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The Entrepreneurial Domain

Converging on the EntrepreneurialManagerThere are convergent pressures on being an entre-preneur and being a manager as a venture acceleratesand grows beyond founder-driven and founder-dominated survival. Key to achieving sustainedgrowth, and an eventual harvest, is an entrepreneur’sability to have or develop competencies as an entre-preneurial manager.

In the past, those studying entrepreneurship andothers active in starting new ventures, such as venture

capitalists, professors, and researchers, have generallybelieved that the kind of person with the entrepre-neurial spirit required to propel a new venture throughstartup to a multi-million-dollar annual sales level isdifferent from the kind of person who has the capacityto manage the new firm as it grows from zero to $20million or more in sales. Further, it has long beenthought that the entrepreneur who clings to the leadrole too long will limit or impede company growth.

As John Kenneth Galbraith explained in 1971,“The great entrepreneur must, in fact, be comparedin life with the male apis mellifera. He accomplisheshis act of conception at the price of his own extinc-tion.”1 In short, conventional wisdom stated that a

7Chapter Seven

The Entrepreneurial ManagerIt’s rare to find a leader who can carry a growing company through all its phases.When you get into the $1-to-$2-billion range, then you may find leaders withentrepreneurial tendencies; but, in addition, they have real management andpeople skills.

Peter J. SpragueChairman of the Board, National Semiconductor Corporation

Results ExpectedUpon completion of this chapter, you will have:1. Studied different views about entrepreneurial managers and discovered that an indi-

vidual can be both an entrepreneur and a manager.2. Identified the stages of growth entrepreneurial ventures go through, the domain occu-

pied, the venture modes characteristic of the entrepreneurial domain, and the princi-pal forces acting in the domain.

3. Identified specific skills entrepreneurs need to know to manage startup, survival, andgrowth.

4. Analyzed the new “Dawson Products” case study.5. Evaluated your own skills and developed an action plan.

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1 John Kenneth Galbraith, The New Industrial State (Boston: Houghton Mifflin, 1971).

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CONFIRMING PROOFSMASTER SETPlease markall alterations

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good entrepreneur is usually not a good manager,since he or she lacks the necessary management skilland experience. Likewise, it is assumed that a man-ager is not an entrepreneur, since he or she lackssome intense personal qualities and the orientationrequired to launch a business from ground zero.

While results are mixed, some evidence suggeststhat new ventures that flourish beyond startup andgrow to become substantial, successful enterprisescan be headed by entrepreneurs who are also effec-tive managers. Testing conventional wisdom, tworesearchers empirically studied the tenure of 54 For-tune 1,000 corporations’ founders. They assumedthat there are three ways founders have to adapt: (1)shift from creation to exploitation, (2) shift from pas-sionate commitment to dispassionate objectivity, and(3) shift from direct personal control over organiza-tional actions to indirect impersonal control. Takinginto account the growth rate, the timing of the initialpublic offering, the founder’s age, education, andother factors, this 1990 study found the following:

1. If the firm grows relatively slowly, and thefounder is capable of some adaptation, thenthe firm can apparently become quite large.

2. Founders with scientific or engineering back-grounds remain in control of the companiesthey found for shorter periods than dofounders whose academic focus was business.

3. The founder’s tenure will typically be longer infamily-dominated firms.2

More recently, researchers “observed that manyfounders can and do manage growth successfully.The applicability of conventional wisdom regardingthe ‘leadership crisis’ in rapid-growth entrepreneur-ial firms may no longer be valid, if, in fact, it everwas.”3 Founder Bill Gates still heads Microsoft,founder; Steve Jobs is once again at the helm of Ap-ple Computer, and founder Andy Grove is now thesenior advisor to executive management at Intel. Nu-merous examples such as this clearly indicatefounders can learn and grow faster than their compa-nies do.

These and other data seem to defy the notion thatentrepreneurs can start but cannot manage growingcompanies. While the truth is probably somewhere inbetween, one thing is apparent: Growing a higher po-tential venture requires management skills.

Clearly, a complex set of factors goes into makingsomeone a successful entrepreneurial manager.Launching a new venture and then managing rapid

growth involves managerial roles and tasks not foundin most mature or stable environments. Further, oneof the greatest strengths of successful entrepreneursis that they know what they do and do not know. Theyhave disciplined intellectual honesty, which preventstheir optimism from becoming myopic delusion andtheir dreams from becoming blind ambition. No indi-vidual has all these skills, nor does the presence orabsence of any single skill guarantee success or fail-ure. That an entrepreneur knows that he or she needsa certain skill and knows where to get it is as valuableas knowing whether he or she already has it.

Principal Forces and Venture ModelsCompanies, whether they are new, growing, or ma-ture, occupy a place in either an administrative or anentrepreneurial domain, an area influenced by cer-tain principal forces and characterized by ways ofacting, called venture modes. Exhibits 7.1 and 7.2 illus-trate the entrepreneurial and administrative domainsand the dynamic of the principal forces acting in thedomains and the dominant venture modes that result.

In the exhibits, the four cells are defined by thestage of the venture (upper axis), the extent of changeand uncertainty accompanying it (right axis), andthe degree to which a venture is administrative (bot-tom axis) or entrepreneurial (left axis). Clearly, theentrepreneurial domain is the two upper cells in bothexhibits, and the domains are functions of both thechange and uncertainty facing a venture and thestage of growth of the venture.

Each venture mode (i.e., way of acting) for firms ineach cell is driven by certain principal forces. Theseforces are shown in Exhibit 7.2. Shown in Exhibit 7.1are dominant venture modes characteristic of firmsin each cell. Organizations at different stages arecharacterized by differing degrees of change anduncertainty and are therefore more or less entrepre-neurial or more or less administrative. Thus, forexample, a new venture in the seed/startup stage,which is characterized by high change and uncer-tainty, is most entrepreneurial. These firms will benew, innovative, or backbone ventures; will be led bya team; will be driven by their founders’ goals, values,commitment, and perceptions of the opportunities;and will minimize the use of resources. At the otherextreme is a mature firm, one that is in the maturitystage and characterized by low change and uncer-tainty, is stable or contracting, is led by an adminis-trator or custodian, is driven by resource ownership

258 Part III The Founder and Team

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2 George C. Rubenson and Anil K. Gupta, “The Founder’s Disease: A Critical Reexamination,” Frontiers of Entrepreneurship Research: 1990, ed. Neil Churchillet al. (Babson Park, MA: Babson College, 1990), pp. 177–78.

3 Gary E. Willard, David A. Krueger, and Henry R. Feeser, “In Order to Grow, Must the Founder Go: A Comparison of Performance between Founder andNon-Founder Managed High-Growth Manufacturing Firms,” Journal of Business Venturing 7, 1996, p. 190.

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• Creativity • Collaboration within the firm• Opportunity focus• Resource requirements expanding

• Rejuvenators and innovators• Opportunity focus• Resource ownership • Capital gain

• Few owners• A specific product• Burdensome resource requirements

• Administrators/trustees• Product focus• Resource ownership • Quarterly profits

Most

MostLeast

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MaturityHigh GrowthSeed/Startup

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Entrepreneurial domain Administrative domain

• Formal• Informal; fluid

• None or too rigid • Formal

Driven by: Driven by:

Driven by:Driven by:

Organization: Organization:

Organization:Organization:

Higher potential, growth-minded ventures Higher potential, growth-minded ventures

Lifestyle, mom-and-pop ventures Mature, bureaucratic dinosaurs

Most

MostLeast

Least

MaturityHigh GrowthSeed/StartupE

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Chapter 7 The Entrepreneurial Manager 259

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EXHIBIT 7.1

Dominant Venture Modes

Source: These exhibits are built on work by Timmons and Stevenson: See Howard H. Stevenson, “A New Paradigm for Entrepreneurial Management,”in Entrepreneurship: What It Is and How to Teach It (Harvard Business School, 1985), pp. 30–51; and Jeffry A. Timmons and Howard H. Stevenson,“Entrepreneurship Education in the 80s: What Entrepreneurs Say,” in Entrepreneurship: What It Is and How to Teach It, pp. 115–34.

EXHIBIT 7.2

Principal Driving Forces

and administrative efficiency, and is reactive. Otherfirms fall in between.

The managerial skills required of the firms in eachcell are more evident upon examination of these prin-cipal forces and dominant venture modes. For exam-ple, creativity and comprehensive managerial skills

are required to manage firms in both cells in the en-trepreneurial domain. In the upper-left-hand cell,entrepreneurial managers need to cope effectivelywith high levels of change and uncertainty, whethertheir management skills can be affectionately la-beled MBWA (management by wandering around, of

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Hewlett-Packard fame) or management by muddlingthrough. Certainly, as the firm enters the high-growth stage, this changes.

Stages of Growth

A Theoretical ViewClearly, entrepreneurship is not static. Exhibit 7.3represents a theoretical view of the process of gesta-tion and growth of new ventures and the transitionsthat occur at different “boundaries” in this process.4

Ventures are sown, sprout, grown, and harvested.Even those successful ventures that are not grown toharvest (i.e., those that have been defined as “attrac-tive”) go through stages of growth.

This smooth, S-shape curve in the exhibit is rarely,if ever, replicated in the real world. If one actually

tracked the progress of most emerging companies,the “curve” actually would be a ragged and jaggedline with many ups and downs; these companieswould experience some periods of rapid progress fol-lowed by setbacks and accompanying crises.

For the purposes of illustration, Exhibit 7.3 showsventure stages in terms of time, sales, and number ofemployees. It is at the boundaries between stages thatnew ventures seem to experience transitions. Severalresearchers have noted that the new venture invariablygoes through transition and will face certain issues.5

Thus, the exhibit shows the crucial transitions duringgrowth and the key management tasks of the chief ex-ecutive officer or founders. Most important and mostchallenging for the founding entrepreneur or a chiefexecutive officer is coping with crucial transitions andthe change in management tasks, going from manag-ing to managing managers, as a firm grows to roughly30 employees, to 50, to 75, and then up.


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4 For another useful view of the stages of development of a firm and required management capabilities, see Carroll V. Kroeger, “Management Development andthe Small Firm,” California Management Review 17, no. 1 (Fall 1974), pp. 41–47.

5 L. A. Griener, “Evolution and Revolution as Organizations Grow,” in Trials and Rewards of the Entrepreneur (Boston: Harvard Business Review, 1977),pp. 47–56; and H. N. Woodward, “Management Strategies for Small Companies,” in Trials and Rewards of the Entrepreneur (Boston: Harvard BusinessReview, 1981), pp. 57–66.

