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Chapter 1 - Introduction

1.2 From Ideas to Entrepreneurs to Adaptive Corporations

The creation of new knowledge precedes the possibility of new ideas leading to new products holding economic promise. So we must first understand how new knowledge is created and diffused in order to understand the process of technological innovation becoming economic growth. Consequently, the history of computer communications begins long before working high-speed modems or an Arpanet. Retracing the experiences of individuals and the source of their inspirations and ideas is a reoccurring theme throughout this history. For the mental models of scientists, engineers and entrepreneurs are deeply embedded in their formative experiences and thus invariably shape their ability to adapt their perspectives onto an ever-changing competitive landscape.

Entrepreneurs are people who imagine the world differently and induce others to help them bring it into being with new enabling products. The entrepreneurs in this history are largely economic entrepreneurs who envision products or systems they, and the team they recruit, can develop and commercialize usually with the aid of outside venture capitalists. Two characteristics distinguish an entrepreneur: vision and leadership. Vision is seeing economic opportunity latent in the benefits a new technology brings to satisfy unmet customer needs. Those unmet needs may be either manifest or anticipated to happen in their future. Leadership is the ability to convince others to follow and to work in pursuit of the shared vision. No new idea can be developed and then brought to market by an individual by him or herself. To do so requires the collaboration of many people working together as a team bonded in part by sharing ownership of the new firm by way of stock options. After recruiting the key engineers and marketing people to join him, the entrepreneur and his team then write a business plan that sets out their intentions, timing of events and the amount of cash, or investment, needed to see them through to either profitability or an event of such importance that it will be possible to raise more capital.

At this point, the corporation the entrepreneur and team will form has entered the Collective stage. After writing the business plan, their next task is the daunting challenge of raising the money needed to fund product development and organizational start-up costs. It was this act that changed so dramatically in the late-1960s with the emergence of institutional venture capital. For the first time, large pools of risk capital became available to be invested in the formation of new companies. Venture capitalists invest capital for shares of corporate ownership in expectation that the shares will be worth considerably more in the future, so much so, that the shares will be able to be sold either to the public in an IPO or to an acquiring firm. Most efforts by entrepreneurs fail to complete the Collective stage because they are unable to raise the needed venture capital.

If capital is raised, the corporation enters the Emergent stage of development. Two tasks are essential to this stage: self-organization and product creation. Self-organization refers to the organization not simply functioning at the directive of the entrepreneur, but becoming a well coordinated, multi-disciplined, tightly focused, and highly motivated group sharing a common purpose. If this does not happen, the organization never develops the ability to execute the complex set of decisions and actions required to grow an organization. Product creation does not mean the perfection of a product, only the creation of product that can be sold and used by customers for the intended purpose and that the customer will buy.

The Competitive stage comes next and begins with product shipment and ends when the corporation has attained profitability. Few start-ups ever successfully attain completion of this stage. Profitability, or more precisely positive free cash flow, is the essential goal for only then is management freed from having to raise more venture capital to subsidize negative cash flow. The Competitive stage can be the most stressful for the entrepreneur for often he or she is often deemed no longer able to manage the complexity of a business but cast in the role of product visionary and replaced by a new Chief Executive Officer (CEO) with a proven track record of effective managerial leadership. For the management of the rare few corporations that can reach profitability, the golden prize, the option to go public, is possible. Becoming a public company raises always-needed capital and gives shareholders an opportunity to sell their shares for a profit. The IPO is a singular event in the life of a corporation.

The Persistent stage that follows profitability can last for many years, depending on the length of time customers will continue to purchase the products the company is innovating. This stage is particularly characterized by incremental innovation as management tries to capture market share from marginal competitors. What is critical to this stage is that management navigates the company to another technology base rather than remaining mired in the technology paradigm first innovated. If the company can’t compete successfully in more than one technology, then the company can be thought to exhibit structural inertia. This phenomenon occurs repeatedly in this history.

For those even more unique corporations whose personnel can make the successful leap to a new technology, the corporation enters the Adaptive stage. Yet even this unique accomplishment may not be sufficient to ensure perpetual success, financial as well as technical. In some sense, it is this issue that creates the economic breathing room for start-ups to beat existing firms to new opportunities, even when the management of existing firms are fully aware of the potential for a new technology. More often than not, the desire of larger firms to make the transition to a new technology is the inspiration, or necessity, to acquire another firm.

Yet in spite of all the travails and successes of individual firms, it is less the individual firm that matters than it is the emergence of oligopolies selling interchangeable dominant designs.