In Chapter 10, we examined the processes necessary to develop new products and services within the existing corporate environment, based on the strategy and capabilities identified in Chapter 4. In this chapter, we explore how firms develop and commercialize technologies, products, and businesses outside their existing strategy and core competencies. We will discuss the role and management of internal corporate ventures and new ventures in the creation and execution of new technologies, products, and businesses, specifically:

• internal corporate ventures, or “intrapreneurship”
• new ventures and spin-out firms
• factors that influence success and growth

12.1 Ventures, Defined

Ventures, broadly defined, are a range of different ways of developing innovations, alternative to conventional internal processes for new product or service development. We discussed in Chapter 10 the many benefits of using structured approaches to new product and service development, such as stage-gate and development funnel processes. However, these approaches have also a major disadvantage, because decisions at the different gates are likely to favor those innovations close to existing strategy, markets, and products and are likely to filter out or reject potential innovations further from the organization’s comfort zone. For this reason, other mechanisms of development and commercialization are necessary, ranging from internal corporate ventures through to spin-out new ventures.

Figure 12.1 suggests a range of venture types that can be used in different contexts. Corporate ventures are likely to be most appropriate where the organization needs to exploit some internal competencies and retain a high degree of control over the business. Joint ventures and alliances involve working with external partners, discussed in the previous chapter, will demand some release of control and autonomy, but in return introduce the additional competencies of the partners. Spin-out or new venture businesses are the extreme case, often necessary where there is little relatedness between the core competencies and new venture business. Note that these options are not mutually exclusive, for example, a spin-out business can become an alliance partner, or a corporate venture can spin-out. Also, all types of venture require a venture champion, a strong business case, and sufficient resources to be successful.

Profile of a Venture Champion

Research by Ed Roberts [1], who studied 156 new technology-based firms (NTBFs), which were spin-offs from MIT in the United States (herein referred to as “the US study”), and Ray Oakey [2], who examined 131 NTBFs in the United Kingdom (herein referred to as “the UK study”), provide a pretty consistent picture of the profile of a typical venture champion. Despite the obvious Anglo-Saxon bias of these two large studies, other research confirms the general relevance of these factors.

The creation of a venture is the interaction of individual skills and disposition and the technological and market characteristics. The US study emphasizes the role of personal characteristics, such as family background, goal orientation, personality, and motivation; whereas, the UK study stresses the role of technological and market factors. The decision to start an NTBF typically begins with a desire to gain independence and to escape the bureaucracy of a large organization, whether in the public or private sector. Thus, the background, psychological profile, and work and technical experience of a technical entrepreneur interact to contribute to the decision to create an NTBF, as illustrated in Figure 12.2.

Much of the American research on new ventures, and more general studies of entrepreneurs, tends to emphasize the background and characteristics of a typical entrepreneur. Factors found to affect the likelihood of establishing a venture include:

• family background
• religion
• formal education and early work experience
• psychological profile

A number of studies confirm that both family background and religion affect an individual’s propensity to establish a new venture. A significant majority of technical entrepreneurs have a self-employed or professional parent. Studies indicate that between 50% and 80% have at least one self-employed parent. For example, the US study found that four times as many technical entrepreneurs have a parent who is a professional, compared with other groups of scientists and engineers. The most plausible explanation for this is that the parent acts as a role model and may provide more support for self-employment.

The effect of religious background is more controversial, but it is clear that certain religions are overrepresented in the population of technical entrepreneurs. Whether this observed bias is the result of specific cultural or religious norms, or the result of minority status, is the subject of much controversy but little research. The US study suggests that cultural values are more important than minority status, but even this work indicates that the effect of family background is more significant than religion. In any case, and perhaps more importantly, there appears to be no significant relationship between family and religious background and the subsequent probability of success of an NTBF.

Education and training are major factors that distinguish the founders of NTBFs from other entrepreneurs. The median level of education of technical entrepreneurs in the US study was a master’s degree and, with the important exception of biotechnology-based NTBFs, a doctorate was superfluous. Significantly, the levels of education of technical entrepreneurs do not differentiate them from other scientists and engineers. However, potential technical entrepreneurs tend to have higher levels of productivity than their technical work colleagues, measured in terms of papers published or patents granted: 6.35 versus 2.2 papers on average and 1.6 versus 0.05 patents. This suggests that potential entrepreneurs may be more driven and focussed on outcomes than their corporate counterparts.

In addition to a master’s-level education, on average, a technical entrepreneur will have around 13 years of work experience before establishing an NTBF. In the case of the Route 128 technology cluster in Boston, the entrepreneurs’ work experience is typically with a single incubator organization, whereas technical entrepreneurs in Silicon Valley tend to have gained their experience from a larger number of firms before establishing their own NTBF. This suggests that there is no ideal pattern of previous work experience. However, experience of development work appears to be more important than work in basic research. As a result of the formal education and experience required, a typical technical entrepreneur will be aged between 30 and 40 years when establishing their first NTBF. This is relatively late in life compared to other types of ventures and is due to a combination of ability and opportunity. On the one hand, it typically takes between 10 and 15 years for a potential entrepreneur to attain the necessary technical and business experience. On the other hand, many people begin to have greater financial and family responsibilities at this time. Thus, there appears to be a window of opportunity to start an NTBF in the mid-thirties. Research Note 12.1 discusses the concept of entrepreneurial effectuation, which emphasizes the background and attributes of an entrepreneur.

Much of the research on the psychology of entrepreneurs is based on the experience of small firms in the United States, so the generalizability of the findings must be questioned. However, in the specific case of technical entrepreneurs, there appears to be some consensus regarding the necessary personal characteristics. The two critical requirements appear to be an internal locus of control and a high need for achievement. The former characteristic is common in scientists and engineers, but the need for high levels of achievement is less common. Entrepreneurs are typically motivated by a high need for achievement (so-called “n-Ach”), rather than a general desire to succeed. This behavior is associated with moderate risk-taking, but not gambling or irrational risk-taking. A person with a high n-Ach:

• likes situations where it is possible to take personal responsibility for finding solutions to problems
• has a tendency to set challenging but realistic personal goals and to take calculated risks
• needs concrete feedback on personal performance

However, the US study of almost 130 technical entrepreneurs and almost 300 scientists and engineers found that not all entrepreneurs have high n-Ach, only some do. Technical entrepreneurs had only moderate n-Ach, but low need for affiliation (n-Aff). This suggests that the need for independence, rather than success, is the most significant motivator for technical entrepreneurs. Technical entrepreneurs also tend to have an internal locus of control. In other words, technical entrepreneurs believe that they have personal control over outcomes, whereas someone with an external locus of control believes that outcomes are the result of chance, powerful institutions, or others. More sophisticated psychometric techniques such as the Myers–Briggs type indicators (MBTIs) confirm the differences between technical entrepreneurs and other scientists and engineers.

Numerous surveys indicate that around three-quarters of technical entrepreneurs claim to have been frustrated in their previous job. This frustration appears to result from the interaction of the psychological predisposition of the potential entrepreneur and poor selection, training, and development by the employer. Specific events may also trigger the desire or need to establish an NTBF, such as a major reorganization or downsizing of the parent organization. Case Study 12.1 charts the creation and rise of the app, WhatsApp.

Funding

New ventures are different from the relatively simple assessment of new products, as there is often no marketable product available before or shortly after formation. Therefore, initial funding of the venture cannot normally be based on cash flow derived from early sales. The precise cash-flow profile will be determined by a number of factors, including development time and cost and the volume and profit margin of sales. Different development and sales strategies exist, but to some extent these factors are determined by the nature of the technology and markets (Figure 12.3(a)–(c)).

For example, biotechnology ventures typically require more start-up capital than electronics or software-based ventures and have longer product development lead times. Therefore, from the perspective of a potential entrepreneur, the ideal strategy would be to conduct as much development work as possible within the incubator organization before starting the new venture. However, there are practical problems with this strategy, in particular ownership of the intellectual property on which the venture is to be based.

