Description
This detailed illustration related to venture opportunity, concept, and strategy capitalism and the technology entrepreneur.
1
Venture Opportunity, Concept,
and Strategy
E
ntrepreneurs have important roles in creating new businesses that fuel
progress in societies worldwide. The entrepreneur uses a combination
of innovation and technology to foster new, effective means of activity
in all facets of life. The capable entrepreneur learns to identify, select, describe,
and communicate the essence of an opportunity that has attractive potential to
become a successful venture. The entrepreneur is able to describe the valuable
contributions of a venture and create the design of a business model that can
be sustained by a competitive advantage. The venture team creates a road map
(strategy) that can, with good chance, effectively lead to the commercialization
of the new product or service in the marketplace. Finally, the venture team
builds an innovation strategy that fosters the sustainable advantage of the tech-
nology venture. ?
P A R T 1
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Capitalism and the Technology
Entrepreneur
The empires of the future are the empires of the mind.
Winston Churchill
3
C H A P T E R 1
CHAPTER OUTLI NE
1.1 The Entrepreneur and the Challenge
1.2 Entrepreneurial Activity Based on
Innovation and Technology
1.3 Entrepreneurial Capital and the
Value of a Venture
1.4 Building an Enterprise
1.5 Economics, the Entrepreneur, and
Productivity
1.6 The Knowledge Economy
1.7 The Firm
1.8 Dynamic Capitalism and Creative
Destruction
1.9 The Sequential Case: AgraQuest
1.10 Summary
ntrepreneurs provide the creative force
capitalism needs to work. Entrepreneurs
strive to make a difference in our world
and contribute to its betterment. They are also
motivated by achievement, independence, and the
accumulation of wealth. In this chapter, we de-
scribe the characteristics of the people called en-
trepreneurs and the process they use to create new
enterprises. We describe the four types of entre-
preneurship used to respond to opportunity: incre-
mental, innovative, imitative, and rent-seeking.
Engineers and scientists often respond to the chal-
lenge to build important new enterprises by com-
bining their knowledge of new technologies with
sound business practices. The technology entre-
preneur’s role in the improvement of an economy
and the role of knowledge in the creation and
growth of new enterprises are described. Finally,
the ?rm or organization as the key structure for a
new enterprise and the system of innovation used
by new ventures are depicted. ?
What enables global capitalism?
E
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CHAPTER 1 Capitalism and the Technology Entrepreneur 4
1.1 The Entrepreneur and the Challenge
Wealth and social change are created by people who strike out on their own
and are devoted to worthy tasks and enterprises that make a difference in the
world. An entrepreneur is a person who undertakes the creation of an enter-
prise or business that has the chance of pro?t (or success). Entrepreneurs dis-
tinguish themselves through their ability to accumulate and manage knowledge,
as well as their ability to mobilize resources to achieve a speci?ed business or
social goal [Kuemmerle, 2002a].
The entrepreneur is a bold, imaginative deviator from established business
methods and practices who constantly seeks the opportunity to commercialize
new products, technologies, processes, and arrangements (Baumol, 2002). Entre-
preneurs are skilled in applied creativity, thrive in response to challenge, and look
for unconventional solutions. They experience challenges, create visions for solu-
tions, build stories that explain their visions, and then act to be part of the solu-
tion. They forge new paths and risk failure, but persistently seek success.
The Horatio Alger myth describes the rise of a young man from rags to
riches through entrepreneurism. In this myth, the entrepreneurial hero personi-
?es freedom and creativity. A century ago, this was a common possibility,
although actually limited to a few success stories such as those of John D.
Rockefeller and Andrew Carnegie. The key virtue was self-reliance and dili-
gence. While this possibility remains for a few today, almost all entrepreneurs
are educated, experienced, and skilled. Furthermore, entrepreneurship is an atti-
tude and capability that diffuses beyond the founding team to all members of
its organization. For most, collective entrepreneurship represents the path
toward a promising economic future. Most growing ?rms strive to infuse the
culture of the entire company with the entrepreneurial spirit. Thomas Edison
created an enterprise that became General Electric. Steve Jobs and Steve Wozniak
founded Apple Computer, one of the ?rst personal computer companies. These
entrepreneurs combined their knowledge of valuable new technologies with
sound business practices to build important new enterprises that continued to
maintain their entrepreneurial spirit for years after founding.
Entrepreneurship is more than the creation of a business and the wealth
associated with it. It is focused on the creation of a new enterprise that serves
society and makes a positive change. Entrepreneurs can create great ?rms that
exhibit performance, leadership, reputation, and longevity. Examples of new
enterprises that have made a signi?cant contribution to life in our day are pro-
vided in Table 1.1. What organization would you add to the list?
Entrepreneurs seek to achieve a certain goal by starting an organization that
will address the needs of society and the marketplace. Entrepreneurs are prepared
to respond to a challenge to overcome obstacles and build a business. When faced
with dif?cult situations, they are prepared to make the extra effort to overcome
these obstacles and succeed. As Martin Luther King, Jr. (1963), said, “The ulti-
mate measure of a man is not where he stands in moments of comfort and con-
venience, but where he stands at times of challenge and controversy.”
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1. 1 The Entrepreneur and the Challenge 5
For an entrepreneur, a challenge is a call to respond to a dif?cult task and
the commitment to undertake the required enterprise. Richard Branson, the cre-
ator of Virgin Group, reported (Garrett, 1992): “Ever since I was a teenager, if
something was a challenge, I did it and learned it. That’s what interests me
about life—setting myself tests and trying to prove that I can do it.”
Entrepreneurs are resilient people who pounce on problems, determined to
?nd a solution. The elements of the ability to overcome a challenge are sum-
marized in Table 1.2. Most entrepreneurs create a compelling story that brings
in more partners on a journey into unmapped challenges. They concentrate on
husbanding resources, open-mindedness about the future, and learning as they
go in order to create something of value [Sarasvathy, 2004].
Over nearly a decade, Fred Smith worked on perfecting a solution to
what he viewed as a growing problem of organizations to ?nd ways to rap-
idly ship products to customers. To address this challenge, Smith saw an oppor-
tunity to build a freight-only airline that would ?y packages to a huge air-
port and then sort, transfer, and ?y them onto their destinations overnight.
He turned in his paper describing this plan to his Yale University professor,
TABLE 1.1 Important new enterprises that started or emerged from
1973 to 2005.
? Amazon.com ? Google
? Amgen ? Intel
? Apple Computer ? Microsoft
? Cisco ? Nature Conservancy
? Conservation International ? Nokia Corporation
? Dell Computer ? Qualcomm
? Doctors Without Borders / Medecins Sans Frontières ? Southwest Airlines
? eBay ? Starbucks
? Federal Express (FedEx) ? Virgin Group
? Genentech ? Wal-Mart
TABLE 1.2 Elements of the ability to overcome a challenge.
? Able to deal with a series of tough
issues
? Able to create solutions and work to
perfect them
? Able to handle many tasks
simultaneously
? Resilient in the face of setbacks
? Willing to work hard and not expect
easy solutions
? Well-developed problem-solving skills
? Able to learn and acquire the skills
needed for the tasks at hand
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CHAPTER 1 Capitalism and the Technology Entrepreneur 6
who gave it an average grade, said to be a C. After he graduated, Smith
served four years as a U.S. Marine Corps of?cer and pilot. Following his mil-
itary service, he spent a few years in the aviation industry building up his
experience and knowledge of the industry. Then, he prepared a fully devel-
oped business plan for an overnight freight service. By 1972, he had secured
financial backing, and Federal Express took to the air in 1973. Federal
Express became a new way of shipping goods that revolutionized the cargo
shipping business worldwide.
Smith and other entrepreneurs recognize a change in society and its needs,
and then, based on their knowledge and skill, they respond with a new way of
doing things. Typically, entrepreneurs create a novel response to an opportu-
nity by recombining people, concepts, and technologies into an original solu-
tion. Smith saw that the combination of dedicated cargo airplanes, computer-
assisted tracking systems, and overnight delivery would serve a new market
that required just-in-time delivery of critically important parts, documents, and
other valuable items. Smith adapted computer technology to manage the complex
task of tracking and moving packages.
When does a person know that he or she is ready to assume the mantle of
entrepreneur? When people are ready to assume the risk and effort and are truly
motivated to organize an enterprise to meet the entrepreneurial challenge, they
will most likely know it since they will be unable to think of anything but the
challenge. A straightforward test of a potential entrepreneur is provided in
Table 1.3. Take the test and see if you are ready. Perhaps the right opportunity
has not yet emerged, but when it does, you can prepare now to seize it.
An opportunity is a favorable juncture of circumstances with a good
chance for success or progress. It is the job of the entrepreneur to locate new
ideas and put them into action. Entrepreneurs respond to opportunities by
exploiting changes, needs, or new skills or knowledge within the context of
their industry. Thus, entrepreneurship may be described as the identi?cation
and exploitation of previously unexploited opportunities [Hitt, 2001]. Fortu-
nately for the reader, it is a systematic, repeatable discipline that can be learned.
Entrepreneurship can consist of innovation or the introduction of creative
change. Change is generally considered as part of the entrepreneurial expec-
tation. In that sense, the entrepreneur is a change agent. Change agents thrive
in a land of opportunity in which people can rise from nothing to greatness,
depending on their talents and their hard work. Entrepreneurs act as change
agents for progress when, as Abraham Lincoln said in 1864, they are offered
“an open ?eld and a fair chance for industry, enterprise and intelligence.”
Since only about one-third or fewer new ventures survive their ?rst three
years, entrepreneurial ventures can be viewed as experiments or probes into a
market. This approach is consistent with the goals of change agents who are
willing to accept failure as a potential outcome of their venture.
Regardless of whether the right opportunity has emerged, a person can
learn to act as an entrepreneur by trying the activity in a low-cost manner. The
would-be entrepreneur should, if possible, engage in this sequence: do it, then
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1. 2 Entrepreneurial Activity Based on Innovation and Technology 7
re?ect on it. To avoid the realm of daydreams and fantasy, a person needs to
start the practice of experimenting, testing, and learning about his or her entre-
preneurial self [Ibarra, 2002]. The ?rst step is to craft small experiments in new
activities with entrepreneurial teams or small ventures. Through these small
experiments, the entrepreneur develops new contacts and mentors. He or she
may also ?nd a challenge that serves as a catalyst for a new venture.
1.2 Entrepreneurial Activity Based on Innovation
and Technology
Capitalism and enterprise are about having a dynamic economy and innova-
tion, but ultimately, they rest on the actions of businesspeople who assume and
accept the bene?ts and risks of an initiative. It is people acting as leaders,
organizers, and motivators who are the central ?gures of modern economic
activity. Most entrepreneurs strive to make a productive, useful contribution to
their society while creating wealth for shareholders and themselves. Pro?t
maximization, however, is not the only goal of these creative businesspeople,
who also value independence and leadership challenges.
TABLE 1.3 Entrepreneur test.
Are you an entrepreneur? Answer each question by checking yes or no.
Yes No
1. When I am faced with a challenge, I am con?dent that I can work
through it. ___ ___
2. I want to be ?nancially independent and be rewarded for my
accomplishments. ___ ___
3. Trying something new is attractive, even if I know the risk of failure
is signi?cant. ___ ___
4. I would prefer to gain independence and control my destiny. ___ ___
5. Building a new enterprise is important to me. ___ ___
6. My experiences during my youth and early career have shown me the
bene?ts of starting a new enterprise. ___ ___
7. Starting a new business some day soon is always in my thoughts. ___ ___
8. I like working with others and can provide leadership when called upon. ___ ___
9. Our society and my family provide a strong, supportive base for my
initiatives. ___ ___
10. I possess strong technical and relationship skills in the industry I wish
to enter. ___ ___
Add your total score for yes and no: ___ ___
Seven or more yes answers mean that you may be ready to act as an entrepreneur in the
near future.
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CHAPTER 1 Capitalism and the Technology Entrepreneur 8
Three factors make up entrepreneurial action: (1) a person or group who
is responsible for the enterprise, (2) the purposeful enterprise, and (3) initia-
tion and growth of the enterprise. The individuals responsible for the organi-
zation were described in section 1.1. The purposeful enterprise may be a new
?rm organized for a suitable and attractive purpose or a new unit within or sep-
arated from an existing business corporation. Furthermore, the organization
may be based on incremental changes, innovation, imitation, or rent-seeking
behavior.
The ?rst type of enterprise emphasizes the founding and management of a
business that entails moderate novelty, such as a new restaurant in town. The
founder may still be thought of as an entrepreneur. In the second form, the entre-
preneur engages in an innovative activity that results in novel methods, processes,
and products. The third, imitative venture, is founded by an entrepreneur who is
involved in the rapid dissemination of an innovative idea or process. This per-
son or group ?nds a novel innovation and transfers it to another region or coun-
try. The ?nal means of entrepreneurship is called rent-seeking or pro?t-seeking
and focuses on the use of regulation, standards, or laws to appropriate some of
the value of a monopoly that is generated somewhere in the economy. These four
types of entrepreneurship are summarized in Table 1.4.
