Description
Management McGraw−Hill Primis
Management
McGraw?Hill Primis
ISBN: 0?390?52229?5
Text:
New Venture Creation: Entrepreneurship for
the 21st Century, 6/e
Timmons et al.
New Ventures 1
BUSAD 511
Instructor:
Chuck Thomas
Penn State Great Valley
New Ventures
McGraw-Hill/Irwin
=>?
Managementhttp://www.mhhe.com/primis/online/
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Management
Contents
Timmons et al. • New Venture Creation: Entrepreneurship for the 21st Century, 6/e
V. Startup and After 1
17. Managing Rapid Growth: Entrepreneurship Beyond Startup 1
18. The Entrepreneur and the Troubled Company 15
19. The Harvest and Beyond 26
20. Crafting a Personal Entrepreneurial Strategy 36
iii
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 17. Managing Rapid
Growth: Entrepreneurship
Beyond Startup
1
© The McGraw?Hill
Companies, 2004
Inventing New Organizational Paradigms
At the beginning of this text we chronicled the demise
of brontosaurus capitalism. The nimble and fleet-
footed entrepreneurial firms have supplanted the ag-
ing giants with new leadership approaches, a passion
for value creation, and an obsession with opportunity
that have been unbeatable in the marketplace for tal-
ent and ideas. These entrepreneurial ventures have
experienced rapid to explosive growth and have be-
come the investments of choice of the U.S. venture
capital community.
Because of their innovative nature and competi-
tive breakthroughs, entrepreneurial ventures have
demonstrated a remarkable capacity to invent new
paradigms of organization and management. They
have abandoned the organizational practices and
structures typical of the industrial giants from the
post-World War II era to the 1990s. One could
characterize those brontosaurus approaches thus:
What they lacked in creativity and flexibility to deal
with ambiguity and rapid change, they made up for
with rules, structure, hierarchy, and quantitative
analysis.
17
Chapter Seventeen
Managing Rapid Growth:
Entrepreneurship Beyond Startup
“Bite off more than you can chew, and then chew it!”
Roger Babson
Founder, Babson College
Results Expected
Upon completion of the chapter, you will have:
1. Examined how higher potential, rapidly growing ventures have invented new
organizational paradigms to replace brontosaurus capitalism.
2. Studied how higher potential ventures “grow up big” and the special problems,
organization, and leadership requirements of rapid growth.
3. Examined new research on the leading management practices that distinguish high
growth companies.
4. Explored concepts of organizational culture and climate, and how entrepreneurial
leaders foster favorable cultures.
5. Identified specific signals and clues that can alert entrepreneurial managers to
impeding crises and approaches to solve these.
6. Analyzed the “Quick Lube Franchise Corporation” case study.
559
Special thanks to Ed Marram, entrepreneur, educator, and friend, for his lifelong commitment to studying and leading growing businesses and sharing his knowledge
with the authors.
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 17. Managing Rapid
Growth: Entrepreneurship
Beyond Startup
2
© The McGraw?Hill
Companies, 2004
560 Part V Startup and After
The epitome of this pattern is the Hay System,
which by the 1980s became the leading method of
defining and grading management jobs in large com-
panies. Scoring high with “Hay points” was the key to
more pay, a higher position in the hierarchy, and
greater power. The criteria for Hay points include:
number of people who are direct reports, value of as-
sets under management, sales volume, number of
products, square feet of facilities, total size of one’s
operating and capital budget, and the like. One can
easily see who gets ahead in such a system: Be bu-
reaucratic, have the most people and largest budget,
increase head count and levels under your control,
and think up the largest capital projects. Missing in
the criteria are all the basic components of entrepre-
neurship we have seen in this book: value creating,
opportunity creating and seizing, frugality with re-
sources, bootstrapping strategies, staged capital com-
mitments, team building, achieving better fits, and
juggling paradoxes.
Contrast the multilayered, hierarchical, military-
like levels of control and command that characterize
brontosaurus capitalism with the common patterns
among entrepreneurial firms: they are flat—often
only one or two layers deep—adaptive, and flexible;
they look like interlocking circles rather than ladders;
they are integrative around customers and critical
missions; they are learning- and influence-based
rather than rank- and power-based. People lead more
through influence and persuasion, which are derived
from knowledge and performance rather than
through formal rank, position, or seniority. They cre-
ate a perpetual learning culture. They value people
and share the wealth with people who help create it.
Entrepreneurial Leaders Are Not
Administrators or Managers
In the growing business, owner-entrepreneurs focus on
recognizing and choosing opportunities, allocating
resources, motivating employees, and maintaining
control—while encouraging the innovative actions that
cause a business to grow. In a new venture the entre-
preneur’s immediate challenge is to learn how to dance
with elephants without being trampled to death! Once
beyond the start-up phase, the ultimate challenge of the
owner/manager is to develop the firm to the point
where it is able to lead the elephants on the dance floor.
Consider the following quotes from two distin-
guished business leaders, based on their experiences
with holders of MBAs in the 1960s–80s. Fred Smith,
founder, chairman, and CEO of Federal Express
“MBAs are people in Fortune 500 companies who
make careers out of saying no!”
Accoridng to General George Doriot, father of
American venture capital and for years a professor at
Harvard Business School, “There isn’t any business
that a Harvard MBA cannot analyze out of existence!”
Those are profound statements, given the sources.
These perceptions also help to explain the stagnancy
and eventual demise of brontosaurus capitalism. Le-
gions of MBAs in the 1950s, 60s, 70s, and early 1980s
were taught the brontosaurus model of management.
Until the 1980s, virtually all the cases, problems, and
lectures in MBA programs were about large, estab-
lished companies.
Breakthrough Strategy: Babson’s F. W.
Olin Graduate School
The first MBA program in the world to break the
lockstep of the prior 50 years was the Franklin W.
Olin Graduate School of Business at Babson College.
In 1992, practicing what they taught, faculty mem-
bers discarded the traditional, functional approach to
an MBA education, consisting of individual courses in
accounting, marketing, finance, information technol-
ogy, operations, and human resources in stand-alone
sequence, with too many lectures.
A revolutionary curriculum for the first year of the
MBA took its place: An entirely new and team-taught
curriculum in a series of highly integrative modules
anchored conceptually in the model of the entrepre-
neurial process from New Venture Creation.
1
MBAs
now experience a unique learning curve that im-
merses them for the first year in cases, assignments,
and content that has immediate and relevant applica-
bility to the entrepreneurial process. Emerging entre-
preneurial companies are the focal points for most
case studies, while larger, established companies seek-
ing to recapture their entrepreneurial spirit and man-
agement approach are examined in others. After more
than five years, students, employers, and faculty have
characterized the program as a resounding success.
(See the Babson College Web site: www.babson.edu.)
Leading Practices of High Growth
Companies
2
In Exhibit 2.11, we examined a summary of research
conducted on fast growth companies to determine
the leading practices of these firms. Now, this re-
1
See William Glavin, The President’s Report—1996 (Babson Park, MA: 1996). Babson College.
2
Special appreciation is given to Ernst & Young LLP and The Kauffman Center for Entrepreneurial Leadership for permission to include the summary of their
research here.
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 17. Managing Rapid
Growth: Entrepreneurship
Beyond Startup
3
© The McGraw?Hill
Companies, 2004
Chapter 17 Managing Rapid Growth: Entreprenuership Beyond Startup 561
search will likely take on new meaning to the reader.
As one examines each of these four practice areas—
marketing, financial, management, and planning—
one can see the practical side of how fast growth en-
trepreneurs pursue opportunities; devise, manage,
and orchestrate their financial strategies; build a team
with collaborative decision making; and plan with vi-
sion, clarity, and flexibility. Clearly, rapid growth is a
different game, requiring an entrepreneurial mind-
set and skills.
Growing Up Big
Stages of Growth Revisited
Higher potential ventures do not stay small very long.
While an entrepreneur may have done a good job of
assessing an opportunity, forming a new venture
team, marshaling resources, planning, and so forth,
managing and growing such a venture is, a different
managerial game.
Ventures in the high growth stage face the prob-
lems discussed in Chapter 8. These include forces
that limit the creativities of the founders and team;
that cause confusion and resentment over roles, re-
sponsibilities, and goals; that call for specialization
and therefore erode collaboration; that require oper-
ating mechanisms and controls; and more.
Recall also that managers of rapidly growing ven-
tures are usually relatively inexperienced in launching a
new venture and yet face situations where time and
change are compounded and where events are nonlin-
ear and nonparametric. Usually, structures, procedures,
and patterns are fluid, and decision making needs to fol-
low counterintuitive and unconventional patterns.
Chapter 8 discussed the stages or phases compa-
nies experience during their growth. Recall that the
first three years before startup are called the research-
and-development (R&D) stage; the first three years,
the startup stage; years 4 through 10, the early-growth
stage; the 10th year through the 15th or so, maturity;
and after the 15th year, stability stage. These time es-
timates are approximate and may vary somewhat.
Various models, and our previous discussion, de-
picted the life cycle of a growing firm as a smooth curve
with rapidly ascending sales and profits and a leveling
off toward the peak and then dipping toward decline.
In truth, however, very few, if any, new and grow-
ing firms experience such smooth and linear phases of
growth. If the actual growth curves of new companies
are plotted over their first 10 years, the curves will
look far more like the ups and downs of a roller-
coaster ride than the smooth progressions usually de-
picted. Over the life of a typical growing firm, there
are periods of jerks, bumps, hiccups, indigestion, and
renewal interspersed with periods of smooth sailing.
Sometimes there is continual upward progress
through all this, but with others, there are periods
where the firms seem near collapse or at least in con-
siderable peril. Ed Marram, an entrepreneur and ed-
ucator for 20 years, characterizes the five stages of a
firm as Wonder, Blunder, Thunder, Plunder, Asunder
(see Exhibit 17.1). Wonder is the period that is filled
Hard
Work!
Creation
of
Myths
Teach
&
Share
or
Destroy!
Successor's
Hard Work
Death
Liquidation
Time
Failures
Quit
Growth
(1)
WONDER
(2)
BLUNDER
(3)
THUNDER
(4)
PLUNDER
ASUNDER or
renaissance
of WONDER
EXHIBIT 17.1
Growth Stages
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 17. Managing Rapid
Growth: Entrepreneurship
Beyond Startup
4
© The McGraw?Hill
Companies, 2004
562 Part V Startup and After
with uncertainty about survival. Blunder is a growth
stage when many firms stumble and fail. The Thun-
der stage occurs when growth is robust and the en-
trepreneur has built a solid management team. Cash
flow is robust during Plunder, but in Asunder the firm
needs to renew or will decline.
Core Management Mode
As was noted earlier, changes in several critical vari-
ables determine just how frantic or easy transitions
from one stage to the next will be. As a result, it is pos-
sible to make some generalizations about the main
management challenges and transitions that will be
encountered as the company grows. The core man-
agement mode is influenced by the number of em-
ployees a firm has, which is in turn related to its dol-
lar sales.
3
Recall, as shown in Exhibit 8.3, that until sales
reach approximately $5 million and employees num-
ber about 25, the core management mode is one of
doing. Between $5 million and $15 million in sales
and 25 to 75 employees, the core management mode
is managing. When sales exceed $10 million and em-
ployees number over 75, the core management mode
is managing managers. Obviously, these revenue and
employment figures are broad generalities. The num-
ber of people is an indicator of the complexity of the
management task, and suggests a new wall to be
scaled, rather than a precise point. To illustrate just
how widely sales per employee can vary, consider
Exhibit 17.2. This report from 1992 illustrates a met-
ric that applies today—established firms generate
$125,000 to $175,000 in sales per employee, while the
$691,700 in sales generated by Reebok (due to having
relatively few employees because of a great deal of
subcontracting of shoe manufacture) was nearly 35
times larger than Sonesta International Hotels’
$19,700. These numbers are boundaries, constantly
moving as a result of inflation and competitive dy-
namics. Sales per employee (SPE) can illustrate how
a company stacks up in its industry, but remember
that the number is a relative measurement. In 2001
Siebel Systems’ SPE was $560,532, while Sun Mi-
crosystems’ SPE was $493,098. IT provider GTSI had
an SPE of $1,300,871 and NVIDIA’s SPE was
$1,875,673.
4
Explosive sales per employee was one of
the failed promises of the Internet, and to some ex-
tent the irrational dot.com valuations of the late 1990s
were an anticipation of technology massively leverag-
ing variable employee expense.
The central issue facing entrepreneurs in all sorts
of businesses is this: As the size of the firm increases,
the core management mode likewise changes from
doing to managing to managing managers.
During each of the stages of growth of a firm, there
are entrepreneurial crises, or hurdles, that most firms
will confront. Exhibit 17.3 and the following discus-
sion consider by stage some indications of crisis.
5
As
the exhibit shows, for each fundamental driving force
of entrepreneurship, a number of “signals” indicate
crises are imminent. While the list is long, these are
not the only indicators of crises—only the most com-
mon. Each of these signals does not necessarily indi-
cate that particular crises will happen to every com-
pany at each stage, but when the signals are there,
serious difficulties cannot be too far behind.
The Problem in Rate of Growth
Difficulties in recognizing crisis signals and devel-
oping management approaches are compounded by
rate of growth itself. The faster the rate of growth,
the greater the potential for difficulty; this is be-
cause of the various pressures, chaos, confusion,
and loss of control. It is not an exaggeration to say
3
Harvey “Chet” Krentzman described this phenomenon to the authors many years ago. The principle still applies.
4
Kim Cross, “Does Your Team Measure Up? Business 2.0 (www.business2.com), June 2001.
5
The crises discussed here are the ones the authors consider particularly critical. Usually, failure to overcome even a few can imperil a venture at a given stage. There
are, however, many more, but a complete treatment of all of them is outside the scope of this book.
EXHIBIT 17.2
1992 Sales per Employee
Company (000)
Raytheon Company $141.8
Digital Equipment Corporation 138.7
Data General Corporation 159.5
Stratus Computer, Inc. 185.5
Wang Laboratories, Inc. 164.8
Well Fleet Communications 226.9
Lotus Development Corporation 204.6
Gillette 167.6
Biogen, Inc. 309.4
Genetic Institute 158.1
Picture Tel Corporation 199.2
Augat, Inc. 92.7
Ground Round Restaurants 23.4
Sonesta International Hotels 19.7
Mediplex Group, Inc. 40.8
Neiman Marcus Group 170.0
Stop & Shop Company 118.5
Reebok International Ltd. 691.7
Source: Boston Globe, June 8, 1993, p. 60.
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 17. Managing Rapid
Growth: Entrepreneurship
Beyond Startup
5
© The McGraw?Hill
Companies, 2004
Chapter 17 Managing Rapid Growth: Entreprenuership Beyond Startup 563
EXHIBIT 17.3
Crises and Symptoms
Pre-Startup (Years ?3 to ?1)
Entrepreneurs:
Focus. Is the founder really an entrepreneur, bent on building a company, or an inventor, technical dilettante, or the like?
Selling. Does the team have the necessary selling and closing skills to bring in the business and make the plan—on time?
Management. Does the team have the necessary management skills and relevant experience, or is it overloaded in one or two areas
(e.g., the financial or technical areas)?
Ownership. Have the critical decisions about ownership and equity splits been resolved, and are the members committed to these?
Opportunity:
Focus. Is the business really user-, customer-, and market-driven (by a need), or is it driven by an invention or a desire to create?
Customers. Have customers been identified with specific names, addresses, and phone numbers, and have purchase levels been
estimated, or is the business still only at the concept stage?
Supply. Are costs, margins, and lead times to acquire supplies, components, and key people known?
Strategy. Is the entry plan a shotgun and cherry-picking strategy, or is it a rifle shot at a well-focused niche?
Resources:
Resources. Have the required capital resources been identified?
Cash. Are the founders already out of cash (OOC) and their own resources?
Business plan. Is there a business plan, or is the team “hoofing it”?
Startup and Survival (Years 0–3)
Entrepreneurs:
Leadership. Has a top leader been accepted, or are founders vying for the decision role or insisting on equality in all decisions?
Goals. Do the founders share and have compatible goals and work styles, or are these starting to conflict and diverge once the
enterprise is underway and pressures mount?
Management. Are the founders anticipating and preparing for a shift from doing to managing and letting go—of decisions and
control—that will be required to make the plan on time?
Opportunity:
Economics. Are the economic benefits and payback to the customer actually being achieved, and on time?
Strategy. Is the company a one-product company with no encore in sight?
Competition. Have previously unknown competitors or substitutes appeared in the marketplace?
Distribution. Are there surprises and difficulties in actually achieving planned channels of distribution on time?
Resources:
Cash. Is the company facing a cash crunch early as a result of not having a business plan (and a financial plan)? That is, is it facing
a crunch because no one is asking: When will we run out of cash? Are the owners’ pocketbooks exhausted?
Schedule. Is the company experiencing serious deviations from projections and time estimates in the business plan? Is the company
able to marshall resources according to plan and on time?
Early Growth (Years 4–10)
Entrepreneurs:
Doing or managing. Are the founders still just doing, or are they managing for results by a plan? Have the founders begun to
delegate and let go of critical decisions, or do they maintain veto power over all significant decisions?
Focus. Is the mind-set of the founders operational only, or is there some serious strategic thinking going on as well?
Opportunity:
Market. Are repeat sales and sales to new customers being achieved on time, according to plan, and because of interaction with
customers, or are these coming from the engineering, R&D, or planning group? Is the company shifting to a marketing orientation
without losing its killer instinct for closing sales?
Competition. Are price and quality being blamed for loss of customers or for an inability to achieve targets in the sales plan, while
customer service is rarely mentioned?
Economics. Are gross margins beginning to erode?
Resources:
Financial control. Are accounting and information systems and control (purchasing orders, inventory, billing, collections, cost and
profit analysis, cash management, etc.) keeping pace with growth and being there when they are needed?
Cash. Is the company always out of cash—or nearly OOC, and is no one asking when it will run out, or is sure why or what to do
about it?
Contacts. Has the company developed the outside networks (directors, contacts, etc.) it needs to continue growth?
(Continued)
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 17. Managing Rapid
Growth: Entrepreneurship
Beyond Startup
6
© The McGraw?Hill
Companies, 2004
564 Part V Startup and After
that these pressures and demands increase geomet-
rically, rather than in a linear way (see discussion in
Chapter 8).
Growth rates affect all aspects of a business. Thus,
as sales increase, as more people are hired, and as in-
ventory increases, sales outpace manufacturing ca-
pacity. Facilities are then increased, people are
moved between buildings, accounting systems and
controls cannot keep up, and so on. The cash burn
rate accelerates. As such acceleration continues,
learning curves do the same. Worst of all, cash collec-
tions lag behind, as shown in Exhibit 17.4.
Distinctive issues caused by rapid growth were
considered at seminars at Babson College with the
founders and presidents of rapidly growing companies—
companies with sales of at least $1 million and grow-
ing in excess of 30 percent per year.
6
These founders
and presidents pointed to the following:
Opportunity overload. Rather than lacking
enough sales or new market opportunities, a
classic concern in mature companies, these
firms faced an abundance. Choosing from
among these was a problem.
EXHIBIT 17.3 (conc luded)
Crises and Symptoms
Maturity (Years 10–15 plus)
Entrepreneurs:
Goals. Are the partners in conflict over control, goals, or underlying ethics or values?
Health. Are there signs that the founders’ marriages, health, or emotional stability are coming apart (i.e., are there extramarital
affairs, drug and/or alcohol abuse, or fights and temper tantrums with partners or spouses)?
Teamwork. Is there a sense of team building for a “greater purpose,” with the founders now managing managers, or is there conflict
over control of the company and disintegration?
Opportunity:
Economics/competition. Are the products and/or services that have gotten the company this far experiencing unforgiving economics
as a result of perishability, competitor blind sides, new technology, or off-shore competition, and is there a plan to respond?
Product encore. Has a major new product introduction been a failure?
Strategy. Has the company continued to cherry-pick in fast-growth markets, with a resulting lack of strategic definition (which
opportunities to say no to)?
Resources:
Cash. Is the firm OOC again?
Development/information. Has growth gotten out of control, with systems, training, and development of new managers failing to
keep pace?
Financial control. Have systems continued to lag behind sales?
Harvest/Stability (Years 15–20 plus)
Entrepreneurs:
Succession/ownership. Are there mechanisms in place to provide for management succession and the handling of very tricky
ownership issues (especially family)?
Goals. Have the partners’ personal and financial goals and priorities begun to conflict and diverge? Are any of the founders simply
bored or burned out, and are they seeking a change of view and activities?
Entrepreneurial passion. Has there been an erosion of the passion for creating value through the recognition and pursuit of
opportunity, or are turf-building, acquiring status and power symbols, and gaining control favored?
Opportunity:
Strategy. Is there a spirit of innovation and renewal in the firm (e.g., a goal that half the company’s sales come from products or
services less than five years old), or has lethargy set in?
Economics. Have the core economics and durability of the opportunity eroded so far that profitability and return on investment are
nearly as low as that for the Fortune 500?
Resources:
Cash. Has OOC been solved by increasing bank debt and leverage because the founders do not want—or cannot agree—to give up
equity?
Accounting. Have accounting and legal issues, especially their relevance for wealth building and estate and tax planning, been
anticipated and addressed? Has a harvest concept been part of the long-range planning process?
6
These seminars were held at Babson College near Boston in 1985 and 1999. A good number of the firms represented had sales over $1 million, and many were
growing at greater than 100 percent per year.
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 17. Managing Rapid
Growth: Entrepreneurship
Beyond Startup
7
© The McGraw?Hill
Companies, 2004
Chapter 17 Managing Rapid Growth: Entreprenuership Beyond Startup 565
Abundance of capital. While most stable or
established smaller or medium-size firms often
have difficulties obtaining equity and debt
financing, most of the rapidly growing firms
were not constrained by this. The problem was,
rather, how to evaluate investors as “partners”
and the terms of the deals with which they
were presented.
Misalignment of cash burn and collection rates.
These firms all pointed to problems of cash
burn rates racing ahead of collections. They
found that unless effective integrated
accounting, inventory, purchasing, shipping,
and invoicing systems and controls are in place,
this misalignment can lead to chaos and
collapse. One firm, for example, had tripled its
sales in three years from $5 million to $16
million. Suddenly, its president resigned,
insisting that, with the systems that were in
place, the company would be able to grow to
$100 million. However, the computer system
was disastrously inadequate, which
compounded other management weaknesses. It
was impossible to generate any believable
financial and accounting information for many
months. Losses of more than $1 million
annually mounted, and the company’s lenders
panicked. To make matters worse, the auditors
failed to stay on top of the situation until it was
too late and were replaced. While the company
has survived, it has had to restructure its
business and has shrunk to $6 million in sales,
to pay off bank debt and to avoid bankruptcy.
Fortunately, it is recovering.
Decision making. Many of the firms succeeded
because they executed functional day-to-day
and week-to-week decisions, rather than
strategizing. Strategy had to take a back seat.
Many of the representatives of these firms
argued that in conditions of rapid growth,
strategy was only about 10 percent of the story.
Expanding facilities and space . . . and surprises.
Expansion of space or facilities is a problem and
one of the most disrupting events during the
early explosive growth of a company. Managers
of many of these firms were not prepared for
the surprises, delays, organizational difficulties,
and system interruptions that are spawned by
such expansion.
Industry Turbulence
The problems just discussed are compounded by the
amount of industry turbulence surrounding the ven-
ture. Firms with higher growth rates are usually found
in industries that are also developing rapidly. In addi-
tion, there are often many new entrants, both with
competing products or services and with substitutes.
The effects are many. Often, prices fluctuate. The
turbulence in the semiconductor industry in the 1980s
is a good example. From June 1984 to June 1985, the
Time (quarter)
0 1 2 3 4 5 6 7 8
D
o
l
l
a
r
s
Spend rate
Orders
Collections
EXHIBIT 17.4
Spend-Rate/Orders/Collection Leads and Lags
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 17. Managing Rapid
Growth: Entrepreneurship
Beyond Startup
8
© The McGraw?Hill
Companies, 2004
566 Part V Startup and After
price to original equipment manufacturers (OEMs)
of 64K memory chips fell from $2.50 each to 50 cents.
The price to OEMs of 256K chips fell from $15 to $3.
The same devastating industry effect manifested in
the years 2000–2002 when cellular airtime pricing
plunged by more than 50 percent. Imagine the dis-
ruption this caused in marketing and sales projec-
tions, in financial planning and cash forecasting, and
the like, for firms in these industries. Often, too, there
are rapid shifts in cost and experience curves. The
consequences of missed steps in growing business are
profound. Consider the examples of Polaroid and Xe-
rox shown in Exhibit 17.5.
The Importance of Culture
and Organizational Climate
Six Dimensions
The organizational culture and climate, either of a
new venture or of an existing firm, are critical in how
well the organization will deal with growth. Studies of
performance in large businesses that used the con-
cept of organizational climate (i.e., the perceptions of
people about the kind of place it is to work) have led
to two general conclusions.
7
First, the climate of an
organization can have a significant impact on perfor-
mance. Further, climate is created both by the expec-
tations people bring to the organization and by the
practices and attitudes of the key managers.
The climate notion has relevance for new ven-
tures, as well as for entrepreneurial efforts in large
organizations. An entrepreneur’s style and priorities—
particularly how he or she manages tasks and people—
is well known by the people being managed and af-
fects performance. Recall the entrepreneurial climate
described by Enrico of Pepsi, where the critical fac-
tors included setting high performance standards by
developing short-run objectives that would not sacri-
fice long-run results, providing responsive personal
leadership, encouraging individual initiative, helping
others to succeed, developing individual networks for
success, and so forth. Or listen to the tale of Gerald H.
Langeler, the president of the systems group of Men-
tor Graphics Corporation, who explained what “the vi-
sion trap” was.
8
Langeler described the vision of his
company’s entrepreneurial climate as simply to “Build
Something People Will Buy.”
9
The culture of Mentor
Graphics was definitely shaped by the founders’ styles
because “there were perhaps 15 of us at the time—we
could not only share information very quickly, we
74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01
$34.94
$20.46
$8.01
$2.62
DJIA 2001 = $10,000+ DJIA 1974 = $853
$60
$50
$40
$30
$20
$10
$0
EXHIBIT 17.5
How the Mighty Have Fallen
Source: The authors wish to thank Ed Marram for sharing this analysis.
7
See Jeffry A. Timmons, “The Entrepreneurial Team: Formation and Development,” a paper presented at the Academy of Management annual meeting, Boston,
August 1973.
8
Gerald H. Langeler, “The Vision Trap,” Harvard Business Review, March–April 1992, reprint 92204.
9
Ibid., p. 4.
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Entrepreneurship for the
21st Century, 6/e
V. Startup and After 17. Managing Rapid
Growth: Entrepreneurship
Beyond Startup
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© The McGraw?Hill
Companies, 2004
Chapter 17 Managing Rapid Growth: Entreprenuership Beyond Startup 567
could also create a sense of urgency and purpose with-
out the help of an articulated vision.”
10
Evidence suggests that superior teams function dif-
ferently than inferior teams in their setting priorities,
in resolving leadership issues, in what and how roles
are performed by team members, in attitudes toward
listening and participation, and in dealing with dis-
agreements. Further, evidence suggests that specific
approaches to management can affect the climate of a
growing organization. For example, gains from the
motivation, commitment, and teamwork, which are
anchored in a consensus approach to management,
while not immediately apparent, are striking later. At
that time, there is swiftness and decisiveness in actions
and in follow-through, since the negotiating, compro-
mising, and accepting of priorities are history. Also,
new disagreements that emerge generally do not bring
progress to a halt because there is both high clarity and
broad acceptance of overall goals and underlying pri-
orities. Without this consensus, each new problem or
disagreement often necessitates a time-consuming
and painful confrontation and renegotiation simply
because it was not done initially.
Organizational climate can be described along six
basic dimensions:
Clarity. The degree of organizational clarity
in terms of being well organized, concise, and
efficient in the way that tasks, procedures,
and assignments are made and accomplished.
Standards. The degree to which management
expects and puts pressure on employees for
high standards and excellent performance.
Commitment. The extent to which employees
feel committed to the goals and objectives of
the organization.
Responsibility. The extent to which members
of the organization feel responsibility for
accomplishing their goals without being
constantly monitored and second-guessed.
Recognition. The extent to which employees
feel they are recognized and rewarded
(nonmonetarily) for a job well done, instead of
only being punished for mistakes or errors.
Esprit de corps. The extent to which employees
feel a sense of cohesion and team spirit, of
working well together.
Approaches to Management
In achieving the entrepreneurial culture and climate
described above, certain approaches to management
(also discussed in Chapter 8) are common across core
management modes.
Leadership No single leadership pattern seems
to characterize successful ventures. Leadership may
be shared, or informal, or a natural leader may guide
a task. What is common, however, is a manager who
defines and gains agreements on who has what re-
sponsibility and authority and who does what with
and to whom. Roles, tasks, responsibilities, account-
abilities, and appropriate approvals are defined.
There is no competition for leadership in these or-
ganizations, and leadership is based on expertise, not
authority. Emphasis is placed on performing task-
oriented roles, but someone invariably provides for
“maintenance” and group cohesion by good humor
and wit. Further, the leader does not force his or her
own solution on the team or exclude the involvement
of potential resources. Instead, the leader under-
stands the relationships among tasks and between the
leader and his or her followers and is able to lead in
those situations where it is appropriate, including
managing actively the activities of others through di-
rections, suggestions, and so forth.
This approach is in direct contrast to the commune
approach, where two to four entrepreneurs, usually
friends or work acquaintances, leave unanswered
such questions as who is in charge, who makes the fi-
nal decisions, and how real differences of opinion are
resolved. While some overlapping of roles and a shar-
ing in and negotiating of decisions are desirable in a
new venture, too much looseness is debilitating.
This approach also contrasts with situations where
a self-appointed leader takes over, where there is
competition for leadership, or where one task takes
precedence over other tasks.
Consensus Building Leaders of most successful
new ventures define authority and responsibility in a
way that builds motivation and commitment to cross-
departmental and corporate goals. Using a consensus
approach to management requires managing and
working with peers and with the subordinates of others
(or with superiors) outside formal chains of command
and balancing multiple viewpoints and demands.
In the consensus approach, the manager is seen as
willing to relinquish his or her priorities and power in
the interests of an overall goal, and the appropriate
people are included in setting cross-functional or
cross-departmental goals and in making decisions.
Participation and listening are emphasized.
In addition, the most effective managers are com-
mitted to dealing with problems and working prob-
lems through to agreement by seeking a reconciliation
of viewpoints, rather than emphasizing differences,
and by blending ideas, rather than playing the role of
hard-nose negotiator or devil’s advocate to force their
10
Ibid., p. 5.
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Entrepreneurship for the
21st Century, 6/e
V. Startup and After 17. Managing Rapid
Growth: Entrepreneurship
Beyond Startup
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© The McGraw?Hill
Companies, 2004
568 Part V Startup and After
own solution. There is open confrontation of differ-
ences of opinion and a willingness to talk out differ-
ences, assumptions, reasons, and inferences. Logic
and reason tend to prevail, and there is a willingness
to change opinions based on consensus.
Communication The most effective managers
share information and are willing to alter individual
views. Listening and participation are facilitated by
such methods as circular seating arrangements, few
interruptions or side conversations, and calm discus-
sion versus many interruptions, loud or separate con-
versations, and so forth, in meetings.
Encouragement Successful managers build con-
fidence by encouraging innovation and calculated
risk-taking, rather than by punishing or criticizing
what is less than perfect, and by expecting and en-
couraging others to find and correct their own errors
and to solve their own problems. Their peers and oth-
ers perceive them as accessible and willing to help
when needed, and they provide the necessary re-
sources to enable others to do the job. When it is ap-
propriate, they go to bat for their peers and subordi-
nates, even when they know they cannot always win.
Further, differences are recognized and performance
is rewarded.
Trust The most effective managers are perceived
as trustworthy and straightforward. They do what
they say they are going to do; they are not the corpo-
rate rumor carriers; they are more open and sponta-
neous, rather than guarded and cautious with each
word; and they are perceived as being honest and di-
rect. They have a reputation of getting results and be-
come known as the creative problem solvers who
have a knack for blending and balancing multiple
views and demands.
Development Effective managers have a reputa-
tion for developing human capital (i.e., they groom
and grow other effective managers by their example
and their mentoring). As noted in Chapter 8, Brad-
ford and Cohen distinguish between the heroic man-
ager, whose need to be in control in many instances
actually may stifle cooperation, and the post-heroic
manager, a developer who actually brings about ex-
cellence in organizations by developing entrepre-
neurial middle management. If a company puts off
developing middle management until price competi-
tion appears and its margins erode, the organization
may come unraveled. Linking a plan to grow human
capital at the middle management and the supervi-
sory levels with the business strategy is an essential
first step.
Entrepreneurial Management for the 21st
Century: Three Breakthroughs
Three extraordinary companies have been built or
revolutionized in the past two decades: Marion Labs,
Inc., of Kansas City; Johnsonville Sausage of Cheboy-
gan, Wisconsin; and Springfield Remanufacturing
Corporation of Springfield, Missouri. Independently
and unbeknown to each other, these companies cre-
ated “high standard, perpetual learning cultures,”
which create and foster a “chain of greatness.” The
lessons from these three great companies provide a
blueprint for entrepreneurial management in the
21st century. They set the standard and provide a tan-
gible vision of what is possible. Not surprisingly, the
most exciting, faster growing, and profitable compa-
nies in America today have striking similarities to
these firms.
Ewing Marion Kauffman
and Marion Labs
As described in Chapter 1, Marion Laboratories,
founded in Ewing Marion Kauffman’s garage in 1950,
had reached $2.5 billion in sales by the time it
merged with Merrill Dow in 1989. Its market capi-
talization was $6.5 billion. Over 300 millionaires and
13 foundations including the Ewing Marion Kauff-
man Foundation, were created from the builders of
the company. In sharp contrast, RJR Nabisco, about
10 times larger than Marion Labs at the time of the
KKR leveraged buyout, generated only 20 million-
aires. Clearly, these were very different companies.
Central to Marion Labs’ phenomenal success story
was the combination of a high potential opportunity
with management execution based on core values
and management philosophy ahead of its time. These
principles are simple enough, but difficult to incul-
cate and sustain through good times and bad:
1. Treat everyone as you would want to be
treated.
2. Share the wealth with those who have
created it.
3. Pursue the highest standards of performance
and ethics.
As noted earlier, the company had no organiza-
tional chart, referred to all its people as associates, not
employees, and had widespread profit-sharing and
stock participation plans. Having worked for a few
years now with Mr. K and the top management that
built Marion Labs and then ran the foundation, the
authors can say that they are genuine and serious
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 17. Managing Rapid
Growth: Entrepreneurship
Beyond Startup
11
© The McGraw?Hill
Companies, 2004
Chapter 17 Managing Rapid Growth: Entreprenuership Beyond Startup 569
about these principles. They also have fun while suc-
ceeding, but they are highly dedicated to the practice
of these core philosophies and values.
Jack Stack and Springfield
Remanufacturing Corporation
The truly remarkable sage of this revolution in man-
agement is Jack Stack; his book, The Great Game of
Business, should be read by all entrepreneurs. In
1983, Stack and a dozen colleagues acquired a tractor
engine remanufacturing plant from the failing In-
ternational Harvester Corporation. With an 89-to-1
debt-to-equity ratio and 21 percent interest, they ac-
quired the company for 10 cents a share. In 1993, the
company’s shares were valued near $20 for the em-
ployee stock ownership plan, and the company had
completely turned around with sales approaching
$100 million. What had happened?
Like Ewing Marion Kauffman, Jack Stack created
and implemented some management approaches and
values radically opposite to the top-down, hierarchi-
cal, custodial management commonly found in large
manufacturing enterprises. At the heart of his leader-
ship was creating a vision called The Big Picture:
Think and act like owners, be the best we can be, and
be perpetual learners. Build teamwork as the key by
learning from each other, open the books to everyone,
and educate everyone so they can become responsible
and accountable for the numbers, both short and long
term. Stack puts it this way:
We try to take ignorance out of the workplace and force
people to get involved, not with threats and intimidation
but with education. In the process, we are trying to close
the biggest gaps in American business—the gap be-
tween workers and managers. We’re developing a sys-
tem that allows everyone to get together and work to-
ward the same goals. To do that, you have to knock down
the barriers that separate people, that keep people from
coming together as a team.
11
At Springfield Remanufacturing Corporation, every-
one learns to read and interpret all the financial state-
ments, including an income statement, balance sheet,
and cash flow, and how his or her job affects each line
item. This open-book management style is linked with
pushing responsibility downward and outward, and to
understanding both wealth creation (i.e., shareholder
value) and wealth sharing through short-term bonuses
and long-term equity participation. Stack describes the
value of this approach thus: “The payoff comes from
getting the people who create the numbers to under-
stand the numbers. When that happens, the communi-
cation between the bottom and the top of the organiza-
tion is just phenomenal.”
12
The results he achieved in
10 years are astounding. Even more amazing is that he
has found the time to share this approach with others.
More than 150 companies have participated in semi-
nars that have enabled them to adopt this approach.
Ralph Stayer and Johnsonville
Sausage Company
13
In 1975, Johnsonville Sausage was a small company
with about $5 million in sales and a fairly traditional,
hierarchical, and somewhat custodial management.
In just a few years, Ralph Stayer, the owner’s son, rad-
ically transformed the company through a manage-
ment revolution whose values, culture, and philoso-
phy are remarkably similar to the principles of Ewing
Marion Kauffman and Jack Stack.
The results are astonishing: By 1980, the com-
pany had reached $15 million in sales; by 1985, $50
million; and by 1990, $150 million. At the heart of
the changes he created was the concept of a total
learning culture: Everyone is a learner, seeking to
improve constantly, finding better ways. High per-
formance standards accompanied by an investment
in training, and performance measures that made it
possible to reward fairly both short- and long-term
results were critical to the transition. Responsibility
and accountability was spread downward and out-
ward. For example, instead of forwarding complaint
letters to the marketing department, where they are
filed and the standard response is sent, they go di-
rectly to the front-line sausage stuffer responsible
for the product’s taste. The sausage stuffers are the
ones who respond to customer complaints now. An-
other example is the interviewing, hiring, and train-
ing process for new people. A newly hired woman
pointed out numerous shortcomings with the exist-
ing process and proposed ways to improve it. As a re-
sult, the entire responsibility was shifted from the
traditional human resources/personnel group to the
front line, with superb results.
As one would guess, such radical changes do not
come easily. Consider Stayer’s insight:
In 1980, I began looking for a recipe for change. I
started by searching for a book that would tell me how
11
Jack Stack, The Great Game of Business (New York: Currency/Doubleday Books, 1991), p. 5.
12
Ibid., p. 93.
13
For an excellent discussion of this transformation, see “The Johnsonville Sausage Company,” HBS Case 387-103, rev. June 27, 1990. Copyright © 1990 by the
President and Fellows of Harvard College. See also Ralph Stayer, “How I Learned to Let My Workers Lead,” Harvard Business Review, November–December
1990. Copyright © 1990 by the President and Fellows of Harvard College.
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 17. Managing Rapid
Growth: Entrepreneurship
Beyond Startup
12
© The McGraw?Hill
Companies, 2004
570 Part V Startup and After
to get people to care about their jobs and their com-
pany. Not surprisingly, the search was fruitless. No
one could tell me how to wake up my own workforce;
I would have to figure it out for myself . . . The most
important question any manager can ask is: “In the
best of all possible worlds what would I really want to
happen?”
14
Even having taken such a giant step, Stayer was ready
to take the next, equally perilous steps: Acting on in-
stinct, I ordered a change. “From now on,” I an-
nounced to my management team, “you’re all re-
sponsible for making your own decisions” . . . I went
from authoritarian control to authoritarian abdica-
tion. No one had asked for more responsibility; I had
forced it down their throats.
