Center for Management of Emerging Companies

Global Entrepreneurship and Development Index

An interesting and dynamic new tool for measuring and comparing knowledge- and technology-based entrepreneurship and emerging company activities on a global basis is the recently developed and announced Global Entrepreneurship and Development Index (“GEDI”).  The GEDI was created to address and overcome several of key shortcomings of existing measures of national entrepreneurship, including the failure of indexes such as the Global Entrepreneurship Monitor to incorporate the different impacts of businesses and ranking countries based primarily on the number of businesses without regard to their success from a financial perspective or in terms of job creation and improving the local knowledge base.  In the words of the US Small Business Administration: “The GEDI captures the contextual features of entrepreneurship by focusing on three broad areas.  The first is entrepreneurial attitudes, a society’s basic attitudes toward entrepreneurship through education and social stability.  The second area of focus is entrepreneurial activity, what individuals are actually doing to improve the quality of human resources and technological efficiency.  The final area is entrepreneurial aspirations, how much of the entrepreneurial activity is being directed toward innovation, high-impact entrepreneurship, and globalization.”  The dimension of “entrepreneurial aspirations” is particularly important to the study of emerging companies across borders since it incorporates, in the words of the researchers who developed the GEDI, “the efforts of the early-stage entrepreneur to introduce new products and services, develop new production processes, penetrate foreign markets, substantially increase the number of firm employees, and finance the business with either formal or informal venture capital, or both”.  The first rankings appeared earlier this year and were highlighted in a recent article in The Economist, which noted: “America is the most enterprising big economy. The EU comes second. The rest of the world, including India and China, is far behind.”  An interesting finding was that four of the five Nordic countries were in the top ten, with Denmark leading the pack at No. 1!  We’ll be revisiting the GEDI again in the future.

Knowledge-Based Entrepreneurship in India

There is intense interest in the formation and evolution of "emerging companies" in India.  Mani has referred to this type of entrepreneurial activity in India as “knowledge-based entrepreneurship”, which he defined as “entrepreneurship in the context of medium and high technology industries, both in the manufacturing and service sectors as well”.  With respect to India, the specific industries considered to meet the criteria for “knowledge-based” status include chemical and chemical products, metal products and machinery, electrical machinery, transport equipment, communication services, computer-related services and research and development services.

An analysis by Mani of the “hottest start ups” in India identified by the National Entrepreneurship Network as of 2008 revealed the following characteristics of technology-based entrepreneurship activities in the country:

• 40% of the companies were technology-based (i.e., information technology, Internet, software, telecommunications and mobile);
• Most of the companies—63%--were based in the larger cities (Bangalore (25%), Mumbai (19%) and Delhi (19%);78% of the companies had been in existence less than three years and the oldest companies had been formed in 2003;
• Just under half of the founders were still in their 20s and more than half of the founders were “first generation” entrepreneurs launching their first business; however, only 8% of the founders were women;
• 585 of the founders had either studied abroad or received their education in one of India’s “Tier I” institutions; and
• The number of employees ranged from five to 15.

For purposes of determining eligibility as a “technology company”, the following criteria are used: (i) the company must own proprietary technology that contributes to a significant portion of the company’s operating revenues; (ii) the company must manufacture a technology-related product; and (iii) the company must devote a significant portion of its operating revenues to research and development.

There has also been a significant increase in the number of Indian companies included among the Deloitte Technology Fast 500 Asia Pacific, a collection of the fastest growing technology companies in the Asia Pacific Region.  Indian representation grew from just 12 firms in 2003 to 82 (engaged predominantly in information technology or software) in 2007, the second highest among all countries represented on the list that year.  By 2010, the number of Indian firms had dropped to 60, fourth among all countries represented behind China, Taiwan and Australia; however, India still outpaced traditional technology leaders such as Korea, Japan and Singapore.

Characteristics of Emerging Companies--A New Look

Whether or not a particular company is "emerging" is sometimes assessed by reference to how the company stands with respect to certain key business and financial characteristics.  This report identifies and describes some of those characteristics and also incorporates interesting empirical information derived from a comprehensive study of the evolution of emerging companies by researchers from the University of Chicago Graduate School of Business.

