Entrepreneurship and Innovation

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Entrepreneurship and Innovation

• Henry C. Co
• Technology and Operations Management,
• California Polytechnic and State University

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Categories of Innovating Small Firms

• Superstars are large firms that have emerged from
  small beginnings, through high rates of growth
  based on
• the exploitation of a major invention, e.g.
  instant photography, reprography
• rich technological trajectory, e.g.
  semiconductors, software
• Successful innovators often either accumulated
  their technological knowledge in large firms
  before leaving to start their own, or they
  offered their invention to large firms but were
  refused (e.g., Polaroid, Xerox).

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• NTBFs are small firms that have emerged recently
  from large firms and large laboratories in such
  fields as electronics, software and
  biotechnology.
• NTBFs are usually specialized in the supply of a
  key component., subsystem, service or technique
  to larger firms, who may often be their former
  employers.
• Most of NTBFs in electronics and software have
  emerged from corporate or government
  laboratories. It is only with the advent of
  biotechnology that university laboratories have
  become a regular source of NTBFs.

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NTBFs are small firms ...

• Very few NTBFs can become superstars, since they
  provide mainly specialized niche products with
  no obvious or spectacular synergies with other
  markets.
• How far the NTBF will grow depends on whether the
  management is aiming to the maximize long-term
  value of the business, or merely seeking an
  increase in income and independence. Owners often
  sell their firms after a few years and live off
  their investments.

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• Specialized supplier firms design, develop and
  build specialized inputs into production, in the
  form of machinery, instruments and software, and
  interact closely with their large technically
  progressive customers.
• Most small firms fall into the supplier-dominated
  category. These firms depend heavily on their
  suppliers for innovations, and therefore are
  often unable to appropriate firm-specific
  technology as a source of competitive advantage.

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Creation of NTBFs

• Many NTBFs originated from a parent or
  incubator organization, typically either an
  academic institution or large well-established
  firm.
• Examples of university incubators
• Stanford which spawned Silicon Valley, MIT which
  spawned Route 128 in Boston, and Imperial and
  Cambridge Science Parks (UK).
• In addition to Route 128, MIT alumni have
  established some 200 NTBFs in northern
  California, and account for more than a fifth of
  employment in Silicon Valley.

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Creation of NTBFs ...

• Examples of large incubator firms
• The Xerox PARC and Bell Laboratories which
  spawned Fairchild Semiconductor which in turn led
  to numerous spin-offs including Intel, Advanced
  Memory Systems, Teledyne, and Advanced
  Micro-Devices.
• Engineering Research Associates (ERA) led to more
  than 40 new firms, including Cray, Control Data
  Systems, Sperry and Univac.
• NTBFs tend to cluster around their respective
  incubator organizations, forming regional
  networks of expertise.
• Most retain contacts with their parent
  organizations to gain financial and technical
  support. Mortality is low (20-30 in 10 years)
  compared to other new business (80).

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Profile of Technical Entrepreneurs

• Family background
• self-employed (50-80) or professional parent
  Four times as likely to have a parent that is a
  professional, compared with other groups of
  scientists and engineers.
• religious values (Jews/Chinese more likely to
  start NTBF)
• highly educated (median masters degree except
  in biotechnology average 6.35 papers published
  versus 2.2 for corporate counterparts 1.6
  patents versus 0.05.)
• Personality
• high control technical entrepreneurs tend to
  have an internal locus of control. They believe
  that they have personal control over outcomes,
  whereas someone with an external locus of control
  believes that outcomes are the result of chance,
  powerful institutions or others.
• high achiever moderate n-Ach (need for
  achievement)
• independence low n-Aff(need for affiliation)
• Home context
• single or divorced
• supportive spouse
• few family commitments

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• Work environment
• relevant experience (age between 30 and 40
  years average 13 years work experience before
  establishing NTBF)
• frustration (3/4 have been frustrated in their
  previous job)
• redundancy
• specific events, such as downsizing or major
  reorganization of the parent organization also
  trigger the desire or need to establish NTBF
• Technology and markets
• uncertainty
• capital requirements
• product lead time
• Institutional support
• incubator organization
• venture capital
• government support

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Funding

• Initial funding required includes purchase of
  equipment, accommodation and other start-up
  costs, plus the day-to-day running costs such as
  salaries, heating, light and so on.
• Initial capital required is relatively modest,
  typically lt50,000 and in almost half of the
  cases lt10,000 (1990).
• Software-based ventures typically require less
  start-up capital than either electronics or
  biotechnology ventures, thus is more likely to
  rely solely on personal funding.
• Biotechnology firms tend to have the highest RD
  costs, typically in excess of 100,000.
• Almost ¾ of software firms were funded by profits
  after three years, only 1/3 of biotechnology
  firms had achieved this (UK study).
• NTBFs often do not have marketable product before
  or shortly after formation. Funding cannot
  normally be based on cash flow derived from early
  sales.
• Biotechnology ventures typically require more
  start-up capital than electronics or
  software-based ventures, and have longer product
  development lead times. The strategy would be to
  conduct as much development work as possible
  within the incubator organization before starting
  the new venture.
• Most begin as part-time ventures, and are funded
  by personal savings, loans from friends and
  relatives, and bank loans, in that order. Half
  receive some funding from government sources, but
  almost 0 from venture capitalist.
• Venture capital is typically only made available
  at later stages to fund growth on the basis of a
  proven development and sales record.