3

The Entrepreneurial Process

"1 don't moke movies lo make money. 1 moke money lo make movies."
- Walt Disney

Results Expected
Upon completion of thi.~ chapter, you. willltave:
l. Develop.ed a deflnition of entrepreneurship and the entrepreneurial process that
spans lifestyle to high potential ventures.
2. Examined the practica] issues you will address and explore throughout the book.
3. Learn~d how entrepreneurs and their financial backers get the odds for success in
their favor, defying the pattem of disappointment and failure experienced by many.
4. Examined the Timmons Model of the entTepreneurial process, how it can be applied
to your entrepreneunal career aspirations and ideas for businesses, and how recent
research confinns its validity.
5. Analyzed the Kurt and John Bauer case study.

Demystifying Entrepreneurship Today, entrepreneurship has evolved beyond the

Entrepreneurship is a way of thinking, reasoning,
and actíng that is opportunity obsessed, holístic in
approach, and leadership balanced. 1 Entrepreneur-
ship results in the creabon, enhancement, realiza-
tion, and renewal of valu e, not just for owners, but for
all participants and stakeholders. At the heart of the
process is the creation and!or recognition of opportu-
nities,2 followed by the will and initiative to seize
these opportunities. It requires a willingness to take
risks-both personal and financial- but in a very cal-
culated fashion in arder to constantly shift the odds of
success, balancing the risk with the potential reward.
Typically, entrepreneurs devise ingenious strategies
to marshall their limited resources.
classic startup notion to include companies and or-
ganizations of all types, in all stages. Thus, entrepre-
neurshíp can occur--and fail to occur-ín firms that
are old and new; small and large;fast and slow grow-
íng; in the prívate, not-for-profit, and public sectors;
in all geographic points; ancl in all stages of a nation's
development, regardless of politícs.
Entrepreneurial leaders inject imagination, moti-
vation , commitment, passion, tenacity, integrity,
teamwork, and vision into their companies. They face
dilemmas and must make decisions despíte ambigu-
ity and contradictions. Very rarely is entrepreneur-
ship a get-J;ch-quick proposition. On the contrary, it
is one of continuous renewal, as entrepreneurs are
never satisfied with the nature of their opportunity.

1
This definition of e ntrepreneurship has evolved over the past two dec.1des From research at Babson College and the Harvurd Bn sin~ss School and has rec<Jntly
been. ""hanc:cd by Stephen Spmell1, Jr., the John Muller Chairholder at Babson College. ·
2
J. Ah..Tunmons. D. F. Muzyka, H. H. Stevenson, and W. D. Bygrave, "Opportunity Recognitinn: The Core of Entrepreneurship," in Frcmtim'S 1if Eutre¡mmeur-
s <p Researclt (Babson Park, MA: Babson College, 1987), p. 409.