15
Further insight into just how challenging it is to
transform a company like Johnsonville Sausage is re-
vealed in another Stayer quote:
I spent those two years pursuing another mirage of well-
detailed strategic and tactical plans that would realize
my goals of Johnsonville as the world’s greatest sausage
maker. We tried to plan organizational structure two to
three years before it would be needed . . . Later I real-
ized that these structural changes had to grow from day-
to-day working realities; no one could dictate them from
above, and certainly not in advance.
16
Exhibit 17.6 summarizes the key steps in the trans-
formation of Johnsonville Sausage over several years.
Such a picture undoubtedly oversimplifies the process
and understates the extraordinary commitment and
effort required to pull it off, but it does show how the
central elements weave together.
The Chain of Greatness
As we reflect on these three great companies, we
can see that there is clearly a pattern here, with
some common denominators in both the ingredi-
ents and the process. This chain of greatness be-
comes reinforcing and perpetuating (see Exhibit
17.7). Leadership that instills across the company a
vision of greatness and an owner’s mentality is a
common beginning. A philosophy of perpetual
learning throughout the organization accompanied
by high standards of performance is key to the
value-creating entrepreneurial cultures at the three
firms. A culture that teaches and rewards team-
work, improvement, and respect for each other
provides the oil and glue to make things work. Fi-
nally, a fair and generous short- and long-term re-
ward system, as well as the necessary education to
EXHIBIT 17.6
Summary of the Johnsonville Sausage Company
The critical aspects of the transition:
1. Started at the top: Ralph Stayer recognized that he was the heart of the problem and recognized the need to change—the most difficult
step.
2. Vision was anchored in human resource management and in a particular idea of the company’s culture:
Continuous learning organization.
Team concept—change players.
New model of jobs (Ralph Stayer’s role and decision making).
Performance- and results-based compensation and rewards.
3. Stayer decided to push responsibility and accountability downward to the front-line decision makers:
Front-liners are closest to the customer and the problem.
Define the whole task.
Invest in training and selection.
Job criteria and feedback ? development tool.
4. Controls and mechanisms make it work:
Measure performance, not behavior, activities, and the like.
Emphasize learning and development, not allocation of blame.
Customize to you and the company.
Decentralize and minimize staff.
14
Stayer, “How I Learned to Let My Workers Lead,” p. 1.
15
Ibid., pp. 3–4.
16
Ibid., p. 4.
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 17. Managing Rapid
Growth: Entrepreneurship
Beyond Startup
13
© The McGraw?Hill
Companies, 2004
Chapter 17 Managing Rapid Growth: Entreprenuership Beyond Startup 571
make sure that everyone knows and can use the
numbers, creates a mechanism for sharing the
wealth with those who contributed to it. The results
speak for themselves: extraordinary levels of per-
sonal, professional, and financial achievement.
Chapter Summary
1. The demands of rapid growth have led to the
invention of new organizational paradigms by
entrepreneurs.
2. The entrepreneurial organization today is flatter,
faster, more flexible and responsive, and copes
readily with ambiguity and change. It is the opposite
of the hierarchy, layers of management, and the
more-is-better syndrome prevalent in brontosaurus
capitalism.
3. Entrepreneurs in high growth firms distinguish
themselves with leading entrepreneurial practices in
marketing, finance, management, and planning.
4. As high-potential firms “grow up big” they
experience stages (Wonder, Blunder, Thunder,
Plunder, Asunder or Wonder redux), each with its
own special challenges and crises, which are
compounded the faster the growth.
5. Establishing a culture and climate conducive to
entrepreneurship is a core task for the venture.
6. A chain of greatness characterizes some
breakthrough approaches to leadership and
management in entrepreneurial ventures.
Study Questions
1. Why have old hierarchical management paradigms
given way to new organizational paradigms?
Leadership
Big picture
Think/act like owners
Best we can be
Vision
Results in
Achievement of personal
and performance goals
Shared pride and leadership
Mutual respect
Thirst for new challenges
and goals
Perpetual learning culture
Train and educate
High performance goals/standards
Shared learning/teach each other
Grow, improve, change, innovate
Widespread
responsibility/accountability
Understand and interpret the numbers
Reward short-term with bonuses
Reward long-term with equity
Entrepreneurial mind-set and values
Take responsibility
Get results
Value and wealth creation
Share the wealth with those who create it
Customer and quality driven
and which
Leads to Fosters
EXHIBIT 17.7
The Chain of Greatness
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Entrepreneurship for the
21st Century, 6/e
V. Startup and After 17. Managing Rapid
Growth: Entrepreneurship
Beyond Startup
14
© The McGraw?Hill
Companies, 2004
572 Part V Startup and After
2. What special problems and crises can new ventures
expect as they grow? Why do these occur?
3. Explain the stages many ventures experience and
why these are unique.
4. What role does the organizational culture and
climate play in a rapidly growing venture? Why are
many large companies unable to create an
entreprenial culture?
5. What is the chain of greatness and why can
entrpreneurs benefit from the concept?
6. Why is the rate of growth the central driver of the
organization challenges a growing venture faces?
MIND STRETCHERS
Have You Considered?
1. Many large organizations are now attempting to
reinvent themselves. What will be the biggest
challenge in this process, and why?
2. How fast should a company grow? How fast is too
fast, organizationally and financially?
3. In your ideal world, how would you describe what
it is like to live and work within the perfect
entrepreneurial organization?
4. Who should not be an entrepreneur?
Timmons et al.: New
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Entrepreneurship for the
21st Century, 6/e
V. Startup and After 18. The Entrepreneur and
the Troubled Company
15
© The McGraw?Hill
Companies, 2004
When the Bloom Is Off the Rose
This chapter is about the entrepreneur and the
troubled company. It traces the firm’s route into
and out of crisis and provides insight into how a
troubled company can be rescued by a turnaround
specialist.
Many times in the history of the United States,
companies have experienced times of economic trou-
bles. We are in such a period again in mid-2002. Both
corporate and personal bankruptcies increased dur-
ing 2002, and managers needed a new and special set
of skills to lead through the shoals.
There is a saying among horseback riders that the
person who has never been thrown from a horse
probably has never ridden one! Jim Hindman,
founder of Jiffy Lube, is fond of saying, “Ultimately it
is not how many touchdowns you score but how fast
and often you get up after being tackled.” These in-
sights capture the essence of the ups and downs that
can occur during the growth and development of a
new venture.
18
Chapter Eighteen
The Entrepreneur and the
Troubled Company
“Yes, I did run out of time on a few occasions, but I never lost a ball game!”
Bobby Lane
great quarterback in the 1950s and 1960s of the Detroit Lions and the Pittsburgh Steelers
“It’s OK to go bankrupt, but not on your last deal.”
John W. Altman
entrepreneur and professor
Results Expected
Upon completion of this chapter, you will have:
1. Examined the principle causes and danger signals of impeding trouble.
2. Discussed both quantitative and qualitative symptoms of trouble.
3. Examined the principle diagnostic methods used to devise intervention and turnaround
plans.
4. Identified remedial actions used for dealing with lenders, creditors, and employees.
5. Analyzed the “EverNet Corporation” case study.
579
Special credit is due to Robert Bateman, Scott Douglas, and Ann Morgan for contributing material in this chapter. The material is the result of research and
interviews with turnaround specialists and was submitted in a paper as a requirement for the author’s Financing Entrepreneurial Ventures course in the MBA
program at Babson College.
The authors are especially grateful to two specialists, Leslie B. Charm, who along with his partner has owned three national franchise companies, an entrepreneurial
advisory and troubled business management company, and a venture capital company, AIGIS Ventures, LLC; and Leland Goldberg of Coopers & Lybrand,
Boston, who contributed enormously to the efforts of Bateman, Douglas, and Morgan and to the material.
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 18. The Entrepreneur and
the Troubled Company
16
© The McGraw?Hill
Companies, 2004
580 Part V Startup and After
Getting into Trouble—The Causes
Trouble can be caused by external forces not under the
control of management. Among the most frequently
mentioned are recession, interest rate changes, changes
in government policy, inflation, the entry of new com-
petition, and industry/product obsolescence.
However, those who manage turnarounds find that
while such circumstances define the environment to
which a troubled company needs to adjust, they are
rarely the sole reason for a company failure. External
shocks impact all companies in an industry, and only
some of them fail. Others survive and prosper.
Most causes of failure can be found within com-
pany management. Although there are many causes
of trouble, the most frequently cited fall into three
broad areas: inattention to strategic issues, general
management problems, and poor financial/account-
ing systems and practices. There is striking similarity
between these causes of trouble and the causes of
failure for startups given in Chapter 2.
Strategic Issues
Misunderstood market niche. The first of these
issues is a failure to understand the company’s
market niche and to focus on growth without
considering profitability. Instead of developing
a strategy, these firms take on low-margin
business and add capacity in an effort to grow.
They then run out of cash.
Mismanaged relationships with suppliers and
customers. Related to the issue of not
understanding market niche is the failure to
understand the economics of relationships with
suppliers and customers. For example, some
firms allow practices in the industry to dictate
payment terms, when they may be in a position
to dictate their own terms.
Diversification into an unrelated business area.
A common failing of cash-rich firms that suffer
from the growth syndrome is diversification
into unrelated business areas. These firms use
the cash flow generated in one business to start
another without good reason. As one
turnaround consultant said, “I couldn’t believe
it. There was no synergy at all. They added to
their overhead but not to their contribution. No
common sense!”
Mousetrap myopia. Related to the problem of
starting a firm around an idea, rather than an
opportunity, is the problem of firms that have
“great products” and are looking for other
markets where they can be sold. This is done
without analyzing the firm’s opportunities.
The big project. The company gears up for a
“big project” without looking at the cash flow
implications. Cash is expended by adding
capacity and hiring personnel. When sales do
not materialize, or take longer than expected to
materialize, there is trouble. Sometimes the
“big project” is required by the nature of the
business opportunity. An example of this would
be the high-technology startup that needs to
capitalize on a first-mover advantage. The
company needs to prove the product’s “right to
life” and grow quickly to the point where it can
achieve a public market or become an attractive
acquisition candidate for a larger company. This
ensures that a larger company cannot use its
advantages in scale and existing distribution
channels, after copying the technology, to
achieve dominance over the startup.
Lack of contingency planning. As has been
stated over and over, the path to growth is not a
smooth curve upward. Firms need to be geared
to think about what happens if things go sour,
sales fall, or collections slow. There needs to be
plans in place for layoffs and capacity reduction.
Management Issues
Lack of management skills, experience, and
know-how. As was mentioned in Chapter 8,
while companies grow, managers need to
change their management mode from doing to
managing to managing managers.
Weak finance function. Often, in a new and
emerging company, the finance function is
nothing more than a bookkeeper. One company
was five years old, with $20 million in sales,
before the founders hired a financial
professional.
Turnover in key management personnel.
Although turnover of key management
personnel can be difficult in any firm, it is a
critical concern in businesses that deal in
specialized or proprietary knowledge. For
example, one firm lost a bookkeeper who was
the only person who really understood what
was happening in the business.
Big-company influence in accounting. A
mistake that some companies often make is to
focus on accruals, rather than cash.
Poor Planning, Financial/Accounting
Systems, Practices, and Controls
Poor pricing, overextension of credit, and
excessive leverage. These causes of trouble are
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 18. The Entrepreneur and
the Troubled Company
17
© The McGraw?Hill
Companies, 2004
Chapter 18 The Entrepreneur and the Troubled Company 581
not surprising and need not be elaborated.
Some of the reasons for excess use of leverage
are interesting. Use of excess leverage can
result from growth outstripping the company’s
internal financing capabilities. The company
then relies increasingly on short-term notes
until a cash flow problem develops. Another
reason a company becomes overleveraged is by
using guaranteed loans in place of equity for
either startup or expansion financing. One
entrepreneur remarked, “[The guaranteed
loan] looked just like equity when we started,
but when trouble came it looked more and
more like debt.”
Lack of cash budgets/projections. This is a most
frequently cited cause of trouble. In small
companies, cash budgets/projections are often
not done.
Poor management reporting. While some firms
have good financial reporting, they suffer from
poor management reporting. As one
turnaround consultant stated, “[The financial
statement] just tells where the company has
been. It doesn’t help manage the business. If
you look at the important management
reports—inventory analysis, receivables aging,
sales analysis—they’re usually late or not
produced at all. The same goes for billing
procedures. Lots of emerging companies don’t
get their bills out on time.”
Lack of standard costing. Poor management
reporting extends to issues of costing, too.
Many emerging businesses have no standard
costs against which they can compare the actual
costs of manufacturing products. The result is
they have no variance reporting. The company
cannot identify problems in process and take
corrective action. The company will know only
after the fact how profitable a product is.
Even when standard costs are used, it is not un-
common to find that engineering, manufacturing,
and accounting each has its own version of the bill
of material. The product is designed one way,
manufactured a second way, and costed a third.
Poorly understood cost behavior. Companies
often do not understand the relationship
between fixed and variable costs. For example,
one manufacturing company thought it was
saving money by closing on Saturday. In this way,
management felt it would save paying overtime.
It had to be pointed out to the lead entrepreneur
by a turnaround consultant that, “He had a lot of
high-margin product in his manufacturing
backlog that more than justified the overtime.”
It is also important for entrepreneurs to under-
stand the difference between theory and practice in
this area. The turnaround consultant mentioned
above said, “Accounting theory says that all costs
are variable in the long run. In practice, almost all
costs are fixed. The only truly variable cost is a sales
commission.”
Getting Out of Trouble
The major protection against and the biggest help in
getting out of these troubled waters is to have a set of
advisors and directors who have been through this in
the past. They possess skills that aren’t taught in
school or in most corporate training programs. An
outside “vision” is critical. The speed of action has to
be different; control systems have to be different; and
organization generally needs to be different.
Troubled companies face a situation similar to that
described by Winston Churchill, in While England
Slept, “Descending inconstantly, fecklessly, the stair-
way which leads to dark gulf. It is a fine broad stair-
way at the beginning, but after a bit the carpet ends,
a little farther on there are only flagstones, and a lit-
tle farther on still these break beneath your feet.”
Although uncontrollable external factors such as
new government regulations do arise, an opportu-
nity-driven firm’s crisis is usually the result of man-
agement error. Yet in these management errors are
found part of the solution to the troubled company’s
problems. It is pleasing to see that many companies—
even companies that are insolvent or have negative
net worth or both—can be rescued and restored to
profitability.
Predicting Trouble
Since crises develop over time and typically result
from an accumulation of fundamental errors, can a
crisis be predicted? The obvious benefit of being able
to predict crisis is that the entrepreneur, employees,
and significant outsiders, such as investors, lenders,
trade creditors—and even customers—could see
trouble brewing in time to take corrective actions.
There have been several attempts to develop pre-
dictive models. Two are presented below and have
been selected because each is easy to calculate and
uses information available in common financial re-
ports. Because management reporting in emerging
companies is often inadequate, the predictive model
needs to use information available in common finan-
cial reports.
Each of the two approaches below uses easily ob-
tained financial data to predict the onset of crisis as
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 18. The Entrepreneur and
the Troubled Company
18
© The McGraw?Hill
Companies, 2004
582 Part V Startup and After
much as two years in advance. For the smaller public
company, these models can be used by all interested
observers. With private companies, they are useful
only to those privy to the information and are proba-
bly only of benefit to such nonmanagement outsiders
as lenders and boards of directors.
The most frequently used denominator in all these
ratios is the figure for total assets. This figure often is
distorted by “creative accounting,” with expenses oc-
casionally improperly capitalized and carried on the
balance sheet or by substantial differences between
tangible book value and book value (i.e., overvalued
or undervalued assets).
Net-Liquid-Balance-to-Total-Assets Ratio
The model shown in Exhibit 18.1 was developed by
Joel Shulman, a Babson College professor, to predict
loan defaults. Shulman found that his ratio can pre-
dict loan defaults with significant reliability as much
as two years in advance.
Shulman’s approach is noteworthy because it ex-
plicitly recognizes the importance of cash. Among
current accounts, Shulman distinguishes between op-
erating assets (such as inventory and accounts receiv-
able) and financial assets (such as cash and mar-
ketable securities). The same distinction is made
among liabilities, where notes payable and contrac-
tual obligations are financial liabilities and accounts
payable are operating liabilities.
Shulman then subtracts financial liabilities from fi-
nancial assets to obtain a figure known as the net liquid
balance (NLB). NLB can be thought of as “uncommit-
ted cash,” cash the firm has available to meet contin-
gencies. Because it is the short-term margin for error
should sales change, collections slow, or interest rates
change, it is a true measure of liquidity. The NLB is
then divided by total assets to form the predictive ratio.
Nonquantitative Signals
In Chapter 17 we discussed patterns and actions that
could lead to trouble, indications of common trouble
by growth stage, and critical variables that can be
monitored.
Turnaround specialists also use some nonquantita-
tive signals as indicators of the possibility of trouble.
As with the signals discussed in Chapter 17, the pres-
ence of a single one of these does not necessarily im-
ply an immediate crisis. However, once any of these
surfaces and if the others follow, then trouble is likely
to mount.
Inability to produce financial statements on time.
Changes in behavior of the lead entrepreneur
(such as avoiding phone calls or coming in later
than usual).
Change in management or advisors, such as
directors, accountants, or other professional
advisors.
Accountant’s opinion that is qualified and not
certified.
New competition.
Launching of a “big project.”
Lower research and development expenditures.
Special write-offs of assets and/or addition of
“new” liabilities.
Reduction of credit line.
The Gestation Period of Crisis
Crisis rarely develops overnight. The time between
the initial cause of trouble and the point of interven-
tion can run from 18 months to five years. What hap-
pens to a company during the gestation period has
implications for the later turnaround of the company.
Thus, how management reacts to crisis and what hap-
pens to morale determine what will need to happen
in the intervention. Usually, a demoralized and un-
productive organization develops when its members
think only of survival, not turnaround, and its entre-
preneur has lost credibility. Further, the company has
lost valuable time.
In looking backward, the graph of a company’s key
statistics shows trouble. One can see the sales growth
rate (and the gross margin) have slowed considerably.
This is followed by an increasing rise in expenses as
the company assumes that growth will continue.
EXHIBIT 18.1
Net-Liquid-Balance-to-Total-Assets Ratio
Net-Liquid-Balance-to-Total Assets Ratio ? NLB/Total Assets
Where
NLB ? (Cash ? Marketable securities) ? (Notes Payable ? Contractual obligations)
Source: Joel Shulman, “Primary Rule for Detecting Bankruptcy: Watch the Cash,” Financial Analyst
Journal, September 1988.
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 18. The Entrepreneur and
the Troubled Company
19
© The McGraw?Hill
Companies, 2004
Chapter 18 The Entrepreneur and the Troubled Company 583
When the growth doesn’t continue, the company still
allows the growth rate of expenses to remain high so
it can “get back on track.”
The Paradox of Optimism
In a typical scenario for a troubled company , the first
signs of trouble (such as declining margins, customer
returns, or falling liquidity) go unnoticed or are written
off as teething problems of the new project or as the or-
dinary vicissitudes of business. For example, one en-
trepreneur saw increases in inventory and receivables
as a good sign, since sales were up and the current ra-
tio had improved. However, although sales were up,
margins were down, and he did not realize he had a liqui-
dity problem until cash shortages developed.
Although management may miss the first signs,
outsiders usually do not. Banks, board members, sup-
pliers, and customers see trouble brewing. They won-
der why management does not respond. Credibility
begins to erode.
Soon management has to admit that trouble exists,
but valuable time has been lost. Furthermore, requi-
site actions to meet the situation are anathema. The
lead entrepreneur is emotionally committed to peo-
ple, to projects, or to business areas. Further, to cut
back in any of these areas goes against instinct, be-
cause the company will need these resources when
the good times return.
The company continues its downward fall, and the
situation becomes stressful. Turnaround specialists
mention that stress can cause avoidance on the part of
an entrepreneur. Others have likened the entrepre-
neur in a troubled company to a deer caught in a car’s
headlights. The entrepreneur is frozen and can take
no action. Avoidance has a basis in human psychology.
One organizational behavior consultant who has
worked on turnarounds said, “When a person under
stress does not understand the problem and does not
have the sense to deal with it, the person will tend to
replace the unpleasant reality with fantasy.” The con-
sultant went on to say, “The outward manifestation of
this fantasy is avoidance.” This consultant noted it is
common for an entrepreneur to deal with pleasant
and well-understood tasks, such as selling to cus-
tomers, rather than dealing with the trouble. The re-
sult is that credibility is lost with bankers, creditors,
and so forth. (These are the very people whose coop-
eration needs to be secured if the company is to be
turned around.)
Often, the decisions the entrepreneur does make
during this time are poor and accelerate the company
on its downward course. The accountant or the con-
troller may be fired, resulting in a company that is
then flying blind. One entrepreneur, for example,
running a company that manufactured a high-margin
product, announced across-the-board cuts in expen-
ditures, including advertising, without stopping to
think that cutting advertising on such a product only
added to the cash flow problem.
Finally, the entrepreneur may make statements
that are untrue or may make promises that cannot be
kept. This is the death knell of his or her credibility.
The Bloom Is Off the Rose—Now What?
Generally, when an organization is in trouble some
telltale trends appear.
Ignore outside advice.
The worse is still yet to come.
People (including and usually, most especially,
the entrepreneur) have stopped making
decisions and also have stopped answering the
phone.
Nobody in authority has talked to the
employees.
Rumors are flying.
Inventory is out of balance.
Accounts receivable aging is increasing.
Customers are becoming afraid of new
commitments.
A general malaise has settled in while a still
high-stressed environment exists (an unusual
combination).
Decline in Organizational Morale
Among those who notice trouble developing are the
employees. They deal with customer returns, calls
from creditors, and the like, and they wonder why
management does not respond. They begin to lose
confidence in management.
Despite troubled times, the lead entrepreneur talks
and behaves optimistically or hides in the office de-
clining to communicate with either employees, cus-
tomers, or vendors. Employees hear of trouble from
each other and from other outsiders. They lose confi-
dence in the formal communications of the company.
The grapevine, which is always exaggerated, takes on
increased credibility. Company turnover starts to in-
crease. Morale is eroding.
It is obvious there is a problem and that it is not be-
ing dealt with. Employees wonder what will happen,
whether they will be laid off, and whether the firm
will go into bankruptcy. With their security threat-
ened, employees lapse into survival mode. As an or-
ganizational behavior consultant explains:
The human organism can tolerate anything except un-
certainty. It causes so much stress that people are no
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 18. The Entrepreneur and
the Troubled Company
20
© The McGraw?Hill
Companies, 2004
584 Part V Startup and After
longer capable of thinking in a cognitive, creative man-
ner. They focus on survival. That’s why in turnarounds
you see so much uncooperative, finger-pointing behav-
ior. The only issue people understand is directing the
blame elsewhere [or in doing nothing].
Crisis can force intervention. The occasion is usu-
ally forced by the board of directors, lender, or a law-
suit. For example, the bank may call a loan, or the
firm may be put on cash terms by its suppliers. Per-
haps creditors try to put the firm into involuntary
bankruptcy. Or something from the outside world
fundamentally changes the business environment.
The Threat of Bankruptcy
1
Unfortunately the heads of most troubled companies
usually do not understand the benefits of bankruptcy
law. To them, bankruptcy carries the stigma of failure;
however, the law merely defines the priority of cred-
itors’ claims when the firm is liquidated.
Although bankruptcy can provide for the liquida-
tion of the business, it also can provide for its reorga-
nization. Bankruptcy is not an attractive prospect for
creditors because they stand to lose at least some of
their money, so they often are willing to negotiate.
The prospect of bankruptcy also can be a foundation
for bargaining in a turnaround.
Voluntary Bankruptcy
When bankruptcy is granted to a business under
bankruptcy law (often referred to as Chapter 11), the
firm is given immediate protection from creditors.
Payment of interest or principle is suspended, and
creditors must wait for their money. Generally the
current management (a debtor in possession) is al-
lowed to run the company, but sometimes an out-
sider, a trustee, is named to operate the company, and
creditor committees are formed to watch over the op-
erations and to negotiate with the company.
The greatest benefit of Chapter 11 is that it buys
time for the firm. The firm has 120 days to come up
with a reorganization plan and 60 days to obtain ac-
ceptance of that plan by creditors. Under a reorgani-
zation plan, debt can be extended. Debt also can be
restructured (composed). Interest rates can be in-
creased, and convertible provisions can be intro-
duced to compensate debt holders for any increase in
their risk as a result of the restructuring. Occasionally,
debt holders need to take part of their claim in the
form of equity. Trade creditors can be asked to take
equity as payment, and they occasionally need to ac-
cept partial payment. If liquidation is the result of the
reorganization plan, partial payment is the rule, with
the typical payment ranging from zero to 30 cents on
the dollar, depending on the priority of the claim.
Involuntary Bankruptcy
In involuntary bankruptcy, creditors force a troubled
company into bankruptcy. Although this is regarded
as a rare occurrence, it is important for an entrepre-
neur to know the conditions under which creditors
can force a firm into bankruptcy.
A firm can be forced into bankruptcy by any three
creditors whose total claim exceeds the value of assets
held as security by $5,000, and by any single creditor
who meets the above standard when the total number
of creditors is less than 12.
Bargaining Power
For creditors, having a firm go into bankruptcy is not
particularly attractive. Bankruptcy, therefore, is a
tremendous source of bargaining power for the trou-
bled company. Bankruptcy is not attractive to credi-
tors because once protection is granted to a firm,
creditors must wait for their money. Further, they are
no longer dealing with the troubled company but with
the judicial system, as well as with other creditors.
Even if creditors are willing to wait for their money,
they may not get full payment and may have to accept
payment in some unattractive form. Last, the legal
and administrative costs of bankruptcy, which can be
substantial, are paid before any payments are made to
creditors.
Faced with these prospects, many creditors con-
clude that their interests are better served by negoti-
ating with the firm. Because the law defines the pri-
ority of creditors’ claims, an entrepreneur can use it
to determine who might be willing to negotiate.
Since the trade debt has the lowest claim (except
for owners), these creditors are often the most willing
to negotiate. The worse the situation, the more will-
ing they may be. If the firm has negative net worth
but is generating some cash flow, the trade debt cred-
itors should be willing to negotiate extended terms or
partial payment, or both, unless there is no trust in
current management.
However, the secured creditors, with their higher
priority claims, may be less willing to negotiate. Many
1
As this edition goes to press, the U.S. Congress is deliberating a revision of the federal bankruptcy laws, which if enacted could have a profound impact on a
business’s relationship with its lenders and creditors. Updates on bankruptcy laws, including additional Web links can be found athttp://www.swiggartagin.com/lawfind/.
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 18. The Entrepreneur and
the Troubled Company
21
© The McGraw?Hill
Companies, 2004
Chapter 18 The Entrepreneur and the Troubled Company 585
factors affect the willingness of secured creditors to ne-
gotiate. Two are the strength of their collateral and their
confidence in management. Bankruptcy is still some-
thing they wish to avoid for the reasons cited above.
Bankruptcy can free a firm from obligations under
executory contracts. This has caused some firms to
file for bankruptcy as a way out of union contracts.
Since bankruptcy law in this case conflicts with the
National Labor Relations Act, the law has been up-
dated and a good-faith test has been added. The firm
must be able to demonstrate that a contract prevents
it from carrying on its business. It is also possible for
the firm to initiate other executory contracts such as
leases, executive contracts, and equipment leases. If a
company has gradually added to its overhead in a
noneconomic fashion, it may be able to reduce its
overhead significantly using bankruptcy as a tool.
Intervention
A company in trouble usually will want to use the
services of an outside advisor who specializes in
turnarounds.
The situation the outside advisor usually finds at
intervention is not encouraging. The company is of-
ten technically insolvent or has negative net worth. It
already may have been put on a cash basis by its sup-
pliers. It may be in default on loans, or if not, it is
probably in violation of loan covenants. Call provi-
sions may be exercised. At this point, as the situation
deteriorates more, creditors may be trying to force
the company into bankruptcy, and the organization is
demoralized.
The critical task is to quickly diagnose the situa-
tion, develop an understanding of the company’s bar-
gaining position with its many creditors, and produce
a detailed cash flow business plan for the turnaround
of the organization.To this end, a turnaround advisor
usually quickly signals that change is coming. He or
she will elevate the finance function, putting the
“cash person” (often the consultant himself) in charge
of the business. Some payments may be put on hold
until problems can be diagnosed and remedial actions
decided upon.
Diagnosis
Diagnosis can be complicated by the mixture of
strategic and financial errors. For example, for a com-
pany with large receivables, questions need to be an-
swered about whether receivables are bloated be-
cause of poor credit policy or because the company is
in a business where liberal credit terms are required
to compete.
Diagnosis occurs in three areas: the appropriate
strategic posture of the business, the analysis of man-
agement, and “the numbers.”
Strategic Analysis This analysis in a turn-
around tries to identify the markets in which the com-
pany is capable of competing and decide on a com-
petitive strategy. With small companies, turnaround
experts state that most strategic errors relate to the in-
volvement of firms in unprofitable product lines, cus-
tomers, and geographic areas. It is outside the scope
of this book to cover strategic analysis in detail. (See
the many texts in the area.)
Analysis of Management Analysis of man-
agement consists of interviewing members of the
management team and coming to a subjective judg-
ment of who belongs and who does not. Turnaround
consultants can give no formula for how this is done
except that it is the result of judgment that comes
from experience.
The Numbers Involved in “the numbers” is a de-
tailed cash flow analysis, which will reveal areas for
remedial action. The task is to identify and quantify
the profitable core of the business.
Determine available cash. The first task is to
determine how much cash the firm has
available in the near term. This is accomplished
by looking at bank balances, receivables (those
not being used as security), and the confirmed
order backlog.
Determine where money is going. This is a
more complex task than it appears to be. A
common technique is called subaccount
analysis, where every account that posts to cash
is found and accounts are arranged in
descending order of cash outlays. Accounts
then are scrutinized for patterns. These
patterns can indicate the functional areas where
problems exist. For example, one company had
its corporate address on its bills, rather than the
lockbox address at which checks were
processed, adding two days to its dollar days
outstanding.
Calculate percent-of-sales ratios for different
areas of a business and then analyze trends in
costs. Typically, several of the trends will show
flex points, where relative costs have changed.
For example, for one company that had
undertaken a big project, an increase in cost of
sales, which coincided with an increase in
capacity and in the advertising budget, was
noticed. Further analysis revealed this project
was not producing enough in dollar
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 18. The Entrepreneur and
the Troubled Company
22
© The McGraw?Hill
Companies, 2004
586 Part V Startup and After
contribution to justify its existence. Once the
project was eliminated, excess capacity could
be reduced to lower the firm’s break-even
point.
Reconstruct the business. After determining
where the cash is coming from and where it is
going, the next step is to compare the business
as it should be to the business as it is. This
involves reconstructing the business from the
ground up. For example, a cash budgeting
exercise can be undertaken and collections,
payments, and so forth determined for a given
sales volume. Or the problem can be
approached by determining labor, materials,
and other direct costs and the overhead
required to drive a given sales volume. What is
essentially a cash flow business plan is created.
Determine differences. Finally, the cash flow
business plan is tied into pro forma balance
sheets and income statements. The ideal cash
flow plan and financial statements are
compared to the business’s current financial
statements. For example, the pro forma income
statements can be compared to existing
statements to see where expenses can be
reduced. The differences between the
projected and actual financial statements form
the basis of the turnaround plan and remedial
actions.
The most commonly found areas for potential
cuts/improvements are these: (1) working capital
management, from order processing and billing to re-
ceivables, inventory control, and, of course, cash
management; (2) payroll; and (3) overcapacity and
underutilized assets. More than 80 percent of poten-
tial reduction in expenses can usually be found in
workforce reduction.
The Turnaround Plan
The turnaround plan not only defines remedial ac-
tions, but because it is a detailed set of projections, it
also provides a means to monitor and control turn-
around activity. Further, if the assumptions about unit
sales volume, prices, collections, and negotiating suc-
cess are varied, it can provide a means by which
worst-case scenarios—complete with contingency
plans—can be constructed.
Because short-term measures may not solve the
cash crunch, a turnaround plan gives a firm enough
credibility to buy time to put other remedial actions
in place. For example, one firm’s consultant could ap-
proach its bank to buy time with the following: By re-
ducing payroll and discounting receivables, we can
improve cash flow to the point where the firm can be
current in five months. If we are successful in negoti-
ating extended terms with trade creditors, then the
firm can be current in three months. If the firm can
sell some underutilized assets at 50 percent off, it can
become current immediately.
The turnaround plan helps address organizational
issues. The plan replaces uncertainty with a clearly
defined set of actions and responsibilities. Since it sig-
nals to the organization that action is being taken, it
helps get employees out of their survival mode. An ef-
fective plan breaks tasks into the smallest achievable
unit, so successful completion of these simple tasks
soon follows and the organization begins to experi-
ence success. Soon the downward spiral of organiza-
tional morale is broken.
Finally, the turnaround plan is an important source
of bargaining power. By identifying problems and pro-
viding for remedial actions, the turnaround plan en-
ables the firm’s advisors to approach creditors and tell
them in very detailed fashion how and when they will
be paid. If the turnaround plan proves that creditors
are better off working with the company as a going con-
cern, rather than liquidating it, they will most likely be
willing to negotiate their claims and terms of payment.
Payment schedules can then be worked out that can
keep the company afloat until the crisis is over.
Quick Cash Ideally, the turnaround plan estab-
lishes enough creditor confidence to buy the turn-
around consultant time to raise additional capital and
turn underutilized assets into cash. It is imperative,
however, to raise cash quickly. The result of the ac-
tions described below should be an improvement in
cash flow. The solution is far from complete, however,
because suppliers need to be satisfied.
For the purpose of quick cash, the working capital
accounts hold the most promise.
Accounts receivable is the most liquid noncash
asset. Receivables can be factored, but negotiating
such arrangements takes time. The best route to
cash is discounting receivables. How much receiv-
ables can be discounted depends on whether they
are securing a loan. For example, a typical bank will
lend up to 80 percent of the value of receivables that
are under 90 days. As receivables age past the 90 days,
the bank needs to be paid. New funds are advanced
as new receivables are established as long as the 80
percent and under-90-day criteria are met. Receiv-
ables under 90 days can be discounted no more than
20 percent, if the bank obligation is to be met. Re-
ceivables over 90 days can be discounted as much as
is needed to collect them, since they are not secur-
ing bank financing. One needs to use judgment in
deciding exactly how large a discount to offer. A
common method is to offer a generous discount
with a time limit on it, after which the discount is no
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 18. The Entrepreneur and
the Troubled Company
23
© The McGraw?Hill
Companies, 2004
Chapter 18 The Entrepreneur and the Troubled Company 587
longer valid. This provides an incentive for the cus-
tomer to pay immediately.
Consultants agree it is better to offer too large a
discount than too small a one. If the discount is too
small and needs to be followed by further discounts,
customers may hold off paying in the hope that an-
other round of discounts will follow. Generally it is
the slow payers that cause the problems and dis-
counting may not help. By getting on the squeaky-
wheel list of the particular slow-pay customer, you
might get attention. A possible solution is to put on a
note with the objective of having the customer start
paying you on a regular basis; also, adding a small ad-
ditional amount to every new order helps to work
down the balance.
Inventory is not as liquid as receivables but still can
be liquidated to generate quick cash. An inventory
“fire sale” gets mixed reviews from turnaround ex-
perts. The most common objection is that excess in-
ventory is often obsolete. The second objection is that
because much inventory is work in process, it is not in
salable form and requires money to put in salable
form. The third is that discounting finished-goods in-
ventory may generate cash but is liable to create cus-
tomer resistance to restored margins after the com-
pany is turned around. The sale of raw materials
inventory to competitors is generally considered the
best route. Another option is to try to sell inventory at
discounted prices to new channels of distribution. In
these channels, the discounted prices might not affect
the next sale.
One interesting option for the company with a lot
of work-in-process inventory is to ease credit terms. It
often is possible to borrow more against receivables
than against inventory. By easing credit terms, the
company can increase its borrowing capacity to per-
haps enough to get cash to finish work in process. This
option may be difficult to implement because, by the
time of intervention, the firm’s lenders are likely fol-
lowing the company very closely and may veto the
arrangements.
Also relevant to generating quick cash is the policy
regarding current sales activity. Guiding criteria for
this needs to include increasing the total dollar value
of margin, generating cash quickly, and keeping work-
ing capital in its most liquid form. Prices and cash dis-
counts need to be increased and credit terms eased.
Easing credit terms, however, can conflict with the
receivables policy described above. Obviously, care
needs to be taken to maintain consistency of policy.
Easing credit is really an “excess inventory” policy.
The overall idea is to leverage policy in favor of cash
first, receivables second, and inventory third.
Putting all accounts payable on hold is the next op-
tion. Clearly, this eases the cash flow burden in the
near term. Although some arrangement to pay sup-
pliers needs to be made, the most important uses of
cash at this stage are meeting payroll and paying
lenders. Lenders are important, but if you do not get
suppliers to ship goods you are out of business. Get-
ting suppliers to ship is critical. A company with neg-
ative cash flow simply needs to “prioritize” its use of
cash. Suppliers are the least likely to force the com-
pany into bankruptcy because, under the law, they
have a low priority claim.
Dealing with Lenders The next step in the
turnaround is to negotiate with lenders. To continue
to do business with the company, lenders need to be
satisfied that there is a workable long-term solution.
However, at the point of intervention, the com-
pany is most likely in default on its payments. Or, if
payments are current, the financial situation has
probably deteriorated to the point where the com-
pany is in violation of loan covenants. It also is likely
that many of the firm’s assets have been pledged as
collateral. To make matters worse, it is likely that the
troubled entrepreneur has been avoiding his or her
lenders during the gestation period and has demon-
strated that he or she is not in control of the situation.
Credibility has been lost.
It is important for a firm to know that it is not the
first ever to default on a loan, that the lender is usu-
ally willing to work things out, and that it is still in a
position to bargain.
Strategically, there are two sources of bargaining
power. The first is that bankruptcy is an unattractive
result to a lender, despite its senior claims. A low mar-
gin business cannot absorb large losses easily. (Recall
that banks typically earn 0.5 percent to 1.0 percent to-
tal return on assets.)
The second is credibility. The firm that, through its
turnaround specialist, has diagnosed the problem and
produced a detailed turnaround plan with best-
case/worst-case scenarios, the aim of which is to prove
to the lender that the company is capable of paying, is
in a better bargaining position. The plan details spe-
cific actions (e.g., layoffs, assets plays, changes in
credit policy, etc.) that will be undertaken, and this
plan must be met to regain credibility.
There are also two tactical sources of bargaining
power. First, there is the strength of the lender’s col-
lateral. The second is the bank’s inferior knowledge of
aftermarkets and the entrepreneur’s superior ability
to sell.
The following example illustrates that, when the
lender’s collateral is poor, it has little choice but to look
to the entrepreneur for a way out without incurring a
loss. It also shows that the entrepreneur’s superior
knowledge of his business and ability to sell can get
himself and the lender out of trouble. One company
in turnaround in the leather business overbought
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inventory one year, and, at the same time, a competi-
tor announced a new product that made his inventory
almost obsolete. Since the entrepreneur went to the
lender with the problem, the lender was willing to
work with him. The entrepreneur had plans to sell the
inventory at reduced prices and also to enter a new
market that looked attractive. The only trouble was he
needed more money to do it, and he was already over
his credit limit. The lender was faced with the certainty
of losing 80 percent of its money and putting its cus-
tomer out of business or the possibility of losing money
by throwing good money after bad. The lender decided
to work with the entrepreneur. It got a higher interest
rate and put the entrepreneur on a “full following
mechanism,” which meant that all payments were sent
to a lockbox. The lender processed the checks and re-
duced its exposure before it put money in his account.
