Entrepreneurial Growth and Exit Strategies

Chapter 11 Frederick et al.

Dr. Anton de Waal
School of Business
8 October 2016

latrobe.edu.au CRICOS Provider 00115M

 Objectives
1. To understand the importance of growth
2. To examine the transition from an entrepreneurial style
to a managerial approach
3. To discuss the five stages of a typical venture life cycle
4. To identify key management issues occurring during the
growth stages
5. To identify the unique managerial concerns with a
growth business
6. To elaborate the concept of entrepreneurial leadership
7. To understand the importance to entrepreneurial
startups for having exit strategies in place
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Why is growth important?

1. It creates shareholder value –

shareholders demand it
2. You either grow or you shrink
3. Competitive forces are teaming up against
you
4. Helps secure or maintain CA
5. Other?

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 Appropriate reasons for firm growth
Economies of scale
Economies of scope
Execute a scalable business model
Market leadership
Influence, power and survivability
Need to accommodate the growth of key customers
Ability to attract and retain talented employees

Appropriate reasons for firms not to grow??

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 Why can growth be dangerous?

• Often attempts to grow can cause the entire

firm to crash
• Unplanned out-of-control growth (hyper–
growth) can lead to instant insolvency
• Pursuing growth the wrong way
can be worse than no growth at all

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 Growth Challenges

• Managerial capacity – entrepreneurial

and ‘conventional’
• Cash flow management
• Price stability
• Quality control
• Capital constraints
• Developing and maintaining professional
business practices

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 More Growth Challenges
• The Failure rate is high – 1 out of 10 firms is able to sustain
above-average increase in shareholder returns over more than
5 years
• It is hard to know how to grow. Firms must exceed the
consensus forecast rate of growth in order to boost its share
price
• If you fail once to deliver it, the odds that you ever will be able
to deliver in the future are very low
• Premise: creating new-growth businesses is simply risky and
unpredictable
• “to crack the problem of sustaining growth”
• To understand the process by which new-growth businesses
are created

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 A warning about ‘best practice’

Some theorists observe a few successful

companies and then recommend that
managers in other firms do the same things to
be successful, without regard for the possibility
that there might be some circumstances in
which their favourite solution is a bad idea.

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Five stages of growth

1. New-venture development
Accumulation of resources; creativity, assessment and networking; philosophy,
mission, scope and direction
2. Start-up activities
Business plan, searching for capital, carrying out marketing activities and
developing a team
3. Growth stage
Competition and market forces; administrative challenges; transition from
entrepreneurial one-person leadership to managerial team-oriented
leadership
4. Business stabilisation
Increased competition; consumer indifference; saturation of the market
5. Innovation or decline
Innovate or die. Acquisition; new product/service development.

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 Managing
entrepreneurial
growth

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 Does an entrepreneur really make a good manager?
  Managerial mind-set Entrepreneurial mind-set
The past is the best predictor A new idea or an insight from a unique
Decision-
of the future. Most business experience is likely to provide the best
making
decisions can be quantified. estimate of emerging trends. Go after
assumptions
Keep milking the money. new; don’t stay with old.
Decisions can be quantified.
New insights and real-world experiences
Rigorous analyses are highly
Values are more highly valued than results
valued for making critical
based on historical data.
decisions.
Big data is good. Law of large Always watch the long tail. Law of small
numbers: chaos and numbers: a single incident or several
Beliefs uncertainty can be resolved isolated incidents quickly become
by systematically analysing pivotal for making decisions regarding
the right data. future trends.
Problems represent an opportunity to
Approach to Problems must be resolved
detect emerging changes and possibly
problems with substantiated analyses.
new business opportunities.

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Why don’t Value of strategic
entrepreneurs plan? planning
• Time scarcity • Planning influences
• Lack of knowledge a firm’s survival.
• Lack of planning is
• Lack of
one of the top
expertise/skills
reasons for failure.
• Lack of trust and • Firms with strategic
openness plans outperform
• Perception of high those without.
cost
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The evolving role of the CEO

 Start up: CEO tends to focus on the operational aspects of the new
company and make all the decisions.
 Initial growth: CEO has to move towards the role of delegating tasks and
setting the overall strategic direction for the company.
 Rapid growth: CEO focus on building teams within the organisation and
communicating and coaching these teams to adopt the relevant plan the
organisation is working towards.
 Continuous growth: CEO becomes change catalyst, organisational builder,
strategic innovator and the chief of culture.

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 Some right attitudes

“We weren’t able to really grow until I was able to

change my leadership style.”
“But it is really important to make sure you are
always learning.”
“You don’t ever change who you are, not really.
What you do change are some of the roles you play.”

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 Characteristics of high-growth companies

Growth-oriented vision
Typically the first in a niche market they created
Often better at what they do than their competitors
Leaner in their operations
Unique in what they offer (CA)

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 The Importance of the Harvest

Harvesting (or exiting)

 The process used by entrepreneurs
and investors to reap the
value of a business when
they get out of it.
 The process involves:
̶Capturing value (cash value)
̶Reducing risk
̶Creating future options

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 Methods of Harvesting

Exit Options

Selling the Releasing Going Using

Firm Cash Flows Public Private Equity

Liquidation
Strategic Financial Employee
Acquisition Acquisition: Acquisition
LBO or MBO

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