Group, a company whose sole mission was that of helping formerand highly talentedEnron employees to become entrepreneurs. They succeeded to an amazing degree: Within just three months, they had helped 25 senior Enron employees to found new ventures. Just a few short years later, several of these companies became protable and were adding good jobs to the Houston-area economy. So clearly, group-level (i.e., social) factors such as help and encouragement from others can play a key role in the entrepreneurial process. Societal-level factors, too, are important. Individuals who come from certain social and economic backgrounds, or who live in countries where government policies are favorable to starting new ventures, are more likely to choose this role than individuals from other backgrounds or who live in other countries. We could continue with other examples, but by now, the main point should be clear: Individual-level, group-level, and societal-level factors inuence every action and every decision taken by entrepreneurs during all phases of the entrepreneurial process. Taking note of this fact, we will employ all three levels of analysis throughout this text. Although this approach adds complexity to our discussions of many topics, it will also offer a more complete, accurate, and useful picture of what we know about the process of entrepreneurship and how, perhaps, it can be made to run more smoothly for entrepreneurs. If those are not the ultimate goals of any text, then we, as authors, researchers, and entrepreneurs, have no idea as to what they should be!
learning objective
Explain why entrepreneurship can be viewed as arising out of the intersection of enterprising people and opportunities.
Entrepreneurship: The Intersection of Valuable Opportunities and Enterprising Individuals

Several years ago, one of us (Robert Baron) had the honor of introducing a highly successful entrepreneur, Mukesh Chatter, at a banquet held in his honor. (Mr. Chatter was receiving the Entrepreneur of the Year award given annually by Prof. Barons university, and had just sold his company to Lucent Technologies for almost one billion dollars.) During his acceptance speech, Mr. Chatter made the following remarks: Success comes from many sources. Yes, you have to recognize an opportunity. . . . But to recognize it, it has to be there in the rst placesomething must have changed so as to generate the opportunity. After that, you have to recognize it and be able to tell that it is a good onesomething you can turn into a successful business. Luck denitely plays a role; you have to be in the right place at the right time and know the right people who can help you. But after that, its largely a matter of hard, mind-bending work; if you are not willing to put in the hours and give up lots of other things in your life, you wont succeedyou wont make it happen. We view these remarks as highly insightful. In just a few sentences, Mr. Chatter captured another key theme in entrepreneurshipand this book. Briey stated, this theme suggests that it is the intersection of valuable opportunities and enterprising individuals that is the essence of entrepreneurship. Opportunities, as Mr. Chatter pointed out, are generated by changing economic, technological, and social conditions; but nothing happens with respect to these opportunities until one or more energetic, highly motivated individuals recognizes them and the fact that they are worth pursuing. This is

Figure 1 . 9
Enterprising Individuals (people willing to accept risk, etc.)
New Business Opportunities
Entrepreneurship
an important point: Opportunities vary greatly in their potential value, with the result that only some are worth pursuing. In other words, only for some opportunities is the ratio of risk-to-potential benets sufciently favorable to justify efforts to exploit them. As you have probably observed yourself, some business opportunities are superior to others. They occur in industries that are faster growing or ones in which customer needs are easier to identify or satisfy. Further, some opportunities are easier to protect against competition. In Chapter 2, we carefully examine the specic characteristics that make some opportunities more promising than others. The key point we wish to make here, however, should be obvious: At the very heart of entrepreneurship is a nexus (connection) between opportunities and people (see Figure 1.9). It is this connection or intersection that starts the processand sometimes changes the world!
Entrepreneurship: What Sometimes Happens When Enterprising Individuals Meet New Opportunities What is the essential nature of entrepreneurship? Shane (2003) suggests that it occurs when individuals willing to assume some risk recognize new business opportunitiesand decide to act on them.
KEY POINTS
Entrepreneurship is a process that unfolds over time and moves through distinct but closely interrelated phases. The entrepreneurial process cannot be divided into neat and easily distinguished stages, but in general, it involves generation of an idea for a new product or service and/or recognition of an opportunity, assembling the resources needed to launch a new venture, launching the venture, running and growing the business, and harvesting the rewards.
Individual, group, and societal factors inuence all phases of the entrepreneurial process. Thus, there is no reason to choose between a micro and a macro approach to entrepreneurship; both perspectives are necessary. It is the nexus of valuable opportunities and enterprising individuals that is the essence of entrepreneurship.
The Cutting Edge: Emerging Issues and Questions

There can be no doubt that entrepreneurs encounter change on a daily basis when starting and running their new ventures. In fact, in a sense, change is what entrepreneurship is all about: creating something newprotable new ventureswhere none existed before, bringing new products and services to market, meeting new and emerging customer needs. As a eld of study in business, entrepreneurship reects this basic reality. Partly because it draws on several different existing disciplines (strategy, organizational behavior, cognitive science, etc.), and partly because it is still quite new, it is literally overowing with interesting issues and questions. To provide you with a sense of the breadth this work, well now highlight just a few of the topics that many researchers would view as on the cutting edgetopics related to important aspects of the entrepreneurial process that have recently become the focus of increased attention and study.
learning objective
Understand why this text will both describe what entrepreneurs actually do and what, perhaps, they should do!

learning objective
Describe several issues and questions about entrepreneurship that are currently receiving greater attention in the eld (e.g., university-based technology transfer).
University-Based Technology Transfer: How Universities Encourage Entrepreneurship

Universities are a prime source of new knowledge; in fact, providing it is one of their most important roles. This suggests that they might also serve as the source of ideas for new products, services, means of production, and so on. In fact, this idea is now widely accepted, with the result that many universities have established technology transfer ofces charged with the task of helping to move scientic and technological discoveries by faculty from the laboratory to the marketplace. To encourage this process, legislation adopted in the United States (the Bayh-Dole Act) has made it possible for universities to own patents on inventions that were developed under federal research grants, which support the research of individual scientists or teams of scientists. Has this legislation encouraged patenting by universities, and hence the commercialization of technological and scientic breakthroughs? This and related questions have recently received growing attention from entrepreneurship researchers. Results are mixed: overall, the Bayh-Dole Act has not generated an increase in patenting by universities. However, it has encouraged patenting in elds or areas where licensing is an effective means of gaining new technical knowledge and generating revenue.31 Additional research on the role of universities in encouraging entrepreneurial activities suggests that both the quality of faculty (e.g., to what extent are they leaders in their eld?) and the level of industry research funding received by a university are both important predictors of the number of start-up companies formed on the basis of the discoveries of faculty research.32 Overall, then, a growing body of evidence suggests that universities can indeed play an important role in encouraging entrepreneurship, with major benets both to the universities and to society. It is not at all surprising, then, that studying this process is currently a topic of considerable interest in the eld of entrepreneurship.
Incubators and Science Parks: Helping New Ventures Grow

By now, you may be wondering about the following question: How, specically, do advances achieved in scientic research conducted at universities nd their way into start-up ventures? Licensing, in which the rights to patented inventions are granted to start-ups, is one important way. Another is through incubators and science parks, organizations focused on the mission of encouraging business growth in a specic region by combining and sharing knowledge. The number of such centers in North America is increasing rapidly, from only 12 in 1980 to more than 950 in 2002, and this number continues to rise. Most incubators are associated with universities, but in Asia and elsewhere, science parks sometimes stand alone and are not closely linked to a specic university. Both incubators and science parks are designed contribute to economic growth by nurturing young companies in a protected environmentone in which start-up ventures can rent space at favorable prices and benet from the proximity of a large number of scientists and engineers on the universitys faculty (see Figure 1.10).33 In fact, many successful companies have come out of incubators and science parks. For instance, at Rensselaer Polytechnic Institute (RPI), the university where one of us (Baron) works, many businesses that are now highly protable and are publicly traded on national stock markets were started in the universitys incubator. One such company, MapInfo, Inc., specializes in helping companies pinpoint locations for new branches, and in assisting governments to improve public safety and deal with security issues. A strong need for such services existed, and the founders of MapInfo recognized and exploited it.

