BEYOND STARTUPS

As we have seen, the upstart companies of the 1970s and 1980s have had a profound impact on the competitive structure of companies in Australia, New Zealand, South East Asia and particularly in the United States and world industries. Giant ¿ rms, such as Coles-Myer (knocked off by Wesfarmers), AMCOR (minimised by Visy), passbook banking (demolished by Macquarie Bank’s managed trusts), Bunnings merged with Hardware House (and demolished Mitre 10), IBM (knocked off by Apple Computer and then by Microsoft), Digital Equipment Corporation (another victim of Apple Computer and acquired by Compaq Computer Corporation), Sears (demolished by upstart Wal-Mart and recently merged with Kmart), and AT&T (knocked from its perch ¿ rst by MCI and then by cellular upstarts McCaw Communications, CellularOne and others), once thought invincible, have been dismembered by the new wave of entrepreneurial ventures. The New York Times, LA Times , the Sydney Morning Herald , the Singapore Straits Times , New Zealand Herald and most major city newspapers have been losing market share to internet startups for the past 10 years. While large companies shrank payrolls, new ventures added jobs. Between 2003 and 2005, employment at venture-backed companies grew at an annual rate of 4.1 per cent, compared to just 1.3 per cent for the

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United States economy as a whole. Venture investment is particularly important in the software and computers and peripherals industries, where nearly 90 per cent of all jobs are within venture-backed companies. ³ In Australia, private equity backed companies provided some 650 000 jobs or about 8 per cent of the total private sector employment.

More importantly they are a job-creation driver, with 76 per cent expecting to hire additional workers in 2007. ⁴ According to Dunn and Bradstreet, in 2006 the corresponding economy-wide measure was 5 per cent.

As autopsy after autopsy was performed on failing large companies, a fascinating pattern emerged, showing a dependence on corporatisation, at worst, a total disregard for the winning entrepreneurial approaches of their new rivals and, at best, a glacial pace in recognising the impending demise and the changing course.

‘PEOPLE DON’T WANT TO BE MANAGED. THEY WANT TO BE LED!’ ⁵

These giant ¿ rms can be characterised, during their highly vulnerable periods, as hierarchical in structure with many layers of reviews, approvals and vetoes. Their tired executive blood conceived of leadership as managing and administering from the top down, in stark contrast to Ewing M Kauffman’s powerful insight: ‘People don’t want to be managed. They want to be led!’ Richard Pratt of Visy said: ‘There are managers and leaders. Very few are both. Leaders set aspirations and continually work at success.’ These stagnating giants tended to reward people who accumulated the largest assets, budgets, number of plants, products, and head count, rather than rewarding those who created or found new business opportunities, took calculated risks, and occasionally made mistakes, all with bootstrap resources. While very cognisant of the importance of corporate culture and strategy, the corporate giants’ pace was glacial: it typically takes six years for a large ¿ rm to change its strategy and 10 to 30 years to change its culture. Meanwhile, the median time it took startups to accumulate the necessary capital was one month but averaged six months. ⁶

To make matters worse, these corporate giants had many bureaucratic tendencies, particularly arrogance. They shared a blind belief that if they followed the almost sacred best management practices of the day, they could not help but prevail. During the 1970s and 1980s, these best management practices did not include entrepreneurship, entrepreneurial leadership and entrepreneurial reasoning. If anything, these were considered dirty words in corporate America. Chief among these sacred cows was staying close to your customer. What may shock you is the conclusion of two Harvard Business School professors: ⁷

One of the most consistent patterns in business is the failure of leading companies to stay at the top of their industries when technologies or markets change … But a more fundamental reason lies at the heart of the paradox: Leading companies succumb to one of the most popular, valuable management dogmas. They stay close to their customers. ⁸ When they do attack, the [new] entrant companies ¿ nd the established players to be easy and unprepared opponents because the opponents have been looking up independent or changed markets themselves, discounting the threat from below. ⁹

One gets further insight into just how vulnerable and fragile the larger, so-called well-managed companies can become, and why it is the newcomers who pose the greatest threats. This pattern also explains why there are tremendous opportunities for the coming e-generation even in markets that are currently dominated by large players. Professors Bower and Christensen summarise it this way:

The problem is that managers keep doing what has worked in the past: serving the rapidly growing needs of their current customers. The processes that successful, well-managed companies have developed to allocate resources among proposed investments are incapable of funnelling resources in programs that current customers explicitly don’t want and whose pro¿ t margins seem unattractive. ¹⁰

Given how many new innovations, ¿ rms and industries have been created in the past 30 years, it is no wonder that brontosaurus capitalism has found its ice age.

