Description
This detailed description with regards to the entrepreneurial process demystifying entrepreneurship.
93
ne often hears, especially from younger, newer entrepreneurs,
the exhortation: “Go for it! You have nothing to lose now. So
what if it doesn’t work out. You can do it again. Why wait?”
While the spirit this reflects is commendable and there can be
no substitute for doing, such itchiness can be a mistake unless
it is focused on a solid opportunity.
Most entrepreneurs launching businesses, particularly the
first time, run out of cash quicker than they bring in customers
and profitable sales. While there are many reasons for this,
the first is that they have not focused on the right opportunities.
Unsuccessful entrepreneurs usually equate an idea with an op-
portunity; successful entrepreneurs know the difference!
Successful entrepreneurs know that it is important to “think
big enough.” They understand that they aren’t simply creat-
ing a job for themselves and a few employees; they are
building a business that can create value for themselves and
their community.
While there are boundless opportunities for those with en-
trepreneurial zest, a single entrepreneur will likely be able to
launch and build only a few good businesses—probably no
more than three or four—during his or her energetic and pro-
ductive years. (Fortunately, all you need to do is grow and har-
vest one quite profitable venture whose sales have exceeded
several million dollars. The result will be a most satisfying pro-
fessional life, as well as a financially rewarding one.)
How important is it, then, that you screen and choose an
opportunity with great care? Very important! It is no accident
that venture capital investors have consistently invested in no
more than 1or 2 percent of all the ventures they review.
As important as it is to find a good opportunity, even good
opportunities have risks and problems. The perfect deal has yet
to be seen. Identifying risks and problems before the launch
while steps can be taken to eliminate them or reduce any neg-
ative effect early is another dimension of opportunity screening.
II
PART T WO
The Opportunity
O
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95
Demystifying Entrepreneurship
Entrepreneurship is a way of thinking, reasoning,
and acting that is opportunity obsessed, holistic in
approach, and leadership balanced for the purpose
of value creation and capture.
1
Entrepreneurship
results in the creation, enhancement, realization,
and renewal of value, not just for owners, but for
all participants and stakeholders. At the heart of
the process is the creation and/or recognition of
opportunities,
2
followed by the will and initiative to
seize these opportunities. It requires a willingness
to take risks—both personal and financial—but in a
very calculated fashion in order to constantly shift
the odds of success, balancing the risk with the po-
tential reward. Typically entrepreneurs devise in-
genious strategies to marshall their limited re-
sources.
Today entrepreneurship has evolved beyond the
classic start-up notion to include companies and
organizations of all types, in all stages. Thus entre-
preneurship can occur—and fail to occur—in
firms that are old and new; small and large; fast
and slow-growing; in the private, not-for-profit, and
public sectors; in all geographic points; and in all
stages of a nation’s development, regardless of
politics.
Entrepreneurial leaders inject imagination, moti-
vation, commitment, passion, tenacity, integrity,
teamwork, and vision into their companies. They face
3
Chapter Three
The Entrepreneurial Process
“I don’t make movies to make money. I make money to make movies.”
—Walt Disney
Results Expected
Upon completion of this chapter, you will be able to
1. Articulate a definition of entrepreneurship and the entrepreneurial process—from
lifestyle ventures to high-potential enterprises.
2. Describe the practical issues you will address and explore throughout the book.
3. Discuss how entrepreneurs and their financial backers get the odds for success in
their favor by defying the familiar pattern of disappointment and failure.
4. Articulate the Timmons Model of the entrepreneurial process; describe how it can be
applied to your entrepreneurial career aspirations and ideas for businesses; and
describe how recent research confirms its validity.
5. Provide insights into and analysis of the Loftwork case study.
1
This definition of entrepreneurship has evolved over the past three decades from research by Jeffry A. Timmons, Babson College and the Harvard Business
School, and has recently been enhanced by Stephen Spinelli, Jr., former vice provost for entrepreneurship and global management at Babson College, and
current president of Philadelphia University.
2
J. A. Timmons, D. F. Muzyka, H. H. Stevenson, and W. D. Bygrave, “Opportunity Recognition: The Core of Entrepreneurship,” in Frontiers of Entrepreneur-
ship Research (Babson Park, MA: Babson College, 1987), p. 409.
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dilemmas and must make decisions despite ambigu-
ity and contradictions. Very rarely is entrepreneur-
ship a get-rich-quick proposition. On the contrary, it
is one of continuous renewal because entrepreneurs
are never satisfied with the nature of their opportu-
nity. The result of this value creation process, as we
saw earlier, is that the total economic pie grows larger
and society benefits.
Classic Entrepreneurship: The Start-Up
The classic expression of entrepreneurship is the
raw start-up company, an innovative idea that
develops into a high-growth company. The best
of these become entrepreneurial legends: Haier,
Legend, Acer, Alibaba, Ctrip, and hundreds of
others are now household names. Success, in addi-
tion to the strong leadership from the main entre-
preneur, almost always involves building a team
with complementary talents. The ability to work
as a team and sense an opportunity where others
see contradiction, chaos, and confusion are critical
elements of success. Entrepreneurship also re-
quires the skill and ingenuity to find and control re-
sources, often owned by others, in order to pursue
the opportunity. It means making sure the upstart
venture does not run out of money when it needs it
the most. Most highly successful entrepreneurs
have held together a team and acquired financial
backing in order to chase an opportunity others may
not recognize.
Entrepreneurship in Post-Brontosaurus
Capitalism: Beyond Start-Ups
As we’ve seen, the upstart companies of the 1970s
and 1980s have had a profound impact on the com-
petitive structure of the United States and world in-
dustries. Giant firms, such as IBM (knocked off by
Apple Computer and then Microsoft), Digital Equip-
ment Corporation (another victim of Apple Com-
puter and acquired by Compaq Computer Corpora-
tion), Sears (demolished by upstart Wal-Mart and
recently merged with Kmart), and AT&T (knocked
from its perch first by MCI, and then by cellular up-
starts McCaw Communications, CellularOne, and
others), once thought invincible, have been dismem-
bered by the new wave of entrepreneurial ventures.
While large companies shrank payrolls, new ventures
added jobs.
In Taiwan the giant semiconductor manufactur-
ing firm UMC was knocked off by TSMC in the
field of wafer fabrication. Both companies dominate
the wafer-making industry (and UMC has diversi-
fied into other areas like investing in Integrated
Circuit Design), but TSMC has risen to become the
world’s largest manufacturer of semiconductors,
with its technological capabilities even beating that
of the world’s leading semiconductor giants such as
Intel, and leaving its competitors from Israel, Singa-
pore, China, and South Korea behind. In recent
years, TSMC has also begun developing green tech-
nologies, such as LED and solar cell, to seek new
growths.
Another Taiwanese company that has given the
big names a run for their money is ACER Computer.
The company grew rapidly with the outsourcing
strategy of its U.S. clients such as Intel, Dell, and
HP. After decades of product manufacturing for
global clients, it has established its own global brand
name and is now one of the world’s top three per-
sonal computer makers. Acer’s global success can be
attributed to its tremendous sourcing base in Tai-
wan. With very large supplies of quality chips,
mother boards, IC designs, flat panels, and other
components in its homeland, Taiwan, Acer has been
able to compete in terms of both cost and quality on
a global scale.
As autopsy after autopsy was performed on failing
large companies, a fascinating pattern emerged,
showing, at worst, a total disregard for the winning
entrepreneurial approaches of their new rivals and, at
best, a glacial pace in recognizing the impending de-
mise and the changing course.
“People Don’t Want to Be Managed.
They Want to Be Led!”
3
These giant firms can be characterized, during their
highly vulnerable periods, as hierarchical in structure
with many layers of reviews, approvals, and vetoes.
Their tired executive blood conceived of leadership
as managing and administering from the top down, in
stark contrast to Ewing M. Kauffman’s powerful in-
sight: “People don’t want to be managed. They want
to be led!” These stagnating giants tended to reward
people who accumulated the largest assets, budgets,
number of plants, products, and head count, rather
than rewarding those who created or found new busi-
ness opportunities, took calculated risks, and occa-
96 Part II The Opportunity
3
The authors’ favorite quote from Ewing M. Kauffman, founder of Marion Laboratories, Inc., the Ewing Marion Kauffman Foundation, Kansas City, Missouri.
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Chapter 3 The Entrepreneurial Process 97
sionally made mistakes, all with bootstrap resources.
While very cognizant of the importance of corporate
culture and strategy, the corporate giants’ pace was
glacial: It typically takes six years for a large firm to
change its strategy and 10 to 30 years to change its
culture. Meanwhile, the median time it took start-ups
to accumulate the necessary capital was one month
but averaged six months.
4
To make matters worse, these corporate giants had
many bureaucratic tendencies, particularly arrogance.
They shared a blind belief that if they followed the al-
most sacred best management practices of the day,
they could not help but prevail. During the 1970s and
1980s, these best management practices did not in-
clude entrepreneurship, entrepreneurial leadership,
and entrepreneurial reasoning. If anything, these
were considered dirty words in corporate America.
Chief among these sacred cows was staying close to
your customer. What may shock you is the conclusion
of two Harvard Business School professors:
One of the most consistent patterns in business is the
failure of leading companies to stay at the top of their
industries when technologies or markets change. . . . But
a more fundamental reason lies at the heart of the para-
dox: Leading companies succumb to one of the most
popular, valuable management dogmas. They stay close
to their customers.
5
When they do attack, the [new] entrant companies
find the established players to be easy and unprepared
opponents because the opponents have been looking
up markets themselves, discounting the threat from
below.
6
One gets further insight into just how vulnerable
and fragile the larger, so-called well-managed compa-
nies can become, and why it is the newcomers who
pose the greatest threats. This pattern also explains
why there are tremendous opportunities for the com-
ing e-generation even in markets that are currently
dominated by large players. Professors Bower and
Christensen summarize it this way:
The problem is that managers keep doing what has
worked in the past: serving the rapidly growing needs of
their current customers. The processes that successful,
well-managed companies have developed to allocate re-
sources among proposed investments are incapable of
funneling resources in programs that current customers
explicitly don’t want and whose profit margins seem un-
attractive.
7
Given how many new innovations, firms, and indus-
tries have been created in the past 30 years, it is no
wonder that brontosaurus capitalism has found its
ice age.
Signs of Hope in a Corporate Ice Age
Fortunately, for many giant firms, the entrepreneur-
ial revolution may spare them from their own ice
age. One of the most exciting developments of the
decade is the response of some large, established
corporations to the revolution in entrepreneurial
leadership. Corporate leadership, in unprecedented
numbers, is launching experiments and strategies to
recapture entrepreneurial spirit and to instill the cul-
ture and practices we would characterize as entre-
preneurial reasoning. The e-generation has too
many attractive opportunities in truly entrepreneur-
ial environments. They do not need to work for a
brontosaurus that lacks spirit.
Increasingly, we see examples of large companies
adopting principles of entrepreneurship and entre-
preneurial leadership in order to survive and to re-
new. Researchers document how large firms are ap-
plying entrepreneurial thinking, in pioneering ways,
to invent their futures, including companies such as
Taiwanese companies Acer, Asus, HTC, MediaTech,
Morning Star, Delta Electronics, Foxxcon (Hon Hai
Precision), and AUO. Most large brontosaurus firms
could learn valuable lessons on how to apply entre-
preneurial thinking from companies such as these.
Metaphors
Improvisational, quick, clever, resourceful, and in-
ventive all describe good entrepreneurs. Likewise,
innumerable metaphors from other parts of life
can describe the complex world of the entre-
preneur and the entrepreneurial process. From
music it is jazz, with its uniquely impromptu flair.
From sports many metaphors exist: the agility of
Yi Jianlian ( ), the broken-field running of
Liu Xiang ( ), the wizardry on ice of Sun Xue
( ) and Zhao Hongbo ( ), or the com-
petitiveness of table-tennis player Zhang Yining
( ). Even more fascinating are the unprece-
dented comebacks of athletic greats such as diver
Xiong Ni ( ), sports shooter Zhang Shan ( ),
and weightlifter Chen Yanqing ( ).
Perhaps the game of golf, more than any other,
replicates the complex and dynamic nature of manag-
ing risk and reward, including all the intricate mental
4
W. J. Dennis, Jr., “Wells Fargo/NFIB Series on Business Starts and Stops,” November 1999.
5
IJ. L. Bower and C. M. Christensen, “Disruptive Technologies: Catching the Wave,” Harvard Business Review, January–February 1995, p. 43.
6
Ibid., p. 47.
7
Ibid.
tim81551_ch03IT.qxd 1/20/12 10:31 AM Page 97
challenges faced in entrepreneuring. No other sport,
at one time, demands so much physically, is so com-
plex, intricate, and delicate, and is simultaneously so
rewarding and punishing; and none tests one’s will,
patience, self-discipline, and self-control like golf.
Entrepreneurs face these challenges and remunera-
tions as well. And what about the relationship be-
tween the caddy and golfer?
An entrepreneur also faces challenges like a sym-
phony conductor or a coach, who must blend and bal-
ance a group of diverse people with different skills,
talents, and personalities into a superb team. On
many occasions it demands all the talents and agility
of a juggler who must, under great stress, keep many
balls in the air at once, making sure if one comes
down it belongs to someone else.
The complex decisions and numerous alternatives
facing the entrepreneur also have many parallels with
the game of chess. As in chess, the victory goes to the
most creative player, who can imagine several alterna-
tive moves in advance and anticipate possible defenses.
This kind of mental agility is frequently demanded in
entrepreneurial decision making.
Still another parallel can be drawn from the book
The Right Stuff by Tom Wolfe, later made into a movie.
The first pilot to break the sound barrier, Chuck Yeager,
describes what it was like to be at the edge of both the
atmosphere and his plane’s performance capability, a
zone never before entered—a vivid metaphor for the
experience of a first-time entrepreneur:
In the thin air at the edge of space, where the stars and the
moon came out at noon, in an atmosphere so thin that the
ordinary laws of aerodynamics no longer applied and a
plane could skid into a flat spin like a cereal bowl on a
waxed Formica counter and then start tumbling, end over
end like a brick . . . you had to be “afraid to panic.” In the
skids, the tumbles, the spins, there was only one thing you
could let yourself think about: what do I do next?
8
This feeling is frequently the reality on earth for
entrepreneurs who run out of cash! Regardless of the
metaphor or analogy you choose for entrepreneur-
ship, each is likely to describe a creative, even artistic,
improvised act. The outcomes are often either highly
rewarding successes or painfully visible misses. Al-
ways urgency is on the doorstep.
Entrepreneurship ?Paradoxes
One of the most confounding aspects of the entre-
preneurial process is its contradictions. Because of its
highly dynamic, fluid, ambiguous, and chaotic char-
acter, the process’s constant changes frequently pose
paradoxes. A sampling of entrepreneurial paradoxes
follows. Can you think of other paradoxes that you
have observed or heard about?
An opportunity with no or very low potential
can be an enormously big opportunity. One
of the most famous examples of this paradox is
Alibaba. Founder Jack Ma was turned down by
various venture capitalists before successfully
raising capital. Frequently, business plans re-
jected by some venture capitalists become leg-
endary successes. New Hope Group, one of the
largest agribusiness operators in China, did not
receive venture capital. It operates agribusiness
in China and abroad and has more than 380
subsidiaries and over 60,000 employees.
To make money you have to first lose money. It is
commonly said in the venture capital business
that the lemons, or losers, ripen in two and a half
years, while the plums take seven or eight years.
A start-up, venture-backed company typically
loses money, often $10 million to $25 million or
more, before sustaining profitability and going
public, usually at least five to seven years later.
In contrast, Internet or app upstarters in the 21st
century can often start making a profit, even
from day one, if their services and products are
valuable to their customers.
To create and build wealth one must relinquish
wealth. Among the most successful and growing
companies in Asia, the founders aggressively di-
lute their ownership to create ownership
throughout the company. By rewarding and
sharing the wealth with the people who con-
tribute significantly to its creation, owners moti-
vate stakeholders to make the pie bigger.
To succeed, one first has to experience failure. It
is a common pattern that the first venture fails,
yet the entrepreneur learns and goes on to cre-
ate a highly successful company. Shi Yuzu of Gi-
ant Group started off with a hit when Shi
invented and sold his trademark Chinese opera-
tion software M-6401. This was followed by a
series of popular software inventions. However,
foreign software makers swarmed to China,
which squeezed the profit margins of Giant
Group, which had been relying heavily on soft-
ware sales. Giant Group also collapsed under
the weight of massive debt incurred for a 70-
story skyscraper that was never built. Shi
bounced back from failure and re-established
online games provider, Giant Interactive, which
IPOed on the NASDAQ in 2007.
98 Part II The Opportunity
8
T. Wolfe, The Right Stuff (New York: Bantam Books, 1980), pp. 51–52.
tim81551_ch03IT.qxd 1/20/12 10:31 AM Page 98
Chapter 3 The Entrepreneurial Process 99
Entrepreneurship requires considerable thought,
preparation, and planning, yet is basically an un-
plannable event. The highly dynamic, changing
character of technology, markets, and competi-
tion makes it impossible to know all your com-
petitors today, let alone five years from now. Yet
great effort is invested in attempting to model
and envision the future. The resulting business
plan is inevitably obsolete when it comes off the
printer. This is a creative process—like molding
clay. You need to make a habit of planning and re-
acting as you constantly reevaluate your options,
blending the messages from your head and your
gut, until this process becomes second nature.
For creativity and innovativeness to prosper,
rigor and discipline must accompany the process.
For years, hundreds of thousands of patents for
new products and technologies lay fallow in gov-
ernment and university research labs because
there was no commercial discipline.
Entrepreneurship requires a bias toward action
and a sense of urgency, but also demands pa-
tience and perseverance. Andy Kuo, the co-
founder of Atlaspost.com (a social networking
service developed in Taiwan) in 2009, was not
very sure about whether Atlaspost.com could sur-
vive in the face of competition from its giant rival
Facebook. Based on his experience in assessing
and differentiating itself from strong local com-
petitors, such as Wretch.cc (Taiwan’s largest blog
service site) and PTT ( Taiwan’s largest bulletin
board system), he decided to wait and see. In
2010, both the cash flow and page views (hits) on
Atlaspost.com grew steadily, indicating that Atlas-
post.com had a niche market to sustain and grow
it. For a start-up like his, spending has to be care-
fully planned, so it might be better to wait than
act upon changes.
The greater the organization, orderliness, disci-
pline, and control, the less you will control your
ultimate destiny. Entrepreneurship requires great
flexibility and nimbleness in strategy and tactics.
One has to play with the knees bent. Overcontrol
and an obsession with orderliness are impedi-
ments to the entrepreneurial approach. As the
great race car driver Mario Andretti said, “If I am
in total control, I know I am going too slow!”
Adhering to management best practice, especially
staying close to the customer that created indus-
try leaders in the 1980s, became a seed of self-de-
struction and loss of leadership to upstart
competitors. We discussed earlier the study of
“disruptive technologies.”
To realize long-term equity value, you have to
forgo the temptations of short-term profitability.
Building long-term equity requires large, contin-
uous reinvestment in new people, products, serv-
ices, and support systems, usually at the expense
of immediate profits.
The world of entrepreneurship is not neat, tidy, lin-
ear, consistent, and predictable, no matter how much
we might like it to be that way.
9
In fact, it is from the
collisions inherent in these paradoxes that value is cre-
ated, as illustrated in Exhibit 3.1. These paradoxes il-
lustrate just how contradictory and chaotic this world
can be. To thrive in this environment, one needs to be
very adept at coping with ambiguity, chaos, and un-
certainty, and at building management skills that cre-
ate predictability. Exhibit 3.2 exemplifies this ambigu-
EXHIBIT 3.2
Time for New Technologies to Reach 25%
of the U.S. Population
Household electricity (1873) 46 years
Telephone (1875) 35 years
Automobile (1885) 55 years
Airplane travel (1903) 54 years
Radio (1906) 22 years
Television (1925) 26 years
Videocassette recorder (1952) 34 years
Personal computer (1975) 15 years
Cellular phone 13 years
Internet 7 years
iPod 5 years
Source: The Wall Street Journal, 1997. Used by permission of Dow
Jones & Co. Inc. via The Copyright Clearance Center with adap-
tion for the inclusion of Internet and iPod.
EXHIBIT 3.1
Entrepreneurship Is a Contact Sport
9
See H. H. Stevenson, Do Lunch or Be Lunch (Boston, MA: Harvard Business School Press, 1998) for a provocative argument for predictability as one of the
most powerful of management tools.
Spontaneity,
opportunism
Discipline,
processes
Remember, entrepreneurship
is a full contact sport. The
value comes in the “collision.”
tim81551_ch03IT.qxd 1/30/12 10:06 AM Page 99
ity and need for patience. For example, Apple
shipped the first iPod in November 2001. Eighteen
months later Apple sold the one millionth unit and six
months later sold another million units. In 2005 Apple
shipped 13 million units. A Merrill Lynch analyst pre-
dicts iPod sales could eventually reach 300 million.
The Higher-Potential Venture:
Think Big Enough
One of the biggest mistakes aspiring entrepreneurs
make is strategic. They think too small. Sensible as it
may be to think in terms of a very small, simple busi-
ness as being more affordable, more manageable, less
demanding, and less risky, the opposite is true. The
chances of survival and success are lower in these
small, job-substitute businesses, and even if they do
survive, they are less financially rewarding. As one
founder of numerous businesses put it, unless this
business can pay you at least five times your present
salary, the risk and wear and tear won’t be worth it.
Consider one of the most successful venture capital
investors ever, Arthur Rock. His criterion for searching
for opportunities is very simple: Look for business con-
cepts that will change the way people live or work. His
home-run investments are legendary, including Intel,
Apple Computer, Teledyne, and dozens of others.
Clearly his philosophy is to think big. Today an extraor-
dinary variety of people, opportunities, and strategies
characterize the approximately 30 million proprietor-
ships, partnerships, and corporations in the country.
Remember, high-potential ventures become high-im-
pact firms that often make the world a better place!
Nearly 11 percent of the U.S. population is actively
working toward starting a new venture.
10
More than
90 percent of start-ups have revenues of less than $1
million annually, while 863,505 reported revenues of
$1 million to $25 million—just over 9 percent of the
total. Of these, only 296,695 grew at a compounded
annual growth rate of 30 percent or more for the prior
three years, or about 3 percent. Similarly, just 3 per-
cent—1 in 33—exceeded $10 million in revenues, and
only 0.3 percent exceeded $100 million in revenues.
Not only can nearly anyone start a business, but also
a great many can succeed. While it certainly might help,
a person does not have to be a genius to create a suc-
cessful business. As Nolan Bushnell, founder of Atari,
one of the first desktop computer games in the early
1980s, and Pizza Time Theater, said, “If you are not a
millionaire or bankrupt by the time you are 30, you are
not really trying!”
11
It is an entrepreneur’s preparedness
for the entrepreneurial process that is important. Being
an entrepreneur has moved from cult status in the
1980s to rock star infamy in the 1990s to become de
rigueur at the turn of the century. Amateur entrepre-
neurship is over. The professionals have arrived.
12
A stunning number of mega-entrepreneurs
launched their ventures during their 20s. While the
rigors of new ventures may favor the “young at start,”
age is not a barrier to entry. One study showed that
nearly 21 percent of founders were over 40 when they
embarked on their entrepreneurial careers, the major-
ity were in their 30s, and just over one-fourth did so by
the time they were 25. Further, numerous examples
exist of founders who were over 60 at the time of
launch, including one of the most famous seniors,
Colonel Harland Sanders, who started Kentucky Fried
Chicken with his first Social Security check.
