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5/15/2005

A guide to keeping your start-up from becoming a shut-down

Entrepreneurs represent more than 99 percent of all U.S. employers, and they employ more than one-half of all private sector workers. However, many start-ups quickly become shut-downs.  A Rice  expert details the primary pitfalls for first-time entrepreneurs -- such as a lack of experience and an under-estimation of how much financing it takes to start and maintain a new business -- and provides guidance on how to avoid them.

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Most of us at one time or another have longed to be our own boss, but entrepreneurial experts warn that the dream of running one's own business can become a nightmare without a well-considered plan in place. According to H. Albert Napier at Rice University, the primary pitfalls for first-time entrepreneurs typically include a lack of experience and an under-estimation of how much financing it takes to start and maintain a new business.

"Too many people who think about starting their own company don't realize the time, overall effort and money it takes to get a business up and running as well as living expenses needed while starting the business," Napier says. "Adequate living expenses are particularly important if the entrepreneur has a family."

"The key ingredient of a successful entrepreneur is his or her ability to plan — not just at the outset or on an annual basis, but throughout the year."

In a book titled "Preparing an Entrepreneurial Business Plan," Napier and Edward E. Williams, both faculty at Rice's Jesse H. Jones Graduate School of Management, draw upon their years of entrepreneurial experience and research to show new entrepreneurs step-by-step how to write a complete business plan for starting and operating a new company, as well as a summary plan that may be used to raise capital for a new venture.

"Many entrepreneurs believe that financial experts should do the planning for them," Napier says. "But, in fact, the absolute best business plans are written by entrepreneurs themselves."

As part of the process, Napier and Williams recommend a business plan that includes the new venture's basic goals and specific objectives, an industry and company analysis and an outline of the company's organizational structure. It also should contain an analysis of external variables that could affect the enterprise – economic, demographic, social and competitive factors beyond the control of the entrepreneur that could have an impact on the success of the company.

"New entrepreneurs often don't anticipate how difficult it's going to be to sell their products and services," Napier says. "In this book, we put a great deal of emphasis on marketing and sales, areas that are generally not covered as thoroughly as necessary in most business plans."

The authors also urge entrepreneurs to pinpoint those factors particular to their company's business that could determine its success and others that represent areas of risk.

"For example, turnovers, machine downtime and capacity can be quite important for manufacturing firms, while retail concerns must be very aware of markups and inventory management," Napier says.

Napier and Williams claim that the most important determinant of risk for any business is the predictability of its revenues, which is partially influenced by the company's fixed overhead costs, permanent salaries and depreciation. In general, the authors suggest that the entrepreneur put together an assessment of risks related to the nature of the particular business, including an analysis of the competition, market size and financing options.

The heart of the business plan, according Napier and Williams, are the revenue drivers: What the company will sell, to whom, in what quantity and for how much. While their guide to developing a business plan is not intended to help new entrepreneurs set specific growth goals, they do urge them to reflect on the role growth should lay in their long range goals and objectives.

"There is some truth to the old adage that it may be necessary to grow in order to survive, but growing can be risky and should be avoided as a strategy simply for its own sake," Napier says.

A professor of management and psychology and director of the Center on the Management of Information Technology at the Jones Graduate School of Management, Napier has more than 30 years experience in information technology and entrepreneurship and has started and owned a number of businesses, including a computer consulting and training company.

The author of numerous articles and books on information technology, human-computer interaction and entrepreneurship, he earned his undergraduate, M.B.A. and Ph.D. degrees at The University of Texas–Austin.

Napier's co-author Edward E. Williams is the Henry Gardiner Symonds Professor of Management at the Jones School. A practicing entrepreneur and faculty member for more than 35 years, Williams is the author of nine books on various topics in entrepreneurship, business and finance. He also is on the board of directors of two public companies, both listed on the New York Stock Exchange, and over the years he has been involved in starting, buying and selling hundreds of business enterprises.

Williams earned his undergraduate and Ph.D. degrees at the University of PennsylvaniaThe University of Texas–Austin, respectively.

To learn more about this research, contact Napier at alnapier@rice.edu , or Debra Thomas in the Jones School at dthomas@rice.edu .

Research @Rice 2005