A1:

No. There are many companies in which this template does not apply. First, if a company already has a successful venturing arm or growth model, there will be no incentive or rationale for change. Further, if the corporate culture is characterized by reluctance to change or embrace a new template, there is no opportunity to implement an SEU concept.

A2:

The way a firm is organized and structured greatly influences how it will address a separate venture. Organizations that are centered on distinct business units may be inclined to let a new venture operate independently (i.e., on its own). By contrast, a company with highly centralized functional units may want to force conformity upon all of its new ventures. Centralized organizations do not naturally like things to be different within the firm. Moreover, the larger the firm, the greater the danger that the various corporate staff members will want to become involved with the venture. It will require a strong “hands-off” order from the top, preferably a watchful CEO, to keep the corporate bureaucrats at bay. We identify a few characteristics that we believe will help distinguish between entrepreneurial and traditional organizations in Table 10.1.

A3:

Change really begins at the top. If an SEU venture has any hope of surviving, the CEO must mandate the development of such a venture and help develop a basic template that identifies the scope, responsibilities, equity distribution, compensation, intellectual property, funding, and organizational control parameters. In the absence of CEO participation, and institutional independence, the SEU may be subject to the whims of economic instability or power changes within the organization. The CEO and his or her team need to decide the overall purpose of venturing. The ultimate purpose varies depending on whether it is for strategic growth, market expansion, product innovation, or product development.

A4:

Although the external business and environmental conditions may seem like obvious factors to even the casual observer, the internal factors are equally important and probably more difficult to forecast. Many entrepreneurs simply cannot survive in a rigid corporate climate. Consequently, they tend not to be attracted to working within the large, organizational infrastructure. Moreover if they do happen to find their way into the large, bureaucratic organization, they may not survive very long within it. The “wrong” corporate culture can be lethal to new venture creation and development. Selecting the right entrepreneurial partner may be difficult on its own. Making sure that the entrepreneur is protected and allowed to flourish without corporate interference may be another. The internal corporate business factors are central to new venture growth development. A few of the key factors are shown in Table 10.2.

A5:

If the firm has a history of embracing cross-functional use of personnel and is oriented around work teams, it may be more inclined to favorably accept a “renegade” venture being started than would a traditional situation. Conversely, if the corporate culture is steeped in hierarchical bureaucracy, it will probably spurn new forays or methodologies. Acceptance within the informal culture of the parent firm is critical to the new venture’s success. If the corporate bureaucrats see the new start-up as a potential threat to their power and/or future, they may openly (or deceitfully) campaign against the new venture to preserve their power base. Management needs to recognize this potential threat and to work hard to reduce the internal anxiety that may be present. It cannot ignore the informal structure with its collective “heads in the sand.”

On the other hand, proactive use of the informal structure will probably help the venture to succeed. Enthusiastic support and able volunteers can reduce corporate overhead and provide assistance and expertise that otherwise would be hard or expensive for the venture to procure. But the informal culture support does not occur by accident. Seasoned management knows that the best type of informal support is the result of careful planning and forethought. This is where leadership arises. Senior management, including the CEO, must strongly endorse the venture project and champion its cause. If management ignores the informal market, personnel at the new venture will be left vulnerable to the forces that want to grab hold or influence it. Of all the factors, proactive senior management support is vital to the success of the venture. This is true both in its initial phase and as the new venture matures.

A6:

Yes, corporate culture changes over time. Many large, public companies that are now sluggish and bureaucratic were dynamic entrepreneurial companies in their early days. Where possible, it is helpful to maintain the energy and spirit that founders bring to their organizations. A survey of founder-managed, large companies suggests that the influence of the founder may be extremely helpful in maintaining the growth and spirit of the large company. For example, Bill Gates (Microsoft), Larry Ellison (Oracle), Michael Dell (Dell Computers), and Andy Grove (Intel) are all situations in which the founder/CEO stayed involved in the organization for a long period of time. Although many factors contribute to organizational growth, certainly a major factor is the vision and presence of a strong leader. Professional management needs to be careful about the decay of entrepreneurial spirit over time.