SIGNS OF HOPE IN A CORPORATE ICE AGE

Fortunately, for many giant ¿ rms, the entrepreneurial revolution may spare them from their own ice age. One of the most exciting developments of the decade is the response of some large, established United States corporations

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to the revolution in entrepreneurial leadership. After nearly three decades of experiencing the demise of giant after giant, corporate leadership, in unprecedented numbers, is launching experiments and strategies to recapture entrepreneurial spirit and to instil the culture and practices we would characterise as entrepreneurial reasoning.

The e-generation has too many attractive opportunities in truly entrepreneurial environments. They do not need to work for a brontosaurus that lacks spirit.

Increasingly, we see examples of large companies adopting principles of entrepreneurship and entrepreneurial leadership in order to survive and to renew. The Australian corporate world has found dif¿ culty in incorporating the entrepreneurial leadership culture but is more comfortable with supporting innovation. Researchers document how large ¿ rms are applying entrepreneurial thinking, in pioneering ways, to invent their futures, including companies such as GE, Corning and Motorola, Harley-Davidson ($1.35 billion in revenue), Marshall Industries ($2.2 billion), and Science Applications International Corporation (SAIC) in San Diego. Most large brontosaurus ¿ rms could learn valuable lessons on how to apply entrepreneurial thinking from companies such as these.

METAPHORS

Improvisational, quick, clever, resourceful and inventive all describe good entrepreneurs. Likewise, innumerable metaphors from other parts of life can describe the complex world of the entrepreneur and the entrepreneurial process. From music it is jazz, with its impromptu À air. From sports many metaphors exist: the competitiveness of Tiger Woods, the speed of Ian Thorpe in swimming, the mastery of spin bowling by Shane Warne, or John Bertrand and Ben Lexen winning the Americas Cup in 1982. Even more fascinating are the unprecedented comebacks of athletic greats such as Michael Jordan and Lance Armstrong.

Perhaps the game of golf, more than any other, replicates the complex and dynamic nature of managing risk and reward, including all the intricate mental challenges faced in entrepreneuring. No other sport, at one time, demands so much physically, is so complex, intricate and delicate, and is simultaneously so rewarding and punishing; and none tests one’s will, patience, self-discipline and self-control like golf. Entrepreneurs face these challenges and remunerations as well.

An entrepreneur also faces challenges like those of a symphony conductor or a coach, who must blend and balance a group of diverse people with different skills, talents and personalities into a superb team. On many occasions it demands all the talents and agility of a juggler who must, under great stress, keep many balls in the air at once, making sure if one comes down it belongs to someone else.

The complex decisions and numerous alternatives facing the entrepreneur also have many parallels with the game of chess. As in chess, the victory goes to the most creative player, who can imagine several alternative moves in advance and anticipate possible defences. This kind of mental agility is frequently demanded in entrepreneurial decision making.

Still another parallel can be drawn from the book The Right Stuff by Tom Wolfe, later made into a movie.

The ¿ rst pilot to break the sound barrier, Chuck Yeager, describes what it was like to be at the edge of both the atmosphere and his plane’s performance capability, a zone never before entered—a vivid metaphor for the experience of a ¿ rst-time entrepreneur:

In the thin air at the edge of space, where the stars and the moon came out at noon, in an atmosphere so thin that the ordinary laws of aerodynamics no longer applied and a plane could skid into a À at spin like a cereal bowl on a waxed Formica counter and then start tumbling, end over end like a brick … you had to be ‘afraid to panic’. In the skids, the tumbles, the spins, there was only one thing you could let yourself think about: what do I do next? ¹¹

This feeling is frequently the reality on earth for entrepreneurs who run out of cash! Regardless of the metaphor or analogy you choose for entrepreneurship, each is likely to describe a creative, even artistic, improvised act.

The outcomes are often either highly rewarding successes or painfully visible misses. Urgency is always on the doorstep.

