Knowledge that Transforms

During 1986, approximately 270 early-stage entrepreneurs sought informotion on almost 1,000 legal issues from the Small Business Student (Legal) Clinic, a program run by the New Venture Development Group at The University of Calgary. Using a combination of legal file information and survey data from 100 of these clients, the authors looked at three central questions: 1. Whether entrepreneurial clients were able to identify legal issues affecting their business, and if so, to what extent? 2. Whether stage of venture development was related to the legal problems identified, and 3. Whether failure to identify legal issues affected subsequent business development. Data from the client surveys was used to determine whether clients were made aware of new legal issues and to assess client follow-through behavior; in particular, whether the clients altered or abandoned their business strategy as a result of receiving new information to determine whether these results varied according to stage of venture development. Client files were placed in four broad categories: concept only, prototype development and business planning, pre-selling and financing, and early operation. The data revealed that new venture clients underestimate the amount of legal support they will require at the early stages of venture development. Ninety-one percent (91%) of clients asked clinic personnel to provide information on one or more additional legal issues of importance to their venture. Client files also indicated that while most clients were able to identify and respond to a perceived need to protect personal property, few were able to identify the myriad of other regulatory controls and legislation which would directly impact on their business venture. Failure to understand relevant legal issues resulted in 44% of all clients altering or abandoning their original business strategy when new legal information was received—many clients in the early operational stages. An assessment of the costs associated with these changes was not made. However, the authors discuss the likely costs incurred by entrepreneurs in a number of common situations. The data also revealed the dominance of certain legal issues at various stages of venture development and suggested some logic for an ordering in the legal priorities of newly developed business. The authors conclude: • University based legal assistance clinics can help entrepreneurs identify legal issues that might otherwise go undetected. • The most common legal issues identified by entrepreneurs were related to the protection of personal assets and business ideas. • Different legal problems tend to dominate at different stages of venture development. • Many clients alter or abandon their original business strategy after receiving new information.

This report presents the results of a formal study of the corporate venture capital community in the United States, and is based upon responses to a questionnaire completed by 52 corporate venture capitalists (CVCs). The central question addressed in this study involves which approach to corporate venture capital is most likely to produce successful results. This question was addressed via cluster analysis which segregated the CVC community into two broad classes—“pilots,” which are marked by substantial organizational independence and “copilots,” which are highly dependent on corporate management with respect to venture funding and decision authority. Pilots achieve equal or higher levels of performance, and are plagued by far fewer obstacles, than their highly dependent counterparts. The results suggest the following: 1. The corporate venture fund should be established as an independent entity and should have access to a committed, separate pool of funds. This will enable CVCs to respond aggressively to, and manage, investment opportunities with minimal corporate interference. Such an independent entity will defuse justifiable concerns on the part of entrepreneurs related to such interference. 2. The fund should be managed by skilled venture professionals who may be drawn from the independent venture community or the small but growing pool of experienced CVCs. Corporate executives may comprise a part of the management team. 3. If the corporate venture fund hopes to attract top quality managers, it must be prepared to offer compensation and authority commensurate with their skill level. In short, corporate venture capitalists should be treated like independent venture capitalists. By organizing the fund as an independent entity, the political problem associated with establishing compensation levels above those of the corporation can be minimized. 4. All CVCs should establish a primary focus on the realization of financial objectives (i.e., return on investment). Strategic benefit objectives are not necessarily ill advised so long as they do not interfere with sound financial decision making. When they do, the corporate venture capital process is likely to become less effective. For instance, a corporate venture fund should only confine itself to investing in a few industries if there are sufficient high-grade investment opportunities within those industries to ensure adequate deal flow. The venture fund should not be pressured. Investments that appear exciting from a corporate perspective, for technological or marketing reasons, but are not financially attractive may well drain resources rather than produce opportunities. 5. Venture proposals failing on financial criteria might be referred to other parts of the corporation with the purpose of exploring an alternate relationship (e.g., a development contract or joint venture). If this is appealing to the corporation, a mechanism such as a corporate liaison or reporting system might be established to facilitate the flow of information. 6. A corporation should be willing to make a complete commitment of talent and capital if it establishes its own corporate venture fund. The corporation should then be willing to accept a limited role. If the corporation is unable to accept a limited role with respect to its own fund, it may be best for it to participate as an investor in a traditional fund, where such limitations will be enforced. However, this latter approach may significantly dilute or eliminate potential for strategic benefits.