Smaller Means Higher Failure Odds
Unfortunately, the record of survival is not good
among all firms started. One of the most optimistic re-
search firms estimates the failure rate for start-ups is
46.4 percent. While government data, research, and
business mortality statisticians may not agree on the
precise failure and survival figures for new businesses,
they do agree that failure is the rule, not the exception.
Complicating efforts to obtain precise figures is
the fact that it is not easy to define and identify fail-
ures, and reliable statistics and databases are not
available. However, the Small Business Administra-
tion determined that in 1999 there were 588,900
start-ups, while 528,600 firms closed their doors.
13
Failure rates also vary widely across industries. In
1991, for instance, retail and services accounted for 61
percent of all failures and bankruptcies in that year.
14
The following discussion provides a distillation of a
number of failure rate studies over the past 50
years.
15
These studies illustrate that (1) failure rates
are high, and (2) although the majority of the failures
occur in the first two to five years, it may take consid-
erably longer for some to fail.
16
100 Part II The Opportunity
10
The Global Entrepreneurship Monitor, Babson College and the London Business School, May 2007.
11
In response to a student question at Founder’s Day, Babson College, April 1983.
12
Bob Davis, Partner, Highland Capital, June 2007.
13
The State of Small Business: A Report of the President, Transmitted to the Congress, 1999 (Washington, DC: Small Business Administration, 1999).
14
The State of Small Business, 1992, p. 128.
15
Information has been culled from the following studies: D. L. Birch, MIT Studies, 1979–1980; M. B. Teitz et al., “Small Business and Employment Growth in
California,” Working Paper No. 348, University of California at Berkeley, March 1981, table 5, p. 22; U.S. Small Business Administration, August 29, 1988;
B. D. Phillips and B. A. Kirchhoff, “An Analysis of New Firm Survival and Growth,” Frontiers in Entrepreneurship Research: 1988, ed. B. A. Kirchhoff et al.
(Babson Park, MA: Babson College, 1988), pp. 266–67; and BizMiner 2002 Startup Business Risk Index: Major Industry Report, Brandow Co., Inc., 2002.
16
Summaries of these are reported by A. N. Shapero and J. Gigherano, “Exits and Entries: A Study in Yellow Pages Journalism,” in Frontiers of Entrepreneur-
ship Research: 1982, ed. K. Vesper et al. (Babson Park, MA: Babson College, 1982), pp. 113–41, and A. C. Cooper and C. Y. Woo, “Survival and Failure: A
Longitudinal Study,” in Frontiers of Entrepreneurship Research: 1988, ed. B. A. Kirchhoff et al. (Babson Park, MA: Babson College, 1988), pp. 225–37.
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Chapter 3 The Entrepreneurial Process 101
Government data, research, and business mortal-
ity statisticians agree that start-ups run a high risk of
failure. Another study, outlined in Exhibit 3.3, found
that of 565,812 firms one year old or less in the first
quarter of 1998 only 303,517 were still alive by the
first quarter of 2001. This is an average failure rate of
46.4 percent.
Failure rates across industries vary. The real estate
industry, with a 36.8 percent rate of start-up failure, is
the lowest. The technology sector has a high rate of
failure at 53.9 percent. The software and services seg-
ment of the technology industry has an even higher
failure rate; 55.2 percent of start-ups tracked closed
their doors. Unfortunately the record of survival is not
good among all firms started.
To make matters worse, most people think the fail-
ure rates are actually much higher. Since actions often
are governed by perceptions rather than facts, this
perception of failure, in addition to the dismal record,
can be a serious obstacle to aspiring entrepreneurs.
Still other studies have shown significant differ-
ences in survival rates among Bradstreet industry cat-
egories: retail trade, construction, and small service
businesses accounted for 70 percent of all failures
and bankruptcies. One study calculates a risk factor
or index for start-ups by industry, which sends a clear
warning signal to the would-be entrepreneur.
17
At
the high end of risk is tobacco products, and at the
low end you find the affinity and membership organ-
izations such as AAA or Welcome Wagon. “The fish-
ing is better in some streams versus others,” is a fa-
vorite saying of the authors. Further, 99 percent of
these failed companies had fewer than 100 employ-
ees. Through observation and practical experience
one would not be surprised by such reports. The im-
plications for would-be entrepreneurs are important:
Knowing the difference between a good idea and a
real opportunity is vital. This will be addressed in de-
tail in Chapter 5.
A certain level of failure is part of the “creative
self-destruction” described by Joseph Schumpeter in
his numerous writings, including Business Cycles
(1939) and Capitalism. It is part of the dynamics of
innovation and economic renewal, a process that re-
quires both births and deaths. More important, it is
also part of the learning process inherent in gaining
an entrepreneurial apprenticeship. If a business fails,
no other country in the world has laws, institutions,
and social norms that are more forgiving. Firms go
out of existence, but entrepreneurs survive and learn.
The daunting evidence of failure poses two impor-
tant questions for aspiring entrepreneurs. First, are
there any exceptions to this general rule of failure, or
are we faced with a punishing game of entrepreneur-
ial roulette? Second, if there is an exception, how
does one get the odds for success in one’s favor?
Getting the Odds in Your Favor
Fortunately, there is a decided pattern of exceptions
to the overall rate of failure among the vast majority
of small, marginal firms created each year. Most
smaller enterprises that cease operation simply do
not meet our notion of entrepreneurship. They do
not create, enhance, or pursue opportunities that re-
alize value. They tend to be job substitutes in many
instances. Undercapitalized, undermanaged, and of-
ten poorly located, they soon fail.
Threshold Concept
Who are the survivors? The odds for survival and a
higher level of success change dramatically if the ven-
ture reaches a critical mass of at least 10 to 20 people
with $2 million to $3 million in revenues and is cur-
rently pursuing opportunities with growth potential.
Exhibit 3.4 shows that based on a cross-section of all
new firms, one-year survival rates for new firms in-
crease steadily as the firm size increases. The rates
jump from approximately 54 percent for firms having
up to 24 employees to approximately 73 percent for
firms with between 100 and 249 employees.
One study found that empirical evidence supports
the liability of newness and liability of smallness argu-
ments and suggests that newness and small size make
EXHIBIT 3.3
Starts and Closures of Employer Firms, 2002–2006
Category 2002 2003 2004 2005 2006
New Firms 569,750 612,296 628,917 653,100* 649,700*
Closures 586,890 540,658 541,047 543,700* 564,900*
Bankruptcies 38,540 35,037 39,317 39,201 19,695
*Estimate.
Sources: U.S. Dept. of Commerce, Bureau of the Census; Administrative Office of the U.S. Courts;
U.S. Dept. of Labor, Employment and Training Administration.
17
BizMiner 2002 Startup Business Risk Index.
tim81551_ch03IT.qxd 1/20/12 10:31 AM Page 101
survival problematic. The authors inferred, “Perceived
satisfaction, cooperation, and trust between the cus-
tomer and the organization [are] important for the
continuation of the relationship. High levels of satis-
faction, cooperation, and trust represent a stock of
goodwill and positive beliefs which are critical assets
that influence the commitment of the two parties to
the relationship.”
18
The authors of this study noted,
“Smaller organizations are found to be more respon-
sive, while larger organizations are found to provide
greater depth of service. . . . The entrepreneurial task
is to find a way to either direct the arena of competi-
tion away from the areas where you are at a competi-
tive disadvantage, or find some creative way to develop
the required competency.”
19
After four years, the survival rate jumps from ap-
proximately 35 to 40 percent for firms with fewer than
19 employees to about 55 percent for firms with 20 to
49 employees. Although any estimates based on sales
per employee vary considerably from industry to in-
dustry, this minimum translates roughly to a threshold
of $50,000 to $100,000 of sales per employee annually.
But highly successful firms can generate much higher
sales per employee. According to several reports, the
service (38.6 percent), distribution (28.7 percent), and
production (17.8 percent) industries have the most
closed businesses after four to five years.
Promise of Growth
The definition of entrepreneurship implies the
promise of expansion and the building of long-term
value and durable cash flow streams as well.
However, as will be discussed later, it takes a long
time for companies to become established and grow.
Historically, two of every five small firms founded
survive six or more years, but few achieve growth
during the first four years.
20
The study also found
that survival rates more than double for firms that
grow, and the earlier in the life of the business that
growth occurs, the higher the chance of survival.
21
The 2007 INC. 500 exemplify this, with a three-year
growth rate of 939 percent.
22
Some of the true excitement of entrepreneurship
lies in conceiving, launching, and building firms such
as these.
Venture Capital Backing
Another notable pattern of exception to the failure
rule is found for businesses that attract start-up fi-
nancing from successful private venture capital com-
panies. While venture-backed firms account for a very
small percentage of new firms each year, in 2000, 238
of 414 IPOs, or 57 percent, had venture backing.
23
Venture capital is not essential to a start-up, nor is
it a guarantee of success. Of the companies making
the 2007 INC. 500, about 18 percent raised venture
capital and only 3 percent had venture funding at
start-up.
24
Consider, for instance, that in 2000 only
5,557 companies received venture capital.
25
How-
ever, companies with venture capital support fare
better overall. Only 46 companies with venture capi-
tal declared bankruptcy or became defunct in 2000.
26
This is less than 1 percent of companies that received
venture capital in 2000.
These compelling data have led some to conclude
that a threshold core of 10 to 15 percent of new com-
panies will become the winners in terms of size, job
creation, profitability, innovation, and potential for
harvesting (and thereby realize a capital gain).
Private Investors Join
Venture Capitalists
As noted previously, harvested entrepreneurs by the
tens of thousands have become “angels” as private in-
vestors in the next generation of entrepreneurs. Many
of the more successful entrepreneurs have created their
own investment pools and are competing directly with
venture capitalists for deals. Their operating experi-
ences and successful track records provide a compelling
102 Part II The Opportunity
18
S. Venkataraman and M. B. Low, “On the Nature of Critical Relationships: A Test of the Liabilities and Size Hypothesis,” in Frontiers in Entrepreneurship
Research: 1991 (Babson Park, MA: Babson College, 1991), p. 97.
19
Ibid., pp. 105–6.
20
B. D. Phillips and B. A. Kirchhoff, “An Analysis of New Firm Survival and Growth,” in Frontiers in Entrepreneurship Research: 1988 (Babson Park, MA:
Babson College, 1988), pp. 266–67.
21
This reaffirms the exception to the failure rule noted above and in the original edition of this book in 1977.
22
S. Greco, “The INC. 500 Almanac,” INC., October 2001, p. 80.
23
“Aftermarket at a Glance,” IPO Reporter, December 10, 2001; and “IPO Aftermarket,” Venture Capital Journal, December 2001.
24
www.inc.com/inc5000
25
Venture Economics,http://www.ventureeconomics.com/vec/stats/2001q2/us.html, July 30, 2001.
26
VentureXpert, Thompson Financial Data Services, 2001.
EXHIBIT 3.4
One-Year Survival Rates by Firm Size
Firm Size (Employees) Survival Percentage
1–24 53.6%
25–49 68.0
50–99 69.0
100–249 73.2
Source: BizMiner 2002 Startup Business Risk Index: Major Industry
Report, © 2002 BizMiner. Reprinted by permission.
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Chapter 3 The Entrepreneurial Process 103
case for adding value to an upstart company. Take, for
example, highly successful Boston entrepreneur Jeff
Parker. His first venture, Technical Data Corporation,
enabled Wall Street bond traders to conduct daily trad-
ing with a desktop computer. Parker’s software on the
Apple II created a new industry in the early 1980s.
After harvesting this and other ventures, he cre-
ated his own private investment pool in the 1990s.
As the Internet explosion occurred, he was one of
the early investors to spot opportunities in start-up
ventures. In one case, he persuaded the founders of
a new Internet firm to select him as lead investor in-
stead of accepting offers from some of the most
prestigious venture capital firms in the nation. Ac-
cording to the founders, it was clear that Parker’s
unique entrepreneurial track record and his under-
standing of their business would add more value
than the venture capitalists at start-up.
Private investors and entrepreneurs such as Parker
have similar selection criteria to the venture capitalists:
They are in search of the high-potential, higher-growth
ventures. Unlike the venture capitalists, however, they
are not constrained by having to invest so much money
in a relatively short period that they must invest it in
minimum chunks of $3 million to $5 million or more.
Private investors, therefore, are prime sources for less
capital-intensive start-ups and early-stage businesses.
Bob Davis (Lycos) and Tom Stemberg (Staples) fol-
lowed a similar path with Highland Capital.
This overall search for higher-potential ventures
has become more evident in recent years. The new
e-generation appears to be learning the lessons of
these survivors, venture capitalists, private investors,
and founders of higher-potential firms. Hundreds of
thousands of college students now have been exposed
to these concepts for more than two decades, and
their strategies for identifying potential businesses
are mindful of and disciplined about the ingredients
for success. Unlike 20 years ago, it is now nearly im-
possible not to hear and read about these principles
whether on television, in books, on the Internet, or in
a multitude of seminars, courses, and programs for
would-be entrepreneurs of all types.
Find Financial Backers and Associates
Who Add Value
One of the most distinguishing disciplines of these
higher-potential ventures is how the founders iden-
tify financial partners and key team members. They
insist on backers and partners who do more than
bring just money, friendship, commitment, and moti-
vation to the venture. They surround themselves with
backers who can add value to the venture through
their experience, know-how, networks, and wisdom.
Key associates are selected because they are smarter
and better at what they do than the founder, and they
raise the overall average of the entire company. This
theme will be examined in detail in later chapters.
Option: The Lifestyle Venture
For many aspiring entrepreneurs, issues of family
roots and location take precedence. Accessibility to a
preferred way of life, whether it is access to fishing,
skiing, hunting, hiking, music, surfing, rock climbing,
canoeing, a rural setting, or the mountains, can be
more important than how large a business one has or
the size of one’s net worth. Others vastly prefer to be
with and work with their family or spouse. They want
to live in a nonurban area that they consider very at-
tractive. Take Jake and Diana Bishop, for instance.
Both have advanced degrees in accounting. They gave
up six-figure jobs they both found rewarding and sat-
isfying on the beautiful coast of Maine to return to
their home state of Michigan for several important
lifestyle reasons. They wanted to work together again
in a business, which they had done successfully earlier
in their marriage. It was important to be much closer
than the 14-hour drive to Diana’s aging parents. They
also wanted to have their children—then in their
20s—join them in the business. Finally, they wanted
to live in one of their favorite areas of the country,
Harbor Spring on Lake Michigan in the northwest tip
of the state. They report never to have worked harder
in their 50 years, nor have they been any happier.
They are growing their rental business more than 20
percent a year, making an excellent living, and creat-
ing equity value. If done right, one can have a lifestyle
business and actually realize higher potential.
Yet couples who give up successful careers in New
York City to buy an inn in Vermont to avoid the rat
race generally last only six to seven years. They dis-
cover the joys of self-employment, including seven-
day, 70- to 90-hour workweeks, chefs and day help
that do not show up, roofs that leak when least ex-
pected, and the occasional guests from hell. The
grass is always greener, so they say.
The Timmons Model: Where Theory
and Practice Collide in the Real World
How can aspiring entrepreneurs—and the investors
and associates who join the venture—get the odds of
success on their side? What do these talented and suc-
cessful high-potential entrepreneurs, their venture
capitalists, and their private backers do differently?
What is accounting for their exceptional record? Are
there general lessons and principles underlying their
successes that can benefit aspiring entrepreneurs, in-
vestors, and those who would join a venture? If so, can
these lessons be learned?
tim81551_ch03IT.qxd 1/20/12 10:31 AM Page 103
These are the central questions of our lifetime work.
We have been immersed as students, researchers,
teachers, and practitioners of the entrepreneurial
process. As founding shareholders and investors of sev-
eral high-potential ventures (some of which are now
public), directors and advisors to ventures and venture
capital funds, a charter director and advisor to the
Kauffman Center for Entrepreneurial Leadership at
the Ewing Marion Kauffman Foundation, and as direc-
tor of the Arthur M. Blank Center for Entrepreneur-
ship at Babson College, we have each applied, tested,
refined, and tempered academic theory as fire tempers
iron into steel: in the fire of practice.
Intellectual and Practical Collisions
with the Real World
Throughout this period of evolution and revolution,
New Venture Creation has adhered to one core prin-
ciple: In every quest for greater knowledge of the
entrepreneurial process and more effective learning,
there must be intellectual and practical collisions be-
tween academic theory and the real world of prac-
tice. The standard academic notion of something
being all right in practice but not in theory is unac-
ceptable. This integrated, holistic balance is at the
heart of what we know about the entrepreneurial
process and getting the odds in your favor.
Value Creation: The Driving Forces
A core, fundamental entrepreneurial process ac-
counts for the substantially greater success pattern
among higher-potential ventures. Despite the great
variety of businesses, entrepreneurs, geographies, and
technologies, central themes or driving forces domi-
nate this highly dynamic entrepreneurial process.
It is opportunity driven.
It is driven by a lead entrepreneur and an entre-
preneurial team.
It is resource parsimonious and creative.
It depends on the fit and balance among these.
It is integrated and holistic.
It is sustainable.
These are the controllable components of the en-
trepreneurial process that can be assessed, influenced,
and altered. Founders and investors focus on these
forces during their careful due diligence to analyze the
risks and determine what changes can be made to im-
prove a venture’s chances of success.
First, we will elaborate on each of these forces to
provide a blueprint and a definition of what each
means. Then using Google as an example, we will
illustrate how the holistic, balance, and fit concepts
pertain to a start-up.
Change the Odds: Fix It, Shape It,
Mold It, Make It
The driving forces underlying successful new venture
creation are illustrated in Exhibit 3.5. The process
starts with opportunity, not money, strategy, net-
works, team, or the business plan. Most genuine op-
portunities are much bigger than either the talent
and capacity of the team or the initial resources avail-
104 Part II The Opportunity
Business plan
Communication
Fits and gaps
Ambiguity Exogenous forces
Leadership Creativity
Uncertainty Capital market context
Opportunity Resources
Team
Founder
Sustainability: For environment, community, and society
EXHIBIT 3.5
The Timmons Model of the Entrepreneurial Process
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Chapter 3 The Entrepreneurial Process 105
able to the team. The role of the lead entrepreneur
and the team is to juggle all these key elements in a
changing environment. Think of a juggler bouncing
up and down on a trampoline that is moving on a
conveyor belt at unpredictable speeds and direc-
tions, while trying to keep all three balls in the air.
That is the dynamic nature of an early-stage start-up.
The business plan provides the language and code
for communicating the quality of the three driving
forces of the Timmons Model and of their fit and
balance.
In the entrepreneurial process depicted in the
Timmons Model, the shape, size, and depth of the
opportunity establish the required shape, size, and
depth of both the resources and the team. We have
found that many people are a bit uncomfortable
viewing the opportunity and resources somewhat
precariously balanced by the team. It is especially
disconcerting to some because we show the three key
elements of the entrepreneurial process as circles,
and thus the balance appears tenuous. These reac-
tions are justified, accurate, and realistic. The entre-
preneurial process is dynamic. Those who recognize
the risks better manage the process and garner more
return.
The lead entrepreneur’s job is simple enough.
He or she must carry the deal by taking charge of
the success equation. In this dynamic context, ambi-
guity and risk are actually your friends. Central to
the homework, creative problem solving and strate-
gizing, and due diligence that lie ahead is analyzing
the fits and gaps that exist in the venture. What is
wrong with this opportunity? What is missing?
What good news and favorable events can happen,
as well as the adverse? What has to happen to make
it attractive and a fit for me? What market, technol-
ogy, competitive, management, and financial risks
can be reduced or eliminated? What can be
changed to make this happen? Who can change it?
What are the least resources necessary to grow the
business the farthest? Is this the right team? By im-
plication, if you can determine these answers and
make the necessary changes by figuring out how to
fill the gaps and improve the fit and attract key
players who can add such value, then the odds for
success rise significantly. In essence, the entrepre-
neur’s role is to manage and redefine the risk–re-
ward equation—all with an eye toward sustainabil-
ity. Because part of the entrepreneur’s legacy is to
create positive impact without harming the envi-
ronment, the community, or society, the concept of
sustainability appears as the underlying foundation
in the model.
The Opportunity At the heart of the process is
the opportunity. Successful entrepreneurs and in-
vestors know that a good idea is not necessarily a good
opportunity. For every 100 ideas presented to in-
vestors in the form of a business plan or proposal, usu-
ally fewer than 4 get funded. More than 80 percent of
those rejections occur in the first few hours; another
10 to 15 percent are rejected after investors have read
the business plan carefully. Fewer than 10 percent at-
tract enough interest to merit a more due diligence
thorough review that can take several weeks or
months. These are very slim odds. Countless hours
and days have been wasted by would-be entrepre-
neurs chasing ideas that are going nowhere. An im-
portant skill for an entrepreneur or an investor is to be
able to quickly evaluate whether serious potential ex-
ists, and to decide how much time and effort to invest.
John Doerr is a senior partner at one of the most
famous and successful venture capital funds ever,
Kleiner, Perkins, Caufield & Byers, and is considered
by some to be the most influential venture capitalist of
his generation. During his career, he has been the
epitome of the revolutionaries described earlier, who
have created new industries as lead investors in such
legends as Sun Microsystems, Compaq Computer,
Lotus Development Corporation, Intuit, Genentech,
Millennium, Netscape, and Amazon.com. Regardless
of these past home runs, Doerr insists, “There’s never
been a better time than now to start a company. In the
past, entrepreneurs started businesses. Today they in-
vent new business models. That’s a big difference, and
it creates huge opportunities.”
27
Another venture capitalist recently stated, “Cycles
of irrational exuberance are not new in venture in-
vesting. The Internet bubble burst, we came back to
earth, and then we began another period of excessive
valuation that is subsiding in late 2007 with a credit
squeeze.”
28
Exhibit 3.6 summarizes the most important char-
acteristics of good opportunities. Underlying market
demand—because of the value-added properties of
the product or service, the market’s size and 20-plus
percent growth potential, the economics of the busi-
ness, particularly robust margins (40 percent or
more), and free cash flow characteristics—drives the
value creation potential.
We build our understanding of opportunity by first
focusing on market readiness: the consumer trends
and behaviors that seek new products or services.
Once these emerging patterns are identified, the as-
piring entrepreneur develops a service or product
concept, and finally the service or product delivery
system is conceived. We then ask the questions artic-
ulated in the exhibit.
27
“John Doerr’s Start-Up Manual,” Fast Company, February–March 1997, pp. 82–84.
28
Ernie Parizeau, Partner, Norwest Venture Partners, June 2007.
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These criteria will be described in great detail in
Chapter 5 and can be applied to the search and evalu-
ation of any opportunity. In short, the greater the
growth, size, durability, and robustness of the gross
and net margins and free cash flow, the greater the
opportunity. The more imperfect the market, the
greater the opportunity. The greater the rate of
change, the discontinuities, and the chaos, the greater
is the opportunity. The greater the inconsistencies in
existing service and quality, in lead times and lag
times, and the greater the vacuums and gaps in infor-
mation and knowledge, the greater is the opportunity.
Resources: Creative and Parsimonious
One of the most common misconceptions among un-
tried entrepreneurs is that you first need to have all
the resources in place, especially the money, to suc-
ceed with a venture. Thinking money first is a big
mistake. Money follows high-potential opportunities
conceived of and led by a strong management team.
Investors have bemoaned for years that there is too
much money chasing too few deals. In other words,
there is a shortage of quality entrepreneurs and
opportunities, not money. Successful entrepreneurs
devise ingeniously creative and stingy strategies to
marshal and gain control of resources (Exhibit 3.7).
