Importance of Innovation in Business Competition

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INTRODUCTION

The innovation factor is one of the most important elements of competitiveness. Technological change affects the dynamics of the costs and competitiveness of each company, the strategies to be adopted and the relationships between the same companies. The motivations that drive companies to innovation are related to maintaining or increasing the position on the reference market, entry into new markets, or regulatory adjustments. Consequently, the introduction of successful innovations allows a company to respond positively to the natural life cycle of products and acquire competitive advantages over the competition. That is why innovations (which can be product and/or process) are oriented to improve the efficiency and efficiency of the company.

The term innovation does not simply involve the introduction of a new product or a change in business organization. Innovation is based on the transfer of knowledge from an innovative agent to an economic activity and is substantially different from research and invention.

Through innovation, therefore, we explore new business opportunities for growing opening new markets, with the competitive advantage of the “first player” as the innovative company first manages to answer the needs of a new customer range previously not served until the market does not open up to competition. It also presses toward the increase of value perceived by the customer, who will be willing to pay for the product innovative a premium, compared to the product offered by the competitors.

The first chapter of this thesis is about a theoretical introduction about the concept of the entrepreneur, starting from the definitions coming from the literature. Then the second part of the chapter analyses more in depth the concept of the entrepreneur, especially the features of the innovative entrepreneur related to innovation. Finally, the last part of the chapter is about the forms of financing entrepreneurship.

If the first chapter is an introduction to the concept of entrepreneurship, the second chapter is about the innovation strategy, especially the blue ocean strategy. During the paragraph of this chapter there are presented all the most important elements of the innovation strategy and the principles and tools related to a formulation of a blue ocean strategy. There are also presented a few examples coming from the literature to really understand the importance of the formulation of an innovation strategy for the success of every kind of business.

The first part of the thesis is about a theoretical introduction, while in the second part there are presented two examples related to the theory analysed in the firsts two chapters. In fact, the third chapter is about Steve Jobs, the clearest example of innovative entrepreneur. In fact, one of the most important question to ask is how these people generate new disruptive ideas? For to seek of answer to this demand the authors of The Innovator’s DNA, have dedicated years of studies for revealing the origins of the strategies of business of the innovative companies. Their purpose was to examine with a microscope the innovative entrepreneurs, looking for understanding their nature of innovators and when, how and why they have developed their ideas and for understanding the factors that separates the real entrepreneurial innovators by others executives entrepreneurs, and people like Steve Jobs are clear examples of this concept. During the chapter there are analysed his life and his entrepreneurial characteristics to define how an entrepreneurial leader must be.

In every survey on the priority management, innovation is almost all time one of the most important points of the corporate agenda, but doing innovation a priority not involves automatically it to happen. Too much, indeed, innovation becomes anything more than a slogan or label that receives a bag of rhetoric reverential during the company meeting, the campaigns advertising business and in the annual report. For the companies the challenge consists in translate all this rhetoric in reality (not only doing changes incremental to products or services existing, but producing a flow constant of revolutionary innovations). Only a few companies successfully did this: Apple is an example, in fact was able to incorporate the innovation factor in the DNA of the organization. Finally, the fourth chapter is about Apple strategy, started from its foundation and analysing the critical success factors that put this company at the top of the market.

CHAPTER 1

THE ENTREPRENEUR

  1.        WHAT IS AN ENTREPRENEUR?
    1. DEFINITIONS OF ENTREPRENEUR

The years 1700/1800

Richard Cantillon is considered one of the pioneers of the concept of entrepreneurship, because nobody before him had ever formulated a definition so clear and complete. He defines the entrepreneur as a venture capitalist looking for investment opportunities with better than average yields. The perspective as an investor of the entrepreneur meant that the element of risk was a core aspect of how he creates entrepreneurial projects and defines what he considered to be an entrepreneur. In addition, he described the entrepreneur as a self-employed person who buy a raw material at a known lower price in order to sell it at an unknown higher price (Cantillon, 1755).