A7:

The primary approach of the SEU encourages a portfolio of small, limited scope and focused ventures, rather than large and complex ones. The argument centers on the notion that it is easier to grow a small venture at a faster pace compared to a larger firm. However, because senior management probably does not have the time to filter and support a number of small firms, the SEU template recommends a third-party Facilitator to assist with deal flow, negotiations, and support. Large companies will still continue with significant strategic bets or investments. However, the SEU approach enhances diversification in new venture creation and sheds organizational burden (i.e., Facilitator) to those who can better handle these responsibilities.

A8:

Jeff Timmons from Babson College (previously at Harvard Business School) describes the creation of value being a combination of team, resources, and opportunity. Clearly, trying to create value in the absence of any of these attributes will be difficult. More important, it is necessary within any large organization to ensure that corporate management does not attempt to control or run the venturing process. The large organization should allow the Entrepreneur to build his or her team. Moreover, where possible the risk/reward ratio should attempt to match real-world levels. If people within the organization refuse to engage in the risk of external entrepreneurs (i.e., similar investment and salary consequences), they should be reminded (by an external party) that the returns should consequently be less significant as well.

A9:

The question of where to look for talent is a common dilemma. Some large organization managers believe that there exists a self-selection bias or clientele effect within the firm. That is to say that they think true entrepreneurial talent would never even apply for a job at a large organization, much less work for one. This would suggest going exclusively outside for entrepreneurial talent. We actually believe that the optimal strategy is to look both inside and outside the firm. Too often companies either let the entrepreneur do all of the selection from outside, or go to the other extreme and staff it completely from inside. Neither way may, by itself, optimize the knowledge of internal politics and available resources from the inside, and the hungry enthusiasm and cost-conscious approach from the outside.

A10:

After the CEO decides to move forward with an SEU template, the large organization needs to identify the internal corporate champion. The corporate champion should be a senior executive within the parent firm that can manage the large company resources and keep the corporate politics away from the new ventures. This step is necessary to make sure that interfaces with the parent company are managed and that someone can “call off the dogs” within the company that may seek to force compliance. The champion should be named early in the process so that he or she can monitor the progress and be involved. This internal champion can also be the liaison with external parties and with the SEU Facilitator.

A11:

The organization needs to allocate some risk capital for new venture creation or be comfortable with external funding coming from the outside. Clearly the funding will be critical to the success of the new ventures. The SEU model allows partial funding from the parent firm, but also enables funding to come from a variety of sources including: third-party investors, banks, and possibly venture capitalists. The SEU model suggests that VC funding be kept to a minimum because these parties usually like to control the final harvest scenario (which the SEU model doesn’t provide). The SEU template does not allow a financier to dictate the type or timing of a harvest decision because it may be detrimental to the long-term development of the new venture.

A12:

The SEU model provides considerable opportunity for entrepreneurs to partner with large companies. Entrepreneurs might be both inside and outside the firm. In particular, a large company might currently have untapped projects or projects they deem “ugly ducklings” that could be managed by outside talent. During periods of economic contraction it is possible, and perhaps even probable, that the large company might welcome an external party to assist with value creation and venturing on projects that they no longer have funding to complete or manage properly. Moreover, during periods of employee layoffs, venturing might create an alternative path for both the firm and the employee. Organizations should look for outsiders not to help solve their problems, but rather, to provide an additional source of revenue with relatively low effort and risk. So long as the firm has a facility in place to help generate this additional income, with external parties that will help negotiate terms and keep management’s primary focus on important day-to-day operations, all parties gain.

A13:

Clearly, one of the most contentious and poorly handled areas within the large organization relates to individual accounting and compensation. Many of the problems involved with organizational and security scandal/impropriety deal with individual compensation. Large organizations are accustomed to paying people in general categories (often referred to as “buckets”). Except for variable or incentive-based individuals (i.e., salespeople), the only individuals that tend to negotiate special compensation packages include senior executives. Otherwise, the large organization will have a Herculean task trying to manage all of the combinations and permutations involved with appropriateness and fairness. Large companies need to move to a system that allows more variable compensation with members at all levels within the organization. Moreover, they need to provide a mechanism that invites external members into the family of networks and affiliates. Only through creative compensation facilities will organizations be able to fill this strategic gap. The EntrePartneur process (discussed earlier) establishes variable compensation within an SEU framework. Using an SEU Facilitator, individuals can negotiate within a range of compensation packages that offer a wider array of risk and return.