Surprising as it may sound, investors and successful
entrepreneurs often say one of the worst things that
can happen to an entrepreneur is to have too much
money too early.
Mark Vadon, founder of Blue Nile Inc., was able
to sell his idea of an online diamond retail store and
raise a total of $38 million in 1999. Although Blue
Nile eventually turned out to be a respectable success
story, it may have raised too much capital too early. In
an effort to build a national brand image, Blue Nile
advertised excessively and this led to significant oper-
ating losses since its inception in 1999 to 2002. This
may be due to the pressure entrepreneurs often en-
counter to use the capital they have raised to justify
the investment from venture capitalists. With so much
cold cash on hand, buying mind share through adver-
tising seemed logical. It could be argued that the In-
ternet bubble and the 911 terrorist attacks were the
culprits behind the lacklustre beginning for Blue Nile.
However, with less ammunition, Blue Nile would
have been forced to market its diamonds creatively
rather than hiring premium advertising agencies and
running costly television advertising campaigns.
On the other hand, Howard Head is a wonderful,
classic example of succeeding with few resources. He
developed the first metal ski, which became the mar-
ket leader, and then the oversize Prince tennis racket;
developing two totally unrelated technologies is a rare
feat. Head left his job at a large aircraft manufacturer
during World War II and worked in his garage on a
shoestring budget to create his metal ski. It took more
than 40 versions before he developed a ski that worked
and could be marketed. He insisted that one of the
biggest reasons he finally succeeded is that he had so
little money. He argued that if he had complete financ-
ing he would have blown it all long before he evolved
the workable metal ski.
Bootstrapping is a way of life in entrepreneurial
companies and can create a significant competitive
106 Part II The Opportunity
EXHIBIT 3.6
The Entrepreneurial Process
Is Opportunity Driven*
Market demand is a key ingredient to measuring an opportunity:
• Is customer payback less than one year?
• Do market share and growth potential equal 20 percent
annual growth and is it durable?
• Is the customer reachable?
Market structure and size help define an opportunity:
• Emerging and/or fragmented?
• $50 million or more, with a $1 billion potential?
• Proprietary barriers to entry?
Margin analysis helps differentiate an opportunity from an idea:
• Low-cost provider (40 percent gross margin)?
• Low capital requirement versus the competition?
• Break even in 1– 2 years?
• Value added increase of overall corporate P/E ratio?
Opportunity
M
a
rk
e
t s
e
g
m
e
n
ts
*Durability of an opportunity is a widely misunderstood concept. In
entrepreneurship, durability exists when the investor gets her
money back plus a market or better return on investment.
EXHIBIT 3.7
Understand and Marshall Resources,
Don’t Be Driven by Them
Minimize and control
versus
Maximize and own
Resources
Unleashing creativity
Financial resources
Assets
People
Your business plan
Think cash last!
B
ootstrapping
R
elationships
tim81551_ch03IT.qxd 1/20/12 10:31 AM Page 106
Chapter 3 The Entrepreneurial Process 107
advantage. Doing more with less is a powerful com-
petitive weapon. Effective new ventures strive to
minimize and control the resources, but not neces-
sarily own them. Whether it is assets for the business,
key people, the business plan, or start-up and growth
capital, successful entrepreneurs think cash last.
Such strategies encourage a discipline of leanness,
where everyone knows that every dollar counts, and
the principle “conserve your equity” (CYE) becomes
a way of maximizing shareholder value.
The Entrepreneurial Team There is little dis-
pute today that the entrepreneurial team is a key in-
gredient in the higher-potential venture. Investors
are captivated “by the creative brilliance of a com-
pany’s head entrepreneur: A Mitch Kapor, a Steve
Jobs, a Fred Smith . . . and bet on the superb track
records of the management team working as a
group.”
29
Venture capitalist John Doerr reaffirms
General George Doriot’s dictum: I prefer a Grade A
entrepreneur and team with a Grade B idea, over a
Grade B team with a Grade A idea. Doerr stated, “In
the world today, there’s plenty of technology, plenty
of entrepreneurs, plenty of money, plenty of venture
capital. What’s in short supply is great teams. Your
biggest challenge will be building a great team.”
30
Famous investor Arthur Rock articulated the im-
portance of the team more than a decade ago. He put
it this way: “If you can find good people, they can al-
ways change the product. Nearly every mistake I’ve
made has been I picked the wrong people, not the
wrong idea.”
31
Finally, as we saw earlier, the ventures
with more than 20 employees and $2 million to $3
million in sales were much more likely to survive and
prosper than smaller ventures. In the vast majority of
cases, it is very difficult to grow beyond this without a
team of two or more key contributors.
Clearly a new venture requires a lead entrepre-
neur that has personal characteristics described in
Exhibit 3.8. But the high-potential venture also re-
quires interpersonal skills to foster communications
and, therefore, team building.
Exhibit 3.8 summarizes the important aspects of
the team. These teams invariably are formed and led
by a very capable entrepreneurial leader whose track
record exhibits both accomplishments and several
qualities that the team must possess. A pacesetter
and culture creator, the lead entrepreneur is central
to the team as both a player and a coach. The ability
and skill in attracting other key management mem-
bers and then building the team is one of the most
valued capabilities investors look for. The founder
who becomes the leader does so by building heroes
in the team. A leader adapts a philosophy that re-
wards success and supports honest failure, shares the
wealth with those who help create it, and sets high
standards for both performance and conduct. We will
examine in detail the entrepreneurial leader and the
new venture team in Chapter 8.
Importance of Fit and Balance Rounding
out the model of the three driving forces is the con-
cept of fit and balance between and among these
forces. Note that the team is positioned at the bottom
of the triangle in the Timmons Model (Exhibit 3.5).
Imagine the founder, the entrepreneurial leader of
the venture, standing on a large ball, balancing the tri-
angle over her head. This imagery is helpful in appre-
ciating the constant balancing act because opportu-
nity, team, and resources rarely match. When
envisioning a company’s future, the entrepreneur can
ask, What pitfalls will I encounter to get to the next
boundary of success? Will my current team be large
enough, or will we be over our heads if the company
grows 30 percent over the next two years? Are my re-
sources sufficient (or too abundant)? Vivid examples
of the failure to maintain a balance are everywhere,
such as when large companies throw too many re-
sources at a weak, poorly defined opportunity. For ex-
ample, Lucent Technologies’ misplaced assumption of
slowness to react to bandwidth demand resulted in
an almost 90 percent reduction in market capitaliza-
tion.
29
W. D. Bygrave and J. A. Timmons, Venture Capital at the Crossroads (Boston: Harvard Business School Press, 1992), p. 8.
30
Fast Company, February–March 1997, p. 84.
31
A. Rock, “Strategy vs. Tactics from a Venture Capitalist,” Harvard Business Review, November–December 1987, pp. 63–67.
EXHIBIT 3.8
An Entrepreneurial Team Is a Critical
Ingredient for Success
Team
An entrepreneurial leader
• Learns and teaches—faster, better
• Deals with adversity, is resilient
• Exhibits integrity, dependability, honesty
• Builds entrepreneurial culture and organization
Quality of the team
• Relevant experience and track record
• Motivation to excel
• Commitment, determination, and persistence
• Tolerance of risk, ambiguity, and uncertainty
• Creativity
• Team locus of control
• Adaptability
• Opportunity obsession
• Leadership and courage
• Communication
P
assion
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Sustainability as a Base Building a sustain-
able venture means achieving economic, environmen-
tal, and social goals without compromising the same
opportunity for future generations. The sea change in
entrepreneurship regarding environment, community,
and society is driven by many factors. We are seeing an
elevated social awareness concerning a wide range of
sustainability-related issues, including human rights,
food quality, energy resources, pollution, global warm-
ing, and the like. By understanding these factors, the
entrepreneur builds a firmer base, girding the venture
for the long term.
While the drawings oversimplify these incredibly
complex events, they help us to think conceptually—
an important entrepreneurial talent—about the com-
pany-building process, including the strategic and
management implications of striving to achieve bal-
ance, and the inevitable fragility of the process. Visu-
ally, the process can be appreciated as a constant bal-
ancing act, requiring continual assessment, revised
strategies and tactics, and an experimental approach.
By addressing the types of questions necessary to
shape the opportunity, the resources, and the team, the
founder begins to mold the idea into an opportunity,
and the opportunity into a business, just as you would
mold clay from a shapeless form into a piece of art.
Exhibit 3.9 shows how this balancing act evolved for
Google from inception through its initial public and
secondary offerings. Back in 1996, online search was a
huge, rapidly growing, but elusive opportunity. There
were plenty of early entrants in the search space, but
none had yet broken out of the pack. Stanford graduate
students Larry Page and Sergey Brin began to collabo-
rate on a search engine called BackRub, named for its
unique ability to analyze the “back links” pointing to a
given Web site. Within a year, their unique approach to
link analysis was earning their dorm-room search en-
gine a growing reputation as word spread around cam-
pus. Still, they had no team and no capital, and their
server architecture was running on computers they
borrowed from their computer science department.
Such a mismatch of ideas, resources, and talent
could quickly topple out of the founders’ control and
fall into the hands of someone who could turn it
into a real opportunity. At this tenuous point, the
founders would have seen something like the first
figure, Exhibit 3.9(a), with the huge search engine
opportunity far outweighing the team and resources.
The gaps were major.
Enter entrepreneur and angel investor Andy Bech-
tolsheim, one of the founders of Sun Microsystems.
The partners of the search engine (now named
Google, a variant of googol, an immense number),
met Bechtolsheim very early one morning on the
porch of a Stanford faculty member’s home in Palo
Alto. Impressed, but without the time to hear the de-
tails, Bechtolsheim wrote them a check for $100,000.
From there, Page and Brin went on to raise a first
round of $1 million. The partners were now in a posi-
tion to fill the resource gaps and build the team.
In September 1998 they set up shop in a garage in
Menlo Park, California, and hired their first em-
ployee: technology expert Craig Silverstein. Less
than a year later, they moved to a new location, which
108 Part II The Opportunity
Business plan
Communication
Fits and gaps
• Innumerable: Money and
management
Ambiguity Exogenous forces
Leadership Creativity
Uncertainty Capital market context
Brain trust
Very large,
growing, and
undefined
Team
Resources
Very limited
Opportunity
Founder
Sustainability: For environment, community, and society
EXHIBIT 3.9(a)
Google––Classic Resource Parsimony, Bootstrapping—Journey
through the Entrepreneurial Process: At Start-Up, a Huge Imbalance
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Chapter 3 The Entrepreneurial Process 109
EXHIBIT 3.9(b)
Google—Marshaling of Team and Resources to Pursue
Opportunity—Journey through the Entrepreneurial Process:
At Venture Capital Funding, toward New Balance
Business plan
Communication
Fits and gaps
• Resources and team
• Catching up
Ambiguity Exogenous forces
Leadership Creativity
Uncertainty
Capital market context
Larger and growing
faster
Team
Money to
launch
Opportunity Resources
Founder
Sustainability: For environment, community, and society
quickly became a crush of desks and servers. In June
1999 the firm secured a round of funding that in-
cluded $25 million from Sequoia Capital and Kleiner,
Perkins, Caufield & Byers—two of the leading ven-
ture capital firms in Silicon Valley. The terrible office
gridlock was alleviated with a move to Google’s cur-
rent headquarters in Mountain View, California.
This new balance in Exhibit 3.9(b) created a justi-
fiable investment. The opportunity was still huge and
growing, and some competitors were gaining market
acceptance as well. To fully exploit this opportunity,
attract a large and highly talented group of managers
and professionals, and create even greater financial
strength than competitors like Yahoo!, the company
had to complete an initial public stock offering (IPO).
Following the close of that IPO in the summer of
2004, Google was worth more than $25 billion, giving
it a first-day market capitalization greater than that of
Amazon.com, Lockheed Martin, or General Motors.
Within a year the company had raised another $4 bil-
lion in a secondary public offering.
By 2007 Google (see Exhibit 3.9(c)) had a share
price in the range of $500 and was larger and stronger
in people and resources than any direct competitor.
The company was the place to work and employed
over 10,000 of the best and brightest in the industry.
Could such an unstoppable force as Google be blind-
sided and eclipsed by a new disruptive technology,
just as Apple Computer and Microsoft bludgeoned
IBM and Digital Equipment? While right now such a
prospect might seem impossible given Google’s mo-
mentum, scale, and ability to attract talent, history is
quite clear on this: The answer is not whether, but
when, Google will be overtaken.
This iterative entrepreneurial process is based on
both logic and trial and error. It is both intuitive and
consciously planned. It is a process not unlike what
the Wright brothers originally engaged in while cre-
ating the first self-propelled airplane. They con-
ducted more than 1,000 glider flights before suc-
ceeding. These trial-and-error experiments led to the
new knowledge, skills, and insights needed to actually
fly. Entrepreneurs have similar learning curves.
The fit issue can be appreciated in terms of a ques-
tion: This is a fabulous opportunity, but for whom?
Some of the most successful investments ever were
turned down by numerous investors before the
founders received backing. Intuit received 20 rejections
for start-up funding by sophisticated investors. One for-
mer student, Ann Southworth, was turned down by 24
banks and investors before receiving funding for an eld-
erly extended care facility. Ten years later, the company
was sold for an eight-figure profit. Time and again, there
can be a mismatch between the type of business and in-
vestors, the chemistry between founders and backers, or
a multitude of other factors that can cause a rejection.
Thus how the unique combination of people, opportu-
nity, and resources come together at a particular
time may determine a venture’s ultimate chance for suc-
cess.
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The potential for attracting outside funding for a
proposed venture depends on this overall fit and how
the investor believes he or she can add value to this fit
and improve the fit, risk–reward ratio, and odds for
success. Exhibit 2.12 in the previous chapter shows
the possible outcome.
Importance of Timing Equally important is
the timing of the entrepreneurial process. Each of
these unique combinations occurs in real time, where
the hourglass drains continually and may be friend,
foe, or both. Decisiveness in recognizing and seizing
the opportunity can make all the difference. Don’t
wait for the perfect time to take advantage of an op-
portunity: There is no perfect time. Most new busi-
nesses run out of money before they can find enough
customers and the right teams for their great ideas.
Opportunity is a moving target.
Recent Research Supports the Model
The Timmons Model originally evolved from doctoral
dissertation research at the Harvard Business School,
about new and growing ventures. Over nearly three
decades, the model has evolved and been enhanced
by ongoing research, case development, teaching,
and experience in high-potential ventures and ven-
ture capital funds. The fundamental components of
the model have not changed, but their richness and
the relationships of each to the whole have been
steadily enhanced as they have become better under-
stood. Numerous other researchers have examined a
wide range of topics in entrepreneurship and new
venture creation. The bottom line is that the model,
in its simple elegance and dynamic richness, har-
nesses what you need to know about the entrepre-
neurial process to get the odds in your favor. As each
of the chapters and accompanying cases, exercises,
and issues expand on the process, addressing individ-
ual dimensions, a detailed framework with explicit
criteria will emerge. If you engage this material fully,
you cannot help but improve your chances of success.
Similar to the INC. 500 companies mentioned ear-
lier, the Ernst & Young LLP Entrepreneur of the Year
winners were the basis of a major research effort con-
ducted by the National Center for Entrepreneurship
Research at the Kauffman Center for Entrepreneurial
Leadership, with a specific focus on 906 high-growth
companies.
32
These findings provide important
benchmarks of the practices in a diverse group of in-
dustries among a high-performing group of compa-
nies.
110 Part II The Opportunity
32
D. L. Sexton and F. I. Seale, Leading Practices of Fast Growth Entrepreneurs: Pathways to High Performance (Kansas City, MO: Kauffman Center for
Entrepreneurial Leadership, 1997).
EXHIBIT 3.9(c)
Google—Building and Sustaining the Enterprise; Rebalancing—Journey
through the Entrepreneurial Process: At IPO, a New Balance
Business plan
Communication
Fits and gaps
• How large and profitable
can we become? Ambiguity Exogenous forces
Leadership Creativity
Uncertainty Capital market context
•Great balance
sheet
•Great free cash
flow
•Even bigger and
faster growing
•Competitors
Team
Can play with
the best
Opportunity
Resources
Founder
Sustainability: For environment, community, and society
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Chapter 3 The Entrepreneurial Process 111
EXHIBIT 3.10
Leading Practices
Leading marketing practices of fast-growth firms
Deliver products and services that are perceived as highest quality to expanding segments.
Cultivate pacesetting new products and services that stand out in the market as best of the breed.
Deliver product and service benefits that demand average or higher market pricing.
Generate revenue flows from existing products and services that typically sustain approximately 90 percent of the present revenue
base, while achieving flows from new products and services that typically expand revenue approximately 20 per cent annually.
Generate revenue flows from existing customers that typically sustain approximately 80 percent of the ongoing revenue base, while
achieving flows from new customers that typically expand revenue flows by about 30 percent annually.
Create high-impact, new product and service improvements with development expenditures that typically account for no more than
approximately 6 percent of revenues.
Utilize a high-yield sales force that typically accounts for approximately 60 percent of marketing expenditures.
Rapidly develop broad product and service platforms with complementary channels to help expand a firm’s geographic marketing area.
Leading financial practices of fast-growth firms
Anticipate multiple rounds of financing (on average every 2.5 years).
Secure funding sources capable of significantly expanding their participation amounts.
Utilize financing vehicles that retain the entrepreneur’s voting control.
Maintain control of the firm by selectively granting employee stock ownership.
Link the entrepreneur’s long-term objectives to a defined exit strategy in the business plan.
Leading management practices of fast-growth firms
Use a collaborative decision-making style with the top management team.
Accelerate organizational development by assembling a balanced top management team with or without prior experience of working
together.
Develop a top management team of three to six individuals with the capacity to become the entrepreneur’s entrepreneurs. Align the
number of management levels with the number of individuals in top management.
Establish entrepreneurial competency first in the functional areas of finance, marketing, and operations. Assemble a balanced board
of directors composed of both internal and external directors.
Repeatedly calibrate strategies with regular board of directors meetings.
Involve the board of directors heavily at strategic inflection points.
Leading planning practices of fast-growth firms
Prepare detailed written monthly plans for each of the next 12 to 24 months and annual plans for three or more years.
Establish functional planning and control systems that tie planned achievements to actual performance and adjust management
compensation accordingly.
Periodically share with employees the planned versus actual performance data directly linked to the business plan.
Link job performance standards that have been jointly set by management and employees to the business plan.
Prospectively model the firm based on benchmarks that exceed industry norms, competitors, and the industry leader.
Chapter Summary
We began to demystify entrepreneurship by
examining its classic start-up definition and a
broader, holistic way of thinking, reasoning, and
acting that is opportunity obsessed and leadership
balanced.
Entrepreneurship has many metaphors and poses
many paradoxes.
Getting the odds in your favor is the entrepreneur’s
perpetual challenge, and the smaller the business, the
poorer are the odds of survival.
Most significantly, these results reconfirm the im-
portance of the model and its principles: the team, the
market opportunity, the resource strategies, most of
the individual criteria, the concept of fit and balance,
and the holistic approach to entrepreneurship.
Exhibit 3.10 summarizes the 26 leading practices
identified in four key areas: marketing, finances, man-
agement, and planning. (A complete version of the
study is available from the National Center for Entre-
preneurship Research,http://www.kauffman.org.)
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MIND STRETCHERS
Have You Considered?
1. Who can be an entrepreneur? When?
2. More than 80 percent of entrepreneurs learn the crit-
ical skills they need after age 21. What does this
mean for you?
3. In your lifetime, the odds are that leading firms today
such as Microsoft, Google, Dell Computer, American
Airlines, McDonald’s, and American Express will be
knocked off by upstarts. How can this happen? Why
does it present an opportunity, and for whom?
4. What do you need to be doing now, and in the next
12 months, to get the odds in your favor?
5. List 100 ideas and then pick out the best five that
might be opportunities. How can these become op-
portunities? Who can make them opportunities?
112 Part II The Opportunity
Study Questions
1. Can you define what is meant by classic entrepreneur-
ship and the high-potential venture? Why and how are
threshold concepts, covering your equity, bootstrap-
ping of resources, fit, and balance important?
2. How many additional metaphors and paradoxes
about entrepreneurship can you write down?
3. “People don’t want to be managed, they want to be
led.” Explain what this means and its importance and
implications for developing your own style and lead-
ership philosophy.
4. What are the most important determinants of success
and failure in new businesses? Who has the best and
worst chances for success, and why?
5. What are the most important things you can do to get
the odds in your favor?
6. What criteria and characteristics do high-growth en-
trepreneurs, venture capitalists, and private investors
seek in evaluating business opportunities? How can
these make a difference?
7. Define and explain the Timmons Model. Apply it and
graphically depict, as in the Google example, the first
five years or so of a new company with which you are
familiar.
8. What are the most important skills, values, talents,
abilities, and mind-sets one needs to cultivate as an
entrepreneur?
Internet Resources for Chapter 3
www.sba.gov/advo/research The Office of Advocacy of the
U.S. Small Business Administration (SBA) is an
independent voice for small business within the federal
government. This site is a useful resource for small
business research and statistics on a wide range of topics.
www.ypo.org/ More that 11,000 young global leaders in
90 nations rely on one exclusive peer network that
connects them to exchange ideas, pursue learning, and
share strategies to achieve personal and professional
growth and success.
www.inc.com/inc5000/ The magazine has increased its
database to include 5,00 private businesses. As in
previous years, the top 500 fastest growing firms are
ranked.
Thinking big enough can improve the odds signifi-
cantly. Higher-potential ventures are sought by suc-
cessful entrepreneurs, venture capitalists, and private
investors.
The Timmons Model is at the heart of spotting and
building the higher-potential venture and under-
standing its three driving forces: opportunity, the
team, and resources. The concept of fit and balance
is crucial.
Recent research on CEOs of fast-growth ventures na-
tionwide adds new validity to the model.
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Chapter 3 The Entrepreneurial Process 113
Preparation Questions
1. Apply the Timmons entrepreneurship framework
(entrepreneur–opportunity–resources) to analyze
this case. Pay particular attention to the entrepre-
neur’s traits and how he gathered resources for
his venture.
2. Discuss the revenue model. Will the revenue
streams suggested be able to sustain the
business?
3. Discuss the growth strategy. What additional mar-
ket(s), besides Singapore, would you recommend
pursuing as Loftwork moves ahead?
As the plane touched down at Changi Airport, Singa-
pore, Kawai Toshimasa recounts the tasks at hand await-
ing him during his 10 months’ stint in Singapore. A proj-
ect manager of Loftwork, he has just returned
from Japan after a meeting with Chiaki Hayashi, the
cofounder of the company. Besides a renewal project that
involves making the Web site bilingual (Japanese and
English), he is also tasked with exploring ideas
of how Loftwork can launch its operations internationally.
While he has several conceptual ideas, he realizes
that he will need a wider pool of ideas and alternatives,
preferably from different perspectives. Prior to his return
to Singapore, he was informed by Chiaki that a trio of
university students from Singapore Management Univer-
sity had approached her, stating their interest in offering
their ideas and business knowledge to help Loftwork in
its international expansion plans.
A meeting has been set between the trio of students
and himself, and despite being down with a slight cold,
he looks forward to meeting the students and hearing
their proposals.
Background of Loftwork
Founded in 2001 as a Web-based forum for budding
graphic artists in Japan to come together to share their
artwork, Loftwork has grown to a full-fledged company
providing Web site management and IT consultancy
services. Termed as creators, Loftwork’s database of
graphic designers, Web site developers and creative
artists has grown to over 12,000 in eight years. It is also
the official vendors for big clients such as NEC and
Sony Corporation in Japan.
