Enterprise and Business Development

Enterprise and Business Development

ENGINEERING TRIPOS PART IIB MODULE 4E7 ENTERPRISE AND BUSINESS DEVELOPMENT Session 2 Feb 4 2004 Dr E. Garnsey UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 1 CAMBRIDGE Institute for Manufacturing Last week How do under-resourced new firms make breakthroughs? What explains the success of many entrepreneurial innovators? Entrepreneurs pursue an emergent strategy (Minzbergs term), with

economy and flexibility, responding to opportunities as these arise and as they are able to secure resources. Effective in a rapidly changing scene. In contrast, managers in established companies work out a strategy, allocate resources on the basis of the budget and implement their strategy. This is required to meet shareholder expectations. To grow their new company, founders need to balance entrepreneurial and managerial approaches. UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 2 CAMBRIDGE Institute for Manufacturing Todays session will improve your ability to evaluate a new tech-based company Situate its activity and its business model in relation to the main types of business activity and business model. Appropriate? Identify the problems that must be solved if this enterprise is to achieve its objectives - grow and sustain growth. Assess the role of the founding entrepreneur/s and whether this is

changing appropriately as the business grows Assess the enterprises track record in relation to typical growth paths of other similar companies. Gain practice in relation to a case study firm - BioRobotics UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 3 CAMBRIDGE Institute for Manufacturing COURSEWORK BRIEFING A complete session on this Wednesday 25 Feb 2-3pm Preview A report of around 2000 -3000 words. Aim is for you to apply knowledge gained in classes. There are several options. UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 4

CAMBRIDGE Institute for Manufacturing A. Case Study of a High Tech Business Research a case study of a high tech company, drawing on press reports, websites and, if available, direct contact. Your case study should be in two parts; a factual summary of the development of the company and an analysis of the case, applying knowledge gained on the course. You may prepare two or three shorter cases and compare their experience, drawing out reasons for differences in their business success. Examples: Cedar Audio Systems, Cambridge Positioning Systems, C3 Ltd (Computerbased Telephony) One Ltd, Creature Labs (now Gamesware), Cambridge Silicon Radio, UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 5 CAMBRIDGE Institute for Manufacturing B. Discuss the opportunities for enterprise offered by an emerging technology- based sector or industry. Examine the activities of selected firms in that sector.

Sectors examples: geographical information systems, global positioning systems, a telecommunications sector, voice recognition or imaging technologies, satellite technologies,display technologies, new materials, new instrumentation, environmentally sustainable technologies, etc UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 6 CAMBRIDGE Institute for Manufacturing C. Evaluate a Business Plan Provide a detailed evaluation of a business plan, whether from a venture known to you or based on a plan available in the public domain. Examine the strengths and weaknesses of the plan in terms of the business opportunity identified and the business model proposed to exploit it. Marking criteria - have you effectively applied knowledge gained on the course? Marks are affected by business plan selected.

UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 7 CAMBRIDGE Institute for Manufacturing Part One Types of business activity and business mode Early growth paths UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 8 CAMBRIDGE Institute for Manufacturing Entrepreneurs juxtapose information on two planes: resources and opportunities Resource use: Economy

Leverage Combine Create Opportunities continually scan and reassess Enlist others, create network to open opportunities & obtain resources UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 9 CAMBRIDGE Institute for Manufacturing Enterprise involves the pursuit of opportunities to create value by combining resources in new ways in order to secure returns. Enterprise

Opportunity = possibility of reaching a preferred state Resources are means to achieve ends. Entrepreneur - one who engages in enterprise (= entrepreneurial activity). Opportunity Space Resources An enterprise - a business organization Entrepreneurship: study or practice of entrepreneurial activity. Value Economic value is created when Output > Input Returns Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 10