79
80
The result of this value creation process, as we saw in
Chapter 2, is that the total econornic pie grows larger
and society benefits.
Classic Entrepreneurship: The Startup
The classic expression of entrepreneurship is the raw
startup cornpany, an innovative idea that develops
into a high growth company. The best of tJ1ese be-
come entrepreneurial legends: Microsoft, Netscape,
Amazon.com , Sun Microsystems, Home Depot,
McDonald's, Compaq Computer, Intuit, Staples, and
hundreds of others are now household names. Suc-
cess, in addition to tl1e strong leadership from tJ1e
main entrepreneur, almost always involves building a
team with complementary talents. The ability to work
as a team and sense an opportunity where others see
contradiction, chaos, and confusion are critical ele-
ments of success. Entrepreneurship also requires the
skill and ingenuity to find and conh·ol resources, of-
ten owned by others, in order to pursue the opportu-
nity. It means making sure the upstart venture does
not run out of money when it needs it the most. Most
highly successful entrepreneurs have held togetJ1er a
team and acquired financial backing in arder to chase
an opportunity others may not recognize.
Entrepreneurship in Post-Brontosaurus
Capitalism: Beyond Startups
As we saw in Chapter 2, the upstart companies of the
1970s and 1980s have had a profouncl impact on the
competitive structure of the United States and world
industries. Giant firms , such as IBM (knocked off by
Apple Computer ancl then Microsoft), Digital Equip-
ment Corporation (another victim of Apple Com-
puter ancl acquired by Compaq Computer Corpora-
tion) , Sears (demolishecl by upstart Wal-Mart ancl
recentJy mergecl with Kmart), and AT&T (knocked
from its perch first by MCI, and then by cellular up-
starts McCaw Communications, Inc., CellularOne,
ancl others), once thought invincible, have been clis-
memberecl by the new wave of entrepreneurial ven-
tures. The resulting downsizing cluring the 1980s 3
was still going strong by the end of 2001, witl1 For-
tune 500 companies cutting more than 900,000 jobs
by October. While large companies shrank payrolls,
new ven tu res aclcled jobs. Accorcling to a 2000 stucly,
3
Edwanl J. Mathias, &mwmic & lnvestment EnGimnml'llt-1997 (W:L<hington. OC: The Carlyle Croup, Janumy 1998). p. 119.
·• Ellen Florian. "Layoff Count," http://www.fortune.com/indexw.jhtml?channel=artcol.jhtml&doc id=2054.33, December 10, 2001 .
5
The authors' fuvorite quote from Ewing M. Kauffman, founder of Marion Laborntories . lnc., the Ewing Mnrion KaufTman Foundatiou , Kansas City. ML<somi .
" W . J. Dennis, Jr .. "Wells Fargo/NFII3 Series on Business Starts and Stops," November 19!:19.
PaJt JI The Opportunity
4.3 million jobs ancl $736 billion in an11Ual revenues
were created by venture capital investments. 4 As au-
topsy after autopsy was performed on failing large
companies , a fascinating pattern emerged, showing,
at worst, a total clisregarcl for the winning entrepre-
neurial approaches of their new rivals and, at best, a
glacial pace in recognizing the impending demise and
the changing course.
11
People Don 1 t Want to Be Managed.
They Want to Be Led!" 5
These giant firms can be characterized, cluring ilieir
highly vulnerable periods, as hierarchical in structure
with many layers of reviews, approvals, and vetoes.
Their tired executive blood conceived of leaclership
as managing and administering from the top clown, in
stark contrast to Ewing M. K:auffman's powerful in-
sight, "People don't want to be managed. They want
to be lecl!" These stagnating giants tended to reward
people who accumulated the largest assets, budgets,
number of plants, proclucts, ancl head count, rather
than rewarding those who createcl or founcl new busi-
ness opportunities, took calculated 1isks, and occa-
sionally macle mistakes, all with bootstrap resources.
Whüe very cognizant of th e importance of corporate
culture and strategy, the corporate giants' pace was
glacial: The research on clozens of giant companies in
the 1970s and l980s condueles that it typically took
six years for a large firm to change its strategy and 10
to 30 years to change its culture. Meanwhile, the me-
dian time it too k startups to accumulate the necessary
capital was one month, but averaged six months. 6
To make matters worse, these corporate giants had
many bureaucratic tendencies, particularly arro-
gance. They sharecl a blincl belief that if they followecl
the almost sacrecl best-management practices of the
day, they could not help but prevail. During the
1970s ancl 1980s, these best-management practices
dicl not include entrepreneurship, entrepreneurial
leadership, and entrepreneurial reasoning. If any-
thing, these were considerecl dirty words in corpo-
rate Ame1ica. Chief among these sacrecl cows was
staying clase to your customer. What may shock you
is the conclusion of two Harvard Business School
professors:
One of tbe most consistent pattems in business is tbe
failure of leading companies to stay at the top of their
industries when techno.logies or markets change ....
But a more fundamental reason lies at the heart of the
paradox: Leading companies succumb to one of the
~
Q
to
l
8
 Chapter 3
most popular, valuable ~anagement dogmas. They stay
clase to their customers. 1
When they do attack, the [new] entrant companies
find the established players to be easy and unprepared
opponents because the opponents have been looking
up markets themselves, discounting the threat from
below. 8
One gets further insight into just how vulnerable
and fragile the larger, so-called well-managed compa-
nies can become, and why it is the newcomers who
pose the greatest threats. This pattern also explains
why there are tremendous opportunities for the com-
ing e-generation even in markets that are currently
dominated by large players. Professors Bower and
Christensen summarize it this way:
The problem is that managers keep doing what has
worked in the past: serving the rapidly growing needs of
their current customers. The processes that successful,
well-managed companies have developed to allocate re-
sources among proposed investments are incapable of
funneling resources in programs that current customers
explicitly don 't want and whose profit margins seem
unattractive. 9
Coupled witl1 what we saw in Chapter 2 regarding
how many new innovations, firms, and industries
have been created in the past 30 years, it is no won-
der that brontosaurus capitalism has found its ice age.
Signs of Hope in a Corporate Ice Age
Fortunately, for many giant firms, the entrepreneur-
ial revolution may spare them from their own ice age.
One of the most exciting developments of the decade
is the response of some large, established U.S. corpo-
rations to the revolution in entrepreneurial leader-
ship. After nearly tJrree decades of experiencing the
demise of giant after giant, corporate leadership, in
unprecedented numbers, is launching experiments
and strategies to recapture entrepreneurial spirit and
to instill the culture and practices we would charac-
terize as entrepreneurial reasoning. The e-generation
has too many attractive opportunities in truly entre-
preneurial environments. They do not need to work
for a brontosaurus that lacks spü;t.
fncreasingly, we see examples of large companies
adopting principies of entrepreneurship and entre-
preneurialleadership in arder to smvive and to renew.
Researchers document how large firms are applying
entrepreneurial thinking, in pioneering ways, to in-
vent theír futures, including companies such as GE,
: Joseph L. Bower ¡Uld Clayton M. Christensen. "Disruptive Technologies: Catching the Wave," Harvard Business Review, January-February 1995, p. 43.
Illld.• p. 47.
9
1bid.
"'Fast CornprmiJ. June-July 1997, pp. 32, 79, 104; and U. Srinivasa Rangan, "Alliances Power Corporate Rene-.,•al,"" Babson College, 2001.
The Entrepreneurial Process 81
Corning, and Motorola, 10 Harley-Davidson Motorcy-
cles ($1.35 billion in revenue), Marshall Industries
($2.2 billion), and Science Applications International
Corporation (SAIC) in San Diego. Most large bron-
tosaurus finns could learn valuable Iessons on how to
apply entrepreneurial thinking from companies such
as these.
Metaphors
Improvísational, quick, clever, resourceful, and in-
ventive all describe good entrepreneurs. Likewise,
innumerable metaphors from other parts of life can
describe the complex world of the entrepreneur and
the entrepreneurial process. From music it is jazz,
with its uniquely American impromptu flair. From
sports many metaphors exist: LeBron James's
agility, the broken-field running of Curtis Martín ,
the wizardry on ice of Wayne Gretzky, or the com-
petitiveness ofTíger Woods. Even more fascinating
are tl1e unprecedented comebacks of athletic greats
such as Michael Jordan, Picaba Street, and Lance
Armstrong.
Perhaps the game of golf, more than any other,
replica tes the complex and dynamic nature of manag-
ing risk and reward, including all the intrícate mental
challenges faced in entrepreneuring. No other sport,
at one time, demands so much physically, is so com-
plex, intricate, and delicate, and is simultaneously so
rewarding and punishing; and none tests one's \vill,
patience, self-discipline, and self-control like golf.
Entrepreneurs face these challenges and remunera-
tions as well. If you think that tl1e team concept isn't
important in golf, remember the 2004 American Ryder
Cup team, which failed to work together and lost to
the Europeans. And what about the relationship
between the caddy and golfer?
An entrepreneur also faces challenges like a sym-
phony conductor ora coach who must blend and bal-
ance a group of diverse people with different skills,
talents, and personalities into a superb team. On
many occasions it demands all the talents and agility
of a juggler who must, under great stress, keep many
balls in the air at once, making sure if one comes
clown it belongs to someone else.
The complex decisions and numerous alternatives
facing the entrepreneur also have many parallels with
the game of chess. As in chess, the victory goes to the
most creative player, who can imagine severa! altemate
moves in advance and anticípate possible defenses.
82
This kind of mental agility is frequently demanded in
entrepreneurial decision making.
Still another parallel can be drawn from the book,
The Right Stuff, by Tom Wolfe, later made into a
movie. The first pilot to break the sound barrier,
Chuck Yeager, describes what it was like to be at the
edge of both the atmosphere and his plane's per-
formance capability, a zone never before entered-
a vivid metaphor for the experience of a flrst-hme
entrepreneur:
In the thin air at the edge of space, where the stars ancl
the moon came out at noon, in an atmosphere so thin
that th e orclinary laws of aerody11amics no longer ap-
plied and aplane could skid into a flat spin like a cereal
bowl on a waxed Formica count r and then start tum-
bling, end over end like a btick ... yo u had to be "afraid
to panic." In the skids, the tumbles, the spins, there was
only one thinRyou could let yourself think about: what
do l do next?
This feeling is frequently the reality on earth for
enh·epreneurs who run out of cash! Regardless of the
metaphor or analogy you choose for entrepreneur-
ship, each is likely to describe a creative, even artistic,
improvised act. The outcomes are often either highly
rewarding successes or painfully visible misses. Always,
urgency is on the doorstep.
Entrepreneurship = Paradoxes
One of the most confounding aspects of the entre-
prenemial process is its contradictions . Because of its
highly dynamic, fluid, ambiguous, and chaohc char-
acter, the process's constant changes frequently pose
paradoxes. A sampling of entrepreneurial paradoxes
follows. Can you think of other paradoxes that you
have observed or heard about?
An opportunity wíth no or ven¡ low potential
can be an enormously big opportunity. One of
the most famous examples of this paradox is
Apple Computer Inc. Founders Steve Jobs and
Steve Wozniak approached their employer,
Hewlett-Packard Corporation (HP), with the
idea for a deski:op, personal computer and were
told this was not an opportunity for HP. Hence,
Jobs and Wozniak struied their own company.
Frequently, business plans rejected by some
venture capitalists become legendary successes
wh en backed by another investor. Intuit, maker
of Quicken software, for example, was rejected
by 20 venture capitalists before securing
backing.
11
Tnm Wnlf't-, The Rí>!,ht Stuff (New Ynrk: Bantam Books, 1980).
Part II The Oppmtunity
To nwke 11wney you have to first lose nwney. It
is commonly said in the venture capital business
that the lemons, or losers, ripen in two-and-a-
balf years, while the plurns take seven or eight
years. A startup, venture-backed cornpany typi-
cally loses money, often $10 million to $25 mil-
lion or more, befar sustaining profitability and
going public, usually at least fíve to seven yea.rs
la ter.
To create and bwild wealth one must relinquish
wealth. Among tl1e most successful and growing
companies in the United States, the founders
aggressively dilute their ownership to create
ownership throughout the company. By reward-
i.ng and sharing tl1e wealth "vitl1 tl1e people who
conh·ibute significantly to its creation, owners
motívate stakeholders to make the pie bigger.
To succeed, one first has to experience failu re. It
is a common pattern that the first venture fails ,
yet tl1e entrepreneur learns and goes on to ere-
ate a highly successful company. Jerry Kaplan
teamed with Lotus Development Corporation
founder Mitch Kapor to start the first pen-based
computer. After $80 mil! ion of venture capital
investment, the campany was shut dov.rn .
Kaplan went on to launch On-Sale, Inc., an
Internet Dutch-auction, which experienced
explosive growth and went public in 1996.
Ent·repreneu:rship -requires considerable thought,
preparatíon, and planning, yet is basically an
unplannable event. The highly dynamic, chang-
ing character of technology, markets, and com-
pe tition make it impossible to know all your
competitors today, let alone five yems from now.
Yet great cffmt is invested in atte mpting to
model and envision tl1e future. The resulting
business plan is inevitably obsolete when it
comes off tl1e printer. This is a creative
process- like molding clay. You need to make a
habit of planning and reacting as you constantly
reevaluate your options, blending the messages
from your head and your gut, until this process
becomes second nature.
For creativity and innovativeness to prosper;
rigor and discipline must acc01npany the
process. For years, hundreds of thousands of
patents for new products and technologies lay
fallow i.n government and university research
labs because there was no commercial
discipline.
Entrepreneurship requíres a bias toward action
and a sense of urgency, but also demands
pp. 51-52.
 Chapter 3 Tbe Entreprenemial Process 83

patience and perseverance. While his competi- EXHIBIT 3.1

tors were acquiring and expanding rapidly, one Entrepreneurship 15 a Contad Sport
entrepreneur's management team became
nearly outraged at his inaction . This entrepre-
neur reported he saved the company at least $50 Remember, entrepreneursh ip
million to $100 million dming the p1ior year by is a fu ll contact sport. The
just sitting tight. He learned this lesson from the value comes in t he "col lision."
Jiff)' Lube case series from New Venture Gre-
ation, wlúch he studied during a weeklong p ro-
gram for the Young Presidents Organization
(YPO), at Harvard Business School in 1991.
The greater the organízation, orderliness, disci-
pline, and control, the less you w ill control your
ultimate clestíny. Entrepreneurship requires
Spontaneity,
Opportunism
$ Di scipline,
Processes