A14:

Yes. Although the large firm tends to exhibit too much control over small, local ventures, sometimes the opposite occurs when the large firm invests in a remote project. New high-potential ventures that are too far away may be completely ignored. General Motors and Toyota provide a useful example. In the 1980s, General Motors and Toyota formed a joint venture called “Neumi.” This venture was designed as an attempt to produce a small vehicle in the United States. This joint venture also provided a learning lab and experimental organization for GM to clone or copy Japanese manufacturing and engineering techniques. The venture successfully produced vehicles branded as both Toyotas and Chevrolets. They sold moderately well, although the Toyota version always outsold the Chevy. The secondary objective, which was to provide a learning experience for General Motors executives, has generally been viewed (both internally and externally) as a failure. What happened here?

Groups of GM managers were trotted out to California to witness the Japanese methods and to see, first hand, how their process worked in an interrogated fashion. The plant was on the “must-tour” routine for all up-and-coming GM executives. Several were rotated into the plant management structure for one- or two-year assignments. But this behavior was all superficial to the core organization of GM. Back in Detroit, the not-invented-here syndrome took precedence. The strong-minded, arrogant U.S. automotive industry took control and locked out the valuable input that the joint venture could have provided.

Most departments within GM either refused to adopt the venture examples or found reasons to justify why this experiment would not work within the larger firm. Although the venture did lead to other joint research vehicles, GM decided to start from scratch in the establishment of its Saturn Division and basically duplicated rather than adopted the advantages that they could have learned from the Toyota venture. They spent considerably more money than was necessary, in part because the experiment was too far removed from the corporate buy-in (i.e., informal and formal network) necessary to make it succeed.

A15:

Outside financiers often make the harvest decision at a price and time that is convenient for them. This may not be in the best interest of other members of the SEU and parent firm. An outsider may not be interested in the long-term benefit of the deal or strategic investment and may only be interested in maximizing his or her gain in the short term. Large organizations, particularly those with publicly held stock, should not allow outsiders to drive this important decision. Large, publicly traded organizations can provide investor liquidity through a swap with existing stock, if necessary. When it comes to deal structure and harvest, the venture should only be harvested (i.e., sold or made into IPO) when it appears that an important funding or strategic link is necessary to maximize value. This step should be made clear at venture formation along with the company objective. To add or change the harvest later, once success or failure appears evident, becomes expensive in either respect.

A16:

Before beginning the venture process, senior management needs to decide what they hope to accomplish. There may be at least five different reasons why management would like to pursue growth through ventures including: (1) strategic expansion of the firm into new areas, (2) technological acquisition, (3) new product development, (4) new market entry, and (5) cultural change. Depending on the purpose, the structure of the facility will obviously vary.

A17:

The answer to this question varies with the level of expertise and staffing within the organization. Ideally, talented entrepreneurs converge from both the inside and outside. However, in the past some organizations experimented with “think-tanks” and “skunk-works” projects in which senior managers self-selected “entrepreneurial” people and placed them in entrepreneurial units (perhaps even physically separated from the main operations). These projects often failed because the experiments did not simulate real, entrepreneurial environment conditions.

Often, wealth creation develops with small homogeneous populations sharing a common culture and ideology. Bringing in people with a diverse background or mindset may be detrimental to deal formation. If the organization forces certain members into a team that it deems necessary, it may seriously disrupt or impede the development of the operation. This may hold true irrespective of the educational base or skill set of the added member. In a perfect world, the team will be self-generating and highly motivated to excel at its chosen task. Our early research efforts in this regard suggest that small groups with similar values (work ethic, motivations, goals, etc.) work best in creating successful ventures. Large organizations need to be careful not to meddle in these sensitive value-creating dynamics.

