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MG3009Term2Lecture4Entrepreneurialgrowthandexitstrategies.pdf
Entrepreneurial growth and exit strategies
Professor Catherine Wang
MG3009 Entrepreneurship and Small Business Ventures
In this lecture:
The life cycle of a new venture
Bigger is better, but small is beautiful
Growth strategies
Exit strategies
Options for ventures
Start-up
Sell/exit Stay with the company Start another company Seek other employment
Maintain Become a manager Exit day-to-day management
Grow Become an entrepreneurial leader Take alternative position in the firm Exit day-to-day management
Options for venture Options for the founder
Why should a business maintain/remain small?
Life style and artisan businesses
https://www.youtube.com/watch?v=eVsitTW9XE8
Gardner Street, Brighton
Why should a firm remain ‘small’?
Small firms have less demand on managerial capacity.
Small firms are more likely to reflect the founder’s personal interests (“hobby shops” or “life style businesses”).
Small firms are often more flexible, informally structured, and decisions can be made quickly.
Small firms have few management layers and tend to be more efficient.
Joseph Schumpeter
Early work: innovation and technological change of a nation comes from the entrepreneurs, or ‘wild spirits’. Individuals are the ones who make things work in the economy of the country.
Later work: the ones who really move the innovation and economy are the big companies which have the resources and capital to invest in research and development.
Bigger is better vs. small is beautiful
“…I was brought up on the theory of the ‘economics
of scale’ – that with industries and firms, just as with
nations, there is an irresistible trend, dictated by
modern technology, for units to become ever
bigger. Now, it is quite true that today there are
more large organisations and probably also bigger
organisations than ever before in history; but the
number of small units is also growing […] and many
of these small units are highly prosperous and
provide society with most of the really fruitful new
developments” (Schumacher, 1973, p.48).
Ernst Friedrich Schumacher A Buddhist economist would consider this
approach excessively irrational: since consumption is merely a means to human well-being, the aim should be to obtain the maximum of well-being with the minimum of consumption.... The less toil there is, the more time and strength is left for artistic creativity. Modern economics, on the other hand, considers consumption to be the sole end and purpose of all economic activity.
It is clear, therefore, that Buddhist economics must be very different from the economics of modern materialism, since the Buddhist sees the essence of civilisation not in a multiplication of wants but in the purification of human character. Character, at the same time, is formed primarily by a man's work. And work, properly conducted in conditions of human dignity and freedom, blesses those who do it and equally their products.
Case study: Persephone Books
Persephone Books at 59 Lamb’s Conduit Street, London https://www.youtube.com/watch?v=1IPA1vnqozQ
Founder Nicola Beauman
The logo of Persephone Books
Beautiful endpapers and matching bookmarks are a hallmark of Persephone's publications
Is ‘maintain’ always a feasible option?
Speed is a critical component of success… You have to grow quickly, or others will beat you at your game … but speed can quickly undermine quality and fiscal discipline. – Dan Weinfurter, the founder of Parson Group.
I always thought that expanding my business at a steady pace was a smart move. Now I worry that it could potentially kill us. – Joel Spolsky, the co-founder and CEO of Fog Creek Software
The battle between Oracle and Ingres in early 1980s
What set Oracle apart from Ingres was that Larry Ellison (CEO) drove for 100 percent growth while Ingres 'accepted' 50 percent growth.
Executives at Ingres felt that the company “simply cannot grow any faster than 50 percent and still adequately serve our customers. No one can. Look at Oracle. They are promising anything and everything and shipping little or nothing. Everybody knows it. Their customers hate them. They are going to hit the wall”.
Options for ventures
Start-up
Sell/exit Stay with the company Start another company Seek other employment
Maintain Become a manager Exit day-to-day management
Grow Become an entrepreneurial leader Take alternative position in the firm Exit day-to-day management
Options for venture Options for the founder
Bygrave and Zacharakis (2008)
The growth of a firm
Growth in terms of sales volume, market share, the number of employees, the number of business premises, and profitability??
Firm growth is not always related to profitability!
Pace of growth: steady growth, fast growth, and sustained growth
Why should a firm achieve growth?
To achieve economies of scale/scope: the more units of the product you sell, the cheaper it costs to produce it – scale up your business!
To increase the market share, become a market leader, and establish brand recognition.
To recover R&D and other costs involved in the new product development.