great flexibility and nimbleness in strategy and

tactics. One has to play with the ]mees bent.
Overcontrol and an obsession with orderlincss
are impediments to the entrepreneurial ap-
proach. As the great rae car driver Mario An- EXHIBIT 3.2
dretti said, "If 1 am in total control, 1 k:now 1 a m
Time for New Technologies to Reach 25%
going too slow! " of the U.S. Population
Adhering to management best ¡ymctice, espe-
cially staying clase to the custonwr that created Household electricity (1873) 46 years
industry leaders in the 1980s, beca.me a seed of Telephone (1875) 35 years
self-destruction and loss ofleadership to upstart Automobile (1885) 55 years
competitors. We discussed earlier the study of A irplane travel ( 1903 ) 54 years
"disruptive technologies." Rad io ( 1906) 22 years
Televisian ( 1925) 26 years
To reali;:,e long-term equity valu.e, you ha.ve to
Videocassette recorder (1952) 34 years
fo ·rgo the temptatíons ofslwrt-tenn profitability.
Persona l computer (1 975) 15 years
Building long-term equity requires large, con-
Cellular ph one 13years
tinuous reinvestment in new people, products,
Internet 7 years
services, and support systems , usually at the
expense of immediate profits.
Source: From The Wa/1 Street Jaurn al, 1997. Used by permission of
The world of entrepreneurslúp is not neat, tidy, lin- Dow Jones & Co. lnc. vio The Copyri ght Clearance Center.

ear, consistent, and predictable, no matter how much

we might like it tope that way. 12 In fact, it is from the
ness as being both more affordable, more manage-
collisions inherent in these paradoxes that value is
able, less demanding, and less risky, the opposite is
created as illustrated in Exhibit 3.1. These paradoxes
true. The chances of sunrival and success are 10\ver
illustrate just how contradict01y and chao tic this worlcl
in these small, job-substitute businesses, and even if
can be. To thri.ve in this environm ent, one needs to be
they do sunrive, they are less financially rewarding.
ve1y adept at coping with ambiguity, chaos, anc.l un-
As one founder of numerous businesses put it: Un-
certainty, and at building n tanagement skílls that
less this business can pay you at least five times your
create predictability. Exh:ibit 3.2 exempli:fies this arn -
present salmy, the risk and wear and tear won't be
biguity and need for patience.
WO!th it.
Consider one of the most successful venture capi-
.
·~ The Higher Potential Venture:
tal investors ever, A1thur Rack. His criterion for
searching for opportunities is ve¡y simple: look for
8 Think Big Enough business concepts that will change the wa.y people live
One of tbe biggest mistakes aspiring entrepreneurs or work. His home-run investments are legendary,
make is strategic. They think too small. Sensible as it including Intel, Apple Computer, Teledyne, and
may be to think in terms of a ve1y small, simp.le busi- dozens of others. Clearly, lús philosophy is to tlúnk

1
' See How>.m:l H. St<•vFnson. Do Lunch or Be T. uuch (Cambridge . MA: Harvard Business School Pr.. ss. 1998) lora prowx:ati ve ar"u mcnt (()r predictahil ity as
on~ of th t' most powerfu l of manager11ent tool s.
84 Prut II The Opportunity

big. Today an eAiraordinary variety of people, oppor-

tunities, and strategies characterize the approxl-
mately 30 million prop1;etorships, partnerships, and
cmporations in the country. Remember, high poten-
tia! vcntures become high impact firms that often
make the world a better place!
Eleven percent of the U.S. population is actively
working toward starting a new venture. 13 More than
90 percent of startups have revenues of less than $1
milüon annually, while 863,505 rep01ted revenues of
$1 million to $25 million-just over 9 percent of the
total. Of these, only 296,695 grew at a compounded
annual growth rate of 30 percent or more for the
prior three years, or about 3 percent. Similarly, just 3
percent-1 in 33-exceeded $10 million in rev-
enues, and only 0.3 percent exceeded $100 million in
revenues.
ot only can nearly anyone start a business, but
also a great many can succeed. While it certainly
might help, a person does not have to be a genius to
create a successful business. As Nolan Bushnell,
foundcr of Atari, one of thc first desktop computer
games in the early 1980s, and Pizza Time Theater,
said, "If you are not a milüonaire or b~nla~~t h)~ the
time you are 30, you are not really trymg! 1t JS an
entrepreneur's preparedness for the entreprencurial
process that is importanl. Being an entrepreneur has
moved from cult status in the 1980s to rock star in-
famy in the 1990s to become de rigueur at the turn of
the century. Amateur entre¡reneurship is over. The
professionals have arrived. J.
A stunning number of mega-entrepreneurs
launched their ventures during their 20s. While the
rigors of new ventures may favor the "young at start,"
age is not a barrier to entry. One study showed that
nearly 21 percent of founders were over 40 when
they embarked on their entrepreneUI;al careers,
th e majority were in their 30s, and just over one-
quarter did so by the time they were 25. Further,
numerous examples exist of founders who were
over 60 at the time of launch, including one of the
most famous seniors , Colonel Harland Sanders,
who started Kentucky Fried Chicken with his first
Social Security check.
Smaller Means Higher Foilure Odds
Unf01tunately, the r carel of survival is not good among
all firms started. One of the most optimistic re-
search firm estimatcs the failure rate for startups is
46.4 percent. While government data, research, and
business mortality statisticians may not agree on the
precise failure and survival figures for new busi-
nesses, they do agree that failure is the rule, not the
exception.
Complicating efforts to obtain precise figures is
the fact that it is not easy to define and identify fail-
ures and reliable statistics and databases are not
avail~ble. However, the Small Business Administra-
tion determined that in 1999 there were 588,900
strutups , while 528,600 firms closed thei r doors. 16
Failure rates also vary widely across industries. In
1991, for instance, retail and selVices accounted for
61 percent of all failures and bankruptcies in that
year. 17
The following discussion provides a distillation of a
number of failure-rate studies over the past 50
years. 18 These studies illusb·ate tl1at (1) failure rates
are high , and (2) although the majority of the failures
occur in the first two to five years, it may take consid-
c some to f'aJ· ¡ •19
erably longer wr
While government data, research , and business
m01tality statisticians may not always agree on th e
precise failure and survival figures for new busi-
nesses, they do agree that startups run a high risk of
failure. Another study outlined in Exhibit 3.3 found
that of 565,812 firms one year old or less in the first
quarter of 1998 only 303,517 were still alive by the
first quruter of 200 l. This is an average failure rate of
46.4 percent.
Failure rates across indush;es vary as seen in Ex-
hibit 3.3. The real es tate indushy, with a 36.8 percent
rate of sta1tup failure, is the lowest. The technology
sector has a high rate of filllure at 53.9 percent. The
sofn..,are and servi.ces segment of the teclmology in-
dustJy has an even higher failure rate; 55.2 percent of
startups tracked closed their doors. Unfortunately,
the record of survival is not good among all firms
started.

13
Tlw Gloha/ Enlrr ¡JI"<'IIr'III'Ship Monitor, Babson Collep;c and tite London Bu.<iness Sehool , May 2004.
1
" In r"SJK>llS<' toa student que> tion at Founde r's Day. Bahson College, Apnl J9S3.
'" INC .. May 15, 1997. l. DC S · 11 B .· .. A 1 · · ·t ti 19\J9)
lfi Tlu1 Stnte nf Su 1111/ Bu,c;iue.~.s: A. Reporl of the Pt·esidl!tlt, Transmitted to th e Cougres.t;·, 19<-.)9 (Was ungto n , : m~t ustn es.~ ( tm ms m on, ·
17
The Stat!' tf Suw/1 8usirws.1·, 1992, p. 128. . . . 1 .. 11 · d E 1
"lnformution has heen culled from thc followin¡; studies: David L. Bireh. MIT Studies. 1979-1980; Michad B. T~ 1t>: et a .. Sma _. Busmess an '"P 0 )'111 ~: 1 1
Growth in Califum ia," Working Papcr No. 348, University of Culifomiu at B.erkeley, March ~.981. ta.ble 5, p . 22; U.S. Small Bt:smes.s .Admml stratlon ~.A~..,ust
29 1988. 8 D Ph·u· · a 1d 8 A Kin:hhotr "An Analysis of New Fiml SurviVal and Growth, Fmnflers m EntrqJr<'ncur:<lup & search. 1988. _ed. B. Kirchho!T
• • • • • l IJlS l . • ' k l l M . 1 d
et al. (Babson Park, MA: Babson College. 1988), pp. 266-67; und BizMiner 2002 Startup Business Ris m I'X : a¡or n usrn¡ epo . nm ow o. , n ·•
R rt B d e Ie
2002.
'" Summuries of these are reportt'd by Albert N. Shape ro and Josepb Gighemno, "Exits and Enhi es: A Stu d y m. Ye11ow p ages 1numa ¡·tsm, " ·m Fron ters oJ.r r
Eutn'prrnm"'hip Re•earch: 1982, e d . K. Vespe r e t al. (Babson Park, MA : Babson Collcgc, 1982). pp. 113-4 t. and Arno1d C . Cooper and Carolyn Y. Woo.
"Survival and Fai1ure: A Longitudinal Study," in Fron riers of Enrr·cprrneurship Rcscarch: 1988. ed. B. K1rchho!T e t al. (Bubson Park. MA: Babson College,
l981l), pp. 225-37.
 Chapter 3 The EntrepreneUJi<tl Process 8.5