Entrepreneurial Cognition: A Look Inside the Mind of the Entrepreneur

Are entrepreneurs a breed apartdifferent from other people in important ways? Most peopleincluding many entrepreneursbelieve that they are. Yet, early efforts to identify the characteristics or behaviors that make entrepreneurs unique generally yielded weak and inconsistent ndings. Do these results mean that almost anyone can ll this role and start a successful new venture? Probably not; in fact, we feel that trying to understand entrepreneurship without understanding entrepreneurs is like trying to bake bread without yeast. Entrepreneurs are the active component and must, in one sense, be central to the entire process. But what is it about entrepreneurs that is crucial? Their motives? Skills? Abilities? Experience? Growing evidence suggests that all of these factors are important,35 but perhaps the most impressive research concerning entrepreneurs to date has focused on entrepreneurial cognitionhow entrepreneurs think, reason, make decisions, and perform many other cognitive activities.36 Growing evidence suggests that entrepreneurs may indeed differ from other people with respect to many aspects of cognition. For instance, they may perceive risk differentlyperhaps as more tolerable or not as greatmay be more subject to some cognitive errors (e.g., a tendency to be overly optimistic), may be more capable of recognizing connections or patterns in seemingly unrelated events or trends (and hence, better at recognizing opportunities), and more likely to think long and hard about unexpected or surprising events or outcomes.37 Moreover, successful entrepreneurs, as compared to less successful ones, may have better mental frameworks for identifying good opportunities than other individualsframeworks that are more complete and accurateand take into account practical matters such as speed of revenue generation and solving customers problems.38 These possibilities are just the tip of the iceberg where the study of entrepreneurial cognition is concerned, but we hope the main point is clear: Insights into how entrepreneurs think about opportunities, markets, risk, competitors, their companies, and many other topics can greatly increase our understanding of how the entrepreneurial process unfolds. For this reason, entrepreneurial cognition, too, is a cutting edge topic in the eld of entrepreneurship at the present time. We should hasten to add that many other topics and issues are also receiving a great deal of attention at the present time. The ones we present here merely illustrate the broad range of diverse and intriguing issues that are currently in the forefront of entrepreneurship research. Needless to say, well discuss these and many other cutting-edge topics in the remaining chapters of this book as consistent with our view that we should present not simply a description of what entrepreneurs do, but also guidelines for what they should do based on the most up-to-date knowledge of our eld.
Figure 1 . 10
Incubators and Science Parks: Encouraging Economic Growth Through Entrepreneurship All over the world, the number of incubators and science parks is increasing rapidly. These organizations seek to enhance regional or even national economic growth by providing start-up ventures with a protected environmentone in which they can benet from reduced costs and the proximity of many scientists and engineers. Shown here is the incubator center at Rensselaer Polytechnic Instituteone of the rst incubators in the United Statesthat continues to support start-up companies based on research by faculty or current and former students.
Courtesy of Robert A. Baron
Research is currently being conducted to determine the best ways for incubators and science parks to achieve their primary mission of helping to move advances in science and technology into useful products and services as quickly as possible.34 Incubators and science parks may well play an increasing role in the founding of many new ventures in the future, so again, it is far from surprising that studying them is another cutting-edge topic in entrepreneurship research.

KEY POINTS
The eld of entrepreneurship is broad in scope and reects the wide range of factors that affect the founding and success of new ventures. One topic receiving a great deal of current attention is university-based technology transferthe ways in which universities sometimes encourage entrepreneurial activities by faculty members and others. Another, closely related topic is the role of incubators and science parks organizations that seek to encourage
n
economic development in a region by encouraging the sharing of knowledge. Incubators are associated with universities, while science parks may be entirely independent. Recent research has also attempted to understand the ways in which entrepreneurs think, reason, and make decisions: entrepreneurial cognition. Findings indicate that entrepreneurs do indeed think differently in several respects, and that their cognitive processes often play a key role in the founding and success of new ventures.
learning objective
Explain why certain sources of knowledge about entrepreneurship are more reliable and useful than others.
Sources of Knowledge About Entrepreneurship: How We Know What We Know

In the remaining chapters of this book, we will discuss many aspects of entrepreneurshiphow opportunities arise, how some people recognize them, why some means of developing opportunities are better than others (at least in some contexts), why some entrepreneurs are successful while others fail, and so on. As we discuss each of these issues, we will present the most accurate and up-to-date information available. This goal, in turn, raises an important question: How do we know which information is the most accurate and useful? As any visit to a local bookstore will suggest, many potential sources of information about entrepreneurship exist, with no shortage of self-proclaimed experts on this topic. So how have we chosen the information to include in this book? The answer is straightforward: We have selected information that has been gathered in accordance with a set of rules or methods for acquiring reliable knowledgemethods that prove extremely helpful in many elds ranging from the physical sciences on one hand, through various branches of management on the other. What are these methods, and can they really be applied to the study of entrepreneurship? The methods themselves are quite complex and well beyond the scope of this brief discussion; but their essential nature was stated concisely by the French philosopher Diderot (1753) more than 250 years ago: There are three principal means of acquiring knowledge: observation, reection, and experimentation. Observation collects facts; reection combines them; experimentation veries the result of that combination. . . . That these methods can be used to study entrepreneurship is strongly suggested by the fact that they are currently being employed in a large volume of entrepreneurship research. Since this is the case, and since much of the information presented in this text has been gathered through these methods, we will describe them briey here. Our goal is certainly not that of turning you into an entrepreneurship researcher; on the contrary, it is simply to provide you with a basic understanding of these methods so that you can become a more informed consumer of knowledge about entrepreneurship, deciding for yourself whether, and to what extent, alleged facts about it are really accurate.

