Entrepreneurship Theories
Discuss about the Entrepreneurial Lean Startup.
The startup process of new venture involves copulation in activities of idea creation, product development and the launch of the new business. The business start-up model represented by Shook et al. (2003) as cited in Drnovšek, Wincent, & Cardon (2010), consists of four steps. It starts with obtaining information to be able to start his business. Then he identifies the opportunity to be exploited. Followed by making the decision of exploitation of one or more opportunity. The final step is to create the venture, as the entrepreneur assembles the resources and infrastructure required to start his business. This model is developed according to the social cognitive theory, which assumes that individual success could be achieved at different activities.
Entrepreneurs are able to fulfill their goals through interrelated tasks, including the environmental scanning, information acquisition, classification and sharing to facilitate the organizational learning. Entrepreneurs focus on technology development, market research, communicating with the key stakeholders and testing prototypes. Entrepreneurs who have higher levels of self- efficiency beliefs for success are more likely to achieve higher levels of performance on exploiting opportunities (Drnovšek, Wincent, & Cardon, 2010). Short et al., (2010), argue that the rate of successful entrepreneurship is low. A substantial number of entrepreneurs failed to reach a reasonable level of achievement in a study conducted to measure the entrepreneurial success. Challenges occur in common among the startup ventures. Although, new approaches started to emerge to facilitate the startup process, including the lean startup. The following section discusses the startup theories, the emerging concept of lean startup, the challenges that entrepreneurs face, examples from the practical world and recommendations to entrepreneurs to overcome the challenges
The entrepreneurship theories are classified into two categories, the macro level theories and the micro level theories. These theories analyze the startups, as the entrepreneurship is related to the creativity, ideas, innovation and the development. The entrepreneurship startups are complex by nature, as they have their own lifestyle. They could take different shapes, including, individual effort, family and friends, low investment, angel investors and teamwork. The entrepreneurship lifecycle could be described according to Kesim & Salamzadeh (2015) and Mueller, Volery, & Siemens (2012), as follows:
First: Bootstrapping stage
This is the very early stage, in which the entrepreneur starts to implement his activities to configure them into a profitable business. He considers the level of risk, continues to work on his new idea, create a team, uses his personal funds and argues his friends and family members to invest in his idea. Bootstrapping refers to acquiring or using resources without borrowing. This stage prepares the venture for growth by managing cash, demonstrating the feasibility of the product, building and managing teams.
The Lean Startup
Second: Seed stage
This stage is characterized by entry into new markets, teamwork, average investments and valuation of the venture. This stage involves high uncertainty, the initial capital is used to produce products or introduce services. A large number of entrepreneurs fail at this stage due to the lack of support mechanisms. In the best case, the business could turn into a low profit with a low rate of success. The business that could survive in this stage has a big chance to become a profitable company.
Third: Creation stage
At this stage, the company starts to sell its products, hire employees and enter new markets. At the end of this stage, the organization is formed. It is argued by researchers that the entrepreneurship stops when this stage ends.
The spread of the lean startup reveals that the new firms are struggling to improve their opportunity for success by following the guiding principles and continuous learning. Creating a business plan is the first thing that the business founder have to do. This plan describes the size of the opportunity and offering a solution to the problem. The business plan is to be done for five years to forecast the income, cash flow and profits. Obtaining money from investors are required to start production activities. The feedback from customers is important as it assists in the product development (Blank, 2013).
The idea of lean startup has started in the global arena. Entrepreneurs started local in-person groups to discuss and implement the lean startup. The idea of lean startups is applicable in all types of industries and in companies with different sizes. According to Rise (2011), there are five principles to the lean startups, as follows:
- Entrepreneurs are everywhere: This means that it includes any employee within the definition of a startup. The lean startup approach is applicable to any company size.
- Entrepreneurship is management: The startup is an organization, not a product that requires a new type of management. It is about the way of entrepreneurship management that differs from the traditional management.
