Dynamics of New Venture Creation

Entrepreneurial Process • Identify new venture opportunities or business

concepts • Evaluate viability of the new business concept • Write business plan, prepare investor

presentation • Build team with necessary skills and attributes • Raise finance • Build prototype / proof of concept • Scale up – team, customers, revenues • Create liquidity for shareholders

Dominant ‘perspectives’ of entrepreneurship

Three dominant perspectives:

• ‘Functional’: Regards economic function of the entrepreneur

• ‘Personality’: Regards identification of ‘entrepreneurial’ traits and characteristics

• ‘Behavioural’: Regards set of activities and processes associated with new venture creation

A ‘sea-change’ in entrepreneurship theorising?

• Behavioural perspective grown in response to growing critique of personality-based approach to understanding entrepreneurship

• Focuses on the ‘entrepreneurial process’ of new venture creation – movement away from research that focuses on the ‘entrepreneur’:

‘The goal is not to smooth over any differences that might exist among these new ventures or to throw these very different individuals into the same pot in order to extract the typical qualities of the typical entrepreneur. The goal is to identify the specific variables that describe how each new venture was created, in order that meaningful contrasts and comparisons among new ventures can be made’

• Peter Drucker (1980) coined term ‘sea-change’. It is a change that is substantial in magnitude, comprehensive and pervasive in its impact on all aspects of the system affected, enduring in its influence over time, and generally rapid and discontinuous

in its occurrence

What is a ‘new venture’?

Gartner (1988) uses the following definition:

1. An independent entity

2. A new profit centre within a company which has other established businesses or,

3. A joint venture which satisfies the following requirements:

a) Its founders must acquire expertise in products, process, market and/or technology

b) Results are expected beyond the first year in which the investment is made

c) It is considered a new market entrant by its competitors

d) It is regarded as a new source of supply by its potential customers

‘The Entrepreneurial Process involves all the functions, activities, and actions associated with the perceiving of opportunities and the creation of organisations to pursue them’

Defining the entrepreneurial process

‘Entrepreneurship is most fruitfully defined as the relentless pursuit of opportunity without regard to resources currently controlled…there is an underlying process in entrepreneurship that starts with the identification of opportunity and ends with harvesting the fruits of one’s labours’ (Stevenson and Sahlman, 1989; p104).

Key characteristics of the entrepreneurial process

• It occurs at the level of the individual firm

• It involves a change of state

• It involves a discontinuity

• It is a holistic process

• It is a dynamic process

• It is unique

• It involves numerous antecedent variables

• Its outcomes are extremely sensitive to the initial conditions of these variables

Key research questions for the study of the entrepreneurial process

Key research questions for the study of entrepreneurship

Focused on the entrepreneur Focused on the entrepreneurial process

1. Who become entrepreneurs?

2. Why do people become entrepreneurs?

3. What are the characteristics of successful entrepreneurs?

4. What are the characteristics of unsuccessful entrepreneurs?

1. What’s involved in perceiving opportunities effectively and efficiently?

2. What are the key tasks in successfully establishing new organisations?

3. How are these tasks different from those involved in successfully managing ongoing organisations?

4. What are the entrepreneur’s unique contributions to this process?

Variables in new venture creationINDIVIDUAL

• Need for achievement• Locus of control• Risk taking propensity• Job satisfaction• Previous work experience• Entrepreneurial parents• Age • Education

ORGANISATION

• Overall cost leadership• Differentiation• Focus• The new product or service• Parallel competition• Franchise entry• Geographical transfer• Supply shortage• Tapping unutilised resources• Customer contract• Becoming a second source• Joint ventures• Licensing • Market relinquishment• Sell off of division• Favoured purchasing by government• Governmental rule changes

ENVIRONMENT

• Venture capital availability• Presence of experienced entrepreneurs• Technically skilled labour force• Accessibility of suppliers• Accessibility of customers or new markets• Governmental influences• Proximity of universities• Availability of land or facilities• Accessibility of transportation• Attitude of the area population• Availability of supporting services• Living conditions• High occupational and industrial differentiation• High percentage of recent immigrants in the population• Large industrial base• Larger size urban areas• Availability of financial resources• Barriers to entry• Rivalry among existing competitors• Pressure from substitute products• Bargaining power of buyers• Bargaining power of suppliers

PROCESS

• The entrepreneur locates a business opportunity• The entrepreneur accumulates resources• The entrepreneur markets products and services• The entrepreneur produces a product• The entrepreneur builds an organisation• The entrepreneur responds to government and societyFrom: Gartner (1988)

The social dimension of the new venture creation process

MOTIVATION AND DETERMINATION

Of the individual/group, etc.Reflected in support of family,partners, and track record inalready trying to achieve start-ups. Reflected also in the objectives of the individual or group

IDEA AND MARKET

Reflected in the viability of the Idea. Whether it can be demonstratedThat it works. What needs it meets. How it is better than others. Who are The customers and how many of them are there. And what is the competition

RESOURCES

Physical resources needed (Premises, Plant, materials, labour). Financial Resources available and needed

ABILITY

Of the individual, his/her family andOthers involved. Previous trackRecord (employment and associatedKnowledge and skill) and relevanceTo business. Technical and managerialability

BASIC SUCCESSCOMPONENTS

From: Gibb and Ritchie (1982)

Is the study of the entrepreneur a worthwhile pursuit?

‘Economic circumstances are important; social networks are important;entrepreneurial teams are important; marketing is important; finance isimportant; even public agency assistance is important. But none of these will, alone, create a new venture. For that we need a person, in whose mind all of the possibilities come together, who believes thatinnovation is possible, and who has the motivation to persist until the job is done’

Recipe for Success

• Great Value Proposition • Technically Feasible Product • Protectable Intellectual Property • Sustainable Competitive Advantage • Large Potential Market • Proven Business Model

Causes of New Venture FailureMarket

– Small size of the potential market – No clear product differentiation – Misunderstood customer needs – Lack of channel support – Competitive response

Causes of New Venture Failure

Timing

– Too late in the market – me too – Too early in the market – missionary

marketing Finance – Low Return On Investment (ROI)

Causes of New Venture Failure

Technology

– Right features – Performance - Organizational – Promoter conflicts -- different aspirations – Poor fit between products and organization

(DNA)

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