A century after Cantillon there was Jean-Baptiste Say, and he had a huge impact on the field of entrepreneurship about its definition and its core elements and was the first to identify a clear distinction between an entrepreneur and a capitalist. According him, the most important characteristic of an entrepreneur is the element of innovation; in fact, he defines the entrepreneur as someone who could do new things, and someone who could reinvent and existing product in order to create something completely new on the market (Say, 1803). Say saw the entrepreneur as an economic actor whose activities generate a benefit for him and for the whole society.

Joseph Alois Schumpeter  

Schumpeter was an important pioneer of the concept of entrepreneurship, he pointed out very strongly the innovation as a typical element of an entrepreneur. In fact, “And what they have done: they have not accumulated any kind of goods, they have created no original means of production, but they have employed means of production differently, more advantageously. They have carried out new combinations! They are entrepreneurs. And their profit, the surplus to which no liability corresponds, is the entrepreneurial profit.” (Schumpeter, 1911/1934). He thinks that the entrepreneur is the main vehicle to move an economy forward from static equilibrium to future innovation. He thinks that an entrepreneur can achieve innovation through (Schumpeter, 1934):

  • The introduction of a new good;
  • The introduction of a new method of production;
  • The opening of a new market;
  • The conquest of a new source of supply of a raw material;
  • The carrying out of the new organization of any industry.

From Schumpeter to 2000

After Schumpeter, another important author in the field of entrepreneurship was Knight; he defined the entrepreneur as someone who can transform uncertainty into a calculable risk. According his point of view entrepreneurs are a special social class who direct economic activity and that have special abilities related to innovation (Knight, 1921).

Later, Kirzner (1973) propose a definition of the entrepreneur partly contrasting with Schumpeter, defining the entrepreneur as someone who moved the economy towards equilibrium, by taking advantage of arbitrage possibilities that he discovers.

In the years 2000, the research field of entrepreneurship has been defined as analysis of “How, by whom and with what consequences opportunities to produce future goods and services are discovered, evaluated and exploited” (Shane and Venkataraman 2000).

Related to that ‘whom’ Wennekers and Thurik (1999), suggested a definition of entrepreneur, as a person who:

  • Is innovative, as perceive and create new opportunities;
  • Operates under uncertainty and introduces products to the market, decides on location, and the form and use of resources;
  • Manages his business and competes with others for a share of the market.
  1. TYPES OF ENTREPRENEUR

An interesting distinction about types of entrepreneur is the one proposed by the author Clarence Danhof, which classified entrepreneurs into four groups based on economic development. He based his classification on his study of American agriculture, and he observed that entrepreneurs could be classified depending upon the level of willingness to create innovative ideas; so there can be the following types of entrepreneurs (Danhof, 1969):