0 3 –40 –1.5 10 15

$100 million +

$50 million

$25 million

$3 million

$1 million

Sal

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StartupR & D High growth Maturity Stability

Time (years)

Crucialtransitions:

Sales

Employees

Coremanagementmode

0–$5 million

0 to 20–25

Doing

$5–$15 million

25–75

Managing

$10–$25 million+

75–100+

Managing managers

EXHIBIT 7.3

Stages of Venture Growth, Crucial Transitions, and Core Management Mode

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The research and development stage, sometimesreferred to as the nascent stage, is characterized by asingle aspiring entrepreneur, or small team, doingthe investigation and due diligence for their businessidea. The nascent stage can be as short as a fewmonths or can last years. Research indicates that ifan idea is not turned into a going concern within 18months, the chances of a startup fall dramatically.Nascent entrepreneurs have many fits and starts,and the business model can change often in theprocess.

The startup stage, a stage that usually covers thefirst two or three years but perhaps as many as seven,is by far the most perilous stage and is characterizedby the direct and exhaustive drive, energy, and en-trepreneurial talent of a lead entrepreneur and a keyteam member or two. Here, the critical mass of peo-ple, market and financial results, and competitiveresiliency are established, while investor, banker, andcustomer confidence is earned. The level of salesreached varies widely, but typically ranges between$2 million and $20 million. A new company then be-gins its high growth stage. The exact point at whichthis occurs can rarely be identified by a date on thecalendar until well after the fact. It is in this stagethat new ventures exhibit a failure rate exceeding60 percent; that is, it is in this stage that the lemonsripen.

As with the other stages, the length of time it takesto go through the high growth stage, as well as themagnitude of change occurring during the period,varies greatly. Probably the most difficult challengefor the founding entrepreneur occurs during the highgrowth stage, when he or she finds it is necessary tolet go of power and control (through veto) over keydecisions that he or she has always had, and when keyresponsibilities need to be delegated without abdicat-ing ultimate leadership and responsibility for results.But the challenges do not end there. For example,sales of Litton’s microwave oven division had reached$13 million, and it had 275 employees. The long-range plan called for building sales volume to $100million in five to seven years (i.e., growing at 40 per-cent per year, compounded). The head of the divisionsaid, “Having studied the market for the previous twoyears, I was convinced that the only limit on ourgrowth was our organization’s inability to grow as rap-idly as the market opportunities.”6

From the high growth stage, a company thenmoves to what is called the maturity stage. In thisstage, the key issue for the company is no longer sur-vival; rather, it is one of steady, profitable growth. Thestability stage usually follows.

Managing for Rapid GrowthManaging for rapid growth involves a managementorientation not found in mature and stable environ-ments. (This topic will be addressed again in Chapter16.) For one thing, the tenet that one’s responsibilitymust equal one’s authority is often very counterpro-ductive in a rapid-growth venture. Instead, resultsusually require close collaboration of a manager withother people than his or her subordinates, and man-agers invariably have responsibilities far exceedingtheir authority. Politics and personal power can be away of life in many larger and stagnant institutions, asmanagers jockey for influence and a piece of a shrink-ing pie in a zero-sum game; but in rapid-growthfirms, power and control are delegated. Everyone iscommitted to making the pie larger, and power andinfluence are derived not only from achieving one’sown goals but also from contributing to the achieve-ments of others as well. Influence also is derivedfrom keeping the overall goals in mind, from resolv-ing differences, and from developing a reputation asa person who gets results, can manage others, andgrows managerial talent as well.

Thus, among successful entrepreneurs and en-trepreneurial managers, there is a well-developedcapacity to exert influence without formal power.These people are adept at conflict resolution. Theyknow when to use logic and when to persuade, whento make a concession and when to exact one. To run asuccessful venture, an entrepreneur learns to getalong with many different constituencies, often withconflicting aims—the customer, the supplier, thefinancial backer, and the creditor, as well as the part-ners and others on the inside. Similarly, an entrepre-neurial manager must operate in a world that isincreasingly interdependent. Attempting to advisemanagers on how to exert “influence without author-ity,” Allan R. Cohen and David L. Bradford assert, “Ifyou are a manager, you not only need to exercise in-fluence skills with your peers and your own boss, butalso to help the people who work for you learn to beeffective influencers—even of you—since that willfree you to spend more of your time seeking new op-portunities and working the organization above andaround you.”7

Whereas successful entrepreneurs are interper-sonally supporting and nurturing—not interperson-ally competitive—successful entrepreneurial managersunderstand their interdependencies and have learnedto incorporate mutual respect, openness, trust, andmutual benefit into their management style. Funda-mental to this progressive style of management is the

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6 William W. George, “Task Teams for Rapid Growth,” Harvard Business Review, March–April 1977.7 David L. Bradford and Allan R. Cohen, Power Up: Transforming Organizations through Shared Leadership (New York: John Wiley & Sons, 1998).

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awareness and practice of reciprocity for mutualgain.8 When a strong need to control, influence, andgain power over others characterizes the lead entre-preneur or the entrepreneurial manager, or when heor she has an insatiable appetite for putting an associ-ate down, more often than not the venture gets intotrouble. A dictatorial, adversarial, and dominatingmanagement style makes it very difficult to attractand keep people who thirst for achievement, respon-sibility, and results. Compliant partners and man-agers are often chosen. Destructive conflicts oftenerupt over who has the final say, who is right, andwhose prerogatives are what.

In the corporate setting, the “hero-making” abilityis identified as an essential attribute of successfulentrepreneurial managers.9 These hero makers try tomake the pie bigger and better, rather than jealouslyclutching and hoarding a tiny pie that is all theirs.They have a capacity for objective interpersonal rela-tionships as well, which enables them to smooth outindividual differences of opinion by keeping atten-tion focused on the common goal to be achieved.10

Exhibit 7.4 characterizes probable crises that grow-ing ventures will face, including erosion of creativityby founders and team members; confusion or resent-ment, or both, over ambiguous roles, responsibilities,and goals; failure to clone founders; specialization anderoding of collaboration; desire for autonomy andcontrol; need for operating mechanisms and controls;

and conflict and divorce among founders and mem-bers of the team. The exhibit further delineatesissues that confront entrepreneurial managers.

Compounding of Time and Change In thehigh growth stage, change, ambiguity, and uncer-tainty seem to be the only things that remain con-stant. Change creates higher levels of uncertainty,ambiguity, and risk, which, in turn, compound toshrink time, an already precious commodity. Oneresult of change is a series of shock waves rollingthrough a new and growing venture by way of newcustomers, new technologies, new competitors, newmarkets, and new people. In industries characterizedby galloping technological change, with relativelyminuscule lead and lag times in bringing new prod-ucts to market and in weathering the storms of rapidobsolescence, the effects of change and time areextreme. For example, the president of a rapidly grow-ing, small computer company said, “In our business ittakes 6 to 12 months to develop a new computer,ready to bring to the market, and product technologyobsolescence is running about 9 to 12 months.” Thistime compression has been seen in such industries aselectronics and aerospace in the 1960s; small com-puters, integrated circuits, and silicon chips in the1970s; microcomputers in the 1980s; telecommuni-cations, the Internet, and biotechnology in the 1990s;and nanotechnology in the 2000s.


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8 Ibid.9 David L. Bradford and Allan R. Cohen, Power Up: Transforming Organizations through Shared Leadership (New York: John Wiley & Sons, 1998).10 Neil C. Churchill, “Entrepreneurs and Their Enterprises: A Stage Model,” in Frontiers of Entrepreneurship Research: 1983, ed J. A. Hornaday et al. (Babson

Park, MA: Babson College, 1983), pp. 1–22.

EXHIBIT 7.4

Entrepreneurial Transitions

Modes/Stages Planning Doing Managing Managing Managers

Sales $0 0–$5 million $5–$15 million $10 million or moreEmployees 0–5 0–30 30–75 75 and upTransitions Characteristics: Characteristics: Probable crises: Probable crises:

Founder-driven Founder-driven Erosion of creativity Failure to clone Wrenching changes creativity of founders foundersHighly influential Constant change, Confusion over Specialization/eroding

informal advisor ambiguity, and ambiguous roles, of collaboration versus Resource desperation uncertainty responsibilities, practice of power, Very quick or very Time compression and goals information, and

slow decision making Informal Desire for delegation influenceCommunications versus autonomy Need for operating Counterintuitive and control controls and

decision making Need for mechanismsand structure organization and Conflict among

Relative inexperience operating policies founders

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Nonlinear and Nonparametric EventsEntrepreneurial management is characterized bynonlinear and nonparametric events. Just as the tele-vision did not come about by a succession of im-provements in the radio, and the jet plane did notemerge from engineers and scientists attempting todevelop a better and better piston engine plane, sotoo events do not follow straight lines, progress arith-metically, or even appear related within firms.Rather, they occur in bunches and in stepwise leaps.For example, a firm may double its sales force in 15months, rather than over eight years, while anothermay triple its manufacturing capacity and adopt anew materials resource planning system immediately,rather than utilizing existing capacity by increasingovertime, then adding a third shift nine months later,and finally adding a new plant three years hence.

Relative Inexperience In addition, the man-agement team may be relatively inexperienced. Theexplosive birth and growth of these firms are usuallyunique events that cannot be replicated, and most ofthe pieces in the puzzle—technology, applications,customers, people, the firm itself—are usually new.Take Prime Computer as an example. Sales at thismanufacturer of minicomputers grew rapidly in fiveyears from $100 million per year to nearly $1.2 billionper year. The average age of all employees in thecompany was less than 29 years, and the firm wasbarely 10 years old.

Counterintuitive, Unconventional DecisionMaking Yet another characteristic of rapidlygrowing ventures in the entrepreneurial domain iscounterintuitive, unconventional patterns of decisionmaking. For example, a computer firm needed todecide what approach to take in developing and intro-ducing three new products in an uncertain, riskymarketplace. Each proposed new product appearedto be aimed at the same end-user market, and theperson heading each project was similarly enthusias-tic, confident, and determined about succeeding. Atraditional approach to such a problem would havebeen to determine the size and growth rates of eachmarket segment; evaluate the probable estimates offuture revenue costs and capital requirements fortheir accuracy; compare the discounted, present-value cash flow that will emerge from each project;and select the project with the highest yield versusthe required internal rate of return. Such an analysissometimes overlooks the fact that most rapid growthcompanies have many excellent alternatives and,more commonly, the newness of technology, the im-maturity of the marketplace, and the rapid discoveryof further applications make it virtually impossible toknow which of any product proposals is best. The

computer firm decided to support all three newproducts at once, and a significant new business wasbuilt around each one. New market niches were dis-covered simultaneously and the unconventionalapproach paid.

Fluid Structures and Procedures Most rapidgrowth ventures also defy conventional organiza-tional patterns and structures. It is common to find afirm that has grown $25 million, $50 million, or even$150 million per year in sales and that still has no for-mal organizational chart. If an organizational chartdoes exist, it usually has three distinguishing features:First, it is inevitably out of date. Second, it changesfrequently. For example, one firm had eight majorreorganizations in its first five years as it grew to $5million. Third, the organizational structure is usuallyflat (i.e., it has few management layers), and there iseasy accessibility to the top decision makers. But theinformality and fluidity of organization structures andprocedures do not mean casualness or sloppinesswhen it comes to goals, standards, or clarity of direc-tion and purpose. Rather, they translate into respon-siveness and readiness to absorb and assimilate rapidchanges while maintaining financial and operationalcohesion.