As its database of artists hosting their artwork in-
creased steadily, the demand for Loftwork’s services
also increased correspondingly, with even overseas-
based companies expressing interest. In light of these
positive developments, the founders felt that it is time to
improve Loftwork’s existing servers in preparation for a
bigger pool of artists, as well as to expand its operations
overseas.
In addition to improving server capability, Loftwork
had other considerations, such as improving the search
and blog functions (the two functions that artists in
the database hope Loftwork would improve), retaining
the existing clean layout and simplicity of navigating the
Web site, staying cost-efficient (changing servers was
usually expensive) and remaining compatible to the dif-
ferent markets Loftwork was considering to enter.
On the other hand, while overseas expansion is
an attractive option, Loftwork had to consider which
markets to enter first since it has had no previous
overseas experience. It was also considering what busi-
ness model it should use when entering its selected
markets.
Company Mission
Loftwork’s company mission is to support communi-
cation between creators and producers. Inspired by
an America-based company, eBay, Loftwork aims to
create a platform for distributing creativity freely as
well as a marketplace for various creators to display
artworks.
Loftwork’s History
Inspired by how eBay is fully consumer-driven and
everyone has the freedom to post their items online for
sale, Chiaki Hayashi, an avid lover of Japanese art and
design, decided to set up Loftwork for budding creators
like herself to display their art pieces and to allow those
who appreciated the work to bid for it.
The cofounder is also adamant that there should be
no advertisements on the Web site, and she also does
not allow artists to pay a premium so that his or her
work would be featured more prominently. These meas-
ures are meant to maintain the integrity and credibility
of the Web site: customers know that the most popular
artists are there because of the quality and relevance of
their art rather than because of their ability to buy good
advertisement spots.
This protection of artistic quality and credibility has
encouraged many freelance professionals to sign up
with the Web site, and it has also resulted in many
freelance jobs being matched with the artists. Word
got around that Loftwork’s Web site provides more
job opportunities than others, resulting in an increase
Case
Loftwork
This case was written by Kenneth Tay De Wei, Andy Soh Han Chong,
and Benjamin Ho Chern Yang of Singapore Management University,
with the guidance of Yinglan Tan.
tim81551_ch03IT.qxd 1/30/12 10:06 AM Page 113
in sign-ups. Although the database of 12,000 artists
is considered only mid-sized in Japan, it is the big-
gest consolidation of freelance professionals, whereas
other databases consisted of amateurs or semi-
professionals.
Since its inception in 2001, Loftwork has moved
on from being just a database company to one
that provides project management services, where
dedicated teams of project managers, creative
designers and Web site developers together help
clients to plan and develop Web sites and IT applica-
tions using the information and resources from its
database.
Loftwork’s Competitors
Having the biggest consolidation of freelance profess-
ionals has given Loftwork a competitive advantage
over its competitors, and resulted in a strong brand
name, synonymous with reliability and quality in the
market.
Competitors in Japan include pixiv (www.pixiv.net),
which has a larger database of artists than Loftwork but
made up mainly of amateurs and semi-professionals,
and Creatorz (www.creatorz.jp), which is a print com-
pany that extended its product lines to include a design
database. These companies’ services are more geared
towards graphic designers and their value proposition
is good design integrated with printing services at lower
prices.
Global competitors include Coroflot (www.coroflot.
com), which has the biggest creative design database in
the world, consisting of product, interior, graphic and
art designers. Coroflot has a unique value proposition
of Web advertisements and allowing designers to take
an active approach in soliciting their services. Another
competitor, oDesk (www.odesk.com), allows companies
to track the progress of a designer’s work and for the
designers to bill the companies, on an hourly basis in
the system, and it has a huge following.
Loftwork’s Features
Loftwork’s database currently pays a license fee to use
the Google appliance server, which has the following
features:
Downloading of Content
Users who sign up with Loftwork are included in the
database, and they can freely upload images onto a
common platform. Visitors to the site who wish to con-
tact the designer or purchase the rights to any of the im-
ages would then email the Loftwork administrator for the
necessary arrangements to be made. Loftwork will earn
a commission from the transaction.
Portfolio Search
Users can view all the artwork either by the default dis-
play (this displays the most recently uploaded artwork)
or by other criteria, such as artist name, art category,
and date. The search function is important for filtering
the most relevant items for the user, rather than have him
or her sieve through tons of photographs.
One of the most popular searches is for thematic de-
signs (especially for the Christmas and New Year holi-
days), because the Japanese like to download these to
accompany their e-Cards and other e-greetings. This
search function is also linked to the main Google search
function.
Blogs
Users can also link their own blogs to the Loftwork data-
base so that visitors can get to know the personalities
and portfolio of the artists instead of merely browsing
their work.
Competitions
This is one of the most important features in the Loftwork
database as it provides job opportunities and publicity
for the freelance artists. Companies that need designs
for a particular product launch or Web site can choose
to host competitions by offering prize money to the best
three artists who submit their artwork, according to the
design specifications, within a stipulated time. The win-
ning designs and artists’ names would also be hosted
on Loftwork’s Web site.
Loftwork’s Problems
Loftwork’s main issues can be separated into two main
parts: expansion of the creators’ network, Business to Busi-
ness (B2B), and new revenue models for users, Business to
Customer (B2C). In B2B, Loftwork’s main issue is to ex-
pand its existing creators’ network to include not only
Japan but the rest of the world, primarily targeting Asia as
a market. In line with Loftwork’s vision of becoming the
biggest creators’ network in the world, the recruitment of
new creators as well as the retainment of existing creators
will remain paramount concerns for the company.
Currently, Japanese designers make up 90 percent of
Loftwork creators’ network. It is of utmost importance that
designers from other countries are recruited as part of the
expansion plans. To do so, Loftwork would need a sustain-
able revenue model.
114 Part II The Opportunity
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Chapter 3 The Entrepreneurial Process 115
Loftwork is uninterested in using advertising as the
main revenue model for loftwork.com. The end objective
of distributing creativity freely over the Web must continue
to be met. An initial idea was to capitalize on its large cre-
ators’ database and commercializing it through a licens-
ing model. Customers would then pay a fee to Loftwork to
use these resources.
Loftwork soon realized that there were multiple issues in
this proposition. First, customers could bypass Loftwork
completely by contacting the creators directly. This serves
no purpose of selling the database as a need to gain ac-
cess. Second, creating barriers to prevent creators from be-
ing connected to potential customers might make them less
motivated to join Loftwork’s network. The network is mostly
made up of freelance designers who use Loftwork as a
platform to showcase their art work. Hence, attracting cus-
tomers is one of the top value propositions to join Loftwork.
The current company and structure are as follows:
Loftwork has two main groups of networks: the creators’
network and the users’ network. Both value propositions
would need to be discussed for the whole system to
work. In between the networks is Loftwork, which con-
sists of two main groups of people. The first group is the
Sales and Marketing team, which consists of 200 staff
members; their job scope includes search engine opti-
mizations, recruitment of customers, online advertising,
marketing of Loftwork creators’ network as well as find-
ing customers for Loftwork’s Web site development team.
The other group primarily takes charge of the cre-
ators’ database. Within this group, there exists a project
development team which helps customers to handle var-
ious design projects. This is one of the main sources of
revenue for Loftwork.
The CEO of Loftwork, Chiaki Hayashi, would like to
commercialize Loftwork’s database and find a sustain-
able revenue model over the following one to two years.
This has to be done in two phases. Phase One includes
the expansion of the creators’ network over multiple
countries, with Asia as the primary focus. Phase Two in-
cludes finding alternative revenue models apart from
project management and development.
Company Web site
Loftwork is seeking to improve its existing server by mov-
ing to Microsoft Bing, because Google appliance’s per-
formance was not as good; in addition, Microsoft Bing
is available free-of-charge and provides an API function
(where XML site marks could be searched).
However there are some issues with the improve-
ments:
Open-Source Threat
The new server uses buddypress.com, a new interface
system, and currently an open-source software. The
problem is that front-end users and visitors can view all
the information about the artists, including address and
other contact details. In addition, a new “groups” func-
tion allows users to join a particular group where they
can share information and discuss ideas as if they are in
an open forum. The migration to this system would thus
bypass Loftwork as the intermediary between the artist
and the customer, and result in loss of transaction rev-
enue for Loftwork. However, this issue may not be as se-
rious outside of Japan because not many companies are
able to communicate with the Japanese in their native
language and would still require Loftwork to be an inter-
mediary.
Improving Tag Functions
The current tag and search function is not user-friendly
enough because users must fill in their own words or tags,
Current
Company
and
Structure
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116 Part II The Opportunity
which usually results in users spending too much time
looking for the information they need and in sub-optimal
results, especially for first-time users. Since Loftwork earns
from the transactions made, it is crucial that successful
searches be made more quickly. The new tag and search
functions should thus provide both common tags as well
as personalized tags that will be unique to a user, based
on his usage profile. Microsoft Bing could provide a new
function which allows users to search for pictures based
on a genre similar to previous searches (similar to having
a thesaurus for pictures), rather than to start from scratch.
But would this be a value-add to the existing functions?
Translation
One of the most important features that must be im-
proved, should Loftwork expand overseas, is the trans-
lation of the Web site and database from Japanese to
other languages. However, translation requires a new
interface system and incurs a huge cost. How would
Loftwork mitigate this capital outlay requirement?
Loftwork Proposed Solutions
Before any solution is proposed to Loftwork, an under-
standing of the company structure as well as its business
model is important. A SWOT framework is used to iden-
tify the various opportunities and weaknesses of the
business model.
Loftwork Revenue Model
Loftwork new revenue model is divided into three main
areas.
Commercializing of Database
Apart from creators’ contact details, a large selection of
artworks and designs also reside on the database.
Currently, the revenue model works by providing cus-
tomers—vendors or event organizers—with a means of
obtaining a new design to meet their needs, by way of
design competitions. From these competitions, the large
selection of artwork submissions that do not win the
prize are, at present, stored on the platform and made
available for free download.
Loftwork does hold competitions on the Web site to
help source for the best design for its customers. The
creator with the selected design would be paid by the
customer. However, out of the one design chosen, there
are 99 more designs “unutilized “by any other means.
These designs have commercial value which could po-
tentially pull in revenue for Loftwork.
Currently, the only revenue model for utilizing the
database is by holding competitions for specific vendors
or event organizers. One design would be paid and the
rest of them would be placed in the platform for free
download.
These artwork pieces could, potentially, attract rev-
enue. As such a commercial value could be attached to
every design, with the pricing category determined by its
quality or complexity. Ordinary artwork could either be
available for free download while more complex one
could be watermarked and downloadable for a small
fee. Customers may also purchase the artwork, together
with its copyright, for a one-time premium fee. Such art-
work would then cease to be available for further down-
loads and be removed from the platform.
How would Loftwork benefit from this model? The
transactions would happen only through this platform
and Loftwork would charge a commission for all down-
loads. This capitalization of the database resources
would be a new revenue channel for Loftwork.
Sale of Design through Merchandise
Loftworks can also branch off into customized product
manufacturing. A rating and comment feature would be
implemented for all artworks uploaded onto the plat-
form.
1
Artwork that accumulates the highest number of
votes indicates popularity and there is commercial value
for converting these designs into products. Most cus-
tomers choose design without any plans about converting
those designs into products. Loftwork could reach out to
suppliers and suggest incorporating these highly rated
designs into their existing products (e.g., t-shirts, blankets,
etc.) to increase value. Loftwork could also partner with
manufacturers to produce merchandise with these
popular designs. The revenue would then be split among
Loftwork, the design creators, and the manufacturers.
1
A “Like” comment voting feature would accompany all the artwork and
users could then randomly vote for the artwork they like. Votes and
download information would be collected and published publicly.
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Chapter 3 The Entrepreneurial Process 117
A rating and comment feature would then be imple-
mented for all artworks uploaded onto the platform. Art-
work that accumulates the highest number of votes indi-
cates popularity, and suggests that there is a commercial
viability for converting those designs into products.
Customers would most probably look at the top few
designs and may choose to buy the design they want,
along with the copyright.
2
If Loftwork is able to sell these
highly rated designs to suppliers or to liaise product man-
ufacturing with various manufacturers and suppliers, cus-
tomers could either order these products through Loft-
work’s portal or buy products through the suppliers.
Sale through Rebates and Loyalty
Points
A loyalty scheme, consisting of rebates and discounts,
could be implemented to provide an incentive for custom-
ers to revisit the portal and continue to make purchases.
Most online purchases are transacted based on cus-
tomers’ needs, yet there are no incentives for recurring cus-
tomers who have made purchases from the various portals.
The idea proposed is a rebate and loyalty discount system
that acts as an incentive for recurring customers to revisit the
portal to make another purchase. For every purchase of an
artwork, rebate points would be given. As this concept is
relatively new, especially on the Internet, it would definitely
create a significant impact, especially when the users have
a choice of different artworks from various providers.
Growth Strategy
One idea that is currently proposed to Loftwork is the
adoption of the 3 “E” Framework: Enhance, Extend,
and Expand, to chart the company’s growth for the next
three years.
Overseas Expansion
Expanding overseas would be an attractive option for
Loftwork, one that would leverage on its existing data-
base of Japanese art and freelance professional design-
ers who are cheaper than agencies. This move would al-
low Loftwork to move into markets that are lucrative and
have an interest in Japanese culture and art. It would
also increase Loftwork’s presence overseas, allow over-
seas designers to join the database and thereby grow
the resource pool, and provide additional sources of
revenue for Loftwork.
However, overseas expansion brings along several
key considerations. Questions such as which market to
enter and what the various entry modes are must be an-
swered. Loftwork would also have to consider whether
the foreign business environments and demand condi-
tions are similar to Japan. Thought would also have to
be given to whether there are any other business models
or product line extensions that Loftwork can consider to
expand overseas.
Singapore
A country in the Asia Pacific region and part of ASEAN
(Association of Southeast Asian Nations), Singapore
has often been labeled as a miracle by the Western
countries for its strong economic development that
led to its rise from a Third World Country to a First
World Country status in 40 years. Once a British colony,
Singapore experienced rapid economic growth with
manufacturing as the main engine from the 1970s, after
achieving independence in 1965. Singapore’s favor-
2
Currently, most customers choose design without any plans about con-
verting those designs into products.
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118 Part II The Opportunity
3https://www.cia.gov/library/publications/the-world-factbook/
geos/sn. html.
4http://app.cpib.gov.sg/cpib_new/user/default.aspx?pgID=147.
5
Communicaid, Doing Business in Singapore, Singapore Social and
Business Culture, 2007.
6http://www.kwintessential.co.uk/resources/global-etiquette/
singapore.html.
able position on the trading map also allowed the
country to thrive on entrepot trade. In the new millen-
nium, Singapore has shifted its focus away from un-
skilled manufacturing industries to a knowledge-based
industry, with strong sectors in the electronics and
biotechnological industries. The service sector has also
emerged as the main source of economic growth, with
over 70 percent of the country’s GDP dependent on the
service sector.
Despite a small geographical area of only 687
square kilometers and a population of 4.6 million,
3
Sin-
gapore’s economic development has led to a rise in
standard of living and an increase in the people’s
spending power. High literacy rates have also resulted
in consumers becoming more sophisticated. A demo-
cratic country, Singapore has also been listed as the fifth
least corrupted country in the world,
4
ensuring
that business operations are carried out in a transparent
manner.
Doing Business in Singapore
Business Culture
Singapore’s business culture is largely Asian-centered in
nature despite Western influences. Singaporeans, in
general, function well in groups, and have proven to be
highly-effective team players, perhaps as a result of an
education system that has not placed much emphasis on
individualism.
In business, friendships are based on honor, integrity,
and good character. Due to the relatively strict laws gov-
erning Singapore, business dealings are usually transpar-
ent and illegal dealings are usually avoided. Singapo-
rans are generally cautious and place emphasis on
inking deals in black and white. It also takes time for for-
eign businessmen to establish and maintain contacts as
Singaporeans highly regard warm and personal relation-
ships. As Singaporeans believe in doing business with
the right individuals, long-standing personal relationships
will be the key to establishing a network of contacts.
Negotiations are usually conducted at a slow pace
and Singaporeans are likely to bargain hard on prices
and deadlines.
5
Hence, it is vital that foreign business-
men maintain their patience during negotiations and
come prepared with a list of concessions that one may
be willing to make to seal the business deal.
6
Eventual
decisions are based on consensus due to the group-
driven culture of Singaporeans.
A key aspect of Singapore’s business culture is the con-
cept of “face.” Predominately influenced by Chinese cul-
ture, “face” refers to one’s self image, social status or rep-
utation.
7
In Singapore, one’s social status or reputation is
important, hence, businessmen tend to avoid losing
“face” via embarrassment by their counterparts. Foreign
businessmen should avoid putting their Singaporean
counterparts in an embarrassing scenario, for example,
being ridiculed or made to admit a mistake in front of
others, especially those of lower social standing. Losing
“face” may result in the end of business relationships. In
Singapore, it is common for businessmen to “over-
promise” in order not to show their incompetence, al-
though they may not be able to deliver these “promises.”
Advantages
With high literacy rates, Singapore has a capable and
efficient workforce. Efficient administration and minimal
bureaucracy in business dealings creates an ease of do-
ing business in Singapore.
8
As Southeast Asia’s most
developed nation, Singapore also serves as a regional
hub to the Southeast Asian market, which has huge po-
tential with emerging economies such as Vietnam. Sin-
gapore also has high computer and Internet penetration
rate, where it is common for households to have at least
one desktop computer. Technology-savvy Singaporeans
often rely on the Internet for information and online serv-
ices are used widely.
Japanese companies seeking to expand into the
Singapore market can also receive help and informa-
tion from the Japanese Chamber of Commerce and
Industry (JCCI).
9
It provides information to Japanese
companies on the procedures of setting up business op-
erations in Singapore. Management consultants also
provide companies with advice and insight of the Singa-
pore market while periodic reviews of Singapore’s
economy is conducted to keep companies updated
about the latest trends and development of the economy.
Singapore’s Creative Industry
Overview
In Singapore, the creative industries are defined as in-
dustries that are inspired by cultural and artistic creativ-
ity and have the potential to create economic value
through the generation and exploitation of intellectual
property.
10
For the years following independence, Singapore’s
economy was driven by traditional manufacturing and
more recently the service industry. With innovation be-
ing highlighted as the key to success in the ever-chang-
ing landscape of the global market, government initia-
tives are targeting the imaginative and creative capacity
of the people to generate new ideas and create value.
7http://www.randomwire.com/chinese-culture-101-part-6-core-
concepts.
8http://www.singapore-business.com/info_papers2.htm.
9http://www.jcci.org.sg/.
10http://app.mica.gov.sg/Default.aspx?tabid=66.
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Chapter 3 The Entrepreneurial Process 119
The Ministry of Information, Communication, and the
Arts (MICA), a government agency, has been tasked to
lead an initiative entitled Creative Industries Develop-
ment Strategy (CIDS).
11
Efforts will be focused on laying
the foundation of the creative industry by equipping in-
dustry players with creative capabilities in order to re-
main competitive in the global market. Three key sectors
of the industry are the arts, design and media, where
creative talents will be nurtured in Singapore’s bid to be-
come the new Asia Creative Hub.
Competitors to Loftwork
There exist several incumbents in Singapore’s creative
industry, which offer similar, undifferentiated services in
the form of Web designing and graphic designing.
Companies such as KillerPlush, EnVistar, Above1, and
Akyweb specialize in Web designs and they have a
pool of in-house Web developers and graphic design-
ers. As such, despite a talented pool of Web develop-
ers, the companies can only offer prospective clients
choices from a limited number of designs created by
their in-house creators. In recent years, to leverage
on the designs created, companies such as KillerPlush
has also branched out into sale of T-shirts based on their
creators’ designs.
While companies listed above have only a limited
number of creators onboard, customers may choose to
approach freelance designers. Web sites that provide
the link and contacts to a wide range of freelance de-
signers include www.guru.com and www.openad.net,
with the latter focusing more on design for advertising.
However, to view the gallery of portfolios and submit
requests for designs, customers must pay a member-
ship fee.
Creative Art and Web Design
Schools
With increasing focus on innovation and aesthetics,
Singapore has started to mold future creative talent
through schools that specialize in the creative field.
Institutions such as the LASALLE College of the Arts and
Nanyang Academy of Fine Arts have been established
to cater to the creative industry. Up-and-coming institu-
tions include the School of the Arts (SOTA) and the Sin-
gapore University of Technology and Design; both are
currently undergoing construction. Private institutions,
such as School of Art and New Media, First Media De-
sign School and Raffles Design Institute, also provide
curriculum in art and design. Students in Singapore can
also apply for courses in multimedia and Web design
at one of five polytechnics in Singapore. The diverse
range of educational institutes clearly shows the inten-
tion of the Singapore government to focus on the cre-
ative industries as a new source of economic growth in
the near future.
Opportunities in Singapore
There are currently no companies in Singapore that of-
fer similar service concepts of Loftwork. Despite the
increasing focus on aesthetics, design and innovation,
Web site development in Singapore has yet to attain the
standards of being creative and captivating. Further,
customers are only offered a limited number of design
choices as companies have only a fixed number of
in-house creators. On the other hand, Loftwork, with its
number of creators exceeding 12,000, would provide
clients with an extensive range of design choices,
hence, ensuring that only the best designs would be
chosen.
As part of a business culture that thrives on efficiency
and effectiveness, Loftwork could serve as a destination
for clients who need design ideas within a short turn-
around time. Loftwork’s ability to present a wide range
of design options for clients to choose will become its
core competency and competitive advantage over its
competitors.
The new generation of consumers in Singapore has
also become more sophisticated and generally de-
mands more from companies and services, in terms of
aesthetics and design. Consumers now demand more
than mere basic functions and tend to focus more on
things that capture their attention on first sight. With
Loftwork’s diverse pool of creators, consumers in Singa-
pore can look forward to designs in terms of graphics,
advertising and Web designs that are captivating and
unique.
Singaporeans, in general, view Japanese designs
as creative and superior to those of Singapore, and
Japanese designs are widely accepted in Singapore.
In the Cannes Lions Awards Ceremony, held annually,
Singapore, despite being top-ranked in Southeast
Asia, lags behind Japan in terms of the total num-
ber of awards won. Singapore’s award tally of 66
in the preceding five years pales in comparison to
Japan’s 89.
12
Moving Forward
Toshimasa sat at his desk, pondering the list of ideas
and alternative revenue models suggested by the trio of
university students. Each idea looked attractive in its
own way, yet marketing research has yet to be carried
out to gauge the likelihood of success. He would also
11http://app.mica.gov.sg/Default.aspx?tabid=66.
12http://www.marketing-interactive.com/news/9310.
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120 Part II The Opportunity
have to seek the approval of the Loftwork’s founders,
who seemed keen on these ideas but suggested that
they may be less concrete than desired.
Although Singapore was not part of Loftwork’s initial
international expansion plans, Loftwork realizes that
there may be potential in it, despite the relatively small
consumer and creator base. Toshimasa thought about
the potential of having Loftwork’s Web sites in different
languages for different countries, with an eventual goal
of having a global network. He recollected his idea
about setting up a subsidiary in each country which will
adopt Loftwork’s framework and tap on its database,
and how this could fit in with the revenue models pre-
sented. He was certain that there was potential for Loft-
work on the global stage, but it would certainly take
time and effort for it to be established. To move Loftwork
into the global arena, the right revenue model and for-
mula must be determined.
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doc_311839070.pdf
This detailed description with regards to the entrepreneurial process demystifying entrepreneurship.