A18:

They can’t. A lazy employee will probably not turn into a dynamic EntrePartneur. Although it would be nice to extract value from this large middle group, most middle managers have little incentive to pursue any risk initiative. Moreover, they are not willing to risk their compensation and will probably resent those around them that receive unusual rewards or recognition while betting their corporate assets and future livelihood. The SEU approach applies a compensation-based methodology that engages individuals (inside and external to the organization) to pursue entrepreneurial paths. Given the self-selection bias that may exist at large organizations (i.e., individuals willing to engage in risk/return may not be willing to work for a large company), it may be likely that the organization will need to search outside the organization for entrepreneurs.

Where possible, the goal should be to encourage middle managers to be supportive of entrepreneurial activities in the work environment (or at the very least be neutral toward venture creation) and not to impede the progress of the entrepreneurial members within. The middle managers should see any of their contributions, even minor support (i.e., idea development or product outlets), rewarded with recognition, compensation (bonus, etc.), or both.

A19:

No. During the mid- to late-1990s, so-called rollups, leverage buildups and consolidations were all the rage on Wall Street. Many companies were quick to buy out entrepreneurs and place them on a graduated earn out clause (3–5 years). The intent was to get them out of the business as soon as possible so that management could continue with its cost reductions and corporate consolidations. In quick fashion, some organizations turned highly productive entrepreneurs into drones within the organization. Indications of what the organization had done could be observed in the types of questions asked by the bought-out entrepreneurs.^[1] “How many weeks vacation can I take?”, “Can I leave early for my son’s (daughter’s) baseball (soccer) game?”, “What are the minimum number of hours I have to work per week?” The companies usually didn’t do anything specific to drive these questions, but clearly individuals who were accustomed to calling all of the shots themselves were now thinking like an employee. Their focus shifted immediately from increasing the business to working the minimum effort. This is the exact opposite of what large companies need. They need to change employees into entrepreneurs. Sadly, their experience traditionally has been to do the opposite. If they are to be successful in growing organically, they need to create incentive systems to reverse this long trend. Otherwise, the declining pattern will only continue.

A20:

Large companies should attempt to hire an unbiased individual/group to negotiate internal and external deals. Often a large company may try to negotiate the deals directly, primarily because they want to control the process and use their considerable leverage to negotiate the best terms. However, it is our contention that because the negotiations are so onesided and predictable, many internal entrepreneurs choose not to negotiate at all. In fact, they may prefer to either (1) withhold promising ventures reserving the right to exercise these ideas later or (2) leave the organization to set up a new venture on their own. In either situation, the large organization loses. Furthermore, to the extent that many ideas may expire or become stale due to advancements in the marketplace or obsolescence, there may be considerable “untapped value” within the organization that could be easily extracted. The external negotiators should be reasonable and impartial. Moreover, both the large organization and the entrepreneurial team should pay the negotiator to remove the perception of bias. The large company might be able to draft a short list of potential negotiators, and then after an interview process, the entrepreneurial team could select from that list. Thus, both parties will be responsible and comfortable with this important member of the deal formation and development.

A21:

No. We do not advocate the use of large corporate law firms for handling the negotiation or ombudsman process. Although the knowledge of lawyers will be very helpful at defining parameters related to IP issues, unfortunately, in many situations lawyers have an economic disincentive to be efficient and may have no limit to billings on an hourly basis. Moreover, given their strong leverage against their client, they can develop a coherent argument or series of arguments to justify their wages making it more difficult for the parent company to limit the size or scope of their legal work. It usually follows the line of protectionism for the big company and may be difficult to disengage (i.e., without them the company will lose valuable rights or be vulnerable to large payoffs down the road). Law firms should be helpful in setting up the initial parameters of the SEU and intellectual property rights and responsibilities, but should not be placed in control as the SEU Facilitator.

The last thing the large company wants or needs is the loss of their organizational lifeblood. However, when it comes to negotiations with small entrepreneurs, a large corporate legal staff may be unnecessary or wasteful. Large companies need to be more efficient in employing their legal protection. In some cases, such as Microsoft’s case against the U.S. Justice department, there is no alternative. There is no negotiation. There is no compromise. The large company needs to take the offensive and fight for its stakeholder rights and privileges. However, there are plenty of situations, indeed perhaps most, in which the company is not fighting for its constitutional rights. In these cases it needs to be practical. It needs to be efficient. It needs to be forward-looking in its application and purpose. In these situations the company needs to address the benefits to all parties and think about how it can best grow the firm through mutual cooperation. The corporate lawyers need to step aside. They may be too biased to represent the firm efficiently in these situations.