Preparing a Business Plan - Guidelines for Professional Legal Advisors

This month's post is a chapter on Preparing a Business Plan written with AiMinh Nguyen that will appear in an upcoming book for professional legal advisor published by the American Bar Association--Emerging Companies Guide 2d Edition. 

New Book - Organizational Management & Administration

In December of this year, Thomson West will be publishing the first volume of my new publication--Organizational Management & Administration: A Guide for Managers and Professionals.  The publication is intended to be a comprehensive guide to management and administration of organizations, particularly emerging companies, and will draw on many of the issues covered in this Blog.  Please click here to review the Preface for the publication, which provides an overview of the content of the first volume.

Characteristics of Innovative Companies

Emerging companies are often distinguished from the broader set of entrepreneurial activities by focusing on the significant level of “innovation” associated with their business models.  A number of different definitions and explanations of innovation have been offered by academicians and commentators.  For our purposes, it is useful to think of innovation as the process of successfully acquiring and implementing new ideas within a business organization.  As suggested by this formulation, new ideas can be developed and created internally, or can be borrowed or purchased from other organizations.  New ideas are not confined to new products and services, but also include new or improved processes that enhance productivity or reduce costs associated with manufacturing or distributing existing products.  Put another way, innovation involves firms doing new things in new ways to increase productivity, product development, sales and profitability, including finding new ways of identifying the needs of new and existing clients and making and marketing products that satisfy those needs. 

Researchers have attempted to identify those firms that have been most successful at innovation, and to describe and explain those business practices that tend to be associated with innovative companies.  Among the key factors are the following:

• Innovative companies have strong leaders that are able to clearly articulate a vision for the business, set targets and create and maintain open relationships with all stakeholders (i.e., customers, investors, suppliers and employees).
• The most innovative companies have extensive knowledge of the marketplace, the needs of customers, and the strengths and weaknesses of their competitors.
• Innovative companies seek and retain extraordinarily qualified personnel, provide them with the proper amount of resources and general direction, and then allow them to make and pursue their own specific strategies for achieving the agreed goals.
• The organizational environment of an innovative company emphasizes integration of multiple disciplines and functions and teamwork, goal sharing, and full and effective communication of goals and objectives throughout the firm.
• Technology is used effectively throughout the organization, including small changes in design, production processes and customer services.
• The organization strives and plans for continuous and constant innovation, as opposed to isolated new ideas, to improve and enhance products, services and productivity.
• Innovative firms strive for strong brand recognition and rapid introduction of new products and services into the marketplace.
• Innovative companies have systems for collecting information about, and learning from, customers, competitors and unrelated businesses around the world.

Some of the most common specific strategies for innovation include the following:

• Frequent implementation of new management techniques;
• Implementation of skill development and education programs for employees and managers;
• Regular introduction of new technologies, generally no less frequently than every three years;
• Constant and systematic benchmarking through regular comparison with the best companies in their industry and elsewhere;
• Significant investment in customer-focused product design and in quality-based manufacturing equipment and processes;
• Regular changes in the organization of work and administration, typically made in conjunction with introduction of new products and/or technologies;
• Allocation of a significant share of turnover, generally at least 10%, to development and introduction of new products and processes; and
• Collaboration with universities and other research centers to identify technologies which can be converted into profitable products and processes.

Becoming a High Performance Company

How should we define business success?  Well, according to researchers from Accenture as described in Going the Distance: How the World’s Best Companies Achieve High Performance, the answer is not simply their reputation and stature among influential business executives.  Instead, they argue that business success must be defined both qualitatively and quantitatively.  And, just what measures of performance should be used?  They suggest looking at the following five key dimensions over a seven-year period, all of which must be compared against a carefully set of competitors:

• Growth, as measured by expansion of revenues over the measurement period;
• Profitability, as measured by the different between the company’s return on capital and its cost of capital;
• Positioning for the future, as represented by what the researchers refer to as “future value”--the portion of the company’s share price that cannot be explained by its current earnings--and by the portion of the industry total that each company's future value represents;
• Longevity, as measured by the duration of out-performance in total return to shareholders; and
• Consistency, as measured by the number of years during the measurement period that the company exceeded the median level of profitability, growth and positioning for the future within its group of competitors.