In this book, we emphasize the creation of the innovative venture that will
have a signi?cant impact on a region, a nation, or the world. A minor or sig-
ni?cant incremental innovation may afford the entrepreneur a new opportunity.
Alternatively, a radical or transforming innovation may provide an entrepreneur
an important and very signi?cant opportunity to make a productive contribution.
The third factor of entrepreneurial action is the initiation and growth of the
enterprise. To start an innovative venture, the entrepreneurial team identi?es an
attractive opportunity that also matches the team’s skills. The opportunity offers
the entrepreneurial team a favorable chance to solve a problem or meet a need
by creating or applying a technology.
Technology includes devices, artifacts, processes, tools, methods, and
materials that can be applied to industrial and commercial purposes. Intel was
formed to apply semiconductor technology to the design and manufacture of
semiconductor circuits. Microsoft was formed to create and distribute computer
software products for applications in industry and the home. The four steps
that an entrepreneur typically follows to start a business appear in Table 1.5.
TABLE 1.4 Four types of entrepreneurship.
1. Incremental venture: The founding and management of a routine business exhibiting
modest novelty
2. Innovative venture: The initiation and operation of a business based on an innovation
3. Imitative venture: The identi?cation and imitation of a novel business or venture
4. Rent-seeking venture: The founding of a business that utilizes standards, regulations,
and laws to share in some of the value of an existing enterprise
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1. 2 Entrepreneurial Activity Based on Innovation and Technology 9
Perhaps the most critical aspect of enterprise formation is narrowing in on
the best opportunity. Most people see many opportunities but ?nd it dif?cult
to know when to select a speci?c one and act on it. One useful method of
selecting an opportunity is to look for the sweet spot that matches opportunity
with interests and capabilities, as shown in Figure 1.1. Most entrepreneurs-to-
be will experience a set of good opportunities that ?ow by over time. They
TABLE 1.5 Four steps to starting a business.
1. The founding team or individual has the necessary skills or acquires them.
2. The team members identify the opportunity that attracts them and matches their skills.
They create a solution to match the opportunity.
3. They acquire (or possess) the ?nancial and physical resources necessary to launch the
business by locating investors and partners.
4. They complete an arrangement or contract with their partners, with investors, and within
the founder team to launch the business and share the ownership and wealth created.
Attractive opportunity
• Timely
• Solvable
• Important
• Profitable
• Favorable context
Interest, passions,
and commitment
• Like to do the tasks
• Like the challenge
• Committed to do what
is necessary
Capabilities
and skills
The
sweet
spot
• Good at the
needed tasks
• Willingness
to learn
FIGURE 1.1 Selecting the right opportunity by ?nding the sweet spot.
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CHAPTER 1 Capitalism and the Technology Entrepreneur 10
also will have interests, activities, and tasks they like to do. Furthermore, they
have capabilities or skills and knowledge that qualify them for certain tasks.
Good opportunities display the characteristics of a potential to solve impor-
tant problems within economic constraints. Usually, they will look attractive
because they can be pro?table to the new venture as well as valuable to the
customers. An attractive opportunity displays the ?ve characteristics listed in
Table 1.6. The entrepreneur seeks a timely, solvable, important problem with a
favorable context that can lead to pro?tability.
It is the entrepreneur who adds value to the opportunity by creating a
response to a good opportunity. The opportunity, and a general response to it,
is not unique—many recognize but few possess the relevant passion to solve
the problem as well as the capability to do so. It is really the passion and
capabilities that distinguish the entrepreneurial team. The selection process
consists of looking for the best match of opportunity, capabilities, and interest
(passion).
Jeremy Jaech attended the University of Washington, receiving a BA in
mathematics in 1977. He joined the computer science graduate program after
graduation, completing his master’s degree in 1980, while working at Boeing on
computer graphics. In 1983, he joined Atex, a maker of computer systems for
newspapers. After nine months, Atex closed the facility where he worked, and
Jaech needed to ?nd an opportunity for himself. His capabilities were computer
programming for graphics, and his interest was to achieve independence and suc-
cess. His passion was for developing software for desktop computer graphics.
His former boss at Atex suggested they form their own company that would cre-
ate software for desktop computer graphics. Jaech was a good technical leader,
and his boss was a good manager; together, they made a solid team. In 1984,
the two men founded Seattle-based Aldus Corporation, which created the software
called PageMaker that launched desktop publishing on personal computers.
By 1989, although Aldus had grown, Jaech was faced with a new chal-
lenge. He wanted to broaden the product line, but his partner/CEO wanted
to remain focused on desktop publishing. Jaech saw an opportunity to cre-
ate a Windows-based software product for general-purpose drawing. He
matched his capabilities with his interests and in 1990 started a new ?rm
that was later called Visio Corporation. When the company’s ?rst product
was shipped in 1992, it had 14 employees. It went public as a 200-person
TABLE 1.6 Five characteristics of an attractive opportunity.
? Timely—a current need or problem
? Solvable—a problem that can be solved
in the near future with accessible
resources
? Important—the customer deems the
problem or need important.
? Pro?table—the customer will pay for the
solution and allow the enterprise to
pro?t.
? Context—a favorable regulatory and
industry situation
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1. 3 Entrepreneurial Capital and the Value of a Venture 11
company in 1995 and was eventually purchased in January 2000 by
Microsoft Corporation for $1.5 billion in stock. Jaech served as a vice pres-
ident of Microsoft for another year. Jaech had exploited two successive
opportunities: Aldus and Visio both used his ability to design software while
matching his capabilities and skills with his passions and interest to create
two important companies.
To summarize, entrepreneurship is centrally focused on the identi?cation
and exploitation of previously unexploited opportunities. An opportunity is a
favorable juncture of circumstances with a good chance for success or progress.
Fortunately for the reader, successful entrepreneurs do not possess a rare entre-
preneurial gene. Entrepreneurship is a systematic, organized, rigorous disci-
pline that can be learned and mastered (Drucker, 2002). Eight skills of entre-
preneurship are listed in Table 1.7.
1.3 Entrepreneurial Capital and the Value
of a Venture
The quality of entrepreneurial capability is expressed as its ability to generate
value, future income, and wealth. One measure of the quality of entrepreneur-
ial capability is entrepreneurial capital (EC), which can be formulated as a
combination of entrepreneurial competence and entrepreneurial commitment
(Erikson, 2002). Thus, we say that
Entrepreneurial Capital ?entrepreneurial competence
?entrepreneurial commitment
or
EC ?Ecomp ?Ecomm (1.1)
where Ecomp is entrepreneurial competence and Ecomm is entrepreneurial
commitment. Note that the symbol ? is a multiplication sign, but it must be
recognized that this equation is qualitative in nature.
TABLE 1.7 Eight skills of entrepreneurship.
? Entrepreneurs assess and mitigate
uncertainty and risk associated with the
initiation of the enterprise
? Entrepreneurs provide an innovative
contribution or at least a contribution
that encompasses novelty or originality
? Entrepreneurs Enable and encourage a
collaborative team of people who have
the capabilities and knowledge
necessary for success
? Entrepreneurs Initiate and operate a
purposeful enterprise
? Entrepreneurs Operate within the
context and industrial environment at the
time of initiation
? Entrepreneurs Identify and screen timely
opportunities
? Entrepreneurs accumulate and manage
knowledge and technology
? Entrepreneurs mobilize resources—
?nancial, physical, and human
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CHAPTER 1 Capitalism and the Technology Entrepreneur 12
The presence of competence without any commitment creates little entre-
preneurial capital. The presence of commitment without competence may waste
both time and resources. Both commitment and competence are required to
provide signi?cant entrepreneurial capital (hence, we use the ? sign). Entre-
preneurial competence is the ability (1) to recognize and envision taking
advantage of opportunity and (2) to access and manage the necessary resources
to actually take advantage of the opportunity. Entrepreneurial commitment
is a dedication of the time and energy necessary to bring the enterprise to ini-
tiation and fruition. Entrepreneurial capital re?ects the aggregation of compe-
tence and commitment of the entrepreneurial team.
The accretion of knowledge and experience over time leads to increased
competence as people mature. However, commitment of energy and time may
decline when people become less interested in or available for the necessary
entrepreneurial competence activities. No ?rm rules should be assumed about
the appropriate age, but most entrepreneurs emerge by the age of forty. Both
commitment and competence are qualities of the leadership team, and they
may be complementary qualities shared among the team members.
An opportunity is an auspicious chance of an action occurring at a favor-
able time. Thus, the entrepreneur identi?es a propitious enterprise at a time that
appears to be right for success.
We can then propose that the economic value of a venture is
Economic Value ?Opportunity ?Entrepreneurial Capital
or
EV ?Opp ?Ecomp ?Ecomm (1.2)
where Opp ? opportunity. The economic value of a venture, EV, may grow
eventually to a market value (MV) after a period of years (T) from initiation.
Chester Carlson was a resourceful entrepreneur who built the copying
process now called Xerox. Carlson refused to accept rejection in the late
1940s and was committed to his invention of an electrostatic process for
copying documents. Carlson found partners in Battelle Research Institute
and Haloid Company of Rochester, New York, and went on to produce
the Haloid Xerox 914 in 1960. The opportunity and entrepreneurial cap-
ital of Xerox combined to produce suf?cient economic value.
Founding of Xerox
This economic growth is a complex system dependent on all management
and leadership decisions as well as the forces of competition, market evolution,
and intellectual capital developed or attained over the period T. The allocation
of entrepreneurship between productive and unproductive activities can greatly
in?uence the innovativeness of the ?rm and its intellectual capital and compe-
tencies as well as husband or squander resources. Productive entrepreneurial
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1. 3 Entrepreneurial Capital and the Value of a Venture 13
activities can be summarized as a result of effective and ef?cient management,
(M). In addition, we will represent changes in the contextual situation, such as
a recession or new government regulations, by context (C). Then, an approxi-
mate qualitative model for market value is
MV ?M?C ?EV
Substituting EV from equation (1.2), we have
MV ?M?C ?Opp ?Ecomp ?Ecomm (1.3)
As depicted in equation (1.3) and Figure 1.2, the expected market value of
an enterprise after a period of time will be the result of the cumulative value
of management, context, opportunity, competence, and commitment. All of
these factors must be strongly present to achieve success. The enterprises that
promise the greatest returns lead to entrepreneurs being attracted to opportu-
nities that seem to be brighter. They evaluate their management skills, the con-
text, the opportunity, their team competencies, and their commitment leading
to a choice of a new venture.
The ?rm Google was founded in 1999 by two 26-year-olds who developed
a search engine. As a search gateway to the Internet and over 8 billion Web
pages, Google is an attractive and useful website. A daily tool for millions of
users, it can be queried in 105 languages. It is an excellent example of a pow-
erful combination of entrepreneurial capital, competence, and commitment. The
management and leadership of Google are excellent and continue to grow
Google’s business and value [Hardy, 2003]. As a result, the market value of
Google is signi?cant.
MV
EV
EC
Ecomp,
Ecomm
Opportunity
Management,
Context
FIGURE 1.2 Expected market value.
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CHAPTER 1 Capitalism and the Technology Entrepreneur 14
1.4 Building an Enterprise
Sun Microsystems was founded in 1982 by a team of four young men. The con-
cept of a workstation—a high-performance desktop computer—linked to a net-
work was developed at Xerox Palo Alto Research Center (PARC) in 1980. By
1982, Xerox PARC had a network of workstations running sophisticated appli-
cations. Workstations were leading-edge devices for computer-aided design.
From the age of 15, Vinod Khosla had wanted to start a company. After
receiving his bachelor’s degree in electrical engineering at the Indian Institute
of Technology, he went to Carnegie-Mellon University to study for his mas-
ter’s in biomedical engineering. Khosla then entered the Stanford University
MBA program. At graduation, he joined a small start-up called Daisy Systems,
a ?rm in the computer-aided engineering (CAE) industry.
At Daisy, he saw the need for a workstation to support CAE software. After
a year at Daisy, Khosla decided to start his own ?rm to build workstations.
Khosla’s skills were in the design of computers and knowledge of the CAE
industry. In 1981, he drew up a speci?cation for a workstation that was in?u-
enced by Xerox PARC knowledge. At that point, Khosla looked for a partner.
There was a project at Stanford called the Stanford University Network (SUN),
and there he found a talented graduate student, Andy Bechtolsheim, who agreed
to join Khosla in January 1982 to form a company. They wrote a business plan
and within a month attracted several million dollars of venture capital. With the
funds in hand, they got Scott McNealy, an MBA classmate, to join the team.
By May 1982, they had a prototype computer and had made their ?rst sale.
To create the software for their computer, they recruited Bill Joy in June
1982 from the University of California, Berkeley. Joy had led the project to
create Berkeley UNIX. By June 1982, the company was led by four engineers
and MBAs in their twenties who then built it into the world-renowned Sun
Microsystems. Khosla had marketing, design, and leadership skills; Joy was a
leading software designer of UNIX; McNealy possessed manufacturing and
management skills; and Bechtolsheim had strong skills for designing the hard-
ware workstation. This powerful team created a company that revolutionized
the computer industry.