Research in the United States suggests that the initial capital needed to start an NTBF is relatively modest, but both the amount and source of initial funding for the formation of an NTBF vary considerably. For example, software-based ventures typically require less start-up capital than either electronics or biotechnology ventures, and it is more common for such firms to rely solely on personal funding. Biotechnology firms tend to have the highest R&D costs, and consequently most require some external funding. In contrast, software firms typically require little R&D investment and are less likely to seek external funds. Case Study 12.2 reviews an example of competitive micro-finance for early-stage venture. The UK study found that almost three-quarters of the software firms were funded by profits after 3 years, whereas only a third of the biotechnology firms had achieved this.

The initial funding to establish an NTBF is rarely a major problem. However, Peter Drucker suggests an NTBF requires financial restructuring every 3 years [4]. Other studies identify stages of development, each having different financial requirements:

1. Initial financing for launch.
2. Second-round financing for initial development and growth.
3. Third-round financing for consolidation and growth.
4. Maturity or exit.

In general, professional financial bodies are not interested in initial funding because of the high risk and low sums of money involved. It is simply not worth their time and effort to evaluate and monitor such ventures. However, as the sums involved are relatively small – typically of the order of tens of thousands of pounds – personal savings, remortgages, and loans from friends and relatives are often sufficient. In contrast, third-round finance for consolidation is relatively easy to obtain, because by that time the venture has a proven track record on which to base the business plan, and the venture capitalist can see an exit route.

Given their strong desire for independence, most entrepreneurs seek to avoid external funding for their ventures. However, in practice, this is not always possible, particularly in the latter growth stages. The initial funding required to form an NTBF includes the purchase of accommodation, equipment, and other start-up costs, plus the day-to-day running costs such as salaries, utilities, and so on. Research in the United States and United Kingdom suggests that most NTBFs begin life as part-time ventures and are funded by personal savings, loans from friends and relatives, and bank loans, in that order. Around half also receive some funding from government sources, but in contrast receive next to nothing from venture capitalists. Venture capital is typically only made available at later stages to fund growth on the basis of a proven development and sales record.

Venture capitalists are keen to provide funding for a venture with a proven track record and strong business plan, but in return will often require some equity or management involvement. Moreover, most venture capitalists are looking for a means to make capital gains after about five years. However, almost by definition technical entrepreneurs seek independence and control, and there is evidence that some will sacrifice growth to maintain control of their ventures. For the same reason, few entrepreneurs are prepared to “go public” to fund further growth. Thus, many entrepreneurs will choose to sell the business and create another NTBF. In fact, the typical technical entrepreneur establishes an average of three NTBFs. Therefore, the biggest funding problem for an NTBF is likely to be for the second-round financing to fund development and growth. This can be a time-consuming and frustrating process to convince venture capitalists to provide finance. The formal proposal is critical at this stage. Professional investors will assess the attractiveness of the venture in terms of the strengths and personalities of the founders, the formal business plan and the commercial and technical merits of the product, typically in that order. View 12.1 provides some insights into the role of venture capital.

Corporate Venture Funding

A survey of corporate funding of NTBFs in the United Kingdom found that around 15% of large companies had made investments in external new ventures, mainly in their own sector [5]. This funding is cyclical, reflecting the business environment, for example, in 1998, the number of major corporations funding external ventures was around 110, but by 2000 this had grown to 350 [6]. The typical investment (in 1997) was in excess of £500,000, and the investing companies preferred ventures requiring additional capital for expansion, rather than funds for start-up or early development. The most common problems encountered were agreement of the rate of return and details of corporate representation in the venture. The average period of investment was 5 to 7 years, and corporate investors typically demanded a rate of return of 20–30%, which compares favorably with professional venture capitalists required returns of around 75%.

Regarding professional venture capitalists, Figure 12.4 highlights two important issues. First, that the availability of venture capital varies worldwide and that such disparities tend to be self-reinforcing as potential new ventures relocate to seek funding. The second point to note is the strong bias for finance for expansion, rather than start-ups, which is most significant in the United Kingdom. This creates a potential venture-funding gap, between the initial, usually self-financed stage, and the first involvement of professional venture capital. In the United Kingdom, this gap is in the region of £200,000 to £750,000 [7].

Corporate investment in new ventures is increasingly popular in high-technology sectors, where large firms do not have access to all technologies in-house, and where emerging technologies remain unproven [8]. Investments in small biotechnology companies by pharmaceutical companies can be direct or indirect investment through specialist venture funds (see Case Study 12.3). Direct investment is preferred where there is a high probability of technological success, which is likely to impact the product pipeline in the near term. Indirect investments are concerned more with gaining windows on a range of early-stage technologies with the potential to impact the future direction of the product pipeline [9]. There has been a marked increase in the number of pharmaceutical companies investing through specialist venture funds, recent examples being Novartis (Novartis Ventures) and Bayer (Bayer Innovation). At the same time, pharmaceutical companies and their venture funds appear to be investing increasingly in independent seed capital funds focused on early-stage biotechnology, such as UK Medical Ventures (UK), New Medical Technologies (Switzerland), and Medical Technology Partners (USA). The precise objectives of such funds vary, but all share a common emphasis on strategic issues rather than purely financial. A principal investment criterion is “no fit, no deal,” the decision to invest being largely strategic, to “scout for ‘out there’ science.” The alternative mode of indirect venturing is participation in independent seed capital funds targeted at early-stage investments. A reason for investing is to access “deal flow” – that is, the opportunity to participate directly in subsequent rounds of funding beyond the seed capital stage. A similar strategy applies in other sectors, such as information and communications technology, as illustrated by Case Study 12.4. Clearly then, the goals of industry investments in new ventures are fundamentally different from those of professional venture capital firms. The goals of corporate venture funds are largely strategic, focusing on technology and potential new products, whereas the goals of venture capitalists are (rightly) purely financial.

Internal Corporate Venturing

The term corporate venturing or internal corporate venturing, sometimes confusingly referred to as “intrapreneurship,” to distinguish it from venturing that takes the form of investments in external business. If managed effectively, a corporate venture has the resources of a large organization and the entrepreneurial benefits of a small one. A corporate venture differs from conventional R&D and product development activities in its objectives and organization. The former seeks to exploit existing technological and market competencies, whereas the primary function of a new venture is to develop new competencies.

In practice, the distinction may be less clear. The Internet bubble of the late 1990s produced an ill-timed bandwagon for corporate venturing in large established companies in the information and communications technology sector as they attempted to capture some of the rapid growth of the dotcom start-up firms: in 1996, Nortel Networks created the Business Ventures Programme (see Case Study 12.6), in 1997 Lucent established the Lucent New Ventures Group, in 2000 Ericsson formed Ericsson Business Innovation and British Telecom formed Brightstar.

The most effective organization and management of a new venture will depend on two dimensions: the strategic importance of the venture for corporate development and its proximity to the core technologies and business [12]. Typically, top management has risen through the ranks of the organization, and therefore will be familiar with the evaluation of proposals related to the existing lines of business. However, by definition, new venture proposals are likely to require assessment of new technologies and/or markets. The following checklist can be used to assess the strategic importance of a new venture:

• Would the venture maintain our capacity to compete in new areas?
• Would it help create new defensible niches?
• Would it help identify where not to go?
• To what extent could it put the firm at risk?
• How and when could the firm exit from the venture?

Assessment of the second dimension, the proximity to existing skills and capabilities, is more difficult. On the one hand, a new venture may be driven by newly developed skills and capabilities, but on the other, a new venture may drive the development of new skills and capabilities. The former is consistent with an “incremental” strategy in which diversification is a consequence of evolution, the latter with a “rational” strategy which begins with the identification of new market opportunity. The relative merits and implications of these contrasting approaches were discussed in detail in Chapter 4.

Whatever the primary motive for establishing a new venture, the proposal should identify potential opportunities for positive synergies across existing technologies, products, or markets. A checklist for assessing the proximity of the venture proposal to existing skills and capabilities would include:

• What are the key capabilities required for the venture?
• Where, how, and when is the firm going to acquire the capabilities, and at what cost?
• How will these new capabilities affect current capabilities?
• Where else could they be exploited?
• Who else might be able to do this, perhaps better?

