| The Catamount Newsletter |
Fall 2004 |
"It's fun to think about why you do what you do... I just go for it" -Marshall Smith - founder Booksmith, Videosmith and Learningsmith (and my dad)
I. Introduction
As an early stage venture capital fund, Catamount focuses on the creative process of growing a company from scratch. This report looks at the characteristics, challenges and decisions that a general manager must make to grow such a company from its conception to a national organization. Having founded three companies and been on the boards of numerous other entrepreneurial ventures I have analyzed the lessons that can be learned from previous successes and failures. A concept company is a firm that seeks to change the way things are done; an industry, a methodology, a customer experience.
Valuable lessons can be derived from each of each concept company. We've analyzed the stages of growth of a firm from the original development of the concept, to its initial implementation and through its broader expansion. We've explored the challenges and obstacles faced while keeping ahead of the competition, keeping true to the concept and managing growth in this new, fast paced information age.
We see three clear stages of a concept company's evolving organization:
- Infancy to Childhood: The concept is defined, the company direction set and the market gap determined; Finances and team are brought together to implement the vision and make it reality; Product is built and initial customer reactions received and analyzed. Often a key partnership is created to give competitive advantage.
- Adolescence: The company has been launched and it is time to decide what to do. Initial growth creates initial problems. The Concept Company becomes more complex in size, with diverse constituents and a range of functions. Systems, accelerated team and processes are needed to handle growth.
- Adulthood: Maturity; Transition to Professional Management and Control Systems.
Entrepreneurial management (that within the initial stages) may be suited to only a limited phase of a firm's life and a unique set of managerial skills. One individual is capable of dealing with only so much complexity. When the firm's degree of complexity passes this point it must develop other means of coordination. The successful company must balance the transition from an entrepreneurial fledgling to a more structured company. The new professionally managed organization must be able to implement controls while keeping the innovative atmosphere of the start-up.
Integral to the growth of a concept company is the balance between innovation and control systems in its search for coordination. Conflict can arise from the formality of such systems and the informality of the start-up. Even though flexibility and fluidity is crucial in the entrepreneurial organization integration and coherence must hold it together for it to have a sustainable competitive advantage. It is this relationship, between the organization's strategy and its environment that is necessary to manage carefully.
II. The Concept Company
The concept company creates value in a different way from the traditional organization. It should be treated differently from the traditional organization and needs a new set of management principles in order to achieve sustainability. Before I define these principles, it is important to clarify what I mean by a concept company. For the purposes of this report, I have defined the concept company as a company that has all of the following characteristics:
- Derives differentiating value more on the idea and intellectual capital behind the company than the products sold or the efficiencies of the organization;
- Takes complex ideas and bundles them, in the form of a product, with respect to the differentiating concept in a way that has a clear value proposition;
- Showcases a new concept that is untested and unproved from an economic standpoint, but stands the test of rigorous thinking and public appeal.
The competitive advantage of a concept company is that its core principles are derived from the implementation of its vision, the science behind the technology but usually not from the efficiency of operation nor from promoting a commodity product differently. By filling a vacuum in the marketplace the concept company strives to identify the customer's needs. It is this external focus that sets the vision of the company but an internal strategy that drives it.
There are many companies that take a commodity product or idea, copy it and try to either do it more efficiently or to eke out some incremental profits. Such companies are usually focused on being efficient in manufacturing the product, bringing it to market, or preserving margins. Economist Robert Reich calls such activities paper entrepreneurship, or the phantom economy. Such a company does not create new products or real economic growth. In "paper entrepreneurship" the answer to why a person is in business is always the same: to make money. Although the concept company must make money to survive and succeed, the primary path to success is the fulfillment of the concept. Profit is like oxygen, food, water, and blood for the body; they are not the point of life, but without them, there is no life. Hence, the concept company is not about financial opportunism. The concept company primarily seeks to direct all of its energies towards the fulfillment of the vision of the firm.
The concept company should not try to beat or destroy the competition instead it must fulfill its internal goals. It should seek to offer something to the customer that is unique. In this sense the first 'smart' mover advantage is crucial for a concept company. It enables the concept company to claim customers and quality employees. The period of defining the concept, proving the concept and refining the concept is a remarkable source of competitive advantage. Through innovation and acquired knowledge, the Concept Company can stay a step ahead of the competition on the learning curve. If you start a business behind the competition, most of your effort will be directed toward reacting to what the competition does. If you go your own way, set the standards, and keep looking forward, the majority of your creative energy goes into the ideas that promote new growth. The managers of the concept company can constantly focus on the future, setting the tone for the industry and staying ahead.
