entrepreneurial growth companies: a working definition of entrepreneurship patrick von bargen...

Entrepreneurial Growth Companies:A Working Definition of

Entrepreneurship

Patrick Von Bargen

Executive Director

November 15, 2000

Accelerating Change in Global Economy

• Technological change, demographic change, cultural change, and business model responses (pyramid to web models)

• In 1960, it takes 20 years to replace 35% of Fortune 500; in 1999, it only takes 3-4 years

• Huge Interest in Start-ups in the US

– 600,000 to 800,000 new firms each year• 14-16 startups for every 100 existing firms

Accelerating Change and the Internet

• Internet reinforces/accelerates structural change. It does not cause it.

• But, its effects are profound. And permanent?

– Lowered Barriers to Entry

– Intensified Competition

Entrepreneurial Growth Companies Transform Change into Opportunity• Jobs! 5-10% of U.S. firms (“EGCs”) create

2/3 of 240,000 new jobs every month.

• Innovation. Entrepreneurs account for at least 2/3 of all technological innovation.

• Prosperity. 1/3 to 2/3 of difference in national growth rates is due to high growth companies

Trying to focus ...

• Isn’t the term “entrepreneurial growth company (EGC)” just a fancy name for a small business?

Small Businesses & EGCs

• Very Similar at the Start:

• Both start small and require tremendous energy from their founders

• Both serve important economic functions, meeting market needs and creating jobs

• Both start with limited means

Small Businesses & EGCs

• The Questions:

• Which small businesses will stay small (and later be a supplier to the EGCs)?

• Answer: Most small businesses

• Which will emerge as EGCs (the eventual customer for small business suppliers?)

• Answer: Very few

Small Businesses & EGCs• Why do some small businesses emerge as EGCs?• Example: Ewing Marion Kauffman• Answer: The entrepreneur heading the small

business sees (1) an opportunity (2) to build a big company.

• The goal morphs from independence/ economic well-being for the family to building a big company for the nation and even the world

Small Businesses & EGCs• Intention to build a large, high-growth business leads

to other differences:

• EGCs tend to emerge in newly deregulated or emerging industries; small businesses populate traditional industry sectors (construction, retail, personal service)

• EGCs face more uncertainty -- fewer proven business models and support nets

• EGCs: “small business with a lottery ticket attached”?

Trying to focus ...• Isn’t the term “entrepreneurial growth company

(EGC)” just a fancy name for a small business?• So EGCs are just the high-flying technology

companies that start out with millions of dollars in venture capital, world-class managers with years of experience in their industries, a proven business strategy -- none of which exist in my state, right?

5 Myths about Entrepreneurship• Yes, some companies fit that description -- these

companies are in industries where “get big, get niche, or get out” applies from the very start:

• Biotechnology example

• Internet example

• But given that generalizations here are risky

• Most EGCs evolve over time, through rough stages of development

Close Doors

Stay Small

Grow

AcquiredClose Doors

Grow

Walking Dead

Self-Growth

AcquiredClose Doors

Formal Capital

Walking Dead

AcquiredIPO

Close Doors

Walking Dead

Rough Stages in the

Entrepreneurial Period of a

High-Growth Company

Risk

Intel Prop

Planning

Expertise

Formal Capital

Time of Entrepreneurial Period

Five Characteristics

Risk

Intel Prop

Planning

Expertise

Formal Capital

Time of Entrepreneurial Period

Five Characteristics

5 Myths about Entrepreneurship

• “Most successful entrepreneurs take wild financial and other risks!”

• Earliest stages:

• Not much money, and even then …

• Not much experience in the industry …

• Persuading others to take on risk: employees, suppliers, customers

5 Myths about Entrepreneurship

• “Most successful entrepreneurs take wild financial and other risks!”

• Later Stages:• Value created that might be lost …• To grow, the tasks are more difficult

(management, strategy, sound investment)• If the entrepreneur fails, he may lose his

company, or lose control, or lose his share

Risk

Intel Prop

Planning

Expertise

Formal Capital

Time of Entrepreneurial Period

Five Characteristics

5 Myths about Entrepreneurship

• “EGCs are all built on some radical technology breakthrough!”

