case study (the big issue)
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Case Study (the Big Issue)TRANSCRIPT
Case Study
„The Big Issue“
Development of this case study based on: www.bigissue.com
Contents:
Contents: ....................................................................................................................... 1
1 Presentation of the Case Study .................... Fehler! Textmarke nicht definiert.
2 Questions ..................................................... Fehler! Textmarke nicht definiert.
1 Presentation of the Case Study
The magazine The Big Issue is a weekly entertainment and news magazine styled
like a commercial magazine which is sold on the streets of many British cities by
homeless people. The aim is to provide work for them so they can earn their own
income. This is intended to raise their awareness for their own situation and poverty
and their willingness to take over control of their lives again. Another (indirect) aim
is to call attention to social grievances. The magazine is positioned through the
quality of the thematic contents. It is not just designed as a means to the end of
collecting donations. The magazine is sold on the streets exclusively and not in shops
or newspaper kiosks. When customers are asked if they want to buy the magazine
they find themselves in a face-to-face situation with the vendor. The price of the
magazine is 2 GBP (2,50 Euros approximately). The street vendors buy the magazine
for 1 GBP from the Big Issue Ltd. and sell it at a price of 2 GBP to the customers on
the streets. Each (certified) new vendor receives short instructions for the sale of the
magazine and 5 free copies (in London 10). Copies which are not sold cannot be
returned and no money is refunded. Any further turnover of the magazine, for
example from advertisements, is realized directly by the Big Issue Foundation.
The organization behind The Big Issue is divided into two parts: On the one hand,
there is Big Issue Limited Company (Big Issue Ltd), which produces the magazine
and sells it to a street vendor network. On the other hand, there is the Big Issue
Foundation, a non-profit foundation which aims at helping the street vendors regain
control of their lives. The Big Issue Foundation offers counseling services and
references in the areas housing, health, financial independence and (career)
expectations.
The Big Issue organization is supported by the government only to a minimum
extent. The whole organization depends almost exclusively on (voluntary) donations.
Without the generosity of the individual donors and charitable organizations the
magazine and the counseling services could not be provided.
Currently the organization supports 2,900 homeless people all over Great Britain.
Every week 670,000 copies of The Big Issue are sold. This magazine in its present
form is (almost) unique in Great Britain at the moment.
2 Questions
The managing director of the Big Issue Ltd. is not happy with the present business
model and the company´s development. He hires you to (further) develop the
business model in order to create a company that can support itself almost alone. The
aim is to reduce the dependence on donations and to become more economically
oriented. In this context, the following tasks and questions will have to be dealt with:
(You can make realistic assumptions to support your answers.)
(a) Outline the current business model of The Big Issue in a short survey (use a
model you know as basis for your argumentation).
(b) For the further development of the business model you are expected to make
suggestions for a growth strategy. Present a short sketch for a growth-oriented
(re-)positioning of The Big Issue. Use your entrepreneurship knowledge to find
holistic but well-structured arguments on the basis of the (current) business
model. (What would you (have) to change in order to reduce the dependence
on donations? Sometimes this may involve questions with regard to products
and innovations. In general: How do you want to earn your money?)
Harvard Business School 9-898-171Rev. December 11, 2000
Research Associate Jon M. Biotti prepared this case under the supervision of Professors Joseph B. Lassiter III and William A.Sahlman as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrativesituation.
Copyright © 1998 by the President and Fellows of Harvard College. To order copies or request permission toreproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go tohttp://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system,used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying,recording, or otherwise—without the permission of Harvard Business School.
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Nantucket Nectars
Well, we knew we were in an interesting position. We had five companies expressinterest in acquiring a portion of the company. Sometimes you have to laugh about howthings occur. Tropicana (Seagram) and Ocean Spray became interested in us after reading anarticle in Brandweek magazine that erroneously reported that Triarc was in negotiations tobuy us. (See Exhibit 1 for a copy of this article.) At the time, we hadn’t even met withTriarc, although we knew their senior people from industry conferences. We have no idea howthis rumor began. Within weeks Triarc and Pepsi contacted us. We told no one about theseon-going negotiations and held all the meetings away from our offices so that no Nectarsemployee would become concerned. It was quite a frenetic time.
The most memorable day was just a few days ago actually. Firsty and I were in anextended meeting with Ocean Spray, making us late for our second round meeting withPepsi. Ultimately, Tom and I split up: Firsty stayed with Ocean Spray and I met with Pepsi.Ocean Spray never knew about the Pepsi meeting. Tom and I have learned under firethroughout our Nectars experience, but this experience was a new one for us.