Khosla and his team possessed a great measure of commitment and com-
petency. The opportunity was very attractive, and the industrial context of the
new ?rm was very supportive of their venture. The team’s management skills
were good given their few years of experience. When Khosla and his team
examined the opportunity and their new venture, they saw that the potential
market value of their enterprise could be very signi?cant, if they executed
their plan effectively. Equation 1.3 expresses the potential market value as
MV ?M?C ?Opp ?Ecomp ?Ecomm
Any entrepreneurial team can estimate the qualitative market value of its enter-
prise by reviewing ?ve factors of the qualitative equation: management, con-
text, opportunity, competences, and commitment.
“The Genesis of Palm
Computing” —Jeff
Hawkins (Handspring)
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1. 5 Economics, the Entrepreneur, and Productivity 15
1.5 Economics, the Entrepreneur, and Productivity
All entrepreneurs are workers in the world of economics and business. Eco-
nomics is the study of humans in the ordinary business of life [Mankiw, 2000].
Economics can also be de?ned as the study of how society manages its scarce
resources. Society, operating at its best, works through entrepreneurs to effec-
tively manage its material, environmental, and human resources to achieve
widespread prosperity. An abundance of material and social goods equitably
distributed is the goal of most social systems. Entrepreneurs are the people who
arrange novel organizations or solutions to social and economic problems. They
are the people who make our economic system thrive.
Entrepreneurs ?ourish in nations that provide legal and social incentives
for their activities. A business environment with sound infrastructive and legal
protections will encourage entrepreneurs. A culture that supports and protects
intellectual capital such as patents will provide the necessary context for risk-
taking ventures. The ranking of 10 selected nations by measures of economic
activity is provided in Table 1.8. Nations large and small can provide the con-
text for entrepreneurial activity. In the United States, 10.5 percent of the work-
ing population was engaged in entrepreneurial activity in 2003. The ?gure for
2000 was 16.6 percent [Breeden, 2002]. New ventures and start-ups have been
the source of an estimated one-half to two-thirds of the new jobs created in the
United States over the past decade. The entrepreneur turns a social problem
into an opportunity, a productive organization, and new, well-paid jobs.
TABLE 1.8 Ranking of 10 selected nations by measures of economic
activity.
Business Start-up Nobel Prize
Country environment
1
index
2
Patents
3
winners
4
United States 1 1 2 1
United Kingdom 3 3 5 2
Netherlands 2 4 6 7
Germany 8 8 3 3
Switzerland 4 7 8 5
Finland 5 2 9 9
Sweden 7 5 7 6
France 9 9 4 4
Japan 10 10 1 8
Ireland 6 6 10 10
1
Ease of doing business, infrastructure, and policies.
2
Ease of starting new enterprises.
3
Number of patents granted to residents, 1998.
4
Nobel Prize winners in physics and chemistry, 1901–2000.
Source: Pocket World in Figures, The Economist Books, London, 2002.
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CHAPTER 1 Capitalism and the Technology Entrepreneur 16
An economic system is a system for the production and distribution of
goods and services. Given the limitations of nature and the unlimited desires
of humans, economic systems are schemes for (1) administering scarcities and
(2) improving the system to increase the abundance of goods and services. For
a nation as a whole, its wealth is its food, housing, transportation, health care,
and other goods and services. A nation is wealthier when it has more of these
goods and services. Nations strive to secure more prosperity by organizing to
achieve a more effective and ef?cient economic system. It is entrepreneurs who
organize and initiate that change.
Almost all variation in living standards among countries is explained by
productivity, which is the quantity of goods and services produced from the
sum of all inputs, such as hours worked and fuels used. A model of the econ-
omy is shown in Figure 1.3. The inputs to the economy are the natural capital,
intellectual capital, and ?nancial capital. The outputs are the desired bene?ts
or outcomes and the undesired waste. An appropriate goal is to maximize the
bene?cial outputs and minimize the undesired waste (Dorf, 2001).
Natural capital refers to those features of nature, such as minerals, fuels,
energy, biological yield, or pollution absorption capacity, that are directly or
indirectly utilized or are potentially utilizable in human social and economic
systems. Because of the nature of ecologies, natural capital may be subject to
irreversible change at certain thresholds of use or impact.
Financial capital refers to ?nancial assets, such as money, bonds, securi-
ties, land, patents, and trademarks. The intellectual capital of an organization
is the talents of its people, the ef?cacy of its management systems, the effec-
tiveness of its customer and supplier relations, and the technological knowledge
employed and shared among its people and processes. Intellectual capital is
knowledge that has been formalized, captured, and used to produce a process
that provides a signi?cant value-added product or service. Intellectual capital
is useful knowledge that has been recorded, explained, and disseminated, and
is accessible within the ?rm [T. Sewart, 2001]. The sources of intellectual capital
are threefold: human capital, organizational capital, and relationship capital.
Human capital (HC) is the combined knowledge, skill, and ability of the
company’s employees. Organizational capital (OC) is the hardware, software,
databases, methods, patents, and management methods of the organization that
Economy
Entrepreneurs
as agents of
progress
Beneficial outputs
Undesired waste outputs
Natural capital
Financial capital
Intellectual capital
FIGURE 1.3 A model of the economy.
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1. 6 The Knowledge Economy 17
support the human capital. Relationship capital (RC) is the quality of relation-
ships with a ?rm’s suppliers, allies, partners, and customers. Relationship cap-
ital is often called social capital.
The economy as portrayed in Figure 1.2 consists of the summation of all
organizations, for-pro?t as well as nonpro?t and governmental, that provide the
bene?cial outputs for society. These are the organizations that we study and
will label as enterprises or ?rms. Entrepreneurs constantly form new organi-
zations or enterprises to meet social and economic needs.
Productivity growth is important since it provides all the increases in people’s
standard of living. Over the past half-century, the U.S. workforce (including
immigration) has grown at about 1.7 percent annually, and productivity per
worker has risen at 2.2 percent, generating real economic growth (excluding
in?ation) averaging 3.9 percent. This is an excellent record, due in great part
to the impact of technology entrepreneurship.
Rising output per worker comes from two sources: (1) new technology
and (2) smarter ways of doing work. Both paths have been followed through-
out human history, and they became faster tracks with the coming of the
Industrial Revolution. The twentieth century started with new techniques of
management and many new inventions. The century ended with smarter man-
agement techniques and dramatic advances in electronic technology, which
helped revive productivity growth after limited gains through much of the
1970s and 1980s.
The business system works to drive out inef?ciency and forces business
process renewal. During the past 25 years, the forces of entrepreneurship, com-
petition, and deregulation have encouraged new technologies and business
methods that raise ef?ciency and ef?cacy. In recent years, due to competition,
much of the bene?ts of strong productivity has ?owed to consumers in the form
of lower prices. Innovation, entrepreneurship, and competition are important
sources of productivity growth.
1.6 The Knowledge Economy
Ideas are many, but knowledge is rare. Ideas are ?ltered and transformed into
knowledge, which can be used to guide the actions of entrepreneurs. Ideas are
the raw material from which knowledge is produced. We start with an idea and
pass it through an authentication process in which it may be veri?ed, refuted,
or transformed using additional information. Business ideas are ?ltered through
an authentication process, and if commercialized, they will be validated or
invalidated by the market.
The ?ow of knowledge from science and technology leads to the applica-
tion of this knowledge in products, processes, and services—the essence of
business. The complexity of science and technology, appropriately applied, can
lead to simple and easily understood products. In many ways, we may think
of products as embedded knowledge. Knowledge involves transformed expert-
ise and information. Knowledge can be de?ned as the awareness and possession
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CHAPTER 1 Capitalism and the Technology Entrepreneur 18
of information, facts, ideas, truths, and principles in an area of expertise. Thus,
a person may be said to be knowledgeable of ?nance but less knowledgeable
of product design or manufacturing methods.
Knowledge can be used for wise actions by entrepreneurs. Intellectual cap-
ital is the sum of knowledge assets of an organization. This knowledge is
embodied in the talent, know-how, and skills of the members of an organiza-
tion. The intellectual capital of a ?rm is used to transform raw material into
something more valuable. Mondavi Winery succeeds because of the human
capital of its grape growers and wine makers. McDonald’s relies on the orga-
nizational capital of its recipes and processes. A local coffee shop where the
waiter recognizes you and knows your favorite latté relies on its social capi-
tal. Social capital is based on strong, positive relationships. The elements of
intellectual capital are summarized in Table 1.9. We state that intellectual cap-
ital (IC) is a summation:
IC ?HC ?OC ?SC (1.4)
where OC ? organizational capital, HC ? human capital, and SC ? social
capital.
For many, if not most, ?rms, intellectual capital is the organization’s most
important asset. It is more valuable than its other physical and ?nancial assets.
Many ?rms depend on their patents, copyrights, software, and the capabilities
and relationships of their people. This intellectual capital, appropriately
applied, will determine success or failure. Knowledge has become the most
important factor of production.
The role of a ?rm* is to transform inputs into desirable outputs that serve
the needs of customers. A ?rm exists as a group of people because it can oper-
ate more effectively and ef?ciently than a set of individuals acting separately.
Furthermore, a ?rm creates conditions under which people can work more
effectively than they could on their own. Thus, ?rms exist to coordinate and
motivate people’s economic activity [Roberts, 2004]. A ?rm is more effective
because (1) it has lower transaction costs and (2) the necessary skills and tal-
ent are gathered together in effective, collaborative work. A model of the ?rm
TABLE 1.9 Three elements of the intellectual capital (IC) of an
organization.
Human capital (HC): The skills, capabilities, and knowledge of the ?rm’s people
Organizational capital (OC): The patents, technologies, processes, databases, and networks
Social capital (SC): The quality of the relationships with customers, suppliers, and partners
IC ?HC ?OC ?SC
* Henceforth, we use ?rm to represent organizations, enterprises, and corporations.
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1. 6 The Knowledge Economy 19
as a transformation entity is shown in Figure 1.4. The transformation of inputs
into desired outputs is based on the intellectual capital and the entrepreneurial
capital of the ?rm. As an example, consider Microsoft, a powerful software
?rm. It creates and purchases technologies, develops new software, and builds
a client base. The transformation of its inputs into outputs is based on its for-
midable stock of intellectual capital and entrepreneurial capital.
One hundred years ago, successful companies such as U.S. Steel were pri-
marily managing physical assets. Today’s successful ?rms such as Microsoft
manage knowledge and intellectual capital. Intellectual capital, along with
physical assets, transforms raw material to valuable products. The growth of
knowledge-based innovation enables economic progress to continue to spur
social progress. Acting through an organization, the entrepreneur works for new
ideas and change in the face of go-slow opponents (Mokyr, 2003).
Human capital, embodied in people, has mobility—it goes where it is well
treated. Thus, a ?rm needs to attract and retain the best people for its require-
ments in the same way that it seeks the best technologies or physical assets.
Many talented people leave their jobs to join start-up ?rms because they seek
achievement, independence, and opportunity.
Two characteristics of intellectual capital give it power to add value [T. Stew-
art, 2001]. Firms can use intellectual capital to reduce the expense of physical
assets or maximize the return on those assets. Financial companies, for example,
can expand their reach to more customers using software and websites to enable
online banking as an alternative to building more branches. Another way to
expand their reach ef?ciently through organizational capital is to establish mini-
branches in grocery stores. No longer do a ?rm’s physical assets limit its reach.
Modern entrepreneurial ?rms breed a constant ?ow of high-impact prod-
ucts that create value and stimulate economic growth by bringing new meth-
ods, technologies, and ideas to the global marketplace (Schramm, 2004). Often
they work in partnership with mature ?rms, government, and universities.
The intellectual capital of a new ?rm encompasses its people’s cognitive
knowledge, skills, system understanding, creativity, synthesis, and trained
intuition [Quinn, 1997]. Fortunately, knowledge is one of the few assets that
Transformation
based on:
• Intellectual
capital
• Entrepreneurial
capital
Products and services
Raw materials
The Firm Output Inputs
Financial capital
Component and modules
Physical assets
Technologies
FIGURE 1.4 The ?rm as transforming available inputs into desired outputs.
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CHAPTER 1 Capitalism and the Technology Entrepreneur 20
grows when shared. By organizing around intellectual capital, a new ?rm
strives to leverage it, usually through collaboration, development, and sharing.
A causal diagram can help to portray causal links in a system. Variables
are related by causal links, shown by arrows. The link of Figure 1.5a implies
that if x increases, then y increases. The link shown in Figure 1.5b implies that
if x increases, then y decreases. For example, Figure 1.5c implies that as a
?rm’s intellectual capital and its entrepreneurial capital increase, it will increase
its entrepreneurial activity and prosperity (Sterman, 2000).
x
y
+
(a) (b)
Intellectual
capital
Entrepreneurial
capital
Entrepreneurial
activity
Prosperity
+
+
+
(c)
x
y
–
FIGURE 1.5 Causal diagram: (a) y increases as x
increases, (b) y decreases as x increases, (c) entrepreneurial
activity leads to increasing prosperity.
* Henceforth, we use products to refer to products and services.
