| There are common steps which should be | | | | outside capital to start their ventures. |
| followed when we start our own business. | | | | |
| Thus, the general procedure includes choosing | | | | The other question to be answered while |
| your business idea, learning legal | | | | starting a new business is whether to serve |
| requirements, finding financial resource, | | | | the local market or the large |
| choosing appropriate location, launching | | | | well-established market. Generally it is |
| marketing campaign and hiring employees (How | | | | easier to serve local markets or a small |
| to Start your Own Business 1). I believe that | | | | number of customers with specialized needs |
| the most important tasks in this procedure | | | | (Kirzner 98). In some cases new businesses |
| are choosing the right business idea and | | | | are designed to serve customers who were both |
| finding money for business startup. | | | | local and had special needs. The first client |
| | | | for Inter-Ad, a manufacturer of public access |
| Promising start-ups bear a remarkable | | | | computer information systems, was the city of |
| resemblance to the popular new businesses, | | | | Rochester. InterAd's founder, James Odorczyk, |
| both in the ordinariness of their concepts | | | | recalled: "The city was about to celebrate |
| and in the limited experience and credentials | | | | its 150th birthday, and they needed a system |
| of their founders (Acs and Audretsch 88). As | | | | to put in City Hall to talk about Rochester. |
| we might expect, the many new businesses | | | | We were offering touch screens and |
| started every year in cleaning services, real | | | | high-resolution graphics, which attracted a |
| estate brokerage, lawn maintenance, and so | | | | lot of people. And the city wanted someone |
| on, do not involve any material innovations. | | | | local and they had budgets and timelines, |
| The human capital needed to start such | | | | which didn't allow them to do a lot of |
| businesses is also limited. Starting a beauty | | | | shopping. We were the only game in town then, |
| salon or acquiring a real estate broker's | | | | and we did a complete system, with custom |
| license may require a modest amount of prior | | | | programming included, for $25,000." (Dixit |
| training or apprenticeship; the skills | | | | and Pindy 55). |
| required for lawn maintenance, home cleaning, | | | | |
| or painting can be acquired in days. The | | | | By serving local or specialized customers, |
| limited innovation and investment in human | | | | new businesses avoid competition from large, |
| capital needed to start such popular | | | | well-established companies. |
| businesses is only to be expected. The ease | | | | |
| of entry makes the businesses popularand | | | | In some cases entrepreneurs pick niche |
| limits their profitability. It is surprising, | | | | markets where they do not expect large |
| however, that most successful businesses also | | | | profits because they want to establish a |
| do not start with innovative concepts or | | | | springboard or base for more ambitious |
| founders with much significant prior | | | | subsequent initiatives. |
| experience or training (Baumol 97). | | | | |
| | | | Capital and other constraints, we have seen, |
| There are several examples which prove | | | | usually force the founders of promising |
| everything that was mentioned above. Robert | | | | ventures to pursue small-scale opportunities. |
| Grosshandler and two partners started the | | | | But small-scale by itself cannot explain the |
| Softa Group because they saw opportunities | | | | unusual profitability of such start-ups; |
| for "a simple software product." (Baumol | | | | after all, the popular marginal ventures also |
| 103). Their first product, Total Recall, gave | | | | operate in small, localized markets (Baumol |
| the partners "market knowledge" but was | | | | 148). The distinguishing characteristic of |
| otherwise not a great success. On the side | | | | promising niches is uncertainty (Kelly 159). |
| the Softa Group operated another mundane | | | | Uncertainty does not, of course, assure |
| businessselling hardware and peripheralsto | | | | attractive returns, but it does allow |
| generate cash flow. | | | | entrepreneurs with small initial resources a |
| | | | better chance of making a profit than the |
| Philip Cramer founded Compuclassics, a | | | | typical popular business with predictably |
| software mail order company, in 1984. In his | | | | poor returns. Although promising businesses |
| previous job at a music company, Cramer had | | | | have the same low most likely payoff, they |
| telephoned a mail order company to purchase a | | | | come with a valuable option or lottery ticket |
| database package: "It took me about ten calls | | | | attached. |
| to get through, so I thought that either they | | | | |
| can't handle the demand or they have a lousy | | | | One important source of uncertainty derives |
| phone system!" (Baumol 89). Cramer had a | | | | from unsettled market conditionsfor example, |
| brother-in-law who was a software | | | | new technology, regulatory regime, fashion, |
| distributor. "I was tired of the music | | | | or other such external change. Starting a |
| business, so I asked him about mail order. He | | | | profitable business in a stable market, where |
| thought it was a good idea, but he couldn't | | | | competitive forces have long shaken out weak |
| do it because he didn't want to compete | | | | technologies and firms, requires a |
| against the people he was selling to."(Baumol | | | | significantly better approach or new |
| 90) Cramer then decided to enter the business | | | | "combination" (Kirzner 43). In highly |
| himself. "We weren't breaking new groundwe | | | | competitive fields such as house painting or |
| were in the second wave. But, we had examples | | | | lawn care, providing the same products or |
| that told us that if we did it right, we'd be | | | | services as everyone else can yield only low |