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ENTREPRENEURSHIP = PARADOXES

One of the most confounding aspects of the entrepreneurial process is its contradictions. Because of its highly dynamic, À uid, ambiguous and chaotic character, the process’s constant changes frequently pose paradoxes. A sampling of entrepreneurial paradoxes follows. Can you think of other paradoxes that you have observed or heard about?

An opportunity with no or very low potential can be an enormously big opportunity. One of the most famous examples of this paradox is Apple Computer. Founders Steve Jobs and Steve Wozniak approached their employer, Hewlett-Packard Corporation (HP), with the idea for a desktop, personal computer and were told this was not an opportunity for HP. Hence Jobs and Wozniak started their own company. Frequently business plans rejected by some venture capitalists become legendary successes when backed by another investor. Intuit, maker of Quicken software, for example, was rejected by 20 venture capitalists before securing backing.

To make money you have to ¿ rst lose money. It is commonly said in the venture capital business that the lemons, or losers, ripen in two and a half years, while the plums take seven or eight years. A startup, venture-backed company typically loses money, often $5 million to $15 million or more, before sustaining pro¿ tability and going public, usually at least ¿ ve to seven years later.

To create and build wealth one must relinquish wealth. Among the most successful and growing companies in Australia and the United States, the founders aggressively dilute their ownership to create ownership throughout the company (see the Davnet Ltd case study in this chapter). By rewarding and sharing the wealth with the people who contribute signi¿ cantly to its creation, owners motivate stakeholders to make the pie bigger.

To succeed, one ¿ rst has to experience failure. It is a common pattern that the ¿ rst venture fails, yet the entrepreneur learns to overcome the culture of ‘inhibitors to risk taking and to building business in Australia’ and goes on to create a highly successful company. Evan Thornley of Looksmart (the internet search engine developed in Australia), found it necessary to move to California to build a billion dollar business. Thornley says ‘when you’ve got a market of 20 million people, that’s just not big enough to sustain most of these explosive high growth business’.

Entrepreneurship requires considerable thought, preparation and planning, yet is basically an unplannable event.

The highly dynamic, changing character of technology, markets and competition makes it impossible to know all your competitors today, let alone ¿ ve years from now. Yet great effort is invested in attempting to model and envision the future. The resulting business plan is inevitably obsolete when it comes off the printer. This is a creative process—like moulding clay. You need to make a habit of planning and reacting as you constantly re-evaluate your options, blending the messages from your head and your gut, until this process becomes second nature.

For creativity and innovativeness to prosper, rigour and discipline must accompany the process. For years, hundreds of thousands of patents for new products and technologies lay fallow in government and university research labs because there was no commercial discipline.

Entrepreneurship requires a bias toward action and a sense of urgency, but also demands patience and perseverance.

While his competitors were acquiring and expanding rapidly, one entrepreneur’s management team became nearly outraged at his inaction. This entrepreneur reported he saved the company at least $50 million to $100 million during the prior year by just sitting tight. He learned this lesson from the Jiffy Lube case series from New Venture Creation, which he studied during a weeklong program for the Young Presidents Organization (YPO) at Harvard Business School in 1991.

The greater the organisation, orderliness, discipline and control, the less you will control your ultimate destiny.

Entrepreneurship requires great À exibility and nimbleness in strategy and tactics. One has to play with the knees bent.

Over-control and an obsession with orderliness are impediments to the entrepreneurial approach. As the great racing car driver Mario Andretti said, ‘If I am in total control, I know I am going too slow!’

Adhering to management best practice, especially staying close to the customer that created industry leaders in the 1980s, became a seed of self-destruction and loss of leadership to upstart competitors. We discussed earlier the study of ‘disruptive technologies’.

To realise long-term equity value, you have to forgo the temptations of short-term pro¿ tability. Building long-term equity requires large, continuous reinvestment in new people, products, services and support systems, usually at the expense of immediate pro¿ ts.

The world of entrepreneurship is not neat, tidy, linear, consistent and predictable, no matter how much we might like it to be that way. ¹² In fact, it is from the collisions inherent in these paradoxes that value is created, as illustrated in Exhibit 3.1. These paradoxes illustrate just how contradictory and chaotic this world can be. To thrive

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in this environment, one needs to be very adept at coping with ambiguity, chaos and uncertainty, and at building management skills that create predictability. Exhibit 3.2 exempli¿ es this ambiguity and need for patience. For example, Apple shipped the ¿ rst iPod in November 2001. Eighteen months later Apple sold the one millionth unit and six months later sold another million units. In 2005 Apple shipped 13 million units. A Merrill Lynch analyst predicts iPod sales could eventually reach 300 million.

