Understanding Entrepreneurship

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Understanding Entrepreneurship

We are living in a world where ideas drive economies; it is no wonder that innovation and Entrepreneurship are often seen as inseparable bedfellows. Every country want to progress and hence it will improve country’s economy and for making progress they have to think out-of-the-box and constantly developing innovative products and services.

For thinking out-of-the-box, there focus should be on creative thinking and innovation and they should not forget about Entrepreneurs. The youth should be aware of “Entrepreneur” and in the educational system there should be subject on Entrepreneurs. Some countries have taken this initiative to a higher level by introducing Entrepreneurship education at elementary schools and encouraging them to be future Entrepreneurs when they are of age.

Figure1.1: The above figure is an overview of how to become Entrepreneur.

You know how many youth are interested in becoming an Entrepreneur? Recently there was a survey conducted by Kauffman Center for Entrepreneurial Leadership, and the results were unexpected as it was found that nearly 7 out of 10 youths (aged 14-19) were interested in becoming Entrepreneurs.

“Being an Entrepreneur is now the choice of the new generation as compared to the preferred career choices of yesteryear such as being a doctor, lawyer or a fighter pilot.”

 

So every 7 out of 10 youths want to become Entrepreneurs that’s good but in what field. In an informal survey in China the results showed that being an Entrepreneur, especially in the field of computer and     e-commerce, is perceived as a ‘cool’ career and is an aspiration for many Chinese youths Prior to the ‘opening up’ of modern China, being an Entrepreneur was perceived as the outcome of one’s inability to hold a good government job and those who dared to venture, were often scorned at by their peers. Times have indeed changed.

With this change in mindset and the relative knowledge that Entrepreneurs bring forth increased job creations, the awareness and academic studies of Entrepreneurship have also heightened. In many tertiary institutes, many courses of Entrepreneurship and innovation are being developed and offered to cater to the increasing demand.

The Entrepreneurial journey and the ecosystem that supports it

To understand how we can promote Entrepreneurship in India to meet the needs of employment and income generation, it is important to understand the Entrepreneurial journey and the role various types of capital providers play along this journey.

 Figure1.2: The early Entrepreneurial journey & the role of capital providers

  • Friends and family: Friends and family are the first source of funds for an Entrepreneur and they are the critical element of funding to help convert an idea into a business venture. A few shortcomings of this source are need for validation of the idea and lack of informed business guidance. If Entrepreneurs are not from family background then this source of capital is not available.

 

  • Incubators: Incubators are basically institutions which help Entrepreneurs to develop their ideas to a point where investors can see the viability of the business model and they charge a small fee. It provide infrastructure and services such as mentoring, advisory, access to technology experts and potentially seed funding. Incubators could be run by government, private sector and educational institutions.

 

  • Angel Investors: An Angel Investor is a person who invests in a business venture, providing capital for start-up or expansion. Angel Investors provide capital but they also act as great scouts of emerging ideas, helping them scale at a stage where institutional seed and venture funds would typically not invest.

 

Usually, an Angel Investor is looking for a personal opportunity as well as an investment. Often Angel Investors have business experience as well as money, and will want to play some sort of active role in managing the company.

 

Normally, Angle Investors are individuals and they are looking for an opportunity for growing their money. Angel investors are perceived of as “filling the gap” between the financing provided by family and friends and venture capitalists.

 

They perform a number of different roles:

 

  • Provide high risk capital: They play a bigger role than Incubators as they provide high risk capital for funding new businesses. They are external capital providers.
  • Mentor Entrepreneurs: Angel Investors are either senior professionals or Entrepreneurs themselves and are thus able to guide emerging businesses.
  •  Angel investors have huge network that can help an Entrepreneur for funding, professional services and supplier and buyers.

 

  • Venture Capital: Money provided by Private Investors to start-up firms and small businesses with perceived long-term growth potential. Venture Capitalists also have more money than Angel Investors to invest since venture capitalists are usually in the form of groups with massive funds whereas angel investors can be lone savvy investors looking for an opportunity to grow their money.

They typically invest where at least 25 percent annual returns within one to five years are feasible, and often demand 50 percent or more ownership to exercise control over the investor firm to offset their high risk. Often they also provide management and industry expertise and business connections with other firms and venture capitalists.

Their objective usually is to bring the business to its initial public offering (IPO) stage so that they can sell their shareholdings to the public at high profit, and get out.

A VC Fund is a pooled investment vehicle where institutional and high net-worth individual investors pool their money which is then managed by an asset management company (AMC).

The AMC typically comprises of a small group of professionals with Entrepreneurial / operational experience and / or financial / investment experience. The Fund typically pays the AMC a fee of 2.0 to 3.0 % of the total corpus on an annual basis (depending on the size of the fund) and 20% of the upside, subject to a hurdle rate.

There is a private placement memorandum which defines the contract between the investors and the fund managers, outlining the areas in which investments will be made, size and number of investments, etc. Institutional investors in a Fund normally are banks, pension funds, insurance companies, university endowments, corporate, family offices and government.

Beyond sources of finance, there are multiple elements of the Entrepreneurial ecosystem.

  • Policy and regulatory environment: In successful countries government have created a framework of policies and procedures that makes it easy for Entrepreneurs to create and operate new ventures, take risks, raise financing. Also, the government can itself provide funds.

 

  • End consumers: Entrepreneurship thrives in an environment where consumers are open to innovative products, services or even innovative delivery options for existing products. At the same time, it is important for Entrepreneurs to design business models that are aligned to the market they serve.

 

  • Hard infrastructure: Entrepreneurs can remain solely focused on the business issues and on competing locally and globally. They do this by providing easy to use hard infrastructure – real estate, transportation and logistics, utilities, communication, economic zones.

 

  • Culture: Successful countries have a culture of taking risks, of accepting failure, and Entrepreneurs are celebrated above corporate executives, professionals or government employees. Such a culture not only encourages greater Entrepreneurial activity but it also enables Entrepreneurial ventures to access quality talent.

 

  • Academia and educational institutions: In successful Entrepreneurial countries, academia plays a key role in breeding Entrepreneurship – through designing appropriate curricula, encouraging research and experimentation, encouraging faculty to be directly involved in business ventures, creating incubators and creating strong links with business and Entrepreneurial eco systems. Educational institutions play an even broader role through incubators as well as encouraging their graduates to work with emerging businesses.

 

  • Established businesses: Large businesses play an active role in fostering Entrepreneurship beyond being sources of funding. They are both buyers and suppliers for Entrepreneurs. They also provide mentorship and talent to emerging businesses and can thus play a critical role in being supporters of Entrepreneurial growth. Entrepreneurial and innovative countries often witness close, symbiotic equations between established and emerging businesses.

 

Collaboration and mentor networks: A hallmark of successful Entrepreneurial countries is their ability to enable collaboration between different parts of the ecosystem. Formal and informal networks play a critical part in this. Collaboration and mentor networks serve as sources of information, provide access to investors and buyers, help exchange best practices and create an environment where an Entrepreneur has ready access to resources needed for him/ her to succeed.

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