To accommodate the growth of key customers.
To attract and retain talented employees.
To assert influence and power over its stakeholders and increase survivability.
“Size gives us another big advantage; our reach and resources enable us to go to bat more frequently, to take more swings, to experiment more, and unlike a small company, we can miss on occasion and get to swing again.” – Jack Welch
Factors that influence small firm growth
The founder and often the owner/manager’s ambition, personality, network and socio- cultural characteristics
Family involvement
Marketing, branding and publicity
Funding gap
Management and leadership
Ownership relay
Etc.
Greiner’s stages of business growth
Growth strategies
Internal / organic growth strategies
External growth strategies
New product development
Other product- related strategies
International expansion
Mergers & acquisitions
Licensing
Strategic alliances & joint ventures
Franchising
Open sourcing & outsourcing
Scaling your business: choosing a growth strategy
https://www.youtube.com/watch?v=lhcSkax- PpU
Growth through franchising
Franchising is defined as “an organizational form in which a company (franchisor) grants an individual or another company (franchisee) the right to do business in a prescribed manner over a certain period of time in a specific place in return for royalties or the payment of other fees” (Elango and Fried, 1997, p.68).
Growth through open sourcing and open innovation
Open source is an approach to design, development, and distribution offering practical accessibility to a product's source (goods and knowledge).
“Open innovation is the use of purposive inflows and outflows of knowledge to accelerate internal innovation, and expand the markets for external use of innovation, respectively. [This paradigm] assumes that firms can and should use external ideas as well as internal ideas, and internal and external paths to market, as they look to advance their technology.” – Henry Chesbrough and colleagues (2006): Open Innovation: Researching a New Paradigm
Backstage Use our stuff to build your stuff
Growth through licensing
Licensing involves that the party (the licensor) that owns the intellectual property grants use of it to another party (the licensee) under clearly stated conditions and often for a specific period of time; the licensee pays an initial fee and continuing royalties to the licensor (Baron and Shane, 2008, p.367).
Going public: benefits
Going public can help improve its financial condition by obtaining money that does not have to be repaid
Company stock can be used to raise capital
The company obtains increased prestige and visibility
Company stock in the form of stock options can be offered to employees and contractors as a meaningful form of incentive compensation
The stock market then becomes a ready market for controlling shareholders to sell their interests at retirement, for diversification, or for some other reason.
Options for ventures
Start-up
Sell/exit
Maintain
Grow
Stay with the company Start another company Seek other employment
Become a manager Exit day-to-day management Become an entrepreneurial leader Take alternative position in the firm Exit day-to-day management
Options for venture Options for the founder
Bygrave and Zacharakis (2008)
What are the options for exiting the business?
Exit strategies
“Bleed the company dry” or just take it! But be aware of the tax implications.
The liquidation. An easy and natural way of closing a business, but the best you get is the market value of your company’s assets and the ‘soft’ part of the business – customer base, reputation, business relationships – will be destroyed.
Buyout. The legacy is carried over, but negotiation can take time and effort and emotional attachment could be a problem.
Merger & acquisition. The price may be increased due to the business’s strategic value to the acquirer and bidding among multiple bidders, but it is likely to be broken down and then integrated in the acquirer’s company.
Initial public offering. An opportunity to raise more money than the business’s actual assets, but this option is not always available to small firms and always very time consuming.
Factors to consider when planning your exit
the value you and other shareholders realise from the business
whether you receive a cash deal, deferred or staged payments
the future success of the business and its products or services
whether you retain any involvement in or control of your business
your tax liabilities
Consider what you want to get from the business and what you want to leave behind!
Planning your exit
Carefully planning your exit from the business can help you to:
mould your business into the ideal shape for your chosen exit option - maximising the value you get from it
groom successors if they're coming from within the business - whether they're a family member or part of your management team
exit at a time of your choosing, when the business is doing well and the market conditions are advantageous
Summary
Firm growth is determined by a multitude of internal and external factors, which are illustrated through the contrasting arguments of “bigger is better” but “small is beautiful”.
Different phases of the growth pose different challenges for the firm, from ideas, marketing, and finance to management.
Internal and external growth strategies offer different advantages and disadvantages, and often go hand-in-hand to achieve growth.
When the time has come, your exit from the business should be carefully planned to realise maximum value from the business (and leave a legacy behind!)
