89
Chapter 5
New Venture Creation
5.1 Introduction
“Entrepreneurship is a marathon, not a sprint.”
Statistics show that approximately 20,000 new businesses will start this week
alone. Over 85% of those businesses will have sales of less than $1 million
per year and have less than 20 employees ve years after their establish-
ment. Most of those businesses are mom-and-pop establishments, composed
of restaurants, retail stores, coffee houses, etc. In this Guide, we will concen-
trate on those new ventures that depend on formal technologies and seek
large amounts of external capital for growth. These new ventures exhibit the
following characteristics.
New ventures derive their idea mining primarily from ve sources:
1. Prior, or current, employment
2. Teaming with others
3. Market observations (spotting opportunities)
4. Deliberate searches
5. Accidental encounters
New ventures derive opportunities primarily from four sources:
1. New technology (disruptive, groundbreaking, etc.)—Published sources
2. New regulations; de-regulations—Trade associations
90 ◾ The Guide to Entrepreneurship: How to Create Wealth for Your Company
3. Improved customer services—Customer inquiries
4. Value-added practices—Reverse engineering
New ventures are derived from the following ingredients:
1. Idea and proof of principle
2. Technical knowledge by founder
3. Personal contacts
4. Physical/capital resources
5. Orders
5.2 Corporate Life Cycle
“The difference between failure and success is one more time.”
Just like human beings, organizations progress through ve predictable
life cycle events, such as being born (inception), childhood (survival), fast
growth period (expansion), maturity, and (perhaps) corporate death as pos-
tulated by Scott and Bruce.
1
The typical life cycle trajectory of a venture is
shown in Figure5.1.
Life Cycle of a Venture
Time Since Founding
Product Sales
Seed financing
IPO
Harvesting
Subsequent rounds
Transition
Growth
Startup
Pre-launch
Exit/Succession
Figure 5.1 Life cycle of a venture—Similar to all living creatures, ventures display a
predictable life cycle.
New Venture Creation ◾ 91
Small business ventures go through the life cycle because the business
environment changes with time. The four most common business environ-
ment changes are:
1. Different competition
2. Market dynamics
3. Regulatory changes
4. Loss of a niche market or technology
5.3 Global Fortune 500 Annual Turnover
Obviously, only 500 companies comprise the annual Global Fortune 500
list, but it is illustrative of the rapidity of business changes throughout the
world. In the 1950s, annual turnover (the number of places on the list that
change as companies enter and exit the top 500 list) was moderate, and
then lower through the 1960s and 1970s. Then, starting in the early 1980s,
annual turnover rose to historically high levels, reaching new heights in
the 1990s.
Every spring, Fortune magazine publishes its list of the largest public
companies. This turnover provides a statistical barometer of business rev-
enues. Table5.1 lists the latest global 500 largest companies. These compa-
nies made the Global Fortune 500 in 2010, but fell off the list in 2011.
2
5.4 Corporate Life Cycles
“Starting up is hard to do.”
Startups face a daunting task to get off the ground. From the start, the
founder must decide the strategy that will be pursued. There are two strate-
gies available:
◾ Entry strategies
− First movers (rst mover advantage)
− Followers
◾ Survival strategies
− Specialists
− Generalists
92 ◾ The Guide to Entrepreneurship: How to Create Wealth for Your Company
Table5.1 Global Fortune 500 Companies that Exited Listing in 2011
Company Name
2010 Global arrival
500 rank 2011 exit Country
Acer 487 Taiwan
Akzo Nobel 479 Netherlands
Alcatel-Lucent 461 France
Cathay Life Insurance 259 Taiwan
CEPSA 369 Spain
China Railway Construction 105 China
China State Construction Engineering 147 China
Chrysler Group 205 U.S.
Cie Nationale Portefeuille 480 Belgium
Cigna 459 U.S.
Co-operative Group 476 Britain
Danske Bank Group 454 Denmark
Doosan 489 South Korea
Evonik Industries 452 Germany
Groupama 420 France
GS Holdings 238 South Korea
Hanwha 321 South Korea
Hartford Financial Services 436 U.S.
Henkel 486 Germany
Hochtief 353 Germany
Kimberly-Clark 494 U.S.
Kirin Holdings 466 Japan
LG Display 440 South Korea
Marathon Oil 99 U.S.
Motorola Solutions 427 U.S.
Old Mutual 246 Britain
Petroplus Holdings 472 Switzerland
PPR 421 France
Preman Finanziaria 493 Italy
Research In Motion 490 Canada
Samsung C&T 492 South Korea
Samsung Life Insurance 333 South Korea
Shanghai Automotive 151 China
Sinosteel 354 China
Standard Life 330 Britain
Tohoku Electric Power 488 Japan
U.S. Bancorp 477 U.S.
Wolseley 474 Britain
New Venture Creation ◾ 93
First movers (pioneers), as the name indicates, are the rst entrants to
the market. The classic example is a pharmaceutical company to introduce a
new category of drugs immediately after obtaining FDA approval. All other
pharmaceutical entrants will follow with a “variation of the theme” product.
From a marketing standpoint, the rst movers may dominate the largest mar-
ket share for a prolonged period of time.
Followers may never gain much market traction, but are not as nan-
cially exposed as the rst movers are. Current examples are car manufactur-
ers Fisker and Tesla, who were pioneers in the introduction of electric cars,
but were forced to declare bankruptcy in 2013. Perhaps follower companies,
with the advantage of hindsight, may be more successful.
Specialists concentrate all their skills in one single niche market,
develop a formidable core competency, and end up offering a family of
superior products, at least for a while. If successful, specialists will be cop-
ied by followers, capitalizing on the specialists’ initial success.
Generalists attempt to spread their skills across many market niches
(“do not put all your eggs in one basket”). Generalists are most successful
when the business environment is uncertain because their risk prole has
been spread over a variety of market niches.
5.4.1 Greiner’s Model of Organizational Growth
In 1972, Greiner published his seminal research on the evolution and revolu-
tion as organizations grow.
3
According to this model, organizations encoun-
ter a predictable series of problems (crises) that must be managed if the
edgling organization is allowed to survive, thrive, and mature in a complex
and challenging environment.
The Greiner model consists of ve stages of growth. To advance from
one stage to the next, the organization must successfully manage and solve
the corporate, nancial, and technological problems seen in each stage,
including the predictable “crises” typically associated with each stage. This is
illustrated in Figure5.2.
According to this model, startups are characterized by stages, dened
as a number of predictable, discrete, and consistent growth phases.
Revolutions are dened as those periods of substantial turmoil in organi-
zational life. Crises are an important feature, dened as periods of relatively
stable growth, interspersed with periods of chaotic and discontinued growth.
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