© Amar Bhidé January 15, 1999 The Origin and Evolution of New Businesses The Oxford University Press (expected pub. Date: Nov. 1999) Table of Contents Acknowledgements Preface 1. Introduction Part 1: The Nature of Promising Startups. 2. Endowments and Opportunities 3. Planning versus Opportunistic Adaptation 4. Securing Resources 5. Distinctive Qualities 6. Corporate Initiatives 7. VC backed Start-ups 8. Revolutionary Ventures Part 1: Summary and Generalizations Part 2: The Evolution of Fledgling Businesses. 9. Missing Attributes 10. Existing Theories and Models 11. Critical tasks 12. Exceptional qualities Part 3. Societal Implications 13. Reexamining Schumpeter. 14. Facilitating conditions 15. Taking Stock Appendices and References Copyrighted mateial. Do not reproduce republish, broadcast or otherwise distribute Unproofed draft. Do not be reproduce without the permission of the copyright holder. 0 © A. Bhidé Jan 15, 1999 Acknowledgements I cannot exaggerate, or even accurately describe, Howard Stevenson’s contribution. Howard has had such a profound influence on my world view that a great many of the ideas expressed in this book very likely derive from my subconscious restatement of Howard’s wisdom. He has also been an extraordinary mentor, who has unstintingly given me his time, loyalty and support. David Chaffetz, made copious notes in the course of many airplane journeys. Besides providing insightful suggestions about the ideas and arguments, David served as de facto editor and writing coach. Discussions with Srikant Datar helped me formulate the ‘investment-uncertainty-profit’ framework I used in Part 1. Iain Cockburn, Pankaj Ghemawat, Myra Hart, Josh Lerner, Mike Roberts, Steve Kaplan and Hank Reiling read several drafts, identified my sins of omission and commission, helped clean up the language and logic, and provided data and references. Bill Sahlman’s comments helped me think about the overall message and positioning of this book. Bruce Scott’s suggestions and encouraging words about my rough early drafts kept me going forward. Several colleagues at Harvard Business School (HBS) also gave generously of their time and expertise, notably Chris Argyris, Joe Badaracco, Carliss Baldwin, Jon Biotti, James Heskett, Linda Hill, Herminia Ibarra, Robert Kaplan, David Kotchen, Walter Kuemmerle, Warren McFarlan, Richard Tedlow and Karen Wruck. Lunches, e-mail and snail mail correspondence with Olivier Blanchard, Glenn Hubbard, Andrei Shleifer, Jeremy Stein and Robert Shiller served as valuable quality control mechanisms. Sid Balachandra, John Deighton, Ashish Nanda, V.G. Narayanan, Gus Stuart and George Wu spent many hours answering various technical questions. Deaver Brown, John Case, Paul De Rosa, Paul Eckbo, Richard Floor, George Gendron, Alan Kennedy, Roger Kline, Marcia Radosevich, David Roux, and Susan Webber provided a reality check by comparing my observations against their practical business experience and knowledge. Research Associate Kevin Hinton helped organize and conduct most of the interviews with entrepreneurs that this book draws on. Laura Pochop helped complete the interviews and analysis of the data. Charlene Niles of Inc. magazine and Joanne Guiniven of McKinsey & Co. provided information from their databases. Julie Yao took charge in the final months of this project and made its completion into a breeze. Students from my MBA classes wrote over two hundred papers that I have drawn on and helped test and refine my ideas about entrepreneurs. Ken MacLeod of The Oxford University Press has been very responsive and a pleasure to work with. Rebecca Kohn edited the manuscript with a light and thoughtful hand. Roberta Brown typed large portions of the manuscript and kept my professional life in order. Former HBS Dean, John McArthur has been an enthusiastic supporter; his successor Kim Clark, and my research director Teresa Amabile, arranged for the resources needed to see this work through completion. As ever, my sister Gauri provided rock-like support and many excellent meals. Ashley Wodtke’s company and understanding helped me get started and saw me through much of the first iteration. Her mother, Carol Cross Wodtke, volunteered her artistic talents for the illustrations. My daughter Lila provided a delightful Saturday distraction, as she grew from a toddler to a self possessed pre-K lady. My mother’s affection and example kept me going through a difficult period. She passed away, alas, just ten days after I had turned in the final draft. To all of you, my heartfelt thanks. Your help has gone far beyond the call of professional obligation and friendship. I hope I can make it up to you someday. 