- Validated learning: The startup goes beyond making money, creating a staff or serving customers. They take place to learn the way of building a sustainable
- Build-Measure-Learn: The main activity of a startup is to put ideas into practice by creating new products, measure the customer response and learn. The successful startups should accelerate the feedback loop.
- Innovation accounting: The improvement of entrepreneurial outcomes, the management has to focus on satisfying the staff. Measures as the work progress and work prioritization could be used to measure the accountability and innovativeness of the staff.
The failure of the startups could happen due to different reasons, including the lack of a good plan, lack of solid strategy and not conducting market research. The startup does not know its customers or how its products should be as they did not implement the work activities. Also, startup operates with a high level of uncertainty which makes the prediction of the future a difficult process. The traditional management methods are not suitable for the lean startups (Rise , 2011).
A field study was conducted by Mansoori (2017) to describe the lean startups. Depending on an interview-based approach, the researcher explored whether the entrepreneurs could follow the lean startup methodology. The result of 22 semi-structured interviews with the CEOs and the founders, revealed that the changes in the way of thinking and actions taken by the entrepreneurs are the result of interaction between the lean startup and learning either vicarious or experiential. Both of the two learning methods resulted in the entrepreneurs’ theory of action. This theory agrees at most with the lean startup methodology. The ‘prescriptive accelerators’ empirical phenomenon is utilized to investigate the types of learning. The vicarious learning in entrepreneurial settings refers to the way of learning through modeling the behaviors of other people. People learn through observation. Then, they use the coding knowledge as a basis for their future actions. The learning phenomenon results in direct experience.
Challenges Faced by Entrepreneurs
The basis of vicarious learning involves the acquisition, development or alteration of the existing behavior patterns. Accordingly, entrepreneurs can listen and discuss various social activities with others. This process is influential in what and how activities are learned. They could participate in workshops to facilitate the process of vicarious learning. On the other hand, the experiential learning assists in transforming the experience into knowledge, where knowledge is formed due to the interaction between the entrepreneur prior knowledge and the new gained experiences. Researchers argue that most of the learning activities are experiential learning. The entrepreneurs move in a circular process between different learning phases, as from acting to reflecting and from reflecting to conceptualization. Also, it is experienced by the entrepreneurs during the business development activities. To facilitate the learning process, the entrepreneur has to go through a specific process of acquiring and assimilating knowledge. The highest level of learning is achieved by the entrepreneur when the experience forces him to review his beliefs and behavioral pattern (Mansoori, 2017). Today, entrepreneurs have access to tools and methodologies that aims to make the startup movement as a business engineering activity of learning and experimenting. Different entities offer learning experience to the entrepreneurs, including the research agencies and educational institutes (Weiblen & Chesbrough, 2015). Entrepreneurs that adopt the lean startup usually conduct the contingency approach. They use their own capabilities to develop their course of action. The entrepreneurial activities could be classified into two groups. The first focuses on controlling and the second focus on predicting (Honig & Hopp, 2016).
Some researchers as Rasmussen & Tanev (2015), argue that the lean startups and the born global firms face the same challenges in the early stages of their life cycle many of these challenges result from the dealing simultaneously with early internationalization, partnership relationship management, business modeling, uncertainty conditions and resource allocation. The integration of the two approaches results in the conceptualization of the “lean global startup” that merges the two streams and represent a new type of organizations.
The entrepreneurs have to formulate performance indicators to help them in measuring their performance and align the product and business processes. They are used by the entrepreneurs to measure the return on investment (ROI) and the results of marketing programs. Among the top metrics are the sales, website traffic, quality and high rates of conversation (Mansour & Barandas, 2017).