Entrepreneurial Culture There exists in grow-ing new ventures a common value system, which isdifficult to articulate, is even more elusive to meas-ure, and is evident in behavior and attitudes. There isa belief in and commitment to growth, achievement,improvement, and success and a sense among mem-bers of the team that they are “in this thing together.”Goals and the market determine priorities, ratherthan whose territory or whose prerogatives are beingchallenged. Managers appear unconcerned aboutstatus, power, and personal control. They are moreconcerned about making sure that tasks, goals, androles are clear than whether the organizational chartis current or whether their office and rug reflect theircurrent status. Likewise, they are more concernedabout the evidence, competence, knowledge, and logicof arguments affecting a decision than the status givenby a title or the formal position of the individual doingthe arguing. Contrast this with a multi-billion-dollar,but stagnant, firm in England. Reportedly, 29 differ-ent makes and models of automobiles are used in thefirm to signify one’s position.

This entrepreneurial climate, or culture, exists inlarger firms also. Such a climate attracts and en-courages the entrepreneurial achievers, and it helpsperpetuate the intensity and pace so characteristicof high growth firms. Exhibit 7.5 shows how fivecompanies studied by Rosabeth Moss Kanter rangefrom most to least entrepreneurial. Kanter, who hasC

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been studying “intrapreneurship” since the 1980s,asserted that the global economy was experiencingthe postentrepreneurial revolution, which “takesentrepreneurship a step further, applying entrepre-neurial principles to the traditional corporation,creating a marriage between entrepreneurial cre-ativity and corporate discipline, cooperation, andteamwork.”11 This revolution has not made manag-

ing any easier; in fact, Kanter suggests, “This consti-tutes the ultimate corporate balancing act. Cut backand grow. Trim down and build. Accomplish more,and do it in new areas, with fewer resources.”12

Clearly, some corporations will embrace these chal-lenges with more success than others; the followingsection will shed some light on how “giants learn todance.”13


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EXHIBIT 7.5

Characteristics of Five Companies, Ranging from Most to Least Entrepreneurial

Companies Studied

Chipco Radco Medco Finco Utico

Percent of effective 71% 69% 67% 47% 33%managers with entrepreneurial accomplishments

Economic trend Steadily up Trend up but Upward trend Mixed Downward trendnow down

Change issues Change normal; Change normal in Reorganized 2–3 Change a shock; Change a shock; constant change in products, technolo- years ago to install new top management undergoing product generation; gies; changeover to matrix; normal group from outside reorganization to proliferating staff second management product and reorganizing and install matrix andand units. generation with technology changes. trying to add add competitive

new focus. competitive market market posture andposture. reducing staff.

Organization Matrix Matrix in some Matrix in some Divisional; unitary Functional structure areas; product lines areas. hierarchy within organization;

act as quasi divisions. division; some central currently overlayingofficers. matrix of regions

and markets.

Information flow Decentralized Mixed Mixed Centralized Centralized

Communication Free Free Moderately free Constricted Constrictedemphasis Horizontal Horizontal Horizontal Vertical Vertical

Culture Clear, consistent; Clear, though in Clear; pride in Idiosyncratic; Clear but favors individual transition from company; belief that depends on boss undergoing initiative. invention emphasis talent will be and area. changes; favors

to routinization rewarded. security, and systems. maintenance, and

protection.

Emotional climate Pride in company, Uncertainty Pride in company; Low trust; high High uncertainty, team feeling, some regarding team feeling. uncertainty. confusion.burnout. changes.

Rewards Abundant; visibility, Abundant; visibility, Moderately Scarce; primarily Scarce; promotionchance to do more chance to do more abundant; monetary. and salary freeze;challenging work in challenging work in conventional. recognition by the future, and get the future, and get peers grudging.bigger budget bigger budget projects. projects.

Source: Reprinted by permission of Harvard Business Review. From “Middle Managers as Innovators” by Rosabeth Moss Kanter, July-August 1982,p. 103. Copyright © 1982 by the Harvard Business School Publishing Corporation; all rights reserved.

11 Rosabeth Moss Kanter, When Giants Learn to Dance (New York: Simon & Schuster, 1989), pp. 9–10.12 Ibid., p. 31.13 Ibid.

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What Entrepreneurial Managers Need to KnowMuch of business education traditionally has empha-sized and prepared students for life in the administra-tive domain. There is nothing wrong with that, buteducation preparing students to start and managevibrant, growing new ventures cannot afford to em-phasize administrative efficiency, maintenance tasks,resource ownership, and institutional formalization.Rather, such a program needs to emphasize skills nec-essary for life in the entrepreneurial domain. Forexample, effective entrepreneurial managers need tobe especially skillful at managing conflict, resolving dif-ferences, balancing multiple viewpoints and demands,and building teamwork and consensus. These skills areparticularly difficult when working with others outsideone’s immediate formal chain of command.

In talking of larger firms, Kanter identifies powerand persuasion skills, skill in managing problemsaccompanying team and employee participation, andskill in understanding how change is designed andconstructed in an organization as necessary. Kanternotes:

In short, individuals do not have to be doing “big things”in order to have their cumulative accomplishmentseventually result in big performance for the com-pany. . . . They are only rarely the inventors of the“breakthrough” system. They are only rarely doingsomething that is totally unique or that no one, in anyorganization, ever thought of before. Instead, they areoften applying ideas that have proved themselves else-where, or they are rearranging parts to create a betterresult, or they are noting a potential problem before itturns into a catastrophe and mobilizing the actions toanticipate and solve it.14

A study of midsized growth companies having salesbetween $25 million and $1 billion and a sales orprofit growth of more than 15 percent annually overfive years confirms the importance of many of thesesame fundamentals of entrepreneurial management.15

For one thing, these companies practiced opportunity-driven management. According to the study, theyachieved their first success with a unique product ordistinctive way of doing business and often becameleaders in market niches by delivering superior valueto customers, rather than through low prices. Theyare highly committed to serving customers and pay

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very close attention to them. For another thing, thesefirms emphasize financial control and managing everyelement of the business.

In a book that follows up on the implementationissues of how one gets middle managers to pursueand practice entrepreneurial excellence (first madefamous in In Search of Excellence by Tom Peters andBob Waterman), two authors note that some of theimportant fundamentals practiced by team-builderentrepreneurs—who are more intent on getting re-sults than just getting their own way—also are emu-lated by effective middle managers.16 Or as JohnSculley, of Apple Computers, explained:

The heroic style—the lone cowboy on horseback—isnot the figure we worship anymore at Apple. In the newcorporation, heroes won’t personify any single set ofachievements. Instead, they personify the process. Theymight be thought of as gatekeepers, information carri-ers, and teams. Originally heroes at Apple were thehackers and engineers who created the products. Now,more teams are heroes.17

The ability to shape and guide a cohesive team isparticularly critical in high-tech firms where the com-petitive landscape can shift dramatically in the face ofdisruptive technologies. In his book The Innovator’sDilemma, Clayton Christensen finds that even aggres-sive, innovative, and customer-driven organizationscan been rendered nearly obsolete if they fail to takedecisive, and at times radical, actions to stay competi-tive.18 The point of greatest peril in the developmentof a high-tech market, writes Geoffrey Moore in hisbook Crossing the Chasm, lies in making the transitionfrom an early market, dominated by a few visionarycustomers, to a mainstream market that is dominatedby a large block of customers who are predominantlypragmatists in orientation.19 In Exhibit 7.6, Babsonentrepreneur in residence Ed Marram describes thisas the “Blunder” stage of growth, perilously positionedbetween “Wonder” and Thunder.”

Lead entrepreneurs whose companies success-fully break into the mass market must then find away to manage the hyper-growth and gigantic rev-enues that can result from an international surge indemand.20 Several entrepreneurial managers whohave skillfully negotiated these high-tech waters areas well-known as the companies they founded: thinkDell, Gates, Jobs, and Ellison. What sort of skills and

14 Rosabeth Moss Kanter, The Change Masters (New York: Simon & Schuster, 1983), pp. 354–55.15 The study was done by McKinsey & Company. See “How Growth Companies Succeed,” reported in Small Business Report, July 1984, p. 9.16 David L. Bradford and Allan R. Cohen, Managing for Excellence (New York: John Wiley & Sons, 1984), pp. 3–4.17 John Sculley with John Byrne, Odyssey: Pepsi to Apple . . . A Journey of Adventures, Idea, and the Future (New York: HarperCollins Publishers Inc., 1987),

p. 321.18 Clayton M. Christensen, The Innovator’s Dilemma (Harvard Business School Press, 1997).19 Geoffrey Moore, Crossing the Chasm (New York: HarperCollins, 2002).20 Geoffrey Moore, Inside the Tornado: Marketing Strategies from Silicon Valley’s Cutting Edge (New York: HarperCollins, 1999).

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personality are required to achieve such high levelsof performance in a dynamic and uncertain market-place? As portrayed in Stephen Covey’s classic work,The 7 Habits of Highly Effective People, these indi-viduals are curious, proactive team builders whohave a passion for continuous improvement andrenewal in their lives and in their ventures. Maybemost important in this context: these leaders have “theability to envision, to see the potential, to create withtheir minds what they cannot at present see withtheir eyes . . . ”21

Management Competencies

Entrepreneurs who build substantial companies thatgrow to more than $10 million in sales and 75 to 100employees are good entrepreneurs and good man-agers. Typically, they will have developed a solid baseand a wide breadth of management skills and know-how over a number of years working in differentareas (e.g., sales, marketing, manufacturing, and fi-nance). It would be unusual for any single entre-preneur to be outstanding in all areas. More likely, asingle entrepreneur will have strengths in one area,such as strong people management, conceptual andcreative problem-solving skills, and marketing know-how, as well as some significant weaknesses. While itis risky to generalize, often entrepreneurs whosebackground is technical are weak in marketing,

finance, and general management. Entrepreneurswho do not have a technical background are, as youmight expect, often weakest in the technical or engi-neering aspects.

Throughout this book, the concept of fit has beenstressed. Having a management team whose skills arecomplementary is important, not the possession by anindividual of a single, absolute set of skills or a profile.The art and craft of entrepreneuring involves recog-nizing the skills and know-how needed to succeed in aventure, knowing what each team member does ordoes not know, and then compensating for shortcom-ings, either by getting key people on board to fill voidsor by an individual accumulating the additional“chunks” before he or she takes the plunge. After all,the venture and the people area work in process.

Skills in Building Entrepreneurial CultureManagers of entrepreneurial firms need to recognizeand cope with innovation, taking risks, and respond-ing quickly, as well as with absorbing major setbacks.The most effective managers seem to thrive on thehectic, and at times chaotic, pace and find it chal-lenging and stimulating, rather than frustrating oroverwhelming. They use a consensus approach tobuild a motivated and committed team, they balanceconflicting demands and priorities, and they manageconflicts adroitly.