Assessment of a new venture along these two dimensions will help determine the organization and management of the venture. In particular, the strategic importance will determine the degree of administrative control required, and the proximity to existing skills and capabilities will determine the degree of operational integration that is desirable. In general, the greater the strategic importance, the stronger the administrative linkages between the corporation and venture. Similarly, the closer the skills and capabilities are to the core activities, the greater the degree of operational integration necessary for reasons of efficiency. Putting the two dimensions together creates a number of different options for the organization and management of a new venture. In this section, we explore the design and management of internal corporate ventures, and in the next the role and management of joint ventures and alliances.

The management structures and processes necessary for routine operations are very different from those required to manage innovation. The pressures of corporate long-range strategic planning on the one hand, and the short-term financial control on the other, combine to produce a corporate environment that favors carefully planned and stable growth based on incremental developments of products and processes:

• Budgeting systems favor short-term returns on incremental improvements.
• Production favors efficiency rather than innovation.
• Sales and marketing are organized and rewarded on the basis of existing products and services.

Such an environment is unlikely to be conducive to radical innovation. An internal corporate venture attempts to exploit the resources of the large corporation, but provide an environment more conducive to radical innovation. The key factors that distinguish a potential new venture from the core business are risk, uncertainty, newness, and significance. However, it is not sufficient to promote entrepreneurial behavior within a large organization. Entrepreneurial behavior is not an end in itself, but must be directed and translated into desired business outcomes. Entrepreneurial behavior is not associated with superior organizational performance, unless it is combined with an appropriate strategy in a heterogeneous or uncertain environment [13]. This suggests the need for clear strategic objectives for corporate venturing and appropriate organizational structures and processes to achieve those objectives.

There are a wide range of motives for establishing corporate ventures [14]:

• Grow the business.
• Exploit underutilized resources.
• Introduce pressure on internal suppliers.
• Divest noncore activities.
• Satisfy managers’ ambitions.
• Spread the risk and cost of product development.
• Combat cyclical demands of mainstream activities.
• Learn about the process of venturing
• Diversify the business.
• Develop new technological or market competencies.

We will discuss each of these motives in turn and provide examples. The first three are primarily operational, the remainder primarily strategic.

12.3 Managing Corporate Ventures

A corporate venture is rarely the result of a spontaneous act or serendipity. Corporate venturing is a process that has to be managed. The management challenge is to create an environment that encourages and supports entrepreneurship and to identify and support potential entrepreneurs. In essence, the venturing process is simple and consists of identifying an opportunity for a new venture, evaluating that opportunity and subsequently providing adequate resources to support the new venture. There are six distinct stages divided between definition and development [18].

Definition stages

1. Establish an environment that encourages the generation of new ideas and the identification of new opportunities and establish a process for managing entrepreneurial activity.
2. Select and evaluate opportunities for new ventures and select managers to implement the venturing program.
3. Develop a business plan for the new venture, decide the best location, and organization of the venture and begin operations.
4. Development stages.
5. Monitor the development of the venture and venturing process.
6. Champion the new venture as it grows and becomes institutionalized within the corporation.
7. Learn from experience in order to improve the overall venturing process.

Creating an environment that is conducive to entrepreneurial activity, is the most important, but most difficult stage. Superficial approaches to creating an entrepreneurial culture can be counterproductive. Instead, venturing should be the responsibility of the entire corporation, and top management should demonstrate long-term commitment to venturing by making available sufficient resources and implementing the appropriate processes.

The conceptualization stage consists of the generation of new ideas and identification of opportunities that might form the basis of a new business venture. The interface between R&D and marketing is critical during the conceptualization stage, but the scope of new venture conceptualization is much broader than the conventional activities of the R&D or marketing functions, which understandably are constrained by the needs of existing businesses. At this stage three basic options exist:

1. Rely on R&D personnel to identify new business opportunities based on their technological developments, that is, essentially a “technology-push” approach.
2. Rely on marketing managers to identify opportunities and direct the R&D staff into the appropriate development work, essentially a “market-pull” approach.
3. Encourage marketing and R&D personnel to work together to identify opportunities.

The technology-push approach has been described as being “first-generation R&D,” the “market-pull” strategy as “second generation,” and the close coupling “third generation,” the implication being that firms should progress to close coupling [19]. The issue of strategic positioning was discussed in detail in Chapter 4. In theory, the third option is most desirable as it should encourage the coupling of technological possibilities and market opportunities at the concept stage, before substantial resources are committed to evaluation and development. However, in practice, technology push appears to be the dominant strategy. This is because at the conceptualization stage highly specialized technical knowledge is required about what is feasible and what is not, and therefore what the characteristics of the final product are likely to be. Nevertheless, R&D personnel may become locked into a specific technical solution or address the needs of atypical users. Therefore, management must ensure that R&D personnel are sufficiently flexible to modify or drop their proposals should technical issues or market requirements dictate.

Peter Drucker identifies a number of sources of ideas and opportunities and argues that the search process should be systematic rather than relying on serendipity [4]. He suggests seven common sources of opportunities that should be monitored on a routine basis:

• demographic changes
• new knowledge
• incongruities (i.e., gaps between expectations and reality)
• changes in industry or market structure
• unexpected successes or failures
• process needs
• changes in perception

Other sources of ideas include trade shows, exhibitions, and trade journals. In the specific case of new business ventures, there are four primary sources of ideas:

• the “bright idea”
• customers’ requests for a new product or service
• internal analysis of a company’s competencies and business processes
• scanning of external opportunities in related technologies, markets, or services

Contrary to popular perceptions, the “bright idea” is the least common and most risky source of new business ventures, because the other sources are more directly stimulated by a market need, technological expertise, or both together. These can be the initiative of either someone at operational or managerial level; the former may have difficulties finding an effective champion, whereas the latter may be too powerful, having the influence to force through an idea before it is exhaustively tested. A balance needs to be achieved between screening and championing the proposal. In contrast, a business venture based on a customer request has the highest chance of success as a potential market is to some extent predetermined. However, such ventures are typically based on an adaptation or extension of an existing product or service, and therefore less likely to spawn radical new businesses. These tend to be bottom-up initiatives, and the most difficult problem is to decide how the potential new business relates to the existing business or division. By far, the two most promising corporate ventures are the result of systematic scanning of the internal and external environments, a process we advocate in Chapter 2.

Venture capital firms can help firms to monitor the external environment without distraction and to take equity stakes in potential partners fairly anonymously. This practice is common in the pharmaceutical industry, where firms use a range of strategies to tap into the knowledge of biotechnology firms, including direct investment, licensing deals, and indirect investment through professionally managed venture funds. Direct investments are favoured for technologies of high strategic importance, licensing for process and product developments, and indirect investments for windows on emerging technologies [9].

Having identified the potential for a new venture, a product champion must convince higher management that the business opportunity is both technically feasible and commercially attractive, and therefore justifies development and investment. Potential corporate entrepreneurs face significant political barriers:

• They must establish their legitimacy within the firm by convincing others of the importance and viability of the venture.
• They are likely to be short of resources, but will have to compete internally against established and powerful departments and managers.
• They are, as advocates of change and innovation, likely to face at best organizational indifference, and at worst hostile attacks.

To overcome these barriers, a potential venture manager must have political and social skills, in addition to a viable business plan. In addition, the product champion must be able to work effectively in a nonprogrammed and unpredictable environment. This contrasts with much of the R&D conducted in the operating divisions, which is likely to be much more sequential and systematic. Therefore, a product champion requires dedication, flexibility, and luck to manage the transition from product concept to corporate venture, in addition to sound technical and market knowledge. The product champion is likely to require a complementary organizational champion, who is able to relate the potential venture to the strategy and structure of the corporation. A number of key roles must be filled when a new venture is established [20]:

• The technical innovator, who was responsible for the main technological development.
• The business innovator or venture manager, who is responsible for the overall progress of the venture.
• The product champion, who promotes the venture through the early critical stages.
• The executive champion or organizational champion, who acts as a protector and buffer between the corporation and venture.
• A high-level executive responsible for evaluating, monitoring, and authorizing resources for the venture, but not the operation of specific ventures.

A new venture requires two types of skill: the technical knowledge necessary to develop the product, process, or knowledge base; and the management expertise necessary to communicate and sell to the markets and parent organization (see Table 12.3). The dilemma that has to be resolved in each case is whether to allow and develop technical experts to play a role in selling the product or managing the business or to place managers above their heads to take the baton on.