93
ne often hears, especially from younger, newer entrepreneurs,
the exhortation: “Go for it! You have nothing to lose now. So
what if it doesn’t work out. You can do it again. Why wait?”
While the spirit this reflects is commendable and there can be
no substitute for doing, such itchiness can be a mistake unless
it is focused on a solid opportunity.
Most entrepreneurs launching businesses, particularly the
first time, run out of cash quicker than they bring in customers
and profitable sales. While there are many reasons for this,
the first is that they have not focused on the right opportunities.
Unsuccessful entrepreneurs usually equate an idea with an op-
portunity; successful entrepreneurs know the difference!
Successful entrepreneurs know that it is important to “think
big enough.” They understand that they aren’t simply creat-
ing a job for themselves and a few employees; they are
building a business that can create value for themselves and
their community.
While there are boundless opportunities for those with en-
trepreneurial zest, a single entrepreneur will likely be able to
launch and build only a few good businesses—probably no
more than three or four—during his or her energetic and pro-
ductive years. (Fortunately, all you need to do is grow and har-
vest one quite profitable venture whose sales have exceeded
several million dollars. The result will be a most satisfying pro-
fessional life, as well as a financially rewarding one.)
How important is it, then, that you screen and choose an
opportunity with great care? Very important! It is no accident
that venture capital investors have consistently invested in no
more than 1or 2 percent of all the ventures they review.
As important as it is to find a good opportunity, even good
opportunities have risks and problems. The perfect deal has yet
to be seen. Identifying risks and problems before the launch
while steps can be taken to eliminate them or reduce any neg-
ative effect early is another dimension of opportunity screening.
II
PART T WO
The Opportunity
O
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95
Demystifying Entrepreneurship
Entrepreneurship is a way of thinking, reasoning,
and acting that is opportunity obsessed, holistic in
approach, and leadership balanced for the purpose
of value creation and capture.
1
Entrepreneurship
results in the creation, enhancement, realization,
and renewal of value, not just for owners, but for
all participants and stakeholders. At the heart of
the process is the creation and/or recognition of
opportunities,
2
followed by the will and initiative to
seize these opportunities. It requires a willingness
to take risks—both personal and financial—but in a
very calculated fashion in order to constantly shift
the odds of success, balancing the risk with the po-
tential reward. Typically entrepreneurs devise in-
genious strategies to marshall their limited re-
sources.
Today entrepreneurship has evolved beyond the
classic start-up notion to include companies and
organizations of all types, in all stages. Thus entre-
preneurship can occur—and fail to occur—in
firms that are old and new; small and large; fast
and slow-growing; in the private, not-for-profit, and
public sectors; in all geographic points; and in all
stages of a nation’s development, regardless of
politics.
Entrepreneurial leaders inject imagination, moti-
vation, commitment, passion, tenacity, integrity,
teamwork, and vision into their companies. They face
3
Chapter Three
The Entrepreneurial Process
“I don’t make movies to make money. I make money to make movies.”
—Walt Disney
Results Expected
Upon completion of this chapter, you will be able to
1. Articulate a definition of entrepreneurship and the entrepreneurial process—from
lifestyle ventures to high-potential enterprises.
2. Describe the practical issues you will address and explore throughout the book.
3. Discuss how entrepreneurs and their financial backers get the odds for success in
their favor by defying the familiar pattern of disappointment and failure.
4. Articulate the Timmons Model of the entrepreneurial process; describe how it can be
applied to your entrepreneurial career aspirations and ideas for businesses; and
describe how recent research confirms its validity.
5. Provide insights into and analysis of the Loftwork case study.
1
This definition of entrepreneurship has evolved over the past three decades from research by Jeffry A. Timmons, Babson College and the Harvard Business
School, and has recently been enhanced by Stephen Spinelli, Jr., former vice provost for entrepreneurship and global management at Babson College, and
current president of Philadelphia University.
2
J. A. Timmons, D. F. Muzyka, H. H. Stevenson, and W. D. Bygrave, “Opportunity Recognition: The Core of Entrepreneurship,” in Frontiers of Entrepreneur-
ship Research (Babson Park, MA: Babson College, 1987), p. 409.
tim81551_ch03IT.qxd 1/20/12 10:31 AM Page 95
dilemmas and must make decisions despite ambigu-
ity and contradictions. Very rarely is entrepreneur-
ship a get-rich-quick proposition. On the contrary, it
is one of continuous renewal because entrepreneurs
are never satisfied with the nature of their opportu-
nity. The result of this value creation process, as we
saw earlier, is that the total economic pie grows larger
and society benefits.
Classic Entrepreneurship: The Start-Up
The classic expression of entrepreneurship is the
raw start-up company, an innovative idea that
develops into a high-growth company. The best
of these become entrepreneurial legends: Haier,
Legend, Acer, Alibaba, Ctrip, and hundreds of
others are now household names. Success, in addi-
tion to the strong leadership from the main entre-
preneur, almost always involves building a team
with complementary talents. The ability to work
as a team and sense an opportunity where others
see contradiction, chaos, and confusion are critical
elements of success. Entrepreneurship also re-
quires the skill and ingenuity to find and control re-
sources, often owned by others, in order to pursue
the opportunity. It means making sure the upstart
venture does not run out of money when it needs it
the most. Most highly successful entrepreneurs
have held together a team and acquired financial
backing in order to chase an opportunity others may
not recognize.
Entrepreneurship in Post-Brontosaurus
Capitalism: Beyond Start-Ups
As we’ve seen, the upstart companies of the 1970s
and 1980s have had a profound impact on the com-
petitive structure of the United States and world in-
dustries. Giant firms, such as IBM (knocked off by
Apple Computer and then Microsoft), Digital Equip-
ment Corporation (another victim of Apple Com-
puter and acquired by Compaq Computer Corpora-
tion), Sears (demolished by upstart Wal-Mart and
recently merged with Kmart), and AT&T (knocked
from its perch first by MCI, and then by cellular up-
starts McCaw Communications, CellularOne, and
others), once thought invincible, have been dismem-
bered by the new wave of entrepreneurial ventures.
While large companies shrank payrolls, new ventures
added jobs.
In Taiwan the giant semiconductor manufactur-
ing firm UMC was knocked off by TSMC in the
field of wafer fabrication. Both companies dominate
the wafer-making industry (and UMC has diversi-
fied into other areas like investing in Integrated
Circuit Design), but TSMC has risen to become the
world’s largest manufacturer of semiconductors,
with its technological capabilities even beating that
of the world’s leading semiconductor giants such as
Intel, and leaving its competitors from Israel, Singa-
pore, China, and South Korea behind. In recent
years, TSMC has also begun developing green tech-
nologies, such as LED and solar cell, to seek new
growths.
Another Taiwanese company that has given the
big names a run for their money is ACER Computer.
The company grew rapidly with the outsourcing
strategy of its U.S. clients such as Intel, Dell, and
HP. After decades of product manufacturing for
global clients, it has established its own global brand
name and is now one of the world’s top three per-
sonal computer makers. Acer’s global success can be
attributed to its tremendous sourcing base in Tai-
wan. With very large supplies of quality chips,
mother boards, IC designs, flat panels, and other
components in its homeland, Taiwan, Acer has been
able to compete in terms of both cost and quality on
a global scale.
As autopsy after autopsy was performed on failing
large companies, a fascinating pattern emerged,
showing, at worst, a total disregard for the winning
entrepreneurial approaches of their new rivals and, at
best, a glacial pace in recognizing the impending de-
mise and the changing course.
“People Don’t Want to Be Managed.
They Want to Be Led!”
3
These giant firms can be characterized, during their
highly vulnerable periods, as hierarchical in structure
with many layers of reviews, approvals, and vetoes.
Their tired executive blood conceived of leadership
as managing and administering from the top down, in
stark contrast to Ewing M. Kauffman’s powerful in-
sight: “People don’t want to be managed. They want
to be led!” These stagnating giants tended to reward
people who accumulated the largest assets, budgets,
number of plants, products, and head count, rather
than rewarding those who created or found new busi-
ness opportunities, took calculated risks, and occa-
96 Part II The Opportunity
3
The authors’ favorite quote from Ewing M. Kauffman, founder of Marion Laboratories, Inc., the Ewing Marion Kauffman Foundation, Kansas City, Missouri.
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Chapter 3 The Entrepreneurial Process 97
sionally made mistakes, all with bootstrap resources.
While very cognizant of the importance of corporate
culture and strategy, the corporate giants’ pace was
glacial: It typically takes six years for a large firm to
change its strategy and 10 to 30 years to change its
culture. Meanwhile, the median time it took start-ups
to accumulate the necessary capital was one month
but averaged six months.
4
To make matters worse, these corporate giants had
many bureaucratic tendencies, particularly arrogance.
They shared a blind belief that if they followed the al-
most sacred best management practices of the day,
they could not help but prevail. During the 1970s and
1980s, these best management practices did not in-
clude entrepreneurship, entrepreneurial leadership,
and entrepreneurial reasoning. If anything, these
were considered dirty words in corporate America.
Chief among these sacred cows was staying close to
your customer. What may shock you is the conclusion
of two Harvard Business School professors:
One of the most consistent patterns in business is the
failure of leading companies to stay at the top of their
industries when technologies or markets change. . . . But
a more fundamental reason lies at the heart of the para-
dox: Leading companies succumb to one of the most
popular, valuable management dogmas. They stay close
to their customers.
5
When they do attack, the [new] entrant companies
find the established players to be easy and unprepared
opponents because the opponents have been looking
up markets themselves, discounting the threat from
below.
6
One gets further insight into just how vulnerable
and fragile the larger, so-called well-managed compa-
nies can become, and why it is the newcomers who
pose the greatest threats. This pattern also explains
why there are tremendous opportunities for the com-
ing e-generation even in markets that are currently
dominated by large players. Professors Bower and
Christensen summarize it this way:
The problem is that managers keep doing what has
worked in the past: serving the rapidly growing needs of
their current customers. The processes that successful,
well-managed companies have developed to allocate re-
sources among proposed investments are incapable of
funneling resources in programs that current customers
explicitly don’t want and whose profit margins seem un-
attractive.
7
Given how many new innovations, firms, and indus-
tries have been created in the past 30 years, it is no
wonder that brontosaurus capitalism has found its
ice age.
Signs of Hope in a Corporate Ice Age
Fortunately, for many giant firms, the entrepreneur-
ial revolution may spare them from their own ice
age. One of the most exciting developments of the
decade is the response of some large, established
corporations to the revolution in entrepreneurial
leadership. Corporate leadership, in unprecedented
numbers, is launching experiments and strategies to
recapture entrepreneurial spirit and to instill the cul-
ture and practices we would characterize as entre-
preneurial reasoning. The e-generation has too
many attractive opportunities in truly entrepreneur-
ial environments. They do not need to work for a
brontosaurus that lacks spirit.
Increasingly, we see examples of large companies
adopting principles of entrepreneurship and entre-
preneurial leadership in order to survive and to re-
new. Researchers document how large firms are ap-
plying entrepreneurial thinking, in pioneering ways,
to invent their futures, including companies such as
Taiwanese companies Acer, Asus, HTC, MediaTech,
Morning Star, Delta Electronics, Foxxcon (Hon Hai
Precision), and AUO. Most large brontosaurus firms
could learn valuable lessons on how to apply entre-
preneurial thinking from companies such as these.
Metaphors
Improvisational, quick, clever, resourceful, and in-
ventive all describe good entrepreneurs. Likewise,
innumerable metaphors from other parts of life
can describe the complex world of the entre-
preneur and the entrepreneurial process. From
music it is jazz, with its uniquely impromptu flair.
From sports many metaphors exist: the agility of
Yi Jianlian ( ), the broken-field running of
Liu Xiang ( ), the wizardry on ice of Sun Xue
( ) and Zhao Hongbo ( ), or the com-
petitiveness of table-tennis player Zhang Yining
( ). Even more fascinating are the unprece-
dented comebacks of athletic greats such as diver
Xiong Ni ( ), sports shooter Zhang Shan ( ),
and weightlifter Chen Yanqing ( ).
Perhaps the game of golf, more than any other,
replicates the complex and dynamic nature of manag-
ing risk and reward, including all the intricate mental
4
W. J. Dennis, Jr., “Wells Fargo/NFIB Series on Business Starts and Stops,” November 1999.
5
IJ. L. Bower and C. M. Christensen, “Disruptive Technologies: Catching the Wave,” Harvard Business Review, January–February 1995, p. 43.
6
Ibid., p. 47.
7
Ibid.
tim81551_ch03IT.qxd 1/20/12 10:31 AM Page 97
challenges faced in entrepreneuring. No other sport,
at one time, demands so much physically, is so com-
plex, intricate, and delicate, and is simultaneously so
rewarding and punishing; and none tests one’s will,
patience, self-discipline, and self-control like golf.
Entrepreneurs face these challenges and remunera-
tions as well. And what about the relationship be-
tween the caddy and golfer?
An entrepreneur also faces challenges like a sym-
phony conductor or a coach, who must blend and bal-
ance a group of diverse people with different skills,
talents, and personalities into a superb team. On
many occasions it demands all the talents and agility
of a juggler who must, under great stress, keep many
balls in the air at once, making sure if one comes
down it belongs to someone else.
The complex decisions and numerous alternatives
facing the entrepreneur also have many parallels with
the game of chess. As in chess, the victory goes to the
most creative player, who can imagine several alterna-
tive moves in advance and anticipate possible defenses.
This kind of mental agility is frequently demanded in
entrepreneurial decision making.
Still another parallel can be drawn from the book
The Right Stuff by Tom Wolfe, later made into a movie.
The first pilot to break the sound barrier, Chuck Yeager,
describes what it was like to be at the edge of both the
atmosphere and his plane’s performance capability, a
zone never before entered—a vivid metaphor for the
experience of a first-time entrepreneur:
In the thin air at the edge of space, where the stars and the
moon came out at noon, in an atmosphere so thin that the
ordinary laws of aerodynamics no longer applied and a
plane could skid into a flat spin like a cereal bowl on a
waxed Formica counter and then start tumbling, end over
end like a brick . . . you had to be “afraid to panic.” In the
skids, the tumbles, the spins, there was only one thing you
could let yourself think about: what do I do next?
8
This feeling is frequently the reality on earth for
entrepreneurs who run out of cash! Regardless of the
metaphor or analogy you choose for entrepreneur-
ship, each is likely to describe a creative, even artistic,
improvised act. The outcomes are often either highly
rewarding successes or painfully visible misses. Al-
ways urgency is on the doorstep.
Entrepreneurship ?Paradoxes
One of the most confounding aspects of the entre-
preneurial process is its contradictions. Because of its
highly dynamic, fluid, ambiguous, and chaotic char-
acter, the process’s constant changes frequently pose
paradoxes. A sampling of entrepreneurial paradoxes
follows. Can you think of other paradoxes that you
have observed or heard about?
An opportunity with no or very low potential
can be an enormously big opportunity. One
of the most famous examples of this paradox is
Alibaba. Founder Jack Ma was turned down by
various venture capitalists before successfully
raising capital. Frequently, business plans re-
jected by some venture capitalists become leg-
endary successes. New Hope Group, one of the
largest agribusiness operators in China, did not
receive venture capital. It operates agribusiness
in China and abroad and has more than 380
subsidiaries and over 60,000 employees.
To make money you have to first lose money. It is
commonly said in the venture capital business
that the lemons, or losers, ripen in two and a half
years, while the plums take seven or eight years.
A start-up, venture-backed company typically
loses money, often $10 million to $25 million or
more, before sustaining profitability and going
public, usually at least five to seven years later.
In contrast, Internet or app upstarters in the 21st
century can often start making a profit, even
from day one, if their services and products are
valuable to their customers.
To create and build wealth one must relinquish
wealth. Among the most successful and growing
companies in Asia, the founders aggressively di-
lute their ownership to create ownership
throughout the company. By rewarding and
sharing the wealth with the people who con-
tribute significantly to its creation, owners moti-
vate stakeholders to make the pie bigger.
To succeed, one first has to experience failure. It
is a common pattern that the first venture fails,
yet the entrepreneur learns and goes on to cre-
ate a highly successful company. Shi Yuzu of Gi-
ant Group started off with a hit when Shi
invented and sold his trademark Chinese opera-
tion software M-6401. This was followed by a
series of popular software inventions. However,
foreign software makers swarmed to China,
which squeezed the profit margins of Giant
Group, which had been relying heavily on soft-
ware sales. Giant Group also collapsed under
the weight of massive debt incurred for a 70-
story skyscraper that was never built. Shi
bounced back from failure and re-established
online games provider, Giant Interactive, which
IPOed on the NASDAQ in 2007.
98 Part II The Opportunity
8
T. Wolfe, The Right Stuff (New York: Bantam Books, 1980), pp. 51–52.
tim81551_ch03IT.qxd 1/20/12 10:31 AM Page 98
Chapter 3 The Entrepreneurial Process 99
Entrepreneurship requires considerable thought,
preparation, and planning, yet is basically an un-
plannable event. The highly dynamic, changing
character of technology, markets, and competi-
tion makes it impossible to know all your com-
petitors today, let alone five years from now. Yet
great effort is invested in attempting to model
and envision the future. The resulting business
plan is inevitably obsolete when it comes off the
printer. This is a creative process—like molding
clay. You need to make a habit of planning and re-
acting as you constantly reevaluate your options,
blending the messages from your head and your
gut, until this process becomes second nature.
For creativity and innovativeness to prosper,
rigor and discipline must accompany the process.
For years, hundreds of thousands of patents for
new products and technologies lay fallow in gov-
ernment and university research labs because
there was no commercial discipline.
Entrepreneurship requires a bias toward action
and a sense of urgency, but also demands pa-
tience and perseverance. Andy Kuo, the co-
founder of Atlaspost.com (a social networking
service developed in Taiwan) in 2009, was not
very sure about whether Atlaspost.com could sur-
vive in the face of competition from its giant rival
Facebook. Based on his experience in assessing
and differentiating itself from strong local com-
petitors, such as Wretch.cc (Taiwan’s largest blog
service site) and PTT ( Taiwan’s largest bulletin
board system), he decided to wait and see. In
2010, both the cash flow and page views (hits) on
Atlaspost.com grew steadily, indicating that Atlas-
post.com had a niche market to sustain and grow
it. For a start-up like his, spending has to be care-
fully planned, so it might be better to wait than
act upon changes.
The greater the organization, orderliness, disci-
pline, and control, the less you will control your
ultimate destiny. Entrepreneurship requires great
flexibility and nimbleness in strategy and tactics.
One has to play with the knees bent. Overcontrol
and an obsession with orderliness are impedi-
ments to the entrepreneurial approach. As the
great race car driver Mario Andretti said, “If I am
in total control, I know I am going too slow!”
Adhering to management best practice, especially
staying close to the customer that created indus-
try leaders in the 1980s, became a seed of self-de-
struction and loss of leadership to upstart
competitors. We discussed earlier the study of
“disruptive technologies.”
To realize long-term equity value, you have to
forgo the temptations of short-term profitability.
Building long-term equity requires large, contin-
uous reinvestment in new people, products, serv-
ices, and support systems, usually at the expense
of immediate profits.
The world of entrepreneurship is not neat, tidy, lin-
ear, consistent, and predictable, no matter how much
we might like it to be that way.
9
In fact, it is from the
collisions inherent in these paradoxes that value is cre-
ated, as illustrated in Exhibit 3.1. These paradoxes il-
lustrate just how contradictory and chaotic this world
can be. To thrive in this environment, one needs to be
very adept at coping with ambiguity, chaos, and un-
certainty, and at building management skills that cre-
ate predictability. Exhibit 3.2 exemplifies this ambigu-
EXHIBIT 3.2
Time for New Technologies to Reach 25%
of the U.S. Population
Household electricity (1873) 46 years
Telephone (1875) 35 years
Automobile (1885) 55 years
Airplane travel (1903) 54 years
Radio (1906) 22 years
Television (1925) 26 years
Videocassette recorder (1952) 34 years
Personal computer (1975) 15 years
Cellular phone 13 years
Internet 7 years
iPod 5 years
Source: The Wall Street Journal, 1997. Used by permission of Dow
Jones & Co. Inc. via The Copyright Clearance Center with adap-
tion for the inclusion of Internet and iPod.
EXHIBIT 3.1
Entrepreneurship Is a Contact Sport
9
See H. H. Stevenson, Do Lunch or Be Lunch (Boston, MA: Harvard Business School Press, 1998) for a provocative argument for predictability as one of the
most powerful of management tools.
Spontaneity,
opportunism
Discipline,
processes
Remember, entrepreneurship
is a full contact sport. The
value comes in the “collision.”
tim81551_ch03IT.qxd 1/30/12 10:06 AM Page 99
ity and need for patience. For example, Apple
shipped the first iPod in November 2001. Eighteen
months later Apple sold the one millionth unit and six
months later sold another million units. In 2005 Apple
shipped 13 million units. A Merrill Lynch analyst pre-
dicts iPod sales could eventually reach 300 million.
The Higher-Potential Venture:
Think Big Enough
One of the biggest mistakes aspiring entrepreneurs
make is strategic. They think too small. Sensible as it
may be to think in terms of a very small, simple busi-
ness as being more affordable, more manageable, less
demanding, and less risky, the opposite is true. The
chances of survival and success are lower in these
small, job-substitute businesses, and even if they do
survive, they are less financially rewarding. As one
founder of numerous businesses put it, unless this
business can pay you at least five times your present
salary, the risk and wear and tear won’t be worth it.
Consider one of the most successful venture capital
investors ever, Arthur Rock. His criterion for searching
for opportunities is very simple: Look for business con-
cepts that will change the way people live or work. His
home-run investments are legendary, including Intel,
Apple Computer, Teledyne, and dozens of others.
Clearly his philosophy is to think big. Today an extraor-
dinary variety of people, opportunities, and strategies
characterize the approximately 30 million proprietor-
ships, partnerships, and corporations in the country.
Remember, high-potential ventures become high-im-
pact firms that often make the world a better place!
Nearly 11 percent of the U.S. population is actively
working toward starting a new venture.
10
More than
90 percent of start-ups have revenues of less than $1
million annually, while 863,505 reported revenues of
$1 million to $25 million—just over 9 percent of the
total. Of these, only 296,695 grew at a compounded
annual growth rate of 30 percent or more for the prior
three years, or about 3 percent. Similarly, just 3 per-
cent—1 in 33—exceeded $10 million in revenues, and
only 0.3 percent exceeded $100 million in revenues.
Not only can nearly anyone start a business, but also
a great many can succeed. While it certainly might help,
a person does not have to be a genius to create a suc-
cessful business. As Nolan Bushnell, founder of Atari,
one of the first desktop computer games in the early
1980s, and Pizza Time Theater, said, “If you are not a
millionaire or bankrupt by the time you are 30, you are
not really trying!”
11
It is an entrepreneur’s preparedness
for the entrepreneurial process that is important. Being
an entrepreneur has moved from cult status in the
1980s to rock star infamy in the 1990s to become de
rigueur at the turn of the century. Amateur entrepre-
neurship is over. The professionals have arrived.
12
A stunning number of mega-entrepreneurs
launched their ventures during their 20s. While the
rigors of new ventures may favor the “young at start,”
age is not a barrier to entry. One study showed that
nearly 21 percent of founders were over 40 when they
embarked on their entrepreneurial careers, the major-
ity were in their 30s, and just over one-fourth did so by
the time they were 25. Further, numerous examples
exist of founders who were over 60 at the time of
launch, including one of the most famous seniors,
Colonel Harland Sanders, who started Kentucky Fried
Chicken with his first Social Security check.