A22:

The Facilitator should represent all parties to the deal in a fair and proper manner. This means that the Facilitator sets as a stated priority or objective to first protect the interests of the “SEU” and not just the rights of the large organization. The Facilitator should help develop a simple template offering rights and privileges to all stakeholders in the deal. So long as the interests of the “SEU deal” are represented first and foremost, the direction ought to be clear. This is an important first step to developing strategic growth through entrepreneurial partners (e.g., “EntrePartneurs”). It will be a contentious first step hotly debated within the inner circle. Ultimately, many companies will not relax control and will not follow through with this recommendation. This is to be expected. The organization will at first need to select a catalyst or corporate champion to lead the charge, but once the infrastructure has been established, it should no longer depend on that corporate champion’s energies alone. Otherwise, the facility may not survive an economic downturn or change in organizational leadership, and may risk losing the opportunity for long-term value creation.

A23:

No, we do not believe that large companies should focus on general stock option plans. The vast majority of individuals do not have influence on the overall stock price and usually do not have enough stock options to make a substantive difference in their behavior. However, we do advocate the creation of new economic incentive packages allowing for “pure play” or venture-specific opportunities. Large companies need to reduce stock option plays on total firm and increase option plays for new venture appreciation or growth within the large company. Some employees need and should be able to develop an equity stake or accumulated equity interest in a long-term venture. Because the efforts of most employees have little, if any, effect on the large company, arguably the best way to provide employees with a meaningful ownership interest would be to provide a stake within a smaller venture. This would improve their vested interest over an extended time period and increase the likelihood that they would seek to enhance venture revenues and reduce venture costs. Moreover, providing equity in a smaller venture would increase the accountability and linkage between the individual’s efforts and the development of true value.

Executives of a large company need to make big changes to the company to influence the stock. Otherwise, their stock options won’t have much value. As we’ve seen with the M&A activity of the 1990s, significant transaction activity is not in the best interests of all stakeholders. Large company stock options only make sense for a few individuals, and even here, it is not clear whether the incentives are always aligned properly. If individuals in the executive circle only have a few years to see their job through, they are under immediate pressure to accelerate performance quickly. Whether or not it is in the long-term best interests of all parties may be secondary to their mission. Irrespective of their urgency to change, they have economic incentive to search for the “quick fix.” If the stock market reacts favorably during their tenure, they are afforded a rare treat and perhaps favorable popular press clippings. Their stock options are tied to the total performance of the organization. They may be able to change the development and general movement of the organization. But overnight, they cannot change the organic profit equation. This takes time and strategic focus.

A24:

Given their enormous resources and leverage, large companies can exert heavy-handed negotiations and demand a large percentage of any new business ventures with their internal candidates. However, this will reduce entrepreneurial incentive and reduce the likelihood that others will attempt to maximize the economic value and growth of the new initiative. Moreover, by consistently taking 100% of the equity, large companies may be providing incentive for entrepreneurial employees to leave the organization (where employees can earn equity on their own). If organizations want to facilitate new growth in a dynamic new manner, they will need to become accustomed to giving up part of the upside. Otherwise they may continue to own everything in ventures with little or no potential.

A25:

Wherever possible it is best to continue an ownership stake in the intellectual property. This becomes particularly important with intellectual property of a strategic interest. Most large firms refuse to sell or license their intellectual property out of concern for its control and misuse. On the other hand, some companies, particularly during periods of economic recession, may be inclined to sell intellectual property to generate cash. Given the timing of the sale and the poor negotiating position of the selling firm, the revenue may not be maximized in this way. As an alternative, we believe the firm should consider more licensing arrangements that provide economic incentive for outsiders to promote its products. As the brand recognition improves, the large company will find that it is growing faster with no incremental investment.