To take project managers to venture manager status is often dangerous. While these individuals understand the product fully, they may have difficulties in maximizing the cost/price differential, perhaps not always realizing the commercial value of the product and being less experienced in the negotiation process. It can be equally difficult to identify a manager who can communicate the product characteristics to customers with real needs, relay those needs to the product development team, and communicate and justify venture management needs to the corporate center. View 12.2 discusses the challenges of managing internal corporate ventures.

12.4 Assessing New Ventures

The most appropriate filter to apply to a potential venture will depend on the motive for venturing. Roberts illustrates the point:

“The best time to detect if a CEO has a strategy or not is to observe the management team at work when trying to evaluate opportunities, especially those somewhat remote from the current business. On these occasions, we noticed that when faced with unfamiliar opportunities, management would put them through a hierarchy of different filters. The ultimate filter was always a fit between the products, customers, and markets that the opportunity brought and one key element, or driving force, of the business. This is a clear signal that management had a sound filter for its decision [21].”

In assessing any venture, it is essential to specify the purpose and criteria for success in the new market, business or technology. Ultimately the style of assessment adopted will depend on the size of the potential venture, the abilities of the people who currently understand the product and whether new partners or managers are expected to be introduced following assessment. See Case Study 12.7 for a description of how Lucent Technologies approached this. A plan needs to be written by the managers involved in the venture, in part to test whether they understand the business as well as the technology. It is essential for in-house managers to be fully involved in the market research. The use of market research consultants should be limited to providing a first pass of potential markets. No one can know the product better, especially if it is new, and has niche applications, than the people who have worked on its development, and whose future careers may depend on it.

The purpose and nature of a business plan for a new venture differ from that for established businesses. The main purpose of the venture plan is to establish if and how to conduct the new business and to attract key personnel and resources. The purpose of a plan for an existing business is to monitor and control performance. The technical and commercial aspects of a new venture plan will have much greater uncertainty than that for existing businesses. There are 10 essential elements of a new venture plan (see Table 12.4). The main criteria for assessing the business plan for a corporate venture are strategic fit and potential to enhance competitive position. But beyond such basic requirements, there appear to be significant differences between the criteria applied by American and Japanese firms (see Table 12.5).

Structures for Corporate Ventures

The choice of location and structure for a new venture will depend on a number of factors. The most fundamental factor is how close the activities are to the core business. How close a venture’s focal activity is to the parent firm’s technology, products and markets will determine the learning challenges the venture will face and the most appropriate linkages with the parent. In practice, there is likely to be some trade-off between the desire to optimize learning and the desire to optimize the use of existing resources. The venture will need to acquire resources, know-how and information from the corporate parent, get sufficient attention and commitment, but at the same time be protected politically and allowed optimal access to the target market. Consideration of these sometimes conflicting requirements will determine the best location and structure for the venture.

The classic study by Burgelman and Sayles of six internal ventures within a large American corporation demonstrated the managerial and administrative difficulties of establishing and managing internal ventures [22]. The study confirmed that no single organizational solution is optimal, and that different structures and processes are required in different circumstances. The choice of structure will depend on the level and urgency of the venturing activity, the nature and number of ventures to be established, and the corporate culture and experience. More fundamentally, it will depend on the balance between the desire to learn new competencies and the need to leverage existing competencies, as shown in Figure 12.5. For example, in e-business established firms are faced with the decision whether to develop separate businesses to exploit the opportunities, or to fully integrate e-business with the existing business. Neither strategy nor structure appears to be inherently superior and depends on a consideration of the relatedness of the assets, operations, management, and brand [23]. Design options for corporate ventures include:

• direct integration with existing business
• integrated business teams
• a dedicated staff function to support efforts company-wide
• a separate corporate venturing unit, department or division
• divestment and spin-off

Each structure will demand different methods of monitoring and management – that is, procedures, reporting mechanisms, and accountability. These choices are illustrated by studies of venturing in the Europe and the United States [24].

12.5 Spin-outs and New Ventures

Much of what we know about spin-out ventures and NTBFs is based on the experience of firms in the United States, in particular, the growth of biotechnology, semiconductor, and software firms. Many of these originated from a parent or “incubator” organization, typically either an academic institution or large well-established firm. Examples of university incubators include Stanford, which spawned much of Silicon Valley, the Massachusetts Institute of Technology (MIT), which spawned Route 128 in Boston, and Imperial and Cambridge in the United Kingdom. MIT in particular has become the archetype academic incubator, and in addition to the creation of Route 128, its alumni have established some 200 NTBFs in northern California and account for more than a fifth of employment in Silicon Valley. The so-called MIT model has been adopted worldwide, but with limited success. For example, in 1999 Cambridge University in the United Kingdom formed a UK government-sponsored joint venture with MIT to help develop spin-offs in the United Kingdom. However, to put such initiatives into perspective, Hermann Hauser, a venture capitalist, notes “Stanford alumni have produced companies worth a trillion dollars. MIT half a trillion dollars. If Cambridge is getting to $20 billion we will be lucky.” One reason is the differences in scale. Mike Lynch, founder of the software company Autonomy, observes, “Silicon Valley is 60 miles long and in the last few months there will have been 70 to 80 money raisings in the $50 million to $200 million range. In Cambridge we might think of one, perhaps.”

Examples of large incubator firms include the Xerox PARC (see Case Study 12.8) and Bell Laboratories in the United States, which spawned Fairchild Semiconductor, which in turn led to numerous spin-offs including Intel, Advanced Memory Systems, Teledyne, and Advanced Micro-Devices. Similarly, Engineering Research Associates (ERA) led to more than 40 new firms, including Cray, Control Data Systems, Sperry, and Univac (see Case Study 12.9). In many cases, incubator firms provide the technical entrepreneurs, and the associated academic institutions provide the additional qualified staff.

NTBF spin-offs tend to cluster around their respective incubator organizations, forming regional networks of expertise. The firms tend to remain close to their parents for a number of technical and personal reasons. Most NTBFs retain contacts with their parent organizations to gain financial and technical support and are often reluctant to disrupt their social and family lives while establishing a new venture. Perhaps surprisingly, the mortality rate of NTBFs is lower than that of most other types of new firm, around 20–30% in 10 years compared to more than 80% for other types of new businesses [29]. One explanation for the higher survival rate of NTBFs is that the barriers to entry are higher than for many other businesses, in terms of expertise and capital. Therefore, those NTBFs that are able to overcome such barriers are more likely to survive. The concentration of start-ups in a region can create positive feedback, through demonstration effects and by increasing the demand for, and experience of, supporting institutions, such as venture capitalists, legal services, and contract research and production, thereby improving the environment and probability of success of subsequent start-ups. Failures are an inherent part of such a system and provided a steady stream of new venture proposals exists and venture capitalists maintain diverse investment portfolios and are ruthless with failed ventures, the system continues to learn from both good and bad investments.

However, the unique circumstances of the US environment in the 1970s and 1980s question the generalizability of the lessons of Silicon Valley and Route 128. Specifically, the role of the defense industry investment, liberal tax regimes, and sources of venture capital were unique. In addition, it is important to distinguish the evolutionary growth of such regional clusters of NTBFs, from more recent attempts to establish science parks based around universities. For example, success of science parks in Europe and Asia in the 1990s, and other attempts to emulate the early US experiences, has been limited [30]. This is partly because NTBFs are often very unwilling to share their knowledge with other firms or organizations, including universities. A study comparing high-technology firms located on and off university science parks concluded that there were no statistically significant differences between their technological inputs, such as expenditure on R&D, and outputs, such as new products and patents [31]. Research Note 12.3 reviews the factors that influence the success of new ventures.