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Hard Work!

FailuresQuit

(1) (2) (3) (4) ASUNDER orrenaissanceof WONDER

Growth Death Successor’sHard Word

Liquidation

Time

Creationof

Myths

Teachand

Shareor

Destroy!

WONDER BLUNDER THUNDER PLUNDER

EXHIBIT 7.6

Stages of Growth

21 Stephen R. Covey, The 7 Habits of Highly Effective People (New York: Simon and Schuster, 1989).

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These managers thus need interpersonal/team-work skills that involve (1) the ability to create,through management, a climate and spirit conduciveto high performance, including pressing for perform-ance while rewarding work well done and encourag-ing innovation, initiative, and calculated risk taking;(2) the ability to understand the relationships amongtasks and between the leader and followers; and (3) theability to lead in those situations where it is appro-priate, including a willingness to manage actively,supervise and control activities of others throughdirections, suggestions, and the like.

These interpersonal skills can be called entrepre-neurial influence skills, since they have a great deal todo with the way these managers exact influence overothers.

Leadership, Vision, Influence These man-agers are skillful in creating clarity out of confusion,ambiguity, and uncertainty. These entrepreneurialmanagers are able to define adroitly and gain agree-ment on who has what responsibility and authority.Further, they do this in a way that builds motivationand commitment to cross-departmental and corpo-rate goals, not just parochial interests. But this is notperceived by other managers as an effort to jealouslycarve out and guard personal turf and prerogatives.Rather, it is seen as a genuine effort to clarify roles,tasks, and responsibilities, and to make sure there isaccountability and appropriate approvals. This doesnot work unless the manager is seen as willing to re-linquish his or her priorities and power in the interestof an overall goal. It also requires skill in making surethe appropriate people are included in setting cross-functional or cross-departmental goals and in makingdecisions. When things do not go as smoothly as washoped, the most effective managers work themthrough to an agreement. Managers who are accus-tomed to traditional line/staff or functional chains ofcommand are often baffled and frustrated in theirnew role. While some may be quite effective in deal-ing with their own subordinates, it is a new task tomanage and work with peers, the subordinates ofothers, and even superiors outside one’s chain ofcommand.

Helping, Coaching, and Conflict Manage-ment The most effective managers are very cre-ative and skillful in handling conflicts, generatingconsensus decisions, and sharing their power andinformation. They are able to get people to open up,instead of clamming up; they get problems out on thetable, instead of under the rug; and they do not be-come defensive when others disagree with theirviews. They seem to know that high-quality decisionsrequire a rapid flow of information in all directions

and that knowledge, competence, logic, and evidenceneed to prevail over official status or formal rank inthe organization. The way they manage and resolveconflicts is intriguing. They can get potential adver-saries to be creative and to collaborate by seeking areconciliation of viewpoints. Rather than emphasiz-ing differences and playing the role of hard-nosenegotiator or devil’s advocate to force their own solu-tion, they blend ideas. They are more willing to riskpersonal vulnerability in this process—often by giv-ing up their own power and resources—than areless-effective managers. They insist on fairness andintegrity in the short and long term, rather than shortterm gain. The trade-offs are not easy: At the outset,such an approach involves more managers, takesmore time, often appears to yield few immediate re-sults, and seems like a more painful way to manage.Later, however, the gains from the motivation, com-mitment, and teamwork anchored in consensus arestriking. For one thing, there is swiftness and deci-siveness in actions and follow-through because thenegotiating, compromising, and accepting of priori-ties is history. For another, new disagreements thatemerge do not generally bring progress to a halt,since there is both high clarity and broad acceptanceof the overall goals and underlying priorities. Withoutthis consensus, each new problem or disagreementoften necessitates a time-consuming and painful con-frontation and renegotiation simply because it wasnot done initially. Apparently, the Japanese under-stand this quite well.

Teamwork and People Management An-other form of entrepreneurial influence has to dowith encouraging creativity and innovation, and withtaking calculated risks. Entrepreneurial managersbuild confidence by encouraging innovation andcalculated risk taking, rather than by punishing orcriticizing whatever is less than perfect. They breedindependent, entrepreneurial thinking by expectingand encouraging others to find and correct their ownerrors and to solve their own problems. This does notmean they follow a throw-them-to-the-wolves ap-proach. Rather, they are perceived by their peers andother managers as accessible and willing to helpwhen needed, and they provide the necessary re-sources to enable others to do the job. When it isappropriate, they go to bat for their peers and subor-dinates, even when they know they cannot alwayswin. An ability to make heroes out of other teammembers and contributors and to make sure othersare in the limelight, rather than accept these thingsoneself, is another critical skill.

The capacity to generate trust—the glue thatbinds an organization or relationship together—iscritical. The most effective managers are perceivedC

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as trustworthy; they behave in ways that create trust.They do this by being straightforward. They do whatthey say they are going to do. They are not the cor-porate rumor carriers. They are open and sponta-neous, rather than guarded and cautious with eachword. And they are perceived as being honest anddirect. They treat their associates with respect, asthey would want to be treated. They share the wealthwith those who help create it by their high perform-ance. Also, it is easy to envision the kind of trackrecord and reputation these entrepreneurial man-agers build for themselves. They have a reputation ofgetting results, because they understand that the taskof managing in a rapid growth company usually goeswell beyond one’s immediate chain of command.They become known as the creative problem solverswho have a knack for blending and balancing multipleviews and demands. Their calculated risk taking worksout more often than it fails. And they have a reputa-tion for developing human capital (i.e., they groomother effective growth managers by their example andtheir mentoring).

Other Management CompetenciesEntrepreneurial managers need a sound foundationin what are considered traditional management skills.Interestingly, in the study of practicing entrepreneursmentioned earlier, no one assigned much importanceto capital asset-pricing models, beta coefficients, lin-ear programming, and so forth, the prevailing andhighly touted “new management techniques.”22

The list below is divided into two cross-functionalareas (administration and law and taxation) and fourkey functional areas (marketing, operations/produc-tion, finance, entrepreneurial management, law andtaxes, and information technology). Technical skillsunique to each venture are also necessary.

MarketingMarket research and evaluation. Ability toanalyze and interpret market research studyresults, including knowing how to design andconduct studies and to find and interpretindustry and competitor information, and afamiliarity with questionnaire design and sam-pling techniques. One successful entrepreneurstated that what is vital “is knowing where thecompetitive threats are and where the oppor-tunities are and an ability to see the customers’needs.”Marketing planning. Skill in planning overallsales, advertising, and promotion programs and

in deciding on effective distributor or sales rep-resentative systems and setting them up.Product pricing. Ability to determine com-petitive pricing and margin structures and to position products in terms of price and abilityto develop pricing policies that maximize profits.Sales management. Ability to organize, super-vise, and motivate a direct sales force, and theability to analyze territory and account salespotential and to manage a sales force to obtainmaximum share of market.Direct selling. Skills in identifying, meeting,and developing new customers and in closingsales. Without orders for a product or service, a company does not really have a business.Service management. Ability to perceive serviceneeds of particular products and to determineservice and spare-part requirements, handlecustomer complaints, and create and managean effective service organization.Distribution management. Ability to organizeand manage the flow of product from manufac-turing through distribution channels to ultimatecustomer, including familiarity with shippingcosts, scheduling techniques, and so on.Product management. Ability to integratemarket information, perceived needs, researchand development, and advertising into a rationalproduct plan, and the ability to understandmarket penetration and breakeven.New product planning. Skills in introducingnew products, including marketing testing,prototype testing, and development of price/sales/merchandising and distribution plans fornew products.

Operations/ProductionManufacturing management. Knowledge ofthe production process, machines, personnel,and space required to produce a product andthe skill in managing production to produceproducts within time, cost, and qualityconstraints.Inventory control. Familiarity with techniquesof controlling in-process and finished goodsinventories of materials.Cost analysis and control. Ability to calculatelabor and materials costs, develop standard costsystems, conduct variance analyses, calculateovertime labor needs, and manage/controlcosts.


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22 Timmons and Stevenson, “Entrepreneurship Education in the 80s. What Entrepreneurs Say,” pp. 115–34.

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Quality control. Ability to set up inspectionsystems and standards for effective control of quality of incoming, in-process, and fin-ished materials. Benchmarking continuous improvement.Production scheduling and flow. Ability toanalyze work flow and to plan and manageproduction processes, to manage work flow, and to calculate schedules and flows for risingsales levels.Purchasing. Ability to identify appropriatesources of supply, to negotiate supplier con-tracts, and to manage the incoming flow of material into inventory, and familiarity withorder quantities and discount advantages.Job evaluation. Ability to analyze worker pro-ductivity and needs for additional help, and the ability to calculate cost-saving aspects oftemporary versus permanent help.

FinanceRaising capital. Ability to decide how best toacquire funds for startup and growth; ability toforecast funds needs and to prepare budgets;and familiarity with sources and vehicles ofshort- and long-term financing, formal andinformal.Managing cash flow. Ability to project cashrequirements, set up cash controls, and man-age the firm’s cash position, and the ability toidentify how much capital is needed, whenand where you will run out of cash, andbreakeven.Credit and collection management. Ability todevelop credit policies and screening criteria,and to age receivables and payables, and anunderstanding of the use of collection agenciesand when to start legal action.Short-term financing alternatives. Understand-ing of payables management and the use ofinterim financing, such as bank loans, factoringof receivables, pledging and selling notes andcontracts, bills of lading and bank acceptance;and familiarity with financial statements andbudgeting/profit planning.Public and private offerings. Ability to developa business plan and an offering memo that canbe used to raise capital, a familiarity with thelegal requirements of public and private stockofferings, and the ability to manage shareholderrelations and to negotiate with financialsources.Bookkeeping, accounting, and control. Abilityto determine appropriate bookkeeping andC

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accounting systems as the company starts andgrows, including various ledgers and accountsand possible insurance needs.Other specific skills. Ability to read and preparean income statement and balance sheet, andthe ability to do cash flow analysis and planning,including break-even analysis, contributionanalysis, profit and loss analysis, and balancesheet management.

Entrepreneurial ManagementProblem solving. Ability to anticipate potentialproblems; ability to gather facts about prob-lems, analyze them for real causes, and planeffective action to solve them; and ability to bevery thorough in dealing with details of particu-lar problems and to follow through.Communications. Ability to communicateeffectively and clearly—orally and in writing—to media, public, customers, peers, and subor-dinates.Planning. Ability to set realistic and attainablegoals, identify obstacles to achieving the goals,and develop detailed action plans to achievethose goals, and the ability to schedule personaltime very systematically.Decision making. Ability to make decisions onthe best analysis of incomplete data, when thedecisions need to be made.Project management. Skills in organizing proj-ect teams, setting project goals, defining project tasks, and monitoring task comple-tion in the face of problems and cost/qualityconstraints.Negotiating. Ability to work effectively in nego-tiations, and the ability to balance quickly valuegiven and value received. Recognizing onetimeversus ongoing relationships.Managing outside professionals. Ability to iden-tify, manage, and guide appropriate legal, finan-cial, banking, accounting, consulting, and othernecessary outside advisors.Personnel administration. Ability to set up payroll,hiring, compensation, and training functions.