UNIVERSITY OF CAMBRIDGE Institute for Manufacturing Enterprise - wider than new firm creation There are temporary entrepreneurial projects: e.g. expeditions,events, which dont involve setting up a business. Some terms Business - common usage - imprecise term. Company - entity that is legally incorporated Firm - economic terminology Enterprise - business organization UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 11 CAMBRIDGE Institute for Manufacturing Not all entrepreneurial activity involves business

creation. Secure / create resources reinvest distribute Business Idea Set up new activity Secure returns exit Create value UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 12 CAMBRIDGE Institute for Manufacturing A company is a legal entity that can sustain activity and

ownership over recurrent production cycles, cumulatively. Firm output revenue Customers UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 13 CAMBRIDGE Institute for Manufacturing Business creation involves recurrent production cycles. Company itself may become valuable: develop productive capacity, financial assets Productive base Value creating output sold

reinvest distribute exit Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 14 Asset base UNIVERSITY OF CAMBRIDGE Institute for Manufacturing Advantages of starting a business Last time Tax concessions Limited liability Protect ownership through incorporation

Demonstrate product viability Embed learning in organization Store resources Create a community; create jobs Possible to grow and accumulate wealth But firm may be hostage to fortune Paradox of enterprise UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 15 CAMBRIDGE Institute for Manufacturing

Survival all US New Firms 1970s/80s (SBA data) Source Kirchoff 1994 UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 16 CAMBRIDGE Institute for Manufacturing Exposur e High Hard Model Create infrastructure Product Mass Market OEM's Niche Market

In house manufacture Manufacturing subcontracted License IP Contract R&D Lo w Technical services Design studies Consultancy Testing reports Analytical reports Resource commitment Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 17 Soft Model UNIVERSITY OF

CAMBRIDGE Institute for Manufacturing Some business models involve commitment and sunk costs Product concept The range of options being considered reduces over time The cost of design changes increases over time Graphic: J. Allwood UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 18 CAMBRIDGE Institute for Manufacturing Soft Start: services, software, licensing

Lower capital requirements Fewer sunk costs - flexibility Attractive when cost of capital is high. So why manufacture? UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 19 CAMBRIDGE Institute for Manufacturing Hard Start - Manufacturing Strengths: Automate, lower costs Reach markets beyond reach of a service Opportunities: Revenue growth through economies of scale and scope Strengths of in-house manufacture: control competitive advantage embedded in hard- toimitate capabilities UNIVERSITY OF Module 4E7 2004

Elizabeth Garnsey Session 1 Slide 20 CAMBRIDGE Institute for Manufacturing Global Enterprise Monitor 2001, 2003 shows manufacturing start ups that survive are more robust than service companies: survive longer grow larger UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 21 CAMBRIDGE Institute for Manufacturing Challenge of Manufacturing Upfront capital costs to create production base Sunk costs may be irrecoverable Flexibility limited Expertise - multi-functional, difficult for start up team to develop

Difficult to apply entrepreneurial problem solving - but possible, as shown by Oxford Instruments and BioRobotics UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 22 CAMBRIDGE Institute for Manufacturing Soft Start example Cash Flow (000s) 1000 500 0 Cumulative Cash Flow 1 2

3 4 5 Years -200 -500 UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 23 Source: Presentation by M. Bullock of Barclays Bank to British Technology Group Conference, 1986 CAMBRIDGE Institute for Manufacturing Hard Start example

Cash Flow (000s) 1000 Cumulative Cash Flow 500 Net Cash Flow Quarterly Product Launch 1 0 2 3 4 5 Years 500

UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 24 Source: Presentation by M. Bullock of Barclays Bank to British Technology Group Conference, 1986 CAMBRIDGE Institute for Manufacturing Revenues make a company "How do you like our new offices?.. Now we look like a real company. But we're missing one thing ... Revenues. We look like a company, but we are only a venture. Ventures have investors, while companies have revenues. Every month we delay a revenue stream, we have to sell off more equity to stay alive. If we delay too long, the price of the equity goes down.. eventually no one wants to buy..." Kaplan p 93 UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 25

CAMBRIDGE Institute for Manufacturing Internet - Hope and Hype Concept of business model originated with the Internet Usually involved an existing activity, reconfigured for Internet Focus was on how to achieve returns Network of alliances created to produce and deliver by ebusiness Often customers were not users, but advertisers Miscalculated transaction costs of alliances Miscalculated marketing costs of attracting and retaining customers Few early entrants succeeded in achieving and sustaining revenues UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 26

