GETTING BIGGER BY

GROWING SMALLER
A New Growth Model
For Corporate America
JOEL SHULMAN

JOEL SHULMAN is associate professor of entrepreneurship at Babson College. Dr. Shulman, a graduate of
Harvard, specializes in providing training for investment professionals. In addition to lecturing, Dr. Shulman
has also consulted for the World Bank where he assisted with the development of capital markets throughout
Central Asia and in the former Soviet Union. Dr. Shulman is the author or co-author of more than seven books
including How to Manage and Evaluate Capital Expenditures and Planning Cash Flow.
 Getting Bigger By Growing Smaller - Page 1

MAIN IDEA
Companies today need a smarter way to grow. The traditional approach of focusing on major investments or acquisitions is running
out of steam. The most fertile place to look for the growth of the future is actually in small entrepreneurial initiatives and ideas which
take advantage of the established firm’s research and development capabilities, but which will not be burdened by the bureaucracy of
the established corporation.
What’s needed, therefore, are new commercial entities called Strategic Entrepreneurial Units (SEU). An SEU template is:

Board of Directors
Strategic Advisors

Established Facilitator Strategic Enterprise 3rd Parties and

Corporation Unit (SEU) Strategic Partners

Entrepreneur

SEUs capture the best of both worlds – the new venture will be able to make its own decisions and establish its own strategic direction
but at the same time take advantage of the established corporation’s access to capital, established relationships and other
infrastructure assets. As a result, the SEU should create value for those involved in the new venture and the parent organization.

The Key Challenges Facing The Solution The Keys To Making

Corporate America At Present This Solution Work

1 The need for corporate renewal 1 Implementing SEUs effectively

2 Rampant compensation demands Strategic Enterprise 2 Financing the SEU venture

Unit (SEU)
3 Internal resistance to change 3 Cashing out appropriately
4 Sluggish corporate growth 4 Jumpstarting the process of change

1. The Key Challenges Facing Corporate America At Present . . . . . . . . . . . . . . . . . . . . . . . . . . . Pages 2 - 3

Big companies don’t seem to endure all that well. Despite all the advantages available to them (economies
of scale, marketing savvy, strong channels of distribution), large corporations typically don’t get bigger and
stronger over time. Instead, they often become increasingly irrelevant and out of touch with the
marketplace until eventually they are forced to close their doors. What’s needed is a workable way to
implant entrepreneurial thinking inside the corporate walls in such a way that wealth can be created on an
ongoing basis. Specifically, corporations face four key challenges:
1. Finding effective ways to renew the corporate spirit and stay vibrant and successful.
2. Developing better ways to link employee compensation with the creation of long-term value.
3. Overcoming internal resistance to change.
4. Generating genuine growth in revenues and profits.
2. The Solution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pages 4 - 5
Large companies need a way to capture and then benefit from the ideas that may already be incubating
within their own organizations. The best way to do this is by establishing a new standalone strategic
enterprise unit (SEU). The SEU template offers the best of both worlds – the SEU can take advantage of
the infrastructure of the established corporation without detracting from the entrepreneurial mindset and
spirit that typically is found in a start-up. Overall, the SEU is purpose designed to generate new corporate
growth.
3. The Keys To Making This Solution Work . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pages 6 - 8
The SEU business model has the potential to generate growth but it isn’t for everyone. More specifically,
for the potential benefits of the SEU template to be fully realized, all of the requisite elements must be put in
place first:
1. The SEU must be fully thought out and implemented
2. Adequate financing must be put in place.
3. The timing of any harvest must be considered.
4. The green light must be given to start making changes.
As for most things in business, the key to making an SEU work lies in the details. Get those details right and
SEUs can be a great engine for corporate growth. Fudge the details, or get them wrong, and nothing much
will happen.