—Tom Scott, co-founder of Nantucket Nectars
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It was certainly exciting to have some companies interested in acquiring Nantucket Nectars.But, should the founders sell at this time? They had originally planned to take the company public.The company was doing great, better than they had ever imagined. See Exhibit 2 for historicalfinancials and Exhibit 3 for recent valuations of initial public offerings. But, many people,particularly company founders who were running their newly public companies, were telling themthat going public wasn’t a completely positive experience. They wondered whether the company waseven ready to go public. Regardless of their decision about going public, should they continuenegotiating with potential buyers to find out the market value of their company? Ultimately, theyneeded to decide whether to sell the company or begin the initial public offering process. Of course,operating Nantucket Nectars as a stand alone company was always an option.
Background
Tom Scott and Tom First met while students at Brown University. (See Exhibit 4 for theirrésumés.) During their summers, the two created Allserve, a floating convenience store serving boatsin the Nantucket Harbor. The founders decided to return to Nantucket after graduation to continuethis service business. At the time, they sold ice, beer, soda, cigarettes and newspapers and performedservices such as pumping waste and delivering groceries and laundry for boats in the Harbor. Thefounders did not even sell juice at that time. As First recalled, “we started what was basically afloating 7-Eleven.”1
During the winter of 1990, First recreated a peach fruit juice drink that he had discoveredduring a trip to Spain. The drink inspired the two founders to start a side-business of making freshjuices. In the spring of 1990, the founders decided to hand bottle their new creation and sell them offtheir Allserve boat. “We started by making it in blenders and selling it in cups off the boat. But wealso put it in milk cartons and wine bottles—there was a wine guy on the island—basically anythingthat we could find. 2” Everyone loved the product, prompting the founders to open the AllserveGeneral Store on Nantucket’s Straight Wharf. Soon thereafter, other Nantucket stores startedcarrying the product. In its first year, Nantucket Allserve sold 8,000 cases of its renamed juice,Nantucket Nectars, and 20,000 the following year.
Financing
In the first two years, the two founders invested their collective life savings, about $17,000, inthe company to contract an outside bottler and finance inventory. For the next two years, NantucketNectars operated in an undercapitalized state on a small bank loan. Tom Scott recalled the situation:
We were scraping along. Everything was going back into the company. Byearly 1993, our few employees hadn’t been paid in a year, never mind that Tom and Ihadn’t paid ourselves in three and a half years. But we worked all sorts of odd jobson the side, especially during the winter. It was especially tough because we couldsee the juice really taking off.
Ultimately, the two founders and Ned Desmond, who would later become the RegionalDirector of Sales and Marketing, persuaded Mike Egan to invest $600,000 in Nantucket Nectars inexchange for 50% of the company. The founders originally met Mike Egan while serving his boat inNantucket Harbor during the early days of Allserve. Mike Egan was the founder and former CEO ofAlamo Car Rentals and still maintained 93% of that company’s stock. While the founders were
1 Beverage Aisle, February 1996.2 Beverage Aisle, February 1996.
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concerned about ceding a controlling share to an outsider, they needed the money and had no otheroptions.
Egan performed the function of trusted advisor while not meddling in the day-to-dayoperations of the business. As Egan explained, “I really made the investment because it makes mewake up in the morning and feel like I’m twenty-five again, trying to grow another company.”
The founders used the capital to improve distribution and increase inventory. First, theysecured better, independent bottlers. Given their lack of credit history and Snapple’s fantasticgrowth, which utilized the majority of good bottler capacity, Nantucket Nectars previously haddifficulty finding quality bottlers at an affordable price. Secondly, they built their own distributionarm with the equity capital. The founders needed to decide how to distribute their beverages in theearly days, deciding between three options:
• implement a large advertising campaign to build brand awareness whilemoving their product through an independent distributor channel whichwould carry multiple brands at the same time;
• contact retailers directly to create trade promotions; or,• distribute the product yourself.
Given that Nantucket Nectars could not afford the first two strategies, the founders created aunique private distribution strategy where they themselves sold, delivered, and stocked the product.Ned Desmond explained:
We were doing it all. We leased some warehouse space, bought an old van,and went up and down the street selling Nantucket Nectars and our passion to makethe brand succeed. The retailers immediately loved our story and enjoyed seeing usstock the shelves ourselves. Becoming our own distributor allowed us to control thepositioning of the product. We often rearranged the shelves to ensure that NantucketNectars was better positioned than Snapple.