A26:

Wall Street analysts tend to be focused on corporate revenue and profit growth. Moreover, they tend to be keenly interested in their own compensation and incentive systems that may or may not correspond with the long-term best interests of the large firm’s stakeholders. So long as the large firm is focused on new product innovations and new methodologies to enhance organic growth and keep administrative costs low, Wall Street will be unable to find fault with management practice. Moreover, as the organization becomes increasingly transparent in its growth methodologies and compensation mechanisms, fewer surprises and potential improprieties will likely occur, thus reducing the potential volatility of the company’s stock price.

Management needs to be careful not to fall prey to external consultants, dealmakers, lawyers, shareholders, suppliers, internal executives/managers, and other stakeholders who may all have varying economic incentives. Ultimately, it will probably not be possible to satisfy the interests of all stakeholders and potential stakeholder groups. However, management needs to balance the interests of each party and select the path that maximizes stakeholder welfare. Ultimately, creating a venture with true organic growth helps expand the economic pie for the mutual benefit of all stakeholders.

A27:

Creating an environment that discourages talent flight may only serve to make employees increasingly dependent and resentful of the parent firm. Organizations need to think of ways to partner with some value-creating employees that will reduce the organizational cost structure and allow members to work with the firm on an independent basis. This may increase the flexibility to source with multiple agents and allow the entrepreneur to allocate cost structure to multiple parties (separate from the parent firm). However, organizations need to be careful that their new venturing facilities do not create incentive for the valuable employees to leave while the less mobile (and less valuable) individuals remain.

A28:

Yes. By licensing and partnering with former employees or external parties, large companies might be able to increase their revenues and profits without any additional investment capital or management oversight. Once management creates a basic template that invites external and internal participation, it theoretically should be able to appreciably enhance its shareholders’ return on investment (ROI) due to the lack of incremental investment. The implementation of this approach mandates that the company not over-invest or over-manage these new areas. This would require relaxing traditional areas of control or domination that may be difficult in practice to implement. However, the theoretical model should be held as a benchmark in which to judge future performance (i.e., measure administrative overhead).

A29:

It is true that large companies need considerable growth to make any meaningful difference to the investor community. However, we disagree that it needs to come from large investments. In fact, the empirical evidence over the past decade makes increasingly clear that growth through large acquisitions or purchases may be the fastest way to lose value for corporate stakeholders. We advocate value creation or partnering with many smaller, high-growth entrepreneurial units. Although the contributions from any single source may be insignificant, we believe that in the aggregate a portfolio of these entities can provide appreciable growth and a substantive, measurable difference to the corporate bottom line.

A30:

In theory, large firms offer extraordinary economies of scale. They have resources only dreamed about by small entrepreneurial firms: talent, capital, brand, distribution, and so forth. However, despite these enormous advantages, large firms are just too inefficient to manage their resources in a productive manner. We believe large companies should provide a vehicle of growth for small companies. Given their ability to lend specific expertise, cheap capital, brand, and distribution, large companies can bring value added to the bargaining table, but then they need to step aside. Small companies provide accountability for their employees and management team and will not squander their scarce resources. Moreover, the small entrepreneurial venture will more likely figure out a way to make things work, even if at first pass, it appears that there are difficult barriers in the way. Entrepreneurs learn how to manage risks and motivate their key people. They can be more responsive to market conditions and adapt faster than the large firm to the mutual benefit of all of their stakeholders.

A31:

Interestingly enough, our study suggests that the median age of the Fortune 500 company is about 54 years. Although some may last longer than 200 years, that is clearly the exception to the rule. We believe that as organizations age it becomes increasingly difficult for all stakeholders to maintain the same motivating goal. Although a few events may galvanize the organizational viewpoint, such as a public stock offering or a strategic sale, acquisition, or merger, for the most part, individuals pursue an individual path that may come at the expense of most other stakeholders. Collectively, these individual paths may not necessarily benefit other members of the firm to the ultimate detriment of all other stakeholders.