• Earliest Stages:

• Interferon vs. Jiffy Lube: exceptional execution of an ordinary idea …

• Minor improvements, slight variations: WalMart, Schwab, McDonald’s

5 Myths about Entrepreneurship

• “EGCs are all built on some radical technology breakthrough!”

• Later Stages:• Distinctions leading to dominance --

WordPerfect vs. Wang, Wordstar• Protecting the distinctions• (And remember the “get big, get niche, or get

out” industries)

Risk

Intel Prop

Planning

Expertise

Formal Capital

Time of Entrepreneurial Period

Five Characteristics

5 Myths about Entrepreneurship• “Entrepreneurs have well-researched ideas built

into a proven business plan!”

• Earliest Stages:

• Research = 4%; business plan = 33%; just consulted a lawyer = 50%

• Jumping from rock to rock vs. plans for the Golden Gate Bridge

• Adaptiveness, open-mindedness, deciding quickly, face-to-face selling

5 Myths about Entrepreneurship• “Entrepreneurs have well-researched ideas built into a

proven business plan!”

• Later Stages:

• Growth demands strategic planning, strategic decisions

• Growth demands coordinated management

• Growth demands investment which demands accountability

• (And remember the “get big, get niche, or get out” industries)

Risk

Intel Prop

Planning

Expertise

Formal Capital

Time of Entrepreneurial Period

Five Characteristics

5 Myths about Entrepreneurship• “Most entrepreneurs have world-class expertise and

experience in their industries!”

• Earliest Stages:

• 40% = no industry experience; 33% = no job

• Jann Wenner; Steve Wozniack; John Katzman

• High opportunity costs vs. bootstrapped corps

• Instead: intelligence, desire, adaptability, sales skills, willingness to provide specialized products

5 Myths about Entrepreneurship

• “Most entrepreneurs have world-class expertise and experience in their industries!”

• Later Stages:

• Growth requires “upgrading resources”

• Skilled, experienced, specialized training

• Steve Ballmer at Microsoft; Starbucks

• (And remember the “get big, get niche, or get out” industries)

Risk

Intel Prop

Planning

Expertise

Formal Capital

Time of Entrepreneurial Period

Five Characteristics

5 Myths about Entrepreneurship• “Most entrepreneurs with a decent idea get millions

of dollars in venture capital!”

• Earliest Stages:

• 66% = less than $50,000; average = $25k; not 1, or 3, or 13 million dollars

• Rolling Stone, Waste Management, Hotmail, Microsoft, Dell Computers

• Personal savings, friends & family, credit cards … and then angels?

5 Myths about Entrepreneurship• “Most entrepreneurs with a decent idea get millions

of dollars in venture capital!”• Later Stages:• Growth requires investment, and that requires

money• Remember the “get big, get niche, or get out”

industries• Venture capital participation may be critical to

successful transitions to later stages

• Transition through growth stages requires “comprehensive” changes in the entrepreneur and her company

• From start to finish, new attitudes and new skills and roles -- sometimes opposites

Risk

Intel Prop

Planning

Expertise

Formal Capital

Time of Entrepreneurial Period

Five Characteristics

• The difficulties of the “comprehensive” changes required explain in part the relatively few number of EGCs that make to the pinnacle of growth

Close Doors

Stay Small

Grow

AcquiredClose Doors

Grow

Walking Dead

Self-Growth

AcquiredClose D oors

Formal Capital

Walkin g Dead

AcquiredIPO

Close Doors

Walking Dead

Rough Stages inthe

EntrepreneurialPeriod of a

High-GrowthCompany

Policy Implications: Past 30 Years in U.S.

• For first time, created a vibrant capital market to finance EGCs: credit, angel capital, venture capital, acquisition system, and IPOs and NASDAQ

• Huge investment in technology, intellectual property protection, tech transfer regime

• Moved tech and management expertise to EGCs: stock options, relaxed employment covenants, little stigma for failure, bankruptcy

Policy Implications: Past 30 Years in U.S.

• Opened significant new market opportunities: trade; and deregulation of industries: package delivery, transportation, telecommunications, and now finance and even electricity

• Invested in stable, dependable, and ubiquitous legal & physical infrastructure: rule of law, securities regulation, transportation and telecommunications, and universities