EXHIBIT 3.3
Overall Startup Failure Rates
Startups• Tracked
Startups Survivors Survival Failure
lndustry 1998 Ql 2002 Ql (percent) (percent)
Total for all industries 565 ,812 303,517 53 .6% 46 .4%
Agriculture 15,564 9,239 59 .4 40.6
Finance 14,899 8,005 53.7 46 .3
Manufacturing 32,236 18,92 1 58.7 41.3
Real estate 16,229 10,261 63 .2 36.8
Retail 142,504 72,512 50.9 49.1
Wholesale 37,307 19, 171 51.4 48.6
Technology 28,575 13, 159 46.1 53.9
Computer Hardware 485 221 45.6 54.4
Computer Software/Services 18,733 8,387 44.8 55.2

Source: BizMiner 2002 Srarfup Business Risk lndex: Ma¡or lndusfry Reporf, © 2002 BizMiner.
Reprinted by permission.
* Startups are defined as firms that are one year old or less.

To make matters worse, most people think th e fail-
ure rates are ach1ally much higher. Since actions of-
ten are governed by perceptions rather than facts,
this perception of failure, in addition to the dismal
record, can be a serious obstacle to aspiring en tre-
preneurs.
Still other studies have shown significant differ-
ences in survival rates among Bradstreet inclustry cat-
egOJies: retail trade, construction, and small service
businesses accounted for 70 percent of aU f~ülures
and bankruptcies. One study calculates a 1isk factor
or inclex for startups by indusb·y, which sends a clear
warning signa) to the would-be entrepreneur. 20 At
the hígh end of risk is tobacco pmducts and at the low
end you find the affinity and membership organiza-
tions such as AAA or Welcom e Wagon. "The fishing is
better in some streams versus others," is a favorite
saying of the authors. Further, 99 percent of these
failed companies had fewer than lOO employees.
Through observation ancl practica! experience on
would not be surprised by such reports. The implica-
tions for would-be entrepreneurs are imp01iant:
Knowing the difference between a good idea ancl a
real opportunity is vital. This will be addressed in cle-
tail in Chapter 4.
A certain leve] of failure is part of the "creative
self-destruction " described by Joseph Schumpeter in
his num erous writings, including Business Cueles
(1939) ancl Capitalísm. It is part of the dynarnics of
innovation and economic renewal, a process that re-
quires both births and deaths . More important, it is
also part of the learning process inherent in gaining
f.
·~
an entrepreneurial apprenticeship. If a business
fails , no other country in the world has laws, institu-
tions, and social norms that are more forgiving.
Finns go out of existence, but entrepreneurs survive
an d le<:trn .
The daunting evidence of f~lilure poses two impor-
tant questious for aspiring entreprene urs. First, are
there any exceptions to this general rule of f<lilure, or
are we faced with a punishing game of entrepreneur-
ial roulette? Second, if the re is an exception, how
does one get the odds for success in one's favor'?
GeHing the Odds in Your Favor
Fortunately, there is a clecicled pattern of exceptions
to the overall rate of failure among the vast majority
of small, marginal flrm s createcl each year. Most
smaller enterprises th at cease operation simply do
not meet our notion of entrepreneurship. They do
not create, enhance, or pursue opportunities th at re-
alize value. They tend to be job substitutes in rnany
instances. Undercapitalized, undennanaged, and of-
ten poorly locatecl, they soon hül.
Threshold Concept
W'ho are the survivors? The odds for survival and a
lugher leve! of success change dramatically if th e ven-
ture reaches a criticalmass of at least JO to 20 people
with $2 million to $3 million in revenues and is cur-
rently pursuing opportunities with growth potential.

8 '" Bi~Miuer 2002 Startu p Busincs.• Risk [tl(/e:,.

86 Part U The Opportunity

EXHIBIT 3.4
One-Year Survival Rates by Firm Siz:e
Firm Si:ze (employees)
1-24
25-49
50-99
100-249
Source: BizMiner 2002 Startup Business Risk lndex: Ma¡or lndustry
Report, © 2002 BizMiner. Reprinted by permission.
Exhibit 3.4 shows that based on a cross-section of all
new finns, one-year survival rates for new firms in-
crease steadily as the firm size increases. The rates
jump from approximately 54 percent for firms having
up to 24 employees to approximately 73 percent for
Hrms with behveen lOO and 249 employees.
One study found that empirical evidence supports
the liability of newness and liabiüty of smallness ar-
guments and suggests that newness and small size
make survival problematic. The authors inferred,
''Perceived satisfaction, cooperation, and trust be-
1:\veen the customer and the organization [are] im-
portant for the continuation of the relationship. High
levels of satisfaction, cooperation, and trust represent
a stock of goodwill and positive beliefs which are crit-
ical assets that influence the commitment of the two
parties to the relationship. "2 1 The authors of this
study noted, "Smaller organízations are found to be
more responsive, while larger organizations are
found to provide greater depth of service ... . The
entrepreneurial task is to find a way to either direct
the arena of competition away from the areas where
you are at a competitive disadvantage, or find sorne
creative way to develop the required competency."22
After four years, the survival rate jumps from ap-
proximately 35 to 40 percent for firms with fewer
than 19 employees to about 55 percent for firms with
20 to 49 employees. Although any estimates based on
sales per employee vary considerably from industry
to industry, this minímum translates roughly to a
thresholcl of $50,000 to $100,000 of sales per em-
ployee annually. But highly successful firms can gen-
erate much higher sales per employee . According to
severa! reports, the service industry has the most
closed businesses (38.6 percent), distJibution (28.7
percent), ancl production (17.8 percent) after four to
Survival Percent five years.
53.6%
68.0
69.0 Promise of Growth
73.2 The definition of entrepreneurship implies the prom-
ise of expansion and the building of long-term value
and durable cash flow streams as well.
However, as will be discussed later, it takes a long
time for companies to become established and grow.
Historically, 1:\vo of every five small firms founcled
survive six or more years but few achieve growth clur-
ing the first four years .23 The study also found that
survival rates more than double for fums that grow,
ancl the earlier in the life of the business that growth
occurs, the higher the c.:hance óf survival. 24 The 2000
IN C. 500 exempli!>' this, with a :five-year growth rate
of 1,933 percent.z.
Sorne of the b·ue excitement of entrepreneurship
lies in conceiving, launching, ancl building flrms such
as these.
Venture Capital Backing
Another notable pattern of exception to the failure
rule is founcl for businesses that attract startup financ-
ing from successful prívate venture capital companies.
vVhile venture-backed firms account for a very small
percentage of new firms each year, in 2000, 238 of 414
IPOs, or 57 percent, had vent:ure backing. 26
Venture capital is not: essential to a startup, nor is it
a guarantee of success. Of the companies making the
2001 INC. 500, only 18 percent raised venture capi-
tal and only 3 percent had venture funding at
startup. 27 Consider, for instance, that in 2000 only
5,557 companies received venture capital.28 How-
ever, companies with venture capital support fare
better overall. Only 46 companies with venture capi-
tal declared bankruptcy or became defunct in 2000.29
This is less than 1 percent of companies that received
venture capital in 2000 .
These compelling data have lecl someto conclude a
threshold core of 10 to 15 percent of new companies