Where possible, the firm should attempt to create accountability and growth through separate operating units. For example, although Johnson and Johnson is over 116 years old, it provides a shining example of how some old companies can maintain an aggressive growth pattern. In the last 10 to 20 years it seems to have gotten even more profitable and maintains more than 200 separate operating units. We believe it may be possible for other firms to replicate this pattern of growth or more through separate, albeit related, operating units. We also believe that it is beneficial to provide equity incentive to participants, where possible.

A32:

Organizations that scale back from their non-strategic initiatives can reduce their cost structure and improve their ROI. The improvement in ROI results from SEU formations or facilities in which individuals embrace risk (their own capital and time) for mutual gain. This enables management to free up their time to focus on strategic issues and direction, without losing sight of the larger prizes and future growth.

A33:

The SEU concept essentially enables the large company to bet on people who are betting on themselves. On an individual basis, many of these people may not be able to generate a strong company alone. However, the large company should hold a portfolio of SEU investments. On net, these SEUs will make a fine, perhaps even outstanding, investment. Remember, the individual entrepreneurs in an SEU do not have a backup plan. They are investing their own capital and career path, as well as the livelihood of their dependents, on the success of their new venture. They do not want to fail. Indeed, many of them will operate as if they can’t fail. From a portfolio perspective, the large firm may not be able to perform better than betting on this group that quite literally may be betting everything on themselves.

A34:

The concept should be simple in design with an easy entry and exit feature. If it is too complex or cumbersome, it may frighten away potentially good investments and people. Moreover, the project should be fluid, flexible, and fair enough to address unanticipated problems without undue stress or controversy to participants in the venture. The ideal SEU facility will provide equity participation and fair compensation to the value creators. It will have relatively little administrative over-head and day-to-day monitoring and mutual trust developed over time. Moreover, the group must have a common sense of purpose and destination. If goal alignment does not exist among the key stakeholders, it may be become problematic later on as stakeholders age and goals diverge.

A35:

By creating an opportunity to partner with entrepreneurial individuals, both internal and external to the organization, the large firm can amplify its return on investment and leverage its research and development. Although new projects will tend to be extensions of company brand and distribution channels they can really develop in a number of ways. Clever entrepreneurs (both internal and external to the organization) will examine methods in which they can combine their talents, expertise and intellectual property with the large firm to create a product or service that is mutually beneficial. This means that the large company will be able to extend its set of opportunities without incremental investment. In effect, it will be leveraging its existing investment in research and development in a very efficient manner.

A36:

Since the SEU approach combines the brand and intellectual property of the large firm with the intellectual property of the entrepreneur, it should require less risk capital investment by the large firm. Rather than making a direct capital investment in another strategic area or acquisition, the large firm can simply partner with entrepreneurs and allow each to earn an equity-like return on whichever aspect each brings to the negotiating table. There is no need for the large firm to invest in areas which may consume capital with a low or negative return. The firm will be able to simply broker deals (and contribute no capital) and license its brand, distribution capabilities, patents or other intellectual property. This will enable the firm to essentially earn an unlimited return on investment (ROI) as the incremental revenue will accrue with no incremental investment. Of course, given the size of most large, public companies it may require a number of small SEU investments to make a significant contribution to the overall bottom line.

A37:

Growing a multibillion dollar organization through a series of small $0.5 to $2 million projects will be a logistical and administrative challenge. However, the SEU template does not encourage senior management to spend its valuable time structuring, negotiating and nurturing small entrepreneurial ventures. Rather, management should set up an external growth initiative program and select an independent (unbiased) Facilitator that will help solicit, review and approve appropriate deals. Given the modest or non-existent investment requirements of many deals (e.g., licensing intellectual property or distribution channels), the SEUs can only help to serve the demands of the investment community and other corporate stakeholders. Meanwhile, management can still pursue its large scale strategic investments. The process is not mutually exclusive. In fact, given the tendency of large companies to make a few, closely-monitored large strategic bets (in order to have an impact on the bottom line) the SEU approach provides a buffer from a portfolio perspective. In the unfortunate event that management makes a large strategic bet that fails (e.g., Motorola’s $1 billion + investment in satellite technology--Iridium), the company can still fall back on its diversified investment base of SEU projects. Thus, an SEU program can only serve to reinforce an overall growth strategy.