The main findings in this study are that: • Entrepreneurs from smaller firms are less comprehensive in their decision behavior than professional managers from larger firms, with comprehensiveness defined as the degree to which an individual follows a formal rational decision process; • As decision comprehensiveness declines, so too does organizational performance, both among entrepreneurs and professional managers. The present study was based on the responses of 15 entrepreneurs from smaller firms averaging 25 employees and 13 CEOs and other top level corporate executives from larger, more professionally managed firms averaging 740 employees. The firms were randomly selected from a list of mid-Atlantic electronic manufacturing firms. Field interviews and questionnaires were employed, as well as a decision scenario involving a series of questions to which the entrepreneur or professional manager responded. After reviewing the literature on entrepreneurship, the researchers noted that most of it focused on developing profiles of entrepreneurs—for example, that they were high achievers, impatient and made decisions quickly. However, little—if any—research has focused on the behavior of entrepreneurs, particularly when compared to that of professional managers. Given this gap in the research, a field study was designed to compare the decision behavior of entrepreneurs and professional managers. It was expected that entrepreneurs would be less comprehensive than professional managers, but given previous research on comprehensiveness, it was difficult to predict the consequences of this less comprehensive model for performance. The researchers note in the discussion and conclusion that the results of the study have major implications for entrepreneurs and professional managers. Granted that decision comprehensiveness should be emphasized, they question the ability of entrepreneurs to change their decision behavior. It is argued that many of the drawbacks of comprehensiveness can be overcome by more sophisticated planning techniques and information processing systems. The paper concludes by stressing the need for research on techniques and ways to train entrepreneurs and managers to be more comprehensive. In summary, the present study has produced some important preliminary findings. It confirmed in larger scale studies, they could have major implications for the manner in which entrepreneurs and professional managers are trained and developed.

Firm growth is typically described as, “from the inside out;” an integrated process of resource capture. Supplementing the traditional view of growth from within, this article focuses on how small firms come into being and grow resorting to cooperative relationships with external organizations. Through such a process new firms come into being without notable direct investments and grow without significant employment increases. The emerging organizational design stresses the importance of constellations. Constellational structures suggest that organizations do not survive as isolated and self-sufficient entities; rather they are strongly tied to supportive quasi-infrastructural collectives. Firms grow through various and changing interorganizational relationships. We suggest that a growth path of firm disintegration is positively associated with flexibility, cost reductions and more favorable competitive position; that the success of this path in different industries and countries makes a venturing without investing process more than a “small is beautiful fad”. We find regularities in growth patterns, at the beginning, an unplanned constellation of firms each geared to solving short-term contingent problems. Planned interfirm linkages and partnerships geared to greater effectiveness arise in more advanced stages: in this manner the competitive position of the constellation is improved. This article suggests underlying conditions facilitating the growth of organizations that use synergies and the constellations' resources effectively.

A public shell is generally defined as an inactive public corporation. It may or may not have assets or a publicly trading stock. However, for purposes here it must have valid SEC and domicile-State legal standing to permit its reactivation by merger with, or acquisition of, an operating company. After many years of clouded regard because of promoters' stock abuses, acceptance of using a shell to go public has considerably widened. This has been due to clarified and tighter SEC policies, rising costs of an IPO, and innovative financial uses of a shell by businessmen and investment bankers. Supply of shells probably still greatly exceeds demand for shells because of the mortality rate of the waves of new issues of recent years, the lack of cleanness of many of these shells and still lagging sophistication in their use. Nevertheless, advertising analysis indicates that in the past year alone companies “going public the back door” has at least trebled the number a decade ago. The greater part of this increase, also, appears to be accountable by ventures. For venture start-ups public access via merger with a shell can produce economies in legal/accounting costs and opportunity cost in time. It is also a means of becoming public when an initial public offering is not feasible due to market condition or nature of business. If the stock is trading it can encourage initial venture capital investment. The concept impact can vault the stock price even before earnings eventuate. Or exciting prospects can entice an exaggerated price/earnings ratio on tiny earnings. These events can even facilitate additional financing to prolong viability. But once the venture decides to use a shell for public access, the caveats of the route must be considered. In addition to valid registration and cleanness, such aspects as stockholder list, market sponsorship, control and dilution problems must be matched to the venture's financial aims. Cost of the shell can vary between 25,000–100,000 depending on the outcome of these considerations, terms of payment, and general attractiveness of the venture entering the shell. Finally, speculative merits of shell stocks compared with the OTC Index of Industrial Stocks show that for equal holding periods, a market basket of revived-shell stocks bought soon after revival and sold around their highs, during the past decade would have produced multiple total returns compared to the less speculative index market basket. This optimum buy-sell period usually fell between 18 months and two years. But these returns presume not only sagacious timing, but that sales of stock of the typically small companies constituting shell-revivals could actually be made at the prices shown in the National Securities Dealers Pink Sheets. Beyond the optimum holding period, shell-descended companies become increasingly subject to valuation factors similar to those accorded to long established companies in related industries.