The Key Challenges Facing
1.
Corporate America At Present
Big companies don’t seem to endure all that well. Despite all the
advantages available to them (economies of scale, marketing
savvy, strong channels of distribution), large corporations
typically don’t get bigger and stronger over time. Instead, they
often become increasingly irrelevant and out of touch with the
marketplace until eventually they are forced to close their doors.
What’s needed is a workable way to implant entrepreneurial
thinking inside the corporate walls in such a way that wealth can
be created on an ongoing basis.
Specifically, corporations face four key challenges:
1. Finding effective ways to renew the corporate spirit and stay
vibrant and successful over an extended period of time.
2. Developing better ways to link employee compensation with
the creation of long-term value.
3. Overcoming internal resistance to change.
4. Generating genuine growth in revenues and profits.
Key
1 The need for corporate renewal
Challenges
Loads of ideas have already been tried to extend the life cycle of
large corporations:
■ In the 1960s, acquisitions were all the craze, with
diversification as the main aim.
■ In the 1970s, many companies tried to generate growth
internally through intrapreneurship programs.
■ During the 1980s, creating value through financial techniques
(junk bonds, leveraged buyouts, financial asset repackaging)
was tried.
■ In the 1990s, corporate venture groups became the fashion,
with spinoffs being taken to IPO stage as rapidly as possible.
All of these fads had their moment in the sun, but none have been
able to extend the corporate life cycle appreciably. More than
80-percent of today’s Fortune 500 companies have been in
business for less than 100 years, and more than a third of the
Fortune 500 companies are less than 25-years old. With very few
exceptions, older companies don’t keep gaining in strength over
the years, but lose out to younger, more aggressive companies
with new ideas.
“What is the template for creating a long-lasting, self-sustaining
organization or empire? History demonstrates that great
empires can last for hundreds, even thousands of years, yet our
evidence suggests that large companies in the United States
don’t normally last beyond 100 years. With the proper growth
model, multinational companies can extend their corporate
existence and push the average age well beyond 54 years.
These firms need the appropriate incentive structure that
attracts great talent and keeps it motivated for long periods of
time. They cannot afford to lose key people to new ventures or
competitors. Corporate America needs a template in which
potential partners both within and outside the organization have
economic incentive to drive toward a common purpose and goal.
It needs a better model for growth. And it needs it now.”
– Joel Shulman
Getting Bigger By Growing Smaller - Page 2
Key
2 Rampant compensation demands
Challenges
At the present time, many organizations have executive
compensation schemes which are poorly designed. Often,
management are being rewarded for behavior which does not
create long-term value for the shareholders. For example:
■ Dealmakers – CEOs, investment bankers, venture capitalists
and even high-profile consultants – typically make
unprecedented amounts of money based solely on closing an
acquisition, not on how the combined entity actually performs
in the marketplace. This has created many corporate
acquisitions which have lost significant shareholder value.
■ Some CEOs have encouraged their organizations to take
large short-term risks and then cashed out their options
before the long-term problems appear.
■ Many companies have used their own inflated stock to
acquire other companies. Often, these acquisitions were
made in the light of bidding wars which saw the acquiring
company pay many billions more than the companies were
worth, causing a number of flow-on problems.
■ Some executives have traded away a better price for
stockholders in an acquisition situation in exchange for more
job security for themselves in the future.
■ Many CEOs have more power and influence over their
compensation level than they should. As a result, they are
able to extract extraordinary levels of compensation for
med iocr e p erf orma nce . D ur in g 199 0 -20 00 , C E O
compensation increased by 1,300-percent while average
employee salaries grew over the same period by 43-percent.
In all, the executive management teams of many organizations
have tilted their compensation systems to their own advantage.
They devote more time to managing the company’s stock price
(so they can exercise their stock options) than they do to growing
the business through organic growth or strategic expansion.
There is a bias towards actions which will make an immediate
impact on the company’s stock price – mergers, divestitures,
refinancing, equity carve-outs, venture funds, extensive layoffs
and cost-cutting measures, strategic alliances and so forth.
“The markets supposedly incorporate future expectations into
the existing price and know best. In the 1990s, the market had
boundless energy coinciding with sky-rocketing compensation
levels. It was not by coincidence. More deals create more
growth, which justifies higher salaries, bonuses and options.
This was a wild ride fueled, in part, by insatiable greed and cheap
financing. It was a great time to be an executive of a large
company. An unprecedented amount of money could be earned
in a relatively short period.”
– Joel Shulman
“The current system seems broke and its already attracting the
attention of regulators. Change is inevitable and companies will
need to grow revenues and compensate people in a different
manner. Identifying the problem is only part of the battle. Getting
people to fix a situation when it runs counter to their financial best
interests is appreciably more complex. However, in recent years,
developments in the financial community suggest that major
change may be imminent. Compensation has been and
continues to be a major issue that needs to be addressed one
way or another.”
– Joel Shulman

