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Entrepreneurial Growth Companies: A Working Definition of Entrepreneurship Patrick Von Bargen Executive Director November 15, 2000
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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
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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
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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
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Trying to focus... Isn’t the term “entrepreneurial growth company (EGC)” just a fancy name for a small business?
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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
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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
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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
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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”?
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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?
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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
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Rough Stages in the Entrepreneurial Period of a High-Growth Company
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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
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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
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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
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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)
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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
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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)
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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
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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)
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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?
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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
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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
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The difficulties of the “comprehensive” changes required explain in part the relatively few number of EGCs that make to the pinnacle of growth
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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
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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
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