  • Innovative: an aggressive assemblage and synthesis of information and the analysis of results deriving from new combination of factors of production characterize this type of entrepreneurship. These entrepreneurs have the ability to think newer, better and more economical ideas of business organization and management. They are characterized by the smell of innovativeness, and they are aggressive in experimentation and in putting attractive possibilities into practice. An innovative entrepreneur sees the opportunity for introducing a new technology, a new product or a new market. Schumpeter’s entrepreneur was of this type (Schumpeter 1934). They are business leaders and contributors to the economic development of a country, as they are very much helpful for their country because they bring about a transformation in life style.
  • Adoptive/Imitative: the imitative entrepreneurs copy or adopt suitable innovations made by the innovative entrepreneurs. These entrepreneurs imitate the existing entrepreneurs and setup their enterprise in the same manner. Instead of innovating, they just imitate the technology and methods innovated by others. These entrepreneurs face lesser risks and uncertainty then innovative entrepreneurs. While innovative entrepreneurs are creative, imitative entrepreneurs are adoptive. They imitate innovative entrepreneurs because the environment in which they operate is such that it does not permit them to have creative and innovative ideas on their own. For example, this kind of entrepreneur is particularly important in developing regions because they contribute significantly to the development of such economies. Imitative entrepreneurs are most suitable for the developing regions because in such countries people prefer to imitate the technology, knowledge and skill already available in more advanced countries. Imitative entrepreneurs help to transform the system of those countries with the limited resources available.
  • Fabian: the dictionary meaning of the term ‘fabian’ is ‘a person seeking victory by delay rather than by a decisive battle’; in fact, this kind of entrepreneurs are timid, cautious and a little bit lazy. This type of entrepreneurs are not interested in introducing new changes or desiring to adopt new methods of production innovated by the most entrepreneurs. They are very much skeptical in their approach in adopting or innovating new technology in their enterprise and they love to remain in the existing business with the age-old techniques of production. They adopt new technologies only when there are not options left to survive in the business venture. Usually they are second-generation entrepreneur in a business family enterprise.
  • Drone: the dictionary meaning of the term ‘drone’ is ‘a person who lives on the labor of others’. Drone entrepreneurs refuse to copy or use opportunities that come on their way. In fact, these entrepreneurs are very conservative; they always feel comfortable with their old-fashioned technology of production even though the environment as well as the society have undergone considerable changes and they are even ready to suffer the loss of their business. They are laggards as they continue to operate in their traditional way and resist changes.

Figure 1.1 – The types of entrepreneur. Source: personal elaboration from: Danhof C. H., (1969), Change in Agricolture, Harvard University Press, Cambridge, Ma.

1.2 BREAKING THE “ENTREPRENEUR”

1.2.1 CHARACTERISTIC OF AN ENTREPRENEUR

Entrepreneurs have in common some characteristics and skills, but anywhere there is a wide range of individuality among them. Some entrepreneurs receive formal training and skill development, while others have a natural flair for it, still others break every rule or use very unusual approaches, but still succeed. There is no recipe for becoming a successful entrepreneur, but there are certain characteristics that are associated with entrepreneurial success, here are described several important ones:

Aptitude

Most people have a wide range of aptitudes-natural talents, tendencies, or capacities. Entrepreneurs can apply their aptitudes to their business ventures. Every potential entrepreneur has to analyze his aptitudes and talents, which are an important part of his starting background. Then, with practice, hard work, and education, those basic aptitudes and talents can turn the potential entrepreneur into a real business man.

Risk tolerance

Risk can be defined as the possibility of failure or adverse consequences in pursuing some activity or business venture. In fact, risk, as an attribute, affects entrepreneurial behavior, and represent an important part of the life of the entrepreneur. Risk tolerance is the degree to which you can comfortably accept taking chances, and entrepreneurs need to have a high tolerance of risks. This does not mean that they are gamblers, but they take calculated risks, while most people try to avoid risk, entrepreneurs understand that risk is a natural part of trying to achieve goals. For them, the opportunity of success is higher the possibility of failure. In addition, an entrepreneur can always learn from his risks or failure, because he can understand what is wrong in his business and correct the errors to create a better future venture. Moreover, even if they do fail, entrepreneurs are likely to try again, even if they fail, they know they will succeed the next time.

Self-confidence

A key characteristic of an entrepreneur is that he believe in his own abilities. Because entrepreneurs are sure of themselves, it is easier for others to believe in them and to invest in their success, in fact, their confidence can help them work through setbacks and sell ideas to potential customers and investors. An entrepreneur is also confident because he know when to ask for help without feeling embarrassed. In fact, every entrepreneur encounters problems, and he has to believe that he can overcome them, also with a little help by other managers or advisors.

Creativity

This characteristic means that the entrepreneur find innovative ways to problem solve, he always looks for new and better ways to do things, ways that no one has already proposed. An entrepreneur has to believe in his ability to be creative, because only in this way he can open his mind to innovation and to potential success of his business ideas. The creativity appears as an invention, an innovation, or as marketing or problem solving, in fact, the successful entrepreneur is a person full of ideas, usually, he has more ideas that can ever implement. Entrepreneurs see opportunities everywhere, just walking down the street; they see gaps between needs and wants of the customers.