21
S. Venkataraman and Mnrray B. Low, "On thc Nature of Critica) Belationships: A Test of the Liabililies ami Sizc Hypothesis,"" in FnmlicJO in Enlrepreneur·
sl1íp Research: 1991 (Babson Park. MA: Babson Collcge, 1991), p. 97.
"" lhid. , pp. 105-6.
¡¡:¡ Bmt-e D. Phillips ami Brucc A. Kirchho!l", "Au Anal}'l'is of New Finll Survival w1d Growth."" in Fnmlia.~ i11 Enrn·¡m' IICIIT'Yhip Research: 1988 (Babson Park,
MA: Babson Cnllege, J9RS), pp. 266-67.
2-J Thi.< reafflrms !he e xception tn the f:tilure m le notro abovc and in the uri¡;inal ~;clition of this book in HJ77.
~' Susan Cwm, "Thc INC. 500 Alutauac," INC, October 2001 , p. 80.
~ "Aftermarke t at a Clance; · Th e IPO Reporter . Decemher 10. 2001: and ··¡pQ Aftcrmtu·kct,"' V~11111m Co¡Jilul jounwl. December 2001.
~' ''Thc INC. 500 Ahnanac."
2k Ve nture Ec-onomics, http://www.veuturect1momks.com/vec/stats/200lq21us.html, July 30, 200 l.
"" VentureXpert . Thompson FinancinJ Dala Se JVice,, 2001.
 Chapter 3 The Entreprenelllial Process
will become the winners in tenns of size, job cre-
ation, profitability, innovation, and potential for har-
vesting (and thereby realize a capital gain).
Private lnvestors Join
Venture Capitalists
As noted in Chapter 2, hatvested entrepreneurs by
the tens of thousands have become "angels" as prí-
vate investors in the next generation of entrepre-
neurs. Many of the more successful entrepreneurs
have created their own investment pools and are
competing directly with venture capitalists for deals.
Their operating experiences and successful track
records provide a compelling case for adding value to
an upstart company. Take, for example, highly suc-
cessful Boston entrepreneur Jeff Parker. His first
venture, Technical Data Corporation, enabled Wall
Street bond traders to conduct daily trading with a
desktop computer. Parker's software on the Apple II
created a new industry in the early 1980s.
After harvesting this and other ventures, he cre-
ated his own p1ivate investment pool in the 1990s. As
the Internet explosion occurred, he was one of the
early investors to spot opportunities in startup ven-
tures. In one case, he persuaded the founders of a
new Internet firm to select him as lead investor in-
stead of accepting offers frorn some of the most pres-
tigious venture capital firms in the nation. According
to the founders, it was clear that Parker's unique
entrepreneurial track record and his understanding
of their business would add more value than the
venture capitalists at startup.
Prívate investors and entrepreneurs such as Parker
have very similar selection criteria to the venture cap-
italists: They are ip. search of the high potential,
higher growth ventures . Unlike the venture capital-
ists, however, they are not constrained by having to
invest so much money in a relatively short period that
they must invest it in mínimum chunks of $3 million
to $5 million or more. Prívate investors, therefore,
are prime sources for less capital-intensive startups
and early-stage businesses.
This overall search for higher potential ventures
has become more evident in recent years. The new
e-generation appears to be learning the lessons of
these survivors, venture capitalists, private ínvestors,
and founders of higher potential firms. Hundreds of
thousands of college students now have been exposed
to these concepts for more than two decades, and
their strategies for identifying potential businesses
are mindful of and disciplined about the ingredients
for success. Unlike 20 years ago, it is now nearly im-
possible not to hear and read about these principies
whether on television, in books, on the Internet, or in
87
a multitude of seminars, courses, and programs for
would-be entrepreneurs of all types.
Find Financial Backers and Associates
Who Add Value
One of the most distinguishing disciplines of these
higher potential ventures is how the founders iden-
tify financia! partners and key teéUn members. They
insist on backers and partners who do more than
bringjust money, fi;endship, commitment, and moti-
vation to the venture. They surround themselves with
backers who can add value to the venture through
their experience, know-how, networks, and wisdom.
Key associates are selected because they are smruter
and better at what they do than the founder; and they
raise the overall average of the entire company. This
theme will be examined in detail in later chapters.
Option: The Lifestyle Venture
For many aspiiing entrepreneurs, issues of family
roots and location take precedence. Accessibility to a
preferred way of life, whether it is access to fishing,
skiing, hunting, hiking, music, surfing, rock climbing,
canoeing, a rural setting, the mountains, can be more
impmtant than how large a business one has or the
size of one's net wmth. Others vastly prefer to be with
and work with their family or spouse. They want to
live in a nonurban area that they consider very attrac-
tive. Take Jake and Diana Bishop, for instance. Both
have advanced degrees in accounting. They gave up
six-figure jobs they both found rewarding ru1d satisfy-
ing on the beautiful coast of Maine to return to their
home state of Michigan for several important lifestyle
reasons . They wanted to work together again in a
business, which they had done successfully earlier in
their marriage. lt was important to be much closer
than the 14-hour drive to Diana's aging pru·ents. They
also wanted to have their children- then in tl1eir
20s-join them in the business. Finally, tl1ey wanted
to live in one of their favorite areas of the counby,
Harbar Spring on Lake Michigan in the northwest tip
of the state. They report never to have worked harder
in their 50 years, nor have thcy been any happier.
They are growing their renta! business more than 20
percent ayear, making an excellent living, and creat-
ing equ.ity value. If done right, one can have a lifestyle
business and actually realize higher potential.
Yet, couples who give up successful careers in
New York City to buy an inn in Vermont to avoid the
rat race generally last only six to seven years. They
discover the joys of self-employment, including
seven-day, 70- to 90-hour workweeks, chefs and day
help that do not show up, roofs that leak when least
88 Part II
expected, and the occasional guests from hell. The
grass is always greener, so they say.
The nmmons Model: Where Theory
and Pradice Collide in the Real World
How can aspiring entrepreneurs-and the investors
and associates who join the venture-get the odds of
success on their side? What do these talented and
successful high potential entrepreneurs, their ven-
ture capitalists , and their prívate backers do differ-
ently? What is accounting for their exceptional
record? Are there generallessons and principies un-
derlying their successes that can benefit aspiiing en-
trepreneurs, investors, and those who would join a
venture? If so, can these lessons be leamed?
These are the central questions of our lifetime
work. vVe have been immersed as students, re-
searchers, teachers, and practitioners of the entre-
preneurial process. As founding shareholders and
investors of several high potential venh1res (sorne of
which are now public), directors and advisors to ven-
tures and venture capital funds, a charter director
and advisor to the Kauffman Center for Entrepre-
neurial Leadership at the Ewing Marion Kauffman
Foundation, and as director of the Arthur M. Blank
Center for Entrepreneurship at Babson College, we
have each applied, testcd, refined, and tempered
academic theory as fire tempers iron into steel: in the
fire of practice.
lntellectual and Practical Collisions
w ith the Real World
Throughout this period of evolution and revolution,
New Venture Creation has adhered to one core prin-
cipie: In every quest for greater knowledge of the en-
trepreneurial process and more effective learning,
there must be intellectual and practica! collisions
between academic theory and the real world of prac-
tice. The standard academic notion of something
being all right in practice but not in theory is unac-
ceptable. This integrated, holistic balance is at the
heart of what we know about the entrepreneurial
process and getting the odds in your favor.
Value Creation: The Driving Forces
A core, fundamental entrepreneurial process ac-
counts for the substantially greater success pattem
among higher potential ventures. Despite the great
va1iety ofbusinesses, entrepreneurs, geographies, and
The Opportunity
technologies, central themes or driving forces domí-
nate this highly dynamic entrepreneurial process.
• lt is opportunity driven.
• lt is driven by alead entrepreneur andan
entrep1·eneurial team.
• It is resource parsimoníous and creative.
• It depends on the .fit and balance among these.
• lt is integrated and holistic.
• lt is sustainahle.
Tbese are the controllable components of the
entrepreneurial process that can be assessed, influ-
enced, and altered. Founders and investors focus on
these forces during their careful due-diligence process
to analyze the risks and determine what changes can
be made to improve a venture's chances of success.
First, we will elaborate on each of these forces to
provide a blueprint and a definition of what each
means. Then using the early years of Netscape as an