Law and TaxesCorporate and securities law. Familiarity withthe Uniform Commercial Code, includingforms of organization and the rights andobligations of officers, shareholders, anddirectors; and familiarity with Security andExchange Commission, state, and other regu-lations concerning the securities of your firm,both registered and unregistered, and the

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advantages and disadvantages of differentinstruments.Contract law. Familiarity with contract proce-dures and requirements of government andcommercial contracts, licenses, leases, andother agreements, particularly employmentagreements and agreements governing thevesting rights of shareholders and founders.Law relating to patent and proprietary rights.Skills in preparation and revision of patentapplications and the ability to recognize a strongpatent, trademark, copyright, and privilegedinformation claims, including familiarity withclaim requirements, such as intellectualproperty.Tax law. Familiarity with state and federalreporting requirements, including specificrequirements of a particular form of organiza-tion, of profit and other pension plans, and thelike.Real estate law. Familiarity with leases, pur-chase offers, purchase and sale agreements, andso on, necessary for the rental or purchase andsale of property.Bankruptcy law. Knowledge of bankruptcy law,options, and the forgivable and nonforgivableliabilities of founders, officers, and directors.

Information TechnologyInformation and management systems toolsfrom laptop to Internet: sales, supply chain,inventory, payroll, etc.Business to business, business to consumer,business to government via the Internet.Sales, marketing, manufacturing, and merchan-dising tools.Financial, accounting, and risk analysis and man-agement tools (e.g., Microsoft’s Office platform).Telecommunications and wireless solutions forcorporate information, data, and processmanagement.

As has been said before, not all entrepreneurs willfind they are greatly skilled in the areas listed above,and if they are not, they will most likely need to ac-quire these skills, either through apprenticeship,through partners, or through the use of advisors.However, while many outstanding advisors, such aslawyers and accountants, are of enormous benefit toentrepreneurs, these people are not always business-people and they often cannot make the best businessjudgments for those they are advising. For example,lawyers’ judgments, in many cases, are so contami-nated by a desire to provide perfect or fail-safe pro-tection that they are totally risk averse.


Chapter Summary

1. The growing enterprise requires that the founder andteam develop competencies as entrepreneurial leadersand managers.

2. Founders who succeed in growing their firms beyond $10million in sales learn to adapt and grow quickly themselvesas managers and leaders, or they do not survive.

3. Founders of rapidly growing firms defy the conventionalwisdom that entrepreneurs cannot manage growing be-yond the startup.

4. Ventures go through stages of growth from startup,through rapid growth, to maturity, to decline andrenewal.

5. The largest single factor that increases the complexityand difficulty of managing a young company is its rate ofgrowth in orders and revenue.

6. The faster the rate of growth, the more difficult andchallenging are the management issues, and the moreflexible, adaptive, and quick learning must be theorganization.

7. Entrepreneurs create and invent new and uniqueapproaches to organizing and managing work.

8. As ventures grow, the core management competenciesneed to be covered by the team.

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Study Questions

1. What is the difference between an entrepreneurialmanager and an administrator?

2. What do founders do to grow their ventures beyond $10million in sales?

3. Define the stages that most companies experience asthey grow, and explain the management issues andrequirements anticipated at each stage.

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4. What drives the extent of complexity and difficulty ofmanagement issues in a growing company?

5. List the main management competencies that need tobe addressed as a company grows to exceed $10 millionin revenue.

6. Can you compare and describe the principal differencesin the leadership, management, and organization

between the best growing companies of which you areaware, and large, established companies? Why are theredifferences?

7. What would be your strategy for changing and creatingan entrepreneurial culture in a large, nonentrepreneurialfirm? Is it possible? Why, or why not?

Internet Sources for Chapter 7

http://www.entreworld.org A selective review guide to Websources for the entrepreneurhttp://www.hbr.com The Harvard Business Reviewhttp://www.fastcompany.com Fast Company is a mediacompany that chronicles how companies develop andcompete in fast-paced, challenging business environmentshttp://www.redherring.com Red Herring is a media companycovering innovation, technology, financing, andentrepreneurial activityhttp://www.business.gov One-stop access to federalgovernment information, services, and transactions on

business development, financial assistance, taxes, laws andregulations, international trade, workplace issues, buying andsellinghttp://edge.lowe.org Peerspectives is a peer-learningcommunity for growing companies that provides access toinformation that leads to solutions for the entrepreneurtrying to grow his or her businesshttp://emc.score.org The SCORE Association is a national,nonprofit association and a resource partner with the SBA,with 11,500 volunteer members and 389 chapters throughoutthe United States

MIND STRETCHERS

Have you considered?

1. It is often said, “You cannot hire an entrepreneur.” Whatare the implications for large companies today?

2. How would you characterize the attitudes, behaviors,and mind-sets of the most effective leaders and man-agers you have worked for? The worst? What accountsfor the difference?

3. Read recent issues of Fast Company magazine: What ishappening in corporate America?

4. What should the president, the Congress, and governorsdo to encourage and accelerate entrepreneurship inAmerica?

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STEP 1Complete the Management Competency Inventory on the following pages. For each management competency, place acheck in the column that best describes your knowledge and experience. Note that a section is at the end of the inventoryfor unique skills required by your venture; for example, if it is a service or franchise business, there will be some skills andknow-how that are unique. Then rank from 1 to 3 particular management competencies as follows:

1 � Critical

2 � Very Desirable

3 � Not Necessary


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Competency Inventory

Thorough Some Knowledge Knowledge No Knowledge

& Experience & Experience or Experience Importance Rank (Done Well) (So–So) (New Ground) (1–3 Years)

Marketing

Market Researchand EvaluationFinding andinterpreting industryand competitorinformation; designingand conducting marketresearch studies;analyzing andinterpreting marketresearch data; etc.

ExerciseManagerial Skills andKnow-How Assessment

Name:

Venture:

Date:

Part I—Management Competency Inventory

Part I of the exercise involves filling out the Management Competency Inventory and evaluating how critical certain man-agement competencies are either (1) for the venture or (2) personally over the next one to three years. How you rank the im-portance of management competencies, therefore, will depend on the purpose of your managerial assessment.

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Market PlanningPlanning overall sales,advertising, andpromotion programs;planning and settingup effective distributoror sales representativesystems; etc.

Product PricingDeterminingcompetitive pricingand margin structuresand break-evenanalysis; positioningproducts in terms ofprice; etc.

CustomerRelationsManagement(CRM)

Customer ServiceDetermining customerservice needs andspare-partrequirements;managing a serviceorganization andwarranties; training;technical backup,telecom and Internetsystems and tools; etc.

SalesManagementOrganizing, recruiting,supervising,compensating, andmotivating a directsales force; analyzingterritory and accountsales potential;managing sales force;etc.

Direct SellingIdentifying, meeting,and developing newcustomers, suppliers,investors, brain trustand team; closingsales; etc.

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Direct Mail/Catalog SellingIdentifying anddevelopingappropriate direct mailand catalog sales andrelated distribution; etc.

Electronic andTelemarketingIdentifying, planning,implementingappropriatetelemarketingprograms; Internet-based programs; etc.

Supply ChainManagement

DistributionManagementOrganizing andmanaging the flow of product frommanufacturing throughdistribution channels tocustomers, etc.

ProductManagementIntegrating marketinformation, perceivedneeds, research anddevelopment, andadvertising into arational product plan;etc.

New ProductPlanningPlanning theintroduction of newproducts, includingmarketing testing,prototype testing, anddevelopment of price,sales, merchandising,and distribution plans;etc.


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Operations/Production

ManufacturingManagementManaging productionto produce productswithin time, cost, andquality constraints;knowledge ofManufacturingResource Planning; etc.

Inventory ControlUsing techniques ofcontrolling in-processand finished goodsinventories, etc.

Cost Analysis and ControlCalculating labor andmaterials costs;developing standardcost systems;conducting varianceanalyses; calculatingovertime labor needs;managing andcontrolling costs; etc.

Quality ControlSetting up inspectionsystems and standardsfor effective control ofquality in incoming, in-process, and finishedgoods; etc.

ProductionScheduling and FlowAnalyzing work flow;planning andmanaging productionprocesses; managingwork flow; calculatingschedules and flowsfor rising sales levels;etc.

PurchasingIdentifying appropri-ate sources of supply;negotiating suppliercontracts; managingthe incoming flow ofmaterial into inventory,etc.

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Job EvaluationAnalyzing workerproductivity and needsfor additional help;calculating cost-savingaspects of temporaryversus permanent help;etc.

Finance

AccountingDeterminingappropriatebookkeeping andaccounting systems;preparing and usingincome statements andbalance sheets;analyzing cash flow,breakeven,contribution, and profitand loss; etc.

Capital BudgetingPreparing budgets;deciding how best toacquire funds forstartup and growth;forecasting fundsneeds; etc.

Cash FlowManagementManaging cashposition, includingprojecting cashrequirements; etc.

Credit andCollectionManagementDeveloping creditpolicies and screeningcriteria, etc.

Short-TermFinancingManaging payablesand receivables; usinginterim financingalternatives, managingbank and creditorrelations; etc.


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Public and PrivateOffering SkillsDeveloping a businessplan and offeringmemo; managingshareholder relations;negotiating withfinancial sources dealstructuring andvaluation; etc.

EntrepreneurialManagement

Problem SolvingAnticipating problemsand planning to avoidthem; analyzing andsolving problems, etc.

Culture andCommunicationsCommunicatingeffectively and clearly,both orally and inwriting, to customers,peers, subordinates,and outsiders; etc.Treat others as youwould be treated,share the wealth, giveback.

PlanningAbility to set realisticand attainable goals,identify obstacles toachieving the goals,and develop detailedaction plans toachieve those goals.

Decision MakingMaking decisionsbased on the analysisof incomplete data, etc.

ProjectManagementOrganizing projectteams; setting projectgoals; defining projecttasks; monitoring taskcompletion in the faceof problems and cost/quality constraints; etc.C

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NegotiatingWorking effectively innegotiations; etc.

PersonnelAdministrationSetting up payroll,hiring, compensation,and training functions;identifying, managing,and guidingappropriate outsideadvisors; etc.

ManagementInformationSystemsKnowledge of relevantmanagementinformation systemsavailable andappropriate for growthplans; etc.

InformationTechnology andthe InternetUsing spreadsheet,word processing, andother relevantsoftware; using e-mail,management tools,and systems

InterpersonalTeam

EntrepreneurialLeadership/Vision/InfluenceActively leading,instilling vision andpassion in others, andmanaging activities ofothers; creating aclimate and spiritconducive to highperformance; etc.