CAMBRIDGE Institute for Manufacturing Other new business models - configured to reduce resource intensity and improve rate of return. Facilitated by Internet. Contract research, consultancy for specific customers (biotech ventures) Licensing designs and inventions to manufacturing partners e.g. ARM - revenues from customer support Development Company - raise funds with partners to develop future product/service - e.g. biotech ventures, CDT, Plastic Logic Production company - with various outsourcing arrangements e.g. BioRobotics UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 27 CAMBRIDGE Institute for Manufacturing e.g. Cambridge Display Technology: activity and business model

Founded in 1992 as spin-out from University Work by Richard Friend (Cavendish) and Andrew Holmes (Melville) Developing Light Emitting Polymer technology Acts as systems integrator bringing together key technologies and competencies Relies on web of alliances - initially no manufacture Partners include: Seiko-Epson, Phillips, DuPont UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 28 CAMBRIDGE Institute for Manufacturing Every new firm is unique So how do we compare them? Business realities provide a basis for comparing cases UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 29

CAMBRIDGE Institute for Manufacturing New firms must solve a common set of problems as input-output systems in a market environment Search for and choose a business opportunity Secure resources for productive activity Set up productive base and organize productive activity Sustain inputs and outputs to survive in competitive market economy UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 30 CAMBRIDGE Institute for Manufacturing Compare growth measures Inputs - employees, investment, equipment, premises. R&D budget, patents

Outputs - sales, revenues, profits Value - tangible assets, intangibles, market valuation Throughputs: sales per employee, lead time to market All measures have limitations - qualitative evidence also needed UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 31 CAMBRIDGE Institute for Manufacturing Relative employment growth of 6 Cambridge software companies UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 32 CAMBRIDGE Institute for Manufacturing COMPARING CASES - evidence

THROUGHPUT measures: productivity p.e. WIP, stocks/ sales, lead times Generate & Sustain Revenues Secure Resources & Set Up productive activity Search & Select OUTPUT measures: revenues, profit INITIAL INPUT measures: Investment funds, endowment assets, patents, recruits Pre-venture activities, ideas, contacts: hard to measure (Reynolds and White 97) UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 33

CAMBRIDGE Institute for Manufacturing From start up to self sustaining business Early learning and problem-solving may be sequential - e. a new product is designed and production facility required Solutions needed before next problems can be dealt with? Dominant problems may give rise to phases of activity. As problems are solved, further ones arise. Stages of growth - common idea in literature. In practice there are often overlapping processes (chains of related activity) rather than distinct stages or phases. UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 34 CAMBRIDGE Institute for Manufacturing It simplifies comparison to look at problem-solving sequentially Generate & Sustain Revenues Secure Resources & Set Up

Search & Select But in practice: there may not be separately identifiable phases. Entrepreneurial problem solving is iterative. Length and distinctiveness of specific problem solving processes depend on activity and business model. E.g. spin outs or de-mergers: start with ability to generate revenues through activity and customers inherited from a parent organization UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 35 CAMBRIDGE Institute for Manufacturing Opportunities - Selected or Created? Analysis, Telecomms Consulting founded by David Cleevely in 1986 Spin-out from CUED 1980s, rapid technology change and deregulation - policy challenge Analysys provided decision-support software for telecommunications policy makers at the European Commission, Brussels Analysys created demand for what they could supply: decision support software and telecomms industry analysis Success of European mobile phone industries - policy re common standards

UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 36 CAMBRIDGE Institute for Manufacturing Search and Select Resources and opportunities - both are relative (means/ends) Matching process - difficult because both are in flux Scientists have difficulty selecting a business opportunity Generic technologies - too many options E.g. holonic technology At some point, entrepreneurs have to target and commit to a specific opportunity, narrowing their options. UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 37 CAMBRIDGE Institute for Manufacturing

Burn rate can exhaust endowment resources Figure 1 Anamartic: Revenue and Cash 1988-1991 7000 2nd Round Finance 6000 3rd Round Finance 5000 4000 Cash Cash 000's 3000 Monthly Revenue 2000 1000

0 Oct-88 Feb-88 Jun-89 Oct-89 Feb-90 Jun-90 Oct-90 Feb-91 Jun-91 UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 38