Perseverance

Creating and running a business is a very hard thing. It often means long hours working, disappointments, and setbacks and many people fail because they give up at the first sign of difficulty. Perseverance is the determination that pushes the entrepreneur to keep going, keep trying in investing time, money and effort in his business ideas. Often, a new business can take two or more years to become profitable and a successful entrepreneur is prepared to continue selling his ideas through the tough times and keep on working hard without giving up if he encounter an initial fail or difficulty. In fact, every successful story includes elements of endurance and determination.

Integrity

Integrity is a personal commitment of the entrepreneur to keep his promises, to do what he say he would do and when would do it. An entrepreneur with integrity creates more confidence in customers and potential investors, so they are more inclines to be satisfied, in fact, honest producers of goods and services tend to foster the loyalty of both their customers and their investors. For example, when someone follows through on promises and follow integrity principles, customers start knowing and buying his products, and may even tell friends about the business and about the entrepreneur. In addition, personal integrity can help entrepreneurs maintain their commitment to their business vision.

Passion

One of the most important qualities associated with successful entrepreneurship is passion. Entrepreneurs love what they do, and they do what they love. Often, their ideas arise from within, from something they love, like a hobby, or invention. Maybe is the most important characteristic of an entrepreneur, in fact when people feel committed to what they are doing and when they care deeply about it, they stand the best chance of being successful at it. Entrepreneurs are passionate about their ideas, their company, and their vision. Talk to any entrepreneur for five minutes about her company and you will hear excitement in his voice, and this passion helps entrepreneurs overcome the various challenges that they will surely face. Entrepreneurs typically care more about what they are doing than how much money they might make; they earn an income, of course, but the amount they earn often is secondary because the most important thing is to achieve their goals. In fact, there is an important quota said by Muhammad Ali, which can also be used in relation to the entrepreneur and to his passion in reaching his business goals:

“If my mind can conceive it,                                                                                                                                          and my heart can believe it,                                                                                                                                        then I can achieve it!”

Figure 1.2 – Entrepreneurial characteristics.

1.2.2 SKILLS NEEDED TO BE AN ENTREPRENEUR

Entrepreneurs need to have a wide variety of skills to run a successful business. Unlike personal characteristics and attitudes, which can often be hard or impossible to change, entrepreneurs can acquire skills if they are willing to learn them. Additionally, they can hire people to work for them who have the needed skills. The following skills are very important if the entrepreneur want to succeed in his business:

Problem solving

Every customer have to deal with problems and every entrepreneur has find solutions to them. The successful entrepreneur sees opportunities in these problems where many of the rest of us only see difficulties. A lot of time, the best new ideas come from the need to solve a problem. The entrepreneur has to be good in identifying the problem, and then has to be able to identify solutions that can be good from the customer perspective.

Communication

Entrepreneurs have to be able to communicate clearly with customers, suppliers, banks, investors, and employees, otherwise they will not be successful. Entrepreneurs communication skills are related to their ability to be able to explain, discuss, sell and market their good or service. In addition, it is important to be able to interact effectively with the business management team. Additionally, entrepreneurs need to be able to express themselves clearly both verbally and in writing, to let everybody clearly understand their business vision and what they have in mind for the development of their business strategy. They also should have strong reading comprehension skills to understand contracts and other forms of written business communication.

Planning

The ability to plan is a key skill for entrepreneurs. They must be able to develop plans to achieve goals in a variety of areas, as finance, marketing, production, sales and personnel (hiring and maintaining productive and satisfied employees). Having a great idea is only the first step to becoming an entrepreneur. The difference between success and failure can be the ability to plan of the entrepreneur, in fact planning allows you to prepare for the future, for example if you know you will need to replace expensive equipment in three years, you can begin saving now, rather than going into debt to purchase the replacement, or having the equipment break down. Planning is related to planning for growth, thinking ahead about the changes your company needs to make to continue growing means that the entrepreneur has strong skills and for this reason probably he will success. Sometimes companies that grow rapidly without planning, collapse soon afterwards. They could not sustain the growth; in fact, massive unexpected growth can leave entrepreneurs scrambling for equipment, staff, and time.