Observation, Reection, and Experimentation: Alternative Routes to Knowledge

Because it is the method most frequently used to study entrepreneurship, well start with systematic observation. The basic idea is straightforward: We observe certain aspects of the world systematically, keeping careful records of what we notice. Then, we use this information as a basis for reaching conclusions about the topics we wish to studyand understand. For example, suppose that a researcher is interested in increasing our knowledge of opportunity recognitionthe process through which entrepreneurs identify opportunities for protable new businesses. Imagine that this researcher has reason to believe that opportunity recognition involves noticing or recognizing patternsconnections between seemingly unrelated events, changes, or trends. In other words, recognizing opportunities involves connecting the dots between such factors as advances in technology, changes in markets, shifts in government policies, and other factors so as to form a recognizable pattern.39 The patterns entrepreneurs detect then point to opportunities for new ventures. For instance, do you recall our discussion of Expedia.com? In that discussion we pointed out that the idea for this new business involved connecting several independent events and trendsthe growing number of individuals with personal computers, the development of secure means for making purchases online, deregulation of the airline industrywhich produced huge variations in ticket prices. This basic processperceiving connections between various events and trendsmay play a role in the identication of many opportunities. How would a researcher study this basic idea? One way to do so would involve deriving from this reasoning one or more hypotheses, as yet untested predictions or explanations for a set of facts, and then proceeding to test these predictions by collecting relevant data. For instance, the researcher might reason that if recognizing patterns plays a key role in opportunity recognition, then the broader or more varied the work experience individuals have, the better they will be at recognizing opportunities. Why? Because broad experience helps individuals perceive connections between seemingly independent events or trends. To test this idea, the researcher might then obtain information on two variablesaspects of the world that can take different values. One variable would be the breadth of work experience individuals have had (from very narrow to very broad) and the other would be the number of opportunities they have recognized (perhaps, the number of companies they have started or the number of patents they have received this variable could potentially be measured in several different ways). The researcher might then predict that these two variables will be correlated, where changes in one are accompanied by changes in the other. Specically, she might predict that the more varied individuals work experience, the more opportunities they will recognize or the greater the number of companies they will start. Correlations can range from 1.00 to 1.00. Negative numbers indicate that as one variable increases, the other decreases. Positive numbers indicate that as one increases, so does the other. So in this case, the researcher would predict a positive correlation between breadth of work experience and number of opportunities recognized. Research conducted in this manner can, and often does, add much to our understanding of entrepreneurship. In fact, there is simply no substitute for careful research if we really want to understand how the entrepreneurial process unfolds and what factors inuence it. All the educated guesses offered by self-proclaimed experts on entrepreneurship are not, in our view, nearly as informative as the ndings of careful research. (By the way, actual research on this topic suggests that in fact, breadth of experience is positively related to opportunity recognition.)40
learning objective
Describe the nature of three basic means for obtaining knowledge about entrepreneurship systematic observation, the case method, and experimentationand the role of theory in the eld of entrepreneurship.

The Case Method

Systematic observation is an important method of research in entrepreneurship, and perhaps the one most frequently used, but it is certainly not the only one. Another involves what Diderot described as reection. In entrepreneurship research, this approach is the basis for the case method, which involves gathering large amounts of data about one organization or specic individuals, and then using this information to reach conclusions about what factors inuenced important outcomes such as economic success. How could this method be used to investigate opportunity recognition? One possibility is to gather detailed information on famous entrepreneurs, to determine whether they recognized important opportunities by connecting the dots between various events and trends. As an example, consider Chester Carlson, the individual credited with inventing the modern copy machine and laser printers (see Figure 1.11). At the time he invented (or rather, adapted) the basic process used in copy machines (and in laser printers), the need for better means of making copies, especially in business and educational settings, was clear. During the 1940s and 1950s, many products for making copies had been invented, but none seemed to work very well. Why, then, was Chester Carlson able to come up with one that worked well? Careful study of his background and life suggest some intriguing possibilities. First, he held both a law degree and a technical degree. As a result, he understood both the strong need for improved means of making copies as well as several of the technical processes that might be used to meet this need. Further, once he decided to try to solve this problem, he restricted his efforts (i.e., search) to technologies and processes he understood well. By focusing on these processes, he may have enhanced his own ability to perceive ways of connecting several processes into a means of making dry, permanent copies. In other words, a detailed case study of Carlsons activities offers support for the hypothesis that opportunity recognition does indeed involve perception of complex patterns. Moreover, using the case method also suggests that often those individuals who possess the cognitive equipment needed to perceive such patterns are the ones who then become highly successful entrepreneurs. We should hasten to add that the case method, by itself, does not in any sense prove that this is so. Findings obtained through the case method are often highly valuable and can offer useful insights into how complex processes occur. But since they often rely on somewhat informal means and on the judgment and intuition of researchers, they provide a different kind of knowledge than systematic observation or another method we will now describeexperimentation. In essence, experimentation involves systematically changing one variable in order to see whether such changes affect one or more other variables. Note that this approach involves active interventions by the researcher; in systematic observation, in contrast, the researcher merely observes the variables of interest without attempting to change them. Similarly, in the case method, a researcher observes the people or companies of interest and makes no attempt to change them in any way.
Figure 1 . 11
Chester Carlson: A Case Study in Entrepreneurship Why was Chester Carlson able to come up with a practical and costeffective technology for making dry, permanent copiesan invention with far-reaching effects? Detailed study of his life and activities through the case method offers some intriguing possibilities and in this way, sheds important new light on the basic nature of opportunity recognition.
Experimentation: Knowledge Through Intervention

When it is conducted carefully, and in accordance with certain basic rules, experimentation is a powerful tool. The reasoning behind it is impeccable: If we change one variable while holding everything else constant, and these
Bettmann/CORBIS

changes affect another variable, we can conclude that changes in the rst cause changes in the second. Can this method actually be used to study entrepreneurship? In many instances, not very readily, because researchers simply cannot change many variables that are of interest to them. For instance, they cannot alter government policies or demographic trends, or change amount of capital available in economic markets. But in some contexts especially in research relating to the behavior of individual entrepreneursit is possible to use experimentation. For example, consider, again, the possibility that recognizing opportunities involves connecting the dots between seemingly unrelated events or trends so that meaningful patterns emerge and point to ideas for new products or services. This suggestion could be studied by experimentation. For instance, one group of individuals could be given training in recognizing patternsthat is, they would be trained in techniques that help in searching for and noticing patterns in complex events or trends. Another group, carefully matched to the rst in as many respects as possible (e.g., education, age, work experience), would not receive such training. Then, both groups would be asked to read materials carefully designed to contain information that can be combined into patterns pointing to new business opportunities. For instance, these materials could 8 be based on new ventures that actually developed Individuals Given Training Do Better 7 in Recognizing Opportunities in the past, but about which the participants in 7 the study do not know. If recognizing patterns does indeed play a role in identifying opportu6 nities, then the individuals given training in pattern recognition would be more successful at 5 this task than those not given such training (see Figure 1.12). 4 We realize that this scenario may seem very far removed from the chaotic, ever-changing 3 3 world in which entrepreneurs normally operate. However, the purpose of experimentation is not 2 to simulate or reproduce these conditions; rather, it is to gain insights into the nature of complex 1 processes such as opportunity recognition insights that cannot readily be gained through 0 the case method or systematic observation. Training No Training Experimentation offers one additional imporTraining in Recognizing Patterns tant advantage: It is useful for establishing causality. When changing one variable in an experiment produces changes in another, it provides strong evidence that Figure 1 . 12 the rst variable caused changes in the second. In the experiment we just Experimentation in described, differences in the performance of the two groups (one with training Entrepreneurship Research: in pattern recognition and the other without such training) would point clearly an Example to the potential role of connecting the dots in opportunity recognition. In the study illustrated here, one Moreover, this evidence would be stronger and more conclusive than that group of participants was given obtained by other methods. training in recognizing patterns Because of practical constraints (e.g., it is difcult to vary the factors of while the other was not. When interest systematically), experimentation is not often used in the study of both groups then read materials containing potential opportunities entrepreneurship. Instead, researchers employ a wide range of statistical for new ventures, the group given techniques to help determine causality on the basis of other methods, such as training was more successful in systematic observation. One approach is to determine whether one variable or recognizing these opportunities. change occurs before another. Something that occurs later in time cannot This research suggests that reasonably be the cause of something that occurred earlier. This concept, called recognizing patterns in complex Granger causality, can be used to establish the direction of causality in trends and changes may indeed systematic observation. So, for instance, suppose that research ndings play an important role in opportunity recognition. indicate that the more varied individuals work experience, the more
Success in Recognizing Opportunities