In order to speed up their growth, the founders obtained the exclusive rights to distributeArizona Iced Tea in Massachusetts. Boston was one of the top 5 New Age beverage markets in theUnited States and Arizona Ice Tea needed a strong Boston position in its own race with Snapple.While hoping to harness the "on-the-street, upstart energy" of the Nantucket Nectars team, ArizonaIced Tea was more than prepared to cancel the contract if Nantucket Nectars did not perform.
The founders wanted to piggyback off the strong brand and higher volumes of Arizona IcedTea to build their own distribution arm and to get more outlets for their own products in the market.Within three months the distribution division grew from seven to one hundred employees and from2,000 to 30,000 cases sold per month. At the same time, the founders repackaged and reformulatedtheir own product while convincing small stores to carry Nantucket Nectars along side the red-hotArizona Iced Tea. By the end of 1994, revenues surpassed $8 million.
Marketing and the Creation of a Brand
Most New Age3 beverage companies must have clear differentiation because under-capitalization did not allow traditional, expensive advertising strategies and slotting charges forgarnering shelf space. Nantucket Nectars relied on creative packaging, rapid and original productintroductions, word-of-mouth and a memorable story line. Achieving this combination of low-pricedbut effective marketing was extremely difficult. Knowing this difficulty, the founders decided tofocus on a simple vision without the help of any outside agencies: create a high quality product and
3 Term given to trendy, more healthy beverages such as ready-to-drink teas, sports drinks and juices.
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sell a persona. The result was the creation of a unique brand personality based on the start of thecompany on Nantucket. In the early days, Nantucket Nectars focused on creative but mundane waysof creating name recognition at a minimal cost. The company set up samplings, giveaways,sponsorship for road races and summer sports leagues which usually required only donation ofproduct. In addition, the company set up publicity stunts including salespeople dressed up as fruits.
With the increased capital raised from Egan, the founders segued into radio ads as a means topush the Nantucket “story.” The founders described early mishaps in radio ads and placed messagesunderneath their bottle caps in order to attract consumer interest. See Exhibit 5, Exhibit 6 andExhibit 7. For example, an early radio ad described how Ned Desmond, on the first sales trip toBoston, crashed the Nantucket Nectars van on Storrow Drive destroying all the juice. Another radioad explained how early employee Larry Perez accidentally dropped the proceeds from the first saleinto the harbor.
Growth
The early days were extremely frustrating for the two founders. While customers clearlyliked the product, Nantucket Nectars only had three flavors—Cranberry Grapefruit, Lemonade andPeach Orange—and the founders were completely unsure of how to grow the business. Tom Scottexplained: “The frustrations that we dealt with were immense. We didn’t know what point-of-salewas, we didn’t know what promotion was, we didn’t know what margin we should be making.4”
Product development As a means to differentiate, Nantucket Nectars committed to creating highquality, all natural juice beverages without regard for the margins; the quality of the product camefirst. This strategy translated into replacing high fructose corn syrup with only pure cane sugar. Thefounders believed that using pure cane sugar would improve the taste without leaving the consumerthirsty like other sweetened beverages. Furthermore, the founders used four times the juice of othermajor brands to improve on their mantra of quality and taste. The founders also differentiated theirproduct by introducing a proprietary 17.5 ounce bottle to complement their existing 12 ounce line ascompared to competitors’ standard 16 ounce bottle. From the original three juice flavors, NantucketNectars developed 27 flavors across three product lines during the first three years: 100% fruit juices,juice cocktails and ice teas/lemonades.
Sales and distribution Having started out as a "floating 7-Eleven," the founders had beendistributors long before they had been suppliers and marketers of juice. At first, the foundersstructured their in-house distribution arm to target delis, sandwich shops, small markets, gourmetfood shops, convenience stores and food service cafeterias. The Arizona Iced Tea contract and theirown self-confidence lead them to launch a broader distribution business with the hopes of carryingmultiple brands and higher volumes at lower costs into the New England market. This new businessallowed them to penetrate even more of the small outlets and to begin building up a presence in thelarger stores and chains. They learned the "ins and outs" of the distribution business and forgedrelationships with many independent distributors around the country. Unfortunately, they alsolearned that the economics of the distribution business really required one of the "big brands" or youjust could not carry the overhead. Having "made every mistake in the book," the founders gained anew respect for the talent and time it took to scale up a business. In 1995, the founders sold theirdistribution arm after losing $2 million in the previous year. They believed that their brand wasfirmly entrenched on the shelves and were confident that any adverse effects on revenue growthcaused by selling the distribution business would be small. The founders concentrated on marketingtheir own product and developing the Nantucket Nectars brand name. The priority at NantucketNectars was “moving the juice.”