This paper describes some of the limitations involved in using traditional performance measures to evaluate new ventures and suggests an alternative. We argue that the use of traditional performance measures in the new venture setting can produce misdirected decision making by managers and misleading model development by researchers. The traditional performance measures evaluated are return on investment, cashflow, market share gain, and returns to stockholders. The alternative performance measured presented is based upon an evaluation of patterns of improvement in return on investment across time. These patterns of performance are mapped using regression analysis. Return on investment is regressed against time, and the parameters of the resulting models' parameters are themselves used as performance measures. The beta-coefficient (β) is used to measure the overall rate of change in financial performance from year to year and the coefficient of determination (r2) is used to measure the predictability of change. To combine the information available in each of these parameters into a single variable, we multiply β by r2 and call the result “V.” Thus, V is a measure of the velocity of improvement in financial performance across time adjusted for the level of variability in the performance trend. Much work remains to be done that could substantially improve the usefulness of V to managers and researchers. More sophisticated approaches than the one used here might include weighting either β or r2 to fit the particular goal orientation of a given management team. Other model parameters might be used in conjunction with, or in place of, β or r2 to increase or improve the information captured in V. Measures of financial performance other than return on investment (ROI) could also be used as the basis of calculating V. Even in its current simple form, however, V appears to be a useful performance measure. In 87 of 112 NCVs studied, V provided a useful summary of the pattern of performance's development. In 25 of 112 cases, there were important characteristics of performance that could not be captured by V. The most important managerial implication of V entails the shift to evaluating a new venture on the basis of its progress toward a desirable end rather than on the end itself. This provides a logical means of evaluating the financial performance of a new venture at an earlier time than would be possible otherwise.

This article discusses how many entrepreneurs create multiple ventures, and thereby apparently lengthen the duration of their entrepreneurial careers. A new concept, called the Corridor Principle, is proposed as a possible explanation of the multiple venture phenomenon. The Corridor Principle states that the mere act of starting a venture enables entrepreneurs to see other venture opportunities they could neither see nor take advantage of until they had started their initial venture. The Corridor Principle presents an alternative model to the linear single venture career model, embodied by such celebrity entrepreneurs as Ray Kroc of MacDonald' s and Kenneth Olsen of Digital Equipment Corp. Six hypotheses test expectations about the timing and duration of entrepreneurial careers, as well as the relationship between entrepreneurial career length and the creation of multiple ventures. The findings strongly support: • the position that entrepreneurship is a dynamic, multi-venture process for a great many entrepreneurs the rule, rather than the exception. • the existence of a positive correlation between finding at least a second venture and realizing a longer entrepreneurial career. Though there are a variety of explanations for this, and the patterns include both sequential and overlapping ventures, the net effect of creating multiple ventures appears to produce a longer entrepreneurial career. • the position that significant numbers of entrepreneurs create their second venture very early in their entrepreneurial careers especially when contrasted to the group of ex-entrepreneurs, who create multiple ventures (if at all) at a slower rate and later in their careers. Overall, these observations reinforce the notion of the Corridor Principle. Though who can and cannot take advantage of the Corridor Principle is not entirely revealed by the data, some indication exists that an entrepreneurs ability to use Corridor Principle strategy to prolong his or her career is related both to age at startup, and to conscious anticipation and preparation for an entrepreneurial career. The main implications for entrepreneurship practitioners, advisors, researchers, teachers and students are these: Whether studying the entrepreneurial process or planning to start an entrepreneurial career, a long-term view should be taken, one that includes the likely possibility of multiple ventures. The minimum economic returns of earlier ventures can be lower than previously thought if these ventures provide entry to subsequent ventures that possess higher (more acceptable) returns to the entrepreneur. The evidence thus far available indicates that the creation of subsequent ventures occurs relatively quickly when corridors of opportunity become visible and attainable after earlier ventures are established. The likelihood of career failure, as opposed to venture failure, may be lowered if one selects earlier ventures based on their potential to reveal follow-on-venture opportunities that the entrepreneur can investigate and possibly pursue.