Another example illustrates the existence of bar-
gaining power with a lender who is undercollateralized
and stands to take a large loss. A company was import-
ing look-alike Cabbage Patch dolls from Europe. This
was financed with a letter of credit. However, when the
dolls arrived in this country, the company could not sell
the dolls because the Cabbage Patch doll craze was
over. The dolls, and the bank’s collateral, were worth-
less. The company found that the doll heads could be
replaced, and with the new heads, the dolls did not
look like Cabbage Patch dolls. It found also that one
doll buyer would buy the entire inventory. The com-
pany needed $30,000 to buy the new heads and have
them put on, so it went back to the bank. The bank
said, if the company wanted the money, key members
of management had to give liens on their houses.
When this was refused, the banker was astounded. But
what was he going to do? The company had found a
way for him to get his money, so it got the $30,000.
Lenders are often willing to advance money for a
company to meet its payroll. This is largely a public
relations consideration. Also, if a company does not
meet its payroll, a crisis may be precipitated before
the lender can consider its options.
When the situation starts to improve, a lender may
call the loan. Such a move will solve the lender’s prob-
lem but may put the company under. While many
bankers will deny this ever happens, some will concede
that such an occurrence depends on the loan officer.
Dealing with Trade Creditors In dealing
with trade creditors, the first step is to understand the
strength of the company’s bargaining position. Trade
creditors have the lowest priority claims should a
company file for bankruptcy and, therefore, are often
the most willing to deal. In bankruptcy, trade credi-
tors often receive just a few cents on the dollar.
Another bargaining power boost with trade cred-
itors is the existence of a turnaround plan. As long as
a company demonstrates that it can offer a trade
creditor a better result as a going concern than it can
in bankruptcy proceedings, the trade creditor should
be willing to negotiate. It is generally good to make
sure that trade creditors are getting a little money on
a frequent basis. Remember trade creditors have a
higher gross margin than a bank, so their getting paid
pays down their “risk” money faster. This is espe-
cially true if the creditor can ship new goods and get
paid for that, and also get some money toward the
old receivables.
Also, trade creditors have to deal with the customer
relations issue. Trade creditors will work with a troubled
company if they see it as a way to preserve a market.
The relative weakness in the position of trade cred-
itors has allowed some turnaround consultants to ne-
gotiate impressive deals. For example, one company
got trade creditors to agree to a 24-month payment
schedule for all outstanding accounts. In return, the
firm pledged to keep all new payables current. The
entrepreneur was able to keep the company from
dealing on a cash basis with many of its creditors and
to convert short-term payables into what amounted to
long-term debt. The effect on current cash flow was
very favorable.
The second step is to prioritize trade creditors ac-
cording to their importance to the turnaround. The
company then needs to take care of those creditors
that are most important. For example, one entrepre-
neur told his controller never to make a commitment
he could not keep. The controller was told that, if the
company was going to miss a commitment, he was to
get on the phone and call. The most important sup-
pliers were told that if something happened and they
needed payment sooner than had been agreed, they
were to let the company know and it would do its best
to come up with the cash.
The third step in dealing with trade creditors is to
switch vendors if necessary. The lower priority sup-
pliers will put the company on cash terms or refuse to
do business. The troubled company needs to be able
to switch suppliers, and its relationship with its prior-
ity suppliers will help it to do this, because they can
give credit references. One firm said, “We asked our
best suppliers to be as liberal with credit references as
possible. I don’t know if we could have established
new relationships without them.”
The fourth step in dealing with trade creditors is to
communicate effectively. “Dealing with the trade is as
simple as telling the truth,” one consultant said. If a
company is honest, at least a creditor can plan.
Workforce Reductions With workforce reduc-
tion representing 80 percent of the potential ex-
pense reduction, layoffs are inevitable in a turn-
around situation.
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Chapter 18 The Entrepreneur and the Troubled Company 589
A number of turnaround specialists recommend that
layoffs be announced to an organization as a onetime
reduction in the workforce and be done all at once.
They recommend further that layoffs be accomplished
as soon as possible, since employees will never regain
their productivity until they feel some measure of secu-
rity. Finally, they suggest that a firm cut deeper than
seems necessary to compensate for other remedial ac-
tions that may be difficult to implement. For example,
it is one thing to set out to reduce capacity by half and
quite another thing to sell or sublet half a plant.
Longer-Term Remedial Actions
If the turnaround plan has created enough credibility
and has bought the firm time, longer-term remedial
actions can be implemented.
These actions will usually fall into three categories:
Systems and procedures. Systems and
procedures that contributed to the problem can
be improved, or others can be implemented.
Asset plays. Assets that could not be liquidated
in a shorter time frame can be liquidated. For
example, real estate could be sold. Many
smaller companies, particularly older ones,
carry real estate on their balance sheet at far
below market value. This could be sold and
leased back or could be borrowed against to
generate cash.
Creative solutions. Creative solutions need to
be found. For example, one firm had a large
amount of inventory that was useless in its
current business. However, it found that if the
inventory could be assembled into parts, there
would be a market for it. The company shipped
the inventory to Jamaica, where labor rates
were low, for assembly, and it was able to sell
very profitably the entire inventory.
As was stated at the beginning of the chapter, many
companies—even companies that are insolvent or
have negative net worth or both—can be rescued and
restored to profitability. It is perhaps helpful to recall
another quote from Winston Churchill: “I have noth-
ing to offer but blood, toil, tears, and sweat.”
Chapter Summary
1. An inevitable part of the entrepreneurial process is
that firms are born, grow, get ill, and die.
2. Numerous signals of impending trouble—strategic
issues, poor planning and financial controls, and
running out of cash—invariably point to a core cause:
top management.
3. Crises don’t develop overnight. Often it takes 18
months to five years before the company is sick
enough to trigger a turnaround intervention.
4. Both quantitative and qualitative signals can predict
patterns and actions that could lead to trouble.
5. Bankruptcy, usually an entrepreneur’s nightmare, can
actually be a valuable tool and source of bargaining
power to help a company survive and recover.
6. Turnaround specialists begin with a diagnosis of the
numbers—cash, strategic market issues, and
management—and develop a turnaround plan.
7. The turnaround plan defines remedial action to
generate cash, deal with lenders and trade creditors,
begin long-term renewal, and monitor progress.
Study Questions
1. What do entrepreneurs need to know about how
companies get into and out of trouble? Why?
2. Why do most turnaround specialists invariably
discover that it is management that is the root cause
of trouble?
3. Why is it difficult for existing management to detect
and to act early on signals of trouble?
4. What are some key predictors and signals that warn
of impending trouble?
5. Why can bankruptcy be the entrepreneur’s ally?
6. What diagnosis is done to detect problems, and why
and how does cash play the central role?
7. What are the main components of a turnaround plan
and why are these so important?
Internet Sources for Chapter 18http://www.entreworld.orghttp://www.swiggartagin.com/lawfind/http://www.uscourts.gov
MIND STRETCHERS
Have You Considered?
1. In the 1970s, IBM had more cash on its balance
sheet than the total sales of the rest of the
computer industry. Why, and how, did IBM get
into so much trouble 10 years later?
2. Talk in person to an entrepreneur who has
personal loan guarantees and has been through
bankruptcy. What lessons were learned?
3. Can Microsoft become a troubled company?
When, and why?
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 19. The Harvest and
Beyond
26
© The McGraw?Hill
Companies, 2004
A Journey, Not a Destination
A common sentiment among successful entrepre-
neurs is that it is the challenge and exhilaration of the
journey that gives them the greatest kick. Perhaps
Walt Disney said it best: “I don’t make movies to
make money. I make money to make movies.” It is the
thrill of the chase that counts.
These entrepreneurs also talk of the venture’s in-
credibly insatiable appetite for not only cash but also
time, attention, and energy. Some say it is an addic-
tion. Most say it is far more demanding and difficult
than they ever imagined. Most, however, plan not to
retire and would do it again, usually sooner rather
than later. They also say it is more fun and satisfying
than any other career they have had.
For the vast majority of entrepreneurs, it takes 10,
15, even 20 years or more to build a significant net
worth. According to the popular press and government
statistics, there are more millionaires than ever in
America. In 2002, it is estimated that as many as 3.5 mil-
lion persons in the United States (or nearly 3 percent of
the working population) will be millionaires—their net
worth exceeding $1 million. Sadly, a million dollars is
not really all that much money today as a result of infla-
tion, and while lottery and sweepstakes winners be-
come instant millionaires, entrepreneurs do not. The
number of years it usually takes to accumulate such a
net worth is a far cry from the instant millionaire, the
get-rich-quick impression associated with lottery win-
ners or in fantasy TV shows.
The Journey Can Be Addictive
The total immersion required, the huge workload,
the many sacrifices for a family, and the burnout of-
ten experienced by an entrepreneur are real. Main-
taining the energy, enthusiasm, and drive to get
across the finish line, to achieve a harvest, may be
exceptionally difficult. For instance, one entrepre-
neur in the computer software business, after work-
ing alone for several years, developed highly so-
phisticated software. Yet, he insisted he could not
stand the computer business for another day. Imag-
ine trying to position a company for sale effectively
19
Chapter Nineteen
The Harvest and Beyond
“And don’t forget: Shrouds have no pockets.”
the late Sidney Rabb
Chairman Emeritus, Stop & Shop, Boston
Results Expected
Upon completion of this chapter, you will have:
1. Examined the importance of first building a great company and thereby creating
harvest options.
2. Examined why harvesting is an essential element of the entrepreneurial process and
does not necessarily mean abandoning the company.
3. Identified the principal harvest options, including going public.
4. Analyzed the Paul J. Tobin case study.
605
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Beyond
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606 Part V Startup and After
and to negotiate a deal for a premium price after
such a long battle.
Some entrepreneurs wonder if the price of victory
is too high. One very successful entrepreneur put it
this way:
What difference does it make if you win, have $20 mil-
lion in the bank—I know several who do—and you are
a basket case, your family has been washed out, and your
kids are a wreck?
The opening quote of the chapter is a sobering re-
minder and its message is clear: Unless an entrepreneur
enjoys the journey and thinks it is worthy, he or she may
end up on the wrong train to the wrong destination.
First Build a Great Company
One of the simplest but most difficult principles for
non-entrepreneurs to grasp is that wealth and liquidity
are results—not causes—of building a great company.
They fail to recognize the difference between making
money and spending money. Most successful entre-
preneurs possess a clear understanding of this distinc-
tion; they get their kicks from growing the company.
They know the payoff will take care of itself if they con-
centrate on the money-making part of the process.
Create Harvest Options
Here is yet another great paradox in the entrepre-
neurial process: Build a great company but do not for-
get to harvest. This apparent contradiction is difficult
to reconcile, especially among entrepreneurs with
several generations in a family-owned enterprise.
Perhaps a better way to frame this apparent contra-
diction is to keep harvest options open and to think of
harvesting as a vehicle for reducing risk and for creat-
ing future entrepreneurial choices and options, not
simply selling the business and heading for the golf
course or the beach, although these options may ap-
peal to a few entrepreneurs. To appreciate the im-
portance of this perspective, consider the following
actual situations
An entrepreneur in his 50s, Nigel reached an
agreement with Brian, a young entrepreneur in his
30s, to join the company as marketing vice president.
Their agreement also included an option for Brian to
acquire the company in the next five years for $1.5 mil-
lion. At the time, the firm, a small biscuit maker, had
revenues of $500,000 per year. By the end of the third
year, Brian had built the company to $5 million in
sales and substantially improved profitability. He no-
tified Nigel of his intention to exercise his option to
buy the company. Nigel immediately fired Brian, who
had no other source of income, had a family, and a
$400,000 mortgage on a house whose fair market
value had dropped to $275,000. Brian learned that
Nigel had also received an offer from a company for
$6 million. Thus, Nigel wanted to renege on his orig-
inal agreement with Brian. Unable to muster the le-
gal resources, Brian settled out of court for less than
$100,000. When the other potential buyer learned
how Nigel had treated Brian, it withdrew the $6 mil-
lion offer. Then, there were no buyers. Within two
years, Nigel drove the company into bankruptcy. At
that point, he called Brian and asked if he would now
be interested in buying the company. Brian suggested
that Nigel go perform certain unnatural anatomical
acts on himself!
In a quite different case, a buyer was willing to pur-
chase a 100-year-old family business for $100 million,
a premium valuation by any standard. The family in-
sisted that it would never sell the business under any
circumstances. Two years later, market conditions
changed and the credit crunch transformed slow-
paying customers into nonpaying customers. The
business was forced into bankruptcy, which wiped out
100 years of family equity.
It is not difficult to think of a number of alternative
outcomes for these two firms and many others like
them, who have erroneously assumed that the busi-
ness will go on forever. By stubbornly and steadfastly
refusing to explore harvest options and exiting as a
natural part of the entrepreneurial process, owners
may actually increase their overall risk and deprive
themselves of future options. Innumerable examples
exist whereby entrepreneurs sold or merged their
companies and then went on to acquire or to start an-
other company and pursued new dreams:
Robin Wolaner founded Parenting magazine in
the mid-1980s and sold it to Time-Life.
1
Wolaner then joined Time and built a highly
successful career there, and in July 1992, she
became the head of Time’s Sunset Publishing
Corporation.
2
Right after graduate school, the two brothers
described in the Securities Online case in
Chapter 5 launched the company Gary had
worked on creating as a MBA student. That
company rapidly became quite successful and
was sold in early 2000 for more than $50 million.
About three years into the startup, younger
1
This example is drawn from “Parenting Magazine,” Harvard Business School case study 291-015.
2
Lawrence M. Fisher, “The Entrepreneur Employee,” New York Times, August 2, 1992, p. 10.
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 19. The Harvest and
Beyond
28
© The McGraw?Hill
Companies, 2004
Chapter 19 The Harvest and Beyond 607
brother George decided he would pursue his
own startup. He left Securities Online on the
best of terms and created ColorKinetics, Inc.,
in Boston. That company, by early 2003, had
raised over $48 million of venture capital and
would soon exceed $30 million in sales as the
leading firm in LED lighting technology. These
will not be either Gary’s or George’s last
startup, we predict.
Craig Benson founded Cabletron in the 1980s,
which became a highly successful company.
Eventually he brought in a new CEO and
became involved as a trustee of Babson
College, and then began teaching
entrepreneurship classes with a focus on
information technology and the Internet. He
has just been elected governor of New
Hampshire, as another way of giving back to
society and to pursue his new dreams.
While in his early 20s, Steve Spinelli was
recruited by his former college football coach,
Jim Hindman (see the Jiffy Lube case series),
to help start and build Jiffy Lube International.
As a captain of the team, Steve had exhibited
the qualities of leadership, tenacity, and
competitive will to win that Hindman knew was
needed to create a new company. Steve later
built the largest franchise in America, and after
selling his 44 stores to Pennzoil in 1993, he
returned to his MBA alma mater to teach. So
invigorated by this new challenge, he even went
back to earn his doctorate and then became
director of the Arthur M. Blank Center for
Entrepreneurship at Babson, and first division
chair of the very first full-fledged
Entrepreneurship Division at any American
university.
After creating and building the ninth largest
pharmaceutical company in the United States,
Marion Laboratories, Ewing Marion Kauffman
led an extraordinary life as philanthropist and
sportsman. His Kauffman Foundation and its
Center for Entrepreneurial Leadership became
the first and premier foundation in the nation
dedicated to accelerating entrepreneurship. He
brought the Kansas City Royals baseball team
to that city and made sure it would stay there
by gifting the team to the city, with the
stipulation that it stay there when the team
was sold. The $75 million proceeds of the sale
were also donated to charitable causes in
Kansas City.
Jeff Parker built and sold two companies,
including Technical Data Corporation,
3
by the
time he was 40. His substantial gain from these
ventures has led to a new career as a private
investor who works closely with young
entrepreneurs to help them build their
companies.
In mid-1987, George Knight, founder and
president of Knight Publications,
4
was actively
pursuing acquisitions to grow his company into
a major force. Stunned by what he believed to
be exceptionally high valuations for small
companies in the industry, he concluded that
this was the time to be a seller rather than a
buyer. Therefore, in 1988, he sold Knight
Publications to a larger firm, within which he
could realize his ambition of contributing as a
chief executive officer to the growth of a major
company. Having turned around the troubled
divisions of this major company, he is currently
seeking a small company to acquire and to grow
into a large company.
These are a tiny representation of the tens of thou-
sands of entrepreneurs that build on their platforms
of entrepreneurial success to pursue highly meaning-
ful lives in philanthropy, public service, and commu-
nity leadership. By realizing a harvest, such options
become possible, yet the vast majority of entrepre-
neurs make these contributions to society while con-
tinuing to build their companies. This is one of the
best-kept secrets in American culture: The public has
very little awareness and appreciation of just how
common this pattern of generosity is of their time,
their leadership, and their money. One could fill a
book with numerous other examples. The entrepre-
neurial process is endless.
A Harvest Goal
Having a harvest goal and crafting a strategy to
achieve it are what separate successful entrepre-
neurs from the rest of the pack. Many entrepreneurs
seek only to create a job and a living for themselves.
It is quite different to grow a business that creates a
living for many others, including employees and in-
vestors, by creating value—value that can result in a
capital gain.
Setting a harvest goal achieves many purposes, not
the least of which is helping an entrepreneur get after-
tax cash out of an enterprise and enhancing substantially
3
For TDC’s business plan, see “Technical Data Corporation Business Plan,” Harvard Business School case 283–973. Revised November 1987. For more on TDC’s
progress and harvest strategy, see “Technical Data Corporation,” Harvard Business School case 283–072. Revised December 1987.
4
For a detailed description of this process, see Harvard Business School case 289-027, revised February 1989.
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 19. The Harvest and
Beyond
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© The McGraw?Hill
Companies, 2004
608 Part V Startup and After
his or her net worth. Such a goal also can create high
standards and a serious commitment to excellence
over the course of developing the business. It can pro-
vide, in addition, a motivating force and a strategic fo-
cus that does not sacrifice customers, employees, and
value-added products and services just to maximize
quarterly earnings.
There are other good reasons to set a harvest goal
as well. The workload demanded by a harvest-oriented
venture versus one in a venture that cannot achieve a
harvest may actually be less and is probably no greater.
Such a business may be less stressful than managing a
business that is not oriented to harvest. Imagine the
plight of the 46-year-old entrepreneur, with three chil-
dren in college, whose business is overleveraged and
on the brink of collapse. Contrast that frightful pres-
sure with the position of the founder and major stock-
holder of another venture who, at the same age, sold
his venture for $15 million. Further, the options open
to the harvest-oriented entrepreneur seem to rise geo-
metrically in that investors, other entrepreneurs,
bankers, and the marketplace respond.
There is great truth in the old cliché that “success
breeds success.”
There is a very significant societal reason as well for
seeking and building a venture worthy of a harvest.
These are the ventures that provide enormous impact
and value added in a variety of ways. These are the
companies that contribute most disproportionately to
technological and other innovations, to new jobs, to
returns for investors, and to economic vibrancy.
Also, within the harvest process, the seeds of re-
newal and reinvestment are sown. Such a recycling of
entrepreneurial talent and capital is at the very heart
of our system of private responsibility for economic
renewal and individual initiative. Entrepreneurial
companies organize and manage for the long haul in
ways to perpetuate the opportunity creation and
recognition process and thereby to ensure economic
regeneration, innovation, and renewal.
Thus, a harvest goal is not just a goal of selling and
leaving the company. Rather, it is a long-term goal to
create real value added in a business. (It is true, how-
ever, that if real value added is not created, the business
simply will not be worth much in the marketplace.)
Crafting a Harvest Strategy:
Timing Is Vital
Consistently, entrepreneurs avoid thinking about har-
vest issues. In a survey of the computer software in-
dustry between 1983 and 1986, Steven Holmberg
found that 80 percent of the 100 companies surveyed
had only an informal plan for harvesting. The rest of
the sample confirmed the avoidance of harvest plans
by entrepreneurs—only 15 percent of the companies
had a formal written strategy for harvest in their busi-
ness plans and the remaining 5 percent had a formal
harvest plan written after the business plan.
5
When a
company is launched, then struggles for survival, and
finally begins its ascent, the farthest thing from its
founder’s mind usually is selling out. Selling is often
viewed by the entrepreneur as the equivalent to com-
plete abandonment of his or her very own “baby.”
Thus, time and again, a founder does not consider
selling until terror, in the form of the possibility of los-
ing the whole company, is experienced. Usually, this
possibility comes unexpectedly: New technology
threatens to leapfrog over the current product line, a
large competitor suddenly appears in a small market,
or a major account is lost. A sense of panic then grips
the founders and shareholders of the closely held
firm, and the company is suddenly for sale—for sale
at the wrong time, for the wrong reasons, and thus for
the wrong price. Selling at the right time, willingly, in-
volves hitting a strategic window; one of the many
strategic windows that entrepreneurs face.
Entrepreneurs find that harvesting is a nonissue
until something begins to sprout, and again there is a
vast distance between creating an existing revenue
stream of an ongoing business and ground zero. Most
entrepreneurs agree that securing customers and
generating continuing sales revenue are much harder
and take much longer than even they could have
imagined. Further, the ease with which those revenue
estimates can be cast and manipulated on a spread-
sheet belies the time and effort necessary to turn
those projections into cash.
At some point, with a higher potential venture, it
becomes possible to realize the harvest. It is wiser to
be selling as the strategic window is opening than as
it is closing. Bernard Baruch’s wisdom is as good as it
gets on this matter. He has said, “I made all my
money by selling too early.” For example, a private
candy company with $150 million in sales was not
considering selling. After contemplating advice to
sell early, the founders recognized a unique opportu-
nity to harvest and sold the firm for 19 times earn-
ings, an extremely high valuation. Another example is
that of a cellular phone company that was launched
and built from scratch and began operations in late
1987. Only 18 months after purchasing the original
rights to build and operate the system, the founders
decided to sell the company, even though the future
looked extremely bright. They sold because the sell-
ers’ market they faced at the time had resulted in a
5
Steven R. Holmberg, “Value Creation and Capture: Entrepreneurship Harvest and IPO Strategies,” in Frontiers of Entrepreneurship Research: 1991, ed. Neil
Churchill et al. (Babson Park, MA: Babson College, 1991), pp. 191–205.
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 19. The Harvest and
Beyond
30
© The McGraw?Hill
Companies, 2004
Chapter 19 The Harvest and Beyond 609
premium valuation—30 percent higher on a per
capita basis (the industry valuation norm) than that
for any previous cellular transaction to date. The har-
vest returned over 25 times the original capital in a
year and a half. (The founders had not invested a
dime of their own money.)
If the window is missed, disaster can strike. For
example, at the same time as the harvests described
above were unfolding, another entrepreneur saw
his real estate holdings rapidly appreciate to nearly
$20 million, resulting in a personal net worth, on
paper, of nearly $7 million. The entrepreneur used
this equity to refinance and leverage existing prop-
erties (to more than 100 percent in some cases) to
seize what he perceived as further prime opportu-
nities. Following a change in federal tax law in 1986
and the stock market crash of 1987, there was a ma-
jor softening of the real estate market in 1988. As a
result, by early 1989, half of the entrepreneur’s
holdings were in bankruptcy and the rest were in a
highly precarious and vulnerable position. The
prior equity in the properties had evaporated, leav-
ing no collateral as increasing vacancies and lower
rents per square foot turned a positive cash flow
into a negative one.
This very same pattern happened again in
2000–2002 after the dot.com bubble burst and the
NASDAQ began to crash, losing 63 percent of its
value from its high of over 5000 to under 2000. Cali-
fornia’s Silicon Valley was particularly hard hit by the
rapid downturn. Technology and Internet entrepre-
neurs who had exercised their stock options when
their company’s stock was soaring in the $80 to $100
range, on the hope that such escalation would con-
tinue for a long time, faced a rude a awakening. As the
stock plummeted to single-digit prices, they still
faced a huge capital gain tax on the difference be-
tween the cost of their options and the price at which
their stock was acquired. In one community of more
than 2,000 homes priced at $1 million and up, only
three or four were on the market in January 2001. By
the middle of 2001, nearly 60 such homes were for
sale. Nationwide in 2001, the sale of homes priced
above $1 million dropped 25 percent.
Shaping a harvest strategy is an enormously com-
plicated and difficult task. Thus, crafting such a strat-
egy cannot begin too early. In 1989–91, banking poli-
cies that curtailed credit and lending severely
exacerbated the downturn following the October
1987 stock market crash. One casualty of this was a
company we shall call Cable TV. The value of the
company in early 1989 exceeded $200 million. By
mid-1990, this had dropped to below zero! The heavy
debt overwhelmed the company. It took over five
years of sweat, blood, tears, and rapid aging of the
founder to eventually sell the company. The price:
about one-quarter of the peak value of 1989!
This same pattern was common again in 2001 and
2002, as major companies declared bankruptcy in the
wake of the dot.com and stock market crash, includ-
ing luminaries such an Enron, Kmart, Global Cross-
ing, and dozens of lesser known but larger telecom-
munications and networking-related companies. This
is one history lesson that seems to repeat itself. While
building a company is the ultimate goal, failure to
preserve the harvest option, and utilize it when it is
available, can be deadly.
In shaping a harvest strategy, some guidelines and
cautions can help:
Patience. As has been shown, several years are
required to launch and build most successful
companies; therefore, patience can be
invaluable. A harvest strategy is more sensible if
it allows for a time frame of at least 3 to 5 years
and as long as 7 to 10 years. The other side of
the patience coin is not to panic as a result of
precipitate events. Selling under duress is
usually the worst of all worlds.
Realistic valuation. If impatience is the enemy
of an attractive harvest, then greed is its
executioner. For example, an excellent, small
firm in New England, which was nearly 80 years
old and run by the third generation of a line of
successful family leaders, had attracted a
number of prospective buyers and had obtained
a bona fide offer for more than $25 million.
The owners, however, had become convinced
that this “great little company” was worth
considerably more, and they held out. Before
long, there were no buyers, and market
circumstances changed unfavorably. In
addition, interest rates skyrocketed. Soon
thereafter, the company collapsed financially,
ending up in bankruptcy. Greed was the
executioner.
Outside advice. It is difficult but worthwhile to
find an advisor who can help craft a harvest
strategy while the business is growing and, at
the same time, maintain objectivity about its
value and have the patience and skill to
maximize it. A major problem seems to be that
people who sell businesses, such as investment
bankers or business brokers, are performing the
same economic role and function as real estate
brokers; in essence, their incentive is their
commissions during a quite short time frame,
usually a matter of months. However, an
advisor who works with a lead entrepreneur for
as much as five years or more can help shape
and implement a strategy for the whole
business so that it is positioned to spot and
respond to harvest opportunities when they
appear.
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 19. The Harvest and
Beyond
31
© The McGraw?Hill
Companies, 2004
610 Part V Startup and After
Harvest Options
There are seven principal avenues by which a com-
pany can realize a harvest from the value it has cre-
ated. Described below, these most commonly seem to
occur in the order in which they are listed. No at-
tempt is made here to do more than briefly describe
each avenue, since there are entire books written on
each of these, including their legal, tax, and account-
ing intricacies.
Capital Cow
A “capital cow” is to the entrepreneur what a “cash
cow” is to a large corporation. In essence, the high-
margin profitable venture (the cow) throws off more
cash for personal use (the milk) than most entrepre-
neurs have the time and uses or inclinations for
spending. The result is a capital-rich and cash-rich
company with enormous capacity for debt and rein-
vestment. Take, for instance, a health care-related
venture that was started in the early 1970s that real-
ized early success and went public. Several years later,
the founders decided to buy the company back from
the public shareholders and to return it to its closely
held status. Today the company has sales in excess of
$100 million and generates extra capital of several
million dollars each year. This capital cow has enabled
its entrepreneurs to form entities to invest in several
other higher potential ventures, which included par-
ticipation in the leveraged buyout of a $150 million
sales division of a larger firm and in some venture
capital deals.
Employee Stock Ownership Plan
Employee stock ownership plans have become very
popular among closely held companies as a valuation
mechanism for stock for which there is no formal
market. They are also vehicles through which
founders can realize some liquidity from their stock
by sales to the plan and other employees. And since
an ESOP usually creates widespread ownership of
stock among employees, it is viewed as a positive mo-
tivational device as well.
Management Buyout
Another avenue, called a management buyout
(MBO), is one in which a founder can realize a gain
from a business by selling it to existing partners or to
other key managers in the business. If the business
has both assets and a healthy cash flow, the financing
can be arranged via banks, insurance companies, and
financial institutions that do leveraged buyouts
(LBOs) and MBOs. Even if assets are thin, a healthy
cash flow that can service the debt to fund the pur-
chase price can convince lenders to do the MBO.
Usually, the problem is that the managers who
want to buy out the owners and remain to run the
company do not have the capital. Unless the buyer
has the cash up front—and this is rarely the case—
such a sale can be very fragile, and full realization of
a gain is questionable. MBOs typically require the
seller to take a limited amount of cash up front and a
note for the balance of the purchase price over sev-
eral years. If the purchase price is linked to the future
profitability of the business, the seller is totally de-
pendent on the ability and integrity of the buyer. Fur-
ther, the management, under such an arrangement,
can lower the price by growing the business as fast as
possible, spending on new products and people, and
showing very little profit along the way. In these cases,
it is often seen that after the marginally profitable
business is sold at a bargain price, it is well positioned
with excellent earnings in the next two or three years.
As can be seen, the seller will end up on the short end
of this type of deal.
Merger, Acquisition,
and Strategic Alliance
Merging with a firm is still another way for a founder
to realize a gain. For example, two founders who had
developed high-quality training programs for the
rapidly emerging personal computer industry con-
summated a merger with another company. These
entrepreneurs had backgrounds in computers, rather
than in marketing or general management, and the
results of the company’s first five years reflected this
gap. Sales were under $500,000, based on custom
programs and no marketing, and they had been un-
able to attract venture capital, even during the mar-
ket of 1982–1983. The firm with which they merged
was a $15 million company that had an excellent rep-
utation for its management training programs, had a
Fortune 1000 customer base, had repeat sales of
70 percent, and had requests from the field sales force
for programs to train managers in the use of personal
computers. The buyer obtained 80 percent of the
shares of the smaller firm, to consolidate the revenues
and earnings from the merged company into its own
financial statements, and the two founders of the
smaller firm retained a 20 percent ownership in their
firm. The two founders also obtained employment
contracts, and the buyer provided nearly $1.5 million
of capital advances during the first year of the new
business. Under a put arrangement, the founders will
be able to realize a gain on their 20 percent of the
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 19. The Harvest and
Beyond
32
© The McGraw?Hill
Companies, 2004
Chapter 19 The Harvest and Beyond 611
company, depending upon performance of the ven-
ture over the next few years.
6
The two founders now
are reporting to the president of the parent firm, and
one founder of the parent firm has taken a key exec-
utive position with the smaller company, an approach
common for mergers between closely held firms.
In a strategic alliance, founders can attract badly
needed capital, in substantial amounts, from a large
company interested in their technologies. Such
arrangements often can lead to complete buyouts of
the founders downstream.
Outright Sale
Most advisors view outright sale as the ideal route to
go because up-front cash is preferred over most stock,
even though the latter can result in a tax-free ex-
change.
7
In a stock-for-stock exchange, the problem
is the volatility and unpredictability of the stock price
of the purchasing company. Many entrepreneurs
have been left with a fraction of the original purchase
price when the stock price of the buyer’s company de-
clined steadily. Often the acquiring company wants to
lock key management into employment contracts for
up to several years. Whether this makes sense de-
pends on the goals and circumstances of the individ-
ual entrepreneur.
Public Offering
Probably the most sacred business school cow of
them all—other than the capital cow—is the notion of
taking a company public.
8
The vision or fantasy of
having one’s venture listed on one of the stock ex-
changes arouses passions of greed, glory, and great-
ness. For many would-be entrepreneurs, this aspira-
tion is unquestioned and enormously appealing. Yet,
for all but a chosen few, taking a company public, and
then living with it, may be far more time and trouble—
and expense—than it is worth.
After the stock market crash of October 1987, the
market for new issues of stock shrank to a fraction of
the robust IPO market of 1986 and a fraction of
those of 1983 and 1985, as well. The number of new
issues and the volume of IPOs did not rebound, in-
stead, they declined between 1988 and 1991. Then
in 1992 and into the beginning of 1993 the IPO win-
dow opened again. During this IPO frenzy, “small
companies with total assets under $500,000 issued
more than 68 percent of all IPOs.”
9
Previously, small
companies had not been as active in the IPO market.
(Companies such as Lotus, Compaq, and Apple
Computer do get unprecedented attention and fan-
fare, but these firms were truly exceptions.)
10
The
SEC tried “to reduce issuing costs and registration
and reporting burdens on small companies, and be-
gan by simplifying the registration process by adopt-
ing Form S-18, which applies to offerings of less
than $7,500,000, and reduced disclosure require-
ments.”
11
Similarly, Regulation D created exemp-
tions from registration up to $500,000 over a 12
month period.
12
This cyclical pattern repeated itself again during
the mid-1990s into 2002. As the dot.com, telecom-
munications, and networking explosion accelerated
from 1995 to 2000, the IPO markets exploded as well.
In June 1996, for instance, nearly 200 small compa-
nies had initial public offerings, and the pace re-
mained very strong through 1999, even into the first
two months of 2000. Once the NASDAQ began its
collapse in March 2000, the IPO window virtually
shut. In 2001, there were months when not a single
IPO occurred and for the year it was well under 100!
Few signs of recovery were evident in 2002. The les-
son is clear: Depending upon the IPO market for a
harvest is a highly cyclical strategy, which can cause
both great joy and disappointment. Such is the reality
of the stock markets. Exhibits 19.1(A) and 19.1(B)
show this pattern vividly.
There are several advantages to going public,
many of which relate to the ability of the company to
fund its rapid growth. Public equity markets provide
access to long-term capital, while also meeting sub-
sequent capital needs. Companies may use the pro-
ceeds of an IPO to expand the business in the exist-
ing market or to move into a related market. The
founders and initial investors might be seeking liq-
uidity, but SEC restrictions limiting the timing and
the amount of stock that the officers, directors, and
insiders can dispose of in the public market are in-
creasingly severe. As a result, it can take several years
after an IPO before a liquid gain is possible. Addi-
tionally, as Jim Hindman believed, a public offering
6
This is an arrangement whereby the two founders can force (the put) the acquirer to purchase their 20 percent at a predetermined and negotiated price.
7
See several relevant articles on selling a company in Growing Concerns, ed. David E. Gumpert (New York: John Wiley & Sons, 1984), pp. 332–98.
8
The Big Five accounting firms, such as Ernst & Young, publish information on deciding to take a firm public, as does NASDAQ. See also Richard Salomon, “Second
Thoughts on Going Live with Wall Street,” Harvard Business Review, reprint No. 91309.
9
Seymour Jones , M. Bruce Cohen, and Victor V. Coppola, “Going Public,” in The Entrepreneurial Venture, ed. William A. Sahlman and Howard H. Stevenson
(Boston: Harvard Business School Publishing, 1992), p. 394.
10
For an updated discussion of these issues, see Constance Bagley and Craig Dauchy, “Going Public,” in The Entrepreneurial Venture, 2nd ed. W. A. Sahlman and
H. H. Stevenson (Boston: Harvard Business School Publishing, 1999), pp. 404–40.
11
Jones et al., p. 395.
12
Ibid.
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 19. The Harvest and
Beyond
33
© The McGraw?Hill
Companies, 2004
612 Part V Startup and After
not only increases public awareness of the company
but also contributes to the marketability of the prod-
ucts, including franchises.
However, there are also some disadvantages to
being a public company. For example, 50 percent of
the computer software companies surveyed by
Holmberg agreed that the focus on short-term prof-
its and performance results was a negative attribute
of being a public company.
13
Also, because of the
disclosure requirements, public companies lose
some of their operating confidentiality, not to men-
tion having to support the ongoing costs of public
disclosure, audits, and tax filings. With public
shareholders, the management of the company has
to be careful about the flow of information because
of the risk of insider trading. Thus, it is easy to see
why companies need to think about the positive and
negative attributes of being a public company.
When considering this decision, you may find it
useful to review the Paul J. Tobin case at the end of
the chapter to identify the key components of the
IPO process and to assess which investment
bankers, accountants, lawyers, and advisors might
be useful in making this decision.
Wealth-Building Vehicles
The 1986 Tax Reform Act severely limited the gener-
ous options previously available to build wealth
within a private company through large deductible
contributions to a retirement plan. To make matters
worse, the administrative costs and paperwork neces-
sary to comply with federal laws have become a night-
mare. Nonetheless, there are still mechanisms that
can enable an owner to contribute up to 25 percent of
his or her salary to a retirement plan each year, an
amount that is deductible to the company and grows
tax free. Entrepreneurs who can contribute such
amounts for just a short time will build significant
wealth.
Beyond the Harvest
A majority of highly successful entrepreneurs seem to
accept a responsibility to renew and perpetuate the
system that has treated them so well. They are keenly
aware that our unique American system of opportu-
nity and mobility depends in large part upon a self-
renewal process.
There are many ways in which this happens. Some
of the following data often surprise people:
College endowments. Entrepreneurs are the
most generous regarding larger gifts and the
most frequent contributors to college
endowments, scholarship funds, and the like.
At Babson College, for example, one study
showed that eight times as many
entrepreneurs, compared to all other
graduates, made large gifts to their colleges.
14
900
800
700
600
500
400
300
200
100
0
Years 1996 through 2001
1996 1997 1998 1999 2000 2001
IPO VC Backed IPOS
25,000.00
20,000.00
15,000.00
10,000.00
5,000.00
0.00
1996 1997 1998 1999 2000 2001
Total Venture-Backed Offer Size ($ Million)
Years 1996 through 2001
EXHIBIT 19.1(A)
Number of Recent IPOs
Source: Thomson Financial/Venture Economics and National Venture
Capital Association, January 7, 2002.
EXHIBIT 19.1(B)
Recent IPO ($millions)
Source: Thomson Financial/Venture Economics and National Venture
Capital Association, January 7, 2002.
13
Holmberg, “Value Creation and Capture,” p. 203.
14
John A. Hornaday, “Patterns of Annual Giving,” in Frontiers of Entrepreneurship Research, 1984, ed. J. Hornaday et al. (Babson Park, MA: Babson College, 1984).
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 19. The Harvest and
Beyond
34
© The McGraw?Hill
Companies, 2004
Chapter 19 The Harvest and Beyond 613
On college and university campuses across
America, a huge number of dorms, classroom
buildings, arts centers, and athletic facilities
are named for the contributor. In virtually
every case, these contributors are
entrepreneurs whose highly successful
companies enabled them to make major gifts
of stock to their alma mater. Earlier at MIT,
more than half of the endowment was from
gifts of founders’ stock. Today that figure is
probably even higher.
Community activities. Entrepreneurs who
have harvested their ventures very often
reinvest their leadership skills and money in
such community activities as symphony
orchestras, museums, and local colleges and
universities. These entrepreneurs lead fund-
raising campaigns, serve on boards of
directors, and devote many hours to other
volunteer work. One Swedish couple, after
spending six months working with venture
capital firms in Silicon Valley and New York,
was “astounded at the extent to which these
entrepreneurs and venture capitalists engage
in such voluntary, civic activities.” The couple
found this pattern in sharp contrast to the
Swedish pattern, where paid government
employees perform many of the same services
as part of their jobs.
Investing in new companies. Postharvest
entrepreneurs also reinvest their efforts and
resources in the next generation of
entrepreneurs and their opportunities.
Successful entrepreneurs behave this way since
they seem to know that perpetuating the
system is far too important, and too fragile, to
be left to anyone else. They have learned the
hard lessons.
The innovation, the job creation, and the eco-
nomic renewal and vibrancy are all results of the en-
trepreneurial process. Government does not cause
this complicated and little understood process,
though it facilitates and/or impedes it. It is not
caused by the stroke of a legislative pen, though it
can be ended by such a stroke. Rather, entrepre-
neurs, investors, and hardworking people in pursuit
of opportunities create it.
Fortunately, entrepreneurs seem to accept a dis-
proportionate share of the responsibility to make sure
the process is renewed. And, judging by the new wave
of entrepreneurship in the United States, both the
marketplace and society once again are prepared to
allocate the rewards to entrepreneurs that are com-
mensurate with their acceptance of responsibility and
delivery of results.