12.6 University Incubators

The creation and sharing of intellectual property is a core role of a university, but managing it for commercial gain is a different challenge. Most universities with significant commercial research contracts understand how to license and the roles of all parties – the academics, the university, and the commercial organization – are relatively clear. In particular, the academic will normally continue with the research while possibly having a consultancy arrangement with the commercial company. However, forming an independent company is a different matter. Here both the university and the scientist must agree that spin-out is the most viable option for technology commercialization and must negotiate a spin-out deal. This may include questions of, for example, equity split, royalties, academic and university investment in the new venture, academic secondment, identification and transfer of intellectual property, and use of university resources in the start-up phase. In short, it is complicated. As Chris Evans, founder of Chiroscience (see Case Study 12.10) and Merlin Ventures notes: “Academics and universities … have no management, no muscle, no vision, no business plan and that is 90% of the task of exploiting science and taking it to the market place. There is a tendency for universities to think, ‘we invented the thing so we are already 50% there.’ The fact is they are 50% to nowhere” (Times Higher, March 27, 1998). A characteristically provocative statement, but it does highlight the gulf between research and successful commercialization. Many universities have accepted and followed the fashion for the commercial exploitation of technology, but typically put too much emphasis on the importance of the technology and ownership of the intellectual property, and “fail to recognize the importance and sophistication of the business knowledge and expertise of management and other parties who contribute to the non-technical aspects of technology shaping and development … the linear model gives no insight into the interplay of technology push and market pull [32].”

Since the mid-1980s, the role of universities in the commercialization of technology has increased significantly. For example, the number of patents granted to US universities doubled between 1984 and 1989 and doubled again between 1989 and 1997. Changes in government funding and intellectual property law played a role, but detailed analysis indicates that the most significant reason was technological opportunity. For example, changes in funding and law in the 1980s clearly encouraged many more universities to establish licensing and technology transfer departments, but the impact of these has been relatively small. For example, there is strong evidence that the scientific and commercial quality of patents has fallen since the mid-1980s as a result of these policy changes and that the distribution of activity has a very long tail. Measured in terms of the number of patents held or exploited, or by income from patent and software licenses, commercialization of technology is highly concentrated in a small number of elite universities, which were highly active prior to changes to funding policy and law: the top 20 US universities account for 70% of the patent activity [33]. Moreover, at each of these elite universities, a very small number of key patents account for most of the licensing income, the 5 most successful patents typically account for 70–90% of total income [34]. This suggests that a (rare) combination of research excellence and critical mass is required to succeed in the commercialization of technology (see Table 12.9). Nonetheless, technological opportunity has reduced some of the barriers to commercialization. Specifically, the growing importance of developments in the biosciences and software present new opportunities for universities to benefit from the commercialization of technology. Case Study 12.11 provides an example of a successful university technology spin-out.

University spin-outs are an alternative to exploitation of technology through licensing and involve the creation of an entirely new venture based upon intellectual property developed within the university. Estimates vary, but between 3% and 12% of all technologies commercialized by universities are via new ventures. However, new venture activity is highly concentrated. For example, MIT and Stanford University each create around 25 new start-ups each year, whereas Columbia and Duke Universities rarely generate any start-up companies. Studies in the United States suggest that the financial returns to universities are much higher from spin-out companies than from the more common licensing approach. One study estimated that the average income from a university license was $63,832, whereas the average return from a university spin-out was more than 10 times this – $692,121. When the extreme cases were excluded from the sample, the return from spin-outs was still $139,722, more than twice that for a license [35]. Apart from these financial arguments, there are other reasons why forming a spin-out company may be preferable to licensing technology to an established company:

• No existing company is ready or able to take on the project on a licensing basis.
• The invention consists of a portfolio of products or is an “enabling technology” capable of application in a number of fields.
• The inventors have a strong preference for forming a company and are prepared to invest their time, effort, and money in a start-up.

As such they involve the “academic entrepreneur” more fully in the detail of creating and managing a market entry strategy than is the case for other forms of commercialization. They also require major career decisions for the participants. Consequently, they highlight most clearly the dilemmas faced as the scientist tries to manage the interface between academe and industry. The extent to which an individual is motivated to attempt the launch of a venture depends upon three related factors – antecedent influences, the incubator organization, and environmental factors:

• Antecedent influences, often called the “characteristics” of the entrepreneur, include genetic factors, family influences, educational choices; and previous career experiences all contribute to the entrepreneur’s decision to start a venture.
• Individual incubator experiences immediately prior to start-up include the nature of the physical location, the type of skills and knowledge acquired, contact with possible fellow founders, the type of new venture, or small business experience gained.
• Environmental factors include economic conditions, availability of venture capital, entrepreneurial role models, and availability of support services.

There are relatively few data on the characteristics of the academic entrepreneur. Nevertheless, it is clear that in the United States, scientists and engineers working in universities have long become disposed toward the commercialization of research. A study of American universities in 1990 observed: “Over the last eight years we have seen increasing legitimizing of university–industry research interactions [36].” A study of 237 scientists working in three large national laboratories in the United States found clear differences between the levels of education in inventors in national laboratories and those in a study of technical entrepreneurs from MIT [37]. The study found significant differences between entrepreneurs and nonentrepreneurs in terms of situational variables such as the level of involvement in business activities outside the laboratory or the receipt of royalties from past inventions. A study of scientists in four research institutes in the United Kingdom identified a relationship between attitudes to industry, number of industry links, and commercial activity [38]. This begs the question: what is the direction of causation? Do entrepreneurial researchers seek more links outside the organization, or do more links encourage entrepreneurial behavior?

Entrepreneurs, academic or otherwise, require a supportive environment. Surveys indicate that two-thirds of university scientists and engineers now support the need to commercialize their research, and half the need for start-up assistance [39]. There are two levels of analysis of the university environment: the formal institutional rules, policies, and structures and the “local norms” within the individual department. There are a number of institutional variables that might influence academic entrepreneurship:

1. Formal policy and support for entrepreneurial activity from management.
2. Perceived seriousness of constraints to entrepreneurship, for example, IPR issues.
3. Incidence of successful commercialization, which demonstrates feasibility and provides role models.

Formal policies to encourage and support entrepreneurship can have both intended and unintended consequences. For example, a university policy of taking an equity stake in new start-ups in return for paying initial patenting and licensing expenses seems to result in a higher number of start-ups, whereas granting generous royalties to academic entrepreneurs appears to encourage licensing activity, but tends to suppress significantly the number of start-up companies [40]. Similarly, encouraging commercially oriented, or industry-funded research, appears to have no effect on the number of start-ups, whereas a university’s intellectual eminence has a very strong positive effect. A reason for the former effect is that typically such research restricts the ownership of formal intellectual property and narrows the choice of route to market. There are two reasons for this: more prestigious universities typically attract better researchers and higher funding; and other commercial investors use the prestige or reputation of the institution as a signal or indicator of quality. In addition, some very common university policies appear to have little or no positive effect on the number of subsequent success of start-ups, including university incubators and local venture capital funding. Moreover, badly targeted and poorly monitored financial support may encourage “entrepreneurial academics,” rather than academic entrepreneurs – scientists in the public sector who are not really committed to creating start-ups, but rather are seeking alternative support for their own research agendas [41]. This can result in start-ups with little or no growth prospects, remaining in incubators for many years.

A survey of 778 life scientists working in 40 US universities concluded that developing formal policies may send a signal, but the effect on individual behavior depends very much on whether these policies are reinforced by behavioral expectations [42]. They found that individual characteristics and local norms appear to be equally effective predictors of entrepreneurial activity, but only provided “weak and unsystematic predictions of the forms of entrepreneurship.” Where successful, this can create a virtuous circle, the demonstration effect of a successful spin-out encouraging others to try. This leads to clusters of spin-outs in space and time, resulting in entrepreneurial departments or universities, rather than isolated entrepreneurial academics. Local norms evolve through self-selection during recruitment, resulting in staff with similar personal values and behavior, and reinforced by peer pressure or behavioral socialization resulting in a convergence of personal values and behavior. However, there is a fundamental conflict between the pursuit of knowledge and its commercial exploitation, and a real danger of lowering research standards exists. Therefore, it is essential to have explicit guidelines for the conduct of business in a university environment [43]:

1. Specific guidelines on the use of university facilities, staff, and students and intellectual property rights.
2. Specific guidelines for, and periodic reviews of, the dual employment of scientist entrepreneurs, including permanent part-time positions.
3. Mechanisms to resolve issues of financial ownership and the allocation of research contracts between the university and the venture.

