Amar Bhide Talk Based On: “The Origin & Evolution of New Businesses

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Amar Bhide Talk Based On: “The Origin & Evolution of New Businesses Amar Bhide talk based on: “The Origin & Evolution of New Businesses Oxford University Press (2000) Key dimensions: Uncertainty, Investment and Profit PROMISING STARTUPS Most Likely The Origin and Evolution of New Businesses Microsoft BASIC (1975) Profit www.bhide.net Irreducible Oxford University Press Uncertainty TRANSITIONAL CORPORATE INITIATIVES INITIATIVES Investment Excel (1985) Windows ‘95 © Amar Bhide 1999 © Amar Bhide Propositions about initiatives Approaches, problems vary with initiatives •Investment inversely proportional to uncertainty •Organizational specialization •Opportunistic adaptation •Personal abilities Most likely Most likely Profit PROMISING STARTUPS Profit Irreducible Uncertainty Irreducible Uncertainty TRANSITIONAL FIRMS Investment InvestmentVENTURE CAPITALISTS CORPORATE •Research and planning ANGELS INITIATIVES •Teamwork © Amar Bhide © Amar Bhide Research base Today u 100 Inc. 500 founders u ‘Promising’ startups u Mail survey of HBS alums u Corporate initiatives u 200+ critical biographies u VC backed startups u 20 Case studies u 'New Economy' implications awkward phraseology © Amar Bhide © Amar Bhide © Amar Bhide 1999 1 Amar Bhide talk based on: “The Origin & Evolution of New Businesses Oxford University Press (2000) Big money paradigm u Experienced founders u Careful market research u Business plan Two engineers in a garage u Top notch team $500 capital u Venture capital Foot fault indicator, harmonica tuner audio-oscillator pricing: $54.40, ‘54 40 or fight’ Sustainable advantage © Amar Bhide IPO © Amar Bhide Compaq Lotus u Rod Canion, Jim Harris, Bill Monroe Genentech Improvised startups u Plan to take on IBM Meager endowments u Ben Rosen + $20 m Sun Microsystems u Experienced managers Lack u National dealer network u Track-record u $100 m sales u Breakthrough ideas and technologies Vs. Dell Rolling Stone H-P Cisco Wal-Mart EDS Microsoft Inc. 500 cos. © Amar Bhide © Amar Bhide Lack of track record + ideas Imitation or mundane modification Inability to raise professional capital u 50% + replicated previous employers idea u or, “undifferentiated” response to opportunities Inc. 500 startups: u 6% claimed “no substitutes” u 80% self financed u 3 patents u Median start-up capital = $10,000 u Student papers/’celebrated’ entrepreneurs u Under 5% raised VC funding © Amar Bhide © Amar Bhide © Amar Bhide 1999 2 Amar Bhide talk based on: “The Origin & Evolution of New Businesses Oxford University Press (2000) Lack of track record + ideas + capital ==> Niche markets Not uniformly distributed u 60% + local u Vs. Small competitors many excluded sectors u Mining COMPETITORS FACED BY 1989 INC. 500 STARTUPS u Textiles Percentage of 1989 Inc. 500 Founders Surveyed u Process industries -- paper, petro-chemicals u Automobiles (1) No direct competitors 18% Fortune 500 companies u Hotels, Airlines 4% u Restaurants (1) u Bio-technology (1) Small companies and other startups 73% Mid-sized companies 5% © Amar Bhide © Amar Bhide Source: Author’s survey Many computer startups High-ticket products and services PERCENTAGE OF COMPUTER COMPANIES IN INC. 500 40 DOLLAR VALUE OF UNIT SALES 35 47% 43% 30 25 % of Inc. 500 IT Industry (Computing and 20 Communications) as % of GDP $5000 median 15 10 7% 5 3% $1 to $100 0 $101 to $5,000 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 $5,001 to $500,000 Price Per Unit over $500,000 Source: Inc. Magazine; © Amar Bhide Source: Author’s survey © Amar Bhide U.S. Dept. of Commerce Economics and Statistics Administration (1998) report (estimates based on Bureau of Economic and Analysis and Census data) Contrast with marginal startups MOST POPULAR START-UPS, 1996 High-ticket products and services Type of business Number of start-ups Construction 24,787 Restaurant 22,781 Retail Store 21,081 Cleaning services (residential, commercial) 19,642 Real Estate 17,549 u Direct sales 90% Automotive Services and Repair 16,158 u 75% sales cycle from days to months Consultant 13,835 Beauty Salon 11,762 u Customization Computer Service and Repair 11,111 Designer 10,676 Management and Business Consulting 9,665 Arts and Crafts 9, 412 86% business-to-business Painter 9,156 Lawn Maintenance 8,498 Marketing Programs and Services 8,314 Landscape Contractor 8,268 Investment Broker 8,206 General Contractor 8,137 Communications Consultant 8,022 © Amar Bhide Building Contractor (remodeling, repairing) 7,998 © Amar Bhide © Amar Bhide 1999 3 Amar Bhide talk based on: “The Origin & Evolution of New Businesses Oxford University Press (2000) Proposition:Entrepreneurs w/meager resources thrive in niche markets with high ESTIMATED DISTRIBUTION OF PROFITS uncertainty: PROMISING STARTUPS MARGINAL STARTUPS • Most likely profits also