4 Beverage Aisle, February 1996.
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The company switched the distribution of Nantucket Nectars to a combination of in-housesalesforce and outside distributors. The company granted exclusive rights to sell Nantucket Nectarsproducts within a defined territory while allowing those distributors to carry other beverageproducts as well. The company wrote multi-year agreements with most of its distributors. When anorder was placed at company headquarters from the outside distributor, the company selected anoutside trucking source to pick up the products from the bottler of the beverage to deliver to theappropriate distributors. The distributors then sold and delivered the product to retail outlets fromtheir warehouses using their own salespeople and delivery drivers. The company initiated incentiveprograms aimed at distributors and their salespeople to promote Nantucket Nectars throughstocking, merchandising and retail sales deals. These programs, which were budgeted individuallyby territory, were meant to gain shelf space and visibility.
With the direct salesforce, Nantucket Nectars called the store accounts to sell the product.The salesforce also employed the strategy of visiting all small retailers to make sure that the productwas displayed well, “eye to thigh” and also to check the distributor’s work. The strategy was to buildsteadily a sustainable organization through strong relations with either the best distributors orindividual vendors. As Tom Scott explained, “we were not trying to build a house of cards, wewanted solid long-term growth.”
Consumer Tastes and Preferences
Nantucket Nectars was fortunate to have caught a new wave emerging in the beverageindustry, the “New Age” segment, including ready-to-drink teas, water, juices and sports drinks.Tremendous growth occurred in this segment from 1992 through 1995:
Table A Three Year Compound Annual Growth Rate for New Age Beverage Segments
Category Three Year CAGR (1992-1995) Ready-to-Drink Teas 24% Water 34% Juices 32% Sports Drinks 12%
Driving this strong growth were trendy young consumers pursuing healthier lifestyles yetfaced with fast-paced lifestyles and shortened lunches. For these reasons, they appreciated large,single-serve packaging of New Age beverages and the “gulpability” of lighter, non-carbonated,natural fruit juices.
Competition
Competition surfaced in three major ways in the New Age beverage world. First, acompetitor might simply undercut in pricing to flood the market while also offering a high quality orinnovative product. The second way of competing involved image and brand strength: brandadvertising, packaging, trade and consumer promotions. Lastly, brands competed, especially thelarge players in the beverage industry, by blocking the smaller, less powerful players from the retailershelf space. At Christy’s in Harvard Square, the New Age beverages held over 75% of the chilledbeverage space with the remainder controlled by traditional carbonated beverages. The proliferationof brands and flavors confused and distracted even the most loyal juice drinker. Promotions, newflavors and even new brands tempted the consumer to try new products. See Exhibit 8 for a list ofNew Age beverages at the Harvard Square Christy’s. So far, more than 100 companies fromtraditional beverage companies like Coca Cola to regional start-ups like Arizona launched New Agebeverages hoping to capture shifting consumer tastes. Product innovation was a critical element of
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competitiveness and created an incredibly fierce battle for shelf space, especially among regionalcompanies focused on differentiating themselves through flavors, packaging and image.Commenting on this competition, Tom First stated:
If we had known how unattractive the industry dynamics were before westarted our business, we probably would not have started Nantucket Nectars.However, now that we’re in the business, we think that the odds of someonereplicating what we did are very slim. The industry dynamics and the fast-pacedchanges within the industry really decrease the probabilities of an early entrant’ssuccess.
Many industry analysts believed that competition would increase as New Age beveragesbecame the latest battle ground in the Cola Wars. Coke, Pepsi and Seagrams were all fighting tobecome the best “total beverage company” to serve the masses while also responding to newbeverage trends. New Age beverages were an opportunity to bolster flattening cola and alcoholbusinesses with short-term profits, and to improve their competencies at serving niche markets.These firms supported a portfolio of beverage brands with expensive marketing and sophisticateddistribution skills. Their access to supermarkets through controlling shelf space, vending machines,convenience stores and fountain distribution channels combined with mass marketing and brandawareness provided them with distinct advantages in developing brands even though theirprocedures and image inhibit their ability to exploit non-traditional, rapidly changing marketopportunities. Furthermore, scale lowered a beverage company’s cost structure by decreasing thecost of per unit ingredients and distribution.