1.7 The Firm
The purpose of a ?rm is to establish an objective and mission and carry it out
for the bene?t of the customer. Thus, the purpose of Merck Corporation is to
create pharmaceuticals that protect and enhance its customers’ health. To do so,
a ?rm acts to develop, attract, and retain intellectual capital. The ?rm develops
and uses intellectual capital to build the strengths of the ?rm and to provide the
desired products.* The ?rm provides a place where people can collaborate,
learn, and grow.
The ?rm’s actions are based on its knowledge of its customer, its product,
and its markets. The ?rm must identify and understand its customers, its com-
petitors, and their values and behavior. Knowledge of organizations, design,
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1. 7 The Firm 21
and technologies is ?ltered through a ?rm’s strengths and weaknesses. The ?rm
acts on all this knowledge.
First, a ?rm is clear about its mission and purpose. Second, the ?rm must
know and understand its customers, suppliers, and competitors. Third, a ?rm’s
intellectual capital is understood, renewed, and enhanced as feasible. Finally,
the ?rm must understand its environment or context, which is set by society,
the market, and the technology available to it. We can call this the theory of
a ?rm’s business, or how it understands its total activities, resources, and relation-
ships. Figure 1.6 depicts the business theory of a ?rm. One hundred years ago,
?rms were hierarchical and bureaucratic with a theory of business that empha-
sized making long runs of standardized products. They regularly introduced
“new and improved” varieties and provided lifetime employment. Today, ?rms
compete globally with high-value, customized products. They use ?attened
organizations and base their future on intellectual capital. Firms look to brands
and images to cut through the clutter of messages. In the future, a ?rm’s human
capital—talent—will become more important.
One way to look at the future of a ?rm is as a competition among its
stakeholders. Flexibility and leanness mostly bene?t the ?rm’s shareowners.
Placing a high valuation on talent gives more power to the workers. A good
reputation means the ?rm needs to look after its community and society.
Customers stand to gain power as competitors vie for their attention. The
Firm’s mission
and purpose
Workers and
associates
Customers
Competitors
Society
Market
Technology
Suppliers
Organizational capital
Firm’s Intellectual Capital
Human capital Social capital
FIGURE 1.6 A ?rm’s theory of business depicts how it understands its total
resources, activities, and relationships.
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CHAPTER 1 Capitalism and the Technology Entrepreneur 22
1.8 Dynamic Capitalism and Creative Destruction
One view of economic activity describes a world of routine in which little
changes. In this static model, all decisions have been made, and all alternatives
are known and explored. Clearly, no economy is static, and change appears to
be certain. In a world of change, entrepreneurs seek to embrace it. Entrepre-
neurs match ideas for change with opportunity. These changes include the
adoption of new and better (or cheaper) sources of input supplies, the opening
of new markets, and the introduction of more pro?table forms of business
organization.
Economic progress can be described as the generation of new types of
goods and services that can be produced ef?ciently. Progress occurs because
individuals engage in creating insights that change the nature of both economic
inputs and outputs. Entrepreneurial insight is the recognition of a pro?t oppor-
tunity that was previously unnoticed [Holcombe, 2001].
The pro?t of the new ?rm is the key to economic growth and progress. By
introducing a new and valuable product, the innovator obtains temporary
monopoly power. Lower costs may give the innovative ?rm pro?ts higher than
those of its rivals, which must continue to sell at higher prices to cover their
higher expenses. Alternatively, a superior product may permit a price above
that charged by other ?rms. The same concept clearly ?ts all forms of suc-
cessful change. The free spirit of entrepreneurs provides the vital energy that
propels the capitalist system.
Dynamic capitalism is the process of wealth creation characterized by the
dynamics of new, creative ?rms forming and growing and old, large ?rms
declining and failing. In this model, it is disequilibrium—the disruption of
existing markets by new entries—that makes capitalism lead to wealth creation
[Kirchhoff, 1994]. New ?rms are formed by entrepreneurs to exploit and com-
mercialize new products or services, thus creating new demand and wealth.
This renewal and revitalization of industry leads to a life cycle of formation,
growth, and decline of ?rms.
Joseph Schumpeter (1883–1950) described this process of new entrepre-
neurial ?rms and waves of change as creative destruction. Born and edu-
cated in Austria, Schumpeter taught at Harvard University from 1932 until
his death in 1950. His most famous book, Capitalism, Socialism and Democ-
racy, which appeared in 1942 [Schumpeter, 1984], argued that the economy
is in a perpetual state of dynamic disequilibrium. Entrepreneurs upend the
established order, unleashing a gale of creative destruction that forces incum-
bents to adapt or die. Schumpeter argued that the concept of perfect compe-
tition is irrelevant because it focused entirely on market (price) competition,
when the focus should be on technological competition. Creative destruction
incessantly revolutionizes the economic structure from within, destroying the
entrepreneur in the new firm strives to build a firm that serves all its
stakeholders well.
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1. 9 The Sequential Case: AgraQuest 23
old structure and creating a new one. The average life span of a company in
the Standard and Poors 500 declined from 35 years in 1975 to less than 20
years today. Less than four of the top 25 technology companies 30 years ago
are leaders today—perhaps only IBM and Hewlett-Packard. Companies are
collections of assets and expertise in the short term and pure opportunity in
the long term.
Schumpeter’s theory was based on disruptive (radical) innovations. He
depicted the innovator as creative and nonhedonistic with a goal of major
change and improvement. He described ?rms that faced uncertainty, change,
and competition and were unable to rationally develop pro?t-maximizing
strategies. Little doubt now exists that the economy is driven by ?rms that cap-
italize on change, technology, and challenge. This book is focused on helping
the reader to purposefully become an agent for creative destruction by creat-
ing his or her own ?rm. An example of an agent for creative disruption is Bill
Gates, who established Microsoft and introduced DOS, Windows, and Of?ce.
Gates saw a discontinuity from mainframe computers to personal computers.
The digital video disk (DVD) created a new wave of creative destruction in the
movie rental business as DVDs replaced videotapes in the 1990s.
With his partners, Jeremy Jaech (see Section 1.2) founded Aldus Corpora-
tion when he saw a disequilibrium or discontinuity in the newspaper graphics
industry. The old system was based on larger workstation computers, and he saw
a transition to desktop personal computers using Microsoft Windows. Jaech saw
the opportunity and matched it with his interests and capabilities in a new ?rm.
Most entrepreneurs should look for opportunities based on discontinuities
since they can lead to important results, creative destruction, and signi?cant
wealth creation. Discontinuities can occur through a new technology, a big cul-
tural change, or a new threat to society such as pandemic disease, global warm-
ing, and terrorism.
A recent large discontinuity in the modern global world is mobile commu-
nication and recreational activities. Many people want access to information,
music, videos, and other media while away from home or the of?ce. This has
led to cell phones and new handheld devices such as the Apple iPod that can
receive video and audio ?les.
The entrepreneur of the creative destruction receives a temporary monop-
oly until rivals ?gure out how to mimic the innovation. The high pro?ts of the
original new product will attract imitators quickly. They imitate the original
monopoly and help to disseminate the new product or service.
1.9 The Sequential Case: AgraQuest
The AgraQuest case illustrates and illuminates the issues raised in each
chapter. It focuses on a real-life emerging ?rm in the life science indus-
try that illustrates each factor described in a chapter. AgraQuest
(continued on next page)
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CHAPTER 1 Capitalism and the Technology Entrepreneur 24
(www.agraquest.com) is an entrepreneurial ?rm that may signi?cantly
contribute to improved environmental and social conditions and agricul-
tural industries around the world. Read the segment on the case at the
end of each chapter and learn of a real-life effort that could make a big
difference to the world.
Every seven years in the woodsy town of Killingworth, Connecticut, where
she grew up, Pamela Marrone would feel the droppings of gypsy moth caterpil-
lars raining down on her head as the cyclical pests gorged on maples and oaks.
Desperate to save a heavily infested dogwood, her father once ignored his own
organic gardening tenets and blasted the tree with a chemical called a carbamate.
By the next morning, every bee, every ladybird beetle, every lacewing—
all the “good” bugs that fed on plant pests—lay dead on the ground. In her
youth, Marrone knew that she wanted to keep the good bugs while deterring
bad pests. She recognized a great opportunity that, if solved, could help farm-
ers prosper while using natural pest control agents (not chemicals). Further-
more, as a youth, Marrone had tried, with her parents’ encouragement, several
modest entrepreneurial ventures at craft fairs and state fairs.
Marrone studied entomology (the study of the forms and behavior of
insects) at Cornell University, going on to North Carolina State University,
from which she received her doctorate in 1983. She then spent seven years as
the leader of the new pest control unit at Monsanto in St. Louis, where she
acted on her dedication to the natural control of pests. At Monsanto, Marrone
built her technical and entrepreneurial skills. As a result, in 1990 she was
recruited by Novo Nordisk, a Danish company, to create a biopesticide sub-
sidiary called Entotech Inc. in Davis, California.
Entotech’s goal was to hunt for natural products that can defeat plant scourges
without wreaking havoc on human beings, animals, helpful insects, or soil. But
in 1995, Entotech was sold to Abbott Laboratories, prompting Marrone to start
her own ?rm to meet the challenge of building a successful company that would
use a new search process for identifying natural products for pest control. Thus
was born AgraQuest. Marrone possessed the interest and passion, the capabilities
and skills, and saw an attractive opportunity in the sweet spot of Figure 1.1.
1.10 Summary
The entrepreneur is the creative force that allows free enterprise to ?ourish.
Entrepreneurship is the process through which individuals and teams bring
together the necessary resources to exploit opportunities and in doing so cre-
ate wealth, social bene?ts, and prosperity.
The critical ideas of this chapter are:
? The entrepreneur as creator of a great enterprise.
? The entrepreneur responds to an attractive opportunity.
(continued from page 23)
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1. 11 Exercises 25
? A person can learn to be an entrepreneur.
? The entrepreneur knows how to use knowledge to create innovation and
new ?rms.
? Positive entrepreneurship activity ?ows from a combination of entrepreneur-
ial capital and intellectual capital that leads to productivity and prosperity.
? The entrepreneur uses an appropriate organizational structure to achieve his
or her goals.
1.11 Exercises
1.1 What is the difference between an idea and an opportunity? How is
this difference important to an entrepreneur?
1.2 Consider opportunities that have occurred to you over the past month
and list them in a column. Then, describe your strong interests and
passions, and list them in a second column. Finally, create a list of your
capabilities in a third column. Is there a natural match of opportunity,
interests, and capabilities? If so, does this opportunity appear to offer a
good chance to build a business? What would you need to do to make
this opportunity an attractive chance to build a business?
1.3 Name an entrepreneur that you personally admire. Why do you
consider that person an entrepreneur? What sets that person apart
from other business leaders? What path did the person take to
entrepreneurship? What personal sacri?ces or investments did the
person make in his or her journey? What people were important to
this person’s success?
1.4 Name a successful entrepreneurial team you personally admire. How
would you classify this team in the context of the entrepreneur types
de?ned in Table 1.4? Do the elements of entrepreneurship de?ned in
Table 1.7 apply to this team?
1.5 Mobile virtual network operators (MVNOs), such as Disney, Virgin,
AMPD, and ESPN, are emerging to provide wireless services to
subscribers without the need of building a wireless network. What
business opportunity have these MVNOs identi?ed? What are some of
the risks?
1.6 Bette Nesmith, working as a secretary, wondered why artists could
paint over their mistakes, but typists couldn’t. The solution was
“liquid paper.” Determine how Nesmith created an enterprise based
on the opportunity (see inventors.about.com).
Principle 1
The entrepreneur develops an enterprise with the purpose of creating
wealth and prosperity for all participants—investors, customers, sup-
pliers, employees, and themselves—using a combination of intellec-
tual and entrepreneurial capital.
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CHAPTER 1 Capitalism and the Technology Entrepreneur 26
1.7 The quantity of undesired junk e-mail called spam has risen to exceed
the number of desired e-mails. Using Figure 1.6, determine the
entrepreneurial capital and the intellectual capital needed to provide
the necessary entrepreneurial activity to reduce the impact of spam.
1.8 The Human Genome Project was a 13-year effort that was completed
in 2003. Its goal was to identify and sequence all the approximately
20,000–25,000 genes in human DNA and store this information in
a database. This was viewed as a signi?cant milestone in genetic
research. What opportunities have been created by the ready
availability of this information and resulting data analysis tools?
1.9 What were some of the key customer, technology, and market trends
that drove entrepreneurship during the last decade? What factors do
you predict will drive entrepreneurial challenges in the next decade?
1.10 Research the number of companies that either had an IPO or were
acquired in the last ?ve years. Where is this trend leading? What
implications does this trend have on the number of new ventures
being started?
Select a high-potential opportunity that interests you and then use it for
the venture challenge exercises at the end of each chapter. For example, you
might consider one of these current trends in science and technology: mobile
data applications, internet telephony, video podcasting, web services, nano-
technology, clean technologies (including fuel cell, battery and solar), pandemic
flu and biodefense treatments, and advancements in stem cell research.
1. Describe the opportunity that attracts you and why you think it is a
new venture opportunity.
2. Describe the competencies and skills you and your team members
possess.
3. What important stakeholders will you need to be successful?
4. Describe the passion and commitment you have for the opportunity.
5. Is this a good opportunity for you?
VENTURE CHALLENGE
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doc_594753714.pdf
This detailed illustration related to venture opportunity, concept, and strategy capitalism and the technology entrepreneur.