It is a commitment to the vision that bonds the employees and the customers. The unifying concept of the firm even helps to soften the effects of separation of employees by vertical and horizontal growth. Hence, everyone is motivated by the same overriding goal. The Concept Company says to its constituents, "Our vision is new and exciting. We know what we stand for and it is important to be a part of this vision."
III. Growth of a Concept Company
The concept company grows from a figment of imagination through many stages before it becomes a mature and sustainable business. The following analysis breaks down the early existence of the concept company into three stages and crucial steps that will be necessary to move on.
A. Infancy to Childhood: The Launching Pad
"Discovery is seeing what everybody has seen, but thinking what nobody has thought." -Amar Bhide
Getting started takes: 1) Vision, 2) The ability to implement this vision, 3) Chutzpah. Success takes perseverance, positioning, leadership, timing, appropriate levels of planning and goal setting and perseverance drive to grow and calculated risk taking. But because the entrepreneur believes in himself and the concept so much, he/she calculates the odds differently. It is this inner confidence and "gut feel" that drives the concept into action. Knowing that most firms fail an entrepreneur needs the tenacity and optimism to drive through times of adversity.
1. Listen and be persistent:
Detach yourself from the events around you and constantly ask questions. Listening is crucial, but it is up to the entrepreneur to go with their gut feeling, and determine what ideas are a reflection of the past and what are visionary and prophetic. The risk lies in guessing whether you are in ground breaking territory or leaping into the abyss. " I knew it was right and I had to resist the cynics. Part of being an entrepreneur is being a risk-taker. You have to accept the fact that you may fail...and fail publicly."
A concept company will immediately generate tremendous skepticism from financiers and suppliers. The newness of a concept is a natural breeding ground for skeptics. The entrepreneur must be persistent in his/her quest. People are used to the-here-and-now, the way that things are. Given this barrage of uncertainty tenacity, hard work, and focus are crucial to the development of the vision for the firm.
2. Define the concept:
"Things should be as simple as possible but no simpler." -Albert Einstein
After taking a step back and listening, it is now crucial to grab hold of the mission and choose the direction. Now is the time to set the stage for the organization. Once the key issues are hashed out, it is time to commit the organization. Everything that the organization does (from human resources to sales) should support the core concept. The concept must fulfill a need in the market. From the outset, however, systems should be built with change in mind. Growth, fine-tuning and revision of the original concept will force change and the company should prepare for it up front.
They were new, untested and intellectually generated companies whose core concept drove the key differentiating value, not business efficiencies. Yet as we will see further, they stayed flexible in the implementation of their concept. Although self confidence is crucial to getting the venture off the ground, for the concept company to succeed, the entrepreneur must be willing to re-look at the situation, change and even seek opportunities that the original concept did not outline.
3. Planning and Goal Setting:
With the concept in hand it is time to turn it into a viable, profit generating organization. When starting a company, there are always issues of how much to analyze the numbers and market before going ahead. Jeff Timmons said that planning is "good for identifying risks, anticipating obstacles and keeping committed to unifying theme... but is bad for its out-of-dateness, and uncertainty." However, in a recent Harvard Business Review article, Amar Bhide states that most planning is not necessary for entrepreneurs and that, "only 28% of the entrepreneurs wrote up a full-blown (business) plan."
I believe that planning takes relative importance according to the stage of the new venture. The later stages of the organization require more significant planning. The entrepreneur of a concept company cannot get too bogged down in the time consuming effort of defining what their market will be. By definition, there is no precedent or direct competition before the concept company is launched. Therefore a stab at how many people will buy the product is mostly guesswork. Hence, the business plan, is for potential investors, and must show that the concept is strong, the management is experienced, and that profitability is possible. The plan is also helpful to highlight the risks and help the entrepreneur to focus, but it will not ensure any level of success.