opportunities they later recognize. Because work experience precedes recognizing opportunities, it makes sense to conclude that the experience produced (caused) opportunity recognition. The oppositethat discovering opportunities produces varied work experiencemakes little or no sense. In sum, there are several different methods for gathering usefuland accurateinformation about various aspects of entrepreneurship. None are perfect, but it is our strong conviction that all are very useful, and are greatly superior to the kind of informal, shoot from the hip approach taken in many popular books on entrepreneurship. Dont misunderstand: We do not mean to imply that the people writing such books are ill-intentioned or totally lacking in useful insights about the entrepreneurial process. Rather, we only wish to note that the information they communicate is based almost entirely on their own experience and other informal sources. Although these sources may sometimes provide important insights, they rest on less certain (i.e., reliable) foundations than information gathered through the use of systematic observation, experimentation, or the case method. For that reason, we will emphasize information gathered through those methods throughout this book.
Theory: Answering the Questions Why? and How?

We need to mention one more aspect of the quest for knowledge about entrepreneurship before concluding: the role of theory in this endeavor. The term theory has a special meaning in the realm of science. It refers to efforts to go beyond merely describing various phenomena to the point at which we can explain themunderstanding why and how they happen or take place as they do. For instance, with respect to opportunity recognition, we dont want merely to be able to state that some people are better at recognizing opportunities than others or to report the percent of people who are highly skilled at this task: We want to be able to explain why they are better and how they go about recognizing these opportunities. In other words, we want to know just what it is about certain people that allows them to be so good at recognizing opportunities, especially, perhaps, ones that other people miss. As we noted earlier, one such theory might involve the ability to perceive meaningful patterns in diverse trends and events. In sum, theories are frameworks for explaining various events or processes. Given the fact that the eld of entrepreneurship has been in existence for only a relatively short period of time, it is not surprising to learn that it has few well-developed theories of its own; in fact, it has sometimes been criticized for lacking such frameworks.41 Up to this point in time, entrepreneurship has largely borrowed theories from other elds, such as economics, psychology, and cognitive science. For instance, efforts have recently been made to apply prospect theory, a well-developed theory of decision making,42 to several important issues relating to entrepreneurship (e.g., the question of how entrepreneurs perceive risk)43 to answering the question above. On the other hand, there is a growing body of theory developed specically to help explain various aspects of the entrepreneurial process. For instance, one theory designed to explain why some family-owned businesses are more successful than others, calls attention to the joint effects of several factors, such as pay incentives for family members, their belief that the rm will or will not be sold, and the extent to which family members know the share of the business they will inherit. Offering family members pay incentives (e.g., year-end cash bonuses) is quite common, but whether, and to what extent, doing so contributes to the companys success is not yet clear. The theory just mentioned suggests that pay incentives for family members will enhance rm performance when these persons believe the business will be sold but will not enhance performance when they believe the company will remain in the family. Why? Perhaps because when they believe the rm will be sold, their feelings of commitment toward the family business are reduced,

thus allowing greater latitude for the impact of economic factors such as pay incentives.44 In situations like this, we say that the effects of one variable are moderated by another variable. In this case, the effects of pay incentives are strong when family members expect the business to remain with the family, but are weak when they expect that the business will be sold. In other words, the effects of pay incentives are moderated (changed, affected) by expectations about ownership of the business. We will encounter many instances in this book when one variable moderates the effects of another; thats why we introduce this concept here. As you can see, theories are extremely useful because they help explain why certain events or processes occur as they do. For instance, as the preceding example suggests, why pay incentives improve the performance of family businesses under some circumstances but not under others. So, how are theories derived in the rst place? Briey, the process goes something like the following: 1. 2. On the basis of existing evidence or observations, a theory reecting the evidence is proposed. The theory, which consists of basic concepts and statements about how these concepts are related, helps to organize existing information and makes predictions about observable events. For instance, the theory might predict the conditions under which individuals recognize or do not recognize opportunities. These predictions, known as hypotheses, are then tested by actual research. If results are consistent with the theory, condence in its accuracy is increased. If they are not, the theory is modied and further tests are conducted. Ultimately, the theory is either accepted as accurate or rejected as inaccurate. Even if it is accepted as accurate, however, the theory remains open to further renement as improved methods of research are developed and additional evidence relevant to the theorys predictions is obtained. (Please see Figure 1.13 for a summary of these steps.)
3. 4.
5.
Perhaps another concrete example will help clarify the importance of theory. Suppose that on the basis of careful observations and existing ndings, an entrepreneurship researcher formulates the following theory: Individuals Figure 1 . 13
Predictions are confirmed Confidence in the theory is increased
Theory about some aspect of entrepreneurship
Predictions are derived from this theory
Research designed to test these predictions is conducted
Additional research designed to test other predictions based on the theory is conducted
Predictions are disconfirmed
Confidence in theory is reduced
Theory is modified
The Role of Theory in Entrepreneurship Research Theories both organize existing knowledge and make predictions about how various events or processes will occur. Once theories are formulated, hypotheses derived logically from them are tested through careful research. If results agree with predictions, condence in the theory is increased. If results disagree with such predictions, the theory may be modied or ultimately rejected as false. Even if initial predictions are conrmed, further tests of the theory are generally required.
Theory is rejected