THE HIGHER POTENTIAL VENTURE: THINK BIG ENOUGH

One of the biggest mistakes aspiring entrepreneurs make is strategic. They think too small. Sensible as it may be to think in terms of a very small, simple business as being more affordable, more manageable, less demanding, and less risky, the opposite is true. A major problem is that no simple de¿ nition exists for a high growth startup enterprise.

Another problem is what is small and what is an SME. Exhibit 3.3 provides various de¿ nitions of small business across the region. The chances of survival and success are lower in these small, job-substitute businesses, and even if they do survive, they are less ¿ nancially rewarding. As one founder of numerous businesses put it, unless this business can pay you at least ¿ ve times your present salary, the risk and wear and tear will not be worth it.

EXHIBIT 3.1

Spontaneity, opportunism

Discipline, processes Remember, entrepreneurship

is a full contact sport. The value comes in the ‘collision’.

EXHIBIT 3.2

Years taken to reach 25 per cent of the world consumer market

Aeroplane 54

Household Electricity 46

Automobile 44

Telephone 35

VCR 35

Microwave Oven 30

TV 26

Radio 22

PC 15

Mobile Phone 13

Internet 7

Source: Adapted by L M Gillin from Leading the Revolution by Gary Hamel, Harvard Businesss School, 2002.

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Consider one of the most successful venture capital investors ever, Arthur Rock. His criterion for searching for opportunities is very simple: Look for business concepts that will change the way people live or work. His home-run investments are legendary, including Intel, Apple Computer, Teledyne, and dozens of others. Clearly his philosophy is to think big. In 2004 an extraordinary variety of people, opportunities, and strategies characterised the approximately 3 million (small, medium and large) proprietorships, partnerships and corporations in Australia.

Also in 2004 small and SME businesses constituted 324 000 in New Zealand, 130 000 in Singapore and 205 000 in Malaysia. ¹³ Remember, high potential ventures become high-impact ¿ rms that often make the world a better place!

In the Australasian region Australia and New Zealand continue to experience high levels of business ownership participation in all three business stages (see Exhibit 3.4).

Compared with the remaining 42 participating countries in the Global Entrepreneurship Monitoring program (GEM 2006), Australia’s overall business participation ranks highest among the developed countries. Of the working Australian population, 20.6 per cent intend to start, are in the process of starting or are running an owner-operated business. In New Zealand, Maori are the third most entrepreneurial people. On average one out of ¿ ve Australians among the working population are in some way engaged in business ownership or intend to be. This is extremely high compared with other developed countries. Iceland has the second highest proportion of people engaged in business ownership among the developed nations. It has 11.3 per cent engaged in business ownership.

United States, United Kingdom and Belgium have respectively 10 per cent, 5.8 per cent and 2.7 per cent. Australia also had the highest early stage business ownership participation among the developed countries. In 2006, 12 per cent of the Australian working population were engaged either in starting a business or were running a newly established business. This number increased from the 2005 ¿ gure of 10.9 per cent. From the quantitative measures it seems safe to infer that Australia’s working population is increasingly interested in business ownership. ¹⁴

Nearly 11 per cent of the United States population is actively working toward starting a new venture. ¹⁵ More than 90 per cent of startups have revenues of less than $1 million annually, while 863 505 reported revenues of

Sources: OECD, Globalisation and SMEs , vol. 2, 1997; Australian Bureau of Statistics, Small Business in Australia 2001 , 2002; NZ Ministry of Economic Development, SMEs in New Zealand: Structure and Dynamics , 2003; ‘FAQs on SMEs and Domestic Sector’, 2006, <www.spring.

gov.sg>; Small and Medium Industries Development Corporation, Malaysia , De¿ nition of SMEs , 2003, <www.smidec.gov.my>.

EXHIBIT 3.3

Australia Micro-enterprise: <5 employees

Small business: 5–19 employees

Medium-sized enterprise: 20–199 employees

Large fi rm: 200+ employees

New Zealand Small fi rm: <6 full-time employees

Medium-sized fi rm: 6–19 full-time employees Large fi rm: 20 or more full-time employees

Medium-sized fi rm: 6–19 full-time employees Large fi rm: 20 or more full-time employees