Z1216: Entrepreneurship: Opportunities and Ventures

What key challenges do entrepreneurs face in trying to grow their businesses?

George Mitchell: 201303721
Date: 03/02/14
Word Count: 1619

Entrepreneurial start-ups face significant adversity in establishing a foothold in their chosen market. Undoubtedly, the extent and specific challenges they face will differ industry to industry, yet a review of the literature on the subject establishes several core factors. This has been covered largely by the umbrella term - ‘liability of newness’ (Stinchcombe, 1965). This incorporates a lack of skills, routines, systems and experience, a lack of legitimacy, a lack of social capital and a lack financial capital. These then, are arguably the most significant challenges entrepreneurs need to overcome if they wish to create a sustainable business. Still there is a dichotomous nature as to what makes a challenge considered as ‘key’- those that pose the greatest threat, or those that yield the greatest reward. This again will be dependent upon what stage in the lifecycle a business is in, (Scott & Bruce, 1987) as this alters the entrepreneurs perception of what the ‘key’ challenges are. As T J Simmons posits in his definition of entrepreneurship, entrepreneurs “create and build something from practically nothing” (Timmons, 1989 pg.1). The emphasis on the fact that there was previously, “practically nothing”, highlights a significant challenge that has many resulting consequences – credibility. To establish trust from the banks, or other forms of financial capital, to win over customers, to form a strong supply chain, all requires some form of trust. When trying to grow a business beyond the ‘inception’ stage to the ‘survival’, will often require some kind of financial creditability (Scott & Bruce, 1987). This highlights how different challenges emerge at what level of maturity the business is in. It must also be noted that the legitimacy created, forms the foundation from which the business will often grow. Its beginning reputation is vital to sustaining growth, which is why a significant element is delivering on promises (Eha, 2013). It is arguably this reason why Scott and Bruce identify “overtrading” as one of the most likely crisis in the survival stage (1987). Therefore in a less specific phrasing, it is appearing reliable and accountable, that creates legitimacy (Hannan & Freeman, 1984). This is further shown by the fact one investigation showed that new ventures which establish “a legal entity are 42% less likely to disband” (Delmar & Shane, pg. 402, 2004). An example of this is creating a global image; James Watt, owner of Brewdog, built credibility by exporting out to numerous countries (Watt, 2011). Having your product in twenty countries is a way of appearing a lot larger than you may actually be. There is strong evidence therefore, to support that creating legitimacy is an imperative to entrepreneurs looking to grow their business. However, creating legitimacy is arguably not the key challenge for an entrepreneur. This is because it is a culmination of nearly all their activities which factor into creating credibility, which therefore makes it hard to individually tackle. Arguably a necessitation of a ‘key’ challenge in relation to specifically growing the business is for the individual to be able to isolate the problem and resolve it. Therefore whilst legitimacy may be seen as the most important issue, it is debatably not a key challenge. Another aspect which challenges the entrepreneur’s competitive advantage is a lack of financial resources. Whilst this links into the aforementioned challenge of building up a relationship of trust with the bank or investors, it is nevertheless an influential challenge on its own. Scott Gemmell of LA Group and James Watt again, both noted the challenge of securing finance (Gemmel, 2011; Watt, 2011). This relates to the ‘internal finance theory of growth’,