Most of the challenges that could be faced by the entrepreneurs in their startups are unique and have a varying effect on the business. The main challenges that are common among entrepreneurs could be addressed according to Kesim & Salamzadeh (2015), Saffer (2011), Welter (2005), Myers & Chan (2017) and Viinikainen (2013) as follows:
- Financial challenges: finance should be provided in the early stage of the startup process. It is a common challenge for the entrepreneurs to face financial problems in the different stages of the business. In the early stages, the business founder needs money to be invested in the business. Afterward, he wants the money to expand his business. Then, he could search for an angel investor to convenience him with his idea and the prepared business plan.
- Human resources: The entrepreneur usually starts the business and he might find a co-founder or some cofounders. As the business grows and time goes by, he will need a staff to assist him. The entrepreneur starts to select people and employ them. This process is essential to success, but the founders should have the sufficient knowledge to lead the business to success. The startup could fail due to the human resource reasons. The best startup is the one that could hire the best people. Also, that could convince the team to join his business rather than another startup.
- Support mechanisms: A number of support mechanisms could have a significant effect on the startup of the business. They could include the angel investors, incubators, accelerators, venture capitals, technology and small business development centers. These support mechanisms reduce the risk.
- Environmental elements: They refer to the existing trends, legal issues, market limitations and governmental regulations. It represents a challenge in the startup phase more than in the later stages of the business lifecycle.
- Market: The market size represents an important indicator of the ability of the business in a startup to attract angel and venture money. As the market size increases, it could supply returns to the investors.
- Management team led by an entrepreneur: The existence of the entrepreneur as a team manager provides good knowledge technological knowledge to the business and increases the skills of the staff. The serial entrepreneur who gained knowledge from past experience is the best manager. Also, he is willing to take the risk. Accordingly, the traditional way of management is likely to create obstacles to the business.
Empirical Examples
Empirical examples show that only startups that could succeed are those who could attract and retain the talented people. The smart entrepreneurs and smart venture capitalists apply this rule. Jeff Clavier, the managing partner of SoftTech, as cited in Devaney & Stein (2011), says that he looks for talents and leaders who can attract and retain these talents. Leaders with charisma and technical experience are the most desirable in their company. This type of leaders accelerates the business ability to succeed. He adds, that in the current environment, slow execution is unacceptable.
Another empirical example is the survey made by the Kauffman Foundation and LegalZoom in 2012. It was conducted in the US and Europe. The survey results revealed that entrepreneurs faced difficulties in access to credit, high cost and undesirable terms of obtaining the credit, underperforming sales, falling real estate values, the unpredictability of the business conditions in general and high rate of delinquent customer debt. The governmental regulations, in general, did not represent a major challenge, but the tax rates accounted for about the half of the respondents’ answers as a major challenge, followed by the licensing issues (Marion, 2015).
Another survey conducted by the World Bank revealed that the reasons of the failure of the startup are the overestimating success, misplaced purpose, negative mindset, poor organization, Lack of employee motivation, lack of support low rate of knowledge and technology transfer, lack of appropriate skills and absence of a special government program to support the entrepreneurship. This survey took place in micro, small and medium companies in Georgia (Kanchana, Divya, & Beegom, 2013).
There are four policy areas, according to that are considered important in the startup stage entrepreneurship and the types that have the chance to emerge. They are represented in the availability of skills, financial access, regulations and the fear of failure. The future entrepreneurship is likely to develop as long as it could obtain the required skills. It has to maintain innovation and to assure it could select and retain the best capabilities. Also, access to information is very important and facilitation of knowledge sharing enables the organizational learning. The support mechanisms are important in fostering the learning process. This could help the business to grow and maintain its innovative capacity (Braunerhjelm et al., 2016).
Conclusions
The entrepreneurship startups are complex by nature, as they have their own lifestyle. The spread of the lean startup reveals that the new firms are struggling to improve their opportunity for success by following the guiding principles and continuous learning. The idea of lean startup has started in the global arena. Entrepreneurs started local in-person groups to discuss and implement the lean startup. The idea of lean startups is applicable in all types of industries and in companies with different sizes.