CAMBRIDGE Institute for Manufacturing Firms that grow early and fast Often incubated in an existing organization where early problems can be solved with less risk of early mortality e.g. BioRobotics UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 39 CAMBRIDGE Institute for Manufacturing Firms that solve initial problems often grow for a while but do not sustain growth. o R? UNIVERSITY OF

Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 40 CAMBRIDGE Institute for Manufacturing This spin out entrepreneur from CUED did not want a big company: "I want to keep the personal feel because it's my life, this business, and I want it to be enjoyable and for the staff to enjoy it." I see my job as people management and for me that means keeping the excitement running. They are very competent people and if they are excited and bouncy then they are extremely productive. Comfort zone? Uncomfortable as soon as conditions change UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 41 CAMBRIDGE Institute for Manufacturing

Most Cambridge Tech Firms Remain Small 800 700 674 600 500 400 339 300 200 78 100 38 21 9

1 200 500 1000 2000 0 10 50 100 Employment UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 42 CAMBRIDGE Source: CCRU Database

Institute for Manufacturing Paradox of Enterprise Greater the success of the enterprise, more difficult it is to remain entrepreneurial Once returns are achieved, there is more to lose Pursuit of opportunity may endanger what has been gained Innovative entrepreneur often turns into conservative small business owner Habitual entrepreneurs often leave and start again once company has grown UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 43 CAMBRIDGE Institute for Manufacturing Unable to grow though aim to do so Cant obtain development capital Cant overcome scale-up problems Manufacturing - initial sunk costs before returns on scale IT products

High initial fixed cost, low variable cost of reproduction May run out of cash before transition to lower costs is achieved UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 44 CAMBRIDGE Institute for Manufacturing Output Demand Capacity Time Under and over production in young firms. Capacity-build is uneven; demand is unpredictable Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 45 UNIVERSITY OF

CAMBRIDGE Institute for Manufacturing Early growth problems o R 1. Returns from output may not keep up with input costs (scale and scope issues ) 2. Timing and coordination (resource mix) problems 1. under-production and over-production problems 2. delay in recovery of resources from output - cash flow blocked 3. Output does not create real or perceived value 1. Quality problems (does output create value for customers?) 2. Demand below forecast Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 46 UNIVERSITY OF CAMBRIDGE Institute for Manufacturing

Quality Crisis at Domino At Domino Printing Sciences, the initial product, an industrial ink jet printer was the first of its kind. It was very carefully designed. However in production, one small component among hundreds had not been inserted. This was vital to the automatic shutdown system if the machine went wrong. When Dominos engineers tested the machines on-site before shipping them, they worked perfectly. The designers had never had occasion to use the automatic shutdown mechanism. But their customers proved less skilled at using the equipment. Before long, three international customers phoned in urgently on the same day. In each case a fire had started in the equipment, with smoke and melt-down of components. What would be a worst case scenario? How could this be averted? UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 47 CAMBRIDGE Institute for Manufacturing Growth and Quality Problems in New Firms

Sales revenues + Time 1 Customer + expanded volume of work + Firm Growth + demand Time 3 - + competitor products Time 2 Quality defects

Staff Shortages UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 48 CAMBRIDGE Institute for Manufacturing Revenue generation does not sustain growth until: Fix /sell Version One of product (takes some inventors years) Ensure recurrent production cycles Routines, rules and roles save time & effort. Store (embed) knowledge Repeat custom and/ or market expansion provide revenues and credibility (early quality problems sorted out) May take a long time e.g. biotech firms lengthy gestation If so, need interim funding/ revenue while product is developed UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 49 CAMBRIDGE

Institute for Manufacturing No Growth Plateau or struggle to survive - when: New firm does not reach minimum efficient scale (MES) to achieve return on assets Resources are all absorbed maintaining current activity Plateau may be a prelude to growth, decline, failure, or merger Growth is least common scenario UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 50 CAMBRIDGE Institute for Manufacturing Growth of new instruments firms in Cambridge 1990-99 Employees 60 1990cohortInstrFsgrwth.10.9.01

50 Series1 Series2 Series3 Series4 40 Series5 Series6 Series7 Series8 Series9 30 Series10

Series11 Series12 Series13 Series14 20 Series15 Series16 Series17 Series18 10 Age of Co. 0 1 2

Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 51 3 4 5 6 UNIVERSITY OF CAMBRIDGE Institute for Manufacturing INPUTS Firms Activity Business idea OUTPUT

RETURNS Over time, firms activity drives its growth path UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 52 CAMBRIDGE Institute for Manufacturing Micromuse attracts major Internet firms as customers Industry and technology knowledge of CTO, develops software Business process knowledge of Stephen Allott IT industry network error-management software required Specific customer

needs at BT Peter Shearan Brokerage by entrepreneur, early CEO who founded Micromuse (Chris Dawe) UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 53 CAMBRIDGE Institute for Manufacturing Micromuse case In early 1995, Micromuse made its first sales of its in-house developed Netcool IT network software. These were quite large and prompted the founder to plan an accelerated transition from the VAR business (distributing

SUN software) to the Netcool business. He announced that the VAR business was no longer mainstream and that the company's future lay with Netcool. The VAR sales started to dwindle quite fast and key people in it started to leave. Meanwhile the strong Netcool sales in the March 95 qtr were a false dawn. Implementation and development resource constraints plus software bugs meant that no further Netcool sales occurred in the June and Sept qtrs. Stephe Allott was appointed CFO in Sep 95. He found: falling sales were feeding through to weak cash receipts and a 1m overdraft. The company could not meet its obligations and was in danger of failing. What should Stephen do? UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 54 CAMBRIDGE Institute for Manufacturing Part Two Problems of successful growth UNIVERSITY OF Module 4E7 2004

Elizabeth Garnsey Session 1 Slide 55 CAMBRIDGE Institute for Manufacturing What was done - Solving the cash flow crisis 1. Re-organise the company into Business Units, with a focus on re-launching the VAR business. 2. Going to see the bank to explain their plan and get their agreement to maintain their overdraft. 3. Re-assign salespeople to focus on the best short term prospects. 4. Implement more effective management information systems to prioritize revenue-generating activity. 5. Work flat out to bring in VAR custom. 6. Sign up a strategic deal with Sun Microsystems to develop Internet infrastructure business (ISP companies to become customers). UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 56 CAMBRIDGE Institute for Manufacturing

250 250 200 200 150 150 100 100 50 50 0 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

-50 -50 NetCool Revenue VAR Revenue NetCool Profit UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 57 CAMBRIDGE Institute forInc Manufacturing Micromuse Strong growth can create further growth pressures Internal pressures for growth After effort of start-up, resources are released for growth Under employed or under-used staff Uneven resource mix: continual shortages and surpluses Lead-lag growth dynamic (Penrose theory) External pressures for growth from:

funders customers distributors Excitement, high morale, stimulus to further effort UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 58 CAMBRIDGE Institute for Manufacturing Riding high A new enterprise has been performing well, though only five years old. Growth record is impressive (sales and revenues employee numbers). Early success makes it possible to expand further through retained earnings and externally obtained funds. Investors view its prospects favourably. Morale is high among its members their prospects are excellent in the expanding enterprise. One of its members is taken ill. After 6 months hospital and recovery he returns to work. He finds: Sales are down and unsold stocks have built up. The banks have withdrawn loan facilities. Creditors are demanding payment. There have been lay-offs and more are expected. The enterprise faces an enforced sell-out or bankruptcy.

How could this happen? UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 59 CAMBRIDGE Institute for Manufacturing Growth reinforcement in a young company can easily tip into reverse Why? UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 60 CAMBRIDGE Institute for Manufacturing System dynamics in an open input-output system (Dissipative system requiring continual input of resources) In natural language:

If positive feedback (self reinforcing process) is interrupted for any reason, output falls. Inputs depend on revenue from outputs, so this reduces input availability. Input shortage prevents output growth. Positive feedback moves into reverse - unless there are reserves to draw on. Young companies have seldom built up reserves. UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 61 CAMBRIDGE Institute for Manufacturing CREATURE LABS ,000 Employment 6000 80

5000 60 4000 3000 40 2000 20 1000 0 1989 1990 1991 1992 1993 1994 1995

1996 1997 1998 1999 2000 0 Turnover Profit Current Assets Fixed Assets Net Worth Employment -1000 -20 -2000 -3000