The Road Ahead: Devise a Personal
Entrepreneurial Strategy
Goals Matter—A Lot!
Of all the anchors one can think of in the entrepre-
neurial process, two loom above all the rest:
1. A passion for achieving goals.
2. A relentless competitive spirit and desire
to win.
These two habits drive the quest for learning, per-
sonal growth, continuous improvement, and all other
development. Without these good habits, most quests
will fall short. The next chapter includes an exercise
on Crafting a Personal Entrepreneurial Strategy.
Completing this lengthy exercise will help you de-
velop these good habits.
Values and Principles Matter—A Lot!
We have demonstrated, in numerous places through-
out the book, that values and principles matter a great
deal. We have encouraged you to consider those of
Ewing M. Kauffman and to develop your own an-
chors. This is a vital part of your leadership approach,
and who and what you are:
Treat others as you would want to be treated.
Share the wealth with those high performers
who help you create it.
Give back to the community and society.
We would add a fourth principle in the Native
American spirit of considering every action with the
seventh generational impact foremost in mind:
Be a guardian and a steward of the air, land,
water, and environment.
One major legacy of the coming generations of en-
trepreneurial leaders can be the sustainability of our
economic activities. It is possible to combine a pas-
sion for entrepreneurship with love of the land and
the environment. The work of such organizations as
the Conservation Fund of Arlington, Virginia, the Na-
ture Conservancy, the Trust for Public Land, the
Henry’s Fork Foundation, the Monadnock Conser-
vancy in New Hampshire, and dozens of others is fi-
nancially made possible by the contributions of
money, time, and leadership from highly successful
entrepreneurs. It is also one of the most durable ways
to give back. Practicing what he preaches, Professor
Timmons and his wife recently made a permanent gift
of nearly 500 acres of their New Hampshire farm to a
conservation easement. Other neighbors joined in for
a combined total of over 1,000 acres of land preserved
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 19. The Harvest and
Beyond
35
© The McGraw?Hill
Companies, 2004
614 Part V Startup and After
forever, never to be developed. This has led to a re-
gional movement as well, which involves landowners
from a dozen surrounding towns.
Seven Secrets of Success
The following seven secrets of success are included
for your contemplation and amusement:
1. There are no secrets. Understanding and
practicing the fundamentals discussed here,
along with hard work, will get results.
2. As soon as there is a secret, everyone else
knows about it, too. Searching for secrets is a
mindless exercise.
3. Happiness is a positive cash flow.
4. If you teach a person to work for others, you
feed him or her for a year, but if you teach a
person to be an entrepreneur, you feed him
or her, and others, for a lifetime.
5. Do not run out of cash.
6. Entrepreneurship is fundamentally a human
process, rather than a financial or
technological process. You can make an
enormous difference.
7. Happiness is a positive cash flow.
Chapter Summary
1. Entrepreneurs thrive on the challenges and
satisfactions of the game: It is a journey, not a
destination.
2. First and foremost, successful entrepreneurs strive to
build a great company; wealth follows that process.
3. Harvest options mean more than simply selling the
company, and these options are an important part of
the entrepreneur’s know-how.
4. Entrepreneurs know that to perpetuate the system
for future generations, they must give back to their
communities and invest time and capital in the next
entrepreneurial generation.
Study Questions
1. Why did Walt Disney say, “I don’t make movies to
make money. I make money to make movies”?
2. Why is it essential to focus first on building a great
company, rather than on just getting rich?
3. Why is a harvest goal so crucial for entrepreneurs and
the economy?
4. Define the principal harvest options, the pros and
cons of each, and why each is valuable.
5. Beyond the harvest, what do entrepreneurs do to
“give back,” and why is this so important to their
communities and the nation?
Internet Resources for Chapter 19http://www.nvca.org - National Veature Capital
Associationhttp://www.nasdaq.comhttp://www.businessweek.comhttp://www.entreworld.org - Kauffman Foundation
Books of Interest
Tom Ashbrook, The Leap
Randy Komisar, The Monk and the Riddle
Jerry Kaplan, Startup
MIND STRETCHERS
Have You Considered?
1. The Outdoor Scene company became the largest
independent tent manufacturer in North America,
but eventually went out of business. The founder
never realized a dime of capital gain. Why?
2. When Steve Pond sold his company in the late
1980s, he wrote checks for hundreds of thousands
of dollars to several people who had left the
company up to several years previously, but who
had been real contributors to the early success of
the company. What are the future implications for
Steve? For you?
3. Dorothy Stevenson, the first woman to earn a ham
radio license in Utah, said, “Success is getting
what you want. Happiness is wanting what you
get.” What does this mean? Why should you care?
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 20. Crafting a Personal
Entrepreneurial Strategy
36
© The McGraw?Hill
Companies, 2004
Crafting a personal entrepreneurial strategy can be
viewed as the personal equivalent of developing a
business plan. As with planning in other situations,
the process itself is more important than the plan.
The key is the process and discipline that put an in-
dividual in charge of evaluating and shaping choices
and initiating action that makes sense, rather than let-
ting things just happen. Having a longer-term sense
of direction can be highly motivating. It also can be
extremely helpful in determining when to say no
(which is much harder than saying yes) and can tem-
per impulsive hunches with a more thoughtful strate-
gic purpose. This is important because today’s choices,
whether or not they are thought out, become tomor-
row’s track record. They may end up shaping an en-
trepreneur in ways that he or she may not find so at-
tractive 10 years hence and, worse, may also result in
failure to obtain those experiences needed to have
high-quality opportunities later.
Therefore, a personal strategy can be invaluable,
but it need not be a prison sentence. It is a point of de-
parture, rather than a contract of indenture, and it can
and will change over time. This process of developing
a personal strategy for an entrepreneurial career is a
very individual one and, in a sense, one of self-selec-
tion. One experienced venture capital investor in small
ventures, Louis L. Allen, shares this view of the impor-
tance of the role of self-selection:
Unlike the giant firm that has recruiting and selection ex-
perts to screen the wheat from the chaff, the small business
firm, which comprises the most common economic unit in our
business systems, cannot afford to employ a personnel man-
ager . . . More than that, there’s something very special about
the selection of the owners: they have selected themselves . . .
As I face self-selected top managers across my desk or visit
them in their plants or offices I have become more and more
impressed with the fact that this self-selection process is far
more important to the success or failure of the company . . .
than the monetary aspects of our negotiations.
Reasons for planning are similar to those for devel-
oping a business plan (see Chapter 12). Planning helps
an entrepreneur to manage the risks and uncertainties
20
Chapter Twenty
Crafting a Personal
Entrepreneurial Strategy
“If you don’t know where you’re going, any path will take you there.”
The Koran
Results Expected
Upon completion of this chapter, you will have:
1. Looked at the self-assessment process.
2. Examined a framework for self-assessment and developed a personal entrepreneurial
strategy.
3. Identified data to be collected in the self-assessment process.
4. Learned about receiving feedback and setting goals.
5. Analyzed the Boston Communications Group, Inc. case study.
643
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644 Part V Startup and After
of the future; helps him or her to work smarter, rather
than simply harder; keeps him or her in a future-
oriented frame of mind; helps him or her to develop
and update a keener strategy by testing the sensibility
of his or her ideas and approaches with others; helps
motivate; gives him or her a “results orientation”;
helps be effective in managing and coping with what
is by nature a stressful role; and so forth.
Rationalizations and reasons given for not planning,
like those mentioned in Chapter 12, are that plans are
out of date as soon as they are finished and that no one
knows what tomorrow will bring and, therefore, it is
dangerous to commit to uncertainty. Further, the cau-
tious, anxious person may find that setting personal
goals creates a further source of tension and pressure
and a heightened fear of failure. There is also the pos-
sibility that future or yet unknown options, which ac-
tually might be more attractive than the one chosen,
may become lost or be excluded.
Commitment to a career-oriented goal, particu-
larly for an entrepreneur who is young and lacks
much real-world experience, can be premature. For
the person who is inclined to be a compulsive and ob-
sessive competitor and achiever, goal setting may add
gasoline to the fire. And, invariably, some events and
environmental factors beyond one’s control may
boost or sink the best-laid plans.
Personal plans fail for the same reasons as business
plans, including frustration when the plan appears not
to work immediately and problems of changing behav-
ior from an activity-oriented routine to one that is goal-
oriented. Other problems are developing plans that are
based on admirable missions, such as improving per-
formance, rather than goals, and developing plans that
fail to anticipate obstacles, and those that lack progress
milestones, reviews, and so forth.
A Conceptual Scheme for Self-Assessment
Exhibit 20.1 shows one conceptual scheme for think-
ing about the self-assessment process called the Jo-
hari Window. According to this scheme, there are two
sources of information about the self: the individual
and others. According to the Johari Window, there
are three areas in which individuals can learn about
themselves.
There are two potential obstacles to self-assess-
ment efforts. First, it is hard to obtain feedback; sec-
ond, it is hard to receive and benefit from it. Everyone
possesses a personal frame of reference, values, and so
forth, which influence first impressions. It is, there-
fore, almost impossible for an individual to obtain an
unbiased view of himself or herself from someone
else. Further, in most social situations, people usually
present self-images that they want to preserve, pro-
tect, and defend, and behavioral norms usually exist
that prohibit people from telling a person that he or
she is presenting a face or impression that differs from
what the person thinks is being presented. For exam-
ple, most people will not point out to a stranger dur-
ing a conversation that a piece of spinach is promi-
nently dangling from between his or her front teeth.
The first step for an individual in self-assessment is
to generate data through observation of his or her
thoughts and actions and by getting feedback from
others for the purposes of (1) becoming aware of
blind spots and (2) reinforcing or changing existing
perceptions of both strengths and weaknesses.
Once an individual has generated the necessary data,
the next steps in the self-assessment process are to
study the data generated, develop insights, and then es-
tablish apprenticeship goals to gain any learning, expe-
rience, and so forth.
Finally, choices can be made in terms of goals and
opportunities to be created or seized.
Crafting an Entrepreneurial Strategy
Profiling the Past
One useful way to begin the process of self-assess-
ment and planning is for an individual to think about
his or her entrepreneurial roots (what he or she has
done, his or her preferences in terms of lifestyle and
EXHIBIT 20.1
Peeling the Onion
Known to Entrepreneur and Team Not Known to Entrepreneur and Team
Known to Prospective Area 1 Known area: Area 2 Blind area: (we do not know what
Investors and Stakeholders (what you see is what you get) we do not know, but you do)
Not Known to Prospective Area 3 Hidden area: (unshared—you do Area 4 Unknown area: (no venture is
Investors and Stakeholders not know what we do, but the deal does certain or risk free)
not get done until we find out)
Source: Derived from an original concept called the “Johari Window” in D. A. Kolb, I. M. Rubin, and J. M. Mcintyre, Organizational Psychology:
An Experimental Approach, 2nd ed. (Englewood Cliffs, NJ: Prentice Hall, 1974).
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Chapter 20 Crafting a Personal Entrepreneurial Strategy 645
work style, etc.) and couple this with a look into the
future and what he or she would like most to be do-
ing and how he or she would like to live.
In this regard, everyone has a personal history that
has played and will continue to play a significant role
in influencing his or her values, motivations, atti-
tudes, and behaviors. Some of this history may pro-
vide useful insight into prior entrepreneurial inclina-
tions, as well as into his or her future potential fit with
an entrepreneurial role. Unless an entrepreneur is
enjoying what he or she is doing for work most of the
time, when in his or her 30s, 40s, or 50s, having a
great deal of money without enjoying the journey will
be a very hollow success.
Profiling the Present
It is useful to profile the present. Possession of cer-
tain personal entrepreneurial attitudes and behav-
iors (i.e., an “entrepreneurial mind”) have been
linked to successful careers in entrepreneurship.
These attitudes and behaviors deal with such factors
as commitment, determination, and perseverance;
the drive to achieve and grow; an orientation toward
goals; the taking of initiative and personal responsi-
bility; and so forth.
In addition, various role demands result from the
pursuit of opportunities. These role demands are ex-
ternal in the sense that they are imposed upon every
entrepreneur by the nature of entrepreneurship. As
discussed in Chapter 7, the external business envi-
ronment is given, the demands of a higher potential
business in terms of stress and commitment are
given, and the ethical values and integrity of key ac-
tors are given. Required as a result of the demands,
pressures, and realities of starting, owning, and oper-
ating a substantial business are such factors as ac-
commodation to the venture, toleration of stress, and
so forth. A realistic appraisal of entrepreneurial atti-
tudes and behaviors in light of the requirements of
the entrepreneurial role is useful as part of the self-
assessment.
Also, part of any self-assessment is an assessment of
management competencies and what “chunks” of expe-
rience, know-how, and contacts need to be developed.
Getting Constructive Feedback
A Scottish proverb says, “The greatest gift that God
hath given us is to see ourselves as others see us.” One
common denominator among successful entrepre-
neurs is a desire to know how they are doing and
where they stand. They have an uncanny knack for
asking the right questions about their performance at
the right time. This thirst to know is driven by a keen
awareness that such feedback is vital to improving
their performance and their odds for success.
Receiving feedback from others can be a most de-
manding experience. The following list of guidelines
in receiving feedback can help:
Feedback needs to be solicited, ideally, from
those who know the individual well (e.g.,
someone he or she has worked with or for) and
who can be trusted. The context in which the
person is known needs to be considered. For
example, a business colleague may be better
able to comment upon an individual’s
managerial skills than a friend. Or a personal
friend may be able to comment on motivation
or on the possible effects on the family situation.
It is helpful to chat with the person before
asking him or her to provide any specific written
impressions and to indicate the specific areas he
or she can best comment upon. One way to do
this is to formulate questions first. For example,
the person could be told, “I’ve been asking
myself the following question . . . and I would
really like your impressions in that regard.”
Specific comments in areas that are particularly
important either personally or to the success of
the venture need to be solicited and more
detail probed if the person giving feedback is
not clear. A good way to check if a statement is
being understood correctly is to paraphrase the
statement. The person needs to be encouraged
to describe and give examples of specific
situations or behaviors that have influenced the
impressions he or she has developed.
Feedback is most helpful if it is neither all
positive nor all negative.
Feedback needs to be obtained in writing so
that the person can take some time to think
about the issues, and so feedback from various
sources can be pulled together.
The person asking for feedback needs to be
honest and straightforward with himself or
herself and with others.
Time is too precious and the road to new
venture success too treacherous to clutter this
activity with game playing or hidden agendas.
The person receiving feedback needs to avoid
becoming defensive and taking negative
comments personally.
It is important to listen carefully to what is
being said and think about it. Answering,
debating, or rationalizing should be avoided.
An assessment of whether the person soliciting
feedback has considered all important
information and has been realistic in his or her
inferences and conclusions needs to be made.
Help needs to be requested in identifying
common threads or patterns, possible
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Companies, 2004
646 Part V Startup and After
implications of self-assessment data and certain
weaknesses (including alternative inferences or
conclusions), and other relevant information
that is missing.
Additional feedback from others needs to be
sought to verify feedback and to supplement
the data.
Reaching final conclusions or decisions needs
to be left until later.
Putting It All Together
Exhibit 20.2 shows the relative fit of an entrepreneur
with a venture opportunity, given his or her relevant
attitudes and behaviors and relevant general manage-
ment skills, experience, know-how, and contacts, and
given the demands of the venture opportunity. A clean
appraisal is almost impossible. Self-assessment just is
not that simple. The process is cumulative, and what
an entrepreneur does about weaknesses, for example,
is far more important than what the particular weak-
nesses might be. After all, everyone has weaknesses.
Thinking Ahead
As it is in developing business plans, goal setting is im-
portant in personal planning. Few people are effective
goal setters. Perhaps fewer than 5 percent have ever
committed their goals to writing, and perhaps fewer
than 25 percent of adults even set goals mentally.
Potential for
singles or doubles,
but may strike out
Potential for triples
and home runs
No hat and no cattle Big hat, no cattle
A
t
t
r
a
c
t
i
v
e
n
e
s
s
o
f
v
e
n
t
u
r
e
o
p
p
o
r
t
u
n
i
t
y
High
Low
Entrepreneur's requisites
(mind-set, know-how, and experience)
High
EXHIBIT 20.2
Fit of the Entrepreneur and the Venture Opportunity
Again, goal setting is a process, a way of dealing
with the world. Effective goal setting demands time,
self-discipline, commitment and dedication, and prac-
tice. Goals, once set, do not become static targets.
A number of distinct steps are involved in goal set-
ting, steps that are repeated over and over as condi-
tions change:
Establishment of goals that are specific and
concrete (rather than abstract and out of focus),
measurable, related to time (i.e., specific about
what will be accomplished over a certain time
period), realistic, and attainable.
Establishment of priorities, including the
identification of conflicts and trade-offs and how
these can be resolved.
Identification of potential problems and
obstacles that could prevent goals from being
attained.
Specification of action steps that are to be
performed to accomplish the goal.
Indication of how results will be measured.
Establishment of milestones for reviewing
progress and tying these to specific dates on a
calendar.
Identification of risks involved in meeting the
goals.
Identification of help and other resources that
may be needed to obtain goals.
Periodic review of progress and revision of
goals.
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Chapter 20 Crafting a Personal Entrepreneurial Strategy 647
MIND STRETCHERS
Have You Considered?
1. How will you personally define success in 5, 10,
and 25 years? Why?
2. Assume that at age 40–50 years, you have achieved
a net worth of $25–$50 million in today’s dollars.
So what? Then what?
Chapter Summary
1. The principal task for the entrepreneur is to
determine what kind of entrepreneur he or she wants
to become based on his or her attitudes, behaviors,
management competencies, experience, and so forth.
2. Self-assessment is the hardest thing for
entrepreneurs to do, but if you don’t do it, you will
really get into trouble. If you don’t do it, who will?
Study Questions
1. “What is one person’s ham is another person’s
poison.” What does this mean?
2. Can you evaluate thoroughly your attraction to
entrepreneurship?
3. Can you evaluate thoroughly the fit between you and
the demands of a particular opportunity?
4. Can you shape a strategy, including an action plan to
make your entrepreneurial aspirations a reality?
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Companies, 2004
648 Part V Startup and After
Exercise
Personal Entrepreneurial
Strategy
The exercise that follows will help you gather data, both
from yourself and from others, evaluate the data you have
collected, and craft a personal entrepreneurial strategy. The
QuickLook exercise from Chapter 7 provided an opportu-
nity to take a quick inventory of your personal attributes.
The personal entrepreneurial strategy exercise takes this
process to the next level.
The exercise requires active participation on your part.
The estimated time to complete the exercise is 1.5 to 3
hours. Those who have completed the exercise—students,
practicing entrepreneurs, and others—report that the self-
assessment process was worthwhile and it was also de-
manding. Issues addressed will require a great deal of
thought, and there are, of course, no wrong answers.
Although this is a self-assessment exercise, it is useful to
receive feedback. Whether you choose to solicit feedback
and how much, if any, of the data you have collected you
choose to share with others is your decision. The exercise
will be of value only to the extent that you are honest and
realistic in your approach.
A complex set of factors clearly goes into making
someone a successful entrepreneur. No individual has all
the personal qualities, managerial skills, and the like, in-
dicated in the exercise. And, even if an individual did
possess most of these, his or her values, preferences, and
such may make him or her a very poor risk to succeed as
an entrepreneur.
The presence or absence of any single factor does not
guarantee success or failure as an entrepreneur. Before pro-
ceeding, remember, it is no embarrassment to reach for the
stars and fail to reach them. It is a failure not to reach for
the stars.
Name:
Date:
Part I: Profile of the Past
STEP 1
Examine Your Personal Preferences.
What gives you energy, and why? These are things from either work or leisure, or both, that give you the greatest amount of
personal satisfaction, sense of enjoyment, and energy.
Source of Energy Reason
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Chapter 20 Crafting a Personal Entrepreneurial Strategy 649
What takes away your energy, and why? These create for you the greatest amount of personal dissatisfaction, anxiety, or
discontent and take away your energy and motivation.
Source of Energy Reason
Gives Energy Takes Energy
Attributes—Would Energize Attributes—Would Turn Off
Rank (from the most to the least) the items you have listed above:
In 20 to 30 years, how would you like to spend an ideal month? Include in your description your desired lifestyle, work style,
income, friends, and so forth, and a comment about what attracts you to, and what repels you about, this ideal existence.
Review the idea generation guide you completed in Chapter 3 and list the common attributes of the 10 businesses you
wanted to enter and the 10 businesses you did not:
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Companies, 2004
Which of these attributes would give you energy and which would take it away, and why?
650 Part V Startup and After
Attribute Give or Take Energy Reason
Complete this sentence: “I would/would not like to start/acquire my own business someday because . . .”
Discuss any patterns, issues, insights, and conclusions that have emerged:
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Chapter 20 Crafting a Personal Entrepreneurial Strategy 651
Rank the following in terms of importance to you:
Important ? ???? ? Irrelevant
Location 5 4 3 2 1
Geography (particular area) 5 4 3 2 1
Community size and nature 5 4 3 2 1
Community involvement 5 4 3 2 1
Commuting distance (one way):
20 minutes or less 5 4 3 2 1
30 minutes or less 5 4 3 2 1
60 minutes or less 5 4 3 2 1
More than 60 minutes 5 4 3 2 1
Lifestyle and Work Style
Size of business:
Less than $1 million sales or under 20 employees 5 4 3 2 1
More than $1 million sales or 20 employees 5 4 3 2 1
More than $10 million sales and 200 employees 5 4 3 2 1
Rate of real growth:
Fast (over 25%/year) 5 4 3 2 1
Moderate (10% to 15%/year) 5 4 3 2 1
Slow (less than 10%/year) 5 4 3 2 1
Workload (weekly):
Over 70 hours 5 4 3 2 1
55 to 60 hours 5 4 3 2 1
40 hours or less 5 4 3 2 1
Marriage 5 4 3 2 1
Family 5 4 3 2 1
Travel away from home:
More than 60% 5 4 3 2 1
30% to 60% 5 4 3 2 1
Less than 30% 5 4 3 2 1
None 5 4 3 2 1
Standard of Living
Tight belt/later capital gains 5 4 3 2 1
Average/limited capital gains 5 4 3 2 1
High/no capital gains 5 4 3 2 1
Become very rich 5 4 3 2 1
Personal Development
Utilization of skill and education 5 4 3 2 1
Opportunity for personal growth 5 4 3 2 1
Contribution to society 5 4 3 2 1
Positioning for opportunities 5 4 3 2 1
Generation of significant contacts, experience, and know-how 5 4 3 2 1
Status and Prestige 5 4 3 2 1
Impact on Ecology and Environment 5 4 3 2 1
Capital Required
From you 5 4 3 2 1
From others 5 4 3 2 1
Other Considerations 5 4 3 2 1
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652 Part V Startup and After
Imagine you had $1,000 with which to buy the items you ranked above. Indicate below how you would allocate the
money. For example, the item that is most important should receive the greatest amount. You may spend nothing on some
items, you may spend equal amounts on some, and so forth. Once you have allocated the $1,000, rank the items in order
of importance, the most important being number 1.
Item Share of $1,000 Rank
Location
Lifestyle and work style
Standard of living
Personal development
Status and prestige
Ecology and environment
Capital required
Other considerations
Discuss why you became involved in each of the activities above and what specifically influenced each of your decisions.
Discuss what you learned about yourself, about self-employment, about managing people, and about making money.
STEP 2
Examine Your Personal History.
List activities (1) that have provided you financial support in the past (e.g., a part-time or full-time job, a paper route), (2) that
have contributed to your well-being (e.g., financing your education or a hobby), and (3) that you have done on your own
(e.g., building something).
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21st Century, 6/e
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Entrepreneurial Strategy
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Companies, 2004
Chapter 20 Crafting a Personal Entrepreneurial Strategy 653
Discuss why you became involved in each of the employment situations above and what specifically influenced each of
your decisions.
List and discuss your full-time work experience, including descriptions of specific tasks for which you had responsibility,
specific skills you used, the number of people you supervised, whether you were successful, and so forth.
Discuss what you learned about yourself, about employment, about managing people, and about making money.
List and discuss other activities, such as sports, in which you have participated and indicate whether each activity was in-
dividual (e.g., chess or tennis) or team (e.g., football).
What lessons and insights emerged, and how will these apply to life as an entrepreneur?
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If you have ever started a business of any kind or worked in a small company, list the things you liked most and those you
liked least, and why.
654 Part V Startup and After
If you have ever been fired from or quit either a full-time or part-time job, indicate the job, why you were fired or quit, the
circumstances, and what you have learned and what difference this has made.
How have the people above influenced you? How do you view them and their roles? What have you learned from them
about self-employment? Include a discussion of the things that attract or repel you, the trade-offs they have had to consider,
the risks they have faced and rewards they have enjoyed, and entry strategies that have worked for them.
Among those individuals who have influenced you most, do any own and operate their own businesses or engage inde-
pendently in a profession (e.g., certified public accountant)?
If you changed jobs or relocated, indicate the job, why the change occurred, the circumstances, and what you have
learned from those experiences.
Like Most Reason Like Least Reason
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21st Century, 6/e
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Entrepreneurial Strategy
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Chapter 20 Crafting a Personal Entrepreneurial Strategy 655
If you have ever worked for a larger company (over 500 employees or about $50 million to $60 million in sales), list the
things you liked most and those you liked least about your work, and why.
Like Most Reason Like Least Reason
Summarize those factors in your history that you believe are entrepreneurial strengths or weaknesses.
Strengths Weaknesses
Part II: Profile of the Present:
Where You Are
STEP 1
Examine Your “Entrepreneurial Mind.”
Examine your attitudes, behaviors, and know-how. Rank yourself (on a scale of 5 to 1)
Strongest ? ???? ? Weakest
Commitment and Determination
Decisiveness 5 4 3 2 1
Tenacity 5 4 3 2 1
Discipline 5 4 3 2 1
Persistence in solving problems 5 4 3 2 1
Willingness to sacrifice 5 4 3 2 1
Total immersion 5 4 3 2 1
Opportunity Obsession
Having knowledge of customers’ needs 5 4 3 2 1
Being market driven 5 4 3 2 1
Obsession with value creation and enhancement 5 4 3 2 1
Tolerance of Risk, Ambiguity, and Uncertainty
Calculated risk-taker 5 4 3 2 1
Risk minimizer 5 4 3 2 1
Risk sharer
Tolerance of uncertainty and lack of structure 5 4 3 2 1
Tolerance of stress and conflict 5 4 3 2 1
Ability to resolve problems and integrate solutions 5 4 3 2 1
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Strongest ? ???? ? Weakest
Creativity, Self-Reliance, and Ability to Adapt
Nonconventional, open-minded, lateral thinker 5 4 3 2 1
Restlessness with status quo 5 4 3 2 1
Ability to adapt 5 4 3 2 1
Lack of fear of failure 5 4 3 2 1
Ability to conceptualize and to “sweat details” (helicopter mind) 5 4 3 2 1
Motivation to Excel
Goal and results orientation 5 4 3 2 1
Drive to achieve and grow (self-imposed) 5 4 3 2 1
Low need for status and power 5 4 3 2 1
Ability to be interpersonally supporting (versus competitive) 5 4 3 2 1
Awareness of weaknesses (and strengths) 5 4 3 2 1
Having perspective and sense of humor 5 4 3 2 1
Leadership
Being self-starter 5 4 3 2 1
Having internal locus of control 5 4 3 2 1
Having integrity and reliability 5 4 3 2 1
Having patience 5 4 3 2 1
Being team builder and hero maker 5 4 3 2 1
Summarize your entrepreneurial strengths.
Summarize your entrepreneurial weaknesses.
STEP 2
Examine Entrepreneurial Role Requirements.
Rank where you fit in the following roles.
Strongest ? ???? ? Weakest
Accommodation to Venture
Extent to which career and venture are No. 1 priority 5 4 3 2 1
Stress
The cost of accommodation 5 4 3 2 1
Values
Extent to which conventional values are held 5 4 3 2 1
Ethics and Integrity 5 4 3 2 1
656 Part V Startup and After
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Chapter 20 Crafting a Personal Entrepreneurial Strategy 657
Summarize your strengths and weaknesses.
STEP 3:
Examine Your Management Competencies.
Rank your skills and competencies below.
Strongest ? ???? ? Weakest
Marketing
Market research and evaluation 5 4 3 2 1
Marketing planning 5 4 3 2 1
Product pricing 5 4 3 2 1
Sales management 5 4 3 2 1
Direct mail/catalog selling 5 4 3 2 1
Telemarketing 5 4 3 2 1
Customer service 5 4 3 2 1
Distribution management 5 4 3 2 1
Product management 5 4 3 2 1
New product planning 5 4 3 2 1
Operations/Production
Manufacturing management 5 4 3 2 1
Inventory control 5 4 3 2 1
Cost analysis and control 5 4 3 2 1
Quality control 5 4 3 2 1
Production scheduling and flow 5 4 3 2 1
Purchasing 5 4 3 2 1
Job evaluation 5 4 3 2 1
Finance
Accounting 5 4 3 2 1
Capital budgeting 5 4 3 2 1
Cash flow management 5 4 3 2 1
Credit and collection management 5 4 3 2 1
Managing relations with financial sources 5 4 3 2 1
Short-term financing 5 4 3 2 1
Public and private offerings 5 4 3 2 1
Administration
Problem solving 5 4 3 2 1
Communications 5 4 3 2 1
Planning 5 4 3 2 1
Decision making 5 4 3 2 1
Project management 5 4 3 2 1
Negotiating 5 4 3 2 1
Personnel administration 5 4 3 2 1
Management information systems 5 4 3 2 1
Computer/IT/www 5 4 3 2 1
Interpersonal/Team
Leadership/vision/influence 5 4 3 2 1
Helping and coaching 5 4 3 2 1
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658 Part V Startup and After
Strongest ? ???? ? Weakest
Marketing
Feedback 5 4 3 2 1
Conflict management 5 4 3 2 1
Teamwork and people management 5 4 3 2 1
Law
Corporations 5 4 3 2 1
Contracts 5 4 3 2 1
Taxes 5 4 3 2 1
Securities 5 4 3 2 1
Patents and proprietary rights 5 4 3 2 1
Real estate law 5 4 3 2 1
Bankruptcy 5 4 3 2 1
Unique Skills 5 4 3 2 1
STEP 4
Based on an Analysis of the Information Given in Steps 1–3, Indicate the Items You Would Add to a
“Do” List.
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Chapter 20 Crafting a Personal Entrepreneurial Strategy 659
Part III: Getting Constructive Feedback
Part III is an organized way for you to gather constructive feedback. (If you choose not to get constructive feedback at this
time, proceed to Part IV.)
STEP 1
(Optional) Give a Copy of Your Answers to Parts I and II to the Person Designated to Evaluate Your Re-
sponses. Ask Him or Her to Answer the Following:
Have you been honest, objective, hard-nosed, and complete in evaluating your skills?
Are there any strengths and weaknesses you have inventoried incorrectly?
Are there other events or past actions that might affect this analysis and that have not been addressed?
STEP 2
Solicit Feedback.
Give one copy of the feedback form (begins on the next page) to each person who has been asked to evaluate your
responses.
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Companies, 2004
660 Part V Startup and After
Feedback Form
Feedback for:
Prepared by:
STEP 1
Please Check the Appropriate Column Next to the Statements About the Entrepreneurial Attributes, and
Add Any Additional Comments You May Have:
Strong Adequate Weak No Comment
Commitment and Determination
Decisiveness S A W NC
Tenacity S A W NC
Discipline S A W NC
Persistence in solving problems S A W NC
Willingness to sacrifice S A W NC
Total immersion S A W NC
Opportunity Obsession
Having knowledge of customer’s needs S A W NC
Being market driven S A W NC
Obsession with value creation and enhancement S A W NC
Tolerance of Risk, Ambiguity, and Uncertainty
Calculated risk-taker S A W NC
Risk minimizer S A W NC
Risk sharer S A W NC
Tolerance of uncertainty and lack of structure S A W NC
Tolerance of stress and conflict S A W NC
Ability to resolve problems and integrate solutions S A W NC
Creativity, Self-Reliance, and Ability to Adapt
Nonconventional, open-minded, lateral thinker S A W NC
Restlessness with status quo S A W NC
Ability to adapt S A W NC
Lack of fear of failure S A W NC
Ability to conceptualize and to “sweat details” (helicopter mind) S A W NC
Motivation to Excel
Goal and results orientation S A W NC
Drive to achieve and grow (self-imposed standards) S A W NC
Low need for status and power S A W NC
Ability to be interpersonally supportive (versus competitive) S A W NC
Awareness of weaknesses (and strengths) S A W NC
Having perspective and sense of humor S A W NC
Leadership
Being self-starter S A W NC
Having internal locus of control S A W NC
Having integrity and reliability S A W NC
Having patience S A W NC
Being team builder and hero maker S A W NC
Please make any comments that you can on such matters as my energy, health, and emotional stability; my creativity and
innovativeness; my intelligence; my capacity to inspire; my values; and so forth.
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Chapter 20 Crafting a Personal Entrepreneurial Strategy 661
STEP 2
Please Check the Appropriate Column Next to the Statements About Entrepreneurial Role Requirements
to Indicate My Fit and Add Any Additional Comments You May Have.
Strong Adequate Weak No Comment
Accommodation to venture S A W NC
Stress (cost of accommodation) S A W NC
Values (conventional economic and professional values of free S A W NC
enterprise system)
Ethics and integrity S A W NC
Additional Comments:
STEP 3
Please Check the Appropriate Column Next to the Statements About Management Competencies, and
Add Any Additional Comments You May Have.
Strong Adequate Weak No Comment
Marketing
Market research and evaluation S A W NC
Marketing planning S A W NC
Product pricing S A W NC
Sales management S A W NC
Direct mail/catalog selling S A W NC
Telemarketing S A W NC
Customer service S A W NC
Distribution management S A W NC
Product management S A W NC
New product planning S A W NC
Operations/Production
Manufacturing management S A W NC
Inventory control S A W NC
Cost analysis and control S A W NC
Quality control S A W NC
Production scheduling and flow S A W NC
Purchasing S A W NC
Job evaluation S A W NC
Finance
Accounting S A W NC
Capital budgeting S A W NC
Cash flow management S A W NC
Credit and collection management S A W NC
Managing relations with financial sources S A W NC
Short-term financing S A W NC
Public and private offerings S A W NC
Administration
Problem solving S A W NC
Communications S A W NC
Planning S A W NC
Decision making S A W NC
Project management S A W NC
Negotiating S A W NC
Personnel administration S A W NC
Management information systems S A W NC
Computer/IT/www S A W NC
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Entrepreneurial Strategy
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Companies, 2004
662 Part V Startup and After
Strong Adequate Weak No Comment
Interpersonal/Team
Leadership/vision/influence S A W NC
Helping and coaching S A W NC
Feedback S A W NC
Conflict management S A W NC
Teamwork and people management S A W NC
Law
Corporations S A W NC
Contracts S A W NC
Taxes S A W NC
Securities S A W NC
Patents and proprietary rights S A W NC
Real estate law S A W NC
Bankruptcy S A W NC
Unique Skills S A W NC
Additional Comments:
STEP 4
Please Evaluate My Strengths and Weaknesses.
In what area or areas do you see my greatest potential or existing strengths in terms of the venture opportunity we have dis-
cussed, and why?
Area of Strength Reason
Area Weakness Reason
In what area or areas do you see my greatest potential or existing weaknesses in terms of the venture opportunity we have
discussed, and why?
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V. Startup and After 20. Crafting a Personal
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Companies, 2004
Chapter 20 Crafting a Personal Entrepreneurial Strategy 663
Please make any other suggestions that would be helpful for me to consider (e.g., comments about what you see that I like
to do, my lifestyle, work style, patterns evident in my skills inventory, the implications of my particular constellation of man-
agement strengths and weaknesses and background, the time implications of an apprenticeship).
If you know my partners and the venture opportunity, what is your evaluation of their fit with me and the fit among them?
Given the venture opportunity, what you know of my partners, and your evaluation of my weaknesses, should I consider
any additional members for my management team? If so, what should be their strengths and relevant experience?
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 20. Crafting a Personal
Entrepreneurial Strategy
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© The McGraw?Hill
Companies, 2004
664 Part V Startup and After
Part IV: Putting It All Together
STEP 1
Reflect on Your Previous Responses and the Feedback You Have Solicited or Have Received Informally
(From Class Discussion or From Discussions With Friends, Parents, Etc.).
STEP 2
Assess Your Entrepreneurial Strategy.
What have you concluded at this point about entrepreneurship and you?
How do the requirements of entrepreneurship—especially the sacrifices, total immersion, heavy workload, and long-term
commitment—fit with your own aims, values, and motivations?
What specific conflicts do you anticipate between your aims and values, and the demands of entrepreneurship?
How would you compare your entrepreneurial mind, your fit with entrepreneurial role demands, your management com-
petencies, and so forth, with those of other people you know who have pursued or are pursuing an entrepreneurial career?
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Chapter 20 Crafting a Personal Entrepreneurial Strategy 665
Think ahead 5 to 10 years or more, and assume that you would want to launch or acquire a higher potential venture.
What “chunks” of experience and know-how do you need to accumulate?
What are the implications of this assessment of your entrepreneurial strategy in terms of whether you should proceed with
your current venture opportunity?
What is it about the specific opportunity you want to pursue that will provide you with sustained energy and motivation?
How do you know this?
At this time, given your major entrepreneurial strengths and weaknesses and your specific venture opportunity, are there
other “chunks” of experience and know-how you need to acquire or attract to your team? (Be specific!)
What other issues or questions have been raised for you at this point that you would like answered?
Timmons et al.: New
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21st Century, 6/e
V. Startup and After 20. Crafting a Personal
Entrepreneurial Strategy
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Companies, 2004
666 Part V Startup and After
Part V: Thinking Ahead
Part V considers the crafting of your personal entrepreneurial strategy. Remember, goals should be specific and concrete,
measurable, and, except where indicated below, realistic and attainable.
STEP 1
List, in Three Minutes, Your Goals to be Accomplished by the Time You Are 70.
STEP 2
List, in Three Minutes, Your Goals to be Accomplished Over the Next Seven Years. (If You Are an Un-
dergraduate, Use the Next Four Years.)
STEP 3
List, in Three Minutes, the Goals You Would Like to Accomplish if You Have Exactly One Year From To-
day to Live. Assume You Would Enjoy Good Health in the Interim but Would Not be Able to Acquire Any
More Life Insurance or Borrow an Additional Large Sum of Money for a “Final Fling.” Assume Further
that You Could Spend that Last Year of Your Life Doing Whatever You Want to Do.
STEP 4
List, in Six Minutes, Your Real Goals and the Goals You Would Like to Accomplish Over Your Lifetime.
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Chapter 20 Crafting a Personal Entrepreneurial Strategy 667
STEP 5
Discuss the List From Step 4 With Another Person and then Refine and Clarify Your Goal Statements.
STEP 6
Rank Your Goals According to Priority.
STEP 7
Concentrate on the Top Three Goals and Make a List of Problems, Obstacles, Inconsistencies, and so
Forth, That You Will Encounter in Trying to Reach Each of These Goals.
STEP 8
Decide and State How You Will Eliminate Any Important Problems, Obstacles, Inconsistencies, and so
Forth.
STEP 9
For Your Top Three Goals, Write Down All the Tasks or Action Steps You Need to Take to Help You At-
tain Each Goal and Indicate How Results Will be Measured.
It is helpful to organize the goals in order of priority.
Goal Task/Action Step Measurement Rank
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Companies, 2004
668 Part V Startup and After
STEP 10
Rank Tasks/Action Steps in Terms of Priority.
To identify high-priority items, it is helpful to make a copy of your list and cross off any activities or task that cannot be com-
pleted, or at least begun, in the next seven days, and then identify the single most important goal, the next most important,
and so forth.
STEP 11
Establish Dates and Durations (and, if Possible, a Place) for Tasks/Action Steps to Begin.