example, we will illustrate how the holistic, balance,
and fit concepts pertain to a starhlp.
Change the Odds: Fix lt, Shape lt,
Mold lt, Make lt
The driving forces underlying successful new ven tu re
creation are illustrated in Exhibit 3.5. The process
starts with opportunity, not money, strategy, net-
works, team, or the business plan. Most genuine
opportunities are much bigger than either the talent
and capacity of the team or the initial resources avail-
able to the team. The role of the lead entrepreneur
and the team is to juggle all these key elements in a
changing environment. Think of a juggler bouncing
up and clown on a trampoline that is moving on a con-
veyor belt at unpredictable speeds and directions,
whi le trying to keep all three balls in the air. That is
the dynamic nature of an early-stage startup. The
business plan provides the language and code for
communicating the quality of the three cbiving forces
of the Timmons Model and of their fit and balance.
In the entrepreneurial process depicted in the
Timmons Model, the shape, size, and depth of the
opportunity establishes the required shape, size, and
depth of both the resources and the team. vVe have
found that many people are a bit uncomfortable
viewing the opportunity and resources somewhat
precariously balanced by the team. lt is especially
disconcerting to some because we show the three key
elements of the entrepreneurial process as circles,
and thus the balance appears tenuous. These reac-
tions are justified, accurate, and realistic. The entre-
preneurial process is dynamic. Those who recognize
the risks better manage the process and garner more
return.
 Chapter 3 The Entrepreneurial Process
EXHIBIT 3.5
The Timmons Model of the Entrepreneurial Process
Communication
Business plan
" Fits and gaps
Ambigu ity " /
Creativity
+
"",,()//~"
Tea m
Uncertamty
Founder
Sustainability: For Environment, Community and Society
The lead enh·epreneur's job is simple enough. He
or she must carry the deal by taking charge off he suc-
cess equation. In tlús dynamic context, ambigu.ity ancl
risk are actually your friends. Central to the home-
work, creative problem solving and st:rategizing, ancl
due cliligence that hes ahead is analyzing tl1e flts ancl
gaps that exist in the venture. What is wrong with this
opportunity? What is missing? What good news and
favorable events can happen, as well as the adverse?
vVhat has to happen to make it attractive and a fit for
me? vVhat market, technology, competitive, manage-
ment, and financia! 1isks can be reduced or elimi-
nated? What can be <changed to make this happen?
Who can change it? What are the least resources nec-
essruy to grow the business the farthest? Is this the
Tight team? By implication, íf yo u cru1 determine these
answers and make the necessa1y changes by figming
out how to fill the gaps and improve the fit and attract
key players who can add such value, then the odds for
success rise significantly. In essence, the entrepre-
neur's role is to manage and redefine the risk-reward
equation- all with an eye towards sustainability.
Since part of the entrepreneur's legacy is to create pos-
itive impact without harming the environment, the
commUlúty, or society, the con~ept of sustainability ap-
peru·s as tl1e underlying foundation in the model.
The Opportunity At the heait of the process is
th e opportunity. SuccessfuJ entrepreneurs and in-
vestors know that a good idea is not necessaJi ly a good
311
"john Docrr's Slart-Up Manual," Fas! Cum¡mny, Fe bnoary--March HJ\,.17, pp. 82--1!4 .
/ /
Exogenous forces
~ Leadership
Capital market context
opporhmity. For cve¡y lOO ideas presented lo in -
vestors in the fonn of a business plan or propasa!,
usually fewer than 4 get funded. More than 80 per-
cent of those reject.ions occur in the flrst few hours;
another 10 to 15 percent are rejected a.fter investors
have read the business plan carefully. Less than 10
percent atb·act enough interest to me1it a more due
diligence thorough review that can take severa! weeks
or months. These <u-e ve1y slim odds. Countless honrs
and days have been wasted by vvould-be entrepre-
neurs chasing ideas that ru·e going nowhere. An im -
pOJtant skill for an en trepreneur oran investor is to be
able to quic.:kly eva.luate whether se1ious potentíal ex-
ists, and to decide how much time and effort to invest.
John Doerr is a senior partner at one of tbe most
famous and successful venture capital funcls ever,
Kleiner, Perkins, Caulfielcl & Byers, and is consid-
ered by some to be the most influential venture capi-
talist of bis generation . During lüs career, he has
been the epítome of the revolutionaries described
earlier, who have createcl new industries as lead
investors in such legends as Sun Microsystems ,
Compaq Computer, Lotus Development COI·pora-
tion, Intuit, Genentech, Millennium, etscape, and
Amazon.Com. Regarclless of these past home runs,
Doerr insists, "There's never heen a better time than
now to start a company. In the past, entrepreneurs
stmted businesses. Today they invent new business
models. That's a big difference, and it creates huge
oppOJtunities."30
90
EXHIBIT 3.6
The Entrepreneurial Process
ls Opportunity Driven *
8
Market demand is a key ingredien t to measu ring an opportuni ty:
• ls customer payback less than one year?
• Do market share and growth potent ia l equal 20 percent
annua l growth and is it durab le?
• ls the customer reachab le?
Market structure and size help define an opportun ity:
• Emerging and/or fragmented?
• $50 mi ll ion or more, wit h a $ 1 bil lion potential?
• Proprietary barriers to entry?
Margin analysis helps differentiate an opportunity from an idea:
• Low cost provider (40 perce nt gross margin)?
• Low cap ita l requi rement versus t he competition?
• Break even in 1- 2 years?
• Value added increase of overall corporate P/E rat io?
*Durobility of on opportunity is o widely misunderstood co ncept. In
entrepreneurship, durobility exists when the investor gets her
money bock plus o morket o r better return on investmen t.
Another venture capitallst recently stated, "After
the inational exuberance of tl1e late 90s, it is again a
great time to start a business. Venture capital is plen-
tiful, valuations make sense and venture capitallsts
are anxious for high potential ventures."31
Exhibit 3.6 summarizes the most impo1iant char-
acteristics of good opportunities. Underlying market
demand- because of the value-added properties of
the product or service, the market's size ancl 20-plus
percent grovvtb potential, the economics of the busi-
ness, particularly robust margins (40 percent or more),
and free cash flow charactelistics-drives the value
creation potential.
We build our understanding of opporturüty by first
focusing on market readiness: the consumer trends
and behaviors that seek new products or services.
Once these emerging patterns are identified, tl1e as-
piring entrepreneur develops a service or product
concept and, fmally, the service or product dellve1y
system is conceived. We then ask the questions artic-
ulatecl in the exhibit.
These criteria will be describecl in great detail in
Chapter 4 and can be applied to the search and eval-
uation of any opp01tunity. In short, the greater the
"' Ernk l'nrizeau. l'artner. Nnrwest v..nture l'artners, June 21KlJ.
Pmt li The Opportunity
EXHIBIT 3.7
Understand and Marshall Resources,
Don't Be Driven by Them
"\!>oo\S
\la\\\l¡ai'
Minimiza and Control
versus
Maximiza and Own
Unleashing creativ ity
Financia! resources
Assets Think cash last !
Peop le
You r business plan
growth, size, durabihty, and robush1ess of the gross
and net margins and free cash flow, the greater the
opportunity. The more imperfect the market, the
greater the opportunity. The greater the rate of
change, the discontinuities , and the chaos, the
greater is the opportunity as we saw with Moore's
Law and Drucker's Postulate in Chapter 2. The
greater the inconsistencies in existing service and
quality, in leacl times and lag times, and the greater
the vacuums and gaps in ínformation and knowledge,
the greater is the opporhmity.
Resources: Creative and Parsimonious
One of the most common misconceptions among un-
tried entrepreneurs is that you first need to have all
the resources in place, especially the money, to suc-
ceed with a venture. Thinking money first is a big
mistake . Money follows high potentia[ opportunities
conceived of and led by a strong management team.
Investors have bemoaned For years that there is too
much money chasing too few deals. In other words,
there is a shortage of quality entrepreneurs and op-
portunities, not money. Successful entrepreneurs
devise ingeniously cr ative and stíngy strategies to
marshal and gain control of resources (Exhibit 3.7).
Suqxising as it may sound, investors and successfu l
entreprenems often say one of the worst things that
can happen to an entrepreneur is to havc too much
money too early.
Howarcl Head is a wonde1ful, classic example of
succeeding with few resources. He developed the
first metal ski, which became the market leader, ancl
then the oversize Prince tennis racket-developing
two totally umelated technologies is a rme feat. Head
 Chapter 3 The Entrepreneurial Process 91