who choose to become entrepreneurs think differently, in various ways, from people who do not choose this role.45 Specically, individuals who choose to become entrepreneurs are (1) more likely than others to be susceptible to several kinds of cognitive errors or biases (e.g., they are more likely to be overly optimistic and to suffer from the illusion of controlthey overestimate their ability to control the outcomes they experience, etc.), and (2) more likely than others to think about situations in terms of the gains they will give up if they do not launch a new venture, which, in turn, causes them to be more accepting of risk. These predictions are then formulated as specic hypotheses and tested in actual research. For instance, actual or would-be entrepreneurs could be compared with people who have no interest in starting new ventures in terms of their susceptibility to cognitive errors and their tendency to think about various situations in terms of losses. Measures of all these variables already exist and have been used in previous studies, so designing research to test these hypotheses is quite feasible. If results are consistent with predictions derived from the theory, condence in it is increased: there would be a stronger basis for accepting the theorys premise that entrepreneurs do indeed think differently from other people. On the other hand, if results are not consistent with predictions derived from the theory, condence in it is reduced. Why should the eld of entrepreneurship, which is eminently practical in orientation, be interested in theory? Because, as one social scientist remarked many years ago, There is nothing as practical as a good theory.46 By this statement he meant that having a good theorya clear understanding of why or how a process occurs as it doesis very useful from the point of view of intervening in it in benecial ways. In other words, if we have good and wellveried theories about entrepreneurship, we will understand this process in ways that enhance our ability to assist entrepreneurs in their efforts to start new ventures. And that, of course, would be a very positive outcome. In short, developing good theories is more than an exercise in basic science: It is an important step toward attaining valuable, practical results. Two nal points: First, theories are never proven in any ultimate sense. Rather, they are always open to testing and are accepted with more or less condence depending on the weight of available evidence relating to them. Second, research should never be undertaken to prove or verify a theory; it is performed to gather evidence relating to the theory. If a researcher sets out to prove her or his pet theory, the researcher commits a serious violation of the methods that should be followed to gather accurate information about any topic. Why? Because in this case, the researcher may lose objectivity, and either unconsciously (or even consciously) design her or his research so that it tips the balance in favor of the theory. Clearly, any results obtained under these conditions are on shaky ground.
KEY POINTS
Many potential sources of knowledge about entrepreneurship exist, but the most accurate and reliable knowledge is provided by methods found to be useful for this purpose in other elds: systematic observation, experimentation, and reection. Systematic observation involves careful measurement of variables of interest in order to determine whether they are related (correlated) in any orderly manner. To the extent they are, one can be predicted from the other. In the case method, large amounts of information are gathered about one organization or
specic individuals, and this information is then used to reach conclusions about what factors inuenced important outcomes such as economic success.
n
Experimentation involves direct interventions: One variable is changed systematically in order to determine whether such changes affect one or more additional variables. Theory involves efforts to explain rather than merely describe various phenomenato understand why and how they occur. Research is conducted to obtain data relevant to theoriesnot to prove them.

A Users Guide to This Text

Although it is many years since we were students, we both remember the following fact well: Not all textbooks are equally useful or easy to read. Some were a pleasure to use, while others quite literally hurt our heads! Recalling these experiences, we have done our best to make this book one of the good ones. Here is an overview of the steps we have taken to reach this goal. First, we have included many reader aids. Each chapter begins with a list of key learning objectives: what you should know after you nish reading it. Within the text itself, important terms are printed in boldface type and are followed by a denition. These terms are also dened in a glossary at the end of each chapter. To help you retain what you read, each major section is followed by a list of key pointsa brief summary of major points covered in that section. All gures and tables are clear and simple, and most contain special labels and notes designed to help you understand them (see Figure 1.11 for an example). Finally, each chapter ends with a summary and review of the key points. Reviewing this section can help you retain the information presented and help you to benet more from this course. Second, the text contains three special features designed to make it more usefuland interesting. One is labeled Danger! Pitfall Ahead! These sections, which appear within each chapter rather than at the end, highlight potential snares and hazards of which entrepreneurs should be awareones that can prove fatal to their new ventures, and their dreams. Having been there ourselves, we are only too aware of these pitfalls, and think it is crucial that we call them clearly to your attention. The second special feature is labeled Qualifying Common Sense: What We Think We Know About Entrepreneurship . . . And What We Really Do Know. These special sections provide vivid illustrations of the fact that, often, commonsense ideas about entrepreneurship are misleading. In addition, they indicate how careful research has helped to correct or clarify many of these misconceptions. After reading these sections, you will have a much clearer understanding of why we cant trust intuition or informal knowledge to provide the full understanding of the entrepreneurial process we seek. Each chapter is followed by one or more brief cases and by experiential exercises labeled Getting Down to Business. As this title suggests, these exercises are designed to provide you with practice in using the information presented earlier in the chapter. Finally, its important to note that the chapters follow the timeline presented earlier in this chapter (refer to Figure 1.7). Thus, Part 1 (Chapters 1, 2, and 3) examines the eld of entrepreneurship and what is, perhaps, the start of the entire process: emergence and recognition of opportunities. Part 2 (Chapters 47) focuses on assembly of the resources needed to launch a new venture: information, nancial, and people resources. Part 3 (Chapters 810) examines the actual launch of new ventures, considering such topics as the legal form of such ventures and strategy for success. Part 4 (Chapter 1112) focuses on key aspects of growthissues relating to strategies for encouraging growth and management techniques and procedures useful in obtaining it through effective management techniques (e.g., attracting, motivating, and retaining top-notch employees). Finally, Part 5 (Chapter 13) focuses on the logical conclusion to the entrepreneurial process: alternative ways in which entrepreneurs can harvest the rewards of their efforts. In addition, the text ends with a unit on accounting for entrepreneurs. This module reviews key principles essential to entrepreneurs in running a new venture. One last word: As authors and teachers, we promise faithfully that we will not lose sight of our major goals in writing this book: providing you with an accurate and up-to-date overview of what we currently know about

Figure 1 . 14
Entrepreneurs: Key Contributors to Society Entrepreneurs do not merely add to their own personal fortunes; they often also improve the lives of millions through the new products and services they bring to market. Moreover, they often make generous donations to worthy causes. For instance, the breathtakingly beautiful Getty Museum, located outside Los Angeles, was funded by a gift of several billion dollars from the John Paul Getty Foundation.
entrepreneurship as a process. In closing, we wish to add that we agree with the English author Lady Mary Montagu who, in writing about personal wealth, once remarked: Tis a sort of duty to be rich, that it may be in ones power to do good. . . . We believe that successful entrepreneurs do indeed do good: true, they add to their own wealth. But in addition, they do much more: The products and services they bring into being improve the lives of countless millions of people; and on top of this, they are often extremely generous in donating substantial portions of their wealth to eminently worthy causes. For instance, a few years ago, one of us (Baron) visited the beautiful art museum in Los Angeles funded by the John Paul Getty Foundation (see Figure 1.14). What a gift to all humanity! And both of us work in Schools of Management that are named after the entrepreneurs who made generous donations to support them and the universities in which they are located. If this book helps emerging entrepreneurs to succeed in attaining their dreamsand therefore enhances their ability to do good with the wealth they acquirewe will feel that as authors, we have done our part.
SUMMARY & REVIEW OF KEY POINTS
Entrepreneurship, as a eld of business, seeks to understand how opportunities to create new products or services arise and are discovered or created by specic individuals, who then use various means to exploit or develop them, thus producing a wide range of effects. In recent years, the allure of entrepreneurship has increased, with the result that more people than ever before are choosing this activity as a career. Entrepreneurship, as a branch of business, has important roots in economics, behavioral science, and sociology. The eld of entrepreneurship recognizes that both the micro perspective (which focuses on the behavior and thoughts of
individuals) and the macro perspective (which focuses primarily on environmental factors) are important for obtaining a full understanding of the entrepreneurial process.
n
This book will not simply describe what entrepreneurs do (common practice); it will go further and describe actions and procedures entrepreneurs can perform to increase the likelihood that their companies will succeed. Entrepreneurship is a process that unfolds over time and moves through distinct but closely interrelated phases. The entrepreneurial process cannot be divided into neat and easily distinguished phases, but in general, it involves generation
Robert Landau/CORBIS