A38:

Yes. Although our work has been based on data collected primarily, but not exclusively, from large, publicly traded organizations, we are now seeing evidence that nonprofit entities such as Battelle are employing an SEU-type venture. Many of the same problems addressing large, publicly held companies also exist in large privately held companies and governmental agencies. These include divergent goals, poor compensation mechanisms, and aversion to risk. Both privately held companies and governmental agencies have unique attributes that make them different from our primary sample of publicly held companies. In some cases, there are characteristics that make them live longer (governmental agencies with long-term commitment and funding). Or, there are some attributes that might make them operate more efficiently (privately held companies with founder/owner focus and control). Further studies will research these different groups and attempt to offer insights about mechanisms that will enable them to grow faster or more efficiently. To the extent that some lessons might apply the other way, perhaps we will see future companies less likely to pursue an IPO, or more companies opting to privatize. We do not know yet what future data will uncover. We do believe, however, that future modifications will continue to apply to other sectors, possibly with far-reaching ramifications.

A39:

Now! The risk of continuing on the same path may be greater than the risk of undertaking new twists to older models of growth. Certainly the answer is not to remain constant. Doing nothing is virtually guaranteeing failure. Organizations have pursued many models of growth in the past 30 years. Most of the quick answers don’t work, though some offer valuable enhancements to long-term wealth creation.

Perhaps the clearest danger to the large firm is in the administration of this new model. It is designed as a “low administrative” approach. Creating hierarchy and layers of management is the surest way to kill this method. The large company needs a high-level company champion to help establish the new facility and then get out of the way. If the facility is set up with the proper incentives then it will drive itself. It does not require, nor advocate, heavy-handed over-sight or day-to-day administration by the corporate office.

When resources are low, such as during an economic recession, the SEU approach could not be better timed. It should be implemented without delay. If large companies ever expect to grow bigger, they will need to learn how to grow through smaller companies. Given their recent history they should not postpone this path. They need to begin today.

A40:

Yes! In 2003 Battelle started to experiment with a model that is extremely close to an SEU template. In a strategic relationship with Babson College, Battelle has explored new entrepreneurial initiatives in an attempt to develop its extensive R&D intellectual property. Babson College is essentially acting as an unbiased SEU “Facilitator” by filtering deal flow, selecting prospective entrepreneurial employees (from its student population), facilitating the development of the budding enterprises, and assisting with negotiations. Because this initiative is now in its early stages, no progress report is yet available. However, early “deal flows” thus far have concentrated on simple licensing arrangements and distribution channels.

Microsoft’s XBox venture also comes close to an SEU template. Although specific terms of the XBox deal are not available, much public information regarding this venture suggests that it was set up with an “SEU-type flavor.” Entrepreneurial employees (e.g., EntrePartneurs) appear to have equity rights along with the corporate parent. Moreover, the funding and development of intellectual property along with the operational independence and extraordinary arbiter or mediator to the deal (Bill Gates) suggests that many of the SEU concepts are represented in this venture arrangement. Given the embracing of talent external to the organization, it actually represents what we refer to as a “reverse SEU” in which the entrepreneurs come from outside the organization and form a deal.

Many other large companies may already be offering some version of the SEU template, though not on a consistent, company-wide basis. In these situations, companies may set up new ventures on a case-by-case basis with senior management providing the deal flow and filtering. For example, Ford Motor Company has structured minority-owned strategic ventures with former employees and other third-party participants (e.g., “EntrePartneurs”) on a limited basis.

Finally, companies such as Johnson and Johnson have a more distant formation, though it also approaches an SEU template. Johnson and Johnson, for example, encourages the formation of many separate divisions and operating entities within its large and diverse organization. Many of these are located near their New Jersey Corporate offices for logistical and coordination reasons. Others are located completely across the country where talent and unique markets reside or where it is easier to retain independence from other corporate groups. It depends on the product and where the company is in its initial startup curve. However, each division receives economic incentive for superior performance and appears to operate with little corporate interference. Furthermore, for a relatively old, large, publicly traded company, it appears to continue with relatively strong revenue and profit performance.