By Joel M. Shulman
In recent years, researchers have examined the success of family-owned ventures, also known as founder-based companies. However, being a successful entrepreneur is more than just starting or owning a business. Many new ventures are created each year, but the vast majority fails within a short time period. Further, there are many examples of successful, entrepreneurial managers, such as Jack Welch at General Electric, who did not start or inherit a company.
What is it, then, that lies at the foundation of a successful, high-potential entrepreneurial company?
Below, I highlight four practices I have observed in my research that help entrepreneurial companies succeed strategically and financially. (For more on the exceptional financial performance of entrepreneurial firms, please see accompanying video.) Those aspiring to become more entrepreneurial should study each carefully, and adapt where appropriate:
Successful entrepreneurial firms efficiently employ their resources opportunistically. This means that they will likely grow their revenues organically, rather than through acquisition, as acquired growth often fails to deliver on its promise. Organic growth, contrasted with acquired growth, enables entrepreneurs to better control the final value-added products/services and unique culture established in their organization.
Moreover, as companies grow larger, they find integrating two distinct business cultures increasingly difficult. In extreme culture clashes, disastrous consequences may ensue, such as Lucent merging with Alcatel and Chrysler merging with Daimler-Benz.
Entrepreneurial companies with strong growth stick to their primary business model of low costs and modest borrowing. For example, in 2009 Apple Inc. generated an approximate growth rate of 20 percent with no long or short debt and more than half of its total assets in cash and equivalents. Furthermore, its return on equity exceeded 24 percent and its margins were double industry averages.
Entrepreneurs know how to sustain long-term growth and maximize return on invested capital (ROIC) through strategic alliances and partnerships. For instance, skillful entrepreneurs such as Steve Jobs know how to use their personal networks and powers of persuasion for mutual gain. In the case of Apple Inc., Steve Jobs coordinated successful partnerships with Nike and Disney/Pixar (among others) for mutual benefit to himself and other stakeholders.
Some creative entrepreneurial firms create organic growth through a revolutionary business platform. In the case of Intuitive Surgical, the leader in robotic-assisted surgery, senior executives are able to achieve extraordinary organic growth with strong ties to training academic and community hospital sites. Further, the company has shifted its primary growth away from sales of its robots to sales of surgical supplies required for each use. The combined strategies have enabled the company to achieve annualized growth exceeding 25 percent since inception.
Entrepreneurs realize the importance of their key team members and strategic stakeholders and make an effort to ensure adequate compensation and incentives for each of them. They lead by example, as is the case with senior executives at Research in Motion, Google, Infosys, and Apple, where CEOs earn relatively modest salaries and generate the bulk of their wealth through stock appreciation.
Successful entrepreneurs maintain a careful watch on all key aspects of the business and project a clean, positive image of the organization. Company morale tends to be high, and senior executive turnover tends to be low. Company profits endure various economic cycles and balance sheets are handled conservatively. The combined effect, when done well, may provide explosive wealth creation for all organization stakeholders assuming the company also enjoys good investment opportunities.
Winning entrepreneurial firms integrate entrepreneurial thinking into their growth strategy. Entrepreneurs and their companies benefit from the entrepreneur’s ability to take their organizations and stakeholders to non-standard plateaus. They have a knack for exploiting opportunities to full advantage. Entrepreneurs seek out and deliver high return on invested capital (ROIC) projects and engage in successful deal brokering. They leverage business relationships to full economic advantage and position their company at the heart of industry growth. Their wealth is created from unique vision on how to extract value within competitive market environments.
Investors eventually recognize these differences, not necessarily attributing it to the specific factors integrated within the company itself, but rather because of superior financial performance. Eventually, the outstanding results attract attention of analysts and media and publicly traded stocks of entrepreneurial companies are bid higher. Clearly, with a rising stock price, all stakeholders mutually benefit, perhaps none more so than the entrepreneurs who stand central to the wealth generation.
Joel M. Shulman, PhD is an associate professor at Babson College in Babson Park, MA.