Key Internal resistance to change
3 4
Challenges
The long-term success of many firms has also been hampered
by the resistance of middle management to change in the status
quo. Or perhaps more accurately, many professional managers
resist any proposed change which will reduce their own
hard-won power and authority or future promotional
opportunities.
Most businesses reward conformity more than innovation at the
middle-manager level. There is a bias towards promoting those
who toe the line which means the status quo becomes
entrenched deeply in the business. Consequently, many
middle-managers view themselves as the protectors of the
corporate history, particularly in light of the fact CEOs come and
go more rapidly these days. The middle-managers embody the
culture of the company and will automatically resist any effort to
change.
Corporate culture is another key issue. The culture sets the
overall tone for an organization. It specifies which set of values,
ethics and experiences will be deemed as desirable for the
organization. The culture impacts on the organization’s
efficiency in a number of ways, formal and informal.
Due to the fact most of the work carried out by middle managers
is hands-on, they can kill a new idea or a new project before it
even gets a chance to get off the ground. If the senior
management of a company want to head off in some new
direction, they need to spend the time and effort getting the
middle managers on board first – otherwise, the new venture is
going to face some severe challenges.
Middle managers often focus on finding ways to spread their
sphere of influence. Therefore, when a new growth initiative
comes along, the criteria by which many middle managers will
judge it is whether or not it will extend their sphere of influence.
Or alternatively, a middle manager may view a new growth
venture as a dumping ground to allocate costs so as to make
their own department budgets look better. Either of these
approaches can place a huge burden on a new business venture
and point to the fact that often the best approach to generating
new growth is to do so through independent business units
rather than trying to overcome the resistance offered by middle
managers.
“Sometimes, the corporate culture works against general
organizational goals and hurts the efficiency of operations.
Rather than encourage a supportive, nurturing environment, the
corporate culture may create divisive, political infighting. In these
situations, management often fails to recognize that existing
corporate culture can result in lost opportunities for the
organization and truncated career paths for the individual. The
key is to recognize the ’Concrete Layer’ of middle management
and to free them up to become agents of change. This may seem
to be a paradox but that is the challenge of running a company.
The middle management of a company is its productive lifeblood
and it keeps the place on an even keel. It makes sure the work
gets accomplished in an orderly manner. In doing so, it defines
and maintains the nature of the corporation. Using start-up
ventures can move a company along the growth curve and
maintain its edge. But, if not considered in their formation, the
Concrete Middle can kill a project or idea before it gets off the
ground.”
– Joel Shulman
Getting Bigger By Growing Smaller - Page 3
Key
Sluggish corporate growth
Challenges
Every corporation aspires to grow, but not all growth is equal.
Specifically:
■ There are times when two large companies merge to try and
grow even more, but instead of growth only political infighting,
redundant costs and expensive severance packages result.
■ Some companies have used inappropriate techniques to
boast explosive growth. This has worked well for a time, but
ultimately results in loss of investor confidence and corporate
failure.
■ Managers, by and large, focus on revenue and asset growth.
Shareholders are looking for increases in the stock price and
shareholder returns. Sometimes, there is a marked difference
between the two types of growth.
■ At one time, managers expected to stay with one company for
their entire careers. Nowadays, most managers anticipate
they will be changing companies every three to five years.
That means there is less interest in initiating long-term
projects which will require years of investment before sizable
returns will be generated.
Because of these and other considerations, many managers
have attempted to fast-track growth in recent times by pursuing
an acquisition strategy rather than attempting to generate
organic or internal growth. Acquired growth, however, generates
another set of problems:
■ When companies merge, there are usually large layoffs to cull
any duplicate job positions. This generates an intensive
internal debate about who should go and who should stay,
distracting attention from running the business.
■ As employee morale deteriorates, internal distrust grows and
collaboration goes out the window. So too does the
opportunity for teamwork on new growth initiatives.
■ Attempting to combine the established culture of one
business organization with that of another quite different
entity is exceptionally difficult. The conflicts which result are
divisive and distracting.
As a result, acquired growth is never as good as growth that has
been generated by market expansion, internal cost-cutting,
intelligent choice of a strategic direction or the other
old-fashioned ways of growing a company.
“Organizations need to create new ventures with a new model of
growth that can operate within the limiting facets of the general
environment and corporate culture. True growth will depend on
strong leadership to craft new solutions that motivate current and
future stakeholders. Much of the outcome may be generated
with appropriate incentives and clever personnel. These may
come from organizational design and structure. Changing the
corporate culture and environmental orientation is a different
story. This will be near impossible to accomplish. Great leaders
will either learn how to embrace and manage the culture or learn
how to effectively get around it.”
– Joel Shulman
“If a large firm really wants entrepreneurial behavior and growth,
it needs to behave like a small firm. The implementation of an
SEU is a step in the right direction for many.”
– Joel Shulman