A recent study of nine university spin-off companies in the United Kingdom identified a number of common stages of development, each demanding different capabilities, resources, and support [44]:

• Research phase – all of the academic entrepreneurs were at the forefront of their respective fields, were focused on their research, respected by their academic communities, and had high levels of publication. This contributes to the generation of know-how and the likelihood of generating more formal intellectual property.
• Opportunity framing phase – the development of an understanding of how best to create commercial value from the science. In most cases, the opportunities are defined imprecisely, targeted ambiguously, and prove impracticable. In particular, there is a need to define the complementary resources necessary for commercialization, including human, financial, physical, and technological resources. Therefore, the framing process is usually iterative and slow, taking many months or even years.
• Preorganization phase – decisions made at this early stage often have a significant impact upon the entire future success of the venture, since they direct the path of development and constrain future options. At this stage, access to networks of expertise and prior entrepreneurial experience are critical.
• Reorientation phase – once the venture has gained sufficient resource and credibility to start-up, the venture must “repackage” its technology and acquire new information and resources to create something of value to some target customer group.
• Sustainable returns phase – with an emphasis on business capabilities, winning orders, selling products or services, and making a return. This demands professional management, greater financial resources, and a broader range of capabilities.

At each of these stages, there are different significant challenges to overcome in order to make a successful transition to the next stage, what the researchers call “critical junctures”:

• Opportunity recognition – at the interface of the research and opportunity framing phases. This requires the ability to connect a specific technology or know-how to a commercial application and is based on a rather rare combination of skill, experience, aptitude, insight, and circumstances. A key issue here is the ability to synthesize scientific knowledge and market insights, which increases with the entrepreneur’s social capital – linkages, partnerships, and other network interactions.
• Entrepreneurial commitment – acts and sustained persistence that bind the venture champion to the emerging business venture. This often demands difficult personal decisions to be made – for example, whether or not to remain an academic – as well as evidence of direct financial investments to the venture.
• Venture credibility – is critical for the entrepreneur to gain the resources necessary to acquire the finance and other resources for the business to function. Credibility is a function of the venture team, key customers and other social capital and relationships. This requires close relationships with sponsors, financial and other, to build and maintain awareness and credibility. Lack of business experience and failure to recognize their own limitations are a key problem here. One solution is to hire the services of a “surrogate entrepreneur.” As one experienced entrepreneur notes, “The not so smart or really insecure academics want their hands over everything. These prima donnas make a complete mess of things, get nowhere with their companies, and end up disappointed professionally and financially.”

In the United Kingdom, the Lambert Review of Business–University Collaboration reviewed the commercialization of intellectual property by universities in the United Kingdom and also made international comparisons of policy and performance. The United Kingdom has a similar pattern of concentration of activity as the United States: 80% of UK universities made no patent applications, whereas 5% filed 20 or more patents; similarly, 60% of universities issued no new licenses, but 5% issued more than 30. However, in the United Kingdom, there has been a bias toward spin-outs rather than licensing, which the Lambert Report criticizes. It argues that spin-outs are often too complex and unsustainable, and of low quality – a third in the United Kingdom is fully funded by the parent university and attracts no external private funding. Lambert argues that universities in the United Kingdom may place too high a price on their intellectual property, and that contracts often lack clarity of ownership. Both problems discourage businesses from licensing intellectual property from universities and may encourage universities to commercialize their technologies through wholly owned spin-outs. The linear model of innovation over-states the significance of technology-push in the creation of new ventures, and therefore can exaggerate the contribution of basic research and universities. However, as Case Study 12.12 demonstrates, the creation, development, and growth of technology ventures involve many different actors, individual, public, and private, and a great deal of trial and error and critical events.

12.7 Growth and Performance of Innovative Small Firms

There has been a great deal of economic and management research on small firms, but much of this has been concerned with the contribution all types of small firms make to economic, employment, or regional development. Relatively little is known about innovation in small firms, or the more salient issue of the performance of NTBFs.

In most of the developed economies, around 10% of the economically active population engage in new venture creation each year, a slightly higher proportion, 15% or so in the United States and Asia, and a little lower in Europe (excluding the United Kingdom) – 6%. However, the difference between the number of new ventures created and closed each year, the so-called churn rate, is high. For example, in the United Kingdom, there are around 425,000 start-ups each year, but almost 500,000 closures. Closure does not necessary indicate failure, as a founder may choose to change business or seek alternative employment. Survival rates are quite high, in the United Kingdom after 2 years 80% survive in, and 54% after 4 years (Barclays Capital, 2008). In the United States, there are more short-term failures, probably due to the ease of establishing a business there, but similar rates of longer-term survival: 66% survive 2 years, 50% 4 years, and 40% more than 6 years [45].

Despite these relatively high rates of survival, very few firms grow significantly or consistently, the so-called “gazelles”, typically around 6% [46]. Although these high growth ventures are atypical, they account for a disproportionate proportion of new employment, between 12% and 33% in Europe. The founding conditions appear to have a very significant and persistent effect on the subsequent success and growth of a new venture, but it is difficult to separate the effects of business planning, strategy and context (see Table 12.10). Most, but not all, studies suggest that formal business planning contributes to success, as we discussed in Chapter 9, but there is no doubt that the initial conditions have a significant and enduring influence on subsequent growth and success [47]. Research Note 12.4 reviews the growing menagerie of terms used to categorize new ventures of varying success.

The most significant controllable factors shown in Table 12.10 all help to build credibility for a new venture, what our colleague Sue Birley refers to as the “credibility carousel”: factors that help to recruit and convince other stakeholders of the viability of a venture [48]. This can be a slow, painful process, but is essential in order to attract the necessary talent, resources, and initial customers.

Studies consistently find that the age, educational level, number of founders, and starting capital all have a positive effect on venture success. The effects of age on the success and growth of a new venture are probably the best understood and shown to be significant in almost every research study. The consensus is that the most common age of successful founders is between 35 and 50 years old [49]. The explanation for this clustering is that younger founders tend to lack the experience, resources, and credibility, whereas older founders may lack the drive and have too much to lose. Of course there are many examples of successful entrepreneurs younger or older than this age range, but the association between age of founders and success is very significant.

To understand the influence of education, one study tracked 118,070 new start-up firms over 10 years and found that human capital at foundation, measured by university degree, had a strong and persistent positive effect on subsequent success. In addition, four structural factors at the time of foundation were predictors of success: firm size at foundation (positive), rate of firm entry into the same sector (negative), concentration of the sector (positive), and GDP growth (positive) [50]. Other research examined 622 young or new small firms over 5 years and found human and financial capital available at start-up was a strong predictor of survival and growth, specifically the founder’s education (degree or above), and access to bank finance [51]. As with age, there are many examples of successful entrepreneurs who chose not to go to college or dropped out early, but the research does consistently demonstrate a strong association between level of education and venture success and growth, especially in more knowledge- or technology-intensive businesses.

Access to sufficient capital is another widely cited founding condition for success and growth. However, the evidence is more mixed than for the effects of age and education. Some studies suggest that access to external capital is associated with higher growth, especially in the case of more high-technology ventures [52], but others find no such effect or even the exact opposite relationship, that higher growth is associated with maintaining internal funding and ownership [53]. The conflicting evidence and advice may be due to methodological differences, such as definition of high growth, time period studied, and so on, but may also reflect the influence of more fundamental moderating factors, for example, the type of venture and market or the roles and control needs of founders.

These founder effects are even stronger for new technology based firms (NTBF). This is partly because of the human capital necessary, especially the high education of founders [54]:

• 85% have degree, almost half a PhD;
• 12 or more years experience in large private-sector firm;
• Founders’ ages cluster mid-30s, two-thirds between ages 30 and 50.

Finally, companies competing on price, rather than by differentiation, are much less likely to survive. Contrary to the popular folklore of the poorly educated, disadvantaged entrepreneur, this study confirms that the more typical profile of a successful new venture is a rare combination of human capital in the form of the university education of founders, availability of sufficient finance, and a strategy of growth by product or service differentiation. Research Note 12.5 identifies factors that contribute to the growth of new ventures.