1
Venture Opportunity, Concept,
and Strategy
E
ntrepreneurs have important roles in creating new businesses that fuel
progress in societies worldwide. The entrepreneur uses a combination
of innovation and technology to foster new, effective means of activity
in all facets of life. The capable entrepreneur learns to identify, select, describe,
and communicate the essence of an opportunity that has attractive potential to
become a successful venture. The entrepreneur is able to describe the valuable
contributions of a venture and create the design of a business model that can
be sustained by a competitive advantage. The venture team creates a road map
(strategy) that can, with good chance, effectively lead to the commercialization
of the new product or service in the marketplace. Finally, the venture team
builds an innovation strategy that fosters the sustainable advantage of the tech-
nology venture. ?
P A R T 1
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Capitalism and the Technology
Entrepreneur
The empires of the future are the empires of the mind.
Winston Churchill
3
C H A P T E R 1
CHAPTER OUTLI NE
1.1 The Entrepreneur and the Challenge
1.2 Entrepreneurial Activity Based on
Innovation and Technology
1.3 Entrepreneurial Capital and the
Value of a Venture
1.4 Building an Enterprise
1.5 Economics, the Entrepreneur, and
Productivity
1.6 The Knowledge Economy
1.7 The Firm
1.8 Dynamic Capitalism and Creative
Destruction
1.9 The Sequential Case: AgraQuest
1.10 Summary
ntrepreneurs provide the creative force
capitalism needs to work. Entrepreneurs
strive to make a difference in our world
and contribute to its betterment. They are also
motivated by achievement, independence, and the
accumulation of wealth. In this chapter, we de-
scribe the characteristics of the people called en-
trepreneurs and the process they use to create new
enterprises. We describe the four types of entre-
preneurship used to respond to opportunity: incre-
mental, innovative, imitative, and rent-seeking.
Engineers and scientists often respond to the chal-
lenge to build important new enterprises by com-
bining their knowledge of new technologies with
sound business practices. The technology entre-
preneur’s role in the improvement of an economy
and the role of knowledge in the creation and
growth of new enterprises are described. Finally,
the ?rm or organization as the key structure for a
new enterprise and the system of innovation used
by new ventures are depicted. ?
What enables global capitalism?
E
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CHAPTER 1 Capitalism and the Technology Entrepreneur 4
1.1 The Entrepreneur and the Challenge
Wealth and social change are created by people who strike out on their own
and are devoted to worthy tasks and enterprises that make a difference in the
world. An entrepreneur is a person who undertakes the creation of an enter-
prise or business that has the chance of pro?t (or success). Entrepreneurs dis-
tinguish themselves through their ability to accumulate and manage knowledge,
as well as their ability to mobilize resources to achieve a speci?ed business or
social goal [Kuemmerle, 2002a].
The entrepreneur is a bold, imaginative deviator from established business
methods and practices who constantly seeks the opportunity to commercialize
new products, technologies, processes, and arrangements (Baumol, 2002). Entre-
preneurs are skilled in applied creativity, thrive in response to challenge, and look
for unconventional solutions. They experience challenges, create visions for solu-
tions, build stories that explain their visions, and then act to be part of the solu-
tion. They forge new paths and risk failure, but persistently seek success.
The Horatio Alger myth describes the rise of a young man from rags to
riches through entrepreneurism. In this myth, the entrepreneurial hero personi-
?es freedom and creativity. A century ago, this was a common possibility,
although actually limited to a few success stories such as those of John D.
Rockefeller and Andrew Carnegie. The key virtue was self-reliance and dili-
gence. While this possibility remains for a few today, almost all entrepreneurs
are educated, experienced, and skilled. Furthermore, entrepreneurship is an atti-
tude and capability that diffuses beyond the founding team to all members of
its organization. For most, collective entrepreneurship represents the path
toward a promising economic future. Most growing ?rms strive to infuse the
culture of the entire company with the entrepreneurial spirit. Thomas Edison
created an enterprise that became General Electric. Steve Jobs and Steve Wozniak
founded Apple Computer, one of the ?rst personal computer companies. These
entrepreneurs combined their knowledge of valuable new technologies with
sound business practices to build important new enterprises that continued to
maintain their entrepreneurial spirit for years after founding.
Entrepreneurship is more than the creation of a business and the wealth
associated with it. It is focused on the creation of a new enterprise that serves
society and makes a positive change. Entrepreneurs can create great ?rms that
exhibit performance, leadership, reputation, and longevity. Examples of new
enterprises that have made a signi?cant contribution to life in our day are pro-
vided in Table 1.1. What organization would you add to the list?
Entrepreneurs seek to achieve a certain goal by starting an organization that
will address the needs of society and the marketplace. Entrepreneurs are prepared
to respond to a challenge to overcome obstacles and build a business. When faced
with dif?cult situations, they are prepared to make the extra effort to overcome
these obstacles and succeed. As Martin Luther King, Jr. (1963), said, “The ulti-
mate measure of a man is not where he stands in moments of comfort and con-
venience, but where he stands at times of challenge and controversy.”
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1. 1 The Entrepreneur and the Challenge 5
For an entrepreneur, a challenge is a call to respond to a dif?cult task and
the commitment to undertake the required enterprise. Richard Branson, the cre-
ator of Virgin Group, reported (Garrett, 1992): “Ever since I was a teenager, if
something was a challenge, I did it and learned it. That’s what interests me
about life—setting myself tests and trying to prove that I can do it.”
Entrepreneurs are resilient people who pounce on problems, determined to
?nd a solution. The elements of the ability to overcome a challenge are sum-
marized in Table 1.2. Most entrepreneurs create a compelling story that brings
in more partners on a journey into unmapped challenges. They concentrate on
husbanding resources, open-mindedness about the future, and learning as they
go in order to create something of value [Sarasvathy, 2004].
Over nearly a decade, Fred Smith worked on perfecting a solution to
what he viewed as a growing problem of organizations to ?nd ways to rap-
idly ship products to customers. To address this challenge, Smith saw an oppor-
tunity to build a freight-only airline that would ?y packages to a huge air-
port and then sort, transfer, and ?y them onto their destinations overnight.
He turned in his paper describing this plan to his Yale University professor,
TABLE 1.1 Important new enterprises that started or emerged from
1973 to 2005.
? Amazon.com ? Google
? Amgen ? Intel
? Apple Computer ? Microsoft
? Cisco ? Nature Conservancy
? Conservation International ? Nokia Corporation
? Dell Computer ? Qualcomm
? Doctors Without Borders / Medecins Sans Frontières ? Southwest Airlines
? eBay ? Starbucks
? Federal Express (FedEx) ? Virgin Group
? Genentech ? Wal-Mart
TABLE 1.2 Elements of the ability to overcome a challenge.
? Able to deal with a series of tough
issues
? Able to create solutions and work to
perfect them
? Able to handle many tasks
simultaneously
? Resilient in the face of setbacks
? Willing to work hard and not expect
easy solutions
? Well-developed problem-solving skills
? Able to learn and acquire the skills
needed for the tasks at hand
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CHAPTER 1 Capitalism and the Technology Entrepreneur 6
who gave it an average grade, said to be a C. After he graduated, Smith
served four years as a U.S. Marine Corps of?cer and pilot. Following his mil-
itary service, he spent a few years in the aviation industry building up his
experience and knowledge of the industry. Then, he prepared a fully devel-
oped business plan for an overnight freight service. By 1972, he had secured
financial backing, and Federal Express took to the air in 1973. Federal
Express became a new way of shipping goods that revolutionized the cargo
shipping business worldwide.
Smith and other entrepreneurs recognize a change in society and its needs,
and then, based on their knowledge and skill, they respond with a new way of
doing things. Typically, entrepreneurs create a novel response to an opportu-
nity by recombining people, concepts, and technologies into an original solu-
tion. Smith saw that the combination of dedicated cargo airplanes, computer-
assisted tracking systems, and overnight delivery would serve a new market
that required just-in-time delivery of critically important parts, documents, and
other valuable items. Smith adapted computer technology to manage the complex
task of tracking and moving packages.
When does a person know that he or she is ready to assume the mantle of
entrepreneur? When people are ready to assume the risk and effort and are truly
motivated to organize an enterprise to meet the entrepreneurial challenge, they
will most likely know it since they will be unable to think of anything but the
challenge. A straightforward test of a potential entrepreneur is provided in
Table 1.3. Take the test and see if you are ready. Perhaps the right opportunity
has not yet emerged, but when it does, you can prepare now to seize it.
An opportunity is a favorable juncture of circumstances with a good
chance for success or progress. It is the job of the entrepreneur to locate new
ideas and put them into action. Entrepreneurs respond to opportunities by
exploiting changes, needs, or new skills or knowledge within the context of
their industry. Thus, entrepreneurship may be described as the identi?cation
and exploitation of previously unexploited opportunities [Hitt, 2001]. Fortu-
nately for the reader, it is a systematic, repeatable discipline that can be learned.
Entrepreneurship can consist of innovation or the introduction of creative
change. Change is generally considered as part of the entrepreneurial expec-
tation. In that sense, the entrepreneur is a change agent. Change agents thrive
in a land of opportunity in which people can rise from nothing to greatness,
depending on their talents and their hard work. Entrepreneurs act as change
agents for progress when, as Abraham Lincoln said in 1864, they are offered
“an open ?eld and a fair chance for industry, enterprise and intelligence.”
Since only about one-third or fewer new ventures survive their ?rst three
years, entrepreneurial ventures can be viewed as experiments or probes into a
market. This approach is consistent with the goals of change agents who are
willing to accept failure as a potential outcome of their venture.
Regardless of whether the right opportunity has emerged, a person can
learn to act as an entrepreneur by trying the activity in a low-cost manner. The
would-be entrepreneur should, if possible, engage in this sequence: do it, then
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1. 2 Entrepreneurial Activity Based on Innovation and Technology 7
re?ect on it. To avoid the realm of daydreams and fantasy, a person needs to
start the practice of experimenting, testing, and learning about his or her entre-
preneurial self [Ibarra, 2002]. The ?rst step is to craft small experiments in new
activities with entrepreneurial teams or small ventures. Through these small
experiments, the entrepreneur develops new contacts and mentors. He or she
may also ?nd a challenge that serves as a catalyst for a new venture.
1.2 Entrepreneurial Activity Based on Innovation
and Technology
Capitalism and enterprise are about having a dynamic economy and innova-
tion, but ultimately, they rest on the actions of businesspeople who assume and
accept the bene?ts and risks of an initiative. It is people acting as leaders,
organizers, and motivators who are the central ?gures of modern economic
activity. Most entrepreneurs strive to make a productive, useful contribution to
their society while creating wealth for shareholders and themselves. Pro?t
maximization, however, is not the only goal of these creative businesspeople,
who also value independence and leadership challenges.
TABLE 1.3 Entrepreneur test.
Are you an entrepreneur? Answer each question by checking yes or no.
Yes No
1. When I am faced with a challenge, I am con?dent that I can work
through it. ___ ___
2. I want to be ?nancially independent and be rewarded for my
accomplishments. ___ ___
3. Trying something new is attractive, even if I know the risk of failure
is signi?cant. ___ ___
4. I would prefer to gain independence and control my destiny. ___ ___
5. Building a new enterprise is important to me. ___ ___
6. My experiences during my youth and early career have shown me the
bene?ts of starting a new enterprise. ___ ___
7. Starting a new business some day soon is always in my thoughts. ___ ___
8. I like working with others and can provide leadership when called upon. ___ ___
9. Our society and my family provide a strong, supportive base for my
initiatives. ___ ___
10. I possess strong technical and relationship skills in the industry I wish
to enter. ___ ___
Add your total score for yes and no: ___ ___
Seven or more yes answers mean that you may be ready to act as an entrepreneur in the
near future.
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CHAPTER 1 Capitalism and the Technology Entrepreneur 8
Three factors make up entrepreneurial action: (1) a person or group who
is responsible for the enterprise, (2) the purposeful enterprise, and (3) initia-
tion and growth of the enterprise. The individuals responsible for the organi-
zation were described in section 1.1. The purposeful enterprise may be a new
?rm organized for a suitable and attractive purpose or a new unit within or sep-
arated from an existing business corporation. Furthermore, the organization
may be based on incremental changes, innovation, imitation, or rent-seeking
behavior.
The ?rst type of enterprise emphasizes the founding and management of a
business that entails moderate novelty, such as a new restaurant in town. The
founder may still be thought of as an entrepreneur. In the second form, the entre-
preneur engages in an innovative activity that results in novel methods, processes,
and products. The third, imitative venture, is founded by an entrepreneur who is
involved in the rapid dissemination of an innovative idea or process. This per-
son or group ?nds a novel innovation and transfers it to another region or coun-
try. The ?nal means of entrepreneurship is called rent-seeking or pro?t-seeking
and focuses on the use of regulation, standards, or laws to appropriate some of
the value of a monopoly that is generated somewhere in the economy. These four
types of entrepreneurship are summarized in Table 1.4.