Meanwhile, the customer clearly had many substitutes from which to choose (water,carbonated sodas, alcoholic beverages, sports drinks, and other fruit juices and ready-to-drink teas)and had no switching costs. Furthermore, some people questioned the sustainability of any New Agebeverage brand given the “fad” status of this segment.
Profitability and Cost Management
Fiscal year 1995 represented the first year of profitability for the company. The company’smargins were among the lowest in the New Age beverage category given the founders’ emphasis onquality. Unfortunately, high sales growth forced the founders to focus on increasing production tomeet high demand, rather than delivering quality at a favorable cost. Their lower margins were aresult of higher quality ingredients in the juices and limited futures contracts in commodityprocurement. All natural juice beverages depended on commodities for their raw inputs, placingtheir margins at risk to the markets. Furthermore, Nantucket Nectars juice cocktails were made withreal cane sugar which was more expensive than the high fructose corn syrup used in mostcompetitive products. The company also used four times more fruit juice in its products instead ofrelying on water and artificial flavorings. Lastly, unlike many competitors, the company offered afull line of 100% unsweetened juices.
The company’s rapid growth and emphasis on quality ingredients accentuated itscompetitive disadvantages in raw material procurement and plant scheduling. Because of difficultyin predicting growth, the founders were unable to institutionalize future contracts on ingredients. Asa consequence, the company was heavily dependent on the harvests as competitors were more likelyto secure products if there were a shortage. For example, due to the poor 1995 cranberry harvest,Nantucket Nectars got no cranberries because Ocean Spray controlled all the supplies. Thiscompetitive disadvantage in procurement had an even greater impact on Nantucket Nectar’s marginsbecause of the higher fruit content in their products.
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Nantucket Nectars’ Strategy
In August 1997, responding to the launch of competitors’ new product lines, NantucketNectars launched a new line of beverages, called Super Nectars, which were herbally enhanced andpasteurized fruit juices and teas. Four of the six new flavors were made from no less than 80% realfruit juice while the remaining two were naturally steeped from green tea and flavored with real fruitjuice and honey. Each Super Nectar was created with a concern for both great taste and good health.
Table B List of Super Nectars
Product Name Description Chi’I Green Tea green tea and ginseng mix flavored with white clover honey, lemon, gardenia; offered
the health benefits of traditional green tea and the revitalizing powers of ginseng.
Protein Smoothie combined the power of natural soy protein with the great tasting juices of strawberries,bananas, oranges, and coconuts. Super Nectars Protein Smoothie offered the nineessential amino acids that the body cannot manufacture on its own.
Vital-C 100% real fruit juice made primarily from the acerola berry, a fruit native to the WestIndies and known as a vitamin C powerhouse. Acerola was blended with the juices ofother fruits including strawberries, kiwifruits, and oranges to offer 140% of therecommended daily allowance of vitamin C.
Ginkgo Mango blended with 100% orange and mango juices, offered the health benefits of ginkgo, anancient Chinese medicinal herb derived from the ginkgo biloba tree. The medicinaluses of ginkgo can be traced back to ancient healing practices where it was valued forits ability to benefit the brain.
Green Angel combined the valued herbs of spirulina, echinacea, wheat grass, and angelica with thejuices of white grapes, bananas, and pineapple. Echinacea was an herb known toenhance the immune system and spirulina was one of nature’s richest protein foods.Wheat grass was a natural vitamin supplement that offered minerals, amino acids,and enzymes, and angelica was valued for its ability to promote healing and balance.
Red Guarana Tea an herbal tea mixed with white clover honey, cranberry juice, and guarana nut berry, aplant native to the Amazon region. Guarana was naturally high in caffeine and avaluable source of energy.