It is crucial to integrate action and analysis. All of the answers will not be available and the businessperson must be ready to change the course at any given moment. For example, building a concept company and then analyzing the customer reaction will be more fruitful than doing exhaustive analysis of a novel product. This is scary for most people, but with the right conviction and concept, the entrepreneur moves right ahead. As my grandfather said, "95% of business decisions are made with insufficient information." In starting a concept company this premise is that much more valid. Research may be done to validate the next move and to determine whether its outcome is likely to be positive or negative, but exhaustive analysis of the exact outcome could negate the value of being the first mover.
Goals are crucial to translating the initial vision into reality. They will help define the progress and success. They should be specific, measurable, related to time and realistic. They should be clear and compelling and get people motivated. Collins and Porras stress the importance of "Big Hairy Audacious Goals." They say that such goals give people the reason to believe that it is realistic, but that it will require a heroic effort to be successful. These goals, must, as everything else, point back to the company’s core ideology. Strategy gives shape to the tasks at hand by defining the goals and purpose of the organization.
4. First 'Smart' Mover Advantage:
The first mover advantage can be the greatest competitive advantage that the concept company has, it can also be the companies doomsday. The advantage stems from getting to market before anyone else, but the difficulty will occur because the concept company, by definition is "inventing the wheel". This period of invention and experimentation takes tremendous energy and time. That's why I believe that it's the first smart mover that usually wins, not the first mover! It also takes tremendous capital in order to work out the kinks. The industry structure and competitive advantages are yet to be determined for the concept company. Hence, the traditions, habits and standard operating procedures of an established organization are completely absent; they must be created anew.
The first mover has an advantage when it has enough money to capitalize on its position. Given the general availability of the concept company's products on the market, it is very difficult to prevent imitation or to patent the "concept". Blockbuster was not the first mover by any means, but they were able to capitalize on the existing paradigm and roll the concept out nationally. The plethora of organizational choices and management principles, to be outlined later, can determine the new venture's differentiation from its future competition.
5. Positioning:
By positioning I mean the statement that is made by the how the customer will perceive their derived value. There are two primary characteristics in the success of a large organization operation:
- Clarity of presentation
- Domination of market
Clarity of presentation is crucial for the concept company in its early stages, (domination of the market will come later with growth). It must be clear what the product is all about. Everything in the company must lead back to the concept if it is truly a "new" concept then it must be presented as a new concept and therefore it must state clearly how it is different
6) Timing:
Last but definitely not least is timing. Timing, I believe, is not a learned trait. The special entrepreneur is able to absorb the events around him/her that everyone else sees, and package them in a marketable way. Due to the newness of a concept company, these instincts are even more rare and integral to its success.
This initial stage of the concept company’s life cycle sets the tone for those to come. In each of the three companies, the core competence was set. Clearly products played an integral role, but as we will see later, products alone will not suffice and clearly, each of the concepts was new and unproved. Finally, each of the company concepts aimed high, intellectually.
Each has gone through the difficult steps that have made the intangible concept into an implementable experience. This has been a process of validating the concept through the product and opening, pricing and categories. Now the question will be how to maximize the value of and return on the concept.
B. Adolescence: The Go-Go Years
"Any damned fool can start a love affair but it takes a genius to end one successfully." -George Bernard Shaw
The company has launched; it looks like the concept works and can be expanded. What next? In this section I will explore how the concept will be proved and refined so that the new organization can be geared for growth. This period of adolescence is crucial to view what aspects of the original concept can be expanded on and what must be laid to rest. The resulting process will hopefully lead to the ability to stave off competition and to maximize the first mover advantage. These times will be turbulent as are those of a teenager. Growing pains will distract the employees from the company's mission. It is at this point that the concept company is put to the test. The flexibility and perseverance of management will decide the firm's future.
First: Decide what's working and what's not.
From the moment the company is launched, be alert to what is working and what is not in real time. This should help to keep ahead of problems and to hone in on the concept. The second and third products will be different on many levels from the initial prototype. The entrepreneur/general manager must have a willingness to change. Everyone will have advice, and it is important to listen, but it is up to him/her to decide which advice will work. Dick Nolan at Harvard Business School highlighted the Cycle-time Principle in which resource allocation decisions are made in real time versus monthly or yearly cycles.
Second: Once you've gotta hit, whattaya do?
"If you don't know where you're going, any path will take you there." -Old Saying
Do you want it to grow? How fast? Do you want to take it regional or national? Do you want to carve out a niche? Do you want to make a quick buck and sell it?