In this book, we emphasize the creation of the innovative venture that will
have a signi?cant impact on a region, a nation, or the world. A minor or sig-
ni?cant incremental innovation may afford the entrepreneur a new opportunity.
Alternatively, a radical or transforming innovation may provide an entrepreneur
an important and very signi?cant opportunity to make a productive contribution.
The third factor of entrepreneurial action is the initiation and growth of the
enterprise. To start an innovative venture, the entrepreneurial team identi?es an
attractive opportunity that also matches the team’s skills. The opportunity offers
the entrepreneurial team a favorable chance to solve a problem or meet a need
by creating or applying a technology.
Technology includes devices, artifacts, processes, tools, methods, and
materials that can be applied to industrial and commercial purposes. Intel was
formed to apply semiconductor technology to the design and manufacture of
semiconductor circuits. Microsoft was formed to create and distribute computer
software products for applications in industry and the home. The four steps
that an entrepreneur typically follows to start a business appear in Table 1.5.
TABLE 1.4 Four types of entrepreneurship.
1. Incremental venture: The founding and management of a routine business exhibiting
modest novelty
2. Innovative venture: The initiation and operation of a business based on an innovation
3. Imitative venture: The identi?cation and imitation of a novel business or venture
4. Rent-seeking venture: The founding of a business that utilizes standards, regulations,
and laws to share in some of the value of an existing enterprise
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1. 2 Entrepreneurial Activity Based on Innovation and Technology 9
Perhaps the most critical aspect of enterprise formation is narrowing in on
the best opportunity. Most people see many opportunities but ?nd it dif?cult
to know when to select a speci?c one and act on it. One useful method of
selecting an opportunity is to look for the sweet spot that matches opportunity
with interests and capabilities, as shown in Figure 1.1. Most entrepreneurs-to-
be will experience a set of good opportunities that ?ow by over time. They
TABLE 1.5 Four steps to starting a business.
1. The founding team or individual has the necessary skills or acquires them.
2. The team members identify the opportunity that attracts them and matches their skills.
They create a solution to match the opportunity.
3. They acquire (or possess) the ?nancial and physical resources necessary to launch the
business by locating investors and partners.
4. They complete an arrangement or contract with their partners, with investors, and within
the founder team to launch the business and share the ownership and wealth created.
Attractive opportunity
• Timely
• Solvable
• Important
• Profitable
• Favorable context
Interest, passions,
and commitment
• Like to do the tasks
• Like the challenge
• Committed to do what
is necessary
Capabilities
and skills
The
sweet
spot
• Good at the
needed tasks
• Willingness
to learn
FIGURE 1.1 Selecting the right opportunity by ?nding the sweet spot.
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CHAPTER 1 Capitalism and the Technology Entrepreneur 10
also will have interests, activities, and tasks they like to do. Furthermore, they
have capabilities or skills and knowledge that qualify them for certain tasks.
Good opportunities display the characteristics of a potential to solve impor-
tant problems within economic constraints. Usually, they will look attractive
because they can be pro?table to the new venture as well as valuable to the
customers. An attractive opportunity displays the ?ve characteristics listed in
Table 1.6. The entrepreneur seeks a timely, solvable, important problem with a
favorable context that can lead to pro?tability.
It is the entrepreneur who adds value to the opportunity by creating a
response to a good opportunity. The opportunity, and a general response to it,
is not unique—many recognize but few possess the relevant passion to solve
the problem as well as the capability to do so. It is really the passion and
capabilities that distinguish the entrepreneurial team. The selection process
consists of looking for the best match of opportunity, capabilities, and interest
(passion).
Jeremy Jaech attended the University of Washington, receiving a BA in
mathematics in 1977. He joined the computer science graduate program after
graduation, completing his master’s degree in 1980, while working at Boeing on
computer graphics. In 1983, he joined Atex, a maker of computer systems for
newspapers. After nine months, Atex closed the facility where he worked, and
Jaech needed to ?nd an opportunity for himself. His capabilities were computer
programming for graphics, and his interest was to achieve independence and suc-
cess. His passion was for developing software for desktop computer graphics.
His former boss at Atex suggested they form their own company that would cre-
ate software for desktop computer graphics. Jaech was a good technical leader,
and his boss was a good manager; together, they made a solid team. In 1984,
the two men founded Seattle-based Aldus Corporation, which created the software
called PageMaker that launched desktop publishing on personal computers.
By 1989, although Aldus had grown, Jaech was faced with a new chal-
lenge. He wanted to broaden the product line, but his partner/CEO wanted
to remain focused on desktop publishing. Jaech saw an opportunity to cre-
ate a Windows-based software product for general-purpose drawing. He
matched his capabilities with his interests and in 1990 started a new ?rm
that was later called Visio Corporation. When the company’s ?rst product
was shipped in 1992, it had 14 employees. It went public as a 200-person
TABLE 1.6 Five characteristics of an attractive opportunity.
? Timely—a current need or problem
? Solvable—a problem that can be solved
in the near future with accessible
resources
? Important—the customer deems the
problem or need important.
? Pro?table—the customer will pay for the
solution and allow the enterprise to
pro?t.
? Context—a favorable regulatory and
industry situation
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1. 3 Entrepreneurial Capital and the Value of a Venture 11
company in 1995 and was eventually purchased in January 2000 by
Microsoft Corporation for $1.5 billion in stock. Jaech served as a vice pres-
ident of Microsoft for another year. Jaech had exploited two successive
opportunities: Aldus and Visio both used his ability to design software while
matching his capabilities and skills with his passions and interest to create
two important companies.
To summarize, entrepreneurship is centrally focused on the identi?cation
and exploitation of previously unexploited opportunities. An opportunity is a
favorable juncture of circumstances with a good chance for success or progress.
Fortunately for the reader, successful entrepreneurs do not possess a rare entre-
preneurial gene. Entrepreneurship is a systematic, organized, rigorous disci-
pline that can be learned and mastered (Drucker, 2002). Eight skills of entre-
preneurship are listed in Table 1.7.
1.3 Entrepreneurial Capital and the Value
of a Venture
The quality of entrepreneurial capability is expressed as its ability to generate
value, future income, and wealth. One measure of the quality of entrepreneur-
ial capability is entrepreneurial capital (EC), which can be formulated as a
combination of entrepreneurial competence and entrepreneurial commitment
(Erikson, 2002). Thus, we say that
Entrepreneurial Capital ?entrepreneurial competence
?entrepreneurial commitment
or
EC ?Ecomp ?Ecomm (1.1)
where Ecomp is entrepreneurial competence and Ecomm is entrepreneurial
commitment. Note that the symbol ? is a multiplication sign, but it must be
recognized that this equation is qualitative in nature.
TABLE 1.7 Eight skills of entrepreneurship.
? Entrepreneurs assess and mitigate
uncertainty and risk associated with the
initiation of the enterprise
? Entrepreneurs provide an innovative
contribution or at least a contribution
that encompasses novelty or originality
? Entrepreneurs Enable and encourage a
collaborative team of people who have
the capabilities and knowledge
necessary for success
? Entrepreneurs Initiate and operate a
purposeful enterprise
? Entrepreneurs Operate within the
context and industrial environment at the
time of initiation
? Entrepreneurs Identify and screen timely
opportunities
? Entrepreneurs accumulate and manage
knowledge and technology
? Entrepreneurs mobilize resources—
?nancial, physical, and human
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CHAPTER 1 Capitalism and the Technology Entrepreneur 12
The presence of competence without any commitment creates little entre-
preneurial capital. The presence of commitment without competence may waste
both time and resources. Both commitment and competence are required to
provide signi?cant entrepreneurial capital (hence, we use the ? sign). Entre-
preneurial competence is the ability (1) to recognize and envision taking
advantage of opportunity and (2) to access and manage the necessary resources
to actually take advantage of the opportunity. Entrepreneurial commitment
is a dedication of the time and energy necessary to bring the enterprise to ini-
tiation and fruition. Entrepreneurial capital re?ects the aggregation of compe-
tence and commitment of the entrepreneurial team.
The accretion of knowledge and experience over time leads to increased
competence as people mature. However, commitment of energy and time may
decline when people become less interested in or available for the necessary
entrepreneurial competence activities. No ?rm rules should be assumed about
the appropriate age, but most entrepreneurs emerge by the age of forty. Both
commitment and competence are qualities of the leadership team, and they
may be complementary qualities shared among the team members.
An opportunity is an auspicious chance of an action occurring at a favor-
able time. Thus, the entrepreneur identi?es a propitious enterprise at a time that
appears to be right for success.
We can then propose that the economic value of a venture is
Economic Value ?Opportunity ?Entrepreneurial Capital
or
EV ?Opp ?Ecomp ?Ecomm (1.2)
where Opp ? opportunity. The economic value of a venture, EV, may grow
eventually to a market value (MV) after a period of years (T) from initiation.
Chester Carlson was a resourceful entrepreneur who built the copying
process now called Xerox. Carlson refused to accept rejection in the late
1940s and was committed to his invention of an electrostatic process for
copying documents. Carlson found partners in Battelle Research Institute
and Haloid Company of Rochester, New York, and went on to produce
the Haloid Xerox 914 in 1960. The opportunity and entrepreneurial cap-
ital of Xerox combined to produce suf?cient economic value.
Founding of Xerox
This economic growth is a complex system dependent on all management
and leadership decisions as well as the forces of competition, market evolution,
and intellectual capital developed or attained over the period T. The allocation
of entrepreneurship between productive and unproductive activities can greatly
in?uence the innovativeness of the ?rm and its intellectual capital and compe-
tencies as well as husband or squander resources. Productive entrepreneurial
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1. 3 Entrepreneurial Capital and the Value of a Venture 13
activities can be summarized as a result of effective and ef?cient management,
(M). In addition, we will represent changes in the contextual situation, such as
a recession or new government regulations, by context (C). Then, an approxi-
mate qualitative model for market value is
MV ?M?C ?EV
Substituting EV from equation (1.2), we have
MV ?M?C ?Opp ?Ecomp ?Ecomm (1.3)
As depicted in equation (1.3) and Figure 1.2, the expected market value of
an enterprise after a period of time will be the result of the cumulative value
of management, context, opportunity, competence, and commitment. All of
these factors must be strongly present to achieve success. The enterprises that
promise the greatest returns lead to entrepreneurs being attracted to opportu-
nities that seem to be brighter. They evaluate their management skills, the con-
text, the opportunity, their team competencies, and their commitment leading
to a choice of a new venture.
The ?rm Google was founded in 1999 by two 26-year-olds who developed
a search engine. As a search gateway to the Internet and over 8 billion Web
pages, Google is an attractive and useful website. A daily tool for millions of
users, it can be queried in 105 languages. It is an excellent example of a pow-
erful combination of entrepreneurial capital, competence, and commitment. The
management and leadership of Google are excellent and continue to grow
Google’s business and value [Hardy, 2003]. As a result, the market value of
Google is signi?cant.
MV
EV
EC
Ecomp,
Ecomm
Opportunity
Management,
Context
FIGURE 1.2 Expected market value.
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CHAPTER 1 Capitalism and the Technology Entrepreneur 14
1.4 Building an Enterprise
Sun Microsystems was founded in 1982 by a team of four young men. The con-
cept of a workstation—a high-performance desktop computer—linked to a net-
work was developed at Xerox Palo Alto Research Center (PARC) in 1980. By
1982, Xerox PARC had a network of workstations running sophisticated appli-
cations. Workstations were leading-edge devices for computer-aided design.
From the age of 15, Vinod Khosla had wanted to start a company. After
receiving his bachelor’s degree in electrical engineering at the Indian Institute
of Technology, he went to Carnegie-Mellon University to study for his mas-
ter’s in biomedical engineering. Khosla then entered the Stanford University
MBA program. At graduation, he joined a small start-up called Daisy Systems,
a ?rm in the computer-aided engineering (CAE) industry.
At Daisy, he saw the need for a workstation to support CAE software. After
a year at Daisy, Khosla decided to start his own ?rm to build workstations.
Khosla’s skills were in the design of computers and knowledge of the CAE
industry. In 1981, he drew up a speci?cation for a workstation that was in?u-
enced by Xerox PARC knowledge. At that point, Khosla looked for a partner.
There was a project at Stanford called the Stanford University Network (SUN),
and there he found a talented graduate student, Andy Bechtolsheim, who agreed
to join Khosla in January 1982 to form a company. They wrote a business plan
and within a month attracted several million dollars of venture capital. With the
funds in hand, they got Scott McNealy, an MBA classmate, to join the team.
By May 1982, they had a prototype computer and had made their ?rst sale.
To create the software for their computer, they recruited Bill Joy in June
1982 from the University of California, Berkeley. Joy had led the project to
create Berkeley UNIX. By June 1982, the company was led by four engineers
and MBAs in their twenties who then built it into the world-renowned Sun
Microsystems. Khosla had marketing, design, and leadership skills; Joy was a
leading software designer of UNIX; McNealy possessed manufacturing and
management skills; and Bechtolsheim had strong skills for designing the hard-
ware workstation. This powerful team created a company that revolutionized
the computer industry.