Organize tasks/action steps according to priority. If possible, the date should be during the next seven days.
STEP 12
Make a List of Problems, Obstacles, Inconsistencies, and so Forth.
STEP 13
Decide How You Will Eliminate Any Important Problems, Obstacles, Inconsistencies, and so Forth, and
Adjust the List in step 12.
STEP 14
Identify Risks Involved and Resources and Other Help Needed.
Goal Task/Action Step Measurement Rank
doc_893118902.pdf
Management McGraw−Hill Primis
Management
McGraw?Hill Primis
ISBN: 0?390?52229?5
Text:
New Venture Creation: Entrepreneurship for
the 21st Century, 6/e
Timmons et al.
New Ventures 1
BUSAD 511
Instructor:
Chuck Thomas
Penn State Great Valley
New Ventures
McGraw-Hill/Irwin
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Management
Contents
Timmons et al. • New Venture Creation: Entrepreneurship for the 21st Century, 6/e
V. Startup and After 1
17. Managing Rapid Growth: Entrepreneurship Beyond Startup 1
18. The Entrepreneur and the Troubled Company 15
19. The Harvest and Beyond 26
20. Crafting a Personal Entrepreneurial Strategy 36
iii
Timmons et al.: New
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Entrepreneurship for the
21st Century, 6/e
V. Startup and After 17. Managing Rapid
Growth: Entrepreneurship
Beyond Startup
1
© The McGraw?Hill
Companies, 2004
Inventing New Organizational Paradigms
At the beginning of this text we chronicled the demise
of brontosaurus capitalism. The nimble and fleet-
footed entrepreneurial firms have supplanted the ag-
ing giants with new leadership approaches, a passion
for value creation, and an obsession with opportunity
that have been unbeatable in the marketplace for tal-
ent and ideas. These entrepreneurial ventures have
experienced rapid to explosive growth and have be-
come the investments of choice of the U.S. venture
capital community.
Because of their innovative nature and competi-
tive breakthroughs, entrepreneurial ventures have
demonstrated a remarkable capacity to invent new
paradigms of organization and management. They
have abandoned the organizational practices and
structures typical of the industrial giants from the
post-World War II era to the 1990s. One could
characterize those brontosaurus approaches thus:
What they lacked in creativity and flexibility to deal
with ambiguity and rapid change, they made up for
with rules, structure, hierarchy, and quantitative
analysis.
17
Chapter Seventeen
Managing Rapid Growth:
Entrepreneurship Beyond Startup
“Bite off more than you can chew, and then chew it!”
Roger Babson
Founder, Babson College
Results Expected
Upon completion of the chapter, you will have:
1. Examined how higher potential, rapidly growing ventures have invented new
organizational paradigms to replace brontosaurus capitalism.
2. Studied how higher potential ventures “grow up big” and the special problems,
organization, and leadership requirements of rapid growth.
3. Examined new research on the leading management practices that distinguish high
growth companies.
4. Explored concepts of organizational culture and climate, and how entrepreneurial
leaders foster favorable cultures.
5. Identified specific signals and clues that can alert entrepreneurial managers to
impeding crises and approaches to solve these.
6. Analyzed the “Quick Lube Franchise Corporation” case study.
559
Special thanks to Ed Marram, entrepreneur, educator, and friend, for his lifelong commitment to studying and leading growing businesses and sharing his knowledge
with the authors.
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V. Startup and After 17. Managing Rapid
Growth: Entrepreneurship
Beyond Startup
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Companies, 2004
560 Part V Startup and After
The epitome of this pattern is the Hay System,
which by the 1980s became the leading method of
defining and grading management jobs in large com-
panies. Scoring high with “Hay points” was the key to
more pay, a higher position in the hierarchy, and
greater power. The criteria for Hay points include:
number of people who are direct reports, value of as-
sets under management, sales volume, number of
products, square feet of facilities, total size of one’s
operating and capital budget, and the like. One can
easily see who gets ahead in such a system: Be bu-
reaucratic, have the most people and largest budget,
increase head count and levels under your control,
and think up the largest capital projects. Missing in
the criteria are all the basic components of entrepre-
neurship we have seen in this book: value creating,
opportunity creating and seizing, frugality with re-
sources, bootstrapping strategies, staged capital com-
mitments, team building, achieving better fits, and
juggling paradoxes.
Contrast the multilayered, hierarchical, military-
like levels of control and command that characterize
brontosaurus capitalism with the common patterns
among entrepreneurial firms: they are flat—often
only one or two layers deep—adaptive, and flexible;
they look like interlocking circles rather than ladders;
they are integrative around customers and critical
missions; they are learning- and influence-based
rather than rank- and power-based. People lead more
through influence and persuasion, which are derived
from knowledge and performance rather than
through formal rank, position, or seniority. They cre-
ate a perpetual learning culture. They value people
and share the wealth with people who help create it.
Entrepreneurial Leaders Are Not
Administrators or Managers
In the growing business, owner-entrepreneurs focus on
recognizing and choosing opportunities, allocating
resources, motivating employees, and maintaining
control—while encouraging the innovative actions that
cause a business to grow. In a new venture the entre-
preneur’s immediate challenge is to learn how to dance
with elephants without being trampled to death! Once
beyond the start-up phase, the ultimate challenge of the
owner/manager is to develop the firm to the point
where it is able to lead the elephants on the dance floor.
Consider the following quotes from two distin-
guished business leaders, based on their experiences
with holders of MBAs in the 1960s–80s. Fred Smith,
founder, chairman, and CEO of Federal Express
“MBAs are people in Fortune 500 companies who
make careers out of saying no!”
Accoridng to General George Doriot, father of
American venture capital and for years a professor at
Harvard Business School, “There isn’t any business
that a Harvard MBA cannot analyze out of existence!”
Those are profound statements, given the sources.
These perceptions also help to explain the stagnancy
and eventual demise of brontosaurus capitalism. Le-
gions of MBAs in the 1950s, 60s, 70s, and early 1980s
were taught the brontosaurus model of management.
Until the 1980s, virtually all the cases, problems, and
lectures in MBA programs were about large, estab-
lished companies.
Breakthrough Strategy: Babson’s F. W.
Olin Graduate School
The first MBA program in the world to break the
lockstep of the prior 50 years was the Franklin W.
Olin Graduate School of Business at Babson College.
In 1992, practicing what they taught, faculty mem-
bers discarded the traditional, functional approach to
an MBA education, consisting of individual courses in
accounting, marketing, finance, information technol-
ogy, operations, and human resources in stand-alone
sequence, with too many lectures.
A revolutionary curriculum for the first year of the
MBA took its place: An entirely new and team-taught
curriculum in a series of highly integrative modules
anchored conceptually in the model of the entrepre-
neurial process from New Venture Creation.
1
MBAs
now experience a unique learning curve that im-
merses them for the first year in cases, assignments,
and content that has immediate and relevant applica-
bility to the entrepreneurial process. Emerging entre-
preneurial companies are the focal points for most
case studies, while larger, established companies seek-
ing to recapture their entrepreneurial spirit and man-
agement approach are examined in others. After more
than five years, students, employers, and faculty have
characterized the program as a resounding success.
(See the Babson College Web site: www.babson.edu.)
Leading Practices of High Growth
Companies
2
In Exhibit 2.11, we examined a summary of research
conducted on fast growth companies to determine
the leading practices of these firms. Now, this re-
1
See William Glavin, The President’s Report—1996 (Babson Park, MA: 1996). Babson College.
2
Special appreciation is given to Ernst & Young LLP and The Kauffman Center for Entrepreneurial Leadership for permission to include the summary of their
research here.
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21st Century, 6/e
V. Startup and After 17. Managing Rapid
Growth: Entrepreneurship
Beyond Startup
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Companies, 2004
Chapter 17 Managing Rapid Growth: Entreprenuership Beyond Startup 561
search will likely take on new meaning to the reader.
As one examines each of these four practice areas—
marketing, financial, management, and planning—
one can see the practical side of how fast growth en-
trepreneurs pursue opportunities; devise, manage,
and orchestrate their financial strategies; build a team
with collaborative decision making; and plan with vi-
sion, clarity, and flexibility. Clearly, rapid growth is a
different game, requiring an entrepreneurial mind-
set and skills.
Growing Up Big
Stages of Growth Revisited
Higher potential ventures do not stay small very long.
While an entrepreneur may have done a good job of
assessing an opportunity, forming a new venture
team, marshaling resources, planning, and so forth,
managing and growing such a venture is, a different
managerial game.
Ventures in the high growth stage face the prob-
lems discussed in Chapter 8. These include forces
that limit the creativities of the founders and team;
that cause confusion and resentment over roles, re-
sponsibilities, and goals; that call for specialization
and therefore erode collaboration; that require oper-
ating mechanisms and controls; and more.
Recall also that managers of rapidly growing ven-
tures are usually relatively inexperienced in launching a
new venture and yet face situations where time and
change are compounded and where events are nonlin-
ear and nonparametric. Usually, structures, procedures,
and patterns are fluid, and decision making needs to fol-
low counterintuitive and unconventional patterns.
Chapter 8 discussed the stages or phases compa-
nies experience during their growth. Recall that the
first three years before startup are called the research-
and-development (R&D) stage; the first three years,
the startup stage; years 4 through 10, the early-growth
stage; the 10th year through the 15th or so, maturity;
and after the 15th year, stability stage. These time es-
timates are approximate and may vary somewhat.
Various models, and our previous discussion, de-
picted the life cycle of a growing firm as a smooth curve
with rapidly ascending sales and profits and a leveling
off toward the peak and then dipping toward decline.
In truth, however, very few, if any, new and grow-
ing firms experience such smooth and linear phases of
growth. If the actual growth curves of new companies
are plotted over their first 10 years, the curves will
look far more like the ups and downs of a roller-
coaster ride than the smooth progressions usually de-
picted. Over the life of a typical growing firm, there
are periods of jerks, bumps, hiccups, indigestion, and
renewal interspersed with periods of smooth sailing.
Sometimes there is continual upward progress
through all this, but with others, there are periods
where the firms seem near collapse or at least in con-
siderable peril. Ed Marram, an entrepreneur and ed-
ucator for 20 years, characterizes the five stages of a
firm as Wonder, Blunder, Thunder, Plunder, Asunder
(see Exhibit 17.1). Wonder is the period that is filled
Hard
Work!
Creation
of
Myths
Teach
&
Share
or
Destroy!
Successor's
Hard Work
Death
Liquidation
Time
Failures
Quit
Growth
(1)
WONDER
(2)
BLUNDER
(3)
THUNDER
(4)
PLUNDER
ASUNDER or
renaissance
of WONDER
EXHIBIT 17.1
Growth Stages
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 17. Managing Rapid
Growth: Entrepreneurship
Beyond Startup
4
© The McGraw?Hill
Companies, 2004
562 Part V Startup and After
with uncertainty about survival. Blunder is a growth
stage when many firms stumble and fail. The Thun-
der stage occurs when growth is robust and the en-
trepreneur has built a solid management team. Cash
flow is robust during Plunder, but in Asunder the firm
needs to renew or will decline.
Core Management Mode
As was noted earlier, changes in several critical vari-
ables determine just how frantic or easy transitions
from one stage to the next will be. As a result, it is pos-
sible to make some generalizations about the main
management challenges and transitions that will be
encountered as the company grows. The core man-
agement mode is influenced by the number of em-
ployees a firm has, which is in turn related to its dol-
lar sales.
3
Recall, as shown in Exhibit 8.3, that until sales
reach approximately $5 million and employees num-
ber about 25, the core management mode is one of
doing. Between $5 million and $15 million in sales
and 25 to 75 employees, the core management mode
is managing. When sales exceed $10 million and em-
ployees number over 75, the core management mode
is managing managers. Obviously, these revenue and
employment figures are broad generalities. The num-
ber of people is an indicator of the complexity of the
management task, and suggests a new wall to be
scaled, rather than a precise point. To illustrate just
how widely sales per employee can vary, consider
Exhibit 17.2. This report from 1992 illustrates a met-
ric that applies today—established firms generate
$125,000 to $175,000 in sales per employee, while the
$691,700 in sales generated by Reebok (due to having
relatively few employees because of a great deal of
subcontracting of shoe manufacture) was nearly 35
times larger than Sonesta International Hotels’
$19,700. These numbers are boundaries, constantly
moving as a result of inflation and competitive dy-
namics. Sales per employee (SPE) can illustrate how
a company stacks up in its industry, but remember
that the number is a relative measurement. In 2001
Siebel Systems’ SPE was $560,532, while Sun Mi-
crosystems’ SPE was $493,098. IT provider GTSI had
an SPE of $1,300,871 and NVIDIA’s SPE was
$1,875,673.
4
Explosive sales per employee was one of
the failed promises of the Internet, and to some ex-
tent the irrational dot.com valuations of the late 1990s
were an anticipation of technology massively leverag-
ing variable employee expense.
The central issue facing entrepreneurs in all sorts
of businesses is this: As the size of the firm increases,
the core management mode likewise changes from
doing to managing to managing managers.
During each of the stages of growth of a firm, there
are entrepreneurial crises, or hurdles, that most firms
will confront. Exhibit 17.3 and the following discus-
sion consider by stage some indications of crisis.
5
As
the exhibit shows, for each fundamental driving force
of entrepreneurship, a number of “signals” indicate
crises are imminent. While the list is long, these are
not the only indicators of crises—only the most com-
mon. Each of these signals does not necessarily indi-
cate that particular crises will happen to every com-
pany at each stage, but when the signals are there,
serious difficulties cannot be too far behind.
The Problem in Rate of Growth
Difficulties in recognizing crisis signals and devel-
oping management approaches are compounded by
rate of growth itself. The faster the rate of growth,
the greater the potential for difficulty; this is be-
cause of the various pressures, chaos, confusion,
and loss of control. It is not an exaggeration to say
3
Harvey “Chet” Krentzman described this phenomenon to the authors many years ago. The principle still applies.
4
Kim Cross, “Does Your Team Measure Up? Business 2.0 (www.business2.com), June 2001.
5
The crises discussed here are the ones the authors consider particularly critical. Usually, failure to overcome even a few can imperil a venture at a given stage. There
are, however, many more, but a complete treatment of all of them is outside the scope of this book.
EXHIBIT 17.2
1992 Sales per Employee
Company (000)
Raytheon Company $141.8
Digital Equipment Corporation 138.7
Data General Corporation 159.5
Stratus Computer, Inc. 185.5
Wang Laboratories, Inc. 164.8
Well Fleet Communications 226.9
Lotus Development Corporation 204.6
Gillette 167.6
Biogen, Inc. 309.4
Genetic Institute 158.1
Picture Tel Corporation 199.2
Augat, Inc. 92.7
Ground Round Restaurants 23.4
Sonesta International Hotels 19.7
Mediplex Group, Inc. 40.8
Neiman Marcus Group 170.0
Stop & Shop Company 118.5
Reebok International Ltd. 691.7
Source: Boston Globe, June 8, 1993, p. 60.
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 17. Managing Rapid
Growth: Entrepreneurship
Beyond Startup
5
© The McGraw?Hill
Companies, 2004
Chapter 17 Managing Rapid Growth: Entreprenuership Beyond Startup 563
EXHIBIT 17.3
Crises and Symptoms
Pre-Startup (Years ?3 to ?1)
Entrepreneurs:
Focus. Is the founder really an entrepreneur, bent on building a company, or an inventor, technical dilettante, or the like?
Selling. Does the team have the necessary selling and closing skills to bring in the business and make the plan—on time?
Management. Does the team have the necessary management skills and relevant experience, or is it overloaded in one or two areas
(e.g., the financial or technical areas)?
Ownership. Have the critical decisions about ownership and equity splits been resolved, and are the members committed to these?
Opportunity:
Focus. Is the business really user-, customer-, and market-driven (by a need), or is it driven by an invention or a desire to create?
Customers. Have customers been identified with specific names, addresses, and phone numbers, and have purchase levels been
estimated, or is the business still only at the concept stage?
Supply. Are costs, margins, and lead times to acquire supplies, components, and key people known?
Strategy. Is the entry plan a shotgun and cherry-picking strategy, or is it a rifle shot at a well-focused niche?
Resources:
Resources. Have the required capital resources been identified?
Cash. Are the founders already out of cash (OOC) and their own resources?
Business plan. Is there a business plan, or is the team “hoofing it”?
Startup and Survival (Years 0–3)
Entrepreneurs:
Leadership. Has a top leader been accepted, or are founders vying for the decision role or insisting on equality in all decisions?
Goals. Do the founders share and have compatible goals and work styles, or are these starting to conflict and diverge once the
enterprise is underway and pressures mount?
Management. Are the founders anticipating and preparing for a shift from doing to managing and letting go—of decisions and
control—that will be required to make the plan on time?
Opportunity:
Economics. Are the economic benefits and payback to the customer actually being achieved, and on time?
Strategy. Is the company a one-product company with no encore in sight?
Competition. Have previously unknown competitors or substitutes appeared in the marketplace?
Distribution. Are there surprises and difficulties in actually achieving planned channels of distribution on time?
Resources:
Cash. Is the company facing a cash crunch early as a result of not having a business plan (and a financial plan)? That is, is it facing
a crunch because no one is asking: When will we run out of cash? Are the owners’ pocketbooks exhausted?
Schedule. Is the company experiencing serious deviations from projections and time estimates in the business plan? Is the company
able to marshall resources according to plan and on time?
Early Growth (Years 4–10)
Entrepreneurs:
Doing or managing. Are the founders still just doing, or are they managing for results by a plan? Have the founders begun to
delegate and let go of critical decisions, or do they maintain veto power over all significant decisions?
Focus. Is the mind-set of the founders operational only, or is there some serious strategic thinking going on as well?
Opportunity:
Market. Are repeat sales and sales to new customers being achieved on time, according to plan, and because of interaction with
customers, or are these coming from the engineering, R&D, or planning group? Is the company shifting to a marketing orientation
without losing its killer instinct for closing sales?
Competition. Are price and quality being blamed for loss of customers or for an inability to achieve targets in the sales plan, while
customer service is rarely mentioned?
Economics. Are gross margins beginning to erode?
Resources:
Financial control. Are accounting and information systems and control (purchasing orders, inventory, billing, collections, cost and
profit analysis, cash management, etc.) keeping pace with growth and being there when they are needed?
Cash. Is the company always out of cash—or nearly OOC, and is no one asking when it will run out, or is sure why or what to do
about it?
Contacts. Has the company developed the outside networks (directors, contacts, etc.) it needs to continue growth?
(Continued)
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Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 17. Managing Rapid
Growth: Entrepreneurship
Beyond Startup
6
© The McGraw?Hill
Companies, 2004
564 Part V Startup and After
that these pressures and demands increase geomet-
rically, rather than in a linear way (see discussion in
Chapter 8).
Growth rates affect all aspects of a business. Thus,
as sales increase, as more people are hired, and as in-
ventory increases, sales outpace manufacturing ca-
pacity. Facilities are then increased, people are
moved between buildings, accounting systems and
controls cannot keep up, and so on. The cash burn
rate accelerates. As such acceleration continues,
learning curves do the same. Worst of all, cash collec-
tions lag behind, as shown in Exhibit 17.4.
Distinctive issues caused by rapid growth were
considered at seminars at Babson College with the
founders and presidents of rapidly growing companies—
companies with sales of at least $1 million and grow-
ing in excess of 30 percent per year.
6
These founders
and presidents pointed to the following:
Opportunity overload. Rather than lacking
enough sales or new market opportunities, a
classic concern in mature companies, these
firms faced an abundance. Choosing from
among these was a problem.
EXHIBIT 17.3 (conc luded)
Crises and Symptoms
Maturity (Years 10–15 plus)
Entrepreneurs:
Goals. Are the partners in conflict over control, goals, or underlying ethics or values?
Health. Are there signs that the founders’ marriages, health, or emotional stability are coming apart (i.e., are there extramarital
affairs, drug and/or alcohol abuse, or fights and temper tantrums with partners or spouses)?
Teamwork. Is there a sense of team building for a “greater purpose,” with the founders now managing managers, or is there conflict
over control of the company and disintegration?
Opportunity:
Economics/competition. Are the products and/or services that have gotten the company this far experiencing unforgiving economics
as a result of perishability, competitor blind sides, new technology, or off-shore competition, and is there a plan to respond?
Product encore. Has a major new product introduction been a failure?
Strategy. Has the company continued to cherry-pick in fast-growth markets, with a resulting lack of strategic definition (which
opportunities to say no to)?
Resources:
Cash. Is the firm OOC again?
Development/information. Has growth gotten out of control, with systems, training, and development of new managers failing to
keep pace?
Financial control. Have systems continued to lag behind sales?
Harvest/Stability (Years 15–20 plus)
Entrepreneurs:
Succession/ownership. Are there mechanisms in place to provide for management succession and the handling of very tricky
ownership issues (especially family)?
Goals. Have the partners’ personal and financial goals and priorities begun to conflict and diverge? Are any of the founders simply
bored or burned out, and are they seeking a change of view and activities?
Entrepreneurial passion. Has there been an erosion of the passion for creating value through the recognition and pursuit of
opportunity, or are turf-building, acquiring status and power symbols, and gaining control favored?
Opportunity:
Strategy. Is there a spirit of innovation and renewal in the firm (e.g., a goal that half the company’s sales come from products or
services less than five years old), or has lethargy set in?
Economics. Have the core economics and durability of the opportunity eroded so far that profitability and return on investment are
nearly as low as that for the Fortune 500?
Resources:
Cash. Has OOC been solved by increasing bank debt and leverage because the founders do not want—or cannot agree—to give up
equity?
Accounting. Have accounting and legal issues, especially their relevance for wealth building and estate and tax planning, been
anticipated and addressed? Has a harvest concept been part of the long-range planning process?
6
These seminars were held at Babson College near Boston in 1985 and 1999. A good number of the firms represented had sales over $1 million, and many were
growing at greater than 100 percent per year.
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 17. Managing Rapid
Growth: Entrepreneurship
Beyond Startup
7
© The McGraw?Hill
Companies, 2004
Chapter 17 Managing Rapid Growth: Entreprenuership Beyond Startup 565
Abundance of capital. While most stable or
established smaller or medium-size firms often
have difficulties obtaining equity and debt
financing, most of the rapidly growing firms
were not constrained by this. The problem was,
rather, how to evaluate investors as “partners”
and the terms of the deals with which they
were presented.
Misalignment of cash burn and collection rates.
These firms all pointed to problems of cash
burn rates racing ahead of collections. They
found that unless effective integrated
accounting, inventory, purchasing, shipping,
and invoicing systems and controls are in place,
this misalignment can lead to chaos and
collapse. One firm, for example, had tripled its
sales in three years from $5 million to $16
million. Suddenly, its president resigned,
insisting that, with the systems that were in
place, the company would be able to grow to
$100 million. However, the computer system
was disastrously inadequate, which
compounded other management weaknesses. It
was impossible to generate any believable
financial and accounting information for many
months. Losses of more than $1 million
annually mounted, and the company’s lenders
panicked. To make matters worse, the auditors
failed to stay on top of the situation until it was
too late and were replaced. While the company
has survived, it has had to restructure its
business and has shrunk to $6 million in sales,
to pay off bank debt and to avoid bankruptcy.
Fortunately, it is recovering.
Decision making. Many of the firms succeeded
because they executed functional day-to-day
and week-to-week decisions, rather than
strategizing. Strategy had to take a back seat.
Many of the representatives of these firms
argued that in conditions of rapid growth,
strategy was only about 10 percent of the story.
Expanding facilities and space . . . and surprises.
Expansion of space or facilities is a problem and
one of the most disrupting events during the
early explosive growth of a company. Managers
of many of these firms were not prepared for
the surprises, delays, organizational difficulties,
and system interruptions that are spawned by
such expansion.
Industry Turbulence
The problems just discussed are compounded by the
amount of industry turbulence surrounding the ven-
ture. Firms with higher growth rates are usually found
in industries that are also developing rapidly. In addi-
tion, there are often many new entrants, both with
competing products or services and with substitutes.
The effects are many. Often, prices fluctuate. The
turbulence in the semiconductor industry in the 1980s
is a good example. From June 1984 to June 1985, the
Time (quarter)
0 1 2 3 4 5 6 7 8
D
o
l
l
a
r
s
Spend rate
Orders
Collections
EXHIBIT 17.4
Spend-Rate/Orders/Collection Leads and Lags
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 17. Managing Rapid
Growth: Entrepreneurship
Beyond Startup
8
© The McGraw?Hill
Companies, 2004
566 Part V Startup and After
price to original equipment manufacturers (OEMs)
of 64K memory chips fell from $2.50 each to 50 cents.
The price to OEMs of 256K chips fell from $15 to $3.
The same devastating industry effect manifested in
the years 2000–2002 when cellular airtime pricing
plunged by more than 50 percent. Imagine the dis-
ruption this caused in marketing and sales projec-
tions, in financial planning and cash forecasting, and
the like, for firms in these industries. Often, too, there
are rapid shifts in cost and experience curves. The
consequences of missed steps in growing business are
profound. Consider the examples of Polaroid and Xe-
rox shown in Exhibit 17.5.
The Importance of Culture
and Organizational Climate
Six Dimensions
The organizational culture and climate, either of a
new venture or of an existing firm, are critical in how
well the organization will deal with growth. Studies of
performance in large businesses that used the con-
cept of organizational climate (i.e., the perceptions of
people about the kind of place it is to work) have led
to two general conclusions.
7
First, the climate of an
organization can have a significant impact on perfor-
mance. Further, climate is created both by the expec-
tations people bring to the organization and by the
practices and attitudes of the key managers.
The climate notion has relevance for new ven-
tures, as well as for entrepreneurial efforts in large
organizations. An entrepreneur’s style and priorities—
particularly how he or she manages tasks and people—
is well known by the people being managed and af-
fects performance. Recall the entrepreneurial climate
described by Enrico of Pepsi, where the critical fac-
tors included setting high performance standards by
developing short-run objectives that would not sacri-
fice long-run results, providing responsive personal
leadership, encouraging individual initiative, helping
others to succeed, developing individual networks for
success, and so forth. Or listen to the tale of Gerald H.
Langeler, the president of the systems group of Men-
tor Graphics Corporation, who explained what “the vi-
sion trap” was.
8
Langeler described the vision of his
company’s entrepreneurial climate as simply to “Build
Something People Will Buy.”
9
The culture of Mentor
Graphics was definitely shaped by the founders’ styles
because “there were perhaps 15 of us at the time—we
could not only share information very quickly, we
74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01
$34.94
$20.46
$8.01
$2.62
DJIA 2001 = $10,000+ DJIA 1974 = $853
$60
$50
$40
$30
$20
$10
$0
EXHIBIT 17.5
How the Mighty Have Fallen
Source: The authors wish to thank Ed Marram for sharing this analysis.
7
See Jeffry A. Timmons, “The Entrepreneurial Team: Formation and Development,” a paper presented at the Academy of Management annual meeting, Boston,
August 1973.
8
Gerald H. Langeler, “The Vision Trap,” Harvard Business Review, March–April 1992, reprint 92204.
9
Ibid., p. 4.
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 17. Managing Rapid
Growth: Entrepreneurship
Beyond Startup
9
© The McGraw?Hill
Companies, 2004
Chapter 17 Managing Rapid Growth: Entreprenuership Beyond Startup 567
could also create a sense of urgency and purpose with-
out the help of an articulated vision.”
10
Evidence suggests that superior teams function dif-
ferently than inferior teams in their setting priorities,
in resolving leadership issues, in what and how roles
are performed by team members, in attitudes toward
listening and participation, and in dealing with dis-
agreements. Further, evidence suggests that specific
approaches to management can affect the climate of a
growing organization. For example, gains from the
motivation, commitment, and teamwork, which are
anchored in a consensus approach to management,
while not immediately apparent, are striking later. At
that time, there is swiftness and decisiveness in actions
and in follow-through, since the negotiating, compro-
mising, and accepting of priorities are history. Also,
new disagreements that emerge generally do not bring
progress to a halt because there is both high clarity and
broad acceptance of overall goals and underlying pri-
orities. Without this consensus, each new problem or
disagreement often necessitates a time-consuming
and painful confrontation and renegotiation simply
because it was not done initially.
Organizational climate can be described along six
basic dimensions:
Clarity. The degree of organizational clarity
in terms of being well organized, concise, and
efficient in the way that tasks, procedures,
and assignments are made and accomplished.
Standards. The degree to which management
expects and puts pressure on employees for
high standards and excellent performance.
Commitment. The extent to which employees
feel committed to the goals and objectives of
the organization.
Responsibility. The extent to which members
of the organization feel responsibility for
accomplishing their goals without being
constantly monitored and second-guessed.
Recognition. The extent to which employees
feel they are recognized and rewarded
(nonmonetarily) for a job well done, instead of
only being punished for mistakes or errors.
Esprit de corps. The extent to which employees
feel a sense of cohesion and team spirit, of
working well together.
Approaches to Management
In achieving the entrepreneurial culture and climate
described above, certain approaches to management
(also discussed in Chapter 8) are common across core
management modes.
Leadership No single leadership pattern seems
to characterize successful ventures. Leadership may
be shared, or informal, or a natural leader may guide
a task. What is common, however, is a manager who
defines and gains agreements on who has what re-
sponsibility and authority and who does what with
and to whom. Roles, tasks, responsibilities, account-
abilities, and appropriate approvals are defined.
There is no competition for leadership in these or-
ganizations, and leadership is based on expertise, not
authority. Emphasis is placed on performing task-
oriented roles, but someone invariably provides for
“maintenance” and group cohesion by good humor
and wit. Further, the leader does not force his or her
own solution on the team or exclude the involvement
of potential resources. Instead, the leader under-
stands the relationships among tasks and between the
leader and his or her followers and is able to lead in
those situations where it is appropriate, including
managing actively the activities of others through di-
rections, suggestions, and so forth.
This approach is in direct contrast to the commune
approach, where two to four entrepreneurs, usually
friends or work acquaintances, leave unanswered
such questions as who is in charge, who makes the fi-
nal decisions, and how real differences of opinion are
resolved. While some overlapping of roles and a shar-
ing in and negotiating of decisions are desirable in a
new venture, too much looseness is debilitating.
This approach also contrasts with situations where
a self-appointed leader takes over, where there is
competition for leadership, or where one task takes
precedence over other tasks.
Consensus Building Leaders of most successful
new ventures define authority and responsibility in a
way that builds motivation and commitment to cross-
departmental and corporate goals. Using a consensus
approach to management requires managing and
working with peers and with the subordinates of others
(or with superiors) outside formal chains of command
and balancing multiple viewpoints and demands.
In the consensus approach, the manager is seen as
willing to relinquish his or her priorities and power in
the interests of an overall goal, and the appropriate
people are included in setting cross-functional or
cross-departmental goals and in making decisions.
Participation and listening are emphasized.
In addition, the most effective managers are com-
mitted to dealing with problems and working prob-
lems through to agreement by seeking a reconciliation
of viewpoints, rather than emphasizing differences,
and by blending ideas, rather than playing the role of
hard-nose negotiator or devil’s advocate to force their
10
Ibid., p. 5.
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 17. Managing Rapid
Growth: Entrepreneurship
Beyond Startup
10
© The McGraw?Hill
Companies, 2004
568 Part V Startup and After
own solution. There is open confrontation of differ-
ences of opinion and a willingness to talk out differ-
ences, assumptions, reasons, and inferences. Logic
and reason tend to prevail, and there is a willingness
to change opinions based on consensus.
Communication The most effective managers
share information and are willing to alter individual
views. Listening and participation are facilitated by
such methods as circular seating arrangements, few
interruptions or side conversations, and calm discus-
sion versus many interruptions, loud or separate con-
versations, and so forth, in meetings.
Encouragement Successful managers build con-
fidence by encouraging innovation and calculated
risk-taking, rather than by punishing or criticizing
what is less than perfect, and by expecting and en-
couraging others to find and correct their own errors
and to solve their own problems. Their peers and oth-
ers perceive them as accessible and willing to help
when needed, and they provide the necessary re-
sources to enable others to do the job. When it is ap-
propriate, they go to bat for their peers and subordi-
nates, even when they know they cannot always win.
Further, differences are recognized and performance
is rewarded.
Trust The most effective managers are perceived
as trustworthy and straightforward. They do what
they say they are going to do; they are not the corpo-
rate rumor carriers; they are more open and sponta-
neous, rather than guarded and cautious with each
word; and they are perceived as being honest and di-
rect. They have a reputation of getting results and be-
come known as the creative problem solvers who
have a knack for blending and balancing multiple
views and demands.
Development Effective managers have a reputa-
tion for developing human capital (i.e., they groom
and grow other effective managers by their example
and their mentoring). As noted in Chapter 8, Brad-
ford and Cohen distinguish between the heroic man-
ager, whose need to be in control in many instances
actually may stifle cooperation, and the post-heroic
manager, a developer who actually brings about ex-
cellence in organizations by developing entrepre-
neurial middle management. If a company puts off
developing middle management until price competi-
tion appears and its margins erode, the organization
may come unraveled. Linking a plan to grow human
capital at the middle management and the supervi-
sory levels with the business strategy is an essential
first step.
Entrepreneurial Management for the 21st
Century: Three Breakthroughs
Three extraordinary companies have been built or
revolutionized in the past two decades: Marion Labs,
Inc., of Kansas City; Johnsonville Sausage of Cheboy-
gan, Wisconsin; and Springfield Remanufacturing
Corporation of Springfield, Missouri. Independently
and unbeknown to each other, these companies cre-
ated “high standard, perpetual learning cultures,”
which create and foster a “chain of greatness.” The
lessons from these three great companies provide a
blueprint for entrepreneurial management in the
21st century. They set the standard and provide a tan-
gible vision of what is possible. Not surprisingly, the
most exciting, faster growing, and profitable compa-
nies in America today have striking similarities to
these firms.
Ewing Marion Kauffman
and Marion Labs
As described in Chapter 1, Marion Laboratories,
founded in Ewing Marion Kauffman’s garage in 1950,
had reached $2.5 billion in sales by the time it
merged with Merrill Dow in 1989. Its market capi-
talization was $6.5 billion. Over 300 millionaires and
13 foundations including the Ewing Marion Kauff-
man Foundation, were created from the builders of
the company. In sharp contrast, RJR Nabisco, about
10 times larger than Marion Labs at the time of the
KKR leveraged buyout, generated only 20 million-
aires. Clearly, these were very different companies.
Central to Marion Labs’ phenomenal success story
was the combination of a high potential opportunity
with management execution based on core values
and management philosophy ahead of its time. These
principles are simple enough, but difficult to incul-
cate and sustain through good times and bad:
1. Treat everyone as you would want to be
treated.
2. Share the wealth with those who have
created it.
3. Pursue the highest standards of performance
and ethics.
As noted earlier, the company had no organiza-
tional chart, referred to all its people as associates, not
employees, and had widespread profit-sharing and
stock participation plans. Having worked for a few
years now with Mr. K and the top management that
built Marion Labs and then ran the foundation, the
authors can say that they are genuine and serious
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 17. Managing Rapid
Growth: Entrepreneurship
Beyond Startup
11
© The McGraw?Hill
Companies, 2004
Chapter 17 Managing Rapid Growth: Entreprenuership Beyond Startup 569
about these principles. They also have fun while suc-
ceeding, but they are highly dedicated to the practice
of these core philosophies and values.
Jack Stack and Springfield
Remanufacturing Corporation
The truly remarkable sage of this revolution in man-
agement is Jack Stack; his book, The Great Game of
Business, should be read by all entrepreneurs. In
1983, Stack and a dozen colleagues acquired a tractor
engine remanufacturing plant from the failing In-
ternational Harvester Corporation. With an 89-to-1
debt-to-equity ratio and 21 percent interest, they ac-
quired the company for 10 cents a share. In 1993, the
company’s shares were valued near $20 for the em-
ployee stock ownership plan, and the company had
completely turned around with sales approaching
$100 million. What had happened?
Like Ewing Marion Kauffman, Jack Stack created
and implemented some management approaches and
values radically opposite to the top-down, hierarchi-
cal, custodial management commonly found in large
manufacturing enterprises. At the heart of his leader-
ship was creating a vision called The Big Picture:
Think and act like owners, be the best we can be, and
be perpetual learners. Build teamwork as the key by
learning from each other, open the books to everyone,
and educate everyone so they can become responsible
and accountable for the numbers, both short and long
term. Stack puts it this way:
We try to take ignorance out of the workplace and force
people to get involved, not with threats and intimidation
but with education. In the process, we are trying to close
the biggest gaps in American business—the gap be-
tween workers and managers. We’re developing a sys-
tem that allows everyone to get together and work to-
ward the same goals. To do that, you have to knock down
the barriers that separate people, that keep people from
coming together as a team.
11
At Springfield Remanufacturing Corporation, every-
one learns to read and interpret all the financial state-
ments, including an income statement, balance sheet,
and cash flow, and how his or her job affects each line
item. This open-book management style is linked with
pushing responsibility downward and outward, and to
understanding both wealth creation (i.e., shareholder
value) and wealth sharing through short-term bonuses
and long-term equity participation. Stack describes the
value of this approach thus: “The payoff comes from
getting the people who create the numbers to under-
stand the numbers. When that happens, the communi-
cation between the bottom and the top of the organiza-
tion is just phenomenal.”
12
The results he achieved in
10 years are astounding. Even more amazing is that he
has found the time to share this approach with others.
More than 150 companies have participated in semi-
nars that have enabled them to adopt this approach.
Ralph Stayer and Johnsonville
Sausage Company
13
In 1975, Johnsonville Sausage was a small company
with about $5 million in sales and a fairly traditional,
hierarchical, and somewhat custodial management.
In just a few years, Ralph Stayer, the owner’s son, rad-
ically transformed the company through a manage-
ment revolution whose values, culture, and philoso-
phy are remarkably similar to the principles of Ewing
Marion Kauffman and Jack Stack.
The results are astonishing: By 1980, the com-
pany had reached $15 million in sales; by 1985, $50
million; and by 1990, $150 million. At the heart of
the changes he created was the concept of a total
learning culture: Everyone is a learner, seeking to
improve constantly, finding better ways. High per-
formance standards accompanied by an investment
in training, and performance measures that made it
possible to reward fairly both short- and long-term
results were critical to the transition. Responsibility
and accountability was spread downward and out-
ward. For example, instead of forwarding complaint
letters to the marketing department, where they are
filed and the standard response is sent, they go di-
rectly to the front-line sausage stuffer responsible
for the product’s taste. The sausage stuffers are the
ones who respond to customer complaints now. An-
other example is the interviewing, hiring, and train-
ing process for new people. A newly hired woman
pointed out numerous shortcomings with the exist-
ing process and proposed ways to improve it. As a re-
sult, the entire responsibility was shifted from the
traditional human resources/personnel group to the
front line, with superb results.
As one would guess, such radical changes do not
come easily. Consider Stayer’s insight:
In 1980, I began looking for a recipe for change. I
started by searching for a book that would tell me how
11
Jack Stack, The Great Game of Business (New York: Currency/Doubleday Books, 1991), p. 5.
12
Ibid., p. 93.
13
For an excellent discussion of this transformation, see “The Johnsonville Sausage Company,” HBS Case 387-103, rev. June 27, 1990. Copyright © 1990 by the
President and Fellows of Harvard College. See also Ralph Stayer, “How I Learned to Let My Workers Lead,” Harvard Business Review, November–December
1990. Copyright © 1990 by the President and Fellows of Harvard College.
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 17. Managing Rapid
Growth: Entrepreneurship
Beyond Startup
12
© The McGraw?Hill
Companies, 2004
570 Part V Startup and After
to get people to care about their jobs and their com-
pany. Not surprisingly, the search was fruitless. No
one could tell me how to wake up my own workforce;
I would have to figure it out for myself . . . The most
important question any manager can ask is: “In the
best of all possible worlds what would I really want to
happen?”