Growth is a traditional American business value. Capital markets and internal managers are measured on such growth. But, as Amar Bhide said In a 1994 Harvard Business Review "big ideas often necessitate big money and strong organizations." Early growth is usually characterized by informality, high energy, commitment and boundless zeal. Later stages of growth, however, can occur at the expense of organizational coherence, motivation and individual well-being. The key question at this stage is "how much growth do you want?" Then plan for it.
According to Roberts, the entrepreneur has three options at this stage: 1) Opt out: Sell or pick a successor, 2) Slow growth and simplify the operation or 3) Adopt a new "Strategy of coordination."
Third: Put the right team together
Given the strategy outlined in #2 above, it is crucial to mold a team that can execute the strategy. "To grow a new venture that continues to innovate and exert a competitive edge calls for the managerial skills to cope with a high level of change, chaos and uncertainty." There is an inherent tension between the entrepreneur and the "systems" people. How this is managed is key to the sustained growth of the organization.
Teams will be an important way to grasp change. They should be formed by leaders who attract a cross functional array of workers with needed expertise to achieve the objectives of the project. Such teams have proven to be remarkably flexible, but will need leadership and goals that are measurable and achievable. A critical barrier to rapid growth is finding the right people and building a team. Building this core team will raise the early overhead costs, but will be crucial for future success.
Fourth: Track External Factors and the Competition!
The process of getting the concept, proving the concept and refining the concept can be an incredible period of competitive advantage. As mentioned above, the first mover advantage for a concept company is very valuable, but not permanent. Visionary entrepreneurs must guard against making competitors rich from their work. Many concepts are difficult to prove but, once proven, easy to imitate. In technology such imitation can be protected by market dominance, usually achieved by grabbing the best position in the marketplace. This effectively blocks out competition and gives the concept company a sustainable first mover advantage.
However, inevitably the concept company is particularly vulnerable to varying levels of competition. It is crucial to keep track of the external environment: external resources, people, competition, values, technologies, etc. Companies can easily mimic the products and layout, but often they miss the feeling. In an interview with Anita Roddick, founder of the Body Shop, she said that competition copies what they see; she asks, "Why don't they copy the values." It is these values and personality that have provided the strongest competitive advantage.
Fifth: Relish Change: Revise Goals and Revisit Concept
"A social organism becomes understandable only after one attempts to change it." -Kurt Lewin
Positioning of the concept as best as possible in the new wave is crucial, but it is also imperative not to be permanently fixed to the original position. From the beginning a flexible strategy should be outlined. This will enable the concept company to have a firm position, but to also respond rapidly to internal and external obstacles. Flexibility helps to manage uncertainties and minimize risk, to expect the unexpected.
Sixth: Don't Overextend
The adolescent stage is sometimes referred to as the Bermuda Triangle. When moving form an informally managed to a formally managed organization, operating costs as a percentage of revenue characteristically get higher. Many companies don't make it because it is extremely difficult to see that you are in the Bermuda Triangle. Due to the cost of growth of a start-up firm, it is crucial to manage the cash flows very carefully.
Do not overextend supplies, manufacturing capacity, capital, space or people! Capital and financial planning can make or break the operation. Roberts views two potential problems with a company at this stage, 1) shortage of capital: 2) that the business can grow too fast and in the wrong way overwhelm the adaptive capacity of the people who work there. Sufficient capital should be a haven, but lack of it can be a killer. The primary reason a company goes out of business is because it runs out of cash.
In my mind if the concept company can make it past this stage successfully it is in very good shape. Adolescence for the concept company, like for a teenager, can be the most wrenching and difficult period. But what will hopefully emerge will be a maturing, flexible and profitable venture.
C. Adulthood: Professional Management, Growth and the Need for Business Efficiencies
The initial task of the entrepreneur is "to turn chaos into mere disorder."-Anonymous
The transition from entrepreneurial management to professional management can spell salvation for some companies and the death of creativity and innovation for others. Roberts defines entrepreneurial management as being very direct and highly personal with few formal controls, structures and systems. He defines 'Professional Management' as "the delegation of responsibility (because the company has become too big and complex) and more formal control (by setting objectives monitoring performance against those objectives and rewarding performance)."