HelpingDetermining whenassistance iswarranted and askingfor or providing suchassistance.


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FeedbackProviding effectivefeedback or receivingit; etc.

ConflictManagementConfrontingdifferences openly andobtaining resolution;using evidence andlogic; etc.

Teamwork and PeopleManagementWorking with others toachieve commongoals; delegatingresponsibility andcoachingsubordinates, etc.

Build a Brain Trust

Law

CorporationsUnderstanding theUniform CommercialCode, including formsof organization and therights and obligationsof officers,shareholders, anddirectors; etc.

ContractsUnderstanding therequirements ofgovernment andcommercial contracts,licenses, leases, andother agreements; etc.

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TaxesUnderstanding stateand federal reportingrequirements;understanding taxshelters, estateplanning, fringebenefits, and so forth;etc.

SecuritiesUnderstandingregulations of theSecurity and ExchangeCommission and stateagencies concerningthe securities, bothregistered andunregistered; etc.

Patents andProprietary RightsUnderstanding thepreparation andrevision of patentapplications;recognizing strongpatent, trademark,copyright, andprivileged informationclaims; etc.

Real EstateUnderstandingagreements necessaryfor the rental orpurchase and sale ofproperty; etc.

BankruptcyUnderstanding optionsand the forgivable andnonforgivableliabilities of founders,officers, directors, andso forth; etc.

Unique SkillsList uníquecompetencies required.1.2.3.


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Part II—Managerial Assessment

Part II involves assessing management strengths and weak-nesses, deciding which areas of competence are most criti-cal, and developing a plan to overcome or compensate forany weaknesses and to capitalize on management strengths.

STEP 1Assess management strengths and weaknesses:

Which management skills are particularly strong?

Which management skills are particularly weak?

What gaps are evident? When?

STEP 2Circle the areas of competence most critical to the successof the venture, and cross out those that are irrelevant.

STEP 3Consider the implications for you and for developing theventure management team.

What are the implications of this particular constella-tion of management strengths and weaknesses?

Who in your team can overcome or compensate foreach critical weakness?

How can you leverage your critical strengths?

What are the time implications of the above actions?For you? For the team?

How will you attract and fill the critical gaps in yourweaknesses?

STEP 4Obtain feedback. If you are evaluating your managementcompetencies as part of the development of a personal en-trepreneurial strategy and planning your apprenticeship,refer back to “Crafting a Personal Entrepreneurial Strat-egy” in Chapter 1. Complete this exercise if you have notdone so already.

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CaseJim Poss

Preparation Questions1. Apply the Timmons entrepreneurship framework

(entrepreneur-opportunity-resources) to analyzethis case. Pay particular attention to the entrepre-neur’s traits and how he gathered resources forhis venture.

2. Discuss Jim’s fund-raising strategies. What otheroptions might be considered for raising the fundsSPC needs? Is this a good investment?

3. Discuss the growth strategy. What additionalmarket(s) would you recommend pursuing as theymove ahead?

On his way through Logan Airport, Jim Poss stopped ata newsstand to flip through the June 2004 NationalGeographic cover story that declared, “The End of CheapOil.” Inside was a two-page spread of an Americanfamily sitting among a vast array of household posses-sions that were derived, at least in part, from petroleum-based products: laptops, cell phones, clothing,footwear, sports equipment, cookware, and containersof all shapes and sizes. Without oil, the world will be avery different place. Jim shook his head.

. . . and here we are burning this finite, imported, irre-placeable resource to power three-ton suburban gas-guzzlers with “these colors don’t run” bumper stickers!

Jim’s enterprise, Seahorse Power Company (SPC),was an engineering startup that encouraged the adop-tion of environmentally friendly methods of power gener-ation by designing products that were cheaper and moreefficient than 20th century technologies. Jim was surethat his first product, a patent-pending solar-poweredtrash compactor, could make a real difference.

In the United States alone, 180 million garbage trucksconsume over a billion gallons of diesel fuel a year . . .

By compacting trash on-site and off-grid, the mailbox-sized “BigBelly” could cut pickups by 400 percent. Theprototype—designed on the fly at a cost of $10,000—had been sold to Vail Ski Resorts in Colorado for$5,500. The green technology had been working aspromised since February, saving the resort lots of timeand money on round-trips to a remote lodge accessibleonly by snow machine.

Jim viewed the $4,500 loss on the sale as anextremely worthwhile marketing and proof-of-conceptexpense. Now that they were taking the business to thenext level with a run of 20 machines, Jim and his SPCteam had to find a way to reduce component costs andincrease production efficiencies.

Jim returned the magazine to the rack and made hisway to the New York Shuttle gate. An investor group inthe City had called another meeting, and Jim felt that it

was time for him to start asking the hard questions aboutthe deal they were proposing. These investors in sociallyresponsible businesses had to be given a choice: eitherwrite him the check they’ve been promising—and lethim run SPC the way he saw fit—or decline to invest al-together so he could concentrate on locating othersources of funding to close this $250,000 seed round.So far, all Jim had received from this group were voicesof concern and requests for better terms—it was time todo the deal or move on.

Green Roots

As a kid, Jim Poss was always playing with motors, bat-teries, and other electronics. He especially enjoyed fash-ioning new gadgets from components he had amassedby dismantling all manner of appliances and electronicdevices. He also spent a lot of time out of doors cross-country skiing with his father. Jim said that by his senioryear in high school, he knew where he was headed:

I had read Silent Spring1 and that got me thinking aboutthe damage we are doing to the earth. And once Istarted learning about the severity of our problems—thatwas it. By the end of my first semester at Duke University,I had taken enough environmental science to see thathelping businesses to go green was going to be a hugegrowth industry.

Jim felt that the best way to get businesses to invest insuperior energy systems was to make it profitable for themto do so. In order to prepare himself for this path, Jim setup a double major in environmental science and policy,and geology—with a minor in engineering. He graduatedin 1996 and found work as a hydrologist, analyzing soiland rock samples for a company that engineered stableparking lots for shopping malls. He didn’t stay long:

That certainly wasn’t my higher calling. I poked around,and within six months I found a fun job redesigning the

This case was prepared by Carl Hedberg under the direction of Profes-sor William Bygrave. © Copyright Babson College, 2004. Fundingprovided by the F. W. Olin Graduate School and a gift from the classof 2003.1 Silent Spring, written in 1962 by Rachel Carson, exposed the haz-

ards of the pesticide DDT, eloquently questioned humanity’s faith intechnological progress, and helped set the stage for the environ-mental movement. Appearing on a CBS documentary shortly be-fore her death from breast cancer in 1964, the author remarked,“Man’s attitude toward nature is today critically important simplybecause we have now acquired a fateful power to alter and de-stroy nature. But man is a part of nature, and his war against natureis inevitably a war against himself. . . . [We are] challenged asmankind has never been challenged before to prove our maturityand our mastery, not of nature, but of ourselves.”

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production capabilities at a small electronics firm. Soonafter that, I started working for this company calledSolectria; that was right up my alley.

As a sales engineer at Solectria—a Massachusetts-based designer and manufacturer of sustainable trans-portation and energy solutions—Jim helped clients con-figure electric drive systems for a wide range ofvehicles. He loved the work and developed an expertisein using spreadsheets to calculate the most efficient lay-out of motors, controllers, power converters, and otherhardware. By 1999, though, he decided that it wasonce again time to move on:

Solectria had a great group of people, but my boss wasa micromanager and I wasn’t going to be able to grow.I found an interesting job in San Francisco as a produc-tion manager for a boat manufacturing company—coordinating the flow of parts from seven or eight sub-contractors. When the [Internet] bubble burst, the boatcompany wasn’t able to raise capital to expand. Mywork soon became relatively mundane, so I left.

This time, though, Jim decided to head back toschool:

I had now worked for a bunch of different businessesand I had seen some things done well, but a lot ofthings done wrong. I knew that I could run a good com-pany—something in renewable energy, and maybesomething with gadgets. I still had a lot to learn, so I ap-plied to the MBA program at Babson College. I figuredthat I could use the second-year EIT2 module to incubatesomething.

Opportunity Exploration

Between his first and second year at Babson, Jim appliedfor a summer internship through the Kauffman Program.He sent a proposal to the Spire Corporation—a publiclytraded manufacturer of highly engineered solar electricequipment—about investigating the market and feasibil-ity of solar-powered trash compactors. Jim had dis-cussed his idea with someone he knew on the board,and the same week that the HR department informedhim that there were no openings, he got a call from thepresident of the company:

Roger Little had talked with the board member I knewand said that while they weren’t interested in having mewrite a case study on some solar whatever-it-was, he

said they’d like me to write some business plans forSpire—based on their existing opportunities and exist-ing operations. I said sure, I’ll take it.

That summer, Jim worked with the executive team tocomplete three business plans. When they asked him tostay on, Jim agreed to work 15 hours per week—on topof his full-time MBA classes. Every month or so he wouldbring up his idea for a solar-powered trash compactorwith the Spire executives, but their answer was alwaysthe same:

I was trying to get them to invest in my idea or partnerwith me in some way, and these guys kept saying, “It’llnever work.” So I just kept working on them. I did the cal-culations to show them that with solar we could do 10compactions a day and have plenty [of electric charge]on reserve for a run of cloudy weather. Finally, they justsaid that they don’t get into end-user applications.

Early in his second year, Jim attended a product de-sign fair featuring young engineers from Babson’s newsister school, the Franklin W. Olin School of Engineer-ing. He connected with Jeff Satwicz, an engineering stu-dent with extensive experience in remote vehicle testingfor the Department of Defense. When Jim got involvedwith a project that required engineering capabilities, heknew whom to call:

I went up the hill to Olin to ask Jeff if he’d like to help de-sign a folding grill for tailgating—he said sure. It’sfunny, the two schools are always talking about workingtogether like that, but it doesn’t happen until the studentssit in the café together and exchange ideas. That’s howit works; the faculty wasn’t involved—and they didn’t re-ally need to be.

Although Jim didn’t stay with the grill team, the proj-ect had forged a link with an engineer with a penchantfor entrepreneurship. Now certain of his trajectory, Jimincorporated the Seahorse Power Company (SPC)—anod to his ultimate aspiration of developing power sys-tems that could harness the enormous energy of oceanwaves and currents.

Understanding that sea-powered generators were along way off, Jim began to investigate ways to serve well-capitalized ventures that were developing alternative-energy solutions. One idea was to lease abandoned oilwells in California for the purpose of collecting and sell-ing deep-well data to geothermal energy businesses thatwere prospecting in the area. When Jim sought feed-back, he found that even people who liked his conceptinvariably pointed him in a different direction:

Everybody kept telling me that wind was where it’s at—and they were right; it’s the fastest growing energysource in the world. All the venture capitalists are look-ing at wind power. I realized, though, that if I was go-ing to make wind plants, I’d have to raise $200 millionto $500 million—with no industry experience. Impossi-ble. So instead, I started looking at what these [wind-plant ventures] needed.