low, but with positive skew Probability estimates of profits closely clustered around zero • Fuzzy estimates of probabilities u Market turbulence and/or Probability Probability u Founder’s capacity to satisfy fuzzy wants u Arbitrage or heads I win, tails I don’t lose much u Limits competition from established companies & well capitalized startups Profit Profit © Amar Bhide © Amar Bhide 2. Planning vs. Opportunistic Adaptation TIME FROM IDEA TO STARTUP Percentage of Inc. 500 Founders Responding u An ad-hoc process 37% SOURCES OF STARTUP IDEAS Percentage of 1989 Inc.500 Founders Surveyed 28% 26% Systematic search for business opportunities 4% Other 5% Discovered serendipitously: Built temporary or casual job 20% Replicated or modified 9% into a business (7%) an idea encountered Wanted as an individual through previous consumer (6%) employment Happened to read 71% about the industry (4%) Developed family a matter of weeks a few months member's idea (2%) six months to one Thought up during year over one year honeymoon (1%) Source: Author’s survey Source: Case, John, “The Origins of Entrepreneurship”, Inc. Magazine, 1989. © Amar Bhide © Amar Bhide planning/research: costs > benefits BUSINESS PLANS OF INC. 500 STARTUPS Percentage of Inc. 500 Founders Responding u Uncertainty ==> limited data, costly delays u Small markets/likely profit 41% u Capital constraints u Limited downside 26% 28% 5% Rudimentary Pro-forma for No business plan Detailed plan Plan bank or investors © Amar Bhide © Amar Bhide © Amar Bhide 1999 4 Amar Bhide talk based on: “The Origin & Evolution of New Businesses Oxford University Press (2000) Example: High uncertainty, limited planning ==> Eaglebrook's Evolution Opportunistic Adaptation • Brokers for scrap plastic (1983) • $700 grinder triggered by: •$25,000 grinder • Purification of paper contaminated scrap (1985) u Failure to generate sales. (Factor-Fox) u Declining profitability. (Compu-Link) • Recycling plastic bottles (1987) u Saturated Niche. (H-P audio-oscillator) • Plastic Lumber (1989) u Unexpected Opportunities. (MS-DOS) • Styrofoam Recycling (1990) © Amar Bhide © Amar Bhide Securing resources: customers, employees, suppliers... 3. Securing resources: customers, employees, suppliers... Overcoming the liability of newness: u Special deals and benefits The ‘liability of newness’: u Mimicry u Framing u Rational concerns u Broad search u Cognitive biases and reflexive behavior u Incremental commitments u Second-tier resources © Amar Bhide © Amar Bhide "We were careful to make sure that we only employed people who were unemployed. Not unemployable, but unemployed. We did this for two reasons. One, we were cheap. Two, for conscience reasons--if we went under and it didn't work out for them, we wouldn't feel so bad." John Greenwood, Micron Separations To get hired into this organization was a joke. I mean if you came in and we needed a warm body, you were hired. Literally for any position. Our turnover was high because we had to fire many employees. Grounds for termination were a bad attitude and undermining the company-- Robert Rodriguez, Natcomm © Amar Bhide © Amar Bhide 1999 5 Amar Bhide talk based on: “The Origin & Evolution of New Businesses Oxford University Press (2000) Inferences about traits and skills: Personality traits of the entrepreneur Propensity to start u Optimal human capital and background Many hypotheses about attributes u 81% college degrees u Need for achievement u Middle class u Risk-taking propensity u Tolerance for ambiguity u Internal locus of control u Type A behavior u … But unconvincing results © Amar Bhide © Amar Bhide Inferences about traits and skills: Inferences about traits and skills: Adaptation Securing resources u Decisiveness u Tactical Ingenuity u Open-mindedness u Self-control u Managing Internal Conflict u Perceptiveness (“Allocentric” orientation) u Sales Skills © Amar Bhide © Amar Bhide PROPOSITIONS ABOUT PROMISING STARTUPS Critical traits and skills: In contrast to: Entrepreneurs with meager endowments... u Tolerance for ambiguity u Tolerance for risk ...thrive in ... INITIAL ..face the tasks of... u Open-mindedness u Breakthrough creativity. CONDITIONS NATURE OF BUSINESSES Lack of Limited u Managing Internal Conflict u Vision and foresight. breakthroug verifiable • Low investment OPPORTUNISTIC …requiring h ideas or+ human • High uncertainty ADAPTATION capital technology • Low likely profit to unforeseen u Tactical Ingenuity u Grand ambition. circumstances TRAITS AND SKILLS u Self-control u Charisma. Unavailability of • Tolerance for outside funding SECURING ambiguity u u • Open-mindedness Perceptiveness Using power. RESOURCES • Decisiveness through risk • Self-control u Sales Skills u Administrative abilities. transfer and • Sales skills syndication • • • © Amar Bhide © Amar Bhide © Amar Bhide 1999 6 Amar Bhide talk
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