Smaller Means Higher Failure Odds
Unfortunately, the record of survival is not good
among all firms started. One of the most optimistic re-
search firms estimates the failure rate for start-ups is
46.4 percent. While government data, research, and
business mortality statisticians may not agree on the
precise failure and survival figures for new businesses,
they do agree that failure is the rule, not the exception.
Complicating efforts to obtain precise figures is
the fact that it is not easy to define and identify fail-
ures, and reliable statistics and databases are not
available. However, the Small Business Administra-
tion determined that in 1999 there were 588,900
start-ups, while 528,600 firms closed their doors.
13
Failure rates also vary widely across industries. In
1991, for instance, retail and services accounted for 61
percent of all failures and bankruptcies in that year.
14
The following discussion provides a distillation of a
number of failure rate studies over the past 50
years.
15
These studies illustrate that (1) failure rates
are high, and (2) although the majority of the failures
occur in the first two to five years, it may take consid-
erably longer for some to fail.
16
100 Part II The Opportunity
10
The Global Entrepreneurship Monitor, Babson College and the London Business School, May 2007.
11
In response to a student question at Founder’s Day, Babson College, April 1983.
12
Bob Davis, Partner, Highland Capital, June 2007.
13
The State of Small Business: A Report of the President, Transmitted to the Congress, 1999 (Washington, DC: Small Business Administration, 1999).
14
The State of Small Business, 1992, p. 128.
15
Information has been culled from the following studies: D. L. Birch, MIT Studies, 1979–1980; M. B. Teitz et al., “Small Business and Employment Growth in
California,” Working Paper No. 348, University of California at Berkeley, March 1981, table 5, p. 22; U.S. Small Business Administration, August 29, 1988;
B. D. Phillips and B. A. Kirchhoff, “An Analysis of New Firm Survival and Growth,” Frontiers in Entrepreneurship Research: 1988, ed. B. A. Kirchhoff et al.
(Babson Park, MA: Babson College, 1988), pp. 266–67; and BizMiner 2002 Startup Business Risk Index: Major Industry Report, Brandow Co., Inc., 2002.
16
Summaries of these are reported by A. N. Shapero and J. Gigherano, “Exits and Entries: A Study in Yellow Pages Journalism,” in Frontiers of Entrepreneur-
ship Research: 1982, ed. K. Vesper et al. (Babson Park, MA: Babson College, 1982), pp. 113–41, and A. C. Cooper and C. Y. Woo, “Survival and Failure: A
Longitudinal Study,” in Frontiers of Entrepreneurship Research: 1988, ed. B. A. Kirchhoff et al. (Babson Park, MA: Babson College, 1988), pp. 225–37.
tim81551_ch03IT.qxd 1/20/12 10:31 AM Page 100
Chapter 3 The Entrepreneurial Process 101
Government data, research, and business mortal-
ity statisticians agree that start-ups run a high risk of
failure. Another study, outlined in Exhibit 3.3, found
that of 565,812 firms one year old or less in the first
quarter of 1998 only 303,517 were still alive by the
first quarter of 2001. This is an average failure rate of
46.4 percent.
Failure rates across industries vary. The real estate
industry, with a 36.8 percent rate of start-up failure, is
the lowest. The technology sector has a high rate of
failure at 53.9 percent. The software and services seg-
ment of the technology industry has an even higher
failure rate; 55.2 percent of start-ups tracked closed
their doors. Unfortunately the record of survival is not
good among all firms started.
To make matters worse, most people think the fail-
ure rates are actually much higher. Since actions often
are governed by perceptions rather than facts, this
perception of failure, in addition to the dismal record,
can be a serious obstacle to aspiring entrepreneurs.
Still other studies have shown significant differ-
ences in survival rates among Bradstreet industry cat-
egories: retail trade, construction, and small service
businesses accounted for 70 percent of all failures
and bankruptcies. One study calculates a risk factor
or index for start-ups by industry, which sends a clear
warning signal to the would-be entrepreneur.
17
At
the high end of risk is tobacco products, and at the
low end you find the affinity and membership organ-
izations such as AAA or Welcome Wagon. “The fish-
ing is better in some streams versus others,” is a fa-
vorite saying of the authors. Further, 99 percent of
these failed companies had fewer than 100 employ-
ees. Through observation and practical experience
one would not be surprised by such reports. The im-
plications for would-be entrepreneurs are important:
Knowing the difference between a good idea and a
real opportunity is vital. This will be addressed in de-
tail in Chapter 5.
A certain level of failure is part of the “creative
self-destruction” described by Joseph Schumpeter in
his numerous writings, including Business Cycles
(1939) and Capitalism. It is part of the dynamics of
innovation and economic renewal, a process that re-
quires both births and deaths. More important, it is
also part of the learning process inherent in gaining
an entrepreneurial apprenticeship. If a business fails,
no other country in the world has laws, institutions,
and social norms that are more forgiving. Firms go
out of existence, but entrepreneurs survive and learn.
The daunting evidence of failure poses two impor-
tant questions for aspiring entrepreneurs. First, are
there any exceptions to this general rule of failure, or
are we faced with a punishing game of entrepreneur-
ial roulette? Second, if there is an exception, how
does one get the odds for success in one’s favor?
Getting the Odds in Your Favor
Fortunately, there is a decided pattern of exceptions
to the overall rate of failure among the vast majority
of small, marginal firms created each year. Most
smaller enterprises that cease operation simply do
not meet our notion of entrepreneurship. They do
not create, enhance, or pursue opportunities that re-
alize value. They tend to be job substitutes in many
instances. Undercapitalized, undermanaged, and of-
ten poorly located, they soon fail.
Threshold Concept
Who are the survivors? The odds for survival and a
higher level of success change dramatically if the ven-
ture reaches a critical mass of at least 10 to 20 people
with $2 million to $3 million in revenues and is cur-
rently pursuing opportunities with growth potential.
Exhibit 3.4 shows that based on a cross-section of all
new firms, one-year survival rates for new firms in-
crease steadily as the firm size increases. The rates
jump from approximately 54 percent for firms having
up to 24 employees to approximately 73 percent for
firms with between 100 and 249 employees.
One study found that empirical evidence supports
the liability of newness and liability of smallness argu-
ments and suggests that newness and small size make
EXHIBIT 3.3
Starts and Closures of Employer Firms, 2002–2006
Category 2002 2003 2004 2005 2006
New Firms 569,750 612,296 628,917 653,100* 649,700*
Closures 586,890 540,658 541,047 543,700* 564,900*
Bankruptcies 38,540 35,037 39,317 39,201 19,695
*Estimate.
Sources: U.S. Dept. of Commerce, Bureau of the Census; Administrative Office of the U.S. Courts;
U.S. Dept. of Labor, Employment and Training Administration.
17
BizMiner 2002 Startup Business Risk Index.
tim81551_ch03IT.qxd 1/20/12 10:31 AM Page 101
survival problematic. The authors inferred, “Perceived
satisfaction, cooperation, and trust between the cus-
tomer and the organization [are] important for the
continuation of the relationship. High levels of satis-
faction, cooperation, and trust represent a stock of
goodwill and positive beliefs which are critical assets
that influence the commitment of the two parties to
the relationship.”
18
The authors of this study noted,
“Smaller organizations are found to be more respon-
sive, while larger organizations are found to provide
greater depth of service. . . . The entrepreneurial task
is to find a way to either direct the arena of competi-
tion away from the areas where you are at a competi-
tive disadvantage, or find some creative way to develop
the required competency.”
19
After four years, the survival rate jumps from ap-
proximately 35 to 40 percent for firms with fewer than
19 employees to about 55 percent for firms with 20 to
49 employees. Although any estimates based on sales
per employee vary considerably from industry to in-
dustry, this minimum translates roughly to a threshold
of $50,000 to $100,000 of sales per employee annually.
But highly successful firms can generate much higher
sales per employee. According to several reports, the
service (38.6 percent), distribution (28.7 percent), and
production (17.8 percent) industries have the most
closed businesses after four to five years.
Promise of Growth
The definition of entrepreneurship implies the
promise of expansion and the building of long-term
value and durable cash flow streams as well.
However, as will be discussed later, it takes a long
time for companies to become established and grow.
Historically, two of every five small firms founded
survive six or more years, but few achieve growth
during the first four years.
20
The study also found
that survival rates more than double for firms that
grow, and the earlier in the life of the business that
growth occurs, the higher the chance of survival.
21
The 2007 INC. 500 exemplify this, with a three-year
growth rate of 939 percent.
22
Some of the true excitement of entrepreneurship
lies in conceiving, launching, and building firms such
as these.
Venture Capital Backing
Another notable pattern of exception to the failure
rule is found for businesses that attract start-up fi-
nancing from successful private venture capital com-
panies. While venture-backed firms account for a very
small percentage of new firms each year, in 2000, 238
of 414 IPOs, or 57 percent, had venture backing.
23
Venture capital is not essential to a start-up, nor is
it a guarantee of success. Of the companies making
the 2007 INC. 500, about 18 percent raised venture
capital and only 3 percent had venture funding at
start-up.
24
Consider, for instance, that in 2000 only
5,557 companies received venture capital.
25
How-
ever, companies with venture capital support fare
better overall. Only 46 companies with venture capi-
tal declared bankruptcy or became defunct in 2000.
26
This is less than 1 percent of companies that received
venture capital in 2000.
These compelling data have led some to conclude
that a threshold core of 10 to 15 percent of new com-
panies will become the winners in terms of size, job
creation, profitability, innovation, and potential for
harvesting (and thereby realize a capital gain).
Private Investors Join
Venture Capitalists
As noted previously, harvested entrepreneurs by the
tens of thousands have become “angels” as private in-
vestors in the next generation of entrepreneurs. Many
of the more successful entrepreneurs have created their
own investment pools and are competing directly with
venture capitalists for deals. Their operating experi-
ences and successful track records provide a compelling
102 Part II The Opportunity
18
S. Venkataraman and M. B. Low, “On the Nature of Critical Relationships: A Test of the Liabilities and Size Hypothesis,” in Frontiers in Entrepreneurship
Research: 1991 (Babson Park, MA: Babson College, 1991), p. 97.
19
Ibid., pp. 105–6.
20
B. D. Phillips and B. A. Kirchhoff, “An Analysis of New Firm Survival and Growth,” in Frontiers in Entrepreneurship Research: 1988 (Babson Park, MA:
Babson College, 1988), pp. 266–67.
21
This reaffirms the exception to the failure rule noted above and in the original edition of this book in 1977.
22
S. Greco, “The INC. 500 Almanac,” INC., October 2001, p. 80.
23
“Aftermarket at a Glance,” IPO Reporter, December 10, 2001; and “IPO Aftermarket,” Venture Capital Journal, December 2001.
24
www.inc.com/inc5000
25
Venture Economics,http://www.ventureeconomics.com/vec/stats/2001q2/us.html, July 30, 2001.
26
VentureXpert, Thompson Financial Data Services, 2001.
EXHIBIT 3.4
One-Year Survival Rates by Firm Size
Firm Size (Employees) Survival Percentage
1–24 53.6%
25–49 68.0
50–99 69.0
100–249 73.2
Source: BizMiner 2002 Startup Business Risk Index: Major Industry
Report, © 2002 BizMiner. Reprinted by permission.
tim81551_ch03IT.qxd 1/20/12 10:31 AM Page 102
Chapter 3 The Entrepreneurial Process 103
case for adding value to an upstart company. Take, for
example, highly successful Boston entrepreneur Jeff
Parker. His first venture, Technical Data Corporation,
enabled Wall Street bond traders to conduct daily trad-
ing with a desktop computer. Parker’s software on the
Apple II created a new industry in the early 1980s.
After harvesting this and other ventures, he cre-
ated his own private investment pool in the 1990s.
As the Internet explosion occurred, he was one of
the early investors to spot opportunities in start-up
ventures. In one case, he persuaded the founders of
a new Internet firm to select him as lead investor in-
stead of accepting offers from some of the most
prestigious venture capital firms in the nation. Ac-
cording to the founders, it was clear that Parker’s
unique entrepreneurial track record and his under-
standing of their business would add more value
than the venture capitalists at start-up.
Private investors and entrepreneurs such as Parker
have similar selection criteria to the venture capitalists:
They are in search of the high-potential, higher-growth
ventures. Unlike the venture capitalists, however, they
are not constrained by having to invest so much money
in a relatively short period that they must invest it in
minimum chunks of $3 million to $5 million or more.
Private investors, therefore, are prime sources for less
capital-intensive start-ups and early-stage businesses.
Bob Davis (Lycos) and Tom Stemberg (Staples) fol-
lowed a similar path with Highland Capital.
This overall search for higher-potential ventures
has become more evident in recent years. The new
e-generation appears to be learning the lessons of
these survivors, venture capitalists, private investors,
and founders of higher-potential firms. Hundreds of
thousands of college students now have been exposed
to these concepts for more than two decades, and
their strategies for identifying potential businesses
are mindful of and disciplined about the ingredients
for success. Unlike 20 years ago, it is now nearly im-
possible not to hear and read about these principles
whether on television, in books, on the Internet, or in
a multitude of seminars, courses, and programs for
would-be entrepreneurs of all types.
Find Financial Backers and Associates
Who Add Value
One of the most distinguishing disciplines of these
higher-potential ventures is how the founders iden-
tify financial partners and key team members. They
insist on backers and partners who do more than
bring just money, friendship, commitment, and moti-
vation to the venture. They surround themselves with
backers who can add value to the venture through
their experience, know-how, networks, and wisdom.
Key associates are selected because they are smarter
and better at what they do than the founder, and they
raise the overall average of the entire company. This
theme will be examined in detail in later chapters.
Option: The Lifestyle Venture
For many aspiring entrepreneurs, issues of family
roots and location take precedence. Accessibility to a
preferred way of life, whether it is access to fishing,
skiing, hunting, hiking, music, surfing, rock climbing,
canoeing, a rural setting, or the mountains, can be
more important than how large a business one has or
the size of one’s net worth. Others vastly prefer to be
with and work with their family or spouse. They want
to live in a nonurban area that they consider very at-
tractive. Take Jake and Diana Bishop, for instance.
Both have advanced degrees in accounting. They gave
up six-figure jobs they both found rewarding and sat-
isfying on the beautiful coast of Maine to return to
their home state of Michigan for several important
lifestyle reasons. They wanted to work together again
in a business, which they had done successfully earlier
in their marriage. It was important to be much closer
than the 14-hour drive to Diana’s aging parents. They
also wanted to have their children—then in their
20s—join them in the business. Finally, they wanted
to live in one of their favorite areas of the country,
Harbor Spring on Lake Michigan in the northwest tip
of the state. They report never to have worked harder
in their 50 years, nor have they been any happier.
They are growing their rental business more than 20
percent a year, making an excellent living, and creat-
ing equity value. If done right, one can have a lifestyle
business and actually realize higher potential.
Yet couples who give up successful careers in New
York City to buy an inn in Vermont to avoid the rat
race generally last only six to seven years. They dis-
cover the joys of self-employment, including seven-
day, 70- to 90-hour workweeks, chefs and day help
that do not show up, roofs that leak when least ex-
pected, and the occasional guests from hell. The
grass is always greener, so they say.
The Timmons Model: Where Theory
and Practice Collide in the Real World
How can aspiring entrepreneurs—and the investors
and associates who join the venture—get the odds of
success on their side? What do these talented and suc-
cessful high-potential entrepreneurs, their venture
capitalists, and their private backers do differently?
What is accounting for their exceptional record? Are
there general lessons and principles underlying their
successes that can benefit aspiring entrepreneurs, in-
vestors, and those who would join a venture? If so, can
these lessons be learned?
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These are the central questions of our lifetime work.
We have been immersed as students, researchers,
teachers, and practitioners of the entrepreneurial
process. As founding shareholders and investors of sev-
eral high-potential ventures (some of which are now
public), directors and advisors to ventures and venture
capital funds, a charter director and advisor to the
Kauffman Center for Entrepreneurial Leadership at
the Ewing Marion Kauffman Foundation, and as direc-
tor of the Arthur M. Blank Center for Entrepreneur-
ship at Babson College, we have each applied, tested,
refined, and tempered academic theory as fire tempers
iron into steel: in the fire of practice.
Intellectual and Practical Collisions
with the Real World
Throughout this period of evolution and revolution,
New Venture Creation has adhered to one core prin-
ciple: In every quest for greater knowledge of the
entrepreneurial process and more effective learning,
there must be intellectual and practical collisions be-
tween academic theory and the real world of prac-
tice. The standard academic notion of something
being all right in practice but not in theory is unac-
ceptable. This integrated, holistic balance is at the
heart of what we know about the entrepreneurial
process and getting the odds in your favor.
Value Creation: The Driving Forces
A core, fundamental entrepreneurial process ac-
counts for the substantially greater success pattern
among higher-potential ventures. Despite the great
variety of businesses, entrepreneurs, geographies, and
technologies, central themes or driving forces domi-
nate this highly dynamic entrepreneurial process.
It is opportunity driven.
It is driven by a lead entrepreneur and an entre-
preneurial team.
It is resource parsimonious and creative.
It depends on the fit and balance among these.
It is integrated and holistic.
It is sustainable.
These are the controllable components of the en-
trepreneurial process that can be assessed, influenced,
and altered. Founders and investors focus on these
forces during their careful due diligence to analyze the
risks and determine what changes can be made to im-
prove a venture’s chances of success.
First, we will elaborate on each of these forces to
provide a blueprint and a definition of what each
means. Then using Google as an example, we will
illustrate how the holistic, balance, and fit concepts
pertain to a start-up.
Change the Odds: Fix It, Shape It,
Mold It, Make It
The driving forces underlying successful new venture
creation are illustrated in Exhibit 3.5. The process
starts with opportunity, not money, strategy, net-
works, team, or the business plan. Most genuine op-
portunities are much bigger than either the talent
and capacity of the team or the initial resources avail-
104 Part II The Opportunity
Business plan
Communication
Fits and gaps
Ambiguity Exogenous forces
Leadership Creativity
Uncertainty Capital market context
Opportunity Resources
Team
Founder
Sustainability: For environment, community, and society
EXHIBIT 3.5
The Timmons Model of the Entrepreneurial Process
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Chapter 3 The Entrepreneurial Process 105
able to the team. The role of the lead entrepreneur
and the team is to juggle all these key elements in a
changing environment. Think of a juggler bouncing
up and down on a trampoline that is moving on a
conveyor belt at unpredictable speeds and direc-
tions, while trying to keep all three balls in the air.
That is the dynamic nature of an early-stage start-up.
The business plan provides the language and code
for communicating the quality of the three driving
forces of the Timmons Model and of their fit and
balance.
In the entrepreneurial process depicted in the
Timmons Model, the shape, size, and depth of the
opportunity establish the required shape, size, and
depth of both the resources and the team. We have
found that many people are a bit uncomfortable
viewing the opportunity and resources somewhat
precariously balanced by the team. It is especially
disconcerting to some because we show the three key
elements of the entrepreneurial process as circles,
and thus the balance appears tenuous. These reac-
tions are justified, accurate, and realistic. The entre-
preneurial process is dynamic. Those who recognize
the risks better manage the process and garner more
return.
The lead entrepreneur’s job is simple enough.
He or she must carry the deal by taking charge of
the success equation. In this dynamic context, ambi-
guity and risk are actually your friends. Central to
the homework, creative problem solving and strate-
gizing, and due diligence that lie ahead is analyzing
the fits and gaps that exist in the venture. What is
wrong with this opportunity? What is missing?
What good news and favorable events can happen,
as well as the adverse? What has to happen to make
it attractive and a fit for me? What market, technol-
ogy, competitive, management, and financial risks
can be reduced or eliminated? What can be
changed to make this happen? Who can change it?
What are the least resources necessary to grow the
business the farthest? Is this the right team? By im-
plication, if you can determine these answers and
make the necessary changes by figuring out how to
fill the gaps and improve the fit and attract key
players who can add such value, then the odds for
success rise significantly. In essence, the entrepre-
neur’s role is to manage and redefine the risk–re-
ward equation—all with an eye toward sustainabil-
ity. Because part of the entrepreneur’s legacy is to
create positive impact without harming the envi-
ronment, the community, or society, the concept of
sustainability appears as the underlying foundation
in the model.
The Opportunity At the heart of the process is
the opportunity. Successful entrepreneurs and in-
vestors know that a good idea is not necessarily a good
opportunity. For every 100 ideas presented to in-
vestors in the form of a business plan or proposal, usu-
ally fewer than 4 get funded. More than 80 percent of
those rejections occur in the first few hours; another
10 to 15 percent are rejected after investors have read
the business plan carefully. Fewer than 10 percent at-
tract enough interest to merit a more due diligence
thorough review that can take several weeks or
months. These are very slim odds. Countless hours
and days have been wasted by would-be entrepre-
neurs chasing ideas that are going nowhere. An im-
portant skill for an entrepreneur or an investor is to be
able to quickly evaluate whether serious potential ex-
ists, and to decide how much time and effort to invest.
John Doerr is a senior partner at one of the most
famous and successful venture capital funds ever,
Kleiner, Perkins, Caufield & Byers, and is considered
by some to be the most influential venture capitalist of
his generation. During his career, he has been the
epitome of the revolutionaries described earlier, who
have created new industries as lead investors in such
legends as Sun Microsystems, Compaq Computer,
Lotus Development Corporation, Intuit, Genentech,
Millennium, Netscape, and Amazon.com. Regardless
of these past home runs, Doerr insists, “There’s never
been a better time than now to start a company. In the
past, entrepreneurs started businesses. Today they in-
vent new business models. That’s a big difference, and
it creates huge opportunities.”
27
Another venture capitalist recently stated, “Cycles
of irrational exuberance are not new in venture in-
vesting. The Internet bubble burst, we came back to
earth, and then we began another period of excessive
valuation that is subsiding in late 2007 with a credit
squeeze.”
28
Exhibit 3.6 summarizes the most important char-
acteristics of good opportunities. Underlying market
demand—because of the value-added properties of
the product or service, the market’s size and 20-plus
percent growth potential, the economics of the busi-
ness, particularly robust margins (40 percent or
more), and free cash flow characteristics—drives the
value creation potential.
We build our understanding of opportunity by first
focusing on market readiness: the consumer trends
and behaviors that seek new products or services.
Once these emerging patterns are identified, the as-
piring entrepreneur develops a service or product
concept, and finally the service or product delivery
system is conceived. We then ask the questions artic-
ulated in the exhibit.
27
“John Doerr’s Start-Up Manual,” Fast Company, February–March 1997, pp. 82–84.
28
Ernie Parizeau, Partner, Norwest Venture Partners, June 2007.
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These criteria will be described in great detail in
Chapter 5 and can be applied to the search and evalu-
ation of any opportunity. In short, the greater the
growth, size, durability, and robustness of the gross
and net margins and free cash flow, the greater the
opportunity. The more imperfect the market, the
greater the opportunity. The greater the rate of
change, the discontinuities, and the chaos, the greater
is the opportunity. The greater the inconsistencies in
existing service and quality, in lead times and lag
times, and the greater the vacuums and gaps in infor-
mation and knowledge, the greater is the opportunity.
Resources: Creative and Parsimonious
One of the most common misconceptions among un-
tried entrepreneurs is that you first need to have all
the resources in place, especially the money, to suc-
ceed with a venture. Thinking money first is a big
mistake. Money follows high-potential opportunities
conceived of and led by a strong management team.
Investors have bemoaned for years that there is too
much money chasing too few deals. In other words,
there is a shortage of quality entrepreneurs and
opportunities, not money. Successful entrepreneurs
devise ingeniously creative and stingy strategies to
marshal and gain control of resources (Exhibit 3.7).