-40 -4000 -5000 -60 UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 62 CAMBRIDGE Institute for Manufacturing Changing role of founder Qualities required for opportunity detection and start up a company - last week, lecture one As company grows, change of mind set required in leader. Qualities required to grow and increase returns include Project management skills Ability to delegate Ability to interface with partners and retain investors confidence Difficult to change mindset. Crises often force changes. UNIVERSITY OF

Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 63 CAMBRIDGE Institute for Manufacturing Growth Reversal - internal pressures Increased complexity is hard to manage Rapid growth - shortages, bottlenecks - decision making impaired. People problems Constraints on co-ordination and decision making - cannot be remedied from outside Jobs outgrow people and vice versa Burn out and disaffection UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 64 CAMBRIDGE Institute for Manufacturing

Case Studies Tadpole Technology 100000 80000 60000 40000 35000 30000 25000 20000 15000 10000 5000 0 -5000 -10000 -15000 Oxford Instruments Last week 20000 0 1995

1994 1993 1992 Datapaq 1991 Sales 1990 1989 1988 1987 1986 1985 1984

-20000 Pre-tax Profit Linx 4000 18000 16000 14000 12000 10000 8000 6000 4000 2000 0 -2000 3500 3000 2500 2000 1500

1000 500 0 -500 1985 1986 1987 1988 Sales 1989 1990 Pre-tax Profit 1991 1992 1988

1989 1990 1991 Sales 1992 1993 1994 1995 Pre-tax Profit UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 65 CAMBRIDGE Institute for Manufacturing

Cambridge high tech firms have relatively high survival rates Garnsey and Heffernan 2002 on CTM CUED website 110% 100% 90% 80% 70% 60% 50% 40% 0 2 4 6 8 10 Age (Years) UNIVERSITY OF

Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 66 CAMBRIDGE Source: Garnsey and Heffernan 2002 Institute for Manufacturing But growth reversal was common even among ten year survivors Continuous growth Growth reversal and three subsequent alternatives Size (e.g. sales) Size (e.g. sales) 6% Time Early growth and plateau

Delayed take-off and growth 28% Time Size (e.g. sales) Size (e.g. sales) Time 34% 12% Time Growth paths of 237 high tech ten year survivors, founded c 1990 UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 67

CAMBRIDGE Institute for Manufacturing Ways of limiting pressures of growth Managing rapid growth requires embedding problem-solving in effective procedures Avoid growth pressures through segmentation or spin-out. Oxford Instruments TTP - grow without getting too big UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 68 CAMBRIDGE Institute for Manufacturing

Surviving Setbacks Growth reversal processes induce intense strain. Reversal after rapid growth can be a learning experience Double-loop learning: challenge own assumptions Build reserves against setbacks; continue to pursue opportunity Firms that survive may become leaders UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 69 CAMBRIDGE Institute for Manufacturing Accumulation : Resource recovery (outputs-> inputs) exceeds demands of growth Reserves build up and allow firm to weather storms Can expand by buying other companies (O.I.,Domino,Microsoft, Cisco) Growing to be a dominant firm is an improbable event 5% of firms provide 50% + jobs after 10yrs (Storey 1994) 5% of firms provide VCs with 90% of their profits UNIVERSITY OF Module 4E7 2004

Elizabeth Garnsey Session 1 Slide 70 CAMBRIDGE Institute for Manufacturing Attributes of Success Studies have shown startup more likely to succeed with Team of entrepreneurs with right skill mix, education Growth ambitions for venture Business experience Well endowed start up, founders share equity with investors Protected technology Fast growing market UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 71 CAMBRIDGE Institute for Manufacturing Beware circular reasoning on success Success attribute studies of start ups leave 75+% of variance in

performance unexplained Some ventures start with better odds than others Can identify losers more easily than winners. Self fulfilling aspect. Investors have not cracked secret of success Luck is a factor - but who makes the most of it? Solutions give rise to new problems (Greiner) But problems can be a source of novel entrepreneurial solutions - Oxford Instruments, Psion, Hotmail UNIVERSITY OF Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 72 CAMBRIDGE Institute for Manufacturing

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