The researchers acknowledged that the relative importance of the five high performance measures might vary from industry-to-industry and that care should be taken before attempting to make comparisons between firms that are not part of the same peer group of competitors.  Nonetheless, they felt it was also possible to identify the following three drivers of performance, or “competitive essence,” that applied across industry boundaries:

• Market focus and position, which means knowing “where and how to compete” and successfully scaling the business by adroitly exiting mature markets and consistently identifying new markets and entering them on a timely basis;
• Distinctive capabilities, which includes the unique set of business processes and resources that cost-effectively serve the specific needs of customers (referred to by the researchers as “differentiation on the outside and simplification on the inside”); and
• Performance anatomy, which begins with a set of stable values developed by the leaders of the company and continues with the constant use and communication of those values to create a shared mindset within the company regarding critical organizational elements such as the balance between strategy and execution; the cultivation of talent; the strategic importance of information technology; the need to measure performance selectively; and the drive for continuous innovation and renewal.

Also interesting was the observation that an apparent condition for aspiring to become a high-performance business (although not a guarantee that the level of performance will actually be achieved) is world-class excellence across the whole range of key functional areas and cross-functional activities (e.g., Supply Chain Management; Human Performance; Customer Relationship Management; Finance & Performance Management; Strategy; and Information Technology).

Food for Thought . . .

As with much of the research in this area, Accenture focused on large companies and thus the applicability of the conclusions to emerging companies is not completely clear but for the fact that emerging companies, almost by definition, aspire to become world leaders at some point in the future.  Four concepts do, however, strike me as interesting for founders and senior executives of emerging companies . . . creating “future value,” mastering market focus and position; identifying and cultivating one or more distinctive capabilities; and laying the foundation for a strong performance anatomy.  By appreciating the ultimate importance of these activities at an early stage, the leaders of an emerging company can consciously invest their time and company resources in pursuit of the goals that will pay the largest dividends in the future.  This means, for example, establishing a solid infrastructure for evaluating market trends and customer needs and fostering a culture that encourages personal development and growth and innovation.

Growth Stages - Concept Stage Part II

In a previous post we discussed the business characteristics of an emerging company during its initial “concept” stage.  Today we’ll look at some of the management-related issues that the founders must confront during the sensitive period before the company is truly launched.  In most cases, the problems are directed related to either the lack of a completed prototype for the product or service that the company will be marketing and selling or the lack of financial resources and other important assets.

First of all, this is the time when cash is almost always extremely tight unless one or more of the founders has a deep reservoir of capital that can be used to hire personnel, lease an office and buy or lease equipment.  The founders will be watching every outlay of cash carefully and will literally be “managing by checkbook.”  Preliminary inquiries may be made within angel investor networks and the founders may sometimes be distracted by the need to focus on a mini-business plan or at least a short 10-minute explanation of what they propose to do and why an investor should be interested.  If investors show a serious interest the founders must attempt to place a “value” on their concept, often extremely difficult or impossible at such an early stage, in order to determine how much equity should be surrendered to outside investors.

A second issue, directly related to the lack of capital discussed above, is creating a plan to manage the meager assets that the founders do have under their control.  Actual design and development work on the new product or service will generally be done without expectation of salaries and the founders will usually earmark whatever cash is available for networking, and perhaps some travel, to spread the word about their new venture and identify prospective investors and other business partners (e.g., suppliers and customers).  This type of activity should be part of the company’s initial marketing efforts; however, the founders will generally encounter difficulties at this point in time due to the fact that they have yet to establish a unique identity and brand awareness.  Moreover, unless and until the founders have a prototype of the first product or service available for presentation to interested parties it is tough for the founders to establish credibility regarding any claims of unique attributes or performance characteristics.  One limited, and admittedly rare, exception to all this is the situation where the founders have a recognized track record with respect to innovation and investors are willing to trust their ability to identify the “next big thing” and complete all the steps necessary to bring the promised product or service to market in a timely fashion.