of an idea for a new product or service and/or recognition of an opportunity, assembling the resources needed to launch a new venture, launching the venture, running and growing the business, and harvesting the rewards.
n
indicate that entrepreneurs do indeed think differently from other people in several respects, and that their cognitive processes often play a key role in the founding and success of new ventures.
n
Individual, group, and societal factors inuence all phases of the entrepreneurial process. Thus, instead of choosing between a micro and a macro approach to entrepreneurship, both perspectives are necessary. It is the nexus of valuable opportunities and enterprising individuals that is the essence of entrepreneurship. The eld of entrepreneurship is broad in scope and reects the wide range of factors that affect the founding and success of new ventures. One topic receiving a great deal of current attention is university-based technology transferthe ways in which universities sometimes encourage entrepreneurial activities by faculty members and others. Another, and closely related topic, is the role of incubators and science parksorganizations that seek to encourage economic development in a region by encouraging the sharing of knowledge. Incubators are associated with universities, while science parks may be entirely independent. Recent research has also attempted to understand the ways in which entrepreneurs think, reason, and make decisions: entrepreneurial cognition. Findings
Many potential sources of knowledge about entrepreneurship exist, but the most accurate and reliable knowledge is provided by methods found to be useful for this purpose in other elds: systematic observation, experimentation, and reection. Systematic observation involves careful measurement of variables of interest in order to determine whether they are related (correlated) in any orderly manner. To the extent they are, one can be predicted from the other. In the case method, large amounts of information are gathered about one organization or specic individuals, and this information is then used to reach conclusions about what factors inuenced important outcomes such as economic success. Experimentation involves direct interventions: One variable is changed systematically in order to determine whether such changes affect one or more additional variables. Theory involves efforts to explain rather than merely describe various phenomenato understand why and how they occur. Research is conducted to obtain data relevant to theoriesnot to prove them.
Glossary
Business Plan: A detailed description of the entrepre-
neurs vision for converting ideas into a protable, going business. Case Method: A research method in which large amounts of data about one organization or specic individuals are gathered and then used to reach conclusions about what factors inuenced important outcomes, such as economic success. Experimentation: A research method in which one variable is systematically changed in order to determine whether such changes affect one or more other variables. Hypothesis: An as-yet untested prediction or explanation for a set of facts. Intrapreneurs: Individuals who create something new, but inside an existing company rather than through founding a new venture. Macro (Perspective): A top-down perspective that seeks to understand the entrepreneurial process by focusing largely on environmental factors (i.e.,
economic, nancial, political) that are largely beyond the direct control of an individual. Micro (Perspective): A bottom-up perspective that seeks to understand the entrepreneurial process by focusing on the behavior and thought of individuals or groups of individuals (e.g., founding partners). Opportunity: The potential to create something new (new products or services, new markets, new production processes, new raw materials, new ways of organizing existing technologies, etc.) that emerges from a complex pattern of changing conditionschanges in knowledge, technology, economic, political, social, and demographic conditions. Systematic Observation: A research method in which certain aspects of the world are observed systematically and careful records kept of what is detected. This information is then used as a basis for reaching conclusions about the topics under investigation.

32 PART 1 Entrepreneurship: Who, What, Why? Theory: Refers to effort to go beyond merely describing
Technology Transfer Ofces: Departments at univer-
sities charged with the task of helping to move scientic and technological discoveries by faculty from the laboratory to the marketplace.
various phenomena and, instead, to explain them.

Variables: Aspects of the world that can take different
values.
Questions for Discussion

1. 2. What is the difference between an inventor and an entrepreneur? Suppose that the government passed a series of laws that made it much more difcult to start a new business. What effect(s) do you think such laws would have on the economy? One basic question in the eld of entrepreneurship is: Why do some people leave secure jobs and lives to become entrepreneurs? How would you study this issue from the micro perspective? From the macro perspective? In this chapter, we suggested that entrepreneurs are the new heroes and heroines in many cultures. Do you think they are? If so, why do so many people see entrepreneurs as being 5. heroic? If you think this suggestion is not accurate, why? Do you think that universities should own patents for inventions or scientic advances made by faculty members? Why or why not? Suppose you came across an article in a magazine with the following title: First-Borns Make the Best Entrepreneurs. Reading the article, you discover that it contends that entrepreneurs who are the oldest child in their family are more successful than ones who are the second or third born. What questions should you ask yourself about how this information was obtained in order to decide whether to view it as accurate or valid?
6.
3.
4.
Getting Down
TO BUSINESS
1. Can you handle uncertainty? Is security (e.g., a regular paycheck) important to you, or are you willing to live with uncertaintyeconomic and otherwise? Are you energetic? Do you have the vigor and good health required to work long hours for long periods of time in order to reach goals that are important to you? Do you believe in yourself and your abilities? Do you believe that you can accomplish whatever you set out to accomplish, learning what you need along the way? Can you handle reversals and failures well? How do you react to negative outcomeswith discouragement, or with renewed commitment to succeeding the next time around and learning from your mistakes? Are you passionate about your goals and vision? Once you establish a goal or a vision of where you want to be, are you willing to sacrice almost everything else to get there, because you are truly passionate about doing so?
Becoming an Entrepreneur: Is It Right for You?

A key theme of this chapter is that the entrepreneurial process begins when enterprising individuals identify potentially valuable opportunities. Clearly, this implies that not everyone is suited to becoming an entrepreneur. Just being able to spot potentially protable opportunities is not, in itself, enough. In addition, entrepreneurs must be willing, ready, and able to run with the ballto take the vigorous and continuing steps necessary to launch a new venture. Are you such a person? Are you capable not only of developing a vision of where you want to get, but also of getting there? If not, you should reconsider, because entrepreneurship denitely lives up to Edisons suggestion that Success is 2% inspiration and 98% perspiration. Even though no single test of entrepreneurial potential47 is available, becoming a successful entrepreneur requires several key characteristics. Rate yourself on each of these dimensionsand then ask several people who know you well to do the same thing. The results may give you valuable insight into whether you are cut out to be an entrepreneur.
2.
3.
4.
5.

6.
Are you good with other people? Can you persuade them to see the world the way you do? Can you get along with them well (e.g., handle conicts, build trust)? Are you adaptable? Can you make midcourse corrections easily? For instance, can you admit that you made a mistake and reverse course to correct it? Are you willing to take risks or leaps of faith? Once you establish a goal, are you willing to take reasonable risks to reach it? In other words, are you willing to do what you can to minimize the risks, but then, once you have done so, proceed?
7.
8.
other people.48 They can handle uncertainty, are energetic, believe in themselves, react well and exibly to reversals, are passionate about their beliefs, are good with other people, are highly adaptable, and are willing to accept reasonable levels of risk. To the extent you possess these characteristicsor a least most of themyou may be well-suited for the role of entrepreneur. We suspect that if you are reading this book, you t this description, or you would not be in this course! But if you nd that you are relatively low on several of these characteristics, you might want to reconsider; perhaps becoming an entrepreneur is not really your particular cup of tea.
Current evidence suggests that successful entrepreneurs are high on all these dimensionshigher than
Answering Questions About Entrepreneurship: Practice in Thinking Like a Researcher