Much of the research on innovative small firms has been confined to a small number of high-technology sectors, principally microelectronics and more recently biotechnology. A notable exception is the survey of 2000 SMEs conducted by the Small Business Research Centre in the United Kingdom. The survey found that 60% of the sample claimed to have introduced a major new product or service innovation in the previous five years [55]. While this finding demonstrates that the management of innovation is relevant to the majority of small firms, it does not tell us much about the significance of such innovations, in terms of research and investment, or subsequent market or financial performance. More recent research provides more detailed insights into the types of innovation and how these influence the performance of SMEs (see Table 12.11).

Research over the past decade or so suggests that the innovative activities of SMEs exhibit broadly similar characteristics across sectors [56]. They are as follows:

• are more likely to involve product innovation than process innovation
• are focused on products for niche markets, rather than mass markets
• will be more common among producers of final products, rather than producers of components
• will frequently involve some form of external linkage
• tend to be associated with growth in output and employment, but not necessarily profit

The limitations of a focus on product innovation for niche or intermediate markets were discussed earlier, in particular problems associated with product planning and marketing, and relationships with lead customers and linkages with external sources of innovation. Where an SME has a close relationship with a small number of customers, it may have little incentive or scope for further innovation, and therefore will pay relatively little attention to formal product development or marketing. Therefore, SMEs in such dependent relationships are likely to have limited potential for future growth and may remain permanent infants or subsequently be acquired by competitors or customers [57]. Moreover, an analysis of the growth in the number of NTBFs suggests that the trend has as much to do with negative factors, such as the downsizing of larger firms, as it does with more positive factors such as start-ups [58].

Innovative SMEs are likely to have diverse and extensive linkages with a variety of external sources of innovation, and in general there is a positive association between the level of external scientific, technical, and professional inputs and the performance of an SME [59]. The sources of innovation and precise types of relationship vary by sector, but links with contract research organizations, suppliers, customers, and universities are consistently rated as being highly significant, and constitute the “social capital” of the firm. However, such relationships are not without cost, and the management and exploitation of these linkages can be difficult for an SME, and overwhelm the limited technical and managerial resources of SMEs [60]. As a result, in some cases, the cost of collaboration may outweigh the benefits [61] and in the specific case of collaboration between SMEs and universities there is an inherent mismatch between the short-term, near-market focus of most SMEs and the long-term, basic research interests of universities [62].

In terms of innovation, the performance of SMEs is easily exaggerated. Early studies based on innovation counts consistently indicated that when adjusted for size, smaller firms created more new products than the larger counterparts. However, methodological shortcomings appear to undermine this clear message. When the divisions and subsidiaries of larger organizations are removed from such samples [63], and the innovations weighted according to their technological merit and commercial value, the relationship between firm size and innovation is reversed: larger firms create proportionally more significant innovations than SMEs [64]. The amount of expenditure by SMEs on design and engineering has a positive effect on the share of exports in sales [65], but formal R&D by SMEs appears to be only weakly associated with profitability [66] and is not correlated with growth [67]. Similarly, the high growth rates associated with NTBFs are not explained by R&D effort [68], and investment in technology does not appear to discriminate between the success and failure of NTBFs. Instead, other factors have been found to have a more significant effect on profitability and growth, in particular, the contributions of technically qualified owner managers and their scientific and engineering staff, and attention to product planning and marketing [69].

A large study of start-ups in Germany found that the founder’s level of management experience was a significant predictor of the growth of a venture. However, innovation, broadly defined, was found to be statistically three times more important to growth than founder attributes or any other of the factors measured [70]. Another study, of Korean technology start-ups, also found that innovativeness, defined as a propensity to engage in new idea generation, experimentation and R&D, was associated with performance. So was proactiveness, defined as the firm’s approach to market opportunities through active market research and the introduction of new products and services [71]. The same study also found that what it referred to as sponsorship-based linkages had a positive effect on performance. This included links with venture capital firms, which reinforces the developmental role these can play, as discussed earlier.

The size and location of NTBFs also have an effect on performance. Geographic closeness increases the likelihood of informal linkages and encourages the mobility of skilled labor across firms. However, the probability of a start-up benefiting from such local knowledge exchanges appears to decrease as the venture grows [72]. This growing inability to exploit informal linkages is a function of organizational size, not the age of the venture, and suggests that as NTBFs grow and become more complex, they begin to suffer many of the barriers to innovation discussed in Chapter 3, and therefore the explicit processes and tools to help overcome these become more relevant. Larger SMEs are associated with a greater spatial reach of innovation-related linkages and with the introduction of more novel product or process innovations for international markets. In contrast, smaller SMEs are more embedded in local networks and are more likely to be engaged in incremental innovations for the domestic market [73]. It is always difficult to untangle cause and effect relationships from such associations, but it is plausible that as the more innovative start-ups begin to outgrow the resources of their local networks, they actively replace and extend their networks, which both creates the opportunity and demand for higher levels of innovation. Conversely, the less innovative start-ups fail to move beyond their local networks, and therefore are less likely to have either the opportunity or need for more radical innovation.

However, different contingencies will demand different innovation strategies. For example, a study of 116 software start-ups identified five factors that affected success: level of R&D expenditure; how radical new products were; the intensity of product upgrades; use of external technology; and management of intellectual property [74]. In contrast, a study of 94 biotechnology start-ups found that three factors were associated with success: location within a significant concentration of similar firms; quality of scientific staff (measured by citations); and the commercial experience of the founder [75]. The number of alliances had no significant effect on success, and the number of scientific staff in the top management team had a negative association, suggesting that the scientists are best kept in the laboratory. Other studies of biotechnology start-ups confirm this pattern and suggest that maintaining close links with universities reduces the level of R&D expenditure needed, increases the number of patents produced, and moderately increases the number of new products under development. However, as with more general alliances, the number of university links has no effect on the success or performance of biotechnology start-ups, but the quality of such relationships does [76].

Such sector-specific studies confirm that the environment in which small firms operate significantly influences both the opportunity for innovation, in a technological and market sense, and the most appropriate strategy and processes for innovation. For example, an NTBF may have a choice of whether to use its intellectual assets by translating its technology into product and services for the market, or alternatively it may exploit these assets through a larger, more established firm, through licensing, sale of IPR or by collaboration. More specifically, the NTBF needs to consider two environmental factors [77]:

• Excludability – to what extent the NTBF can prevent or limit competition from incumbents who develop similar technology?
• Complementary assets – to what extent do the complementary assets – production, distribution, reputation, support, and so on. – contribute to the value proposition of the technology?

Combining these two dimensions creates four strategy options:

• Attacker’s advantage – where the incumbent’s complementary assets contribute little or no value, and the start-up cannot preclude development by the incumbent (e.g., where formal intellectual property is irrelevant, or enforcement poor), NTBFs will have an opportunity to disrupt established positions, but technology leadership is likely to be temporary as other NTBFs and incumbents respond, resulting in fragmented niche markets in the longer term. This pattern is common in computer components businesses.
• Ideas factory – in contrast, where incumbents control the necessary complementary assets, but the NTBF can preclude effective development of the technology by incumbents, cooperation is essential. The NTBF is likely to focus on technological leadership and research, with strong partnerships downstream for commercialization. This pattern tends to reinforce the dominance of incumbents, with the NTBFs failing to develop or control the necessary complementary assets. This pattern is common in biotechnology.
• Reputation-based – where incumbents control the complementary assets, but the NTBF cannot prevent competing technology development by the incumbents, NTBFs face a serious problem of disclosure and other contracting hazards from incumbents. In such cases, NTBF will need to seek established partners with caution, and attempt to identify partners with a reputation for fairness in such transactions. Cisco and Intel have both developed such a reputation and are frequently approached by NTBFs seeking to exploit their technology. This pattern is common in capital-intensive sectors such as aerospace and automobiles. However, these sectors have a lower “equilibrium,” as established firms have a reputation for expropriation, therefore discouraging start-ups.
• Greenfield – where incumbents assets are unimportant, and the NTBF can preclude effective imitation, there is the potential for the NTBF to dominate an emerging business. Competition or cooperation with incumbents are both viable strategies, depending upon how controllable the technology is – for example, through establishing standards or platforms, and where value is created in the value chain.