lcft his job at a large aircraft manufacturer during EXHIBIT 3.8

World War 11 and worked in his garage on a shoest1íng
An Entrepreneurial Team ls a Critica!
budget to create his metal ski. It took more than 40 lngredient for Success
vcrsions be fore he developeJ a ski that wo rked and
could be markcted. He insisted that one of the
biggest reasons he Hnally succeeded is that he had so An entrepreneurial leader
Uttle mon ey. He argued that if he had complete fi- • Learns and teaches-faster, better
nancing he would have blown it all long befare he • Dea ls with adversity, is resi lient
evolved the workable metal ski. • Exhib its integrity, dependabil ity, honesty
Bootstrapping is a vvay of Ufe in entrepreneurial • Builds entrepreneurial cu lt ure and organizat ion
com1xmies and can create a significan t cornpetitive ad- Qua lity of the team
vantage. Doing more "'~th less is a powe.Jful competi- • Relevant experience and track record
tive weapon, as we saw in Chapter 2 as upstart Cellulcu· • Mot ivat ion to excel
One outperform ed NY EX three-to-one ,,y¡th one- • Commit ment, determ ination , and persistence
half to one-third the resources. Each company's • Tolerance of risk, ambiguity, and uncertainty
approach was to rninimize ancl control the resources, • Creativity
but not necesscuily own them. Whether it is assets for • Team locus of control
the business, key people, the business plan, or sta1tup • Ada ptability
and growth capital, successful entrep reneurs think cash • Opportunity obsession
lnst. Such strategies encourage a discipline of leanness, • Leadership and co urage
where eve1yone knows that eve1y dallar counts, and • Com munication
the p1incip le "conserve your equity" (CYE ) becomes a
way of maximizing shareholder value.
Exhibit 3.8. But th e high potential venture also re-
The Entrepreneurial Team There is little dis- quires interpersonal skills to foste r cornmunications
pute today that th e entrep re nemial team is a key in- and, therefore, team building.
greclient in the higher potential venture. lnvestors Exhibit 3.8 surnmarizes the important aspects of
are captivated "by the creative brilliance of a com- th e team. These teams invariably are formed and led
pany's head entrepreneur: A Mitch Kapor, a Steve by a ve1y capable entreprene uri<.u leader whose track
Jobs, a Fred Smith . .. and be t on the superb track record exhibits both accomplishments and severa]
records of th e manage ment team working as a qualitics that th e team must possess. A pacesetter
group."32 Venture cüpitalist John Doerr reaffirms and culture creator, the lead entrep reneur is cent1·al
Gene ral George Doriot's dictum: 1 prefer a Grade A to the team as both a player ancla coach. The ability
entrepreneur ancl team with a Grade B idea, over a and skill in attracting other key management rnem-
Grade B team with a GradE· A idea. Doerr stated, "In bers ancl then building the temn is one of the most
the world toclay, there's plenty of technology, plenty valued capabilities investors look for. The founder
of entrepreneurs, plenty of money, plenty of venture who becomes th e leacler does so by building heroes
capital. What's in short supply is great teams . Your in the team. A leader adapts a philosophy that rewarcls
biggest challenge will be building a great team.":3:3 success and supports honest failure, shares the
Famous investor Arthur Hock articulatecl the im- wealth with those who help create it, and sets high
portance of the tea m more than a clecad . ago. He put standards for both performance and conduct. We will
it this way: "Tf you can find good people, they can al- examine in detail th e entrepreneuricu leader and the
ways change th e product. early evc1y mistake J've new venture team in Chapters 7 and 8.
made has heen 1 picked the wrong people, not the
wrong r'elea. "'34 F ma
. 11y, as we saw ear¡·1er, ti1e ven tu res lmportance of Fit and Balance Rouncling
with more than 20 employees and $2 million to $3 out th e model of the three driving forces is the con-
million in sales were much more likely to sur-vive and cept of fit and balance between and among these
prosper than smaller ven tu res. l n the vast majority of forces. ote that the team is positioned at the bottom
cases, it is ve1y clifficult to grow bcyoncl this without a of the tliangle in th e Timmons Model (Exhibit 3.5).
team of two or more key conh·ibutors. Imagü1e the founder, the entrep reneurial leader of
g Clearly, a new venture requires a lead entrepre- the venture, standing on a large ball, balancing the
'i;¡ neur that has personal characteristics describecl in triangle over her head. This image1y is helpfu1 in
"
¡:
1;)

~ '
12
\Villi;om D. lly!(l":ll't: ami J•·ITry A. Tim mons. l'l'Odrtrr• CaJ>itfll flt lhc Cru.;.,nuuf., (13o<ton: Har'Vtlr~l Bnsin<:'SS School Press, !992), p. R.
~ ~\.; Fa_')f Compn"~l· Pt'h ru al) - ~·L m:h I ~J7, p- ~c.:;4.
U .~r Artlrnr 1'\ock. "Str.ot<·¡zy "'· T actie; r,.,,, a V< "tl ltr~ Capitalist: · Ha nJflrd BIL,inc.,s lkview, Now ruhcr-Deccmhe r 19llí. PI'· GJ-6i .
92 . Pmt II The Opportunity

appreciating the constant balancing act since oppor-
tunity, team , and resources rarely match. When envi-
sioning a company's future, th e entreprene ur can
ask: \iVhat pitfalls will 1 e ncounter to get to the next
boundary of success? \iVillmy cnrrent team be large
cnongh, or will we be over our heads if th e company
grows 30 percent over the next tvvo years? Are my
resources sufficie nl (or too abundant)? Vivid exam-
plcs of th e failure to rnaintain a balance are eve¡y -
wh ere, such as when Iarge companies throw too
many resources at a weak, poorly defined opportu-
ni ty. For example , Lucent Technologics' misplaced
assumption slown ess to react to banclwidth demand
resulted in an almost 90 perce nt reduction in mar-
ket capitalization.
Exhibit :3.9 shows how this balancing act evolvecl
for e tscape from inception through the initial pub-
tic ofTe1ing to just befare its me rger with AOL Time
vVarner. vVlüle the clrawings oversimplify these
incredibly complex events, they help us to think con-
ceptually- an important entrepreneurial talent-
about th e company building process, includin g the
strategic and manage ment implications of striving to
achievc balance ancl the inevitable fragilHy of the
process.
Thc Inte rnet was a huge, rapidly growing, but elu-
sive opportunity. Mark Andressen hacl no significant
capital or other resources to speak of. There was no
team. Such a mismatch of ideas, resources, and talent
coulcl quickly topple out of the found er's control and
fall into the hands of someone who coulcl turn it into
a real opportunity. Visually, the process can be appre-
ciatecl as a constant balancing act, requiring continua!
assessment, revised strategies ancl tactics, an experi-
mental approach. By addressing the types of questions
necessmy to shape th e opportunity, the resources,
ancl the team , the founcler begins to molcl the idea
into an opportmüty, and the opportunity into a busi-
ness, just as you woulcl mold clay from a shape less
form into a pi ece of artwork.
At th e outset, founcle r Marc Anclressen would
have seen something like the first figure, Exhibit
3.9(a), vvith the huge Inte rnet opportunity far out-
weighing the team and resources. The gaps were
majar. Enter venture capitalist John Doerr, th e first
venture eapitalist to viviclly see the size ancl potential
of the opportunity. He had great faith in Anclressen
ancl knew he could flll the r~souree gaps ancl help
builcl the team, both with insicle manage ment and
outside directors ancl professional advisors. This ne\.v
balance in Exhibit 3.9(b) creates a justifiable invest-
ment. The opportunity is still huge and growing, ancl
competitors are inevitable (see Exhibit 3.9(c)). To
fully exp loit this opportunity, attract a large ancl
highly tal ented group of managers and professionals,
and create even greater financia! strength than com-
petitors, the company must comple te an initial
pubUc stock offering (IPO ). Strategic investors can
greatly enhance the balance of the driving forces.
Strategic investors, or partners , are clefin ed as

EXHIBIT 3.9(a)
Netscape-Journey through the Entrepreneurial Process:
At Startup, a Huge lmbalance

Communication

..._ __________
Business plan
/f
Fits and gaps / /
• Innumerab le: Money and / Exogenous torces
management /
/

Creativity /
/
~
........
Leadership

Uncertai nty Capital market co ntext

Founder

Sustainability: For Environment, Community and Society

 Chapter 3 The Entrep reneurial Process 93

EXHIBIT 3.9(b)
Netscape-Journey through the Entrepreneurial Process:
At Venture Capital Funding, toward New Balance

Communication

Opportunity
Larger and growing
taster
Business plan

Fits and gaps / /

• Resources and tea m /

. ,. '0
Exogenous torces
"- "- • Catching up //

Creativity ......... "", // ......

~ Leadership

-
Uncertainty
Team

-
Cap1tal market context

Founder

Sustainability: For Environment, Community and Society

EXHIBIT 3.9(<)
Netscape-Journey through the Entrepreneurial Process:
At IPO, a New Balance

Communication

Business plan

/.
Fits and gaps
/
• How large and protitable /
Ambiguity can we become? / Exogenous torces
/

Creativity Leadership

Uncertainty Capita l market context

Founder

Sustainability: For Environment, Community and Society

94 Part II The Opporhmity

EXHIBIT 3.9(d)
Netscape-Journey thraugh the Entrepreneurial Pracess:
Today, toward a New lmbalance

Communication

Opportunity
•Major growth
..,. _ _ Business plan_ _
potential
•Competitors and Fits and gaps
Microsoft •Cand idate for brontosaurus
capitalism?
•Threat of disruptive technology
"'- •Sustaining and reinventing /
Ambiguity "'- "'- entrepreneurial organizati~/ Exogenous torces

........ "'-, .// ..ollllll6..