2. The Solution
Large companies need a way to capture and then benefit from
the ideas that may already be incubating within their own
organizations. The best way to do this is by establishing a new
standalone strategic enterprise unit (SEU). The SEU template
offers the best of both worlds – the SEU can take advantage of
the infrastructure of the established corporation without
detracting from the entrepreneurial mindset and spirit that
typically is found in a start-up. Overall, the SEU is purpose
designed to generate new corporate growth.
Over the years, four distinct business models have been used to
try and generate corporate growth:
1. Corporate intrapreneurship (1970s) – new ventures were
created within the organization. The only problem was the
new ventures were usually subject to the funding whims of
the parent company’s executives.
2. Corporate spinouts (mid-1980s-1990s) – new ventures were
established as standalone companies and then sold by the
corporate parent. These worked well, but have struggled to
get funded in the recent risk-averse market conditions.
3. Corporate venturing (mid- to late-1990s) – where companies
set up venture capital operations to provide seed capital to
new business ventures suggested by employees. In the long
run, however, corporate politics rather than market realities
start dictating investment decisions.
4. Partnerships with venture capitalists (late 1990s onwards) –
where companies collaborate with venture capitalists to fund
new ideas. The problem is venture capitalists focus on an exit
strategy, not on actually growing a company.
Established Facilitator
Corporation
■ Intellectual property
■ Distribution networks
■ Access to capital
■ Infrastructure assets
Board of Directors
Strategic Advisors ■ Financiers
■ Company nominees
■ Entrepreneurs
■ External advisors
Entrepreneur
(Internal/External) ■ Ideas
■ Passion
■ Willingness to take a risk
3rd Parties and
Strategic Partners ■ Business transactions
■ Capacities
■ Increased business
■ Economies of scale
Getting Bigger By Growing Smaller - Page 4
The SEU model is an attempt to develop a growth template
which includes all the best features of the four business models
used previously while simultaneously offsetting some of the
common disadvantages which arise.
The key to making the SEU work is an independent, third-party
facilitator. The facilitator negotiates any conflicts which arise
between the goals of the company, its partners, any third parties
or outside investors and the internal or external entrepreneurs
involved. An effective facilitator will:
■ Be unbiased in helping evaluate the commercial potential of
the ideas put forward to the SEU.
■ Negotiate the terms of the deal between the parties in a way
that everyone will agree to.
■ Always act in the best long-term interests of the SEU rather
than the long-term interests of the parent company.
■ Help develop the metrics by which contributions to the SEU
are measured and accounted for in an even-handed manner.
■ Function as a go-between and a planner for the strategic
enterprise unit as a whole.
■ Sort out who will own any intellectual property which is used or
developed, both current and future.
■ Act to resolve any conflicts which arise in the future as the
dynamics surrounding the SEU change and evolve.
Note that a facilitator is not a venture capitalist. That is, the
facilitator will not have sufficient voting power to force the
business unit to move in a direction it does not want to head, such
as an IPO. Rather, the facilitator will resolve conflicts, handle the
problems which crop up, keep the lines of communication open
and keep everyone focused on maximizing the value of the SEU.
In return, the facilitator will be paid a set fee and a small equity
stake in the venture – something in the order of 1- or 2-percent.
Strategic
Enterprise
Unit
(SEU)
■ Equity stake
■ Opportunity to have meaningful input
into decisions made and achievements
■ Chance to grow quickly
■ Opportunity to take a risk
■ The enthusiasm of a start-up business
environment