In this chapter, we discussed various methods for answering questions about entrepreneurship in ways that yield information that is both reliable and accurate. Although we certainly dont expect you to become an expert in using these methods (that takes years of study and practice), we think it is important for you to understand how they work because if you do, you will become an informed consumer of knowledge about entrepreneurship. In other words, youll be able to tell what information is useful to you, and what is purely conjectureor worse! To gain practice in using these methods, try the following exercise. Consider the following questions and for each, describe how you might go about answering it through use of (1) systematic observation, (2) the case method, or (3) experimentation. For
each, try to specify clearly the variables you would study and the ways in which you would gather information about these variables. Also try to formulate specic hypotheses about how your results will turn out. Finally, consider the implications for entrepreneurs if your ndings conrm, or do not conrm, you initial hypothesis. 1. Do companies that are rst to market with a new product have a competitive edge over companies that enter the same market later? Do repeat entrepreneurs (people who start one successful company after another) search for opportunities differently from entrepreneurs who found only one company? What factors lead individuals to give up secure and well-paid jobs to become entrepreneurs? Are these factors the same for women and men?
2.
3.
case one
Entrepreneurship: A Field, an Activity, and a Way of Life
In 1996, Mario Morino launched the Netpreneur program, aimed at fostering high-tech, Internet-related entrepreneurship in the greater Washington, D.C., region, and to provide a learning community for entrepreneurs and their stakeholders. Morino was himself a successful entrepreneur, having taken an initial $600 investment in Morino Associates, founded in 1973 to develop software for mainframe computers, all the way to an initial public offering. The company then executed a merger to form Legent Corporation, which was in turn acquired in 1995 by IT giant Computer Associates for $1.7 billion, with Morinos share of the deal some $80 million. The Washington, D.C., area is a major metropolitan center and, as home to the federal government, globally known. Those elements do not make it a hub of entrepreneurism, however. When Morino launched his program, D.C. lagged far behind the Silicon Valley region,

Boston, and other urban centers as a locus for entrepreneurial IT innovation. Arguably, the regions major businessesgovernment, major nonprots such as federally chartered mortgage lender Fannie Mae, traditional telecommunications companiesarent the sort to draw the entrepreneurialminded. The one major dot-com in the region at the time, America Online, employed far more administrative workers than high-tech inventors (compared to Silicon Valleys Google, which scours the market for technology Ph.D.s, needed to engineer its high-tech search services). Even so, many nascentand in some cases, accomplishedentrepreneurs worked in the area, and Morinos program gave them a means to meet, learn, and leverage each others resources. The program staged regular Coffee and Doughnets mixers, with local and national entrepreneurs as speakers, for face-to-face (or, in Internet parlance, f2f) interactions, and established a Web site (http://www.netpreneur.org) and mailing lists. Over the course of the program, the Netpreneur e-mail newsletter grew from 35 subscribers to more than 12,000. The Netpreneur program wasnt the only, nor even the rst, effort in the area to promote entrepreneuring, though it was the rst to focus on the Internet, and to broadly target newbies to the eld. Organizations such as the Mid-Atlantic Venture Association (MAVA), formed a decade before Morino chartered Netpreneurs, were working to introduce entrepreneurs to sources of capital, and to strategic partners and relevant service providers. According to its Web site, MAVA offers the following:
n
Facilitates the ow of capital by creating opportunities for membership interaction and investment. Hosts an annual venture fair, which showcases premier companies for private equity investment opportunities. Provides members with additional opportunities for deal ow and interaction during numerous annual luncheons, topical programming receptions, and other events featuring speakers and/or business discussions regarding entrepreneurial concerns, investment trends, company nancing, tax matters, IPOs and public policy issues.
The Netpreneur program casts a far wider net, and helped prospective entrepreneurs take the initial rst steps toward forums like MAVA. Even though the D.C. area most clearly wasnt Silicon Valley, Netpreneur and other area ventureoriented forums and groups did spawn, inspire, or
otherwise facilitate a number of successful entrepreneurial ventures. D.C. netpreneur Trevor Cornwell founded Skyjet in 1997 to serve as an aggregator for the highly fragmented market for charter jets. Corporate jets are expensive to own and operate, and sit idle a good deal of the time. Cornwells innovation was to provide a means for jet owners to advertise the availability of those jets to other corporations and individuals needing the exibility afforded by an executive jet, but unwilling to bear the full cost of one of their own. Here the contribution of the Internet was to facilitate an inexpensive platform for elding inquiries and registering notices of availability. Cornwell sold his company to publicly traded Canadian aircraft manufacturer Bombardier in 2000. Raj Khera became an entrepreneur after a career at the National Institute of Standards and Technology, an arm of the Department of Commerce, as an electrical engineer and technology transfer specialist. Forming Khera Communications with his brother, he turned his knowledge of working with the government into the development of GovCon.com, a business portal for government contractors, which was ultimately sold to VerticalNet, which specialized in portals for vertical markets. For every success, more than a few less-thansuccessful efforts were made, from start-ups that never quite gelled, to companies that successfully sought seed capital and even institutional rounds of venture funding, but went bankrupt. Susan DeFife, for example, created WomenConnect.com as a site for women professionals, launching it from the sunroom of her suburban home, and growing to a staff of 25, while securing some $5.5 million in venture funding. WomenConnect.com declared bankruptcy in 2000, when the dot-com bubbles burst took down a great many start-ups. DeFife has moved on; shes now one of the team at the helm of Backfence, a new service to create geographically local Web-based communities. At the end of 2002, Morino himself moved on, redirecting the efforts of the Morino Institute toward venture philanthropy and helping children of low-income families in the D.C. region. He handed off the Netpreneur program to a new team that pledged to keep it alive and fostering entrepreneurial development. The Washington, D.C., economy, meanwhile, is booming as a result of increased government spending, especially in the defense and intelligence communities, for homeland security, and for the war on terror.