14
Even having taken such a giant step, Stayer was ready
to take the next, equally perilous steps: Acting on in-
stinct, I ordered a change. “From now on,” I an-
nounced to my management team, “you’re all re-
sponsible for making your own decisions” . . . I went
from authoritarian control to authoritarian abdica-
tion. No one had asked for more responsibility; I had
forced it down their throats.
15
Further insight into just how challenging it is to
transform a company like Johnsonville Sausage is re-
vealed in another Stayer quote:
I spent those two years pursuing another mirage of well-
detailed strategic and tactical plans that would realize
my goals of Johnsonville as the world’s greatest sausage
maker. We tried to plan organizational structure two to
three years before it would be needed . . . Later I real-
ized that these structural changes had to grow from day-
to-day working realities; no one could dictate them from
above, and certainly not in advance.
16
Exhibit 17.6 summarizes the key steps in the trans-
formation of Johnsonville Sausage over several years.
Such a picture undoubtedly oversimplifies the process
and understates the extraordinary commitment and
effort required to pull it off, but it does show how the
central elements weave together.
The Chain of Greatness
As we reflect on these three great companies, we
can see that there is clearly a pattern here, with
some common denominators in both the ingredi-
ents and the process. This chain of greatness be-
comes reinforcing and perpetuating (see Exhibit
17.7). Leadership that instills across the company a
vision of greatness and an owner’s mentality is a
common beginning. A philosophy of perpetual
learning throughout the organization accompanied
by high standards of performance is key to the
value-creating entrepreneurial cultures at the three
firms. A culture that teaches and rewards team-
work, improvement, and respect for each other
provides the oil and glue to make things work. Fi-
nally, a fair and generous short- and long-term re-
ward system, as well as the necessary education to
EXHIBIT 17.6
Summary of the Johnsonville Sausage Company
The critical aspects of the transition:
1. Started at the top: Ralph Stayer recognized that he was the heart of the problem and recognized the need to change—the most difficult
step.
2. Vision was anchored in human resource management and in a particular idea of the company’s culture:
Continuous learning organization.
Team concept—change players.
New model of jobs (Ralph Stayer’s role and decision making).
Performance- and results-based compensation and rewards.
3. Stayer decided to push responsibility and accountability downward to the front-line decision makers:
Front-liners are closest to the customer and the problem.
Define the whole task.
Invest in training and selection.
Job criteria and feedback ? development tool.
4. Controls and mechanisms make it work:
Measure performance, not behavior, activities, and the like.
Emphasize learning and development, not allocation of blame.
Customize to you and the company.
Decentralize and minimize staff.
14
Stayer, “How I Learned to Let My Workers Lead,” p. 1.
15
Ibid., pp. 3–4.
16
Ibid., p. 4.
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 17. Managing Rapid
Growth: Entrepreneurship
Beyond Startup
13
© The McGraw?Hill
Companies, 2004
Chapter 17 Managing Rapid Growth: Entreprenuership Beyond Startup 571
make sure that everyone knows and can use the
numbers, creates a mechanism for sharing the
wealth with those who contributed to it. The results
speak for themselves: extraordinary levels of per-
sonal, professional, and financial achievement.
Chapter Summary
1. The demands of rapid growth have led to the
invention of new organizational paradigms by
entrepreneurs.
2. The entrepreneurial organization today is flatter,
faster, more flexible and responsive, and copes
readily with ambiguity and change. It is the opposite
of the hierarchy, layers of management, and the
more-is-better syndrome prevalent in brontosaurus
capitalism.
3. Entrepreneurs in high growth firms distinguish
themselves with leading entrepreneurial practices in
marketing, finance, management, and planning.
4. As high-potential firms “grow up big” they
experience stages (Wonder, Blunder, Thunder,
Plunder, Asunder or Wonder redux), each with its
own special challenges and crises, which are
compounded the faster the growth.
5. Establishing a culture and climate conducive to
entrepreneurship is a core task for the venture.
6. A chain of greatness characterizes some
breakthrough approaches to leadership and
management in entrepreneurial ventures.
Study Questions
1. Why have old hierarchical management paradigms
given way to new organizational paradigms?
Leadership
Big picture
Think/act like owners
Best we can be
Vision
Results in
Achievement of personal
and performance goals
Shared pride and leadership
Mutual respect
Thirst for new challenges
and goals
Perpetual learning culture
Train and educate
High performance goals/standards
Shared learning/teach each other
Grow, improve, change, innovate
Widespread
responsibility/accountability
Understand and interpret the numbers
Reward short-term with bonuses
Reward long-term with equity
Entrepreneurial mind-set and values
Take responsibility
Get results
Value and wealth creation
Share the wealth with those who create it
Customer and quality driven
and which
Leads to Fosters
EXHIBIT 17.7
The Chain of Greatness
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 17. Managing Rapid
Growth: Entrepreneurship
Beyond Startup
14
© The McGraw?Hill
Companies, 2004
572 Part V Startup and After
2. What special problems and crises can new ventures
expect as they grow? Why do these occur?
3. Explain the stages many ventures experience and
why these are unique.
4. What role does the organizational culture and
climate play in a rapidly growing venture? Why are
many large companies unable to create an
entreprenial culture?
5. What is the chain of greatness and why can
entrpreneurs benefit from the concept?
6. Why is the rate of growth the central driver of the
organization challenges a growing venture faces?
MIND STRETCHERS
Have You Considered?
1. Many large organizations are now attempting to
reinvent themselves. What will be the biggest
challenge in this process, and why?
2. How fast should a company grow? How fast is too
fast, organizationally and financially?
3. In your ideal world, how would you describe what
it is like to live and work within the perfect
entrepreneurial organization?
4. Who should not be an entrepreneur?
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 18. The Entrepreneur and
the Troubled Company
15
© The McGraw?Hill
Companies, 2004
When the Bloom Is Off the Rose
This chapter is about the entrepreneur and the
troubled company. It traces the firm’s route into
and out of crisis and provides insight into how a
troubled company can be rescued by a turnaround
specialist.
Many times in the history of the United States,
companies have experienced times of economic trou-
bles. We are in such a period again in mid-2002. Both
corporate and personal bankruptcies increased dur-
ing 2002, and managers needed a new and special set
of skills to lead through the shoals.
There is a saying among horseback riders that the
person who has never been thrown from a horse
probably has never ridden one! Jim Hindman,
founder of Jiffy Lube, is fond of saying, “Ultimately it
is not how many touchdowns you score but how fast
and often you get up after being tackled.” These in-
sights capture the essence of the ups and downs that
can occur during the growth and development of a
new venture.
18
Chapter Eighteen
The Entrepreneur and the
Troubled Company
“Yes, I did run out of time on a few occasions, but I never lost a ball game!”
Bobby Lane
great quarterback in the 1950s and 1960s of the Detroit Lions and the Pittsburgh Steelers
“It’s OK to go bankrupt, but not on your last deal.”
John W. Altman
entrepreneur and professor
Results Expected
Upon completion of this chapter, you will have:
1. Examined the principle causes and danger signals of impeding trouble.
2. Discussed both quantitative and qualitative symptoms of trouble.
3. Examined the principle diagnostic methods used to devise intervention and turnaround
plans.
4. Identified remedial actions used for dealing with lenders, creditors, and employees.
5. Analyzed the “EverNet Corporation” case study.
579
Special credit is due to Robert Bateman, Scott Douglas, and Ann Morgan for contributing material in this chapter. The material is the result of research and
interviews with turnaround specialists and was submitted in a paper as a requirement for the author’s Financing Entrepreneurial Ventures course in the MBA
program at Babson College.
The authors are especially grateful to two specialists, Leslie B. Charm, who along with his partner has owned three national franchise companies, an entrepreneurial
advisory and troubled business management company, and a venture capital company, AIGIS Ventures, LLC; and Leland Goldberg of Coopers & Lybrand,
Boston, who contributed enormously to the efforts of Bateman, Douglas, and Morgan and to the material.
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 18. The Entrepreneur and
the Troubled Company
16
© The McGraw?Hill
Companies, 2004
580 Part V Startup and After
Getting into Trouble—The Causes
Trouble can be caused by external forces not under the
control of management. Among the most frequently
mentioned are recession, interest rate changes, changes
in government policy, inflation, the entry of new com-
petition, and industry/product obsolescence.
However, those who manage turnarounds find that
while such circumstances define the environment to
which a troubled company needs to adjust, they are
rarely the sole reason for a company failure. External
shocks impact all companies in an industry, and only
some of them fail. Others survive and prosper.
Most causes of failure can be found within com-
pany management. Although there are many causes
of trouble, the most frequently cited fall into three
broad areas: inattention to strategic issues, general
management problems, and poor financial/account-
ing systems and practices. There is striking similarity
between these causes of trouble and the causes of
failure for startups given in Chapter 2.
Strategic Issues
Misunderstood market niche. The first of these
issues is a failure to understand the company’s
market niche and to focus on growth without
considering profitability. Instead of developing
a strategy, these firms take on low-margin
business and add capacity in an effort to grow.
They then run out of cash.
Mismanaged relationships with suppliers and
customers. Related to the issue of not
understanding market niche is the failure to
understand the economics of relationships with
suppliers and customers. For example, some
firms allow practices in the industry to dictate
payment terms, when they may be in a position
to dictate their own terms.
Diversification into an unrelated business area.
A common failing of cash-rich firms that suffer
from the growth syndrome is diversification
into unrelated business areas. These firms use
the cash flow generated in one business to start
another without good reason. As one
turnaround consultant said, “I couldn’t believe
it. There was no synergy at all. They added to
their overhead but not to their contribution. No
common sense!”
Mousetrap myopia. Related to the problem of
starting a firm around an idea, rather than an
opportunity, is the problem of firms that have
“great products” and are looking for other
markets where they can be sold. This is done
without analyzing the firm’s opportunities.
The big project. The company gears up for a
“big project” without looking at the cash flow
implications. Cash is expended by adding
capacity and hiring personnel. When sales do
not materialize, or take longer than expected to
materialize, there is trouble. Sometimes the
“big project” is required by the nature of the
business opportunity. An example of this would
be the high-technology startup that needs to
capitalize on a first-mover advantage. The
company needs to prove the product’s “right to
life” and grow quickly to the point where it can
achieve a public market or become an attractive
acquisition candidate for a larger company. This
ensures that a larger company cannot use its
advantages in scale and existing distribution
channels, after copying the technology, to
achieve dominance over the startup.
Lack of contingency planning. As has been
stated over and over, the path to growth is not a
smooth curve upward. Firms need to be geared
to think about what happens if things go sour,
sales fall, or collections slow. There needs to be
plans in place for layoffs and capacity reduction.
Management Issues
Lack of management skills, experience, and
know-how. As was mentioned in Chapter 8,
while companies grow, managers need to
change their management mode from doing to
managing to managing managers.
Weak finance function. Often, in a new and
emerging company, the finance function is
nothing more than a bookkeeper. One company
was five years old, with $20 million in sales,
before the founders hired a financial
professional.
Turnover in key management personnel.
Although turnover of key management
personnel can be difficult in any firm, it is a
critical concern in businesses that deal in
specialized or proprietary knowledge. For
example, one firm lost a bookkeeper who was
the only person who really understood what
was happening in the business.
Big-company influence in accounting. A
mistake that some companies often make is to
focus on accruals, rather than cash.
Poor Planning, Financial/Accounting
Systems, Practices, and Controls
Poor pricing, overextension of credit, and
excessive leverage. These causes of trouble are
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 18. The Entrepreneur and
the Troubled Company
17
© The McGraw?Hill
Companies, 2004
Chapter 18 The Entrepreneur and the Troubled Company 581
not surprising and need not be elaborated.
Some of the reasons for excess use of leverage
are interesting. Use of excess leverage can
result from growth outstripping the company’s
internal financing capabilities. The company
then relies increasingly on short-term notes
until a cash flow problem develops. Another
reason a company becomes overleveraged is by
using guaranteed loans in place of equity for
either startup or expansion financing. One
entrepreneur remarked, “[The guaranteed
loan] looked just like equity when we started,
but when trouble came it looked more and
more like debt.”
Lack of cash budgets/projections. This is a most
frequently cited cause of trouble. In small
companies, cash budgets/projections are often
not done.
Poor management reporting. While some firms
have good financial reporting, they suffer from
poor management reporting. As one
turnaround consultant stated, “[The financial
statement] just tells where the company has
been. It doesn’t help manage the business. If
you look at the important management
reports—inventory analysis, receivables aging,
sales analysis—they’re usually late or not
produced at all. The same goes for billing
procedures. Lots of emerging companies don’t
get their bills out on time.”
Lack of standard costing. Poor management
reporting extends to issues of costing, too.
Many emerging businesses have no standard
costs against which they can compare the actual
costs of manufacturing products. The result is
they have no variance reporting. The company
cannot identify problems in process and take
corrective action. The company will know only
after the fact how profitable a product is.
Even when standard costs are used, it is not un-
common to find that engineering, manufacturing,
and accounting each has its own version of the bill
of material. The product is designed one way,
manufactured a second way, and costed a third.
Poorly understood cost behavior. Companies
often do not understand the relationship
between fixed and variable costs. For example,
one manufacturing company thought it was
saving money by closing on Saturday. In this way,
management felt it would save paying overtime.
It had to be pointed out to the lead entrepreneur
by a turnaround consultant that, “He had a lot of
high-margin product in his manufacturing
backlog that more than justified the overtime.”
It is also important for entrepreneurs to under-
stand the difference between theory and practice in
this area. The turnaround consultant mentioned
above said, “Accounting theory says that all costs
are variable in the long run. In practice, almost all
costs are fixed. The only truly variable cost is a sales
commission.”
Getting Out of Trouble
The major protection against and the biggest help in
getting out of these troubled waters is to have a set of
advisors and directors who have been through this in
the past. They possess skills that aren’t taught in
school or in most corporate training programs. An
outside “vision” is critical. The speed of action has to
be different; control systems have to be different; and
organization generally needs to be different.
Troubled companies face a situation similar to that
described by Winston Churchill, in While England
Slept, “Descending inconstantly, fecklessly, the stair-
way which leads to dark gulf. It is a fine broad stair-
way at the beginning, but after a bit the carpet ends,
a little farther on there are only flagstones, and a lit-
tle farther on still these break beneath your feet.”
Although uncontrollable external factors such as
new government regulations do arise, an opportu-
nity-driven firm’s crisis is usually the result of man-
agement error. Yet in these management errors are
found part of the solution to the troubled company’s
problems. It is pleasing to see that many companies—
even companies that are insolvent or have negative
net worth or both—can be rescued and restored to
profitability.
Predicting Trouble
Since crises develop over time and typically result
from an accumulation of fundamental errors, can a
crisis be predicted? The obvious benefit of being able
to predict crisis is that the entrepreneur, employees,
and significant outsiders, such as investors, lenders,
trade creditors—and even customers—could see
trouble brewing in time to take corrective actions.
There have been several attempts to develop pre-
dictive models. Two are presented below and have
been selected because each is easy to calculate and
uses information available in common financial re-
ports. Because management reporting in emerging
companies is often inadequate, the predictive model
needs to use information available in common finan-
cial reports.
Each of the two approaches below uses easily ob-
tained financial data to predict the onset of crisis as
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 18. The Entrepreneur and
the Troubled Company
18
© The McGraw?Hill
Companies, 2004
582 Part V Startup and After
much as two years in advance. For the smaller public
company, these models can be used by all interested
observers. With private companies, they are useful
only to those privy to the information and are proba-
bly only of benefit to such nonmanagement outsiders
as lenders and boards of directors.
The most frequently used denominator in all these
ratios is the figure for total assets. This figure often is
distorted by “creative accounting,” with expenses oc-
casionally improperly capitalized and carried on the
balance sheet or by substantial differences between
tangible book value and book value (i.e., overvalued
or undervalued assets).
Net-Liquid-Balance-to-Total-Assets Ratio
The model shown in Exhibit 18.1 was developed by
Joel Shulman, a Babson College professor, to predict
loan defaults. Shulman found that his ratio can pre-
dict loan defaults with significant reliability as much
as two years in advance.
Shulman’s approach is noteworthy because it ex-
plicitly recognizes the importance of cash. Among
current accounts, Shulman distinguishes between op-
erating assets (such as inventory and accounts receiv-
able) and financial assets (such as cash and mar-
ketable securities). The same distinction is made
among liabilities, where notes payable and contrac-
tual obligations are financial liabilities and accounts
payable are operating liabilities.
Shulman then subtracts financial liabilities from fi-
nancial assets to obtain a figure known as the net liquid
balance (NLB). NLB can be thought of as “uncommit-
ted cash,” cash the firm has available to meet contin-
gencies. Because it is the short-term margin for error
should sales change, collections slow, or interest rates
change, it is a true measure of liquidity. The NLB is
then divided by total assets to form the predictive ratio.
Nonquantitative Signals
In Chapter 17 we discussed patterns and actions that
could lead to trouble, indications of common trouble
by growth stage, and critical variables that can be
monitored.
Turnaround specialists also use some nonquantita-
tive signals as indicators of the possibility of trouble.
As with the signals discussed in Chapter 17, the pres-
ence of a single one of these does not necessarily im-
ply an immediate crisis. However, once any of these
surfaces and if the others follow, then trouble is likely
to mount.
Inability to produce financial statements on time.
Changes in behavior of the lead entrepreneur
(such as avoiding phone calls or coming in later
than usual).
Change in management or advisors, such as
directors, accountants, or other professional
advisors.
Accountant’s opinion that is qualified and not
certified.
New competition.
Launching of a “big project.”
Lower research and development expenditures.
Special write-offs of assets and/or addition of
“new” liabilities.
Reduction of credit line.
The Gestation Period of Crisis
Crisis rarely develops overnight. The time between
the initial cause of trouble and the point of interven-
tion can run from 18 months to five years. What hap-
pens to a company during the gestation period has
implications for the later turnaround of the company.
Thus, how management reacts to crisis and what hap-
pens to morale determine what will need to happen
in the intervention. Usually, a demoralized and un-
productive organization develops when its members
think only of survival, not turnaround, and its entre-
preneur has lost credibility. Further, the company has
lost valuable time.
In looking backward, the graph of a company’s key
statistics shows trouble. One can see the sales growth
rate (and the gross margin) have slowed considerably.
This is followed by an increasing rise in expenses as
the company assumes that growth will continue.
EXHIBIT 18.1
Net-Liquid-Balance-to-Total-Assets Ratio
Net-Liquid-Balance-to-Total Assets Ratio ? NLB/Total Assets
Where
NLB ? (Cash ? Marketable securities) ? (Notes Payable ? Contractual obligations)
Source: Joel Shulman, “Primary Rule for Detecting Bankruptcy: Watch the Cash,” Financial Analyst
Journal, September 1988.
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 18. The Entrepreneur and
the Troubled Company
19
© The McGraw?Hill
Companies, 2004
Chapter 18 The Entrepreneur and the Troubled Company 583
When the growth doesn’t continue, the company still
allows the growth rate of expenses to remain high so
it can “get back on track.”
The Paradox of Optimism
In a typical scenario for a troubled company , the first
signs of trouble (such as declining margins, customer
returns, or falling liquidity) go unnoticed or are written
off as teething problems of the new project or as the or-
dinary vicissitudes of business. For example, one en-
trepreneur saw increases in inventory and receivables
as a good sign, since sales were up and the current ra-
tio had improved. However, although sales were up,
margins were down, and he did not realize he had a liqui-
dity problem until cash shortages developed.
Although management may miss the first signs,
outsiders usually do not. Banks, board members, sup-
pliers, and customers see trouble brewing. They won-
der why management does not respond. Credibility
begins to erode.
Soon management has to admit that trouble exists,
but valuable time has been lost. Furthermore, requi-
site actions to meet the situation are anathema. The
lead entrepreneur is emotionally committed to peo-
ple, to projects, or to business areas. Further, to cut
back in any of these areas goes against instinct, be-
cause the company will need these resources when
the good times return.
The company continues its downward fall, and the
situation becomes stressful. Turnaround specialists
mention that stress can cause avoidance on the part of
an entrepreneur. Others have likened the entrepre-
neur in a troubled company to a deer caught in a car’s
headlights. The entrepreneur is frozen and can take
no action. Avoidance has a basis in human psychology.
One organizational behavior consultant who has
worked on turnarounds said, “When a person under
stress does not understand the problem and does not
have the sense to deal with it, the person will tend to
replace the unpleasant reality with fantasy.” The con-
sultant went on to say, “The outward manifestation of
this fantasy is avoidance.” This consultant noted it is
common for an entrepreneur to deal with pleasant
and well-understood tasks, such as selling to cus-
tomers, rather than dealing with the trouble. The re-
sult is that credibility is lost with bankers, creditors,
and so forth. (These are the very people whose coop-
eration needs to be secured if the company is to be
turned around.)
Often, the decisions the entrepreneur does make
during this time are poor and accelerate the company
on its downward course. The accountant or the con-
troller may be fired, resulting in a company that is
then flying blind. One entrepreneur, for example,
running a company that manufactured a high-margin
product, announced across-the-board cuts in expen-
ditures, including advertising, without stopping to
think that cutting advertising on such a product only
added to the cash flow problem.
Finally, the entrepreneur may make statements
that are untrue or may make promises that cannot be
kept. This is the death knell of his or her credibility.
The Bloom Is Off the Rose—Now What?
Generally, when an organization is in trouble some
telltale trends appear.
Ignore outside advice.
The worse is still yet to come.
People (including and usually, most especially,
the entrepreneur) have stopped making
decisions and also have stopped answering the
phone.
Nobody in authority has talked to the
employees.
Rumors are flying.
Inventory is out of balance.
Accounts receivable aging is increasing.
Customers are becoming afraid of new
commitments.
A general malaise has settled in while a still
high-stressed environment exists (an unusual
combination).
Decline in Organizational Morale
Among those who notice trouble developing are the
employees. They deal with customer returns, calls
from creditors, and the like, and they wonder why
management does not respond. They begin to lose
confidence in management.
Despite troubled times, the lead entrepreneur talks
and behaves optimistically or hides in the office de-
clining to communicate with either employees, cus-
tomers, or vendors. Employees hear of trouble from
each other and from other outsiders. They lose confi-
dence in the formal communications of the company.
The grapevine, which is always exaggerated, takes on
increased credibility. Company turnover starts to in-
crease. Morale is eroding.
It is obvious there is a problem and that it is not be-
ing dealt with. Employees wonder what will happen,
whether they will be laid off, and whether the firm
will go into bankruptcy. With their security threat-
ened, employees lapse into survival mode. As an or-
ganizational behavior consultant explains:
The human organism can tolerate anything except un-
certainty. It causes so much stress that people are no
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 18. The Entrepreneur and
the Troubled Company
20
© The McGraw?Hill
Companies, 2004
584 Part V Startup and After
longer capable of thinking in a cognitive, creative man-
ner. They focus on survival. That’s why in turnarounds
you see so much uncooperative, finger-pointing behav-
ior. The only issue people understand is directing the
blame elsewhere [or in doing nothing].
Crisis can force intervention. The occasion is usu-
ally forced by the board of directors, lender, or a law-
suit. For example, the bank may call a loan, or the
firm may be put on cash terms by its suppliers. Per-
haps creditors try to put the firm into involuntary
bankruptcy. Or something from the outside world
fundamentally changes the business environment.
The Threat of Bankruptcy
1
Unfortunately the heads of most troubled companies
usually do not understand the benefits of bankruptcy
law. To them, bankruptcy carries the stigma of failure;
however, the law merely defines the priority of cred-
itors’ claims when the firm is liquidated.
Although bankruptcy can provide for the liquida-
tion of the business, it also can provide for its reorga-
nization. Bankruptcy is not an attractive prospect for
creditors because they stand to lose at least some of
their money, so they often are willing to negotiate.
The prospect of bankruptcy also can be a foundation
for bargaining in a turnaround.
Voluntary Bankruptcy
When bankruptcy is granted to a business under
bankruptcy law (often referred to as Chapter 11), the
firm is given immediate protection from creditors.
Payment of interest or principle is suspended, and
creditors must wait for their money. Generally the
current management (a debtor in possession) is al-
lowed to run the company, but sometimes an out-
sider, a trustee, is named to operate the company, and
creditor committees are formed to watch over the op-
erations and to negotiate with the company.
The greatest benefit of Chapter 11 is that it buys
time for the firm. The firm has 120 days to come up
with a reorganization plan and 60 days to obtain ac-
ceptance of that plan by creditors. Under a reorgani-
zation plan, debt can be extended. Debt also can be
restructured (composed). Interest rates can be in-
creased, and convertible provisions can be intro-
duced to compensate debt holders for any increase in
their risk as a result of the restructuring. Occasionally,
debt holders need to take part of their claim in the
form of equity. Trade creditors can be asked to take
equity as payment, and they occasionally need to ac-
cept partial payment. If liquidation is the result of the
reorganization plan, partial payment is the rule, with
the typical payment ranging from zero to 30 cents on
the dollar, depending on the priority of the claim.
Involuntary Bankruptcy
In involuntary bankruptcy, creditors force a troubled
company into bankruptcy. Although this is regarded
as a rare occurrence, it is important for an entrepre-
neur to know the conditions under which creditors
can force a firm into bankruptcy.
A firm can be forced into bankruptcy by any three
creditors whose total claim exceeds the value of assets
held as security by $5,000, and by any single creditor
who meets the above standard when the total number
of creditors is less than 12.
Bargaining Power
For creditors, having a firm go into bankruptcy is not
particularly attractive. Bankruptcy, therefore, is a
tremendous source of bargaining power for the trou-
bled company. Bankruptcy is not attractive to credi-
tors because once protection is granted to a firm,
creditors must wait for their money. Further, they are
no longer dealing with the troubled company but with
the judicial system, as well as with other creditors.
Even if creditors are willing to wait for their money,
they may not get full payment and may have to accept
payment in some unattractive form. Last, the legal
and administrative costs of bankruptcy, which can be
substantial, are paid before any payments are made to
creditors.
Faced with these prospects, many creditors con-
clude that their interests are better served by negoti-
ating with the firm. Because the law defines the pri-
ority of creditors’ claims, an entrepreneur can use it
to determine who might be willing to negotiate.
Since the trade debt has the lowest claim (except
for owners), these creditors are often the most willing
to negotiate. The worse the situation, the more will-
ing they may be. If the firm has negative net worth
but is generating some cash flow, the trade debt cred-
itors should be willing to negotiate extended terms or
partial payment, or both, unless there is no trust in
current management.
However, the secured creditors, with their higher
priority claims, may be less willing to negotiate. Many
1
As this edition goes to press, the U.S. Congress is deliberating a revision of the federal bankruptcy laws, which if enacted could have a profound impact on a
business’s relationship with its lenders and creditors. Updates on bankruptcy laws, including additional Web links can be found athttp://www.swiggartagin.com/lawfind/.
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 18. The Entrepreneur and
the Troubled Company
21
© The McGraw?Hill
Companies, 2004
Chapter 18 The Entrepreneur and the Troubled Company 585
factors affect the willingness of secured creditors to ne-
gotiate. Two are the strength of their collateral and their
confidence in management. Bankruptcy is still some-
thing they wish to avoid for the reasons cited above.
Bankruptcy can free a firm from obligations under
executory contracts. This has caused some firms to
file for bankruptcy as a way out of union contracts.
Since bankruptcy law in this case conflicts with the
National Labor Relations Act, the law has been up-
dated and a good-faith test has been added. The firm
must be able to demonstrate that a contract prevents
it from carrying on its business. It is also possible for
the firm to initiate other executory contracts such as
leases, executive contracts, and equipment leases. If a
company has gradually added to its overhead in a
noneconomic fashion, it may be able to reduce its
overhead significantly using bankruptcy as a tool.
Intervention
A company in trouble usually will want to use the
services of an outside advisor who specializes in
turnarounds.
The situation the outside advisor usually finds at
intervention is not encouraging. The company is of-
ten technically insolvent or has negative net worth. It
already may have been put on a cash basis by its sup-
pliers. It may be in default on loans, or if not, it is
probably in violation of loan covenants. Call provi-
sions may be exercised. At this point, as the situation
deteriorates more, creditors may be trying to force
the company into bankruptcy, and the organization is
demoralized.
The critical task is to quickly diagnose the situa-
tion, develop an understanding of the company’s bar-
gaining position with its many creditors, and produce
a detailed cash flow business plan for the turnaround
of the organization.To this end, a turnaround advisor
usually quickly signals that change is coming. He or
she will elevate the finance function, putting the
“cash person” (often the consultant himself) in charge
of the business. Some payments may be put on hold
until problems can be diagnosed and remedial actions
decided upon.
Diagnosis
Diagnosis can be complicated by the mixture of
strategic and financial errors. For example, for a com-
pany with large receivables, questions need to be an-
swered about whether receivables are bloated be-
cause of poor credit policy or because the company is
in a business where liberal credit terms are required
to compete.
Diagnosis occurs in three areas: the appropriate
strategic posture of the business, the analysis of man-
agement, and “the numbers.”
Strategic Analysis This analysis in a turn-
around tries to identify the markets in which the com-
pany is capable of competing and decide on a com-
petitive strategy. With small companies, turnaround
experts state that most strategic errors relate to the in-
volvement of firms in unprofitable product lines, cus-
tomers, and geographic areas. It is outside the scope
of this book to cover strategic analysis in detail. (See
the many texts in the area.)
Analysis of Management Analysis of man-
agement consists of interviewing members of the
management team and coming to a subjective judg-
ment of who belongs and who does not. Turnaround
consultants can give no formula for how this is done
except that it is the result of judgment that comes
from experience.
The Numbers Involved in “the numbers” is a de-
tailed cash flow analysis, which will reveal areas for
remedial action. The task is to identify and quantify
the profitable core of the business.
Determine available cash. The first task is to
determine how much cash the firm has
available in the near term. This is accomplished
by looking at bank balances, receivables (those
not being used as security), and the confirmed
order backlog.
Determine where money is going. This is a
more complex task than it appears to be. A
common technique is called subaccount
analysis, where every account that posts to cash
is found and accounts are arranged in
descending order of cash outlays. Accounts
then are scrutinized for patterns. These
patterns can indicate the functional areas where
problems exist. For example, one company had
its corporate address on its bills, rather than the
lockbox address at which checks were
processed, adding two days to its dollar days
outstanding.
Calculate percent-of-sales ratios for different
areas of a business and then analyze trends in
costs. Typically, several of the trends will show
flex points, where relative costs have changed.
For example, for one company that had
undertaken a big project, an increase in cost of
sales, which coincided with an increase in
capacity and in the advertising budget, was
noticed. Further analysis revealed this project
was not producing enough in dollar
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 18. The Entrepreneur and
the Troubled Company
22
© The McGraw?Hill
Companies, 2004
586 Part V Startup and After
contribution to justify its existence. Once the
project was eliminated, excess capacity could
be reduced to lower the firm’s break-even
point.
Reconstruct the business. After determining
where the cash is coming from and where it is
going, the next step is to compare the business
as it should be to the business as it is. This
involves reconstructing the business from the
ground up. For example, a cash budgeting
exercise can be undertaken and collections,
payments, and so forth determined for a given
sales volume. Or the problem can be
approached by determining labor, materials,
and other direct costs and the overhead
required to drive a given sales volume. What is
essentially a cash flow business plan is created.
Determine differences. Finally, the cash flow
business plan is tied into pro forma balance
sheets and income statements. The ideal cash
flow plan and financial statements are
compared to the business’s current financial
statements. For example, the pro forma income
statements can be compared to existing
statements to see where expenses can be
reduced. The differences between the
projected and actual financial statements form
the basis of the turnaround plan and remedial
actions.
The most commonly found areas for potential
cuts/improvements are these: (1) working capital
management, from order processing and billing to re-
ceivables, inventory control, and, of course, cash
management; (2) payroll; and (3) overcapacity and
underutilized assets. More than 80 percent of poten-
tial reduction in expenses can usually be found in
workforce reduction.
The Turnaround Plan
The turnaround plan not only defines remedial ac-
tions, but because it is a detailed set of projections, it
also provides a means to monitor and control turn-
around activity. Further, if the assumptions about unit
sales volume, prices, collections, and negotiating suc-
cess are varied, it can provide a means by which
worst-case scenarios—complete with contingency
plans—can be constructed.
Because short-term measures may not solve the
cash crunch, a turnaround plan gives a firm enough
credibility to buy time to put other remedial actions
in place. For example, one firm’s consultant could ap-
proach its bank to buy time with the following: By re-
ducing payroll and discounting receivables, we can
improve cash flow to the point where the firm can be
current in five months. If we are successful in negoti-
ating extended terms with trade creditors, then the
firm can be current in three months. If the firm can
sell some underutilized assets at 50 percent off, it can
become current immediately.
The turnaround plan helps address organizational
issues. The plan replaces uncertainty with a clearly
defined set of actions and responsibilities. Since it sig-
nals to the organization that action is being taken, it
helps get employees out of their survival mode. An ef-
fective plan breaks tasks into the smallest achievable
unit, so successful completion of these simple tasks
soon follows and the organization begins to experi-
ence success. Soon the downward spiral of organiza-
tional morale is broken.
Finally, the turnaround plan is an important source
of bargaining power. By identifying problems and pro-
viding for remedial actions, the turnaround plan en-
ables the firm’s advisors to approach creditors and tell
them in very detailed fashion how and when they will
be paid. If the turnaround plan proves that creditors
are better off working with the company as a going con-
cern, rather than liquidating it, they will most likely be
willing to negotiate their claims and terms of payment.
Payment schedules can then be worked out that can
keep the company afloat until the crisis is over.
Quick Cash Ideally, the turnaround plan estab-
lishes enough creditor confidence to buy the turn-
around consultant time to raise additional capital and
turn underutilized assets into cash. It is imperative,
however, to raise cash quickly. The result of the ac-
tions described below should be an improvement in
cash flow. The solution is far from complete, however,
because suppliers need to be satisfied.
For the purpose of quick cash, the working capital
accounts hold the most promise.
Accounts receivable is the most liquid noncash
asset. Receivables can be factored, but negotiating
such arrangements takes time. The best route to
cash is discounting receivables. How much receiv-
ables can be discounted depends on whether they
are securing a loan. For example, a typical bank will
lend up to 80 percent of the value of receivables that
are under 90 days. As receivables age past the 90 days,
the bank needs to be paid. New funds are advanced
as new receivables are established as long as the 80
percent and under-90-day criteria are met. Receiv-
ables under 90 days can be discounted no more than
20 percent, if the bank obligation is to be met. Re-
ceivables over 90 days can be discounted as much as
is needed to collect them, since they are not secur-
ing bank financing. One needs to use judgment in
deciding exactly how large a discount to offer. A
common method is to offer a generous discount
with a time limit on it, after which the discount is no
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 18. The Entrepreneur and
the Troubled Company
23
© The McGraw?Hill
Companies, 2004
Chapter 18 The Entrepreneur and the Troubled Company 587
longer valid. This provides an incentive for the cus-
tomer to pay immediately.
Consultants agree it is better to offer too large a
discount than too small a one. If the discount is too
small and needs to be followed by further discounts,
customers may hold off paying in the hope that an-
other round of discounts will follow. Generally it is
the slow payers that cause the problems and dis-
counting may not help. By getting on the squeaky-
wheel list of the particular slow-pay customer, you
might get attention. A possible solution is to put on a
note with the objective of having the customer start
paying you on a regular basis; also, adding a small ad-
ditional amount to every new order helps to work
down the balance.
Inventory is not as liquid as receivables but still can
be liquidated to generate quick cash. An inventory
“fire sale” gets mixed reviews from turnaround ex-
perts. The most common objection is that excess in-
ventory is often obsolete. The second objection is that
because much inventory is work in process, it is not in
salable form and requires money to put in salable
form. The third is that discounting finished-goods in-
ventory may generate cash but is liable to create cus-
tomer resistance to restored margins after the com-
pany is turned around. The sale of raw materials
inventory to competitors is generally considered the
best route. Another option is to try to sell inventory at
discounted prices to new channels of distribution. In
these channels, the discounted prices might not affect
the next sale.
One interesting option for the company with a lot
of work-in-process inventory is to ease credit terms. It
often is possible to borrow more against receivables
than against inventory. By easing credit terms, the
company can increase its borrowing capacity to per-
haps enough to get cash to finish work in process. This
option may be difficult to implement because, by the
time of intervention, the firm’s lenders are likely fol-
lowing the company very closely and may veto the
arrangements.
Also relevant to generating quick cash is the policy
regarding current sales activity. Guiding criteria for
this needs to include increasing the total dollar value
of margin, generating cash quickly, and keeping work-
ing capital in its most liquid form. Prices and cash dis-
counts need to be increased and credit terms eased.
Easing credit terms, however, can conflict with the
receivables policy described above. Obviously, care
needs to be taken to maintain consistency of policy.
Easing credit is really an “excess inventory” policy.
The overall idea is to leverage policy in favor of cash
first, receivables second, and inventory third.
Putting all accounts payable on hold is the next op-
tion. Clearly, this eases the cash flow burden in the
near term. Although some arrangement to pay sup-
pliers needs to be made, the most important uses of
cash at this stage are meeting payroll and paying
lenders. Lenders are important, but if you do not get
suppliers to ship goods you are out of business. Get-
ting suppliers to ship is critical. A company with neg-
ative cash flow simply needs to “prioritize” its use of
cash. Suppliers are the least likely to force the com-
pany into bankruptcy because, under the law, they
have a low priority claim.
Dealing with Lenders The next step in the
turnaround is to negotiate with lenders. To continue
to do business with the company, lenders need to be
satisfied that there is a workable long-term solution.
However, at the point of intervention, the com-
pany is most likely in default on its payments. Or, if
payments are current, the financial situation has
probably deteriorated to the point where the com-
pany is in violation of loan covenants. It also is likely
that many of the firm’s assets have been pledged as
collateral. To make matters worse, it is likely that the
troubled entrepreneur has been avoiding his or her
lenders during the gestation period and has demon-
strated that he or she is not in control of the situation.
Credibility has been lost.
It is important for a firm to know that it is not the
first ever to default on a loan, that the lender is usu-
ally willing to work things out, and that it is still in a
position to bargain.
Strategically, there are two sources of bargaining
power. The first is that bankruptcy is an unattractive
result to a lender, despite its senior claims. A low mar-
gin business cannot absorb large losses easily. (Recall
that banks typically earn 0.5 percent to 1.0 percent to-
tal return on assets.)
The second is credibility. The firm that, through its
turnaround specialist, has diagnosed the problem and
produced a detailed turnaround plan with best-
case/worst-case scenarios, the aim of which is to prove
to the lender that the company is capable of paying, is
in a better bargaining position. The plan details spe-
cific actions (e.g., layoffs, assets plays, changes in
credit policy, etc.) that will be undertaken, and this
plan must be met to regain credibility.
There are also two tactical sources of bargaining
power. First, there is the strength of the lender’s col-
lateral. The second is the bank’s inferior knowledge of
aftermarkets and the entrepreneur’s superior ability
to sell.
The following example illustrates that, when the
lender’s collateral is poor, it has little choice but to look
to the entrepreneur for a way out without incurring a
loss. It also shows that the entrepreneur’s superior
knowledge of his business and ability to sell can get
himself and the lender out of trouble. One company
in turnaround in the leather business overbought
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 18. The Entrepreneur and
the Troubled Company
24
© The McGraw?Hill
Companies, 2004
588 Part V Startup and After
inventory one year, and, at the same time, a competi-
tor announced a new product that made his inventory
almost obsolete. Since the entrepreneur went to the
lender with the problem, the lender was willing to
work with him. The entrepreneur had plans to sell the
inventory at reduced prices and also to enter a new
market that looked attractive. The only trouble was he
needed more money to do it, and he was already over
his credit limit. The lender was faced with the certainty
of losing 80 percent of its money and putting its cus-
tomer out of business or the possibility of losing money
by throwing good money after bad. The lender decided
to work with the entrepreneur. It got a higher interest
rate and put the entrepreneur on a “full following
mechanism,” which meant that all payments were sent
to a lockbox. The lender processed the checks and re-
duced its exposure before it put money in his account.
