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Johan Brink 20110516

Entrepreneurship and New Business Development

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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)

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Emergent organizations

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

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New venture emergence

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Barriers for Entrepreneurship

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Barrier No Potentially Intend Actual

Business Risk 3.68* 3.1 2.65 2.58

Failure concerns 3.26* 2.52 2.47 2.15

Work stress 3.3* 2.31 2.19 2.48

Capital 2.63 3.5* 2.62 1.48*

Awareness of regulations 2.66 2.56 2.59 1.56

Economic conditions 2.41 2.86* 2.17 1.18*

Low business income 2.68 2.10 1.59 2.03

Find opportunity 2.84* 1.93 2.29 0.73*

Know business skills 2.13* 1.24 1.49 0.84*

Government policies discourage

1.95* 1.69 1.30 0.67*

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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!)

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Capital requirements

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Capital at start (USD) %

None 24.7

-4.999 32,1

5.000-9.999 10.3

10.000-24.999 11.9

25.000-49.999 7

50.000-999.99 4.3

100.000 - 4.1

Not reported 5.6

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Sources of capital

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Source of Capital %

Family 8.1

Friends 1.7

Personal credit (Home, card) 3.2

Bank Loan 16

Did not need 66.8

Grants 0.5

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GROWTH

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Size distribution

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0-9 Employees

10-99 Employees

100-499 Employees

500+ Employees

Denmark 22 37 17 24

France 28 25 14 33

Germany 17 28 17 38

Greece 59 21 11 9

Italy 48 24 10 19

Spain 36 30 17 17

UK 26 21 18 35

EU average% of Firms

29.693.2

25.16.3

15.80.4

29.50.1

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Survival rates

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AGE

Employees 0-6 7-20 21-45 46-95 95+

1-19 40 22 20 17 0

20-49 32 14 11 11 16

50-99 31 13 10 14 15

100-249 25 12 11 7 11

250-499 32 13 7 7 6

500-999 21 10 6 5 5

1000+ - 13 9 2 8

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Growth measurement

• Assets, • Employment • Market share, • Physical output, • Profits• Sales.

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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)

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Starting big?

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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

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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.

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Growth aspiration

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Growth aspiration

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Growth aspiration

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Growth and profit

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Growth models: Life cycle

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Greiner (1972)

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Proteome systems ltd

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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

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Proteome systems

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Stages of Growth models Dynamic states model

Assumption Organizations grow as if they were organisms Each 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 stagesSequence and order is predictable Incremental and punctuated transitions

Any number of statesSequence and order may be predictable depending on contextIncremental and punctuated transitions, and emergence

Propositions: why

Immanent program of developmentPrefigured rules of development “Regulated” by environment

Adaptive process of retaining the sustainability of a business modelInterdependent rules for development Driven by market change and opportunity creation

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Growth challenge: Managerial transitionsThe founding entrepreneurs become less adept at managing the firm’s evolution Beyond their initial focus – Lower degree of

diversificationAcross an expanding operation – Slower degree of

professionalizationMay not be able to modify their personal management style to match the evolving firm’s needs–Weaker degree of termination– Give up ownership

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Growth challenge: Path dependency

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Experience and skills

(Time 2)

Experience and skills

(Time 2)

StructureStructure

Experience & skills

Experience & skills

Structure (Time 2)Structure (Time 2)

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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?

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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 1972.

• A Multidimensional model of Venture Growth, Baum et al, Academy of Management Journal, vol 44, no 2, 2001

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