Questions
1. The Morino Netpreneur program sought to create a learning community for entrepreneurs and their stakeholders. Its pretty clear who entrepreneurs are, but who are their stakeholders? What sort of entrepreneurial ventures would you expect to come out of the Netpreneurial community located in the Washington, D.C., area? 3. How might D.C.s current booming economy affect its entrepreneurial community?
2.
Notes
1 Shane, S., & Venkataraman, S. (2000). The promise of entrepreneurship as a eld of research. Academy of Management Review, 25, 217226. 2 Sarason, Y., Dean, T., & Dillard, F. (2006). Entrepreneurship as the nexus of individual and opportunity: A structuration view. Journal of Business Venturing, 21, 286305. 3 McMullen, J.S., & Shepherd, D.A. (2006). Entrepreneurial action and the role of uncertainty in the theory of the entrepreneurs. Academy of Management Review, 31, 132 152. 4 Sarasvathy, S.D. (2004). The questions we ask and the question we care about: Reformulating some problems in entrepreneurship research. Journal of Business Venturing, 2004, 19, 707717. 5 Lumpkin, G.T. (In press). Intrapreneurship and innovation. In R. Baum, M. Frese, and F. Baron (Eds.), The Psychology of Entrepreneurship. Mahwah, NJ: Erlbaum. 6 Ricchiuto, J. (1997). Collaborative Creativity. New York: Oakhill. 7 Koen, P.A., & Baron, R.A. (2003). Predictors of resource attainment among corporate entrepreneurs: Executive champion versus team commitment. Paper presented at the Babson-Kaufman Entrepreneurship Research Conference, Babson Park, MA, June 2003. 8 Rauch, A., Wiklund, J., Frese, M., & Lumpkin, G.T. (2004). Entrepreneurial orientation and business performance: Cumulative empirical evidence. Paper presented at 2004 Babson Kauffman Entrepreneurship Research Conference, Wellesley, MA. 9 Dunn & Bradstreet (1999). 10 OReilly, B. (1994). The new deal: What companies and employees owe each other. Fortune, June 13, 4447, 50, 52. 11 Bedian, A.G., Ferris, G.R., & Kacmar, K.M. (1992). Age, tenure, and job satisfaction: A tale of two perspectives. Journal of Vocational Behavior, 40, 3348. 12 Greenberg, J., & Baron, R.A. (In press). Behavior in Organizations, 9th ed. Upper Saddle River, NJ: PrenticeHall. 13 See note 4. 14 Bhide, A.V. (2000). The Origin and Evolution of New Businesses. Oxford: University Press. 15 Baron, R.A., & Markman, G.D. (2005). Toward a process view of entrepreneurship: The changing impact of individual level variables across phases of new venture development. In M.A., Rahim, R.T., Golembiewski, R.T., & K.D. Mackenzie (Eds.), Current Topics in Management, vol. 9. New Brunswick, NJ: Transaction Publishers, 4564. 16 Ardichvilli, A., Cardozo, R., & Ray, S. (2003). A theory of entrepreneurial opportunity identication and development. Journal of Business Venturing, 18, 105124. 17 Hagenbaugh, B. (2004). Couple says celebrate second trip down the aisle. USA Today, August 9, 7B. 18 Shane, S., Locke, E.A., & Collins, C.J. (2003). Entrepreneurial motivation. Human Resource Management Review, 13, 257280. 19 Gartner, W.B. (1990). What are we talking about when we talk about entrepreneurship? Journal of Business Venturing, 5, 1528; Verheul, I., Uhlaner, L., & Thurik, R. (2005). Business accomplishments, gender, and entrepreneurial self-image. Journal of Business Venturing, 20, 483518. 20 Stewart, W.H., Jr., & Roth, P.L. (2001). Risk taking propensity differences between entrepreneurs managers: A meta-analytic review. Journal of Applied Psychology, 86, 145153. 21 Miner, J.B., & Raju, N.S. (2004). When science divests itself of its conservative stance: The case of risk propensity differences between entrepreneurs and managers. Journal of Applied Psychology, 89, 313. 22 See note 15. 23 Nicolaou, N., & Shane, S. (2006). Born entrepreneurs? The genetic foundations of entrepreneurship. Unpublished manuscript under review, Tanaka Business School, Case Western Reserve University. 24 Ozgen, E., & Baron, R.A. (In press). Social sources of information in opportunity recognition: Effects of mentors, industry networks, and professional forums. Journal of Business Venturing. 25 Zhao, H., Seibert, S.E.., & Hills, G.E. (2005). The mediating role of self-efcacy in the development of entrepreneurial intentions. Journal of Applied Psychology, 90, 12651271.
36
PART 1
Entrepreneurship: Who, What, Why? 38 Baron, R.A., & Ensley, M.D. (Under review). Opportunity recognition as the detection of meaningful patterns: Evidence from the prototypes of novice and experienced entrepreneurs. 39 Baron, R.A. (2006). Opportunity recognition as pattern recognition: How entrepreneurs connect the dots to identify new business opportunities. Academy of Management Executive. 40 Evans, D., & Leighton, L. (1989). Some empirical aspects of entrepreneurship. American Economic Review, 9, 519 535. 41 See note 1. 42 Plous, S. (1993). The Psychology of Judgment and Decision Making. New York: McGraw-Hill. 43 See note 20. 44 Schultze, W.S., Lubatkin, M.H., & Dino, R.N. (2003). Toward a theory of agency and altruism in family rms. Journal of Business Venturing, 18, 473490. 45 Krueger, N.F., Jr. (2003). The cognitive psychology of entrepreneurship. In Z. Acs & D.B. Audretsch (Eds.), Handbook of Entrepreneurial Research. London: Kluwer Law International. 46 Lewin, K. (1951). Field Theory in Social Science. New York: Harper & Row. 47 Chen, C.C., Green, P.G., & Crick, A. (1998). Does entrepreneurial self-efcacy distinguish entrepreneurs from managers? Journal of Business Venturing, 13: 295 316. 48 Stewart, W.H., Jr., Watson, W.E., Carland, J.C., & Carland, J.W. (1999). A proclivity for entrepreneurship: A comparison of entrepreneurs, small business owners, and corporate managers. Journal of Business Venturing, 14, 189214.
26 Markman, G.D., Balkin, D.B., & Baron, R.A. (2002). Inventors and new venture formation: The effects of general self-efcacy and regretful thinking. Entrepreneurship Theory & Practice, 20, 149165. 27 White, R.E., Thornhill, S., & Hampson, E. (2005). Entrepreneurs and evolutionary biology: The relationship between testosterone and new venture creation. Paper currently under review. 28 See note 23. 29 Baum, R., & Locke, E. (2004). The relationship of entrepreneurial traits, skill, and motivation to new venture growth. Journal of Applied Psychology, 89, 587598. 30 See note 23. 31 Shane, S. (2004). Encouraging university entrepreneurship? The effect of the Bayh-Dole Act on university patenting in the United States. Journal of Business Venturing, 19, 127151. 32 Powers, J.P., & McDougall, P.P. (2005). University startup formation and technology licensing with rms that go public: A resource-based view of academic entrepreneurship. Journal of Business Venturing, 20, 291311. 33 Phan, P., Siegel, D.S., & Wright, M. (2005). Science parks and incubators: Observations, synthesis, and future research. Journal of Business Venturing, 20, 165182. 34 Markman, G.D., Phan, P.H., Balkin, D.B., & Gianoidis, P.T. (2005). Entrepreneurship and university-based technology transfer. Journal of Business Venturing, 10, 241263. 35 Mullins, J.W., & Forlani, D. (2005). Missing the boat or sinking the boat: A study of new venture decision making. Journal of Business Venturing, 20, 4769. 36 Mitchell, R.K., Buseniz, L., Lant, T., McDougall, P.P., Morse, E.A., & Smith, J.B. (2004). The distinctive and inclusive domain of entrepreneurial cognition research. Entrepreneurship Theory and Practice, 28, Winter, 505518. 37 Gaglio, C.M. (2004). The role of mental simulations and counterfactual thinking in the opportunity identication process. Entrepreneurship Theory and Practice, 28, Winter, 533552.

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Entrepreneurship: A Field, an Activity, and a Way of Life

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Figure 1 . 1 From Small Inventions, Protable Companies

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Dene entrepreneurship as a eld of business.

The Field of Entrepreneurship: Its Nature and Roots

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Source: Universal Press Syndicate, September 4, 2001.

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A Recent Extension and Clarication

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Entrepreneurship: An Engine of Economic Growth

370,000 350,000 Franchises Sold 330,000 310,000 290,000

310,000 291,000 274,000

Source: Adapted from Entrepreneur Magazine, January 2005, p. 79.

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Figure 1 . 4 The Romance of Entrepreneurship

The Field of Entrepreneurship: Foundations in Other Disciplines

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