A third set of issues concerns the organizational structure, or rather the lack thereof, during the concept stage.  Since the form of the initial product or service remains fluid, and the relationships between the company and outsiders are also in a state of flux, the founders must constantly evaluate their business and technological environment and aggressively seek additional information and intelligence that they can immediately factor into their activities.  Important decisions must be made and executed quickly, often without taking any time to lay out even the most rudimentary flow chart of next actions and responsibilities.  The sense of urgency is heightened when the founders know that others may be working on new products or services that are similar or which will offer alternative solutions to the need that the founders are attempting to satisfy.  Management reporting systems and other internal communications are almost totally informal and much of the interaction is “virtual” as the founders and contractors toil away in widely dispersed locations—coming together for face-to-face meetings only as needed since the company usually does not yet have its own office.  Company-specific information systems, including e-mail and software applications, are rare at this point unless absolutely needed for specific design projects and the founders typically rely on what they already have available on their own PCs.

Food for thought . . .

Taken together, the management concerns during the concept stage are formidable and it is easy for the founders to become disoriented and lose focus on what is absolutely essential to moving the business to the next level.  At this point, access to an experienced and dispassionate mentor can be an invaluable business and psychological advantage for the founder.  A mentor can be used as an outlet for explaining frustrations and can assist the founder in seeing the one or two next “best actions” that must be completed.

What is an Emerging Company?

The term “emerging company” is frequently used; however, there is still no widely accepted definition of the term and the characteristics of the firms that might fall within the scope of the definition.  This post will not resolve the issue but it will nonetheless provide some ideas of the types of companies that are the focus of The Emerging Companies Blog.

It is telling that the terms “emerging company” and “emerging growth company” are used interchangeably. While I selected the former for the title of this blog it should be understood that a growth-oriented strategy is a key element for the types of companies that I am interested in.  Also, while I will discuss the trials and challenges that small groups of entrepreneurs will go through during the very earliest stages of conceiving and starting their business (i.e., the “concept” stage), my real interest is in what happens after the “next great idea” has left the garage or the laptop in the attic and landed in its own discrete working space with human and financial resources obtained from outside the founder group. 

Applying these conditions, and a few others, I think that a working definition of an “emerging company” should begin by focusing on newly formed or reorganized companies that have successfully survived the early challenges that typically drive 80% - 90% of new firms out of business and established a resource base and organizational structure suitable for sustained growth.  One very important implicit assumption in the previous sentence is that the founders, other senior managers and outside investors have all targeted growth and expansion as a key goal in the overall strategy of the company.  In addition, emerging companies are built on the assumption that the desired growth will come from some new and unforeseen development that totally changes the dynamics of the market in which they are competing—technological breakthroughs, dramatic shifts in the costs associated with satisfying existing consumer needs, identification of new consumer needs and/or sociological or economic changes.  It is the job of the managers of the emerging company to embrace and exploit these developments by identifying business opportunities and creating new products or services to take advantage of them.

Whether or not a particular company is “emerging” is sometimes assessed by reference to how the company stands with respect to certain key business and financial characteristics.  These characteristics not only test the current and projected financial performance of the company—measured by revenues, sales, profit margin, cash flow, etc.—to determine whether the business has been, and will be, generating steadily increasing revenues at above-average rates, but also examine whether the company has the resources and strategies in place to grow rapidly.  Specifically, in order to qualify as “emerging” a company should demonstrate all or most of the following characteristics:

Management: Probably the most important success factor for any business is the presence of qualified, experienced and credible management and this is especially true in the case of emerging companies since they must face and overcome turbulent and challenging conditions as they move quickly through several growth stages. Ideally, the founder(s) and other senior managers should be experienced in the target industry and each of them must demonstrate a strong entrepreneurial spirit and dedicated focus on the business.  In any event, the company must have a management team in place rather than just one person acting as the CEO.

Distinctive Competence:  A company should have a distinctive competence in one or more areas that are essential to competitive success in its particular market.  Examples include proprietary design technology (e.g., patents and trade secrets), manufacturing know-how, a unique brand, or extraordinary services.