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2 The Entrepreneurship Intensity Track (EIT) was a compressed andhighly focused entrepreneurial curriculum for graduate students atBabson College. The program provided a select group of MBAswith the necessary skills to take a business idea through the criticalstages of exploration, investigation, and refinement. The program’sindividual flexibility tailored each student’s education to best fit theirperceived market opportunity, and enabled them to fund andlaunch their business during the spring of their second year.

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The DAQ Buoy

Jim discovered that The Cape Wind Project, a companyworking to build a wind farm on Nantucket Sound, haderected a $2.5 million, 200-foot monitoring tower tocollect wind and weather data in the targeted area. Jimfelt that there was a better way:

Meteorological testing is a critical first step for thesewind businesses. I thought, whoa, they’ve just spent a lotof money to construct a static tower that probably won’taccurately portray the wind activity in that 25-square-mile area. And without good data, it’s going to be reallyhard for them to get funding.

My idea was to deploy data buoys that could bemoved around a site to capture a full range of datapoints. I spent about six months writing a business planon my data acquisition buoy—the DAQ. I figured that toget to the prototype stage I’d need between $5 millionand $10 million. This would be a pretty sophisticatedpiece of equipment, and a lot of people worried that ifa storm came up and did what storms typically do tobuoys, we’d be all done. I was having a hard time get-ting much traction with investors.

Finding the Waste

Even while he was casting about for a big-concept oppor-tunity, Jim had never lost sight of his solar compactor idea.With the spring semester upon him, he decided to see ifthat business would work as an EIT endeavor. Although hewas sure that such a device would be feasible—eveneasy—to produce, he didn’t start to get excited about theproject until he took a closer look at the industry:

I did an independent study to examine the trash industry.I was about a week into that when I looked at the marketsize and realized that I had been messing around withexpensive, sophisticated business models that didn’t of-fer close to the payback as this compactor would.

U.S. companies spent $12 billion on trash recepta-cles in 2000, and $1.2 billion on compaction equipmentin 2001. The average trash truck gets less than threemiles to the gallon and costs over $100 an hour to op-erate. There are lots of off-grid sites3 that have high trashvolumes—resorts, amusement parks, and beaches—andmany are getting multiple pickups a day. That’s atremendous waste of labor and energy resources.

Joining him in the EIT module was first-year MBAcandidate Alexander Perera. Alex had an undergradu-ate degree in environmental science from BostonUniversity, as well as industry experience in renewableenergy use and energy efficiency measures. The pairreasoned that if a solar-compactor could offer significant

savings as a trash collection device, then the marketcould extend beyond the off-grid adopters to includeretail and food establishments, city sidewalks, and hotels(see Exhibit 1).

Gearing Up

By the time the spring semester drew to a close, theyhad a clear sense of the market and the nature of the op-portunity—in addition to seed funding of $22,500:$10,000 from Jim’s savings, and $12,500 through thehatchery program at Babson College. Since solarpower was widely perceived as a more expensive,more complex, and less efficient energy source thangrid power, it was not surprising to discover that thecompetition—dumpster and compaction equipmentmanufacturers—had never introduced a system like this.Nevertheless, Jim and Alex were certain that if theycould devise a reliable solar-powered compactor thatcould offer end-users significant cost savings, estab-lished industry players could be counted on to aggres-sively seek to replicate or acquire that technology.

Understanding that patent protections were oftenonly as good as the legal minds that drafted them, Jimhad sought out the best. The challenge was that most ofthe talented patent attorneys he met with were far out-side of his meager budget. In May 2003, Jim got abreak when he presented his idea at an investor forum:

I won $1,500 in patent services from Brown andRudnick.4 That might not have taken me too far, but theyhave a very entrepreneurial mind-set. They gave me aflat rate for the patent—which is not something manyfirms will do. I paid the $7,800 up front, we filed a pro-visional patent in June, and they agreed to work with meas I continued to develop and modify the machine.


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BeachSki

TouristSites

ParksUrban& Muni Hotel &

Resorts

University& Corp.Campus

Retail &Food

Amuse-ment

Stadiums& Special

Events

Low Remoteness HighLow

WasteVolume

High

EXHIBIT 1

Target Customers

3 Sites without electrical power. 4 Brown Rudnick Berlack Israels, LLP, Boston, Massachusetts.

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Jim’s efforts had again attracted the interest of Olinengineer Jeff Satwicz, who in turn brought in BretRichmond, a fellow student with experience in productdesign, welding, and fabrication. When the team con-ducted some reverse engineering to see if the vision waseven feasible, Jim said they were pleasantly surprised:

I found a couple of kitchen trash compactors in the wantads and bought them both for about 125 bucks. Wetook them apart, and that’s when I realized how easythis was going to be . . . of course, nothing is ever aseasy as you think it’s going to be.

Pitching without Product

Figuring that it was time to conduct some hard field re-search, they decided to call on businesses that would bethe most likely early adopters of an off-grid compactor.Alex smiled as he described an unexpected turn of events:

We had a pretty simple client-targeting formula: remote-ness, trash volume, financial stability, and an apprecia-tion for the environmental cachet that could come with aproduct like this. Literally the first place I called was theski resort in Vail, Colorado. Some eco-terrorists had re-cently burned down one of their lodges to protest theirexpansion on the mountain, and they were also dealingwith four environmental lawsuits related to some kind ofnoncompliance.

This guy Luke Cartin at the resort just jumped at thesolar compactor concept. He said, “Oh, this is cool. Wehave a lodge at Blue Sky Basin that is an hour and a halfround trip on a snow cat. We pick up the trash out therethree or four times a week, sometimes every day. Wecould really use a product like that . . .” That’s when youput the phone to your chest and think, oh my gosh . . .

Jim added that after a couple of conference calls,they were suddenly in business without a product:

I explained that we were students and that we had notactually built one of these things yet (sort of). Luke askedme to work up a quote for three machines. They hadbeen very open about their costs for trash pickup, and Ifigured that they’d be willing to pay six grand apiece. Ialso had a rough idea that our cost of materials wouldfall somewhat less than that.

Luke called back and said that they didn’t have thebudget for three, but they’d take one. I was actually re-ally happy about that, because I knew by then that mak-ing just one of these was going to be a real challenge.

In September, SPC received a purchase order fromVail Resorts. When Jim called the company to work outa payment plan with 25 percent up front, Luke surprisedthem again:

He said, “We’ll just send you a check for the fullamount, minus shipping, and you get the machine hereby Christmas.” That was great, but now we were in real

trouble because we had to figure out how to build thisthing quickly, from scratch—and on a tight budget.

Learning by Doing

The team set out to design the system and develop theengineering plans for the machine that SPC had nowtrademarked as the “BigBelly Solar-Powered Trash Com-pactor.” Although his Olin team was not yet versant withcomputer-aided design (CAD) software, Jim saw that asan opportunity:

These guys were doing engineering diagrams on paperwith pens and pencils—but now we were going to needprofessional stuff. I said that we could all learn CAD to-gether, and if they made mistakes, great, that’s fine;we’d work through it.

Concurrent to this effort was the task of crunching thenumbers to design a machine that would work as prom-ised. As they began to source out the internal compo-nents, they searched for a design, fabrication, and man-ufacturing subcontractor that could produce the steelcabinet on a tight schedule. Although the team had ex-plained that SPC would be overseeing the entire processfrom design to assembly, quotes for the first box stillranged from $80,000 to $400,000. Jim noted that SPChad an even bigger problem to deal with:

On top of the price, the lead times that they were givingme were not going to cut it; I had to get this thing to Col-orado for the ski season!

So, we decided to build it ourselves. I went to a localfabricator trade show and discovered that although theyall have internal engineering groups, some were willingto take a loss on the research and development side inorder to get the manufacturing contract.

We chose Boston Engineering since they are veryinterested in developing a relationship with Olin engi-neers. They gave me a hard quote of $2,400 for theengineering assistance, and $2,400 for the cabinet. Bythis time we had sourced all the components weneeded, and we began working with their engineer tosize everything up. Bob Treiber, the president, wasgreat. He made us do the work ourselves out at hisfacility in Hudson (Massachusetts), but he also mentoredus, and his firm did a ton of work pro bono.

Fulfillment and Feedback

As the Christmas season deadline came and went, thedays grew longer. By late January 2004, Jim was work-ing through both of the shifts they had set up, from fourin the morning to nearly eleven at night. In February, theyfired up the device, tested it for three hours, and shippedit off to Colorado (see Exhibit 2). Jim met the device attheir shipping dock, helped unwrap it, met the staff, and

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put a few finishing touches on the machine. Although itworked, even at zero degree temperatures, it had neverbeen tested in the field. Jim left after a few days, and fortwo weeks, he endured a deafening silence.

Jim wrestled with how he could check in with SPC’sfirst customer without betraying his acute inventor’sangst about whether the machine was still working, andif it was, what Vail thought about it. Finally, when hecould stand it no longer, he placed the call under theguise of soliciting satisfied-customer feedback. The newsfrom Vail nearly stopped his heart:

They said that they had dropped the machine off a fork-lift and it fell on its face. Oh man, I thought; if it hadfallen on its back, that would have been okay, but thiswas bad—real bad. And then Luke tells me that it was abit scratched—but it worked fine. He told me howhappy they were that we had made it so robust. WhenI asked how heavy the bags were that they were pullingout of the thing, he said, “I don’t know; we haven’t emp-tied it yet . . .” I was astounded.

As it turned out, the Vail crew discovered that thesingle collection bag was indeed too heavy—a two-binsystem would be more user-friendly. The resort also sug-gested that the inside cart be on wheels, that the accessdoor be in the back, and that there be some sort of wire-less notification when the compactor was full.

As the SPC team got to work incorporating theseideas into their next generation of “SunPack” com-pactors, they were also engineering a second productthat they hoped would expand their market reach toinclude manufacturers of standard compaction dumpsters.The “SunPack Hippo” would be a solar generator de-signed to replace the 220-volt AC-power units that wereused to run industrial compactors. The waste haulingindustry had estimated that among commercial cus-tomers that would benefit from compaction, between 5

and 20 percent were dissuaded from adopting such sys-tems because of the setup cost of electrical wiring. SPCplanned to market the system through manufacturingand/or distribution partnerships.

Protecting the Property

While the interstate shipment of the BigBelly had giveSPC a legal claim to the name and the technology, Jimmade sure to keep his able patent attorneys apprised ofnew developments and modifications. SPC had appliedfor a provisional patent in June 2003, and they had oneyear to broaden and strengthen those protections priorto the formal filing. As that date approached, the attor-neys worked to craft a document that protected the in-ventors from infringement, without being so broad that itcould be successfully challenged in court.