Decision-making

Decision-making is an essential skill for the entrepreneur. A successful entrepreneur has to look carefully at the advantages and disadvantages of each possible decision and proposal, weighing the short term and especially long term risks to guarantee the future success of the business. In addition, he has to consider a broad range of ideas from different sources, gathering and analyzing information, and also make market investigations and talk to customers to understand what is right or not in his business venture. Despite the possibility of making a mistake, the decision has to be made. If it turns out to have been a poor decision, a wise entrepreneur will learn from the mistake and move forward to improve his business model. It is important to remember one thing: not deciding is a decision in itself. Decisions can be made through either an intuitive or reasoned process, or a combination of the two.

Leadership

Leadership is the ability to lead others; a leader inspire others to follow his example. A good entrepreneur set an example by having superior work habits and acting with integrity, and so, people are more inclined to follow someone they respect. The more others feel they are valued, the more they seek ways to help and the more ideas they will contribute to the company. Asking people for advice, praising ideas, and encouraging contributions are excellent leadership tactics. When things go wrong, strong leaders take full responsibility, but when they go well, attribute success to the efforts of their team. A great leader has to show passion in his business, so he will be an inspiration for his employees to do their best. In addition, a good leader has to be open minded, that means that has to listen to the advises of his management team or advisors, and has to be able to bring the team together, to reach a common business objective.

Figure 1.3 – Entrepreneurial skills.

1.2.3 FOCUS, LOCUS, MODUS

For an entrepreneur is very important organize his key operational activities to make fundamental business decisions with respect to ‘focus’ – the strategic relevance and prioritization of these activities to achieve a developmental milestone; ‘locus’ – where you should geographically conduct these activities; and ‘modus’ – the way in which these different activities are executed (Onetti et al., 2012a). At the business model level, the focus, locus, and modus of the entrepreneur’s activities represent the company’s output, so represents the unique way in which a business executes its strategy to the market.

Focus

Focus decisions are related to the strategic importance and allocation of a company’s resources to business activities, like where to invest additional resources or disinvest resources. The entrepreneur has to focus his attention on what business activities demand priority, resources, and attention. The key decision process here is to prioritize which activities to focus on during a specific stage of growth and development, so the entrepreneur has to analyze the business environment and determine the priority of all the activities that he has identified. It is very important to identify and analyze all the possible activities that can produce value for the business and give returns to the entrepreneur. Focus decisions should be all about completing the activities plan and getting the products to the market as soon as possible. The base decisions of the entrepreneur in the early stage of his company are the strength of his business proposal, so where he has distinctive core competencies and where he is better than the competitors. When the entrepreneur is focus on something, he is giving an identity to his company and a clear perception of his business to the eyes of the market and the potential investors. Obviously, the focus if the entrepreneur may change as the company evolves and the market conditions change.

Locus   

Locus decisions are among the company’s primary differentiations and are those that concern in which geographical areas or industrial clusters to locate the company’s value-adding activities (Onetti et al., 2012a). These decisions refer to what market to address, but also to where to locate the company and where to locate the operating activities, in order to make the difference in terms of company’s ability to access key resources, develop distinctive competencies, create a network, and that is related to the ability to execute a successful strategy of innovation. Those decisions are not just about where the company is based, but also where the company’s business activities take place. Location choices are very relevant for an entrepreneur because he has multiple options for locating all the different activities with different cost/quality implications, so need to be planned very carefully. In fact, locus decisions determine the geographical configuration of the company’s internal and external value chain.