The move to professional management may encounter conflict in maintaining entrepreneurial zeal. The founder may be integral to keeping concept alive but making the transition to being a guardian of the organizational vision they may "create friction with key managers." Transitions from entrepreneurial to managerial leadership can be orderly (as with Lotus) or traumatic (as with Apple). At Apple and Lotus the new "professional management" brought in by the investor demand could not work with the original entrepreneurial leader. They lacked the creativity and fervor that he possessed, and he could not work with their control bent. The transition took resulted in tumultuous time, and the firm lost much momentum and some staff.
In an entrepreneurial company, standard operating procedures are lacking. They must emerge and evolve rapidly. This evolution brings on numerous challenges. Stevenson highlights the tug-of-war between the entrepreneurial domain and the administrative domain: with the entrepreneurial domain fostering creativity, innovation and implementation of the vision, and the administrative domain engaging in risk reduction, negotiation, continuity, integration and execution. Change can come in the form of managerial and technical needs.
Change is no easy task. As Timmons explains, "The organization must absorb growth and assimilate change while attaining cohesion as well as financial and operating control." These changes occur in a non-linear fashion, in leaps and with a web of simultaneous decisions and events. Flexibility, cohesion and controls will enable managers to be more resilient and responsive. "The form an organization assumes and the tasks it undertakes are defined by and depend on both its strategy and environment." In other words, both the culture and the duties of the evolving organization must be coordinated.
As Kao states, both the influence of individual's change and the nature of their tasks change as the organization evolves. The organization itself becomes more significant and thus thirsts for coordination, integration and leadership. Symptoms of this thirst can be seen in: a lack of responsiveness due to insufficient ability to digest information from the newly expanded organization; an overload of existing decision makers because of lack of delegation of responsibilities; and in inefficiency due to a lack of formal structure and standard policies and practices.
Growth can cover-up a variety of underlying problems: It can be a cushion for wasteful decisions and can forgive a lack of planning and long term focus. Oracle, which doubled in size every year for its first 12 year had the attitude that "we can handle anything." When it hit its first bout of adversity a whole plethora of managerial inefficiencies surfaced. When problems arise in a company that has not built professional management (like Oracle), they can be disastrous if not fatal.
These pressures are mostly due to the growth in the number of employees and customers. The new staff's jobs are more specialized, raising interdependence of tasks and hence an increasing amount of uncertainty in any given job. To bring the company back together, or to avoid this downward spiral, the concept company must plan for significant and planned coordination.
IV. CONCLUSION - Go For It!
"The test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function." - F. Scott Fitzgerald
In this report, I have defined a unique type of company, the concept company. Such a firm has different traits and hence, different challenges to overcome, than other types of companies. I have outlined the life-cycle of such a firm and looked at the successes and failures.
My analysis has shown that the resulting changes necessary for a concept company to reach the stage of a professionally managed firm is a set of paradoxes and apparent contradictions:
| On the one hand: | Yet, on the other hand: |
This is not a game of balance. Balance implies mediocrity on both sides. The concept company should not shoot for either a balance between short and long-term goals: it must attain both. A highly visionary company doesn't want to blend yin and yang into a gray, indistinguishable circle that is neither highly yin nor highly yang; it aims to be distinctly yin and distinctly yang - both at the same time, all the time. Clearly this is not easy and that It why it takes.
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Resources
This document was derived from a research project by Jed Smith at the Harvard Graduate School of Businss Administration. Please contact Catamount for additional specific sources used.
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Collins, James C., and Jerry I. Porras, Built to Last: Successful Habits of Visionary Companies, Harper Collins Publishers, New York, NY: 1994.
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Nolan, Richard L., and David C. Crason, Creative Destruction, Harvard Business School Press, Boston, MA: 1995.
Roberts, Michael J., "The Transition From Entrepreneurial To Professional Management: An Explanatory Study.", Doctoral Dissertation, Harvard Business School, 1986.
Stevenson, Howard, "A Perspective on Entrepreneurship", HBS Case Study rev 9-384-131, Harvard Business School, Boston MA, 1983.
Stevenson, Howard H., Michael J. Roberts and H. Irving Grousbeck, New Business Ventures and the Entrepreneur, Richard Irwin, Inc.: Homewood, IL, 1989.
Timmons, Jeffry A., The Entrepreneurial Mind, Brick House Publishing Co.: Andover, MA, 1989.
Jed Smith is Managing Partner at Catamount Ventures.
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