Johan Brink Entrepreneurship and New Business Development

New venture creation ‘organization creation involves those events before an organization becomes an organization that is, organization creation involves those factors that lead to and influence the process of starting a business’. Carter et al. (1996: 52) ‘... serious gaps in our knowledge remain about the events that occur before an independent organization is started’. Chrisman (1999: 99)

Emergent organizations What defines a ‘firm’? Intentions Resources Boundaries Exchanges (Katz and Gartner, 1988)

New venture emergence

Barriers for Entrepreneurship BarrierNoPotentiallyIntendActual Business Risk3.68* Failure concerns3.26* Work stress3.3* Capital * * Awareness of regulations Economic conditions * * Low business income Find opportunity2.84* * Know business skills2.13* * Government policies discourage 1.95* *

New firms Limited: – financial – technological – human resources – unsophisticated governance models – fluid identities – little power over other actors – Liability of newness – No track record! – BOOTSTRAP! Use what you got Get operations quickly Sell something (anything!)

Capital requirements Capital at start (USD)% None , Not reported5.6

Sources of capital Source of Capital% Family8.1 Friends1.7 Personal credit (Home, card)3.2 Bank Loan16 Did not need66.8 Grants0.5

GROWTH

Size distribution Employees Employees Employees 500+ Employees Denmark France Germany Greece Italy Spain UK EU average % of Firms

Survival rates AGE Employees

Growth measurement Assets, Employment Market share, Physical output, Profits Sales

Growth and size The original interpretation of Gibrat’s Law is that the size of units and measures of percentage growth are statistically independent (Gibrat 1931). In the context of the study of firm growth this means that growth rates should be independent of firm size (Sutton 1997). Some studies have indicated that – growth rates are independent of size, – other studies have indicated that Gibrat’s law is applicable only to large organizations (but not to small organizations), – and some studies find that growth rates diminish with increasing size (Dunne and Hughes, 1996; Evans, 1987; Storey, 1995; Sutton, 1997; Wagner, 1992)

Starting big?

Factors related to growth Human capital, educated individuals Specific human capital, such as – start-up experience, – management experience, and – experience of working in rapidly growing organizations – a founding team rather than solo entrepreneur – willingness to share equity – a multi-skilled management team, – marketing expertise But general work experience and age has no effect

Growth motivation Prior research has shown that many small business managers are reluctant to expand their firms (Davidsson, 1989b; Wiklund et al., 1997). – Personal independence – Expectations of changed work conditions – Aspiration levels for organizational size are founded on managerial beliefs that size affects organizational efficiency or legitimacy

Growth aspiration

Growth aspiration

Growth aspiration

Growth and profit

Growth models: Life cycle

Greiner (1972)

Proteome systems ltd

Proteome systems ltd “We chose IBM as our technology partner because we believe IBM is the only IT company that has a real understanding of the challenges presented by proteomics.” Keith Williams 2001

Proteome systems

Stages of Growth modelsDynamic states model AssumptionOrganizations grow as if they were organismsEach state represents management’s attempts to most efficiently/effectively match internal organizing capacity with the external market/customer demand Propositions: what Configuration of structural variables and management problems Configuration of structural variables and organizational activities (aspirations) Propositions: how A specific number of progressive stages Sequence and order is predictable Incremental and punctuated transitions Any number of states Sequence and order may be predictable depending on context Incremental and punctuated transitions, and emergence Propositions: why Immanent program of development Prefigured rules of development “Regulated” by environment Adaptive process of retaining the sustainability of a business model Interdependent rules for development Driven by market change and opportunity creation

Growth challenge: Managerial transitions The founding entrepreneurs become less adept at managing the firm’s evolution Beyond their initial focus – Lower degree of diversification Across an expanding operation – Slower degree of professionalization May not be able to modify their personal management style to match the evolving firm’s needs – Weaker degree of termination – Give up ownership

Growth challenge: Path dependency Experience and skills (Time 2) Experience and skills (Time 2) Structure Experience & skills Structure (Time 2)

Case discussions 1.Is Cynthia Riggs an entrepreneur or a small business owner? 2.Would you consider MIB a small business or an entrepreneurial venture? Is there a difference? 3.Is the company in trouble? What indicators do you have that the company is not doing well at this time? 4. What would Cynthia need to do differently to position her company for growth? 5. How can Cynthia build the management team she needs to bring her company to the next level? 6.What role should Cynthia take as the company changes and grows?

READINGS Growing profitable or growing from profits: Putting the horse in front of the cart? Davidsson et al, Journal of Business Venturing 24 (2009) 388–406 Gazelles as job creators: a survey and interpretation of the evidence, Magnus Henrekson & Dan Johansson, Small Bus Econ (2010) 35:227–244 Evolution and Revo- lution as Organizations Grow, Larry E. Greiner, Harvard Business ReviewJuly–August A Multidimensional model of Venture Growth, Baum et al, Academy of Management Journal, vol 44, no 2,