Another example illustrates the existence of bar-
gaining power with a lender who is undercollateralized
and stands to take a large loss. A company was import-
ing look-alike Cabbage Patch dolls from Europe. This
was financed with a letter of credit. However, when the
dolls arrived in this country, the company could not sell
the dolls because the Cabbage Patch doll craze was
over. The dolls, and the bank’s collateral, were worth-
less. The company found that the doll heads could be
replaced, and with the new heads, the dolls did not
look like Cabbage Patch dolls. It found also that one
doll buyer would buy the entire inventory. The com-
pany needed $30,000 to buy the new heads and have
them put on, so it went back to the bank. The bank
said, if the company wanted the money, key members
of management had to give liens on their houses.
When this was refused, the banker was astounded. But
what was he going to do? The company had found a
way for him to get his money, so it got the $30,000.
Lenders are often willing to advance money for a
company to meet its payroll. This is largely a public
relations consideration. Also, if a company does not
meet its payroll, a crisis may be precipitated before
the lender can consider its options.
When the situation starts to improve, a lender may
call the loan. Such a move will solve the lender’s prob-
lem but may put the company under. While many
bankers will deny this ever happens, some will concede
that such an occurrence depends on the loan officer.
Dealing with Trade Creditors In dealing
with trade creditors, the first step is to understand the
strength of the company’s bargaining position. Trade
creditors have the lowest priority claims should a
company file for bankruptcy and, therefore, are often
the most willing to deal. In bankruptcy, trade credi-
tors often receive just a few cents on the dollar.
Another bargaining power boost with trade cred-
itors is the existence of a turnaround plan. As long as
a company demonstrates that it can offer a trade
creditor a better result as a going concern than it can
in bankruptcy proceedings, the trade creditor should
be willing to negotiate. It is generally good to make
sure that trade creditors are getting a little money on
a frequent basis. Remember trade creditors have a
higher gross margin than a bank, so their getting paid
pays down their “risk” money faster. This is espe-
cially true if the creditor can ship new goods and get
paid for that, and also get some money toward the
old receivables.
Also, trade creditors have to deal with the customer
relations issue. Trade creditors will work with a troubled
company if they see it as a way to preserve a market.
The relative weakness in the position of trade cred-
itors has allowed some turnaround consultants to ne-
gotiate impressive deals. For example, one company
got trade creditors to agree to a 24-month payment
schedule for all outstanding accounts. In return, the
firm pledged to keep all new payables current. The
entrepreneur was able to keep the company from
dealing on a cash basis with many of its creditors and
to convert short-term payables into what amounted to
long-term debt. The effect on current cash flow was
very favorable.
The second step is to prioritize trade creditors ac-
cording to their importance to the turnaround. The
company then needs to take care of those creditors
that are most important. For example, one entrepre-
neur told his controller never to make a commitment
he could not keep. The controller was told that, if the
company was going to miss a commitment, he was to
get on the phone and call. The most important sup-
pliers were told that if something happened and they
needed payment sooner than had been agreed, they
were to let the company know and it would do its best
to come up with the cash.
The third step in dealing with trade creditors is to
switch vendors if necessary. The lower priority sup-
pliers will put the company on cash terms or refuse to
do business. The troubled company needs to be able
to switch suppliers, and its relationship with its prior-
ity suppliers will help it to do this, because they can
give credit references. One firm said, “We asked our
best suppliers to be as liberal with credit references as
possible. I don’t know if we could have established
new relationships without them.”
The fourth step in dealing with trade creditors is to
communicate effectively. “Dealing with the trade is as
simple as telling the truth,” one consultant said. If a
company is honest, at least a creditor can plan.
Workforce Reductions With workforce reduc-
tion representing 80 percent of the potential ex-
pense reduction, layoffs are inevitable in a turn-
around situation.
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 18. The Entrepreneur and
the Troubled Company
25
© The McGraw?Hill
Companies, 2004
Chapter 18 The Entrepreneur and the Troubled Company 589
A number of turnaround specialists recommend that
layoffs be announced to an organization as a onetime
reduction in the workforce and be done all at once.
They recommend further that layoffs be accomplished
as soon as possible, since employees will never regain
their productivity until they feel some measure of secu-
rity. Finally, they suggest that a firm cut deeper than
seems necessary to compensate for other remedial ac-
tions that may be difficult to implement. For example,
it is one thing to set out to reduce capacity by half and
quite another thing to sell or sublet half a plant.
Longer-Term Remedial Actions
If the turnaround plan has created enough credibility
and has bought the firm time, longer-term remedial
actions can be implemented.
These actions will usually fall into three categories:
Systems and procedures. Systems and
procedures that contributed to the problem can
be improved, or others can be implemented.
Asset plays. Assets that could not be liquidated
in a shorter time frame can be liquidated. For
example, real estate could be sold. Many
smaller companies, particularly older ones,
carry real estate on their balance sheet at far
below market value. This could be sold and
leased back or could be borrowed against to
generate cash.
Creative solutions. Creative solutions need to
be found. For example, one firm had a large
amount of inventory that was useless in its
current business. However, it found that if the
inventory could be assembled into parts, there
would be a market for it. The company shipped
the inventory to Jamaica, where labor rates
were low, for assembly, and it was able to sell
very profitably the entire inventory.
As was stated at the beginning of the chapter, many
companies—even companies that are insolvent or
have negative net worth or both—can be rescued and
restored to profitability. It is perhaps helpful to recall
another quote from Winston Churchill: “I have noth-
ing to offer but blood, toil, tears, and sweat.”
Chapter Summary
1. An inevitable part of the entrepreneurial process is
that firms are born, grow, get ill, and die.
2. Numerous signals of impending trouble—strategic
issues, poor planning and financial controls, and
running out of cash—invariably point to a core cause:
top management.
3. Crises don’t develop overnight. Often it takes 18
months to five years before the company is sick
enough to trigger a turnaround intervention.
4. Both quantitative and qualitative signals can predict
patterns and actions that could lead to trouble.
5. Bankruptcy, usually an entrepreneur’s nightmare, can
actually be a valuable tool and source of bargaining
power to help a company survive and recover.
6. Turnaround specialists begin with a diagnosis of the
numbers—cash, strategic market issues, and
management—and develop a turnaround plan.
7. The turnaround plan defines remedial action to
generate cash, deal with lenders and trade creditors,
begin long-term renewal, and monitor progress.
Study Questions
1. What do entrepreneurs need to know about how
companies get into and out of trouble? Why?
2. Why do most turnaround specialists invariably
discover that it is management that is the root cause
of trouble?
3. Why is it difficult for existing management to detect
and to act early on signals of trouble?
4. What are some key predictors and signals that warn
of impending trouble?
5. Why can bankruptcy be the entrepreneur’s ally?
6. What diagnosis is done to detect problems, and why
and how does cash play the central role?
7. What are the main components of a turnaround plan
and why are these so important?
Internet Sources for Chapter 18http://www.entreworld.orghttp://www.swiggartagin.com/lawfind/http://www.uscourts.gov
MIND STRETCHERS
Have You Considered?
1. In the 1970s, IBM had more cash on its balance
sheet than the total sales of the rest of the
computer industry. Why, and how, did IBM get
into so much trouble 10 years later?
2. Talk in person to an entrepreneur who has
personal loan guarantees and has been through
bankruptcy. What lessons were learned?
3. Can Microsoft become a troubled company?
When, and why?
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 19. The Harvest and
Beyond
26
© The McGraw?Hill
Companies, 2004
A Journey, Not a Destination
A common sentiment among successful entrepre-
neurs is that it is the challenge and exhilaration of the
journey that gives them the greatest kick. Perhaps
Walt Disney said it best: “I don’t make movies to
make money. I make money to make movies.” It is the
thrill of the chase that counts.
These entrepreneurs also talk of the venture’s in-
credibly insatiable appetite for not only cash but also
time, attention, and energy. Some say it is an addic-
tion. Most say it is far more demanding and difficult
than they ever imagined. Most, however, plan not to
retire and would do it again, usually sooner rather
than later. They also say it is more fun and satisfying
than any other career they have had.
For the vast majority of entrepreneurs, it takes 10,
15, even 20 years or more to build a significant net
worth. According to the popular press and government
statistics, there are more millionaires than ever in
America. In 2002, it is estimated that as many as 3.5 mil-
lion persons in the United States (or nearly 3 percent of
the working population) will be millionaires—their net
worth exceeding $1 million. Sadly, a million dollars is
not really all that much money today as a result of infla-
tion, and while lottery and sweepstakes winners be-
come instant millionaires, entrepreneurs do not. The
number of years it usually takes to accumulate such a
net worth is a far cry from the instant millionaire, the
get-rich-quick impression associated with lottery win-
ners or in fantasy TV shows.
The Journey Can Be Addictive
The total immersion required, the huge workload,
the many sacrifices for a family, and the burnout of-
ten experienced by an entrepreneur are real. Main-
taining the energy, enthusiasm, and drive to get
across the finish line, to achieve a harvest, may be
exceptionally difficult. For instance, one entrepre-
neur in the computer software business, after work-
ing alone for several years, developed highly so-
phisticated software. Yet, he insisted he could not
stand the computer business for another day. Imag-
ine trying to position a company for sale effectively
19
Chapter Nineteen
The Harvest and Beyond
“And don’t forget: Shrouds have no pockets.”
the late Sidney Rabb
Chairman Emeritus, Stop & Shop, Boston
Results Expected
Upon completion of this chapter, you will have:
1. Examined the importance of first building a great company and thereby creating
harvest options.
2. Examined why harvesting is an essential element of the entrepreneurial process and
does not necessarily mean abandoning the company.
3. Identified the principal harvest options, including going public.
4. Analyzed the Paul J. Tobin case study.
605
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Venture Creation:
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21st Century, 6/e
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Beyond
27
© The McGraw?Hill
Companies, 2004
606 Part V Startup and After
and to negotiate a deal for a premium price after
such a long battle.
Some entrepreneurs wonder if the price of victory
is too high. One very successful entrepreneur put it
this way:
What difference does it make if you win, have $20 mil-
lion in the bank—I know several who do—and you are
a basket case, your family has been washed out, and your
kids are a wreck?
The opening quote of the chapter is a sobering re-
minder and its message is clear: Unless an entrepreneur
enjoys the journey and thinks it is worthy, he or she may
end up on the wrong train to the wrong destination.
First Build a Great Company
One of the simplest but most difficult principles for
non-entrepreneurs to grasp is that wealth and liquidity
are results—not causes—of building a great company.
They fail to recognize the difference between making
money and spending money. Most successful entre-
preneurs possess a clear understanding of this distinc-
tion; they get their kicks from growing the company.
They know the payoff will take care of itself if they con-
centrate on the money-making part of the process.
Create Harvest Options
Here is yet another great paradox in the entrepre-
neurial process: Build a great company but do not for-
get to harvest. This apparent contradiction is difficult
to reconcile, especially among entrepreneurs with
several generations in a family-owned enterprise.
Perhaps a better way to frame this apparent contra-
diction is to keep harvest options open and to think of
harvesting as a vehicle for reducing risk and for creat-
ing future entrepreneurial choices and options, not
simply selling the business and heading for the golf
course or the beach, although these options may ap-
peal to a few entrepreneurs. To appreciate the im-
portance of this perspective, consider the following
actual situations
An entrepreneur in his 50s, Nigel reached an
agreement with Brian, a young entrepreneur in his
30s, to join the company as marketing vice president.
Their agreement also included an option for Brian to
acquire the company in the next five years for $1.5 mil-
lion. At the time, the firm, a small biscuit maker, had
revenues of $500,000 per year. By the end of the third
year, Brian had built the company to $5 million in
sales and substantially improved profitability. He no-
tified Nigel of his intention to exercise his option to
buy the company. Nigel immediately fired Brian, who
had no other source of income, had a family, and a
$400,000 mortgage on a house whose fair market
value had dropped to $275,000. Brian learned that
Nigel had also received an offer from a company for
$6 million. Thus, Nigel wanted to renege on his orig-
inal agreement with Brian. Unable to muster the le-
gal resources, Brian settled out of court for less than
$100,000. When the other potential buyer learned
how Nigel had treated Brian, it withdrew the $6 mil-
lion offer. Then, there were no buyers. Within two
years, Nigel drove the company into bankruptcy. At
that point, he called Brian and asked if he would now
be interested in buying the company. Brian suggested
that Nigel go perform certain unnatural anatomical
acts on himself!
In a quite different case, a buyer was willing to pur-
chase a 100-year-old family business for $100 million,
a premium valuation by any standard. The family in-
sisted that it would never sell the business under any
circumstances. Two years later, market conditions
changed and the credit crunch transformed slow-
paying customers into nonpaying customers. The
business was forced into bankruptcy, which wiped out
100 years of family equity.
It is not difficult to think of a number of alternative
outcomes for these two firms and many others like
them, who have erroneously assumed that the busi-
ness will go on forever. By stubbornly and steadfastly
refusing to explore harvest options and exiting as a
natural part of the entrepreneurial process, owners
may actually increase their overall risk and deprive
themselves of future options. Innumerable examples
exist whereby entrepreneurs sold or merged their
companies and then went on to acquire or to start an-
other company and pursued new dreams:
Robin Wolaner founded Parenting magazine in
the mid-1980s and sold it to Time-Life.
1
Wolaner then joined Time and built a highly
successful career there, and in July 1992, she
became the head of Time’s Sunset Publishing
Corporation.
2
Right after graduate school, the two brothers
described in the Securities Online case in
Chapter 5 launched the company Gary had
worked on creating as a MBA student. That
company rapidly became quite successful and
was sold in early 2000 for more than $50 million.
About three years into the startup, younger
1
This example is drawn from “Parenting Magazine,” Harvard Business School case study 291-015.
2
Lawrence M. Fisher, “The Entrepreneur Employee,” New York Times, August 2, 1992, p. 10.
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 19. The Harvest and
Beyond
28
© The McGraw?Hill
Companies, 2004
Chapter 19 The Harvest and Beyond 607
brother George decided he would pursue his
own startup. He left Securities Online on the
best of terms and created ColorKinetics, Inc.,
in Boston. That company, by early 2003, had
raised over $48 million of venture capital and
would soon exceed $30 million in sales as the
leading firm in LED lighting technology. These
will not be either Gary’s or George’s last
startup, we predict.
Craig Benson founded Cabletron in the 1980s,
which became a highly successful company.
Eventually he brought in a new CEO and
became involved as a trustee of Babson
College, and then began teaching
entrepreneurship classes with a focus on
information technology and the Internet. He
has just been elected governor of New
Hampshire, as another way of giving back to
society and to pursue his new dreams.
While in his early 20s, Steve Spinelli was
recruited by his former college football coach,
Jim Hindman (see the Jiffy Lube case series),
to help start and build Jiffy Lube International.
As a captain of the team, Steve had exhibited
the qualities of leadership, tenacity, and
competitive will to win that Hindman knew was
needed to create a new company. Steve later
built the largest franchise in America, and after
selling his 44 stores to Pennzoil in 1993, he
returned to his MBA alma mater to teach. So
invigorated by this new challenge, he even went
back to earn his doctorate and then became
director of the Arthur M. Blank Center for
Entrepreneurship at Babson, and first division
chair of the very first full-fledged
Entrepreneurship Division at any American
university.
After creating and building the ninth largest
pharmaceutical company in the United States,
Marion Laboratories, Ewing Marion Kauffman
led an extraordinary life as philanthropist and
sportsman. His Kauffman Foundation and its
Center for Entrepreneurial Leadership became
the first and premier foundation in the nation
dedicated to accelerating entrepreneurship. He
brought the Kansas City Royals baseball team
to that city and made sure it would stay there
by gifting the team to the city, with the
stipulation that it stay there when the team
was sold. The $75 million proceeds of the sale
were also donated to charitable causes in
Kansas City.
Jeff Parker built and sold two companies,
including Technical Data Corporation,
3
by the
time he was 40. His substantial gain from these
ventures has led to a new career as a private
investor who works closely with young
entrepreneurs to help them build their
companies.
In mid-1987, George Knight, founder and
president of Knight Publications,
4
was actively
pursuing acquisitions to grow his company into
a major force. Stunned by what he believed to
be exceptionally high valuations for small
companies in the industry, he concluded that
this was the time to be a seller rather than a
buyer. Therefore, in 1988, he sold Knight
Publications to a larger firm, within which he
could realize his ambition of contributing as a
chief executive officer to the growth of a major
company. Having turned around the troubled
divisions of this major company, he is currently
seeking a small company to acquire and to grow
into a large company.
These are a tiny representation of the tens of thou-
sands of entrepreneurs that build on their platforms
of entrepreneurial success to pursue highly meaning-
ful lives in philanthropy, public service, and commu-
nity leadership. By realizing a harvest, such options
become possible, yet the vast majority of entrepre-
neurs make these contributions to society while con-
tinuing to build their companies. This is one of the
best-kept secrets in American culture: The public has
very little awareness and appreciation of just how
common this pattern of generosity is of their time,
their leadership, and their money. One could fill a
book with numerous other examples. The entrepre-
neurial process is endless.
A Harvest Goal
Having a harvest goal and crafting a strategy to
achieve it are what separate successful entrepre-
neurs from the rest of the pack. Many entrepreneurs
seek only to create a job and a living for themselves.
It is quite different to grow a business that creates a
living for many others, including employees and in-
vestors, by creating value—value that can result in a
capital gain.
Setting a harvest goal achieves many purposes, not
the least of which is helping an entrepreneur get after-
tax cash out of an enterprise and enhancing substantially
3
For TDC’s business plan, see “Technical Data Corporation Business Plan,” Harvard Business School case 283–973. Revised November 1987. For more on TDC’s
progress and harvest strategy, see “Technical Data Corporation,” Harvard Business School case 283–072. Revised December 1987.
4
For a detailed description of this process, see Harvard Business School case 289-027, revised February 1989.
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Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 19. The Harvest and
Beyond
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© The McGraw?Hill
Companies, 2004
608 Part V Startup and After
his or her net worth. Such a goal also can create high
standards and a serious commitment to excellence
over the course of developing the business. It can pro-
vide, in addition, a motivating force and a strategic fo-
cus that does not sacrifice customers, employees, and
value-added products and services just to maximize
quarterly earnings.
There are other good reasons to set a harvest goal
as well. The workload demanded by a harvest-oriented
venture versus one in a venture that cannot achieve a
harvest may actually be less and is probably no greater.
Such a business may be less stressful than managing a
business that is not oriented to harvest. Imagine the
plight of the 46-year-old entrepreneur, with three chil-
dren in college, whose business is overleveraged and
on the brink of collapse. Contrast that frightful pres-
sure with the position of the founder and major stock-
holder of another venture who, at the same age, sold
his venture for $15 million. Further, the options open
to the harvest-oriented entrepreneur seem to rise geo-
metrically in that investors, other entrepreneurs,
bankers, and the marketplace respond.
There is great truth in the old cliché that “success
breeds success.”
There is a very significant societal reason as well for
seeking and building a venture worthy of a harvest.
These are the ventures that provide enormous impact
and value added in a variety of ways. These are the
companies that contribute most disproportionately to
technological and other innovations, to new jobs, to
returns for investors, and to economic vibrancy.
Also, within the harvest process, the seeds of re-
newal and reinvestment are sown. Such a recycling of
entrepreneurial talent and capital is at the very heart
of our system of private responsibility for economic
renewal and individual initiative. Entrepreneurial
companies organize and manage for the long haul in
ways to perpetuate the opportunity creation and
recognition process and thereby to ensure economic
regeneration, innovation, and renewal.
Thus, a harvest goal is not just a goal of selling and
leaving the company. Rather, it is a long-term goal to
create real value added in a business. (It is true, how-
ever, that if real value added is not created, the business
simply will not be worth much in the marketplace.)
Crafting a Harvest Strategy:
Timing Is Vital
Consistently, entrepreneurs avoid thinking about har-
vest issues. In a survey of the computer software in-
dustry between 1983 and 1986, Steven Holmberg
found that 80 percent of the 100 companies surveyed
had only an informal plan for harvesting. The rest of
the sample confirmed the avoidance of harvest plans
by entrepreneurs—only 15 percent of the companies
had a formal written strategy for harvest in their busi-
ness plans and the remaining 5 percent had a formal
harvest plan written after the business plan.
5
When a
company is launched, then struggles for survival, and
finally begins its ascent, the farthest thing from its
founder’s mind usually is selling out. Selling is often
viewed by the entrepreneur as the equivalent to com-
plete abandonment of his or her very own “baby.”
Thus, time and again, a founder does not consider
selling until terror, in the form of the possibility of los-
ing the whole company, is experienced. Usually, this
possibility comes unexpectedly: New technology
threatens to leapfrog over the current product line, a
large competitor suddenly appears in a small market,
or a major account is lost. A sense of panic then grips
the founders and shareholders of the closely held
firm, and the company is suddenly for sale—for sale
at the wrong time, for the wrong reasons, and thus for
the wrong price. Selling at the right time, willingly, in-
volves hitting a strategic window; one of the many
strategic windows that entrepreneurs face.
Entrepreneurs find that harvesting is a nonissue
until something begins to sprout, and again there is a
vast distance between creating an existing revenue
stream of an ongoing business and ground zero. Most
entrepreneurs agree that securing customers and
generating continuing sales revenue are much harder
and take much longer than even they could have
imagined. Further, the ease with which those revenue
estimates can be cast and manipulated on a spread-
sheet belies the time and effort necessary to turn
those projections into cash.
At some point, with a higher potential venture, it
becomes possible to realize the harvest. It is wiser to
be selling as the strategic window is opening than as
it is closing. Bernard Baruch’s wisdom is as good as it
gets on this matter. He has said, “I made all my
money by selling too early.” For example, a private
candy company with $150 million in sales was not
considering selling. After contemplating advice to
sell early, the founders recognized a unique opportu-
nity to harvest and sold the firm for 19 times earn-
ings, an extremely high valuation. Another example is
that of a cellular phone company that was launched
and built from scratch and began operations in late
1987. Only 18 months after purchasing the original
rights to build and operate the system, the founders
decided to sell the company, even though the future
looked extremely bright. They sold because the sell-
ers’ market they faced at the time had resulted in a
5
Steven R. Holmberg, “Value Creation and Capture: Entrepreneurship Harvest and IPO Strategies,” in Frontiers of Entrepreneurship Research: 1991, ed. Neil
Churchill et al. (Babson Park, MA: Babson College, 1991), pp. 191–205.
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 19. The Harvest and
Beyond
30
© The McGraw?Hill
Companies, 2004
Chapter 19 The Harvest and Beyond 609
premium valuation—30 percent higher on a per
capita basis (the industry valuation norm) than that
for any previous cellular transaction to date. The har-
vest returned over 25 times the original capital in a
year and a half. (The founders had not invested a
dime of their own money.)
If the window is missed, disaster can strike. For
example, at the same time as the harvests described
above were unfolding, another entrepreneur saw
his real estate holdings rapidly appreciate to nearly
$20 million, resulting in a personal net worth, on
paper, of nearly $7 million. The entrepreneur used
this equity to refinance and leverage existing prop-
erties (to more than 100 percent in some cases) to
seize what he perceived as further prime opportu-
nities. Following a change in federal tax law in 1986
and the stock market crash of 1987, there was a ma-
jor softening of the real estate market in 1988. As a
result, by early 1989, half of the entrepreneur’s
holdings were in bankruptcy and the rest were in a
highly precarious and vulnerable position. The
prior equity in the properties had evaporated, leav-
ing no collateral as increasing vacancies and lower
rents per square foot turned a positive cash flow
into a negative one.
This very same pattern happened again in
2000–2002 after the dot.com bubble burst and the
NASDAQ began to crash, losing 63 percent of its
value from its high of over 5000 to under 2000. Cali-
fornia’s Silicon Valley was particularly hard hit by the
rapid downturn. Technology and Internet entrepre-
neurs who had exercised their stock options when
their company’s stock was soaring in the $80 to $100
range, on the hope that such escalation would con-
tinue for a long time, faced a rude a awakening. As the
stock plummeted to single-digit prices, they still
faced a huge capital gain tax on the difference be-
tween the cost of their options and the price at which
their stock was acquired. In one community of more
than 2,000 homes priced at $1 million and up, only
three or four were on the market in January 2001. By
the middle of 2001, nearly 60 such homes were for
sale. Nationwide in 2001, the sale of homes priced
above $1 million dropped 25 percent.
Shaping a harvest strategy is an enormously com-
plicated and difficult task. Thus, crafting such a strat-
egy cannot begin too early. In 1989–91, banking poli-
cies that curtailed credit and lending severely
exacerbated the downturn following the October
1987 stock market crash. One casualty of this was a
company we shall call Cable TV. The value of the
company in early 1989 exceeded $200 million. By
mid-1990, this had dropped to below zero! The heavy
debt overwhelmed the company. It took over five
years of sweat, blood, tears, and rapid aging of the
founder to eventually sell the company. The price:
about one-quarter of the peak value of 1989!
This same pattern was common again in 2001 and
2002, as major companies declared bankruptcy in the
wake of the dot.com and stock market crash, includ-
ing luminaries such an Enron, Kmart, Global Cross-
ing, and dozens of lesser known but larger telecom-
munications and networking-related companies. This
is one history lesson that seems to repeat itself. While
building a company is the ultimate goal, failure to
preserve the harvest option, and utilize it when it is
available, can be deadly.
In shaping a harvest strategy, some guidelines and
cautions can help:
Patience. As has been shown, several years are
required to launch and build most successful
companies; therefore, patience can be
invaluable. A harvest strategy is more sensible if
it allows for a time frame of at least 3 to 5 years
and as long as 7 to 10 years. The other side of
the patience coin is not to panic as a result of
precipitate events. Selling under duress is
usually the worst of all worlds.
Realistic valuation. If impatience is the enemy
of an attractive harvest, then greed is its
executioner. For example, an excellent, small
firm in New England, which was nearly 80 years
old and run by the third generation of a line of
successful family leaders, had attracted a
number of prospective buyers and had obtained
a bona fide offer for more than $25 million.
The owners, however, had become convinced
that this “great little company” was worth
considerably more, and they held out. Before
long, there were no buyers, and market
circumstances changed unfavorably. In
addition, interest rates skyrocketed. Soon
thereafter, the company collapsed financially,
ending up in bankruptcy. Greed was the
executioner.
Outside advice. It is difficult but worthwhile to
find an advisor who can help craft a harvest
strategy while the business is growing and, at
the same time, maintain objectivity about its
value and have the patience and skill to
maximize it. A major problem seems to be that
people who sell businesses, such as investment
bankers or business brokers, are performing the
same economic role and function as real estate
brokers; in essence, their incentive is their
commissions during a quite short time frame,
usually a matter of months. However, an
advisor who works with a lead entrepreneur for
as much as five years or more can help shape
and implement a strategy for the whole
business so that it is positioned to spot and
respond to harvest opportunities when they
appear.
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 19. The Harvest and
Beyond
31
© The McGraw?Hill
Companies, 2004
610 Part V Startup and After
Harvest Options
There are seven principal avenues by which a com-
pany can realize a harvest from the value it has cre-
ated. Described below, these most commonly seem to
occur in the order in which they are listed. No at-
tempt is made here to do more than briefly describe
each avenue, since there are entire books written on
each of these, including their legal, tax, and account-
ing intricacies.
Capital Cow
A “capital cow” is to the entrepreneur what a “cash
cow” is to a large corporation. In essence, the high-
margin profitable venture (the cow) throws off more
cash for personal use (the milk) than most entrepre-
neurs have the time and uses or inclinations for
spending. The result is a capital-rich and cash-rich
company with enormous capacity for debt and rein-
vestment. Take, for instance, a health care-related
venture that was started in the early 1970s that real-
ized early success and went public. Several years later,
the founders decided to buy the company back from
the public shareholders and to return it to its closely
held status. Today the company has sales in excess of
$100 million and generates extra capital of several
million dollars each year. This capital cow has enabled
its entrepreneurs to form entities to invest in several
other higher potential ventures, which included par-
ticipation in the leveraged buyout of a $150 million
sales division of a larger firm and in some venture
capital deals.
Employee Stock Ownership Plan
Employee stock ownership plans have become very
popular among closely held companies as a valuation
mechanism for stock for which there is no formal
market. They are also vehicles through which
founders can realize some liquidity from their stock
by sales to the plan and other employees. And since
an ESOP usually creates widespread ownership of
stock among employees, it is viewed as a positive mo-
tivational device as well.
Management Buyout
Another avenue, called a management buyout
(MBO), is one in which a founder can realize a gain
from a business by selling it to existing partners or to
other key managers in the business. If the business
has both assets and a healthy cash flow, the financing
can be arranged via banks, insurance companies, and
financial institutions that do leveraged buyouts
(LBOs) and MBOs. Even if assets are thin, a healthy
cash flow that can service the debt to fund the pur-
chase price can convince lenders to do the MBO.
Usually, the problem is that the managers who
want to buy out the owners and remain to run the
company do not have the capital. Unless the buyer
has the cash up front—and this is rarely the case—
such a sale can be very fragile, and full realization of
a gain is questionable. MBOs typically require the
seller to take a limited amount of cash up front and a
note for the balance of the purchase price over sev-
eral years. If the purchase price is linked to the future
profitability of the business, the seller is totally de-
pendent on the ability and integrity of the buyer. Fur-
ther, the management, under such an arrangement,
can lower the price by growing the business as fast as
possible, spending on new products and people, and
showing very little profit along the way. In these cases,
it is often seen that after the marginally profitable
business is sold at a bargain price, it is well positioned
with excellent earnings in the next two or three years.
As can be seen, the seller will end up on the short end
of this type of deal.
Merger, Acquisition,
and Strategic Alliance
Merging with a firm is still another way for a founder
to realize a gain. For example, two founders who had
developed high-quality training programs for the
rapidly emerging personal computer industry con-
summated a merger with another company. These
entrepreneurs had backgrounds in computers, rather
than in marketing or general management, and the
results of the company’s first five years reflected this
gap. Sales were under $500,000, based on custom
programs and no marketing, and they had been un-
able to attract venture capital, even during the mar-
ket of 1982–1983. The firm with which they merged
was a $15 million company that had an excellent rep-
utation for its management training programs, had a
Fortune 1000 customer base, had repeat sales of
70 percent, and had requests from the field sales force
for programs to train managers in the use of personal
computers. The buyer obtained 80 percent of the
shares of the smaller firm, to consolidate the revenues
and earnings from the merged company into its own
financial statements, and the two founders of the
smaller firm retained a 20 percent ownership in their
firm. The two founders also obtained employment
contracts, and the buyer provided nearly $1.5 million
of capital advances during the first year of the new
business. Under a put arrangement, the founders will
be able to realize a gain on their 20 percent of the
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 19. The Harvest and
Beyond
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© The McGraw?Hill
Companies, 2004
Chapter 19 The Harvest and Beyond 611
company, depending upon performance of the ven-
ture over the next few years.
6
The two founders now
are reporting to the president of the parent firm, and
one founder of the parent firm has taken a key exec-
utive position with the smaller company, an approach
common for mergers between closely held firms.
In a strategic alliance, founders can attract badly
needed capital, in substantial amounts, from a large
company interested in their technologies. Such
arrangements often can lead to complete buyouts of
the founders downstream.
Outright Sale
Most advisors view outright sale as the ideal route to
go because up-front cash is preferred over most stock,
even though the latter can result in a tax-free ex-
change.
7
In a stock-for-stock exchange, the problem
is the volatility and unpredictability of the stock price
of the purchasing company. Many entrepreneurs
have been left with a fraction of the original purchase
price when the stock price of the buyer’s company de-
clined steadily. Often the acquiring company wants to
lock key management into employment contracts for
up to several years. Whether this makes sense de-
pends on the goals and circumstances of the individ-
ual entrepreneur.
Public Offering
Probably the most sacred business school cow of
them all—other than the capital cow—is the notion of
taking a company public.
8
The vision or fantasy of
having one’s venture listed on one of the stock ex-
changes arouses passions of greed, glory, and great-
ness. For many would-be entrepreneurs, this aspira-
tion is unquestioned and enormously appealing. Yet,
for all but a chosen few, taking a company public, and
then living with it, may be far more time and trouble—
and expense—than it is worth.
After the stock market crash of October 1987, the
market for new issues of stock shrank to a fraction of
the robust IPO market of 1986 and a fraction of
those of 1983 and 1985, as well. The number of new
issues and the volume of IPOs did not rebound, in-
stead, they declined between 1988 and 1991. Then
in 1992 and into the beginning of 1993 the IPO win-
dow opened again. During this IPO frenzy, “small
companies with total assets under $500,000 issued
more than 68 percent of all IPOs.”
9
Previously, small
companies had not been as active in the IPO market.
(Companies such as Lotus, Compaq, and Apple
Computer do get unprecedented attention and fan-
fare, but these firms were truly exceptions.)
10
The
SEC tried “to reduce issuing costs and registration
and reporting burdens on small companies, and be-
gan by simplifying the registration process by adopt-
ing Form S-18, which applies to offerings of less
than $7,500,000, and reduced disclosure require-
ments.”
11
Similarly, Regulation D created exemp-
tions from registration up to $500,000 over a 12
month period.
12
This cyclical pattern repeated itself again during
the mid-1990s into 2002. As the dot.com, telecom-
munications, and networking explosion accelerated
from 1995 to 2000, the IPO markets exploded as well.
In June 1996, for instance, nearly 200 small compa-
nies had initial public offerings, and the pace re-
mained very strong through 1999, even into the first
two months of 2000. Once the NASDAQ began its
collapse in March 2000, the IPO window virtually
shut. In 2001, there were months when not a single
IPO occurred and for the year it was well under 100!
Few signs of recovery were evident in 2002. The les-
son is clear: Depending upon the IPO market for a
harvest is a highly cyclical strategy, which can cause
both great joy and disappointment. Such is the reality
of the stock markets. Exhibits 19.1(A) and 19.1(B)
show this pattern vividly.
There are several advantages to going public,
many of which relate to the ability of the company to
fund its rapid growth. Public equity markets provide
access to long-term capital, while also meeting sub-
sequent capital needs. Companies may use the pro-
ceeds of an IPO to expand the business in the exist-
ing market or to move into a related market. The
founders and initial investors might be seeking liq-
uidity, but SEC restrictions limiting the timing and
the amount of stock that the officers, directors, and
insiders can dispose of in the public market are in-
creasingly severe. As a result, it can take several years
after an IPO before a liquid gain is possible. Addi-
tionally, as Jim Hindman believed, a public offering
6
This is an arrangement whereby the two founders can force (the put) the acquirer to purchase their 20 percent at a predetermined and negotiated price.
7
See several relevant articles on selling a company in Growing Concerns, ed. David E. Gumpert (New York: John Wiley & Sons, 1984), pp. 332–98.
8
The Big Five accounting firms, such as Ernst & Young, publish information on deciding to take a firm public, as does NASDAQ. See also Richard Salomon, “Second
Thoughts on Going Live with Wall Street,” Harvard Business Review, reprint No. 91309.
9
Seymour Jones , M. Bruce Cohen, and Victor V. Coppola, “Going Public,” in The Entrepreneurial Venture, ed. William A. Sahlman and Howard H. Stevenson
(Boston: Harvard Business School Publishing, 1992), p. 394.
10
For an updated discussion of these issues, see Constance Bagley and Craig Dauchy, “Going Public,” in The Entrepreneurial Venture, 2nd ed. W. A. Sahlman and
H. H. Stevenson (Boston: Harvard Business School Publishing, 1999), pp. 404–40.
11
Jones et al., p. 395.
12
Ibid.
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Beyond
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612 Part V Startup and After
not only increases public awareness of the company
but also contributes to the marketability of the prod-
ucts, including franchises.
However, there are also some disadvantages to
being a public company. For example, 50 percent of
the computer software companies surveyed by
Holmberg agreed that the focus on short-term prof-
its and performance results was a negative attribute
of being a public company.
13
Also, because of the
disclosure requirements, public companies lose
some of their operating confidentiality, not to men-
tion having to support the ongoing costs of public
disclosure, audits, and tax filings. With public
shareholders, the management of the company has
to be careful about the flow of information because
of the risk of insider trading. Thus, it is easy to see
why companies need to think about the positive and
negative attributes of being a public company.
When considering this decision, you may find it
useful to review the Paul J. Tobin case at the end of
the chapter to identify the key components of the
IPO process and to assess which investment
bankers, accountants, lawyers, and advisors might
be useful in making this decision.
Wealth-Building Vehicles
The 1986 Tax Reform Act severely limited the gener-
ous options previously available to build wealth
within a private company through large deductible
contributions to a retirement plan. To make matters
worse, the administrative costs and paperwork neces-
sary to comply with federal laws have become a night-
mare. Nonetheless, there are still mechanisms that
can enable an owner to contribute up to 25 percent of
his or her salary to a retirement plan each year, an
amount that is deductible to the company and grows
tax free. Entrepreneurs who can contribute such
amounts for just a short time will build significant
wealth.
Beyond the Harvest
A majority of highly successful entrepreneurs seem to
accept a responsibility to renew and perpetuate the
system that has treated them so well. They are keenly
aware that our unique American system of opportu-
nity and mobility depends in large part upon a self-
renewal process.
There are many ways in which this happens. Some
of the following data often surprise people:
College endowments. Entrepreneurs are the
most generous regarding larger gifts and the
most frequent contributors to college
endowments, scholarship funds, and the like.
At Babson College, for example, one study
showed that eight times as many
entrepreneurs, compared to all other
graduates, made large gifts to their colleges.
14
900
800
700
600
500
400
300
200
100
0
Years 1996 through 2001
1996 1997 1998 1999 2000 2001
IPO VC Backed IPOS
25,000.00
20,000.00
15,000.00
10,000.00
5,000.00
0.00
1996 1997 1998 1999 2000 2001
Total Venture-Backed Offer Size ($ Million)
Years 1996 through 2001
EXHIBIT 19.1(A)
Number of Recent IPOs
Source: Thomson Financial/Venture Economics and National Venture
Capital Association, January 7, 2002.
EXHIBIT 19.1(B)
Recent IPO ($millions)
Source: Thomson Financial/Venture Economics and National Venture
Capital Association, January 7, 2002.
13
Holmberg, “Value Creation and Capture,” p. 203.
14
John A. Hornaday, “Patterns of Annual Giving,” in Frontiers of Entrepreneurship Research, 1984, ed. J. Hornaday et al. (Babson Park, MA: Babson College, 1984).
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 19. The Harvest and
Beyond
34
© The McGraw?Hill
Companies, 2004
Chapter 19 The Harvest and Beyond 613
On college and university campuses across
America, a huge number of dorms, classroom
buildings, arts centers, and athletic facilities
are named for the contributor. In virtually
every case, these contributors are
entrepreneurs whose highly successful
companies enabled them to make major gifts
of stock to their alma mater. Earlier at MIT,
more than half of the endowment was from
gifts of founders’ stock. Today that figure is
probably even higher.
Community activities. Entrepreneurs who
have harvested their ventures very often
reinvest their leadership skills and money in
such community activities as symphony
orchestras, museums, and local colleges and
universities. These entrepreneurs lead fund-
raising campaigns, serve on boards of
directors, and devote many hours to other
volunteer work. One Swedish couple, after
spending six months working with venture
capital firms in Silicon Valley and New York,
was “astounded at the extent to which these
entrepreneurs and venture capitalists engage
in such voluntary, civic activities.” The couple
found this pattern in sharp contrast to the
Swedish pattern, where paid government
employees perform many of the same services
as part of their jobs.
Investing in new companies. Postharvest
entrepreneurs also reinvest their efforts and
resources in the next generation of
entrepreneurs and their opportunities.
Successful entrepreneurs behave this way since
they seem to know that perpetuating the
system is far too important, and too fragile, to
be left to anyone else. They have learned the
hard lessons.