Established Corporation
SEU1 SEU2 SEU3 SEU4 SEU5 SEU6
In just the same way as venture capitalists have a portfolio of
investments, corporations can have a number of SEU ventures
in operation. These SEUs can be diversified by any criteria that is
relevant: size, stage of investment, specialist field, etc. That way,
the success or failure of any individual SEU will be less important
than the performance of the overall mix.
The SEU business model is designed in such a way that it
delivers the advantages of spinouts and corporate venturing
without the inherent disadvantages of these approaches. More
specifically, the key advantages of the SEU model are:
■ The company can provide its employees with economic
incentives to commercialize their best ideas. Individuals who
provide the firm with exceptional opportunities are then in a
position to generate exceptional rewards for themselves as
well.
■ The SEU model focuses on creating long-term value for
shareholders. It does not focus on getting the new venture
ready for a strategic sale or IPO which is usually the entire
focus of a venture capitalist. Instead, all the participants in the
SEU are collaborating to create value. (The absence of a sale
or IPO also eliminates transaction costs which often amount
to 10-percent of the total value created).
■ At an appropriate time, the SEU can be brought back into the
corporation itself through the conversion of the SEU’s private
stock into the parent company’s stock which is likely to be
publicly traded. This will generate exceptional compensation
for those involved in the SEU – which will be highly
motivational for other employees of the parent corporation.
The SEU model forces all stakeholders to clarify matters right
■
at the outset. For example, ownership of any intellectual
property created by the SEU and commercial rights to that
intellectual property will be clarified in advance. This will avoid
many of the potential disagreements of the future.
■ The SEU can access the parent corporation’s sources of
cash: long-term public debt, bank borrowings at rates below
the prime rate, lines of credit, publicly traded stock,
commercial paper, etc. All capital can be contributed to the
SEU at a fair market price, as will be the capital contributed by
the other parties. These capital contributions can then be
reflected openly and even-handedly in the capital structure
and shareholding of the SEU.
■ The SEU will have its own board of directors and strategic
advisors. These people will have the sole focus of maximizing
the value of the SEU, free from the restrictions which the
parent corporation may be required to operate under.
■ The SEU will inject entrepreneurial behavior into an
established corporation. Or, put another way, large
corporations will have the opportunity to act like a small
start-up. By allowing a portfolio of SEUs to act independently
in their own best interests, the parent corporation as a whole
can become more profitable and better positioned to grow its
core business faster.
■ Employees of the parent corporation with viable commercial
ideas will have the opportunity to create equity in their own
ventures using the SEU model that otherwise would not have
been possible.
Getting Bigger By Growing Smaller - Page 5
■ The SEU business model harnesses the positive energy
which surrounds new businesses to generate growth for the
parent corporation which has a far more established feel.
■ The SEU model is an incentive-based approach which
presumes that if the proper structure and incentives are in
place, the desired behaviors will result.
■ This approach has the best of both worlds – the inexpensive
capital available to the parent corporation is matched with the
lower cost structure of a start-up entrepreneurial business to
generate above-average returns.
■ An established corporation can expand into new lines of
business or enter new markets with minimal risk and
disturbance to established cash flows by using the SEU
template.
“The SEU model attempts to overcome problems associated
with compensation disincentives and misdirected growth that
may serve the needs of only a few stakeholders. Furthermore, it
attempts to remove any biases resulting from venture capitalists,
investment bankers, and management focusing on short-term
deal harvests at the expense of long-term strategic growth. The
model creates an incentive-based environment that hinges on all
parties working in their own best interests. All parties to the deal
focus on the incremental value being created in the deal, net of
the necessary costs associated with risk capital, intellectual
property, and human talent. Pure wealth creation occurs only
after all of the parties have been adequately compensated for
their contributions. ”
– Joel Shulman
“As in any new venture, the associated rewards should be
commensurate with the risks. The risks could exceed any that
participants in the venture have shouldered while under the
parent’s wing, but those who create new wealth with new
resources should be entitled to exceptional rewards. For
example, individuals (including employees, financiers and
advisors) who forego some salary, benefits, or job security in the
short term should be entitled to higher compensation in the future
if the venture becomes successful. Further, if the parent
organization lends financial resources, intellectual property, or
other strategic infrastructure benefits (e.g. distribution) to the
SEU venture, then its stakeholders (e.g. shareholders) ought to
receive a reasonable financial reward as well.”
– Joel Shulman
“The SEU model is absolutely not for everybody. Senior
managers will have to relax, even concede, control of many
strategic operating units. They will need to have confidence in
the same capital market principles that help create their
organization’s success initially. They will need to help develop a
facility that allows its members to think, act, and behave in an
entrepreneurial manner.”
– Joel Shulman
“Although it is likely no single SEU will, by itself, result in a
measurable impact to the large, publicly traded parent
organization, the growth of a portfolio of numerous, small and
diversified SEU ventures could easily surpass the net
contributions of a few enormous (non SEU) projects. As part of a
diversified approach, the large organization should pursue
growth both from traditional research and development and
venture initiatives as well as SEU ventures. In short, for a large
company to get bigger it needs to grow smaller.”
– Joel Shulman

