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