Market:  Emerging companies tend to be technology-oriented that have the potential to achieve annual revenues of at least $50 million on a profitable basis within three years after launch and ultimately attain a market valuation in excess of $1 billion within five years after launch.  While the current size of the market is relevant the more important consideration is whether the market is expected to grow and expand rapidly in the future and, in fact, many require that the company be competing in an industry that itself is considered to be “emerging”.  A related issue is whether the company has a sensible and believable strategy for distributing its products and services within the target market. 

Strategic Alliances: Emerging companies must have, or be in the process of developing, relationships or contracts with recognized companies in the industry in order to demonstrate the credibility of the company’s business model in the marketplace.  Strategic alliances can provide access to technology and other needed resources and allow the company to scale up its manufacturing and sales activities quickly without having to make substantial capital investments.

Products:  Emerging companies have innovative distinctive products, processes, or services that can dominate a niche market segment.  Ideally the company will be able to begin commercialization of its products immediately following completion of development without delays caused by the need to overcome regulatory hurdles; however, biotechnology and life sciences companies certainly fall within the definition of emerging companies even though they generally must wait several years before their products are approved for release to the public.  It is also a positive sign if customers must make recurring purchases of the company’s products and services.

Margins and Cash Flow: Actual or potential gross margins and/or cash flow should be large enough to permit financing of growth over an extended period of time, and produce a favorable return on invested capital.

Food for thought . . .

Where does your company or client stand in relation to the various characteristics of an emerging company listed above?  What characteristics might be the most important?  At what point should the founders begin to structure their business model and strategies to guide the company into the profile of an emerging company?

Growth Stages - Concept Stage Part I

The first stage in the growth and evolution of a prospective emerging company usually occurs well before the company, as a formal legal body, is formed and ready for recognition in the marketplace.  The emerging company begins with an idea identified by a founder or group of founders and this idea becomes the basis for developing and refining a plausible business concept—how the idea can be converted into a business and what they business will do to bring value to all interested stakeholders.  Accordingly, it is not surprising that this initial early period of contemplation and organization is referred to as the “concept stage.”  It is useful to understand the most common and basic characteristics of the business during the concept stage:

• The founders will be heavily involved in identifying and articulating the overall goals and objectives for the company including clarifying and articulating their vision and mission statement, identifying and defining market requirements, selecting those niches within the identified markets that present the best initial opportunities for the company, and creating a plan for designing and building a sustainable platform that can be expanded in the future to include new products, services and markets.
• The organizational structure will be informal, often virtual, since the founders may still be involved in projects for their current employers.  Lacking significant financial resources in many cases the founders may need to rely on outside parties to provide administrative assistance such as office or laboratory space.
• Since it is unlikely that professional management, apart from any experience that area that the founders might have, will be involved at this point the predominant management style will remain “entrepreneurial” and the founders will be involved in every aspect of the polishing up the rough initial concept.
• Specific activities with respect to products and markets should be focused on identifying, understanding and validating the needs for actual customers and determining what product or service characteristics will be perceived as being the most valuable.  For example, the founders need to determine whether customers are looking for greater convenience or whether they are most interested in things such as price, variety, customer service or durability.  Once this information is collected the founders need to gauge how those “desires” can be accommodated in the product or service design process.
• In general, the concept stage is the time for “bootstrap” financing provided by the founders, their friends and relatives, and perhaps a supplier or customer with an interest in seeing the nascent product or service reach the commercialization stage.  As such, expenditures need to be tightly regulated and focused and this means focusing on R&D or licensing to procure the necessary technology and design and development of the initial products, services and applications.

In a future post we’ll take a look at some of the specific management challenges and problems that often come up during the concept stage. 

Food for thought . . .

By definition a concept is vague and lacks definition and many would-be entrepreneurs may give up when confronted with all of the unstructured tasks that seem to pop during the concept stage.  This is the time to take a quiet weekend and sit down and list out all of the things about the new great idea that may have come into the minds of the founders.  Only then can you bring a refresh and clear head to the task and determine the most valuable use of the next moment in time.