3. The Keys To Making This Solution Work
The SEU business model has the potential to generate growth
but it isn’t for everyone. More specifically, for the potential
benefits of the SEU template to be fully realized, all of the
requisite elements must be put in place first:
1. The SEU must be fully thought out and implemented
2. Adequate financing must be put in place.
3. The timing of any harvest must be considered.
4. The green light must be given to start making changes.
As for most things in business, the key to making an SEU work
lies in the details. Get those details right and SEUs can be a great
engine for corporate growth. Fudge the details, or get them
wrong, and nothing much will happen.
Making
1 Implementing SEUs effectively
SEUs Work
Established corporations should use SEUs as the vehicle for
generating corporate growth in five specific situations:
1. When the firm is wanting to expand into a new line of
business – that offers a higher rate of growth than the core
business. By funding SEUs, the corporation can monitor
remote businesses without affecting core operations.
2. When the firm wants to incubate or acquire new technologies
– but does not want to dilute the core focus of the business on
commercializing the current generation of technologies. The
SEU can be in a totally different business field without any
restrictions whatsoever.
3. To enter a new market – without placing a burden on the
existing structure of the business. An SEU can be
established with local input (financial management and
people) allowing the parent corporation to direct its resources
into other operations.
4. To bring about a change in the prevailing culture of the
business – by experimenting with a radical organizational
concept and seeing how it works out in the real world. This
positions the SEU as a learning lab or experimental site.
5. To expand strategically – thereby injecting some energy,
spirit and vigor into the well established organization.
The key steps in implementing an SEU are:
1. Select a facilitator – someone who will be able to act in the
best interests of the SEU without being unduly influenced by
the parent corporation. A good facilitator:
• Will be independent.
• Must be a separate legal identity.
• Must be competent technically.
• Must have access to capital sources – investors, etc.
• Might be a firm rather than an individual.
Since the facilitator will act as a filter or clearing house for
new ideas, they must have some technical competence to
function. Similarly, the facilitator will act as the arbitrator of
any disagreements between the parties in an SEU and must,
therefore, have a reasonable level of business skills as well.
The facilitator will help negotiate the terms of any
agreements between the parties as well. In all, the facilitator
will act as the catalyst for the growth and development of the
SEU.
Getting Bigger By Growing Smaller - Page 6
2. Decide on the SEU equity allocation between all the key
stakeholders – in such a way that everyone will feel happy
and motivated. Although the precise level of capital
allocation will vary depending on a number of factors, a
general starting point for discussion would be like this:
Party Target Range Ideal
Parent corporation 20% - 49% 40%
Entrepreneur 20% - 60% 25%
Facilitator 1% - 5% 1%
Directors, Advisors 1% - 5% 3%
Other employees 0% - 10% 1%
3rd parties, Partners 10% - 30% 20%
Spare allocation 5% - 10% 10%
Total 100%
The key in deciding on the SEU’s equity distribution is to
com e u p wi t h some thin g t h a t wi ll ge ner at e t he
entrepreneurial spirit needed for the venture to grow. At the
same time, the equity structure must provide the SEU with
room to grow in the future.
Usually, allocating the equity will be very tough. The precise
level of each party’s shareholding will vary widely, depending
on what is brought to the table. This is where the impartiality
of the facilitator will come to the fore. A good facilitator should
be able to see the bigger picture, and create a consensus
around that rather than getting too caught up in the passions
of the moment.
3. Appoint people to the SEU’s board of directors – with the
composition of the board not only reflecting the ownership
stakes of the key parties but also the anticipated needs of the
new business. Most often, the SEU board will include:
• A representative of the parent corporation.
• A representative of any 3rd party which injects funding.
• The lead entrepreneur.
• The facilitator.
Notably, the board of directors needs to be isolated from the
preferences of anyone who wants to serve short-term
interests at the expense of long-term wealth creation. This
situation often arises when a venture capital provider forces
an early IPO in order to liquidate or exit their early-stage
investment. The facilitator is fundamentally different from a
venture capitalist and has a completely different set of
priorities. Similarly, the board needs a long-term focus.
“If the SEU is to have any legitimate chance of entrepreneurial
growth and value creation, it needs to have an organizational
structure and management team that emulates entrepreneurial
conditions. Presumably, key management has already
recognized the institutional advantages of an SEU format and
the need for the new ventures to be separated from large
corporate culture and politics. Otherwise, the establishment of
an SEU and costs associated with implementation may become
a wasteful exercise.”
– Joel Shulman