| okay. Our philosophy was that we'd charge a | | | | average returns. In businesses where |
| little more and go out of our way to | | | | long-standing relationships, reputations, and |
| service." (Baumol 93). | | | | other such barriers to entry generate high |
| | | | profits for the incumbents, imitation or |
| Karen Kirsch founded Best Mailing Lists, a | | | | small modification of existing products and |
| broker of mailing lists for the direct mail | | | | technologies leads to returns that are |
| industry, after working for another company | | | | greater than average (Kirzner 83). |
| in the same business. "My service and product | | | | |
| were not unique, but I offered service to | | | | In a new or changing market, however, |
| which no one could compare." (Baumol 134). | | | | entrepreneurs often do not require a |
| | | | significant innovation or insight to make a |
| The widespread lack of innovative ideas often | | | | profit. Customers and suppliers lack |
| accompanied by limited business or industry | | | | information about their alternatives, so many |
| experience, preclude typical entrepreneurs | | | | firms, all offering the same products and |
| from raising much capital from investors. To | | | | using the same technologies, can make a |
| issue equity in a start-up that does not have | | | | profit. We commonly attribute such profits to |
| an ongoing stream of cash flow, an | | | | "shortages" or an "excess of demand over |
| entrepreneur has to convince investors that | | | | supply"; in fact, entrepreneurs do not need |
| the enterprise has assets that can generate | | | | the foresight or the luck to acquire a good |
| cash flow in the future. Investors have to | | | | that later becomes scarce (Kelly 90). They |
| believe that the start-up merits a positive | | | | can exploit the lack of information, buying |
| "pre-money" valuation deriving from some | | | | inputs cheap from uninformed suppliers and |
| intellectual property or human capital that | | | | selling them dear to uninformed customers. |
| the entrepreneur has contributed to the | | | | They do not even need to discover the |
| venture (Dixit and Pindy 56). Most start-ups, | | | | opportunity themselves or realize they are |
| however, don't have the assets that an | | | | engaging in a form of arbitrage. As long as |
| objective investor would consider valuable. | | | | buyers and sellers remain ill-informed, they |
| The founders, therefore, have to rely on | | | | can simply follow the example of others. |
| their own resources or raise funds from | | | | |
| relatives or friends who are willing to | | | | New markets have other attractive features |
| overlook the founder's me-too strategies and | | | | for start-ups. Incentives to compete on price |
| inexperience. | | | | are limited, especially if demand is |
| | | | expanding, because all the players are |
| Many entrepreneurs don't have significant | | | | profitable. Inexperience makes customers more |
| personal means (or rich and trusting | | | | tolerant and trusting. They don't have |
| friends), so ventures that turn out to be | | | | well-formed expectations about product |
| out-of-the-ordinary successes often start | | | | quality and knowledge of what could go wrong. |
| with the same limited means as the typical | | | | The playing field is level. The start-up does |
| lawn care or painting business. As we might | | | | not have to displace rivals who have |
| expect, most of the hundreds of thousands of | | | | established reputations, and cost advantages |
| businesses launched in the United States | | | | deriving from their accumulated experience, |
| every year start with little capital (Kelly | | | | and customers locked in because of inertia or |
| 80). Most of the founders of companies | | | | switching costs. In mature markets entrants |
| started their businesses with meager personal | | | | have to take their share away from those |
| savings and borrowings or funds raised from | | | | businesses which have already entered the |
| families and friends (Kelly 98). | | | | market. Some researchers propose to create a |
| | | | database of segments which you consider for |
| In many start-ups the founders have little to | | | | starting your business (Finding a Niche 1). |
| offer investors besides their hopes and | | | | This database will help to gather all |
| dreams. The entrepreneurs believe that they | | | | information about the market and choose the |
| can somehow make a profit, but investors do | | | | most suitable option. |
| not. Their capital constraint derives from | | | | |
| the absence of objective information about | | | | Therefore, starting your own business |
| their ability to make a profit, rather than | | | | involves firmness and strong to desire. As it |
| their inability to accurately communicate | | | | was already mentioned, it is not necessarily |
| this information. Even with utterly honest | | | | to have original ideas, experience, and |
| entrepreneurs, investors can only discover | | | | capital; it totally depends on the |
| after the fact who has the innate capacity to | | | | entrepreneur's personal ability to satisfy |
| succeed. If the average entrepreneur cannot | | | | fuzzy customer wants. It is, also, important |
| earn a profit, investors will not back any of | | | | to remember that popular fields for start-ups |
| them. | | | | such as beauty care salons and lawn |
| | | | maintenance, competition between businesses |
| Access to funding depends on whether the | | | | of roughly equal capabilities forces all |
| expected returns are large enough to cover | | | | businesses to subsist at a very similar and |
| the costs of investigation and ongoing | | | | low level of profitability. Competing in |
| oversight (Kirzner 144). These costs can be | | | | small, uncertain niches also allows the |
| substantial compared to the magnitude of the | | | | entrepreneur to avoid competing against |
| expected payoffs. Therefore, very often | | | | well-capitalized rivals. |
| entrepreneurs with novel ideas cannot raise | | | | |