Modus

Modus decisions are relatively close to locus decisions, and they are related to the mode or modus operandi that the entrepreneur choose to conduct his business activities. “Modus decisions are related to the way companies operate, as they define which activities companies handle in-house and which ones they outsource. For activities handled in-house the business model also defines how companies should approach activities, they can be brain-intensive, labor-intensive or technology-intensive. For activities outsourced the business model identifies the relations among companies” (Onetti et al., 2008).

Those three key decisions can be represented through the value architecture, which is a sort of snapshot of the company’s business model. The value architecture summarizes the key elements of focus, locus and modus and can communicate the business model decisions at a particular stage of company growth and development. The value architecture can be very important for the entrepreneur because let to understand the current position of the firm, and the implications of the new decisions that can be made; also, it is important to better communicate the company’s position and business model in an effective way.

Figure 1.4 – The Value Architecture.

Source: personal elaboration from: Onetti A., Zucchella A., Jones M. V., McDougall-Corvin P., (2012), Internationalization, Innovation and Entrepreneurship: Business Models for New Technology-based Firms.

1.2.4 INNOVATION AND CREATIVITY

There is an important relationship between creativity, innovation and entrepreneurship. In fact, creativity is the ability to develop new ideas and to discover new ways of looking at problems and opportunities; innovation is the ability to apply creative solutions to those problems and opportunities in order to enhance people’s lives or to enrich society. Entrepreneurship is a result of a disciplined and systematic process of applying creativity and innovations to needs and opportunities in the marketplace.

Figure 1.5 – Creativity, innovation and entrepreneurship.

Innovation is the specific tool of entrepreneurs, the means by which they exploit change as an opportunity for a different business or a different service. All products or services are the combination of three factors: nature raw materials, labor (physical and mental) and capital. Entrepreneurs, as innovators, are people who create new combinations of these factors and then present to the market for assessment by consumers.

Porter (1985) argues that, while successful businesses will each employ their own strategy, they achieve completive advantage through acts of innovation. Innovation requires three basic components: the infrastructure; the capital, and the entrepreneurial capacity needed to make the first two work (Herbig et al., 1994). Moreover, innovation has to address market needs, and requires entrepreneurship if it is to achieve commercial success (Zhao, 2001). For this reason, it is important to introduce in the analysis the role played by the entrepreneur and to determine those elements or factors that would have any effect on him (Oakley, 1990).

Entrepreneurship and innovation are strictly related to each other and help an organization to prosper. They are also complementary, as a combination of the two might be vital to corporate success and sustainability in the environment of today, which is dynamic and changing. In additions, entrepreneurship and innovation are not confined to the initial stages of a new venture; but they are present in every process of every stage of a business venture.

Creativity is defined as the tendency to generate or recognize ideas, alternatives, or possibilities that may be useful in solving problems, communicating with others, and entertaining others and ourselves. In order to be creative, you need to be able to view things in new ways or from a different perspective to become able to generate new possibilities or new alternatives. The ability to generate alternatives or to see things uniquely does not occur by change; it is linked to other qualities of thinking, such as flexibility, tolerance of ambiguity or unpredictability, and the enjoyment of knowing things. Thus, creativity is the development of ideas about new products, practices, services, or procedures that are potentially useful to the organization.

Creative thinking has various definitions; it is the art of generating solution to problems by the force of imagination and reasoning. It is an activity of the mind seeking to find answer to some of life’s questions. In our dynamic and changing world, the challenges of man are also not static. They take on new forms and require a deep creative thinking approach Okpara (2000). Every idea is a product of thinking and every product is the manifestation of idea naked in a thinker’s mind.

  1.        FINANCING ENTREPRENEURSHIP

Figure 1.6 – Source of Funds.

Source: personal elaboration from: Global Entrepreneurship Monitor (report 2015-2016).

1.3.1 NON INSTITUTIONALLY-SUPPORT FINANCING

Bootstrapping

The term ‘bootstrapping’ itself originates from the phrase “pulling oneself up by one’s bootstraps” and is a relatively recent way of describing the oldest model of entrepreneurial finance: self-funding. This term means dipping into entrepreneur’s personal finances and other resources to fund a new business. “Bootstrapping activities typically include using personal savings and credit cards to access cash, as well as working from home, seeking free advice, using credit from business partners such as customers and suppliers, and leveraging personal networks to save on start-up costs” (Gregson, 2014).