Making
2 Financing the SEU venture
SEUs Work
The real beauty of the SEU business model is that it marries
together two significant competitive advantages. Big companies
have access to inexpensive capital, but aren’t all that good at
applying that capital beneficially. Meanwhile, small founder-led
and well managed companies apply capital very efficiently, but
often struggle to attract the funding that’s required. With the SEU
template, the parent corporation can attract the funding and the
SEU can apply it intelligently to build a new business that will
generate high returns in the future.
In practical terms, the financing of SEUs should follow a few
commonsense rules:
1. Big firms should provide risk capital to SEUs at the market
rate of interest – that is, large firms should secure low-cost
capital from their sources and allot that money to SEUs at a
higher rate of interest. That will be fair to both parties, and will
represent the risks involved.
2. Like a venture capital operation, large firms should invest in a
portfolio of SEUs – diversified by whatever factor makes the
most sense:
• Stage of development – seed, beta testing, launch, etc.
• Industrial sector.
• Geographical region.
• Number of years in business.
3. Anticipate that most SEUs will lose money for the first three
or four years before reaching break-even and then starting to
generate returns. Therefore, stagger investments over a
period of time and have a long-term investment horizon
rather than anticipating immediate returns.
4. Realize that SEU ventures – unlike venture capital
investments – are not geared towards an IPO exit strategy –
and therefore increasing the annual rate of return is the main
focus rather than growing revenues so as to be able to go
public. The intent of the SEU is to retain a strategic link with
the parent corporation indefinitely, and therefore strong cash
flow returns are required.
5. Make available to other SEU investors an exit strategy – by
giving them the option to convert their SEU stock into stock of
the parent corporation at some specified time in the future.
That will allow the early stage investors to realize their
investment without forcing the SEU to be sold or floated.
“Large companies need a better way to distribute their
inexpensive risk capital. They have a clear advantage over other
firms in this regard and need to utilize funds in an efficient,
cost-effective manner. Either they will need to spend money with
a cost-conscious orientation or they will need to allocate funds to
a small group that already has this inherent view. Large
companies should continue with experimentations in small
venture financings. Moreover, they should invest the funds as
professional fund managers and apply a portfolio context so that
they are fully diversified based on timing of distribution, risk of
venture opportunity, geographic representation and (where
possible) industrial allocation. The basic concept for venture
financing is already readily accepted within most major
corporations. Large companies should continue to partner with
many small companies and provide their cheap capital to those
that can make them both a profit.”
– Joel Shulman
Getting Bigger By Growing Smaller - Page 7
Making
3 Cashing out appropriately
SEUs Work
The SEU business model encourages all stakeholders to have
the mindset of an owner rather than a venture capitalist. What
are the differences between these two mindsets?
■ Owners want to build the long-term value of their investment;
venture capitalists are more concerned with packaging the
company to get it ready for an IPO.
■ Owners plan on being with the business for a long time,
therefore they are perfectly happy to generate growth
organically over a long period of time; venture capitalists want
to see explosive growth from one quarter to the next so they
have a good story to go to the market with.
■ Owners want good ongoing annual returns; venture
capitalists want to put together deals that will position the
venture for an IPO.
■ Owners will prefer to do deals that are in the best long-term
interests of all stakeholders; venture capitalists work towards
an IPO as an exit strategy irrespective of any other
considerations.
■ Owners feel an emotional attachment to the business they are
building; venture capitalists look at companies solely through
the lens of when they can cash out of their equity position.
The costs of carrying out an IPO are expensive – usually about
10-percent of the funds raised for small IPOs. In addition,
preparing for an IPO requires a vast amount of management
time and attention, frequently at a time when that energy could
be better spent building the business.
By allowing SEU stakeholders to convert their stock in the SEU
into stock of the parent corporation, there are a number of key
advantages which accrue to the SEU stockholders:
■ The transaction costs of carrying out an IPO are not incurred.
■ There is no need to wait until the capital markets are favorable
for IPOs.
■ Financiers do not dictate the timing.
■ The SEU’s value will increase because of its ability to convert
its stock from private to public status.
■ The parent corporation benefits because it has in place a
strategic alliance with a small, tightly focused business which
is motivated to grow its own value.
In all, this is a great win-win situation. All that’s required is a little
planning beforehand to set out a formula by which the SEU’s
market value will be determined. If this has been set out plainly at
the time of setting up the SEU, everyone will know what to
expect. This will be highly motivational for everyone involved in
the SEU.
“The SEU template offers a slight modification to prior corporate
venturing approaches. This approach minimizes transaction
fees and takes advantage of the added value and liquidity
associated with the parent company’s stock. Offering company
stock in lieu of value created or exceptional performance is
certainly not a new concept. However, providing an equity stake
that becomes valued independent of the parent’s market metrics
and building it into a conversion template for an SEU in lieu of an
alternative harvest methodology is a slightly different twist to an
old compensation dilemma. Large, public companies already
have all the pieces in place to implement this specific strategy.”
– Joel Shulman

