Chapter Five

Growing the Enterprise

5.1. Ventures, Defined

Ventures, broadly defined, are a range of different ways of developing innovations, alternative
toconventional internal processes for new product or service development. Corporate ventures are
likely to be most appropriate where the organization needs to exploit some internal competencies and
retain a high degree of control over the business. Joint ventures and alliances involve working with
external partners, discussed in the previous chapter, will demand some release of control and
autonomy, but in return introduce the additional competencies of the partners. All types of venture
require a venture champion, a strong business case, and sufficient resources to be successful.
5.2. Factors Influencing the decision to establish a New Venture
Much of the American research on new ventures, and more general studies of entrepreneurs, tends to
emphasize the background and characteristics of a typical entrepreneur. Factors found to affect the
likelihood of establishing a venture include: family background, religion, formal

education/early work experience and psychological profile. A number of studies confirm that

both family background and religion affect an individual’s propensity to establish a new venture. A
significant majority of technical entrepreneurs have a self-employed or professional parent.
Studies indicate that between 50% and 80% have at least one self-employed parent.
5.3. Factors Influencing Venture Success
A study of 11,259 new technology ventures in the United States over a period of five years found
that 36% survived after four years, and 22% after five years. To try to explain the success and
failure of these ventures, the researchers reviewed 31 other key studies of technology ventures
and found only eight factors that were consistently found to influence success:
1. Value chain management – cooperation with suppliers, distribution, agents, and customers.
2. Market scope – variety of customers and market segments and geographic reach.
3. Firm age – number of years in existence

4. Size of founding team – likely to bring additional and more diverse expertise to the
ventures and better decision making.

5. Financial resources – venture assets and access to funding.

6. Founders’ marketing experience – but not technical experience, or prior experience of startups
7. Founders’ industry experience – in related markets or sectors.
8. Existence of patent rights – in product or process technology, but R&D investment was
not found to be significant.
The first three factors were by far the most significant predictors of success. However, clearly

there is also some interaction between these effects, for example, the founders’ marketing and

industry experience is likely to influence the attention to market scope and the value chain, and
patent rights make raising finance easier, and vice versa. In addition, they found that some
commonly cited factors had no effect, including founders’ experience of R&D or prior start-ups.
The importance of other factors depended on the precise context of the venture, for example for
independent start-ups R&D alliances and product innovation both had a negative effect on
performance, but for ventures of mixed origins R&D alliances and product innovation both had a
positive effect on performance
5.4. Funding
The initial funding to establish a new venture is rarely a major problem, as most are self-funded.
However, Peter Drucker suggests a new venture requires financial restructuring every three
years. Different stages of development each have different financial requirements:
1. Initial financing for launch.
2. Second-round financing for initial development and growth.

3. Third-round financing for consolidation and growth.

4. Maturity or exit.
In general, professional financial bodies are not interested in initial funding, because of the high
risk and low sums of money involved. It is simply not worth their time and effort to evaluate and
monitor such ventures. However, as the sums involved are relatively small – typically of the
order of tens of thousands of pounds – personal savings, re-mortgages and loans from friends and
relatives are often sufficient. The initial funding required to form a new venture may include the
purchase of accommodation, equipment and other start-up costs, plus the day- to-day running costs
such as salaries, utilities and so on.

Venture capital is typically only made available at later stages to fund growth on the basis of aproven
development and sales record. Given their strong desire for independence, most
entrepreneurs seek to avoid external funding for their ventures. However, in practice this is notalways
possible, particularly in the later growth stages.

Venture capitalists are keen to provide funding for a venture with a proven track record and strong
business plan, but in return will often require some equity or management involvement.

Moreover, most venture capitalists are looking for a means to make capital gains after about five years.
However, almost by definition entrepreneurs seek independence and control, and there is evidence that
some will sacrifice growth to maintain control of their ventures. For the same reason, few entrepreneurs
are prepared to go public to fund further growth. Thus, many

entrepreneurs will choose to sell the business and found another. For example, the typical
technology entrepreneur establishes an average of three ventures in their lifetime. Therefore, the
biggest funding challenge is likely to be for the second-round financing to fund development and
growth. This can be a time-consuming and frustrating process to convince venture capitalists to provide
finance. The formal proposal is critical at this stage. Professional investors will assess the attractiveness
of the venture in terms of the strengths and personalities of the founders, the formal business plan and
the commercial and technical merits of the product, typically in that order.

5.5. Growth and performance of new venture

There has been a great deal of economic and management research on small firms, but much of this has
been concerned with the contribution all types of small firms make to economic,

employment, or regional development. In most of the developed economies, around 10% of the
economically active population engage in new venture creation each year, a slightly higher
proportion, 15% or so in the United States and Asia, and a little lower in Europe (excluding the
United Kingdom) – 6%. However, the difference between the number of new ventures created
and closed each year, the so-called churn rate, is high.A high proportion of new ventures fail to grow
and prosper. Common reasons for failure include: poor financial control lack of managerial ability or
experience no strategy for transition, growth or exit .There are many ways a new venture can grow and
create additional value: organic growth through additional sales and diversification acquisition of or
merger with another company sale of the business to another company, or private equity firm an initial
public offering (IPO) on a stock market. A lack of managerial experience and credibility in their founders
can also be a major barrier to funding and growing new ventures. In the early stage, developing
relationships with potential customers and suppliers is the most critical, but as the venture grows the
relationship and role of
partners in the network of a new venture will change. Later, external sources of funding need to be
cultivated, which can result in changes of ownership and the dissolution of some of the
initialrelationships, and substitution for more mature partners in more stable networks. Over time, the
roles of different actors in the venture network become more specialized and professional. Individual
skills are essential in building and developing such relationships and networks. These skills include: social
and interpersonal communication. To build credibility and promote knowledge sharing negotiating and
balancing skills. To balance cooperation and competition, and to develop awareness, trust and
commitment influencing and visioning skills. To establish roles, and shares of responsibilities and
rewards.
Generally, new venture growth is a consequence of the interaction of internal factors, such athe

entrepreneurs’ personalities and capabilities, and external factors such as social and physicalnetwork
connections.