1 ©A. Bhidé, Jan 15, 1999 2 © A. Bhidé Jan 15, 1999 PREFACE This effort to demystify and organize our thinking about entrepreneurs through systematic research has practical roots. I undertook the research that has led to this book in order to address a problem in business education. Courses in entrepreneurship have gained great popularity, as increasing numbers of students want to start and build their own businesses. In 1979, the year I graduated from the MBA program at Harvard Business School, a solitary course in starting new ventures attracted fewer than 100 students. In 1996, nine courses filled over 1400 student seats. Similarly, Stanford’s business school reports that over 90 percent of its MBA students now elect at least one course in entrepreneurship. We still lack, however, a solid base of ideas for such courses. Over the last half-century, business schools have devoted considerable resources to studying the entrepreneurial activities of large companies – how Merck develops new drugs and Intel new microprocessors, how Disney produces and markets the Jungle Book and McDonald’s introduces Big Macs in China. Little effort has been devoted to systematic research about starting and growing new businesses. Researchers have focused on the initiatives of large corporations for several reasons. As business schools and research in the United States came of age in the 1950s and 1960s, large corporations dominated the economic landscape. According to the historian Alfred Chandler, a “new form of capitalism”, the “large managerial business enterprise”, appeared in the last half of the nineteenth century.1 This new form, which was controlled by a hierarchy of salaried executives rather than the owners, “dominated the core industries in the United States”2.by the end of World War I and by the 1960s, it became ubiquitous. In 1967 Galbraith observed that the five hundred largest corporations produced nearly half the goods and services annually available in the United States. Galbraith wrote: “Seventy years ago the corporation was still confined to those industries—railroading, steamboating, steel-making, petroleum recovery and refining, some mining—where, it seemed, production had to be on a large scale. Now it also sells groceries, mills grain, publishes newspapers, and provides public entertainment, all activities that were once the province of the individual proprietor or the insignificant firm.”3 Large corporations represented as dynamic an economic force as the individual entrepreneurs who had initially founded them. The economist Josef Schumpeter had regarded the rise of the large corporations as inevitable and forecast that such a development would doom capitalism by stifling the “innovative energy” of the individual entrepreneur. “The perfectly bureaucratized giant industrial unit,” Schumpeter wrote, “not only ousts the small- or medium-sized firm and “expropriates” its owners, but in the end it also ousts the entrepreneur and expropriates the bourgeoisie as a class which in the process stands to lose not only its income but also what is infinitely more important, its function.”4 Schumpeter’s contemporary, the economist Frank Knight, also believed that managers who did not own a significant share of the enterprise would be much more conservative and risk-averse than the founding entrepreneurs. 3 ©A. Bhidé, Jan 15, 1999 In fact, large corporations undertook entrepreneurial functions remarkably well. They introduced jet engines, television sets, plastics, pharmaceuticals, mainframe computers, and a host of new products to market. Domestic companies ventured overseas and became multinational. They also experimented with and adopted new forms of decentralized organizations to accommodate their increasing size and scope. Schumpeter’s “perfectly bureaucratized giant industrial units,” to use Chandler’s words, “provided a fundamental dynamic or force for change in the capitalist economies”—a transformation “which brought the most rapid economic growth in the history of mankind.”5 The growth and dynamism of large corporations seemed to reduce the relevance of the individual entrepreneur. At the turn of the last century, Galbraith wrote in 1967, “the corporation was the instrument of its owners and a projection of their personalities. The names of these principals—Carnegie, Rockefeller, Harriman, Mellon, Guggenheim, Ford—were known across the land.”6 By the time of Galbraith’s writing, the heads of the great corporations were unknown (“Not for a generation have people outside Detroit and the automobile industry known the name of the current head of General Motors”7) and owned no appreciable share of the enterprise. The importance of these ‘organization men’ and the corporations they controlled made the individual entrepreneur a less compelling subject of inquiry. The increasingly routinized nature of corporate initiatives