Making
4 Jumpstarting the process of change
SEUs Work
I n t he d ynami c ma rketpl ac e t ha t e xist s toda y,
“business-as-usual” just won’t cut it for large companies.
Mergers and acquisitions simply don’t create lasting growth in
value. The SEU approach makes sense because it enables the
entrepreneurs who create value to be recipients of the wealth
they help create.
Keep in mind the following points with regards to SEUs:
■ The SEU concept will work best for companies which have not
been growing in recent years. It will be less attractive to
companies with well established venture capital operations
because they will be structured so as to maximize the benefits
derived from that approach.
■ Companies which are highly centralized will struggle with the
concep t of establishin g SEUs whic h will operate
independently. That shouldn’t be a disincentive, but it is a
factor which should be addressed realistically.
■ For a SEU venture to succeed, the CEO of the parent
corporation will need to have hands-on involvement. Only the
CEO will be able to specify the scope, intellectual property,
equity allocation, compensation and controls under which the
SEU will operate.
■ The internal characteristics of the parent corporation will have
a greater bearing on the success or failure of an SEU than any
external conditions. To make an SEU work, you’ll need the
right team, the right resources and a suitable opportunity.
Trying to create value without any of these three attributes will
be difficult, more likely impossible.
■ Wherever possible, the risk/reward ratio for those moving to
the SEU should approximate real-world levels. In other words,
if people expect to earn more, they should be prepared to live
with more risk.
■ When looking for people for an SEU, look inside and outside
your organization. Both insiders and outsiders bring
advantages and disadvantages to an SEU.
■ To get things moving, a CEO will generally need to appoint a
corporate champion to the project. A good corporate
champion will be a senior executive who can head off all the
politics. The champion will then work alongside the facilitator
to grow the SEU.
■ Funding for an SEU may come from the parent corporation,
third-party investors, banks or even venture capitalists. It’s
generally better to keep venture capital funding to a minimum
because of their focus on the harvest transaction.
■ The SEU model also provides a great way for corporations to
partner with external entrepreneurs to create new revenue
streams.
■ During times of economic contraction, corporations might
consider setting up SEUs that employees can switch to rather
than being laid off.
■ The SEU will require variable rates of compensation be
available. The facilitator will be responsible for developing
compensation packages that are attractive to the right people.
Getting Bigger By Growing Smaller - Page 8
■ The parent corporation should retain the right to dictate when
the SEU should be liquidated rather than letting this decision
be made by outsiders. As a general rule, the only time the
SEU should be sold or taken public is when doing so will
establish an important funding or strategic link.
■ Before establishing an SEU, the senior management of the
parent corporation need to specify what they are hoping to
accomplish:
1. Strategic expansion of the firm into a new business field.
2. Technological acquisition.
3. Development and commercialization of a new product.
4. Entry into a new market.
5. To be the catalyst for a cultural change.
■ When negotiating the terms of a new SEU, it will probably be
best to use an unbiased individual or group who will be
impartial and realistic in their dealings. This will ensure
everyone in the negotiation gets treated even-handedly.
(Generally speaking, the corporate lawyers won’t be able to
act in this capacity. They wont be sufficiently impartial.)
■ A good SEU program will probably be more attractive to your
most entrepreneurial employees than a stock option plan in
the parent corporation.
■ If the parent corporation attempts to retain 100-percent of the
equity in the SEU, nobody will be all that interested in joining it.
There has to be the potential for substantial capital gains in
the future, and that requires equity ownership be available.
The greater the incentives, the better the people the SEU will
attract.
■ The SEU concept enables a large company to bet on people
who back themselves. These people are betting their own
careers on the success of the SEU. That’s the kind of
commitment that can move mountains.
■ The best SEUs are simple in design and easy to enter or exit.
If it’s too complex, the best people will go elsewhere. Similarly,
if there is no sense of purpose or direction, people will lose
interest.
■ A good SEU will leverage the parent corporation’s research
and development investments. It will combine talents,
expertise and intellectual property together in dynamic,
different and highly effective ways.
■ SEUs can be used to supplement large-scale strategic
investments made by the parent corporation. The right SEU
can generate a lot of interest in the investment community and
amongst other corporate stakeholders. SEUs can reinforce
an overall growth strategy.
■ SEUs can be formed by non-profit and government
organizations to help them grow faster or more efficiently.
■ During economic recessions, the SEU concept becomes
even more attractive because of the fact an SEU will not
usually be resource intensive.
■ The SEU business model takes the best features of many
corporate venturing experiments and makes it more robust
and applicable to the current financial conditions. SEUs take
the best features of the older models and make it possible for
these new ventures to capitalize on the intellectual property
and expertise available to them.