The SPC patents covered as many aspects of SunPack products as possible, including energy storage,battery charging, energy draw cycle time, sensor con-trols, and wireless communication. The filing also speci-fied other off-grid power sources for trash compactionsuch as foot pedals, windmills, and water wheels.

Even without these intellectual property protections,though, Jim felt that they had a good head start in anindustry segment that SPC had created. Now they hadto prove the business model.

The Next Generation

While the first machine had cost far more to build thanthe selling price, the unit had proven the concept andbeen a conduit for useful feedback. A production run of20 machines, however, would have to demonstrate thatthe business opportunity was as robust as the prototype


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EXHIBIT 2

The BigBelly Arrives in Vail

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appeared to be. That would mean cutting the cost of ma-terials by more than 75 percent to around $2,500 perunit. SPC estimated that although the delivered price of$5,000 was far more expensive than the cost of a tradi-tional trash receptacle, the system could pay for itself bytrimming the ongoing cost of collection (see Exhibit 3).

The team had determined that developing a leaseoption for the BigBelly would alleviate new-buyer jittersby having SPC retain the risk of machine ownership—a move that could increase margins by 10 percent.Over the next five years SPC expected to expand its po-tential customer pool by reducing the selling price toaround $3,000—along with a corresponding drop inmaterials costs (see Exhibit 4).

With steel prices escalating, the SPC team designedtheir new machines with 30 percent fewer steel parts.They also cut the size of the solar panel and the two-week battery storage capacity in half, and replaced theexpensive screw system of compaction with a simpler,cheaper, and more efficient sprocket and chain mecha-nism (see Exhibit 5).

In order to offer an effective service response capa-bility, the team tried to restrict their selling efforts to theNew England area, although “a sale was a sale.” Oneconcern that kept cropping up was that this uniquedevice would be a tempting target for vandals. Teammembers explained that the solar panel on top was pro-tected by a replaceable sheet of Lexan,5 that all me-chanical parts were entirely out of reach, and that theunit had already proven to be quite solid. The generalfeeling, Jim noted, was that if the machine could bemessed with, people would find a way:

One state park ranger was worried that it would gettossed into the lake, so I assured him that the units wouldbe very heavy. He said, “So they’ll sink really fast . . .”

Jim added that the overall response had been veryfavorable—so much so that once again, there was areal need for speed:

We have pre-sold nearly half of our next run to placeslike Acadia National Park in Maine, Six-Flags Amuse-ment Park in Massachusetts, Harbor Lights in Boston,

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EXHIBIT 4

BigBelly Economics

5 A clear, high-impact-strength plastic used in many security applications.

EXHIBIT 3

Customer Economics

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

Traditional With BigBelly

Remote Locations (e.g., Ski Resorts)

With BigBelly $0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

Traditional

Urban Locations

Annual Labor Cost Fixed Bin Cost

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

COGS Purchase Price Lease Price

Near Term

$1,000

$0

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

COGS Purchase Price Lease Price

In Five Years

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beaches on Nantucket, and Harvard University. Fiftypercent down-payment deposits should be coming insoon, but that won’t cover what we’ll need to get thisdone.

Projections and Funding

During this “early commercialization period,” Jim wascommitted to moderating investor risk by leveraging on-campus and contractor facilities as much as possible.

The company was hoping to close on an A-round of$250,0006 by early summer to pay for cost-reductionengineering, sales and marketing, and working capital.The following year the company expected to raise aB-round of between $700,000 and $1 million.

SPC was projecting a positive cash flow in 2006 ontotal revenues of just over $4.7 million (see Exhibit 6).


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EXHIBIT 5

BigBelly CAD Schematic

EXHIBIT 6

SPC Financial Projections

2004 2005 2006 2007 2008

BigBelly unit sales 50 300 1,200 3,600 9,000

BigBelly revenues $225,000 $1,200,000 $4,200,000 $10,800,000 $22,500,000

Hippo royalty revenues 0 120,000 525,000 1,620,000 3,937,500

Total income 225,000 1,320,000 4,725,000 12,420,000 26,437,500

COGS 146,250 660,000 2,100,000 4,860,000 9,000,000

Gross income 78,750 660,000 2,625,000 7,560,000 17,437,500

SG&A 400,000 1,600,000 2,600,000 5,000,000 11,000,000

EBIT ($321,250) ($940,000) $25,000 $2,560,000 $6,437,500

6 Based on a pre-money valuation of $2.5 million. The principal andinterest on this seed-round note would convert into equity at theA-round with an additional 30 percent discount to A-roundinvestors. Seed-round investors would have the right to re-invest inthe A-round to offset dilution.

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The team felt that if their products continued to performwell, their market penetration estimates would be highlyachievable (see Exhibit 7). Jim estimated that by 2008,SPC would become an attractive merger or acquisitioncandidate.

In January 2004, as Jim began work on drafting anSBIR7 grant proposal, his parents helped out by invest-ing $12,500 in the venture. That same month, while at-tending a wind energy conference sponsored by Brownand Rudnick, Jim overheard an investor saying that hewas interested in putting a recent entrepreneurial wind-fall to work in socially responsible ventures. Jim decidedit was worth a try:

I gave him my three-minute spiel on the compactor. Hesaid that it sounded interesting, but that he was intowind power—after all, this was a wind-power confer-ence. “Well then,” I said, “have I got a business plan foryou!”

That afternoon Jim sent the investor the most recentversion of the data acquisition buoy business plan. Thatled to a three-hour meeting where the investor ended upexplaining to Jim why the DAQ was such a good idea.Jim said that the investor also understood how difficult itwould be to get the venture fully funded:

[The investor] said, “Well, I sure wish you were doingthe data acquisition buoy, but I can also see whyyou’re not.” I assured him that my passion was, of

course, offshore wind, and that it was something I wasplanning to do in the future. So he agreed to invest$12,500 in the compactor—but only because hewanted to keep his foot in the door for what SPC wasgoing to do later on.

In February, after the folks at Vail had come backwith their favorable review, Jim called on his former in-ternship boss at the Spire Corporation. Roger Little wasimpressed with Jim’s progress, and his company was infor $25,000. In April, the team earned top honors in the2004 Douglas Foundation Graduate Business PlanCompetition at Babson College. The prize—$20,000cash plus $40,000 worth of services—came with agood deal of favorable press as well. The cash, whichJim distributed evenly among the team members, wastheir first monetary compensation since they had begunworking on the project.

Although SPC could now begin to move ahead onthe construction of the next 20 cabinets, Jim was stillfocused on the search for a rather uncommon breed ofinvestor:

This is not a venture capital deal, and selling this idea toangels can be a challenge because many are not so-phisticated enough to understand what we are doing. Ihad one group, for example, saying that this wouldn’twork because most trash receptacles are located in al-leys—out of the sun.

Here we have a practical, commonsense business,but since it is a new technology, many investors are un-sure of how to value it. How scalable is it? Will ourpatent filings hold up? Who will fix them when theybreak?

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EXHIBIT 7

Market Size and Penetration

2004 2005 2006 2007 2008

Top-Down

SunPack market* (billion) $1.0 $1.0 $1.0 $1.0 $1.0

SunPack % penetration 0.0% 0.1% 0.5% 1.2% 2.6%

Bottom-Up

Total potential customers** 30,000 30,000 30,000 30,000 30,000Potential units/customer 20 20 20 20 20

Total potential units 600,000 600,000 600,000 600,000 600,000

Cumulative units sold 50 350 1,550 5,150 14,150Cumulative % penetration 0.0% 0.1% 0.3% 0.9% 2.4%

*Assume $600,000 BigBelly market (5% of $12 billion waste receptacles sold to target segments) plus a $400,000 power unit market($1.2 billion compacting dumpsters sold/$12,000 average price � $4,000 per power unit).

**Assume 400 resorts, 600 amusement parks, 2,000 university campuses, 5,000 commercial campuses, 2,200 hotels, 4,000 municipali-ties, 57 National Parks, 2,500 state parks and forests, 3,700 RV parks and campgrounds, and 17,000 fast-food and retail outlets.

7 The Small Business Innovation Research (SBIR) Program was a source ofgovernment grant funding driven by 10 federal departments andagencies that allocated a portion of their research and developmentcapital for awards to innovative small businesses in the United States.

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Earlier that spring Jim had presented his case inBoston to a gathering of angels interested in socially re-sponsible enterprises. Of the six presenters that day,SPC was the only one offering products that weredesigned to lower direct costs. During the networkingsession that followed, Jim said that one group in partic-ular seemed eager to move ahead:

They liked that Spire had invested, and they seemed sat-isfied with our projections. When I told them that we hada $25,000 minimum, they said not to worry—they wereinterested in putting in $50,000 now and $200,000later. In fact, they started talking about setting up fund-ing milestones so that they could be our primary backersas we grew. They wanted me to stop fund-raising, focuson the business, and depend on them for all my near-term financing needs.

At this point I felt like I needed to play hardball withthese guys, show them where the line was. My answerwas that I wasn’t at all comfortable with that, and that Iwould be comfortable when I had $200,000 in thebank—my bank. They backed off that idea, and by theend of the meeting, they agreed to put in the $50,000;but first they said they had to perform some more duediligence.

Momentum

By May 2004, the Seahorse Power Company had a to-tal of six team members.8 All SPC workers had beengiven an equity stake in exchange for their part-timeservices. The investor group expressed deep concernwith this arrangement, saying that the team could walkaway when the going got tough—and maybe right

when SPC needed them most. Jim explained that it wasn’ta negotiable point:

They wanted my people to have “skin in the game” be-cause they might get cold feet and choose to get regularjobs. I told them that SPC workers are putting in 20hours a week for free when they could be out chargingconsulting rates of $200 an hour. They have plenty ofskin in this game, and I’m not going to ask them forcash. Besides, if we could put up the cash, we wouldn’tneed investors, right?

As Jim settled into his seat for the flight to New York,he thought some more about the investors’ other pri-mary contention: his pre-money valuation was high bya million:

These investors—who still haven’t given us a dime—aresaying they can give me as much early-stage capital asSPC would need, but at a pre-money of $1.5 millionand dependent on us hitting our milestones. With animmediate funding gap of about $50,000, it’s temptingto move forward with these guys so we can fill currentorders on time and maintain our momentum. On the otherhand, I’ve already raised some money on the higher val-uation, and maybe we can find the rest before the needbecomes really critical.


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8 Three of the most recent equity partners were Richard Kennelly, a for-mer director at Conservation Law Foundation where he concen-trated on electric utility deregulation, renewable energy, energyefficiency, air quality, and global warming; Kevin Dutt, an MBA inoperations management and quantitative methods from Boston Uni-versity with extensive work experience in improving manufacturingand operational practices in a range of companies; and SteveDelaney, an MBA from The Tuck School at Dartmouth College witha successful track record in fund-raising, business development,market strategy, finance, and operations.

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chapter 7

Documents

temporary

chief executive

rosabeth moss

uniform commercial

finished goods

privileged

john wiley

federal reporting