This paper demonstrates the importance of new firm formation to economic growth. It begins by providing data that describe the United States as having had greater employment growth than most developed nations of the world over the last 25 years, and focuses upon why job growth in the United States has exceeded that of other nations. Job Creation by Firm Size. We first examine the data on the relative contribution of small and large firms to U.S. job growth. By summarizing research that is uniformly expressed in two-year periods and defines small firms as those with less than 100 employees, conclusive evidence emerges that small firms are the major sources of net new creation. Firm Entry/Exit Rates and Economic Growth. Further understanding of small firm job creation is obtained when we examine firm entry and exit data. Here we find that firm entry rates vary considerably from period to period (range: 10.4%–12.5%), whereas exit rates remain relatively stable from period to period (range: 9.6%–10.4%). Thus, variation in entrepreneurial activity—the formation of new firms—is the major cause of net increases in the number firms. In both the United States and the United Kingdom, net firm increases are positively related to overall economic activity. Firm Entry/Exit and Job Creation. Further exploration of this correlation can be conducted by examining job creation and loss defined by source: entries, expansions, exits, and contractions. The data for 1976 through 1984 shown here demonstrate that new entries account for 74.0% of the 50.8 million new jobs created. Expansions of existing firms accounted for 26.0%. Small firms (less than 500 employees) produced 54.6% of the entry jobs and 56.8% of the expansion jobs. On the other hand, job losses totaled 33.8 million, 79.0% due to exits and 21.0% to contractions. Small firms account for 53.6% of the jobs lost from exits and 47.8% of those lost from contractions. Overall, small firms account for 60.5% of the 17.0 million net new jobs. Given the data that show correlation between net firm formation rates and economic growth, the finding that entry rates vary more than exit rates, and the finding that new entries create most of the new jobs, it can be concluded that firm formation—especially small firm formation—is a significant factor in economic growth. Increases in small firm formation rates have a significant effect on net job creation. Schumpeter's Model and Observed Market Turbulance. Another finding from this data on job creation by entry, expansion, exit, and contraction is the large amount of job creation and destruction activity taking place. For the period studied, three jobs were created and two jobs destroyed for each net new job created. This describes a turbulent job market with many workers moving from job to job. The labor markets are much less stable that normally envisioned. This observed phenomenon fits well with Schumpeter's theory of capitalism; he proposes that capitalistic growth occurs because entrepreneurs use innovations to form new firms which enter existing markets. When successful, these growing new firms destroy existing market structures, causing decline of established firms while creating increased demand and producing overall economic growth. If Schumpeter is correct, one would expect to find high rates of firm formation and failure, and large numbers of jobs created by new firms, while many jobs are lost by exits and contractions of established firms. The findings reported here show this. Government Policy Affects on Entry/Exit. Our results also show that formation of small, new firms is a necessary requirement for economic growth. Historically, however, Government policy has not considered small firm entry as a central issue. Thus, government policies can and have had a negative effect on entry rates and therefore upon economic growth rates. Furthermore, high rates of new firm formation cause a great deal of turbulence in labor markets, with three jobs created and two lost for every one net new job. Such labor turbulence may be seen by policy makers as undesirable as it entails considerable worker movement from job to job. As such, policy makers have recently proposed policies to protect workers from job loss due to contractions and exits. However, such protection policies, as demonstrated in recent European experience, will also construct barriers to entrepreneurial entry. The result may be a decline in small firm entry and a decline in economic growth. Instead of protecting specific jobs, appropriate policies are those that facilitate movement of workers from job to job. Adequate unemployment compensation for short term unemployment, fully vested and portable pension plans, and retraining programs are examples of policies that allow the labor market to remain flexible while reducing the negative effect on those who lose jobs.