Khosla and his team possessed a great measure of commitment and com-
petency. The opportunity was very attractive, and the industrial context of the
new ?rm was very supportive of their venture. The team’s management skills
were good given their few years of experience. When Khosla and his team
examined the opportunity and their new venture, they saw that the potential
market value of their enterprise could be very signi?cant, if they executed
their plan effectively. Equation 1.3 expresses the potential market value as
MV ?M?C ?Opp ?Ecomp ?Ecomm
Any entrepreneurial team can estimate the qualitative market value of its enter-
prise by reviewing ?ve factors of the qualitative equation: management, con-
text, opportunity, competences, and commitment.
“The Genesis of Palm
Computing” —Jeff
Hawkins (Handspring)
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1. 5 Economics, the Entrepreneur, and Productivity 15
1.5 Economics, the Entrepreneur, and Productivity
All entrepreneurs are workers in the world of economics and business. Eco-
nomics is the study of humans in the ordinary business of life [Mankiw, 2000].
Economics can also be de?ned as the study of how society manages its scarce
resources. Society, operating at its best, works through entrepreneurs to effec-
tively manage its material, environmental, and human resources to achieve
widespread prosperity. An abundance of material and social goods equitably
distributed is the goal of most social systems. Entrepreneurs are the people who
arrange novel organizations or solutions to social and economic problems. They
are the people who make our economic system thrive.
Entrepreneurs ?ourish in nations that provide legal and social incentives
for their activities. A business environment with sound infrastructive and legal
protections will encourage entrepreneurs. A culture that supports and protects
intellectual capital such as patents will provide the necessary context for risk-
taking ventures. The ranking of 10 selected nations by measures of economic
activity is provided in Table 1.8. Nations large and small can provide the con-
text for entrepreneurial activity. In the United States, 10.5 percent of the work-
ing population was engaged in entrepreneurial activity in 2003. The ?gure for
2000 was 16.6 percent [Breeden, 2002]. New ventures and start-ups have been
the source of an estimated one-half to two-thirds of the new jobs created in the
United States over the past decade. The entrepreneur turns a social problem
into an opportunity, a productive organization, and new, well-paid jobs.
TABLE 1.8 Ranking of 10 selected nations by measures of economic
activity.
Business Start-up Nobel Prize
Country environment
1
index
2
Patents
3
winners
4
United States 1 1 2 1
United Kingdom 3 3 5 2
Netherlands 2 4 6 7
Germany 8 8 3 3
Switzerland 4 7 8 5
Finland 5 2 9 9
Sweden 7 5 7 6
France 9 9 4 4
Japan 10 10 1 8
Ireland 6 6 10 10
1
Ease of doing business, infrastructure, and policies.
2
Ease of starting new enterprises.
3
Number of patents granted to residents, 1998.
4
Nobel Prize winners in physics and chemistry, 1901–2000.
Source: Pocket World in Figures, The Economist Books, London, 2002.
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CHAPTER 1 Capitalism and the Technology Entrepreneur 16
An economic system is a system for the production and distribution of
goods and services. Given the limitations of nature and the unlimited desires
of humans, economic systems are schemes for (1) administering scarcities and
(2) improving the system to increase the abundance of goods and services. For
a nation as a whole, its wealth is its food, housing, transportation, health care,
and other goods and services. A nation is wealthier when it has more of these
goods and services. Nations strive to secure more prosperity by organizing to
achieve a more effective and ef?cient economic system. It is entrepreneurs who
organize and initiate that change.
Almost all variation in living standards among countries is explained by
productivity, which is the quantity of goods and services produced from the
sum of all inputs, such as hours worked and fuels used. A model of the econ-
omy is shown in Figure 1.3. The inputs to the economy are the natural capital,
intellectual capital, and ?nancial capital. The outputs are the desired bene?ts
or outcomes and the undesired waste. An appropriate goal is to maximize the
bene?cial outputs and minimize the undesired waste (Dorf, 2001).
Natural capital refers to those features of nature, such as minerals, fuels,
energy, biological yield, or pollution absorption capacity, that are directly or
indirectly utilized or are potentially utilizable in human social and economic
systems. Because of the nature of ecologies, natural capital may be subject to
irreversible change at certain thresholds of use or impact.
Financial capital refers to ?nancial assets, such as money, bonds, securi-
ties, land, patents, and trademarks. The intellectual capital of an organization
is the talents of its people, the ef?cacy of its management systems, the effec-
tiveness of its customer and supplier relations, and the technological knowledge
employed and shared among its people and processes. Intellectual capital is
knowledge that has been formalized, captured, and used to produce a process
that provides a signi?cant value-added product or service. Intellectual capital
is useful knowledge that has been recorded, explained, and disseminated, and
is accessible within the ?rm [T. Sewart, 2001]. The sources of intellectual capital
are threefold: human capital, organizational capital, and relationship capital.
Human capital (HC) is the combined knowledge, skill, and ability of the
company’s employees. Organizational capital (OC) is the hardware, software,
databases, methods, patents, and management methods of the organization that
Economy
Entrepreneurs
as agents of
progress
Beneficial outputs
Undesired waste outputs
Natural capital
Financial capital
Intellectual capital
FIGURE 1.3 A model of the economy.
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1. 6 The Knowledge Economy 17
support the human capital. Relationship capital (RC) is the quality of relation-
ships with a ?rm’s suppliers, allies, partners, and customers. Relationship cap-
ital is often called social capital.
The economy as portrayed in Figure 1.2 consists of the summation of all
organizations, for-pro?t as well as nonpro?t and governmental, that provide the
bene?cial outputs for society. These are the organizations that we study and
will label as enterprises or ?rms. Entrepreneurs constantly form new organi-
zations or enterprises to meet social and economic needs.
Productivity growth is important since it provides all the increases in people’s
standard of living. Over the past half-century, the U.S. workforce (including
immigration) has grown at about 1.7 percent annually, and productivity per
worker has risen at 2.2 percent, generating real economic growth (excluding
in?ation) averaging 3.9 percent. This is an excellent record, due in great part
to the impact of technology entrepreneurship.
Rising output per worker comes from two sources: (1) new technology
and (2) smarter ways of doing work. Both paths have been followed through-
out human history, and they became faster tracks with the coming of the
Industrial Revolution. The twentieth century started with new techniques of
management and many new inventions. The century ended with smarter man-
agement techniques and dramatic advances in electronic technology, which
helped revive productivity growth after limited gains through much of the
1970s and 1980s.
The business system works to drive out inef?ciency and forces business
process renewal. During the past 25 years, the forces of entrepreneurship, com-
petition, and deregulation have encouraged new technologies and business
methods that raise ef?ciency and ef?cacy. In recent years, due to competition,
much of the bene?ts of strong productivity has ?owed to consumers in the form
of lower prices. Innovation, entrepreneurship, and competition are important
sources of productivity growth.
1.6 The Knowledge Economy
Ideas are many, but knowledge is rare. Ideas are ?ltered and transformed into
knowledge, which can be used to guide the actions of entrepreneurs. Ideas are
the raw material from which knowledge is produced. We start with an idea and
pass it through an authentication process in which it may be veri?ed, refuted,
or transformed using additional information. Business ideas are ?ltered through
an authentication process, and if commercialized, they will be validated or
invalidated by the market.
The ?ow of knowledge from science and technology leads to the applica-
tion of this knowledge in products, processes, and services—the essence of
business. The complexity of science and technology, appropriately applied, can
lead to simple and easily understood products. In many ways, we may think
of products as embedded knowledge. Knowledge involves transformed expert-
ise and information. Knowledge can be de?ned as the awareness and possession
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CHAPTER 1 Capitalism and the Technology Entrepreneur 18
of information, facts, ideas, truths, and principles in an area of expertise. Thus,
a person may be said to be knowledgeable of ?nance but less knowledgeable
of product design or manufacturing methods.
Knowledge can be used for wise actions by entrepreneurs. Intellectual cap-
ital is the sum of knowledge assets of an organization. This knowledge is
embodied in the talent, know-how, and skills of the members of an organiza-
tion. The intellectual capital of a ?rm is used to transform raw material into
something more valuable. Mondavi Winery succeeds because of the human
capital of its grape growers and wine makers. McDonald’s relies on the orga-
nizational capital of its recipes and processes. A local coffee shop where the
waiter recognizes you and knows your favorite latté relies on its social capi-
tal. Social capital is based on strong, positive relationships. The elements of
intellectual capital are summarized in Table 1.9. We state that intellectual cap-
ital (IC) is a summation:
IC ?HC ?OC ?SC (1.4)
where OC ? organizational capital, HC ? human capital, and SC ? social
capital.
For many, if not most, ?rms, intellectual capital is the organization’s most
important asset. It is more valuable than its other physical and ?nancial assets.
Many ?rms depend on their patents, copyrights, software, and the capabilities
and relationships of their people. This intellectual capital, appropriately
applied, will determine success or failure. Knowledge has become the most
important factor of production.
The role of a ?rm* is to transform inputs into desirable outputs that serve
the needs of customers. A ?rm exists as a group of people because it can oper-
ate more effectively and ef?ciently than a set of individuals acting separately.
Furthermore, a ?rm creates conditions under which people can work more
effectively than they could on their own. Thus, ?rms exist to coordinate and
motivate people’s economic activity [Roberts, 2004]. A ?rm is more effective
because (1) it has lower transaction costs and (2) the necessary skills and tal-
ent are gathered together in effective, collaborative work. A model of the ?rm
TABLE 1.9 Three elements of the intellectual capital (IC) of an
organization.
Human capital (HC): The skills, capabilities, and knowledge of the ?rm’s people
Organizational capital (OC): The patents, technologies, processes, databases, and networks
Social capital (SC): The quality of the relationships with customers, suppliers, and partners
IC ?HC ?OC ?SC
* Henceforth, we use ?rm to represent organizations, enterprises, and corporations.
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1. 6 The Knowledge Economy 19
as a transformation entity is shown in Figure 1.4. The transformation of inputs
into desired outputs is based on the intellectual capital and the entrepreneurial
capital of the ?rm. As an example, consider Microsoft, a powerful software
?rm. It creates and purchases technologies, develops new software, and builds
a client base. The transformation of its inputs into outputs is based on its for-
midable stock of intellectual capital and entrepreneurial capital.
One hundred years ago, successful companies such as U.S. Steel were pri-
marily managing physical assets. Today’s successful ?rms such as Microsoft
manage knowledge and intellectual capital. Intellectual capital, along with
physical assets, transforms raw material to valuable products. The growth of
knowledge-based innovation enables economic progress to continue to spur
social progress. Acting through an organization, the entrepreneur works for new
ideas and change in the face of go-slow opponents (Mokyr, 2003).
Human capital, embodied in people, has mobility—it goes where it is well
treated. Thus, a ?rm needs to attract and retain the best people for its require-
ments in the same way that it seeks the best technologies or physical assets.
Many talented people leave their jobs to join start-up ?rms because they seek
achievement, independence, and opportunity.
Two characteristics of intellectual capital give it power to add value [T. Stew-
art, 2001]. Firms can use intellectual capital to reduce the expense of physical
assets or maximize the return on those assets. Financial companies, for example,
can expand their reach to more customers using software and websites to enable
online banking as an alternative to building more branches. Another way to
expand their reach ef?ciently through organizational capital is to establish mini-
branches in grocery stores. No longer do a ?rm’s physical assets limit its reach.
Modern entrepreneurial ?rms breed a constant ?ow of high-impact prod-
ucts that create value and stimulate economic growth by bringing new meth-
ods, technologies, and ideas to the global marketplace (Schramm, 2004). Often
they work in partnership with mature ?rms, government, and universities.
The intellectual capital of a new ?rm encompasses its people’s cognitive
knowledge, skills, system understanding, creativity, synthesis, and trained
intuition [Quinn, 1997]. Fortunately, knowledge is one of the few assets that
Transformation
based on:
• Intellectual
capital
• Entrepreneurial
capital
Products and services
Raw materials
The Firm Output Inputs
Financial capital
Component and modules
Physical assets
Technologies
FIGURE 1.4 The ?rm as transforming available inputs into desired outputs.
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CHAPTER 1 Capitalism and the Technology Entrepreneur 20
grows when shared. By organizing around intellectual capital, a new ?rm
strives to leverage it, usually through collaboration, development, and sharing.
A causal diagram can help to portray causal links in a system. Variables
are related by causal links, shown by arrows. The link of Figure 1.5a implies
that if x increases, then y increases. The link shown in Figure 1.5b implies that
if x increases, then y decreases. For example, Figure 1.5c implies that as a
?rm’s intellectual capital and its entrepreneurial capital increase, it will increase
its entrepreneurial activity and prosperity (Sterman, 2000).
x
y
+
(a) (b)
Intellectual
capital
Entrepreneurial
capital
Entrepreneurial
activity
Prosperity
+
+
+
(c)
x
y
–
FIGURE 1.5 Causal diagram: (a) y increases as x
increases, (b) y decreases as x increases, (c) entrepreneurial
activity leads to increasing prosperity.
* Henceforth, we use products to refer to products and services.