The innovation, the job creation, and the eco-
nomic renewal and vibrancy are all results of the en-
trepreneurial process. Government does not cause
this complicated and little understood process,
though it facilitates and/or impedes it. It is not
caused by the stroke of a legislative pen, though it
can be ended by such a stroke. Rather, entrepre-
neurs, investors, and hardworking people in pursuit
of opportunities create it.
Fortunately, entrepreneurs seem to accept a dis-
proportionate share of the responsibility to make sure
the process is renewed. And, judging by the new wave
of entrepreneurship in the United States, both the
marketplace and society once again are prepared to
allocate the rewards to entrepreneurs that are com-
mensurate with their acceptance of responsibility and
delivery of results.
The Road Ahead: Devise a Personal
Entrepreneurial Strategy
Goals Matter—A Lot!
Of all the anchors one can think of in the entrepre-
neurial process, two loom above all the rest:
1. A passion for achieving goals.
2. A relentless competitive spirit and desire
to win.
These two habits drive the quest for learning, per-
sonal growth, continuous improvement, and all other
development. Without these good habits, most quests
will fall short. The next chapter includes an exercise
on Crafting a Personal Entrepreneurial Strategy.
Completing this lengthy exercise will help you de-
velop these good habits.
Values and Principles Matter—A Lot!
We have demonstrated, in numerous places through-
out the book, that values and principles matter a great
deal. We have encouraged you to consider those of
Ewing M. Kauffman and to develop your own an-
chors. This is a vital part of your leadership approach,
and who and what you are:
Treat others as you would want to be treated.
Share the wealth with those high performers
who help you create it.
Give back to the community and society.
We would add a fourth principle in the Native
American spirit of considering every action with the
seventh generational impact foremost in mind:
Be a guardian and a steward of the air, land,
water, and environment.
One major legacy of the coming generations of en-
trepreneurial leaders can be the sustainability of our
economic activities. It is possible to combine a pas-
sion for entrepreneurship with love of the land and
the environment. The work of such organizations as
the Conservation Fund of Arlington, Virginia, the Na-
ture Conservancy, the Trust for Public Land, the
Henry’s Fork Foundation, the Monadnock Conser-
vancy in New Hampshire, and dozens of others is fi-
nancially made possible by the contributions of
money, time, and leadership from highly successful
entrepreneurs. It is also one of the most durable ways
to give back. Practicing what he preaches, Professor
Timmons and his wife recently made a permanent gift
of nearly 500 acres of their New Hampshire farm to a
conservation easement. Other neighbors joined in for
a combined total of over 1,000 acres of land preserved
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 19. The Harvest and
Beyond
35
© The McGraw?Hill
Companies, 2004
614 Part V Startup and After
forever, never to be developed. This has led to a re-
gional movement as well, which involves landowners
from a dozen surrounding towns.
Seven Secrets of Success
The following seven secrets of success are included
for your contemplation and amusement:
1. There are no secrets. Understanding and
practicing the fundamentals discussed here,
along with hard work, will get results.
2. As soon as there is a secret, everyone else
knows about it, too. Searching for secrets is a
mindless exercise.
3. Happiness is a positive cash flow.
4. If you teach a person to work for others, you
feed him or her for a year, but if you teach a
person to be an entrepreneur, you feed him
or her, and others, for a lifetime.
5. Do not run out of cash.
6. Entrepreneurship is fundamentally a human
process, rather than a financial or
technological process. You can make an
enormous difference.
7. Happiness is a positive cash flow.
Chapter Summary
1. Entrepreneurs thrive on the challenges and
satisfactions of the game: It is a journey, not a
destination.
2. First and foremost, successful entrepreneurs strive to
build a great company; wealth follows that process.
3. Harvest options mean more than simply selling the
company, and these options are an important part of
the entrepreneur’s know-how.
4. Entrepreneurs know that to perpetuate the system
for future generations, they must give back to their
communities and invest time and capital in the next
entrepreneurial generation.
Study Questions
1. Why did Walt Disney say, “I don’t make movies to
make money. I make money to make movies”?
2. Why is it essential to focus first on building a great
company, rather than on just getting rich?
3. Why is a harvest goal so crucial for entrepreneurs and
the economy?
4. Define the principal harvest options, the pros and
cons of each, and why each is valuable.
5. Beyond the harvest, what do entrepreneurs do to
“give back,” and why is this so important to their
communities and the nation?
Internet Resources for Chapter 19http://www.nvca.org - National Veature Capital
Associationhttp://www.nasdaq.comhttp://www.businessweek.comhttp://www.entreworld.org - Kauffman Foundation
Books of Interest
Tom Ashbrook, The Leap
Randy Komisar, The Monk and the Riddle
Jerry Kaplan, Startup
MIND STRETCHERS
Have You Considered?
1. The Outdoor Scene company became the largest
independent tent manufacturer in North America,
but eventually went out of business. The founder
never realized a dime of capital gain. Why?
2. When Steve Pond sold his company in the late
1980s, he wrote checks for hundreds of thousands
of dollars to several people who had left the
company up to several years previously, but who
had been real contributors to the early success of
the company. What are the future implications for
Steve? For you?
3. Dorothy Stevenson, the first woman to earn a ham
radio license in Utah, said, “Success is getting
what you want. Happiness is wanting what you
get.” What does this mean? Why should you care?
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 20. Crafting a Personal
Entrepreneurial Strategy
36
© The McGraw?Hill
Companies, 2004
Crafting a personal entrepreneurial strategy can be
viewed as the personal equivalent of developing a
business plan. As with planning in other situations,
the process itself is more important than the plan.
The key is the process and discipline that put an in-
dividual in charge of evaluating and shaping choices
and initiating action that makes sense, rather than let-
ting things just happen. Having a longer-term sense
of direction can be highly motivating. It also can be
extremely helpful in determining when to say no
(which is much harder than saying yes) and can tem-
per impulsive hunches with a more thoughtful strate-
gic purpose. This is important because today’s choices,
whether or not they are thought out, become tomor-
row’s track record. They may end up shaping an en-
trepreneur in ways that he or she may not find so at-
tractive 10 years hence and, worse, may also result in
failure to obtain those experiences needed to have
high-quality opportunities later.
Therefore, a personal strategy can be invaluable,
but it need not be a prison sentence. It is a point of de-
parture, rather than a contract of indenture, and it can
and will change over time. This process of developing
a personal strategy for an entrepreneurial career is a
very individual one and, in a sense, one of self-selec-
tion. One experienced venture capital investor in small
ventures, Louis L. Allen, shares this view of the impor-
tance of the role of self-selection:
Unlike the giant firm that has recruiting and selection ex-
perts to screen the wheat from the chaff, the small business
firm, which comprises the most common economic unit in our
business systems, cannot afford to employ a personnel man-
ager . . . More than that, there’s something very special about
the selection of the owners: they have selected themselves . . .
As I face self-selected top managers across my desk or visit
them in their plants or offices I have become more and more
impressed with the fact that this self-selection process is far
more important to the success or failure of the company . . .
than the monetary aspects of our negotiations.
Reasons for planning are similar to those for devel-
oping a business plan (see Chapter 12). Planning helps
an entrepreneur to manage the risks and uncertainties
20
Chapter Twenty
Crafting a Personal
Entrepreneurial Strategy
“If you don’t know where you’re going, any path will take you there.”
The Koran
Results Expected
Upon completion of this chapter, you will have:
1. Looked at the self-assessment process.
2. Examined a framework for self-assessment and developed a personal entrepreneurial
strategy.
3. Identified data to be collected in the self-assessment process.
4. Learned about receiving feedback and setting goals.
5. Analyzed the Boston Communications Group, Inc. case study.
643
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Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 20. Crafting a Personal
Entrepreneurial Strategy
37
© The McGraw?Hill
Companies, 2004
644 Part V Startup and After
of the future; helps him or her to work smarter, rather
than simply harder; keeps him or her in a future-
oriented frame of mind; helps him or her to develop
and update a keener strategy by testing the sensibility
of his or her ideas and approaches with others; helps
motivate; gives him or her a “results orientation”;
helps be effective in managing and coping with what
is by nature a stressful role; and so forth.
Rationalizations and reasons given for not planning,
like those mentioned in Chapter 12, are that plans are
out of date as soon as they are finished and that no one
knows what tomorrow will bring and, therefore, it is
dangerous to commit to uncertainty. Further, the cau-
tious, anxious person may find that setting personal
goals creates a further source of tension and pressure
and a heightened fear of failure. There is also the pos-
sibility that future or yet unknown options, which ac-
tually might be more attractive than the one chosen,
may become lost or be excluded.
Commitment to a career-oriented goal, particu-
larly for an entrepreneur who is young and lacks
much real-world experience, can be premature. For
the person who is inclined to be a compulsive and ob-
sessive competitor and achiever, goal setting may add
gasoline to the fire. And, invariably, some events and
environmental factors beyond one’s control may
boost or sink the best-laid plans.
Personal plans fail for the same reasons as business
plans, including frustration when the plan appears not
to work immediately and problems of changing behav-
ior from an activity-oriented routine to one that is goal-
oriented. Other problems are developing plans that are
based on admirable missions, such as improving per-
formance, rather than goals, and developing plans that
fail to anticipate obstacles, and those that lack progress
milestones, reviews, and so forth.
A Conceptual Scheme for Self-Assessment
Exhibit 20.1 shows one conceptual scheme for think-
ing about the self-assessment process called the Jo-
hari Window. According to this scheme, there are two
sources of information about the self: the individual
and others. According to the Johari Window, there
are three areas in which individuals can learn about
themselves.
There are two potential obstacles to self-assess-
ment efforts. First, it is hard to obtain feedback; sec-
ond, it is hard to receive and benefit from it. Everyone
possesses a personal frame of reference, values, and so
forth, which influence first impressions. It is, there-
fore, almost impossible for an individual to obtain an
unbiased view of himself or herself from someone
else. Further, in most social situations, people usually
present self-images that they want to preserve, pro-
tect, and defend, and behavioral norms usually exist
that prohibit people from telling a person that he or
she is presenting a face or impression that differs from
what the person thinks is being presented. For exam-
ple, most people will not point out to a stranger dur-
ing a conversation that a piece of spinach is promi-
nently dangling from between his or her front teeth.
The first step for an individual in self-assessment is
to generate data through observation of his or her
thoughts and actions and by getting feedback from
others for the purposes of (1) becoming aware of
blind spots and (2) reinforcing or changing existing
perceptions of both strengths and weaknesses.
Once an individual has generated the necessary data,
the next steps in the self-assessment process are to
study the data generated, develop insights, and then es-
tablish apprenticeship goals to gain any learning, expe-
rience, and so forth.
Finally, choices can be made in terms of goals and
opportunities to be created or seized.
Crafting an Entrepreneurial Strategy
Profiling the Past
One useful way to begin the process of self-assess-
ment and planning is for an individual to think about
his or her entrepreneurial roots (what he or she has
done, his or her preferences in terms of lifestyle and
EXHIBIT 20.1
Peeling the Onion
Known to Entrepreneur and Team Not Known to Entrepreneur and Team
Known to Prospective Area 1 Known area: Area 2 Blind area: (we do not know what
Investors and Stakeholders (what you see is what you get) we do not know, but you do)
Not Known to Prospective Area 3 Hidden area: (unshared—you do Area 4 Unknown area: (no venture is
Investors and Stakeholders not know what we do, but the deal does certain or risk free)
not get done until we find out)
Source: Derived from an original concept called the “Johari Window” in D. A. Kolb, I. M. Rubin, and J. M. Mcintyre, Organizational Psychology:
An Experimental Approach, 2nd ed. (Englewood Cliffs, NJ: Prentice Hall, 1974).
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Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 20. Crafting a Personal
Entrepreneurial Strategy
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© The McGraw?Hill
Companies, 2004
Chapter 20 Crafting a Personal Entrepreneurial Strategy 645
work style, etc.) and couple this with a look into the
future and what he or she would like most to be do-
ing and how he or she would like to live.
In this regard, everyone has a personal history that
has played and will continue to play a significant role
in influencing his or her values, motivations, atti-
tudes, and behaviors. Some of this history may pro-
vide useful insight into prior entrepreneurial inclina-
tions, as well as into his or her future potential fit with
an entrepreneurial role. Unless an entrepreneur is
enjoying what he or she is doing for work most of the
time, when in his or her 30s, 40s, or 50s, having a
great deal of money without enjoying the journey will
be a very hollow success.
Profiling the Present
It is useful to profile the present. Possession of cer-
tain personal entrepreneurial attitudes and behav-
iors (i.e., an “entrepreneurial mind”) have been
linked to successful careers in entrepreneurship.
These attitudes and behaviors deal with such factors
as commitment, determination, and perseverance;
the drive to achieve and grow; an orientation toward
goals; the taking of initiative and personal responsi-
bility; and so forth.
In addition, various role demands result from the
pursuit of opportunities. These role demands are ex-
ternal in the sense that they are imposed upon every
entrepreneur by the nature of entrepreneurship. As
discussed in Chapter 7, the external business envi-
ronment is given, the demands of a higher potential
business in terms of stress and commitment are
given, and the ethical values and integrity of key ac-
tors are given. Required as a result of the demands,
pressures, and realities of starting, owning, and oper-
ating a substantial business are such factors as ac-
commodation to the venture, toleration of stress, and
so forth. A realistic appraisal of entrepreneurial atti-
tudes and behaviors in light of the requirements of
the entrepreneurial role is useful as part of the self-
assessment.
Also, part of any self-assessment is an assessment of
management competencies and what “chunks” of expe-
rience, know-how, and contacts need to be developed.
Getting Constructive Feedback
A Scottish proverb says, “The greatest gift that God
hath given us is to see ourselves as others see us.” One
common denominator among successful entrepre-
neurs is a desire to know how they are doing and
where they stand. They have an uncanny knack for
asking the right questions about their performance at
the right time. This thirst to know is driven by a keen
awareness that such feedback is vital to improving
their performance and their odds for success.
Receiving feedback from others can be a most de-
manding experience. The following list of guidelines
in receiving feedback can help:
Feedback needs to be solicited, ideally, from
those who know the individual well (e.g.,
someone he or she has worked with or for) and
who can be trusted. The context in which the
person is known needs to be considered. For
example, a business colleague may be better
able to comment upon an individual’s
managerial skills than a friend. Or a personal
friend may be able to comment on motivation
or on the possible effects on the family situation.
It is helpful to chat with the person before
asking him or her to provide any specific written
impressions and to indicate the specific areas he
or she can best comment upon. One way to do
this is to formulate questions first. For example,
the person could be told, “I’ve been asking
myself the following question . . . and I would
really like your impressions in that regard.”
Specific comments in areas that are particularly
important either personally or to the success of
the venture need to be solicited and more
detail probed if the person giving feedback is
not clear. A good way to check if a statement is
being understood correctly is to paraphrase the
statement. The person needs to be encouraged
to describe and give examples of specific
situations or behaviors that have influenced the
impressions he or she has developed.
Feedback is most helpful if it is neither all
positive nor all negative.
Feedback needs to be obtained in writing so
that the person can take some time to think
about the issues, and so feedback from various
sources can be pulled together.
The person asking for feedback needs to be
honest and straightforward with himself or
herself and with others.
Time is too precious and the road to new
venture success too treacherous to clutter this
activity with game playing or hidden agendas.
The person receiving feedback needs to avoid
becoming defensive and taking negative
comments personally.
It is important to listen carefully to what is
being said and think about it. Answering,
debating, or rationalizing should be avoided.
An assessment of whether the person soliciting
feedback has considered all important
information and has been realistic in his or her
inferences and conclusions needs to be made.
Help needs to be requested in identifying
common threads or patterns, possible
Timmons et al.: New
Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 20. Crafting a Personal
Entrepreneurial Strategy
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Companies, 2004
646 Part V Startup and After
implications of self-assessment data and certain
weaknesses (including alternative inferences or
conclusions), and other relevant information
that is missing.
Additional feedback from others needs to be
sought to verify feedback and to supplement
the data.
Reaching final conclusions or decisions needs
to be left until later.
Putting It All Together
Exhibit 20.2 shows the relative fit of an entrepreneur
with a venture opportunity, given his or her relevant
attitudes and behaviors and relevant general manage-
ment skills, experience, know-how, and contacts, and
given the demands of the venture opportunity. A clean
appraisal is almost impossible. Self-assessment just is
not that simple. The process is cumulative, and what
an entrepreneur does about weaknesses, for example,
is far more important than what the particular weak-
nesses might be. After all, everyone has weaknesses.
Thinking Ahead
As it is in developing business plans, goal setting is im-
portant in personal planning. Few people are effective
goal setters. Perhaps fewer than 5 percent have ever
committed their goals to writing, and perhaps fewer
than 25 percent of adults even set goals mentally.
Potential for
singles or doubles,
but may strike out
Potential for triples
and home runs
No hat and no cattle Big hat, no cattle
A
t
t
r
a
c
t
i
v
e
n
e
s
s
o
f
v
e
n
t
u
r
e
o
p
p
o
r
t
u
n
i
t
y
High
Low
Entrepreneur's requisites
(mind-set, know-how, and experience)
High
EXHIBIT 20.2
Fit of the Entrepreneur and the Venture Opportunity
Again, goal setting is a process, a way of dealing
with the world. Effective goal setting demands time,
self-discipline, commitment and dedication, and prac-
tice. Goals, once set, do not become static targets.
A number of distinct steps are involved in goal set-
ting, steps that are repeated over and over as condi-
tions change:
Establishment of goals that are specific and
concrete (rather than abstract and out of focus),
measurable, related to time (i.e., specific about
what will be accomplished over a certain time
period), realistic, and attainable.
Establishment of priorities, including the
identification of conflicts and trade-offs and how
these can be resolved.
Identification of potential problems and
obstacles that could prevent goals from being
attained.
Specification of action steps that are to be
performed to accomplish the goal.
Indication of how results will be measured.
Establishment of milestones for reviewing
progress and tying these to specific dates on a
calendar.
Identification of risks involved in meeting the
goals.
Identification of help and other resources that
may be needed to obtain goals.
Periodic review of progress and revision of
goals.
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Venture Creation:
Entrepreneurship for the
21st Century, 6/e
V. Startup and After 20. Crafting a Personal
Entrepreneurial Strategy
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Companies, 2004
Chapter 20 Crafting a Personal Entrepreneurial Strategy 647
MIND STRETCHERS
Have You Considered?
1. How will you personally define success in 5, 10,
and 25 years? Why?
2. Assume that at age 40–50 years, you have achieved
a net worth of $25–$50 million in today’s dollars.
So what? Then what?
Chapter Summary
1. The principal task for the entrepreneur is to
determine what kind of entrepreneur he or she wants
to become based on his or her attitudes, behaviors,
management competencies, experience, and so forth.
2. Self-assessment is the hardest thing for
entrepreneurs to do, but if you don’t do it, you will
really get into trouble. If you don’t do it, who will?
Study Questions
1. “What is one person’s ham is another person’s
poison.” What does this mean?
2. Can you evaluate thoroughly your attraction to
entrepreneurship?
3. Can you evaluate thoroughly the fit between you and
the demands of a particular opportunity?
4. Can you shape a strategy, including an action plan to
make your entrepreneurial aspirations a reality?
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648 Part V Startup and After
Exercise
Personal Entrepreneurial
Strategy
The exercise that follows will help you gather data, both
from yourself and from others, evaluate the data you have
collected, and craft a personal entrepreneurial strategy. The
QuickLook exercise from Chapter 7 provided an opportu-
nity to take a quick inventory of your personal attributes.
The personal entrepreneurial strategy exercise takes this
process to the next level.
The exercise requires active participation on your part.
The estimated time to complete the exercise is 1.5 to 3
hours. Those who have completed the exercise—students,
practicing entrepreneurs, and others—report that the self-
assessment process was worthwhile and it was also de-
manding. Issues addressed will require a great deal of
thought, and there are, of course, no wrong answers.
Although this is a self-assessment exercise, it is useful to
receive feedback. Whether you choose to solicit feedback
and how much, if any, of the data you have collected you
choose to share with others is your decision. The exercise
will be of value only to the extent that you are honest and
realistic in your approach.
A complex set of factors clearly goes into making
someone a successful entrepreneur. No individual has all
the personal qualities, managerial skills, and the like, in-
dicated in the exercise. And, even if an individual did
possess most of these, his or her values, preferences, and
such may make him or her a very poor risk to succeed as
an entrepreneur.
The presence or absence of any single factor does not
guarantee success or failure as an entrepreneur. Before pro-
ceeding, remember, it is no embarrassment to reach for the
stars and fail to reach them. It is a failure not to reach for
the stars.
Name:
Date:
Part I: Profile of the Past
STEP 1
Examine Your Personal Preferences.
What gives you energy, and why? These are things from either work or leisure, or both, that give you the greatest amount of
personal satisfaction, sense of enjoyment, and energy.
Source of Energy Reason
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What takes away your energy, and why? These create for you the greatest amount of personal dissatisfaction, anxiety, or
discontent and take away your energy and motivation.
Source of Energy Reason
Gives Energy Takes Energy
Attributes—Would Energize Attributes—Would Turn Off
Rank (from the most to the least) the items you have listed above:
In 20 to 30 years, how would you like to spend an ideal month? Include in your description your desired lifestyle, work style,
income, friends, and so forth, and a comment about what attracts you to, and what repels you about, this ideal existence.
Review the idea generation guide you completed in Chapter 3 and list the common attributes of the 10 businesses you
wanted to enter and the 10 businesses you did not:
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Which of these attributes would give you energy and which would take it away, and why?
650 Part V Startup and After
Attribute Give or Take Energy Reason
Complete this sentence: “I would/would not like to start/acquire my own business someday because . . .”
Discuss any patterns, issues, insights, and conclusions that have emerged:
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Rank the following in terms of importance to you:
Important ? ???? ? Irrelevant
Location 5 4 3 2 1
Geography (particular area) 5 4 3 2 1
Community size and nature 5 4 3 2 1
Community involvement 5 4 3 2 1
Commuting distance (one way):
20 minutes or less 5 4 3 2 1
30 minutes or less 5 4 3 2 1
60 minutes or less 5 4 3 2 1
More than 60 minutes 5 4 3 2 1
Lifestyle and Work Style
Size of business:
Less than $1 million sales or under 20 employees 5 4 3 2 1
More than $1 million sales or 20 employees 5 4 3 2 1
More than $10 million sales and 200 employees 5 4 3 2 1
Rate of real growth:
Fast (over 25%/year) 5 4 3 2 1
Moderate (10% to 15%/year) 5 4 3 2 1
Slow (less than 10%/year) 5 4 3 2 1
Workload (weekly):
Over 70 hours 5 4 3 2 1
55 to 60 hours 5 4 3 2 1
40 hours or less 5 4 3 2 1
Marriage 5 4 3 2 1
Family 5 4 3 2 1
Travel away from home:
More than 60% 5 4 3 2 1
30% to 60% 5 4 3 2 1
Less than 30% 5 4 3 2 1
None 5 4 3 2 1
Standard of Living
Tight belt/later capital gains 5 4 3 2 1
Average/limited capital gains 5 4 3 2 1
High/no capital gains 5 4 3 2 1
Become very rich 5 4 3 2 1
Personal Development
Utilization of skill and education 5 4 3 2 1
Opportunity for personal growth 5 4 3 2 1
Contribution to society 5 4 3 2 1
Positioning for opportunities 5 4 3 2 1
Generation of significant contacts, experience, and know-how 5 4 3 2 1
Status and Prestige 5 4 3 2 1
Impact on Ecology and Environment 5 4 3 2 1
Capital Required
From you 5 4 3 2 1
From others 5 4 3 2 1
Other Considerations 5 4 3 2 1
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652 Part V Startup and After
Imagine you had $1,000 with which to buy the items you ranked above. Indicate below how you would allocate the
money. For example, the item that is most important should receive the greatest amount. You may spend nothing on some
items, you may spend equal amounts on some, and so forth. Once you have allocated the $1,000, rank the items in order
of importance, the most important being number 1.
Item Share of $1,000 Rank
Location
Lifestyle and work style
Standard of living
Personal development
Status and prestige
Ecology and environment
Capital required
Other considerations
Discuss why you became involved in each of the activities above and what specifically influenced each of your decisions.
Discuss what you learned about yourself, about self-employment, about managing people, and about making money.
STEP 2
Examine Your Personal History.
List activities (1) that have provided you financial support in the past (e.g., a part-time or full-time job, a paper route), (2) that
have contributed to your well-being (e.g., financing your education or a hobby), and (3) that you have done on your own
(e.g., building something).
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Discuss why you became involved in each of the employment situations above and what specifically influenced each of
your decisions.
List and discuss your full-time work experience, including descriptions of specific tasks for which you had responsibility,
specific skills you used, the number of people you supervised, whether you were successful, and so forth.
Discuss what you learned about yourself, about employment, about managing people, and about making money.
List and discuss other activities, such as sports, in which you have participated and indicate whether each activity was in-
dividual (e.g., chess or tennis) or team (e.g., football).
What lessons and insights emerged, and how will these apply to life as an entrepreneur?
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If you have ever started a business of any kind or worked in a small company, list the things you liked most and those you
liked least, and why.
654 Part V Startup and After
If you have ever been fired from or quit either a full-time or part-time job, indicate the job, why you were fired or quit, the
circumstances, and what you have learned and what difference this has made.
How have the people above influenced you? How do you view them and their roles? What have you learned from them
about self-employment? Include a discussion of the things that attract or repel you, the trade-offs they have had to consider,
the risks they have faced and rewards they have enjoyed, and entry strategies that have worked for them.
Among those individuals who have influenced you most, do any own and operate their own businesses or engage inde-
pendently in a profession (e.g., certified public accountant)?
If you changed jobs or relocated, indicate the job, why the change occurred, the circumstances, and what you have
learned from those experiences.
Like Most Reason Like Least Reason
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If you have ever worked for a larger company (over 500 employees or about $50 million to $60 million in sales), list the
things you liked most and those you liked least about your work, and why.
Like Most Reason Like Least Reason
Summarize those factors in your history that you believe are entrepreneurial strengths or weaknesses.
Strengths Weaknesses
Part II: Profile of the Present:
Where You Are
STEP 1
Examine Your “Entrepreneurial Mind.”
Examine your attitudes, behaviors, and know-how. Rank yourself (on a scale of 5 to 1)
Strongest ? ???? ? Weakest
Commitment and Determination
Decisiveness 5 4 3 2 1
Tenacity 5 4 3 2 1
Discipline 5 4 3 2 1
Persistence in solving problems 5 4 3 2 1
Willingness to sacrifice 5 4 3 2 1
Total immersion 5 4 3 2 1
Opportunity Obsession
Having knowledge of customers’ needs 5 4 3 2 1
Being market driven 5 4 3 2 1
Obsession with value creation and enhancement 5 4 3 2 1
Tolerance of Risk, Ambiguity, and Uncertainty
Calculated risk-taker 5 4 3 2 1
Risk minimizer 5 4 3 2 1
Risk sharer
Tolerance of uncertainty and lack of structure 5 4 3 2 1
Tolerance of stress and conflict 5 4 3 2 1
Ability to resolve problems and integrate solutions 5 4 3 2 1
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Strongest ? ???? ? Weakest
Creativity, Self-Reliance, and Ability to Adapt
Nonconventional, open-minded, lateral thinker 5 4 3 2 1
Restlessness with status quo 5 4 3 2 1
Ability to adapt 5 4 3 2 1
Lack of fear of failure 5 4 3 2 1
Ability to conceptualize and to “sweat details” (helicopter mind) 5 4 3 2 1
Motivation to Excel
Goal and results orientation 5 4 3 2 1
Drive to achieve and grow (self-imposed) 5 4 3 2 1
Low need for status and power 5 4 3 2 1
Ability to be interpersonally supporting (versus competitive) 5 4 3 2 1
Awareness of weaknesses (and strengths) 5 4 3 2 1
Having perspective and sense of humor 5 4 3 2 1
Leadership
Being self-starter 5 4 3 2 1
Having internal locus of control 5 4 3 2 1
Having integrity and reliability 5 4 3 2 1
Having patience 5 4 3 2 1
Being team builder and hero maker 5 4 3 2 1
Summarize your entrepreneurial strengths.
Summarize your entrepreneurial weaknesses.
STEP 2
Examine Entrepreneurial Role Requirements.
Rank where you fit in the following roles.
Strongest ? ???? ? Weakest
Accommodation to Venture
Extent to which career and venture are No. 1 priority 5 4 3 2 1
Stress
The cost of accommodation 5 4 3 2 1
Values
Extent to which conventional values are held 5 4 3 2 1
Ethics and Integrity 5 4 3 2 1
656 Part V Startup and After
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Summarize your strengths and weaknesses.
STEP 3:
Examine Your Management Competencies.
Rank your skills and competencies below.
Strongest ? ???? ? Weakest
Marketing
Market research and evaluation 5 4 3 2 1
Marketing planning 5 4 3 2 1
Product pricing 5 4 3 2 1
Sales management 5 4 3 2 1
Direct mail/catalog selling 5 4 3 2 1
Telemarketing 5 4 3 2 1
Customer service 5 4 3 2 1
Distribution management 5 4 3 2 1
Product management 5 4 3 2 1
New product planning 5 4 3 2 1
Operations/Production
Manufacturing management 5 4 3 2 1
Inventory control 5 4 3 2 1
Cost analysis and control 5 4 3 2 1
Quality control 5 4 3 2 1
Production scheduling and flow 5 4 3 2 1
Purchasing 5 4 3 2 1
Job evaluation 5 4 3 2 1
Finance
Accounting 5 4 3 2 1
Capital budgeting 5 4 3 2 1
Cash flow management 5 4 3 2 1
Credit and collection management 5 4 3 2 1
Managing relations with financial sources 5 4 3 2 1
Short-term financing 5 4 3 2 1
Public and private offerings 5 4 3 2 1
Administration
Problem solving 5 4 3 2 1
Communications 5 4 3 2 1
Planning 5 4 3 2 1
Decision making 5 4 3 2 1
Project management 5 4 3 2 1
Negotiating 5 4 3 2 1
Personnel administration 5 4 3 2 1
Management information systems 5 4 3 2 1
Computer/IT/www 5 4 3 2 1
Interpersonal/Team
Leadership/vision/influence 5 4 3 2 1
Helping and coaching 5 4 3 2 1
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Strongest ? ???? ? Weakest
Marketing
Feedback 5 4 3 2 1
Conflict management 5 4 3 2 1
Teamwork and people management 5 4 3 2 1
Law
Corporations 5 4 3 2 1
Contracts 5 4 3 2 1
Taxes 5 4 3 2 1
Securities 5 4 3 2 1
Patents and proprietary rights 5 4 3 2 1
Real estate law 5 4 3 2 1
Bankruptcy 5 4 3 2 1
Unique Skills 5 4 3 2 1
STEP 4
Based on an Analysis of the Information Given in Steps 1–3, Indicate the Items You Would Add to a
“Do” List.
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Part III: Getting Constructive Feedback
Part III is an organized way for you to gather constructive feedback. (If you choose not to get constructive feedback at this
time, proceed to Part IV.)
STEP 1
(Optional) Give a Copy of Your Answers to Parts I and II to the Person Designated to Evaluate Your Re-
sponses. Ask Him or Her to Answer the Following:
Have you been honest, objective, hard-nosed, and complete in evaluating your skills?
Are there any strengths and weaknesses you have inventoried incorrectly?
Are there other events or past actions that might affect this analysis and that have not been addressed?
STEP 2
Solicit Feedback.
Give one copy of the feedback form (begins on the next page) to each person who has been asked to evaluate your
responses.
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660 Part V Startup and After
Feedback Form
Feedback for:
Prepared by:
STEP 1
Please Check the Appropriate Column Next to the Statements About the Entrepreneurial Attributes, and
Add Any Additional Comments You May Have:
Strong Adequate Weak No Comment
Commitment and Determination
Decisiveness S A W NC
Tenacity S A W NC
Discipline S A W NC
Persistence in solving problems S A W NC
Willingness to sacrifice S A W NC
Total immersion S A W NC
Opportunity Obsession
Having knowledge of customer’s needs S A W NC
Being market driven S A W NC
Obsession with value creation and enhancement S A W NC
Tolerance of Risk, Ambiguity, and Uncertainty
Calculated risk-taker S A W NC
Risk minimizer S A W NC
Risk sharer S A W NC
Tolerance of uncertainty and lack of structure S A W NC
Tolerance of stress and conflict S A W NC
Ability to resolve problems and integrate solutions S A W NC
Creativity, Self-Reliance, and Ability to Adapt
Nonconventional, open-minded, lateral thinker S A W NC
Restlessness with status quo S A W NC
Ability to adapt S A W NC
Lack of fear of failure S A W NC
Ability to conceptualize and to “sweat details” (helicopter mind) S A W NC
Motivation to Excel
Goal and results orientation S A W NC
Drive to achieve and grow (self-imposed standards) S A W NC
Low need for status and power S A W NC
Ability to be interpersonally supportive (versus competitive) S A W NC
Awareness of weaknesses (and strengths) S A W NC
Having perspective and sense of humor S A W NC
Leadership
Being self-starter S A W NC
Having internal locus of control S A W NC
Having integrity and reliability S A W NC
Having patience S A W NC
Being team builder and hero maker S A W NC
Please make any comments that you can on such matters as my energy, health, and emotional stability; my creativity and
innovativeness; my intelligence; my capacity to inspire; my values; and so forth.
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STEP 2
Please Check the Appropriate Column Next to the Statements About Entrepreneurial Role Requirements
to Indicate My Fit and Add Any Additional Comments You May Have.
Strong Adequate Weak No Comment
Accommodation to venture S A W NC
Stress (cost of accommodation) S A W NC
Values (conventional economic and professional values of free S A W NC
enterprise system)
Ethics and integrity S A W NC
Additional Comments:
STEP 3
Please Check the Appropriate Column Next to the Statements About Management Competencies, and
Add Any Additional Comments You May Have.
Strong Adequate Weak No Comment
Marketing
Market research and evaluation S A W NC
Marketing planning S A W NC
Product pricing S A W NC
Sales management S A W NC
Direct mail/catalog selling S A W NC
Telemarketing S A W NC
Customer service S A W NC
Distribution management S A W NC
Product management S A W NC
New product planning S A W NC
Operations/Production
Manufacturing management S A W NC
Inventory control S A W NC
Cost analysis and control S A W NC
Quality control S A W NC
Production scheduling and flow S A W NC
Purchasing S A W NC
Job evaluation S A W NC
Finance
Accounting S A W NC
Capital budgeting S A W NC
Cash flow management S A W NC
Credit and collection management S A W NC
Managing relations with financial sources S A W NC
Short-term financing S A W NC
Public and private offerings S A W NC
Administration
Problem solving S A W NC
Communications S A W NC
Planning S A W NC
Decision making S A W NC
Project management S A W NC
Negotiating S A W NC
Personnel administration S A W NC
Management information systems S A W NC
Computer/IT/www S A W NC
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Strong Adequate Weak No Comment
Interpersonal/Team
Leadership/vision/influence S A W NC
Helping and coaching S A W NC
Feedback S A W NC
Conflict management S A W NC
Teamwork and people management S A W NC
Law
Corporations S A W NC
Contracts S A W NC
Taxes S A W NC
Securities S A W NC
Patents and proprietary rights S A W NC
Real estate law S A W NC
Bankruptcy S A W NC
Unique Skills S A W NC
Additional Comments:
STEP 4
Please Evaluate My Strengths and Weaknesses.
In what area or areas do you see my greatest potential or existing strengths in terms of the venture opportunity we have dis-
cussed, and why?
Area of Strength Reason
Area Weakness Reason
In what area or areas do you see my greatest potential or existing weaknesses in terms of the venture opportunity we have
discussed, and why?
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Please make any other suggestions that would be helpful for me to consider (e.g., comments about what you see that I like
to do, my lifestyle, work style, patterns evident in my skills inventory, the implications of my particular constellation of man-
agement strengths and weaknesses and background, the time implications of an apprenticeship).
If you know my partners and the venture opportunity, what is your evaluation of their fit with me and the fit among them?
Given the venture opportunity, what you know of my partners, and your evaluation of my weaknesses, should I consider
any additional members for my management team? If so, what should be their strengths and relevant experience?
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664 Part V Startup and After
Part IV: Putting It All Together
STEP 1
Reflect on Your Previous Responses and the Feedback You Have Solicited or Have Received Informally
(From Class Discussion or From Discussions With Friends, Parents, Etc.).
STEP 2
Assess Your Entrepreneurial Strategy.
What have you concluded at this point about entrepreneurship and you?
How do the requirements of entrepreneurship—especially the sacrifices, total immersion, heavy workload, and long-term
commitment—fit with your own aims, values, and motivations?
What specific conflicts do you anticipate between your aims and values, and the demands of entrepreneurship?
How would you compare your entrepreneurial mind, your fit with entrepreneurial role demands, your management com-
petencies, and so forth, with those of other people you know who have pursued or are pursuing an entrepreneurial career?
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Think ahead 5 to 10 years or more, and assume that you would want to launch or acquire a higher potential venture.
What “chunks” of experience and know-how do you need to accumulate?
What are the implications of this assessment of your entrepreneurial strategy in terms of whether you should proceed with
your current venture opportunity?
What is it about the specific opportunity you want to pursue that will provide you with sustained energy and motivation?
How do you know this?
At this time, given your major entrepreneurial strengths and weaknesses and your specific venture opportunity, are there
other “chunks” of experience and know-how you need to acquire or attract to your team? (Be specific!)
What other issues or questions have been raised for you at this point that you would like answered?
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666 Part V Startup and After
Part V: Thinking Ahead
Part V considers the crafting of your personal entrepreneurial strategy. Remember, goals should be specific and concrete,
measurable, and, except where indicated below, realistic and attainable.
STEP 1
List, in Three Minutes, Your Goals to be Accomplished by the Time You Are 70.
STEP 2
List, in Three Minutes, Your Goals to be Accomplished Over the Next Seven Years. (If You Are an Un-
dergraduate, Use the Next Four Years.)
STEP 3
List, in Three Minutes, the Goals You Would Like to Accomplish if You Have Exactly One Year From To-
day to Live. Assume You Would Enjoy Good Health in the Interim but Would Not be Able to Acquire Any
More Life Insurance or Borrow an Additional Large Sum of Money for a “Final Fling.” Assume Further
that You Could Spend that Last Year of Your Life Doing Whatever You Want to Do.
STEP 4
List, in Six Minutes, Your Real Goals and the Goals You Would Like to Accomplish Over Your Lifetime.
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STEP 5
Discuss the List From Step 4 With Another Person and then Refine and Clarify Your Goal Statements.
STEP 6
Rank Your Goals According to Priority.
STEP 7
Concentrate on the Top Three Goals and Make a List of Problems, Obstacles, Inconsistencies, and so
Forth, That You Will Encounter in Trying to Reach Each of These Goals.
STEP 8
Decide and State How You Will Eliminate Any Important Problems, Obstacles, Inconsistencies, and so
Forth.
STEP 9
For Your Top Three Goals, Write Down All the Tasks or Action Steps You Need to Take to Help You At-
tain Each Goal and Indicate How Results Will be Measured.
It is helpful to organize the goals in order of priority.
Goal Task/Action Step Measurement Rank
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668 Part V Startup and After
STEP 10
Rank Tasks/Action Steps in Terms of Priority.
To identify high-priority items, it is helpful to make a copy of your list and cross off any activities or task that cannot be com-
pleted, or at least begun, in the next seven days, and then identify the single most important goal, the next most important,
and so forth.
STEP 11
Establish Dates and Durations (and, if Possible, a Place) for Tasks/Action Steps to Begin.
Organize tasks/action steps according to priority. If possible, the date should be during the next seven days.
STEP 12
Make a List of Problems, Obstacles, Inconsistencies, and so Forth.
STEP 13
Decide How You Will Eliminate Any Important Problems, Obstacles, Inconsistencies, and so Forth, and
Adjust the List in step 12.
STEP 14
Identify Risks Involved and Resources and Other Help Needed.
Goal Task/Action Step Measurement Rank
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