Some entrepreneurs pursue this model by choice, because by self-funding they do not need to give up ownership stakes or equity if their business succeeds. In fact, because the business does not have to rely on other sources of funding, initial business owners do not have to worry about diluting ownership between investors, so they do not need to issue equity, and they can focus debt on personal sources. Bootstrapping allows business owners to experiment with their brand more, as there is not as much pressure for them to get their product right the first time. However, more often, bootstrapping is born out of necessity when entrepreneurs cannot secure outside funding and have no other choice than to use their own resources.

Family & Friends

Entrepreneurs often use informal funding from friends, family members and colleagues, because they cannot secure formal investment through VC or other outside funding. With this model, entrepreneurs may owe their friends or family members some form of equity or controlling stake in return. There are many advantages and disadvantages related to the F&F funding:

Pros:

  • They already know you very well and care about you, so they will surely listen to your pitch;
  • They are more inclined to say “Yes” to your investment request;
  • They can give you all the time you need to develop your own business, without immediately ask for returns.

Cons:

  • They may not be able to add value to your business because they not appreciate your entrepreneurial drive or just because they are not business experts;
  • As you care about them, you will feel highly responsible for any losses that may occur to them, in fact you can put the people you love at risk, as they are giving to you a significant portion of their savings;
  • You may damage relationships with close people.

1.3.2 INSTITUTIONALLY-SUPPORT FINANCING

Public Funding

Entrepreneurs may occasionally receive “seed” capital through a grant or loan from a government or nonprofit organization. The institution providing the money may want to stimulate entrepreneurship generally, or have an interest in promoting a new sector. In fact, some sectors, such as cutting-edge medicine, information technology or energy production, have high start-up costs and are exceptionally risky, so are unattractive to private funders. Often, in exchange for seed capital, entrepreneurs will agree to either surrender or share the rights to any commercialized intellectual property with the funding institution (Bussgang, 2014). It is also increasingly common in the last years for government entities to combine with private venture capitalists to fund entrepreneurs.

Accelerators

A business accelerator is an intensive (usually 3 months) business program that includes mentorship, educational components, networking and aims at growing business rapidly, ending in demo-day. Usually an entrepreneur moves into a shared office space with other new founders for a period to work under the tutelage of advisors and experts to grow their business rapidly. In exchange for the expert mentoring, exposure to investors/future capital and cash investment that entrepreneurs get from the accelerator, entrepreneurs usually give up a small amount of equity to the sponsoring accelerator, in the range of 6% to 10% (Brookings, 2016). Additionally, accelerators feature a ‘Demo Day’ at the end of the program where entrepreneurs pitch to qualified investors in the hopes of securing more financing for their business.

Accelerators have spread rapidly throughout developed and developing countries and have demonstrated success over other forms of financing. It is estimated that there are over 700 accelerator programs in the United States alone (Brookings, 2016), with the most popular program being Y Combinator (founded in 2005) and TechStars (2006).

Venture Capital

Venture capital represent the most glamorous and appealing form of financing to many entrepreneurs and it is a type of funding for a new or growing business. The person who deals in a venture capital is a venture capitalist: a financial intermediator that provide some important elements to the company, as risk sharing, managerial experience and reputation. Just the fact that you have obtained venture capital backing means your business has, in venture capitalists’ eyes, at least, considerable potential for rapid and profitable growth.

Venture capitalists typically invest in companies they anticipate being sold either to the public or to larger firms within the next years. The venture capitalists invest in companies that they consider profitable in the long term, and they are looking at the following company’s features:

  • Sales in constantly growth;
  • Possession of a new technology, that will increase the future market share;
  • Possession of a dominant position, both in emerging and in consolidated market;
  • Possession of a class A management team, able to create innovative products related to the market and customer dynamics.
  • The potential for being acquired by a larger company or taken public in a stock offering.