A high proportion of new ventures fail to grow and prosper. Estimates vary by type of business and national context, but typically 40% of new businesses fail in their first year, and 60% within the first two. In other words, around 40% survive the first 2 years. Common reasons for failure include:

• Poor financial control.
• Lack of managerial ability or experience.
• No strategy for transition, growth, or exit.

There are many ways that a new venture can grow and create additional value:

• Organic growth through additional sales and diversification.
• Acquisition of or merger with another company.
• Sale of the business to another company, or private equity firm.
• An initial public offering (IPO) on a stock exchange.

For example, The UK Sunday Times Profit Track estimates that of the 500 fastest growing private firms in the United Kingdom, over 5 years around 100 have merged with or been acquired by other companies or private equity firms, but only 10 or so have been floated (see Table 12.12). Some of the best-performing have been based upon information communication telecommunications (ICT), others on service innovation. A separate survey of technology-based start-ups reveals a dominance of web-based businesses, which demonstrates how much has changed since the Internet bubble burst. Case Study 12.13 provides examples of high-growth ventures.

A lack of managerial experience and credibility of founders can also be a major barrier to funding and growing new ventures. In the early stage, developing relationships with potential customers and suppliers are the most critical, but as the venture grows, the relationship and role of partners in the network of a new venture will change. Later, external sources of funding need to be cultivated, which can result in changes of ownership and the dissolution of some of the initial relationships and substitution for more mature partners in more stable networks. Over time, the roles of different actors in the venture network become more specialized and professional [78]. Individual skills are essential in building and developing such relationships and networks. These skills include [79]:

• Social and interpersonal communication – to build credibility and promote knowledge sharing;
• Negotiating and balancing skills – to balance cooperation and competition and to develop awareness, trust, and commitment;
• Influencing and visioning skills to establish roles and shares of responsibilities and rewards.

Therefore, the challenge is to simultaneously manage the more mature firm and its relations, but to maintain the early focus on innovation. More recent research has identified the disproportionate contribution of diverse partnerships in the creation and development of innovative, high-growth new ventures, partly due to the combination of different capabilities and cognitive approaches, as discussed in Research Note 12.6 [80].

Summary

A venture represents an opportunity to grow new businesses based on new technologies, products, or markets, where conventional processes for new product or service development are insufficient. In this chapter, we have explored the rationale, characteristics, and management of corporate internal and external new ventures.

Like any new business, a venture requires a clear business plan, strong champion, and sufficient resources. Any venture champion must identify the opportunity for a new venture, raise the finance, and manage the development and growth of the business. The individuals involved in internal and external new ventures are likely to have similar backgrounds, levels of education, and personalities; they tend to be highly motivated and demand a high level of autonomy. However, unlike external entrepreneurs, the corporate entrepreneur requires a high degree of political and social skill. This is because the corporate entrepreneur has the advantage of the financial, technical, and marketing resources of the parent firm, but must deal with internal politics and bureaucracy.

1. A new venture represents an opportunity to develop and deliver new technology, products, or services. However, the majority of new ventures fail after a few years and very few continue to grow.
2. The mythology of the lone risk-taking entrepreneur is unfounded. Internal and external factors contribute to the success and growth of a new venture.
3. Internal factors include the education, experience, and capabilities of founders and a focus on innovation and planning.
4. External factors include access to complementary resources, social and business networks, and the regional and national context.
5. The availability of financial resources is a significant constraint, not so much at the initial stages, but for subsequent development and growth.
6. However, innovation promotes the development and growth of a new venture, and this demands access to complementary resources and capabilities within the new venture and throughout its external networks.

Further Reading

There are thousands of books and journal articles on the more general subject of entrepreneurship, but relatively little has been produced on the more specific subject of new technology-based entrepreneurism. Our companion texts cover the topic in greater detail, Innovation and entrepreneurship (Wiley, third edition, 2015) and Entrepreneurship (Wiley, 2018). Ed. Roberts’s Entrepreneurs in high technology: Lessons from MIT and beyond (Oxford University Press, 1991) is an excellent study of the MIT experience, although perhaps places too much emphasis on the characteristics of individual entrepreneurs. For a broader analysis of technology ventures in the United States see Martin Kenny (ed.), Understanding Silicon Valley: Anatomy of an entrepreneurial region (Stanford University Press, 2000). For a more recent analysis of technological entrepreneurs, see Inventing entrepreneurs: Technology innovators and their entrepreneurial journey, by Gerry George and Adam Bock (Prentice Hall, 2008). Ray Oakey’s High-technology entrepreneurship (Routledge, 2012) is a similar study of NTBFs in the United Kingdom, but places greater emphasis on how different technologies constrain the opportunities for establishing NTBFs, and affect their management and success. Also relevant is the special issue of Research Policy, 43(7), on Entrepreneurial innovation: The importance of context, edited by Erkko Autio, Martin Kenney, Philippe Mustar, Don Siegel and Mike Wright (2014).

For a review of research on the broader issue of innovative small firms see “Small firms, R&D, technology and innovation: a literature review” by Kurt Hoffman et al., published in Technovation, 18(1), 39–55, 1998. Helena Forsman’s Small firms as innovators: From innovation to sustainable growth (Imperial College Press, 2015) and Joe Tidd’s Promoting innovation in new ventures and small- and medium-sized enterprises (Imperial College Press, 2018) present more recent evidence. A special issue of the Strategic Management Journal (volume 22, July 2001) examined entrepreneurial strategies, and includes a number of papers on technology-based firms, and a special issue of the journal Research Policy (volume 32, 2003) features papers on technology spin-offs and start-ups. A special issue of the Journal of Product Innovation Management examined technology commercialization and entrepreneurship (volume 25, 2008), and a special issue of Industrial and Corporate Change focused on university spin-outs (16(4), 2007). Most texts on Entrepreneurship and New Business fail to cover the factors which influence the success and growth of new ventures, in particular the role of innovation, but the worthy exception is the work by our colleagues David Storey & Francis Green (2010) Small business and entrepreneurship (Financial Times Prentice Hall) which provides a thorough review of the research on venture growth. For more succinct but excellent recent reviews of the research on the initial conditions which influence subsequent success and growth, see Gao, Li, Cheng and Shi (2010) “Impact of initial conditions on New Venture Success, International Journal of Innovation Management, 14(1), 41–56, and Geroski, Mata, and Portugal (2010) “Founding conditions and the survival of new firms,” Strategic Management Journal, 31, 510–29. For a comprehensive empirical overview, see Alex Coad’s The growth of firms: A survey of theories and empirical evidence (Edward Elgar, 2009).

On the subject of internal corporate venturing Burgelman and Sayles’s Inside corporate innovation (Macmillan, London, 1986) remains the best combination of theory and case studies, but the more recent book by Block and MacMillan, Corporate venturing: Creating new businesses within the firm (Harvard Business School Press, 1995), provides a better review of research on internal corporate ventures. More recent books which include some interesting examples of venturing in the information and telecommunications sectors are Webs of innovation by Alexander Loudon (FT.com, 2001), which despite its title has several chapters related to venturing, and Henry Chesbrough’s Open innovation (Harvard Business School Press, 2003), which includes case studies of the usual suspects such as IBM, Xerox, Intel, and Lucent. The book Inventuring by W. Buckland, A. Hatche, and J. Birkinshaw (McGraw-Hill, 2003) is also a good review of corporate venture initiatives, including those at GE, Intel, and Lucent, which suggest a range of successful venture models and common reasons for failure. The text Corporate entrepreneurship by Paul Burns provides a useful framework and case examples (Palgrave Macmillan, 2008), and for a more practical approach see Hisrich and Kearney Corporate entrepreneurship (McGraw-Hill, 2011).

Case Studies

Additional case studies are available on the companion website, including these:

• The Espresso Mushroom Company, a gourmet mushroom-growing company fuelled by waste coffee grounds, demonstrates the challenges of starting a new venture.
• GREATS is an online sports brand and sneaker company which, by cutting out wholesale completely from their operations, provides faster product innovation at lower prices. It shows how experience, experimentation and process innovation contribute to success.
• The Internet start-up ihavemoved.com highlights the challenges of growing a new business, after raising initial funding.

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