Performance Indicators
The entrepreneurs move in a circular process between different learning phases, as from acting to reflecting and from reflecting to conceptualization. To facilitate the learning process, the entrepreneur has to go through a specific process of acquiring and assimilating knowledge. The highest level of learning is achieved by the entrepreneur when the experience forces him to review his beliefs and behavioral pattern. Entrepreneurs that adopt the lean startup usually conduct the contingency approach. They use their own capabilities to develop their course of action. Empirical examples show that only startups that could succeed are those who could attract and retain the talented people. The future entrepreneurship is likely to develop as long as it could obtain the required skills. It has to maintain innovation and to assure it could select and retain the best capabilities.
References
Blank, S. (2013, May). Why the lean start-Up changes everything. Retrieved from Harvard Business Review: https://hbr.org/2013/05/why-the-lean-start-up-changes-everything
Braunerhjelm, P., Larsson, J., Thulin, P., & Skoogberg, Y. (2016). The entrepreneurial challenge. Sweden: Swedish Entrepreneurship Forum.
Devaney, T., & Stein, T. (2011). The talent wars: Today’s toughest startup challenge. USA: TriNet.
Drnovšek, M., Wincent, J., & Cardon, M. (2010). Entrepreneurial self-efficacy and business start-up: developing a multi-dimensional definition. International Journal of Entrepreneurial Behavior & Research, 16(4), 329-348.
Honig, B., & Hopp, C. (2016). New venture planning and lean startup activities: A longitudinal empirical study of entrepreneurial success, founder preferences and venture context. In Models of start-up thinking and action: Theoretical, empirical and pedagogical approaches (pp. 75-108). Emerald Group Publishing Limited: UK.
Kanchana, R., Divya, J., & Beegom, A. (2013). Challenges faced by new entrepreneurs. Internatinal Journal of Current Research and Academic Review, 1(3), 71-78.
Kesim, H., & Salamzadeh, A. (2015). Startup companies: Life cycle and challenges. 4th International Conference on Employment, Education and Entrepreneurship (EEE), (pp. 1-11). Serbia.
Mansoori, Y. (2017). Enacting the lean startup methodology: The role of vicarious and experiential learning processes. International Journal of Entrepreneurial Behavior & Research, 23(5), 812-838.
Mansour, D., & Barandas, H. (2017). High-tech entrepreneurial content marketing for business model innovation: A conceptual framework. Journal of Research in Interactive Marketing, 11(3), 296-311.
Marion, E. (2015). Challenges facing new entrepreneurs in 2014. USA: The Kauffman Foundation and LegalZoom.
Mueller, S., Volery, T., & Siemens, B. (2012). What do entrepreneurs actually do? An observational study of entrepreneurs’ everyday behavior in the start-up and growth stages. ET&P, 995-1017.
Myers, S., & Chan, P. (2017). Stuck from the start. USA: Prosperity Now.
Rasmussen, E., & Tanev, S. (2015). The emergence of the lean global startup as a new type of firm. Technology Innovation Management Review, 5(11), 12-19.
Rise, E. (2011). The lean startup: How today’s entrepreneurs use continuous innovation to create radically successful business. New York: Crown Business.
Saffer, L. (2011). Challenges for startups: Getting them on the road to success. Maryland: Technology Development Corporation.
Short, J., Ketchen, D., Combs, J., & Ireland, D. (2010). Research methods in entrepreneurship opportunities and challenges. Organizational Research Methods, 13(1), 6-15.
Viinikainen, D. (2013). The cases of startup in Indonesia. Indonesia: JAMK University of Applied Science.
Weiblen, T., & Chesbrough, H. (2015). Engaging with startups to enhance corporate innovation. University of California, Berkeley, 57(2), 66-90.
Welter, F. (2005). Challenges in entrepreneurship and SME research. Finland: European Council for Small Business and Entrepreneurship (ECSB).
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