VC funds often make substantial investments in these new companies, ranging from $250,000 to upwards of $100 million, and generally seek a return of 10 times their investment via the company going public or being bought out (Gregson, 2014). In exchange for their investment, VC funds usually expect a 20 to 30% (or higher) share of equity ownership in any funded company (Bussgang, 2014).

Angel investors

The term “angel” came from the Broadway Theater, when wealthy individuals gave money to propel theatrical productions. Angels are individuals that want to help entrepreneurs getting their business of the ground and help them with advices and contacts, in fact an angel provide financing advice and networking to the early stage companies. Often, angels are high-worth individuals who have successfully started and operated their own businesses and have skills they may share with entrepreneurs; and they may group together in a business angel network (BAN) to share resources with other investors.

Angel investors typically use their own money, unlike venture capitalists who take care of pooled money from many other investors and place them in a strategically managed fund. The essential difference respect the VCs is that they do not act on behalf of a group of investors. This fact lets angels to invest in a broader range of companies that may take longer to grow or may not deliver the high rates of return expected by VC investors. This characteristic of the angel investors increase their popular image as investors who may fund an entrepreneur because of personal interest or a sense of social responsibility.

Microfinance

Microfinance is a kind of banking system in which the low income and unemployed people take financial service from a bank. The basic purpose of this system is to provide opportunities to low income people to create their own business and let them able to collect money to start to put in practice their ideas. The Grameen foundation and Kiva are typical examples of microfinance organizations. Microfinance institutions support two types of micro entrepreneurs:

  • Potential micro entrepreneur: microfinance Institutions help those kind of entrepreneurs by providing financing and training to enable them to start a business activity. The objective of targeting the low-income people is to make them able to start their own business and enabling them to increase their revenues and to reduce their level of poverty.
  • Existing micro entrepreneur: microfinance institutions also provide services to this category of entrepreneur, for example, money transfers using mobile banking to facilitate their transfers and other financial operations. The microfinance institutions also offer non-financial services to existing micro entrepreneurs, for example enabling them to expand and develop their activities, their skills and empowering them.

Peer-to-peer lending

With this type of financing an individual can get a loan from other individuals through a P2P platform. Peer-to-peer facilitators work with people who need money and other people (called “investors”) who lend money. The platforms facilitate the process of getting these two parties together. Loans are often limited to about $35,000, and are expected to be repaid with interest relatively quickly. Once you submit an application, the site lists your loan request, and this application allows investors to start placing funds. The listings have a deadline, and if the loan request is not funded by the deadline, you have the option to take a partial funding or decline the loan. Most peer-to-peer lending solutions do not lend money to businesses; instead, they lend money to the individual, who then uses the money for their businesses. For being financed, people seeking loans must provide information about themselves, their finances, and how they intend to use the money.

Because this model helps individuals with a strong credit history, it is more established in developed countries, although it is gradually spreading to developing countries as well (Xusheng, 2014). LendingClub and Prosper are the two largest P2P networks in the United States, and together theycreated about 10 billion US$ in loans in 2015.

Crowdfunding

It is a form of alternative finance, which has emerged outside the traditional financial system. It is the practice of funding a project or a venture by raising monetary contributions from a large number of people. It is based on three actors:

  • Project initiator: who propose the idea and the project to be funded;
  • Individuals: who support the project and invest in the idea;
  • Platform: that brings the parties together (for example platforms like Kickstarter or Indiegogo).

Studies indicate that entrepreneurs like the crowdfunding model for three reasons. First, it provides a viable alternative for collecting funds. It also offers entrepreneurs public attention for themselves and their products. Finally, it allows entrepreneurs to gain immediate feedback on their products, which can be incorporated into future iterations (Belleflamme et al. 2014). Kickstarter and Indiegogo are examples of two of the major online platforms.

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