Creativity ..,.. ' ,.. ~ Leadership

Uncertainty Capital market context

- Founder

Sustainability: For Environment, Community and Society

people who can fi 11 gaps left by other me mbers of the
team. They create balance where imbalance exists.
The role of the strategic investor differs according to
the needs of aventure.
Netscape emerged (see Exhibit 3.9(d)) larger and
stronger in people and resources but faced new
challenges. Even the best and brightest of new ven-
tures tend to erode over two or more decades into
slow-moving, reactive firms . Could Netscape sus-
tain and reinvent its entrepreneurial roots and
organization as the opportunity continued to mush-
room and competition for markets, people, and
technology were greater than ever? Would it be-
come blindsided and eclipsed by a new disruptive
technology, just as Apple Computer and Microsoft
bludgeoned IBM and Digital Equipment? Netscape
was acquired by AOL (.45 shares in AOL for every
share of Netscape) in 1998. This all-stock deal
valued Netscape at $4.2 billion. In effect, AOL ac-
quired Netscape so that AOL would not become a
brontosaurus!
This iterative entrepreneu.rial process is based on
both logic and trial and error. lt is both intuitive and
consciously planned. lt is a process not unlike what
the Wright brothers originally engaged in while creat-
ing the frrst self-propelled airplane. They conducted
more than 1,000 glider flights befare succeeding.
These trial-and-error experiments led to the new
knowledge, skills, and insights needed to actually fly.
Entrepreneurs have similar learning curves.
The fit issue can be appreciated in terms of a
question: This is a fabulous opportunity, but for
whom? Some of the most successful investments
ever were turned clown by numerous investors be-
fare the founders received backing. lntuit received
20 rejections for startup funding by sophisticated in-
vestors. One former student, Ann Southworth, was
turned clown by 24 banks and investors befare re-
ceiving funding for an elderly extended-care facility.
Ten years later, the company was sold for an eight-
figure profit. Time and again, there can be a mis-
match between the type of business and investors,
the chemistry between founders and backers, or a
multitude of other factors that can cause a rejection.
Thus , how the unique combination of people, op-
portunity, and resources come together at a particu-
lar time may determine a venture's ultimate chance
for success.
The potential for attracting outside funding for a
proposed venture depends on this overall fit and
how the investor believes he or she can add value to
this fit and improve the fit, risk-reward ratio, and
odds for success. Exhibit 3.10 shows the possible
outcomes.
 Chapter 3 The Entrepreneurial Process 95

EXHIBIT 3.1 O
Fit of Entrepreneur and Venture Capital
High

:e;.
·e Potential for singles
;;>
-e Potential for tr iples
o or doubles, but may
c. and home ru ns
c. strike out
o

z
Q)

e:
Q)
>

<1)

"'
Q)
e:
Q)
.~ No hat and no cattle Big hat, no cattle
ü
~
~

Low High
Entrepreneur's fit and ba lance
(Mind-set, know-how, re levant experience, and track record of team and resources)

lmportance of Timing Equally important is
the timing of the entrepreneurial process. Each of
these unique combinations occurs in real time, where
the hourglass drains continually and may be friend,
foe , or both. Decisiveness in recognizing and seizing
the opportunity can make all the difference. Don't
wait for the perfect time to take advantage of an op-
portunity; there is no perfect tim . Most new busi-
nesses run out of money befare they can find enough
customers and the right team for their great idea. Op-
portunity is a moving target.
Recent Research Supports the Model
The Timmons Model ariginally evolved from doctoral
dissertation research at the Harvard Business School,
about new and grawing ventures. Over nearly three
decades, the model has evolved and been enhanced
by ongoing research, case development, teaching, and
experience in high potential ventures and venture
capital funds . The fundamental components of the
model have not changed, but their richness and rela-
tionships of each to the whole have been steadily
enhanced as they have become better understood.
Numerous other researchers have examined a \vide
range of tapies in entrepreneurship and new ven tu re
creation. The bottam line is that the model, in its sim-
ple elegance and dynamic richness, hamesses what
you need to know about the entrepreneurial process
in arder to get the odds in your favor. As each of the
chapters and accompanying cases, exercises, and is-
sues expand on the process, addressing individual di-
mensians, a detailed framework with explicit criteria
will emerge. If you engage th.is material fully, you can-
not help but improve yaur chances of success.
The 2001 INC. 500 companies had on average a
five-year growth rate af 1,933 percent, 2000 sales of
$25 million, and 160 employees. 35 Similar to the
INC. 500 companies, the Ernst & Young LLP Entre-
preneur of the Year winners were the basis of a majar
research effort conducted by the National Center far
Entrepreneurship Research at the Kauffman Center
for Entrepreneurial Leadership, with a specific facus
on 906 high growth compan.ies. 36 These findings pro-
vide important benchmarks of the practices in a di-
verse group of industries, among a high perfarming
group af companies.
Most significantly, these results reconfinn the im-
portance of the model and its p1inciples: the team, the
market opportuníty, the resource strategies, nwst of
the individual c1ite1ia, the concept offit and balance,
and the holístic approach to entrep·reneurship.
Exhibit 3.11 summalizes the 26 leading practices
identified in four key areas: marketing, finances , man-
agement, and planning. (A complete versian af the
study is available from the National Center far Entre-
preneurship Research, Kauffman Center for Entre-
prenemial Leadership, Kansas City, MO 64112.)

.¡.; Susan Gre~o. " ! C. 500 Almanac;· INC., October 2001, pp. 74-84.
:JI; Donald L. Sexton and Forrest l. Seale, Leading Pracllce8 of Fllst Cmwth Entnrpretleurs: Pathux<ys to Uigh Pe1jimoumce (Kansu.s City, MO: KauiTonan Center
for Entrepreneurial Leadc1-shi p, 1997).
96 Pmt II The Oppmtunity

EXHIBIT 3.11
Leading Practices

Leading marketing practices of fast growth firms

• Deliver products ond services thot ore perceived os highest quolity lo exponding segments.
• Cultivote pocesetting new products and services thot stand out in the market as best of the breed.
• Deliver product and service benefits that demand average or higher market pricing .
• Generote reve nue flows from existing products ond services that typically sustoin opproxima tely 90% of the present revenue base,
while achieving flows from new products and services that typica lly expond revenue approximately 20% onnually.
• Generate revenue flows from existing customers that typicolly susto in opproximotely 80% of the ongoing revenue base, while
achieving flows from new customers that typically expond revenue flows by obout 30% annuolly.
• Create high impoct, new product ond service improvements with development expenditures that typically account for no more than
approximotely 6% of revenues.
• Utilize o high yield sales force that typicolly occounts for approximately 60% of marketing expenditures.
• Ropidly develop bread product and service platforms with complementary chonnels lo help expand a firm's geographic marketing
orea.

Leading financia! practices of fast growth firms

• Anticipote multiple rounds of finonclng (on average every 2.5 years].
• Secure funding sources capable of significantly expanding their participation amounts.
• Utilize financi ng vehicles thot retain the entrepreneur's voting control.
• Maintain control of the firm by selectively granting employee stock ownership.
• Link the entrepreneur's long-term objectives lo o defined exit strategy in th e business plan.

Leading management practices of fast growth finns

• Use o colloborative decision-making style with the top management team.
• Accelerate organizational development by assembling a bo lonced top management team with or without prior experience of working
together.
• Develop a top management teom of three to six individuols with the capocity lo become the entrepreneur's entrepreneurs. Align the
number of management levels with the number of individuols in top monagement.
• Estoblish entrepreneurial competency first in the functional oreas of finance, marketi ng , ond operotions. Assemble a bolonced board
of directors comprised of both interno! ond externo! directors.
• Repeotedly calibrate strotegies with regular board of directors meetings.
• lnvolve the board of directors heovily ot stra tegic inflection points.

Leading planning practices of fast growth firms

• Prepare detoiled written monthly plons for eoch of the next 12 lo 24 months ond onnuol plons for three or more yeors.
• Estoblish functional planning ond control systems thot tie planned ochievements lo actual performance ond odjust monogemenl
compensotion accordingly.
• Periodically shore with employees the plonned versus actua l performance doto d irectly linked lo the business plan.
• Link job performan ce stondards that hove been jolntly set by monogement and employees to the business plan.
• Praspectively model the firm bosed on benchmorks that exceed industry norms, competitors, ond the lndustry leader.

l. \>\Te began to demystify enlrepreneurship by examining
its classic stattup definition and a broader, holistic way
of thinking, reasoning, and acting that is opportunity
obsessed and leadership balanced.
2. Entrepreneurship has many metaphors and poses many
paradoxes.
3. Gctting the oclcls in your favor is the entrepreneur's
peq)ctual challenge, and the smaller the business the
poorer are the <Klds of Survival.
-~
4. Thinking big enough can improve the odds significantly. á.
E
1-Iigher potential ventures are sought by successful 8
entrepreneurs , venture capitalists, and prívate investors.
5. The Tirnmons Model is at the heatt of spotting and
buildiJlg the lügher potential venture and understanding
its three driving forces: opportunity, the team, and
resources. The concept of fit and balance is crucial.
6. Recent research on CEOs of fast-growth ventures
nationwide aJds new validity to the model.