Surprising as it may sound, investors and successful
entrepreneurs often say one of the worst things that
can happen to an entrepreneur is to have too much
money too early.
Mark Vadon, founder of Blue Nile Inc., was able
to sell his idea of an online diamond retail store and
raise a total of $38 million in 1999. Although Blue
Nile eventually turned out to be a respectable success
story, it may have raised too much capital too early. In
an effort to build a national brand image, Blue Nile
advertised excessively and this led to significant oper-
ating losses since its inception in 1999 to 2002. This
may be due to the pressure entrepreneurs often en-
counter to use the capital they have raised to justify
the investment from venture capitalists. With so much
cold cash on hand, buying mind share through adver-
tising seemed logical. It could be argued that the In-
ternet bubble and the 911 terrorist attacks were the
culprits behind the lacklustre beginning for Blue Nile.
However, with less ammunition, Blue Nile would
have been forced to market its diamonds creatively
rather than hiring premium advertising agencies and
running costly television advertising campaigns.
On the other hand, Howard Head is a wonderful,
classic example of succeeding with few resources. He
developed the first metal ski, which became the mar-
ket leader, and then the oversize Prince tennis racket;
developing two totally unrelated technologies is a rare
feat. Head left his job at a large aircraft manufacturer
during World War II and worked in his garage on a
shoestring budget to create his metal ski. It took more
than 40 versions before he developed a ski that worked
and could be marketed. He insisted that one of the
biggest reasons he finally succeeded is that he had so
little money. He argued that if he had complete financ-
ing he would have blown it all long before he evolved
the workable metal ski.
Bootstrapping is a way of life in entrepreneurial
companies and can create a significant competitive
106 Part II The Opportunity
EXHIBIT 3.6
The Entrepreneurial Process
Is Opportunity Driven*
Market demand is a key ingredient to measuring an opportunity:
• Is customer payback less than one year?
• Do market share and growth potential equal 20 percent
annual growth and is it durable?
• Is the customer reachable?
Market structure and size help define an opportunity:
• Emerging and/or fragmented?
• $50 million or more, with a $1 billion potential?
• Proprietary barriers to entry?
Margin analysis helps differentiate an opportunity from an idea:
• Low-cost provider (40 percent gross margin)?
• Low capital requirement versus the competition?
• Break even in 1– 2 years?
• Value added increase of overall corporate P/E ratio?
Opportunity
M
a
rk
e
t s
e
g
m
e
n
ts
*Durability of an opportunity is a widely misunderstood concept. In
entrepreneurship, durability exists when the investor gets her
money back plus a market or better return on investment.
EXHIBIT 3.7
Understand and Marshall Resources,
Don’t Be Driven by Them
Minimize and control
versus
Maximize and own
Resources
Unleashing creativity
Financial resources
Assets
People
Your business plan
Think cash last!
B
ootstrapping
R
elationships
tim81551_ch03IT.qxd 1/20/12 10:31 AM Page 106
Chapter 3 The Entrepreneurial Process 107
advantage. Doing more with less is a powerful com-
petitive weapon. Effective new ventures strive to
minimize and control the resources, but not neces-
sarily own them. Whether it is assets for the business,
key people, the business plan, or start-up and growth
capital, successful entrepreneurs think cash last.
Such strategies encourage a discipline of leanness,
where everyone knows that every dollar counts, and
the principle “conserve your equity” (CYE) becomes
a way of maximizing shareholder value.
The Entrepreneurial Team There is little dis-
pute today that the entrepreneurial team is a key in-
gredient in the higher-potential venture. Investors
are captivated “by the creative brilliance of a com-
pany’s head entrepreneur: A Mitch Kapor, a Steve
Jobs, a Fred Smith . . . and bet on the superb track
records of the management team working as a
group.”
29
Venture capitalist John Doerr reaffirms
General George Doriot’s dictum: I prefer a Grade A
entrepreneur and team with a Grade B idea, over a
Grade B team with a Grade A idea. Doerr stated, “In
the world today, there’s plenty of technology, plenty
of entrepreneurs, plenty of money, plenty of venture
capital. What’s in short supply is great teams. Your
biggest challenge will be building a great team.”
30
Famous investor Arthur Rock articulated the im-
portance of the team more than a decade ago. He put
it this way: “If you can find good people, they can al-
ways change the product. Nearly every mistake I’ve
made has been I picked the wrong people, not the
wrong idea.”
31
Finally, as we saw earlier, the ventures
with more than 20 employees and $2 million to $3
million in sales were much more likely to survive and
prosper than smaller ventures. In the vast majority of
cases, it is very difficult to grow beyond this without a
team of two or more key contributors.
Clearly a new venture requires a lead entrepre-
neur that has personal characteristics described in
Exhibit 3.8. But the high-potential venture also re-
quires interpersonal skills to foster communications
and, therefore, team building.
Exhibit 3.8 summarizes the important aspects of
the team. These teams invariably are formed and led
by a very capable entrepreneurial leader whose track
record exhibits both accomplishments and several
qualities that the team must possess. A pacesetter
and culture creator, the lead entrepreneur is central
to the team as both a player and a coach. The ability
and skill in attracting other key management mem-
bers and then building the team is one of the most
valued capabilities investors look for. The founder
who becomes the leader does so by building heroes
in the team. A leader adapts a philosophy that re-
wards success and supports honest failure, shares the
wealth with those who help create it, and sets high
standards for both performance and conduct. We will
examine in detail the entrepreneurial leader and the
new venture team in Chapter 8.
Importance of Fit and Balance Rounding
out the model of the three driving forces is the con-
cept of fit and balance between and among these
forces. Note that the team is positioned at the bottom
of the triangle in the Timmons Model (Exhibit 3.5).
Imagine the founder, the entrepreneurial leader of
the venture, standing on a large ball, balancing the tri-
angle over her head. This imagery is helpful in appre-
ciating the constant balancing act because opportu-
nity, team, and resources rarely match. When
envisioning a company’s future, the entrepreneur can
ask, What pitfalls will I encounter to get to the next
boundary of success? Will my current team be large
enough, or will we be over our heads if the company
grows 30 percent over the next two years? Are my re-
sources sufficient (or too abundant)? Vivid examples
of the failure to maintain a balance are everywhere,
such as when large companies throw too many re-
sources at a weak, poorly defined opportunity. For ex-
ample, Lucent Technologies’ misplaced assumption of
slowness to react to bandwidth demand resulted in
an almost 90 percent reduction in market capitaliza-
tion.
29
W. D. Bygrave and J. A. Timmons, Venture Capital at the Crossroads (Boston: Harvard Business School Press, 1992), p. 8.
30
Fast Company, February–March 1997, p. 84.
31
A. Rock, “Strategy vs. Tactics from a Venture Capitalist,” Harvard Business Review, November–December 1987, pp. 63–67.
EXHIBIT 3.8
An Entrepreneurial Team Is a Critical
Ingredient for Success
Team
An entrepreneurial leader
• Learns and teaches—faster, better
• Deals with adversity, is resilient
• Exhibits integrity, dependability, honesty
• Builds entrepreneurial culture and organization
Quality of the team
• Relevant experience and track record
• Motivation to excel
• Commitment, determination, and persistence
• Tolerance of risk, ambiguity, and uncertainty
• Creativity
• Team locus of control
• Adaptability
• Opportunity obsession
• Leadership and courage
• Communication
P
assion
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Sustainability as a Base Building a sustain-
able venture means achieving economic, environmen-
tal, and social goals without compromising the same
opportunity for future generations. The sea change in
entrepreneurship regarding environment, community,
and society is driven by many factors. We are seeing an
elevated social awareness concerning a wide range of
sustainability-related issues, including human rights,
food quality, energy resources, pollution, global warm-
ing, and the like. By understanding these factors, the
entrepreneur builds a firmer base, girding the venture
for the long term.
While the drawings oversimplify these incredibly
complex events, they help us to think conceptually—
an important entrepreneurial talent—about the com-
pany-building process, including the strategic and
management implications of striving to achieve bal-
ance, and the inevitable fragility of the process. Visu-
ally, the process can be appreciated as a constant bal-
ancing act, requiring continual assessment, revised
strategies and tactics, and an experimental approach.
By addressing the types of questions necessary to
shape the opportunity, the resources, and the team, the
founder begins to mold the idea into an opportunity,
and the opportunity into a business, just as you would
mold clay from a shapeless form into a piece of art.
Exhibit 3.9 shows how this balancing act evolved for
Google from inception through its initial public and
secondary offerings. Back in 1996, online search was a
huge, rapidly growing, but elusive opportunity. There
were plenty of early entrants in the search space, but
none had yet broken out of the pack. Stanford graduate
students Larry Page and Sergey Brin began to collabo-
rate on a search engine called BackRub, named for its
unique ability to analyze the “back links” pointing to a
given Web site. Within a year, their unique approach to
link analysis was earning their dorm-room search en-
gine a growing reputation as word spread around cam-
pus. Still, they had no team and no capital, and their
server architecture was running on computers they
borrowed from their computer science department.
Such a mismatch of ideas, resources, and talent
could quickly topple out of the founders’ control and
fall into the hands of someone who could turn it
into a real opportunity. At this tenuous point, the
founders would have seen something like the first
figure, Exhibit 3.9(a), with the huge search engine
opportunity far outweighing the team and resources.
The gaps were major.
Enter entrepreneur and angel investor Andy Bech-
tolsheim, one of the founders of Sun Microsystems.
The partners of the search engine (now named
Google, a variant of googol, an immense number),
met Bechtolsheim very early one morning on the
porch of a Stanford faculty member’s home in Palo
Alto. Impressed, but without the time to hear the de-
tails, Bechtolsheim wrote them a check for $100,000.
From there, Page and Brin went on to raise a first
round of $1 million. The partners were now in a posi-
tion to fill the resource gaps and build the team.
In September 1998 they set up shop in a garage in
Menlo Park, California, and hired their first em-
ployee: technology expert Craig Silverstein. Less
than a year later, they moved to a new location, which
108 Part II The Opportunity
Business plan
Communication
Fits and gaps
• Innumerable: Money and
management
Ambiguity Exogenous forces
Leadership Creativity
Uncertainty Capital market context
Brain trust
Very large,
growing, and
undefined
Team
Resources
Very limited
Opportunity
Founder
Sustainability: For environment, community, and society
EXHIBIT 3.9(a)
Google––Classic Resource Parsimony, Bootstrapping—Journey
through the Entrepreneurial Process: At Start-Up, a Huge Imbalance
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Chapter 3 The Entrepreneurial Process 109
EXHIBIT 3.9(b)
Google—Marshaling of Team and Resources to Pursue
Opportunity—Journey through the Entrepreneurial Process:
At Venture Capital Funding, toward New Balance
Business plan
Communication
Fits and gaps
• Resources and team
• Catching up
Ambiguity Exogenous forces
Leadership Creativity
Uncertainty
Capital market context
Larger and growing
faster
Team
Money to
launch
Opportunity Resources
Founder
Sustainability: For environment, community, and society
quickly became a crush of desks and servers. In June
1999 the firm secured a round of funding that in-
cluded $25 million from Sequoia Capital and Kleiner,
Perkins, Caufield & Byers—two of the leading ven-
ture capital firms in Silicon Valley. The terrible office
gridlock was alleviated with a move to Google’s cur-
rent headquarters in Mountain View, California.
This new balance in Exhibit 3.9(b) created a justi-
fiable investment. The opportunity was still huge and
growing, and some competitors were gaining market
acceptance as well. To fully exploit this opportunity,
attract a large and highly talented group of managers
and professionals, and create even greater financial
strength than competitors like Yahoo!, the company
had to complete an initial public stock offering (IPO).
Following the close of that IPO in the summer of
2004, Google was worth more than $25 billion, giving
it a first-day market capitalization greater than that of
Amazon.com, Lockheed Martin, or General Motors.
Within a year the company had raised another $4 bil-
lion in a secondary public offering.
By 2007 Google (see Exhibit 3.9(c)) had a share
price in the range of $500 and was larger and stronger
in people and resources than any direct competitor.
The company was the place to work and employed
over 10,000 of the best and brightest in the industry.
Could such an unstoppable force as Google be blind-
sided and eclipsed by a new disruptive technology,
just as Apple Computer and Microsoft bludgeoned
IBM and Digital Equipment? While right now such a
prospect might seem impossible given Google’s mo-
mentum, scale, and ability to attract talent, history is
quite clear on this: The answer is not whether, but
when, Google will be overtaken.
This iterative entrepreneurial process is based on
both logic and trial and error. It is both intuitive and
consciously planned. It is a process not unlike what
the Wright brothers originally engaged in while cre-
ating the first self-propelled airplane. They con-
ducted more than 1,000 glider flights before suc-
ceeding. These trial-and-error experiments led to the
new knowledge, skills, and insights needed to actually
fly. Entrepreneurs have similar learning curves.
The fit issue can be appreciated in terms of a ques-
tion: This is a fabulous opportunity, but for whom?
Some of the most successful investments ever were
turned down by numerous investors before the
founders received backing. Intuit received 20 rejections
for start-up funding by sophisticated investors. One for-
mer student, Ann Southworth, was turned down by 24
banks and investors before receiving funding for an eld-
erly extended care facility. Ten years later, the company
was sold for an eight-figure profit. Time and again, there
can be a mismatch between the type of business and in-
vestors, the chemistry between founders and backers, or
a multitude of other factors that can cause a rejection.
Thus how the unique combination of people, opportu-
nity, and resources come together at a particular
time may determine a venture’s ultimate chance for suc-
cess.
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The potential for attracting outside funding for a
proposed venture depends on this overall fit and how
the investor believes he or she can add value to this fit
and improve the fit, risk–reward ratio, and odds for
success. Exhibit 2.12 in the previous chapter shows
the possible outcome.
Importance of Timing Equally important is
the timing of the entrepreneurial process. Each of
these unique combinations occurs in real time, where
the hourglass drains continually and may be friend,
foe, or both. Decisiveness in recognizing and seizing
the opportunity can make all the difference. Don’t
wait for the perfect time to take advantage of an op-
portunity: There is no perfect time. Most new busi-
nesses run out of money before they can find enough
customers and the right teams for their great ideas.
Opportunity is a moving target.
Recent Research Supports the Model
The Timmons Model originally evolved from doctoral
dissertation research at the Harvard Business School,
about new and growing ventures. Over nearly three
decades, the model has evolved and been enhanced
by ongoing research, case development, teaching,
and experience in high-potential ventures and ven-
ture capital funds. The fundamental components of
the model have not changed, but their richness and
the relationships of each to the whole have been
steadily enhanced as they have become better under-
stood. Numerous other researchers have examined a
wide range of topics in entrepreneurship and new
venture creation. The bottom line is that the model,
in its simple elegance and dynamic richness, har-
nesses what you need to know about the entrepre-
neurial process to get the odds in your favor. As each
of the chapters and accompanying cases, exercises,
and issues expand on the process, addressing individ-
ual dimensions, a detailed framework with explicit
criteria will emerge. If you engage this material fully,
you cannot help but improve your chances of success.
Similar to the INC. 500 companies mentioned ear-
lier, the Ernst & Young LLP Entrepreneur of the Year
winners were the basis of a major research effort con-
ducted by the National Center for Entrepreneurship
Research at the Kauffman Center for Entrepreneurial
Leadership, with a specific focus on 906 high-growth
companies.
32
These findings provide important
benchmarks of the practices in a diverse group of in-
dustries among a high-performing group of compa-
nies.
110 Part II The Opportunity
32
D. L. Sexton and F. I. Seale, Leading Practices of Fast Growth Entrepreneurs: Pathways to High Performance (Kansas City, MO: Kauffman Center for
Entrepreneurial Leadership, 1997).
EXHIBIT 3.9(c)
Google—Building and Sustaining the Enterprise; Rebalancing—Journey
through the Entrepreneurial Process: At IPO, a New Balance
Business plan
Communication
Fits and gaps
• How large and profitable
can we become? Ambiguity Exogenous forces
Leadership Creativity
Uncertainty Capital market context
•Great balance
sheet
•Great free cash
flow
•Even bigger and
faster growing
•Competitors
Team
Can play with
the best
Opportunity
Resources
Founder
Sustainability: For environment, community, and society
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Chapter 3 The Entrepreneurial Process 111
EXHIBIT 3.10
Leading Practices
Leading marketing practices of fast-growth firms
Deliver products and services that are perceived as highest quality to expanding segments.
Cultivate pacesetting new products and services that stand out in the market as best of the breed.
Deliver product and service benefits that demand average or higher market pricing.
Generate revenue flows from existing products and services that typically sustain approximately 90 percent of the present revenue
base, while achieving flows from new products and services that typically expand revenue approximately 20 per cent annually.
Generate revenue flows from existing customers that typically sustain approximately 80 percent of the ongoing revenue base, while
achieving flows from new customers that typically expand revenue flows by about 30 percent annually.
Create high-impact, new product and service improvements with development expenditures that typically account for no more than
approximately 6 percent of revenues.
Utilize a high-yield sales force that typically accounts for approximately 60 percent of marketing expenditures.
Rapidly develop broad product and service platforms with complementary channels to help expand a firm’s geographic marketing area.
Leading financial practices of fast-growth firms
Anticipate multiple rounds of financing (on average every 2.5 years).
Secure funding sources capable of significantly expanding their participation amounts.
Utilize financing vehicles that retain the entrepreneur’s voting control.
Maintain control of the firm by selectively granting employee stock ownership.
Link the entrepreneur’s long-term objectives to a defined exit strategy in the business plan.
Leading management practices of fast-growth firms
Use a collaborative decision-making style with the top management team.
Accelerate organizational development by assembling a balanced top management team with or without prior experience of working
together.
Develop a top management team of three to six individuals with the capacity to become the entrepreneur’s entrepreneurs. Align the
number of management levels with the number of individuals in top management.
Establish entrepreneurial competency first in the functional areas of finance, marketing, and operations. Assemble a balanced board
of directors composed of both internal and external directors.
Repeatedly calibrate strategies with regular board of directors meetings.
Involve the board of directors heavily at strategic inflection points.
Leading planning practices of fast-growth firms
Prepare detailed written monthly plans for each of the next 12 to 24 months and annual plans for three or more years.
Establish functional planning and control systems that tie planned achievements to actual performance and adjust management
compensation accordingly.
Periodically share with employees the planned versus actual performance data directly linked to the business plan.
Link job performance standards that have been jointly set by management and employees to the business plan.
Prospectively model the firm based on benchmarks that exceed industry norms, competitors, and the industry leader.
Chapter Summary
We began to demystify entrepreneurship by
examining its classic start-up definition and a
broader, holistic way of thinking, reasoning, and
acting that is opportunity obsessed and leadership
balanced.
Entrepreneurship has many metaphors and poses
many paradoxes.
Getting the odds in your favor is the entrepreneur’s
perpetual challenge, and the smaller the business, the
poorer are the odds of survival.
Most significantly, these results reconfirm the im-
portance of the model and its principles: the team, the
market opportunity, the resource strategies, most of
the individual criteria, the concept of fit and balance,
and the holistic approach to entrepreneurship.
Exhibit 3.10 summarizes the 26 leading practices
identified in four key areas: marketing, finances, man-
agement, and planning. (A complete version of the
study is available from the National Center for Entre-
preneurship Research,http://www.kauffman.org.)
tim81551_ch03IT.qxd 1/20/12 10:31 AM Page 111
MIND STRETCHERS
Have You Considered?
1. Who can be an entrepreneur? When?
2. More than 80 percent of entrepreneurs learn the crit-
ical skills they need after age 21. What does this
mean for you?
3. In your lifetime, the odds are that leading firms today
such as Microsoft, Google, Dell Computer, American
Airlines, McDonald’s, and American Express will be
knocked off by upstarts. How can this happen? Why
does it present an opportunity, and for whom?
4. What do you need to be doing now, and in the next
12 months, to get the odds in your favor?
5. List 100 ideas and then pick out the best five that
might be opportunities. How can these become op-
portunities? Who can make them opportunities?
112 Part II The Opportunity
Study Questions
1. Can you define what is meant by classic entrepreneur-
ship and the high-potential venture? Why and how are
threshold concepts, covering your equity, bootstrap-
ping of resources, fit, and balance important?
2. How many additional metaphors and paradoxes
about entrepreneurship can you write down?
3. “People don’t want to be managed, they want to be
led.” Explain what this means and its importance and
implications for developing your own style and lead-
ership philosophy.
4. What are the most important determinants of success
and failure in new businesses? Who has the best and
worst chances for success, and why?
5. What are the most important things you can do to get
the odds in your favor?
6. What criteria and characteristics do high-growth en-
trepreneurs, venture capitalists, and private investors
seek in evaluating business opportunities? How can
these make a difference?
7. Define and explain the Timmons Model. Apply it and
graphically depict, as in the Google example, the first
five years or so of a new company with which you are
familiar.
8. What are the most important skills, values, talents,
abilities, and mind-sets one needs to cultivate as an
entrepreneur?
Internet Resources for Chapter 3
www.sba.gov/advo/research The Office of Advocacy of the
U.S. Small Business Administration (SBA) is an
independent voice for small business within the federal
government. This site is a useful resource for small
business research and statistics on a wide range of topics.
www.ypo.org/ More that 11,000 young global leaders in
90 nations rely on one exclusive peer network that
connects them to exchange ideas, pursue learning, and
share strategies to achieve personal and professional
growth and success.
www.inc.com/inc5000/ The magazine has increased its
database to include 5,00 private businesses. As in
previous years, the top 500 fastest growing firms are
ranked.
Thinking big enough can improve the odds signifi-
cantly. Higher-potential ventures are sought by suc-
cessful entrepreneurs, venture capitalists, and private
investors.
The Timmons Model is at the heart of spotting and
building the higher-potential venture and under-
standing its three driving forces: opportunity, the
team, and resources. The concept of fit and balance
is crucial.
Recent research on CEOs of fast-growth ventures na-
tionwide adds new validity to the model.
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Chapter 3 The Entrepreneurial Process 113
Preparation Questions
1. Apply the Timmons entrepreneurship framework
(entrepreneur–opportunity–resources) to analyze
this case. Pay particular attention to the entrepre-
neur’s traits and how he gathered resources for
his venture.
2. Discuss the revenue model. Will the revenue
streams suggested be able to sustain the
business?
3. Discuss the growth strategy. What additional mar-
ket(s), besides Singapore, would you recommend
pursuing as Loftwork moves ahead?
As the plane touched down at Changi Airport, Singa-
pore, Kawai Toshimasa recounts the tasks at hand await-
ing him during his 10 months’ stint in Singapore. A proj-
ect manager of Loftwork, he has just returned
from Japan after a meeting with Chiaki Hayashi, the
cofounder of the company. Besides a renewal project that
involves making the Web site bilingual (Japanese and
English), he is also tasked with exploring ideas
of how Loftwork can launch its operations internationally.
While he has several conceptual ideas, he realizes
that he will need a wider pool of ideas and alternatives,
preferably from different perspectives. Prior to his return
to Singapore, he was informed by Chiaki that a trio of
university students from Singapore Management Univer-
sity had approached her, stating their interest in offering
their ideas and business knowledge to help Loftwork in
its international expansion plans.
A meeting has been set between the trio of students
and himself, and despite being down with a slight cold,
he looks forward to meeting the students and hearing
their proposals.
Background of Loftwork
Founded in 2001 as a Web-based forum for budding
graphic artists in Japan to come together to share their
artwork, Loftwork has grown to a full-fledged company
providing Web site management and IT consultancy
services. Termed as creators, Loftwork’s database of
graphic designers, Web site developers and creative
artists has grown to over 12,000 in eight years. It is also
the official vendors for big clients such as NEC and
Sony Corporation in Japan.