1.7 The Firm
The purpose of a ?rm is to establish an objective and mission and carry it out
for the bene?t of the customer. Thus, the purpose of Merck Corporation is to
create pharmaceuticals that protect and enhance its customers’ health. To do so,
a ?rm acts to develop, attract, and retain intellectual capital. The ?rm develops
and uses intellectual capital to build the strengths of the ?rm and to provide the
desired products.* The ?rm provides a place where people can collaborate,
learn, and grow.
The ?rm’s actions are based on its knowledge of its customer, its product,
and its markets. The ?rm must identify and understand its customers, its com-
petitors, and their values and behavior. Knowledge of organizations, design,
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1. 7 The Firm 21
and technologies is ?ltered through a ?rm’s strengths and weaknesses. The ?rm
acts on all this knowledge.
First, a ?rm is clear about its mission and purpose. Second, the ?rm must
know and understand its customers, suppliers, and competitors. Third, a ?rm’s
intellectual capital is understood, renewed, and enhanced as feasible. Finally,
the ?rm must understand its environment or context, which is set by society,
the market, and the technology available to it. We can call this the theory of
a ?rm’s business, or how it understands its total activities, resources, and relation-
ships. Figure 1.6 depicts the business theory of a ?rm. One hundred years ago,
?rms were hierarchical and bureaucratic with a theory of business that empha-
sized making long runs of standardized products. They regularly introduced
“new and improved” varieties and provided lifetime employment. Today, ?rms
compete globally with high-value, customized products. They use ?attened
organizations and base their future on intellectual capital. Firms look to brands
and images to cut through the clutter of messages. In the future, a ?rm’s human
capital—talent—will become more important.
One way to look at the future of a ?rm is as a competition among its
stakeholders. Flexibility and leanness mostly bene?t the ?rm’s shareowners.
Placing a high valuation on talent gives more power to the workers. A good
reputation means the ?rm needs to look after its community and society.
Customers stand to gain power as competitors vie for their attention. The
Firm’s mission
and purpose
Workers and
associates
Customers
Competitors
Society
Market
Technology
Suppliers
Organizational capital
Firm’s Intellectual Capital
Human capital Social capital
FIGURE 1.6 A ?rm’s theory of business depicts how it understands its total
resources, activities, and relationships.
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CHAPTER 1 Capitalism and the Technology Entrepreneur 22
1.8 Dynamic Capitalism and Creative Destruction
One view of economic activity describes a world of routine in which little
changes. In this static model, all decisions have been made, and all alternatives
are known and explored. Clearly, no economy is static, and change appears to
be certain. In a world of change, entrepreneurs seek to embrace it. Entrepre-
neurs match ideas for change with opportunity. These changes include the
adoption of new and better (or cheaper) sources of input supplies, the opening
of new markets, and the introduction of more pro?table forms of business
organization.
Economic progress can be described as the generation of new types of
goods and services that can be produced ef?ciently. Progress occurs because
individuals engage in creating insights that change the nature of both economic
inputs and outputs. Entrepreneurial insight is the recognition of a pro?t oppor-
tunity that was previously unnoticed [Holcombe, 2001].
The pro?t of the new ?rm is the key to economic growth and progress. By
introducing a new and valuable product, the innovator obtains temporary
monopoly power. Lower costs may give the innovative ?rm pro?ts higher than
those of its rivals, which must continue to sell at higher prices to cover their
higher expenses. Alternatively, a superior product may permit a price above
that charged by other ?rms. The same concept clearly ?ts all forms of suc-
cessful change. The free spirit of entrepreneurs provides the vital energy that
propels the capitalist system.
Dynamic capitalism is the process of wealth creation characterized by the
dynamics of new, creative ?rms forming and growing and old, large ?rms
declining and failing. In this model, it is disequilibrium—the disruption of
existing markets by new entries—that makes capitalism lead to wealth creation
[Kirchhoff, 1994]. New ?rms are formed by entrepreneurs to exploit and com-
mercialize new products or services, thus creating new demand and wealth.
This renewal and revitalization of industry leads to a life cycle of formation,
growth, and decline of ?rms.
Joseph Schumpeter (1883–1950) described this process of new entrepre-
neurial ?rms and waves of change as creative destruction. Born and edu-
cated in Austria, Schumpeter taught at Harvard University from 1932 until
his death in 1950. His most famous book, Capitalism, Socialism and Democ-
racy, which appeared in 1942 [Schumpeter, 1984], argued that the economy
is in a perpetual state of dynamic disequilibrium. Entrepreneurs upend the
established order, unleashing a gale of creative destruction that forces incum-
bents to adapt or die. Schumpeter argued that the concept of perfect compe-
tition is irrelevant because it focused entirely on market (price) competition,
when the focus should be on technological competition. Creative destruction
incessantly revolutionizes the economic structure from within, destroying the
entrepreneur in the new firm strives to build a firm that serves all its
stakeholders well.
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1. 9 The Sequential Case: AgraQuest 23
old structure and creating a new one. The average life span of a company in
the Standard and Poors 500 declined from 35 years in 1975 to less than 20
years today. Less than four of the top 25 technology companies 30 years ago
are leaders today—perhaps only IBM and Hewlett-Packard. Companies are
collections of assets and expertise in the short term and pure opportunity in
the long term.
Schumpeter’s theory was based on disruptive (radical) innovations. He
depicted the innovator as creative and nonhedonistic with a goal of major
change and improvement. He described ?rms that faced uncertainty, change,
and competition and were unable to rationally develop pro?t-maximizing
strategies. Little doubt now exists that the economy is driven by ?rms that cap-
italize on change, technology, and challenge. This book is focused on helping
the reader to purposefully become an agent for creative destruction by creat-
ing his or her own ?rm. An example of an agent for creative disruption is Bill
Gates, who established Microsoft and introduced DOS, Windows, and Of?ce.
Gates saw a discontinuity from mainframe computers to personal computers.
The digital video disk (DVD) created a new wave of creative destruction in the
movie rental business as DVDs replaced videotapes in the 1990s.
With his partners, Jeremy Jaech (see Section 1.2) founded Aldus Corpora-
tion when he saw a disequilibrium or discontinuity in the newspaper graphics
industry. The old system was based on larger workstation computers, and he saw
a transition to desktop personal computers using Microsoft Windows. Jaech saw
the opportunity and matched it with his interests and capabilities in a new ?rm.
Most entrepreneurs should look for opportunities based on discontinuities
since they can lead to important results, creative destruction, and signi?cant
wealth creation. Discontinuities can occur through a new technology, a big cul-
tural change, or a new threat to society such as pandemic disease, global warm-
ing, and terrorism.
A recent large discontinuity in the modern global world is mobile commu-
nication and recreational activities. Many people want access to information,
music, videos, and other media while away from home or the of?ce. This has
led to cell phones and new handheld devices such as the Apple iPod that can
receive video and audio ?les.
The entrepreneur of the creative destruction receives a temporary monop-
oly until rivals ?gure out how to mimic the innovation. The high pro?ts of the
original new product will attract imitators quickly. They imitate the original
monopoly and help to disseminate the new product or service.
1.9 The Sequential Case: AgraQuest
The AgraQuest case illustrates and illuminates the issues raised in each
chapter. It focuses on a real-life emerging ?rm in the life science indus-
try that illustrates each factor described in a chapter. AgraQuest
(continued on next page)
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CHAPTER 1 Capitalism and the Technology Entrepreneur 24
(www.agraquest.com) is an entrepreneurial ?rm that may signi?cantly
contribute to improved environmental and social conditions and agricul-
tural industries around the world. Read the segment on the case at the
end of each chapter and learn of a real-life effort that could make a big
difference to the world.
Every seven years in the woodsy town of Killingworth, Connecticut, where
she grew up, Pamela Marrone would feel the droppings of gypsy moth caterpil-
lars raining down on her head as the cyclical pests gorged on maples and oaks.
Desperate to save a heavily infested dogwood, her father once ignored his own
organic gardening tenets and blasted the tree with a chemical called a carbamate.
By the next morning, every bee, every ladybird beetle, every lacewing—
all the “good” bugs that fed on plant pests—lay dead on the ground. In her
youth, Marrone knew that she wanted to keep the good bugs while deterring
bad pests. She recognized a great opportunity that, if solved, could help farm-
ers prosper while using natural pest control agents (not chemicals). Further-
more, as a youth, Marrone had tried, with her parents’ encouragement, several
modest entrepreneurial ventures at craft fairs and state fairs.
Marrone studied entomology (the study of the forms and behavior of
insects) at Cornell University, going on to North Carolina State University,
from which she received her doctorate in 1983. She then spent seven years as
the leader of the new pest control unit at Monsanto in St. Louis, where she
acted on her dedication to the natural control of pests. At Monsanto, Marrone
built her technical and entrepreneurial skills. As a result, in 1990 she was
recruited by Novo Nordisk, a Danish company, to create a biopesticide sub-
sidiary called Entotech Inc. in Davis, California.
Entotech’s goal was to hunt for natural products that can defeat plant scourges
without wreaking havoc on human beings, animals, helpful insects, or soil. But
in 1995, Entotech was sold to Abbott Laboratories, prompting Marrone to start
her own ?rm to meet the challenge of building a successful company that would
use a new search process for identifying natural products for pest control. Thus
was born AgraQuest. Marrone possessed the interest and passion, the capabilities
and skills, and saw an attractive opportunity in the sweet spot of Figure 1.1.
1.10 Summary
The entrepreneur is the creative force that allows free enterprise to ?ourish.
Entrepreneurship is the process through which individuals and teams bring
together the necessary resources to exploit opportunities and in doing so cre-
ate wealth, social bene?ts, and prosperity.
The critical ideas of this chapter are:
? The entrepreneur as creator of a great enterprise.
? The entrepreneur responds to an attractive opportunity.
(continued from page 23)
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1. 11 Exercises 25
? A person can learn to be an entrepreneur.
? The entrepreneur knows how to use knowledge to create innovation and
new ?rms.
? Positive entrepreneurship activity ?ows from a combination of entrepreneur-
ial capital and intellectual capital that leads to productivity and prosperity.
? The entrepreneur uses an appropriate organizational structure to achieve his
or her goals.
1.11 Exercises
1.1 What is the difference between an idea and an opportunity? How is
this difference important to an entrepreneur?
1.2 Consider opportunities that have occurred to you over the past month
and list them in a column. Then, describe your strong interests and
passions, and list them in a second column. Finally, create a list of your
capabilities in a third column. Is there a natural match of opportunity,
interests, and capabilities? If so, does this opportunity appear to offer a
good chance to build a business? What would you need to do to make
this opportunity an attractive chance to build a business?
1.3 Name an entrepreneur that you personally admire. Why do you
consider that person an entrepreneur? What sets that person apart
from other business leaders? What path did the person take to
entrepreneurship? What personal sacri?ces or investments did the
person make in his or her journey? What people were important to
this person’s success?
1.4 Name a successful entrepreneurial team you personally admire. How
would you classify this team in the context of the entrepreneur types
de?ned in Table 1.4? Do the elements of entrepreneurship de?ned in
Table 1.7 apply to this team?
1.5 Mobile virtual network operators (MVNOs), such as Disney, Virgin,
AMPD, and ESPN, are emerging to provide wireless services to
subscribers without the need of building a wireless network. What
business opportunity have these MVNOs identi?ed? What are some of
the risks?
1.6 Bette Nesmith, working as a secretary, wondered why artists could
paint over their mistakes, but typists couldn’t. The solution was
“liquid paper.” Determine how Nesmith created an enterprise based
on the opportunity (see inventors.about.com).
Principle 1
The entrepreneur develops an enterprise with the purpose of creating
wealth and prosperity for all participants—investors, customers, sup-
pliers, employees, and themselves—using a combination of intellec-
tual and entrepreneurial capital.
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CHAPTER 1 Capitalism and the Technology Entrepreneur 26
1.7 The quantity of undesired junk e-mail called spam has risen to exceed
the number of desired e-mails. Using Figure 1.6, determine the
entrepreneurial capital and the intellectual capital needed to provide
the necessary entrepreneurial activity to reduce the impact of spam.
1.8 The Human Genome Project was a 13-year effort that was completed
in 2003. Its goal was to identify and sequence all the approximately
20,000–25,000 genes in human DNA and store this information in
a database. This was viewed as a signi?cant milestone in genetic
research. What opportunities have been created by the ready
availability of this information and resulting data analysis tools?
1.9 What were some of the key customer, technology, and market trends
that drove entrepreneurship during the last decade? What factors do
you predict will drive entrepreneurial challenges in the next decade?
1.10 Research the number of companies that either had an IPO or were
acquired in the last ?ve years. Where is this trend leading? What
implications does this trend have on the number of new ventures
being started?
Select a high-potential opportunity that interests you and then use it for
the venture challenge exercises at the end of each chapter. For example, you
might consider one of these current trends in science and technology: mobile
data applications, internet telephony, video podcasting, web services, nano-
technology, clean technologies (including fuel cell, battery and solar), pandemic
flu and biodefense treatments, and advancements in stem cell research.
1. Describe the opportunity that attracts you and why you think it is a
new venture opportunity.
2. Describe the competencies and skills you and your team members
possess.
3. What important stakeholders will you need to be successful?
4. Describe the passion and commitment you have for the opportunity.
5. Is this a good opportunity for you?
VENTURE CHALLENGE
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