As its database of artists hosting their artwork in-
creased steadily, the demand for Loftwork’s services
also increased correspondingly, with even overseas-
based companies expressing interest. In light of these
positive developments, the founders felt that it is time to
improve Loftwork’s existing servers in preparation for a
bigger pool of artists, as well as to expand its operations
overseas.
In addition to improving server capability, Loftwork
had other considerations, such as improving the search
and blog functions (the two functions that artists in
the database hope Loftwork would improve), retaining
the existing clean layout and simplicity of navigating the
Web site, staying cost-efficient (changing servers was
usually expensive) and remaining compatible to the dif-
ferent markets Loftwork was considering to enter.
On the other hand, while overseas expansion is
an attractive option, Loftwork had to consider which
markets to enter first since it has had no previous
overseas experience. It was also considering what busi-
ness model it should use when entering its selected
markets.
Company Mission
Loftwork’s company mission is to support communi-
cation between creators and producers. Inspired by
an America-based company, eBay, Loftwork aims to
create a platform for distributing creativity freely as
well as a marketplace for various creators to display
artworks.
Loftwork’s History
Inspired by how eBay is fully consumer-driven and
everyone has the freedom to post their items online for
sale, Chiaki Hayashi, an avid lover of Japanese art and
design, decided to set up Loftwork for budding creators
like herself to display their art pieces and to allow those
who appreciated the work to bid for it.
The cofounder is also adamant that there should be
no advertisements on the Web site, and she also does
not allow artists to pay a premium so that his or her
work would be featured more prominently. These meas-
ures are meant to maintain the integrity and credibility
of the Web site: customers know that the most popular
artists are there because of the quality and relevance of
their art rather than because of their ability to buy good
advertisement spots.
This protection of artistic quality and credibility has
encouraged many freelance professionals to sign up
with the Web site, and it has also resulted in many
freelance jobs being matched with the artists. Word
got around that Loftwork’s Web site provides more
job opportunities than others, resulting in an increase
Case
Loftwork
This case was written by Kenneth Tay De Wei, Andy Soh Han Chong,
and Benjamin Ho Chern Yang of Singapore Management University,
with the guidance of Yinglan Tan.
tim81551_ch03IT.qxd 1/30/12 10:06 AM Page 113
in sign-ups. Although the database of 12,000 artists
is considered only mid-sized in Japan, it is the big-
gest consolidation of freelance professionals, whereas
other databases consisted of amateurs or semi-
professionals.
Since its inception in 2001, Loftwork has moved
on from being just a database company to one
that provides project management services, where
dedicated teams of project managers, creative
designers and Web site developers together help
clients to plan and develop Web sites and IT applica-
tions using the information and resources from its
database.
Loftwork’s Competitors
Having the biggest consolidation of freelance profess-
ionals has given Loftwork a competitive advantage
over its competitors, and resulted in a strong brand
name, synonymous with reliability and quality in the
market.
Competitors in Japan include pixiv (www.pixiv.net),
which has a larger database of artists than Loftwork but
made up mainly of amateurs and semi-professionals,
and Creatorz (www.creatorz.jp), which is a print com-
pany that extended its product lines to include a design
database. These companies’ services are more geared
towards graphic designers and their value proposition
is good design integrated with printing services at lower
prices.
Global competitors include Coroflot (www.coroflot.
com), which has the biggest creative design database in
the world, consisting of product, interior, graphic and
art designers. Coroflot has a unique value proposition
of Web advertisements and allowing designers to take
an active approach in soliciting their services. Another
competitor, oDesk (www.odesk.com), allows companies
to track the progress of a designer’s work and for the
designers to bill the companies, on an hourly basis in
the system, and it has a huge following.
Loftwork’s Features
Loftwork’s database currently pays a license fee to use
the Google appliance server, which has the following
features:
Downloading of Content
Users who sign up with Loftwork are included in the
database, and they can freely upload images onto a
common platform. Visitors to the site who wish to con-
tact the designer or purchase the rights to any of the im-
ages would then email the Loftwork administrator for the
necessary arrangements to be made. Loftwork will earn
a commission from the transaction.
Portfolio Search
Users can view all the artwork either by the default dis-
play (this displays the most recently uploaded artwork)
or by other criteria, such as artist name, art category,
and date. The search function is important for filtering
the most relevant items for the user, rather than have him
or her sieve through tons of photographs.
One of the most popular searches is for thematic de-
signs (especially for the Christmas and New Year holi-
days), because the Japanese like to download these to
accompany their e-Cards and other e-greetings. This
search function is also linked to the main Google search
function.
Blogs
Users can also link their own blogs to the Loftwork data-
base so that visitors can get to know the personalities
and portfolio of the artists instead of merely browsing
their work.
Competitions
This is one of the most important features in the Loftwork
database as it provides job opportunities and publicity
for the freelance artists. Companies that need designs
for a particular product launch or Web site can choose
to host competitions by offering prize money to the best
three artists who submit their artwork, according to the
design specifications, within a stipulated time. The win-
ning designs and artists’ names would also be hosted
on Loftwork’s Web site.
Loftwork’s Problems
Loftwork’s main issues can be separated into two main
parts: expansion of the creators’ network, Business to Busi-
ness (B2B), and new revenue models for users, Business to
Customer (B2C). In B2B, Loftwork’s main issue is to ex-
pand its existing creators’ network to include not only
Japan but the rest of the world, primarily targeting Asia as
a market. In line with Loftwork’s vision of becoming the
biggest creators’ network in the world, the recruitment of
new creators as well as the retainment of existing creators
will remain paramount concerns for the company.
Currently, Japanese designers make up 90 percent of
Loftwork creators’ network. It is of utmost importance that
designers from other countries are recruited as part of the
expansion plans. To do so, Loftwork would need a sustain-
able revenue model.
114 Part II The Opportunity
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Chapter 3 The Entrepreneurial Process 115
Loftwork is uninterested in using advertising as the
main revenue model for loftwork.com. The end objective
of distributing creativity freely over the Web must continue
to be met. An initial idea was to capitalize on its large cre-
ators’ database and commercializing it through a licens-
ing model. Customers would then pay a fee to Loftwork to
use these resources.
Loftwork soon realized that there were multiple issues in
this proposition. First, customers could bypass Loftwork
completely by contacting the creators directly. This serves
no purpose of selling the database as a need to gain ac-
cess. Second, creating barriers to prevent creators from be-
ing connected to potential customers might make them less
motivated to join Loftwork’s network. The network is mostly
made up of freelance designers who use Loftwork as a
platform to showcase their art work. Hence, attracting cus-
tomers is one of the top value propositions to join Loftwork.
The current company and structure are as follows:
Loftwork has two main groups of networks: the creators’
network and the users’ network. Both value propositions
would need to be discussed for the whole system to
work. In between the networks is Loftwork, which con-
sists of two main groups of people. The first group is the
Sales and Marketing team, which consists of 200 staff
members; their job scope includes search engine opti-
mizations, recruitment of customers, online advertising,
marketing of Loftwork creators’ network as well as find-
ing customers for Loftwork’s Web site development team.
The other group primarily takes charge of the cre-
ators’ database. Within this group, there exists a project
development team which helps customers to handle var-
ious design projects. This is one of the main sources of
revenue for Loftwork.
The CEO of Loftwork, Chiaki Hayashi, would like to
commercialize Loftwork’s database and find a sustain-
able revenue model over the following one to two years.
This has to be done in two phases. Phase One includes
the expansion of the creators’ network over multiple
countries, with Asia as the primary focus. Phase Two in-
cludes finding alternative revenue models apart from
project management and development.
Company Web site
Loftwork is seeking to improve its existing server by mov-
ing to Microsoft Bing, because Google appliance’s per-
formance was not as good; in addition, Microsoft Bing
is available free-of-charge and provides an API function
(where XML site marks could be searched).
However there are some issues with the improve-
ments:
Open-Source Threat
The new server uses buddypress.com, a new interface
system, and currently an open-source software. The
problem is that front-end users and visitors can view all
the information about the artists, including address and
other contact details. In addition, a new “groups” func-
tion allows users to join a particular group where they
can share information and discuss ideas as if they are in
an open forum. The migration to this system would thus
bypass Loftwork as the intermediary between the artist
and the customer, and result in loss of transaction rev-
enue for Loftwork. However, this issue may not be as se-
rious outside of Japan because not many companies are
able to communicate with the Japanese in their native
language and would still require Loftwork to be an inter-
mediary.
Improving Tag Functions
The current tag and search function is not user-friendly
enough because users must fill in their own words or tags,
Current
Company
and
Structure
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116 Part II The Opportunity
which usually results in users spending too much time
looking for the information they need and in sub-optimal
results, especially for first-time users. Since Loftwork earns
from the transactions made, it is crucial that successful
searches be made more quickly. The new tag and search
functions should thus provide both common tags as well
as personalized tags that will be unique to a user, based
on his usage profile. Microsoft Bing could provide a new
function which allows users to search for pictures based
on a genre similar to previous searches (similar to having
a thesaurus for pictures), rather than to start from scratch.
But would this be a value-add to the existing functions?
Translation
One of the most important features that must be im-
proved, should Loftwork expand overseas, is the trans-
lation of the Web site and database from Japanese to
other languages. However, translation requires a new
interface system and incurs a huge cost. How would
Loftwork mitigate this capital outlay requirement?
Loftwork Proposed Solutions
Before any solution is proposed to Loftwork, an under-
standing of the company structure as well as its business
model is important. A SWOT framework is used to iden-
tify the various opportunities and weaknesses of the
business model.
Loftwork Revenue Model
Loftwork new revenue model is divided into three main
areas.
Commercializing of Database
Apart from creators’ contact details, a large selection of
artworks and designs also reside on the database.
Currently, the revenue model works by providing cus-
tomers—vendors or event organizers—with a means of
obtaining a new design to meet their needs, by way of
design competitions. From these competitions, the large
selection of artwork submissions that do not win the
prize are, at present, stored on the platform and made
available for free download.
Loftwork does hold competitions on the Web site to
help source for the best design for its customers. The
creator with the selected design would be paid by the
customer. However, out of the one design chosen, there
are 99 more designs “unutilized “by any other means.
These designs have commercial value which could po-
tentially pull in revenue for Loftwork.
Currently, the only revenue model for utilizing the
database is by holding competitions for specific vendors
or event organizers. One design would be paid and the
rest of them would be placed in the platform for free
download.
These artwork pieces could, potentially, attract rev-
enue. As such a commercial value could be attached to
every design, with the pricing category determined by its
quality or complexity. Ordinary artwork could either be
available for free download while more complex one
could be watermarked and downloadable for a small
fee. Customers may also purchase the artwork, together
with its copyright, for a one-time premium fee. Such art-
work would then cease to be available for further down-
loads and be removed from the platform.
How would Loftwork benefit from this model? The
transactions would happen only through this platform
and Loftwork would charge a commission for all down-
loads. This capitalization of the database resources
would be a new revenue channel for Loftwork.
Sale of Design through Merchandise
Loftworks can also branch off into customized product
manufacturing. A rating and comment feature would be
implemented for all artworks uploaded onto the plat-
form.
1
Artwork that accumulates the highest number of
votes indicates popularity and there is commercial value
for converting these designs into products. Most cus-
tomers choose design without any plans about converting
those designs into products. Loftwork could reach out to
suppliers and suggest incorporating these highly rated
designs into their existing products (e.g., t-shirts, blankets,
etc.) to increase value. Loftwork could also partner with
manufacturers to produce merchandise with these
popular designs. The revenue would then be split among
Loftwork, the design creators, and the manufacturers.
1
A “Like” comment voting feature would accompany all the artwork and
users could then randomly vote for the artwork they like. Votes and
download information would be collected and published publicly.
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Chapter 3 The Entrepreneurial Process 117
A rating and comment feature would then be imple-
mented for all artworks uploaded onto the platform. Art-
work that accumulates the highest number of votes indi-
cates popularity, and suggests that there is a commercial
viability for converting those designs into products.
Customers would most probably look at the top few
designs and may choose to buy the design they want,
along with the copyright.
2
If Loftwork is able to sell these
highly rated designs to suppliers or to liaise product man-
ufacturing with various manufacturers and suppliers, cus-
tomers could either order these products through Loft-
work’s portal or buy products through the suppliers.
Sale through Rebates and Loyalty
Points
A loyalty scheme, consisting of rebates and discounts,
could be implemented to provide an incentive for custom-
ers to revisit the portal and continue to make purchases.
Most online purchases are transacted based on cus-
tomers’ needs, yet there are no incentives for recurring cus-
tomers who have made purchases from the various portals.
The idea proposed is a rebate and loyalty discount system
that acts as an incentive for recurring customers to revisit the
portal to make another purchase. For every purchase of an
artwork, rebate points would be given. As this concept is
relatively new, especially on the Internet, it would definitely
create a significant impact, especially when the users have
a choice of different artworks from various providers.
Growth Strategy
One idea that is currently proposed to Loftwork is the
adoption of the 3 “E” Framework: Enhance, Extend,
and Expand, to chart the company’s growth for the next
three years.
Overseas Expansion
Expanding overseas would be an attractive option for
Loftwork, one that would leverage on its existing data-
base of Japanese art and freelance professional design-
ers who are cheaper than agencies. This move would al-
low Loftwork to move into markets that are lucrative and
have an interest in Japanese culture and art. It would
also increase Loftwork’s presence overseas, allow over-
seas designers to join the database and thereby grow
the resource pool, and provide additional sources of
revenue for Loftwork.
However, overseas expansion brings along several
key considerations. Questions such as which market to
enter and what the various entry modes are must be an-
swered. Loftwork would also have to consider whether
the foreign business environments and demand condi-
tions are similar to Japan. Thought would also have to
be given to whether there are any other business models
or product line extensions that Loftwork can consider to
expand overseas.
Singapore
A country in the Asia Pacific region and part of ASEAN
(Association of Southeast Asian Nations), Singapore
has often been labeled as a miracle by the Western
countries for its strong economic development that
led to its rise from a Third World Country to a First
World Country status in 40 years. Once a British colony,
Singapore experienced rapid economic growth with
manufacturing as the main engine from the 1970s, after
achieving independence in 1965. Singapore’s favor-
2
Currently, most customers choose design without any plans about con-
verting those designs into products.
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118 Part II The Opportunity
3https://www.cia.gov/library/publications/the-world-factbook/
geos/sn. html.
4http://app.cpib.gov.sg/cpib_new/user/default.aspx?pgID=147.
5
Communicaid, Doing Business in Singapore, Singapore Social and
Business Culture, 2007.
6http://www.kwintessential.co.uk/resources/global-etiquette/
singapore.html.
able position on the trading map also allowed the
country to thrive on entrepot trade. In the new millen-
nium, Singapore has shifted its focus away from un-
skilled manufacturing industries to a knowledge-based
industry, with strong sectors in the electronics and
biotechnological industries. The service sector has also
emerged as the main source of economic growth, with
over 70 percent of the country’s GDP dependent on the
service sector.
Despite a small geographical area of only 687
square kilometers and a population of 4.6 million,
3
Sin-
gapore’s economic development has led to a rise in
standard of living and an increase in the people’s
spending power. High literacy rates have also resulted
in consumers becoming more sophisticated. A demo-
cratic country, Singapore has also been listed as the fifth
least corrupted country in the world,
4
ensuring
that business operations are carried out in a transparent
manner.
Doing Business in Singapore
Business Culture
Singapore’s business culture is largely Asian-centered in
nature despite Western influences. Singaporeans, in
general, function well in groups, and have proven to be
highly-effective team players, perhaps as a result of an
education system that has not placed much emphasis on
individualism.
In business, friendships are based on honor, integrity,
and good character. Due to the relatively strict laws gov-
erning Singapore, business dealings are usually transpar-
ent and illegal dealings are usually avoided. Singapo-
rans are generally cautious and place emphasis on
inking deals in black and white. It also takes time for for-
eign businessmen to establish and maintain contacts as
Singaporeans highly regard warm and personal relation-
ships. As Singaporeans believe in doing business with
the right individuals, long-standing personal relationships
will be the key to establishing a network of contacts.
Negotiations are usually conducted at a slow pace
and Singaporeans are likely to bargain hard on prices
and deadlines.
5
Hence, it is vital that foreign business-
men maintain their patience during negotiations and
come prepared with a list of concessions that one may
be willing to make to seal the business deal.
6
Eventual
decisions are based on consensus due to the group-
driven culture of Singaporeans.
A key aspect of Singapore’s business culture is the con-
cept of “face.” Predominately influenced by Chinese cul-
ture, “face” refers to one’s self image, social status or rep-
utation.
7
In Singapore, one’s social status or reputation is
important, hence, businessmen tend to avoid losing
“face” via embarrassment by their counterparts. Foreign
businessmen should avoid putting their Singaporean
counterparts in an embarrassing scenario, for example,
being ridiculed or made to admit a mistake in front of
others, especially those of lower social standing. Losing
“face” may result in the end of business relationships. In
Singapore, it is common for businessmen to “over-
promise” in order not to show their incompetence, al-
though they may not be able to deliver these “promises.”
Advantages
With high literacy rates, Singapore has a capable and
efficient workforce. Efficient administration and minimal
bureaucracy in business dealings creates an ease of do-
ing business in Singapore.
8
As Southeast Asia’s most
developed nation, Singapore also serves as a regional
hub to the Southeast Asian market, which has huge po-
tential with emerging economies such as Vietnam. Sin-
gapore also has high computer and Internet penetration
rate, where it is common for households to have at least
one desktop computer. Technology-savvy Singaporeans
often rely on the Internet for information and online serv-
ices are used widely.
Japanese companies seeking to expand into the
Singapore market can also receive help and informa-
tion from the Japanese Chamber of Commerce and
Industry (JCCI).
9
It provides information to Japanese
companies on the procedures of setting up business op-
erations in Singapore. Management consultants also
provide companies with advice and insight of the Singa-
pore market while periodic reviews of Singapore’s
economy is conducted to keep companies updated
about the latest trends and development of the economy.
Singapore’s Creative Industry
Overview
In Singapore, the creative industries are defined as in-
dustries that are inspired by cultural and artistic creativ-
ity and have the potential to create economic value
through the generation and exploitation of intellectual
property.
10
For the years following independence, Singapore’s
economy was driven by traditional manufacturing and
more recently the service industry. With innovation be-
ing highlighted as the key to success in the ever-chang-
ing landscape of the global market, government initia-
tives are targeting the imaginative and creative capacity
of the people to generate new ideas and create value.
7http://www.randomwire.com/chinese-culture-101-part-6-core-
concepts.
8http://www.singapore-business.com/info_papers2.htm.
9http://www.jcci.org.sg/.
10http://app.mica.gov.sg/Default.aspx?tabid=66.
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Chapter 3 The Entrepreneurial Process 119
The Ministry of Information, Communication, and the
Arts (MICA), a government agency, has been tasked to
lead an initiative entitled Creative Industries Develop-
ment Strategy (CIDS).
11
Efforts will be focused on laying
the foundation of the creative industry by equipping in-
dustry players with creative capabilities in order to re-
main competitive in the global market. Three key sectors
of the industry are the arts, design and media, where
creative talents will be nurtured in Singapore’s bid to be-
come the new Asia Creative Hub.
Competitors to Loftwork
There exist several incumbents in Singapore’s creative
industry, which offer similar, undifferentiated services in
the form of Web designing and graphic designing.
Companies such as KillerPlush, EnVistar, Above1, and
Akyweb specialize in Web designs and they have a
pool of in-house Web developers and graphic design-
ers. As such, despite a talented pool of Web develop-
ers, the companies can only offer prospective clients
choices from a limited number of designs created by
their in-house creators. In recent years, to leverage
on the designs created, companies such as KillerPlush
has also branched out into sale of T-shirts based on their
creators’ designs.
While companies listed above have only a limited
number of creators onboard, customers may choose to
approach freelance designers. Web sites that provide
the link and contacts to a wide range of freelance de-
signers include www.guru.com and www.openad.net,
with the latter focusing more on design for advertising.
However, to view the gallery of portfolios and submit
requests for designs, customers must pay a member-
ship fee.
Creative Art and Web Design
Schools
With increasing focus on innovation and aesthetics,
Singapore has started to mold future creative talent
through schools that specialize in the creative field.
Institutions such as the LASALLE College of the Arts and
Nanyang Academy of Fine Arts have been established
to cater to the creative industry. Up-and-coming institu-
tions include the School of the Arts (SOTA) and the Sin-
gapore University of Technology and Design; both are
currently undergoing construction. Private institutions,
such as School of Art and New Media, First Media De-
sign School and Raffles Design Institute, also provide
curriculum in art and design. Students in Singapore can
also apply for courses in multimedia and Web design
at one of five polytechnics in Singapore. The diverse
range of educational institutes clearly shows the inten-
tion of the Singapore government to focus on the cre-
ative industries as a new source of economic growth in
the near future.
Opportunities in Singapore
There are currently no companies in Singapore that of-
fer similar service concepts of Loftwork. Despite the
increasing focus on aesthetics, design and innovation,
Web site development in Singapore has yet to attain the
standards of being creative and captivating. Further,
customers are only offered a limited number of design
choices as companies have only a fixed number of
in-house creators. On the other hand, Loftwork, with its
number of creators exceeding 12,000, would provide
clients with an extensive range of design choices,
hence, ensuring that only the best designs would be
chosen.
As part of a business culture that thrives on efficiency
and effectiveness, Loftwork could serve as a destination
for clients who need design ideas within a short turn-
around time. Loftwork’s ability to present a wide range
of design options for clients to choose will become its
core competency and competitive advantage over its
competitors.
The new generation of consumers in Singapore has
also become more sophisticated and generally de-
mands more from companies and services, in terms of
aesthetics and design. Consumers now demand more
than mere basic functions and tend to focus more on
things that capture their attention on first sight. With
Loftwork’s diverse pool of creators, consumers in Singa-
pore can look forward to designs in terms of graphics,
advertising and Web designs that are captivating and
unique.
Singaporeans, in general, view Japanese designs
as creative and superior to those of Singapore, and
Japanese designs are widely accepted in Singapore.
In the Cannes Lions Awards Ceremony, held annually,
Singapore, despite being top-ranked in Southeast
Asia, lags behind Japan in terms of the total num-
ber of awards won. Singapore’s award tally of 66
in the preceding five years pales in comparison to
Japan’s 89.
12
Moving Forward
Toshimasa sat at his desk, pondering the list of ideas
and alternative revenue models suggested by the trio of
university students. Each idea looked attractive in its
own way, yet marketing research has yet to be carried
out to gauge the likelihood of success. He would also
11http://app.mica.gov.sg/Default.aspx?tabid=66.
12http://www.marketing-interactive.com/news/9310.
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120 Part II The Opportunity
have to seek the approval of the Loftwork’s founders,
who seemed keen on these ideas but suggested that
they may be less concrete than desired.
Although Singapore was not part of Loftwork’s initial
international expansion plans, Loftwork realizes that
there may be potential in it, despite the relatively small
consumer and creator base. Toshimasa thought about
the potential of having Loftwork’s Web sites in different
languages for different countries, with an eventual goal
of having a global network. He recollected his idea
about setting up a subsidiary in each country which will
adopt Loftwork’s framework and tap on its database,
and how this could fit in with the revenue models pre-
sented. He was certain that there was potential for Loft-
work on the global stage, but it would certainly take
time and effort for it to be established. To move Loftwork
into the global arena, the right revenue model and for-
mula must be determined.
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