Furthermore, there was evidence to suggest that Nantucket Nectars should maintain theirgrowth for at least the next five years:
Table C Projected U.S. Retail Sales of New Age Beverages, by Product Category from 1991 to 2000(in millions)5
Category 1991 1995 2000 CAGR (1991-2000) Alternative Fruit Drinks $236.8 $857.0 $1,328.8 21.1% Gourmet/Natural Sodas 371.9 627.7 697.5 7.2 Flavor-essenced Waters 304.1 329.7 259.2 (1.8) Juice Sparklers 232.9 238.4 231.2 ( 0.1 )
Total $1,145.7 $2,052.8 $2,516.7 9.1%
5 Beverage Industry, March 1997, p. 51.
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Table D Location of All New Age Beverages Sold, 19966
Location Percentage Sold Supermarkets 55% Convenience Stores and Smaller Mass-Volume Stores 35% Health/Natural Food and Gourmet Stores 10% Total 100%
As one compares the channel location of all New Age beverages sold with NantucketNectar’s current sales, one sees the tremendous upside with supermarket distribution:
Table E Sales Location (Channels) for Nantucket Nectars, 1996
Location Percentage Sales Supermarket Channel 1% Convenience Chains 6% All Others (delis, educational institutions, etc.) 93%
Total 100%
This apparent growth potential was also demonstrated by the potential geographicexpansion capabilities of the Nantucket Nectars brand. The following table represented the currentgeographic sales of the brand:
Table F Current Geographic Sales Percentages
Location Sales Percentage Northeast US 38% Mid Atlantic/Southeast US 29% Midwest 9% West 9% International 15%
Total 100%
Based on these growth opportunities, the founders wondered whether a buyer wouldpossibly pay an appropriate price given the negative publicity associated with the Snappletransaction, a previous high growth beverage company.
The founders were also aware that their success to date was accomplished through the morefragmented channels like convenience stores, delis, educational institutions and health and gourmetstores which demanded single-serve product. They also wanted to market their product through thesupermarket channel which demanded multi-serve product.
6 Beverage Industry, March 1997, Page 50.
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The Snapple deal Outside of macro-economic conditions and the stock market jitters of October1997, the Snapple deal profoundly affected the New Age beverage market. In November, 1994,Quaker Oats purchased Snapple from Thomas Lee for $1.7 billion. By 1997, Quaker Oats conceded itsdefeat, selling Snapple to Triarc for $300 million, while firing their chief executive officer, WilliamSmithburg. Industry experts blamed Snapple’s decline on Quaker’s problems with Snapple’sdistributors as well as a new marketing strategy. Quaker Oats replaced Howard Stern and “Wendythe Snapple Lady” with the corporate “Threedom is Freedom” advertising campaign. Quaker Oatsalso attempted to take away the most profitable distribution business from the distributors in order toutilize its own Gatorade distribution arm. Due to expensive legal agreements called “Take or Pay”contracts, Quaker Oats was forced to keep their old distributors or pay exorbitant fees to break awayfrom them. Ultimately, they decided to stay with the old distribution system. However, the olddistributors by that time had relegated Snapple to secondary status causing Snapple sales to declineprecipitously. Quaker’s strategy to drop their old distribution network became known asSnappleization within the distribution industry: a distributor lost its distribution contract after abeverage company was acquired by a bigger player. The acquirer moved distribution either in-houseor simply to larger distributors after the first distribution network helped build the market for thebeverage.
Corporate Strategy
The founders wondered what to do with the company. They wanted to grow the companybut were worried about the associated risks. Given their growth needs, they needed to decidewhether to sell a part or all of the company, operate under status quo, or undergo an IPO. MarkHellendrung, Nantucket Nectars CFO, described the consensus of senior management: “The decisionwas difficult because we felt comfortable operating our company independently with our currentcapital structure, under an IPO scenario, or with a strategic partner making an investment in ourcompany.”
If they decided to proceed with a sale, they wondered how to handle the negotiations inorder to maximize the price. How could they hold all the meetings so that their employees would notfind out prematurely about the transaction? The founders also worried about whether the ownershipstructure of the company helped or hindered the negotiation process. By the time of the case, MikeEgan, the individual investor, had aggregated 55% of the company due to follow-on investmentswhich permitted early operating losses.
With all these issues, Tom and Tom wondered if they needed advisors to help them with theprocess? If so, should they hire a local investment banker from Boston or a large investment bankfrom New York? Should they organize a full blown auction of Nantucket Nectars? Would there beany adverse effects if, after a high profile auction, the founders decided not to sell? Should they picktwo strategic players and ask them for a preemptive offer for the company? Or should they identifysix or so potential bidders and contact them to assess their interest in entering a bidding process. SeeExhibit 9 for descriptions of major potential bidders. Also, how should the founders handle thebeginning of a negotiation: should they specify a minimum bid or force the buyers to submit theirfirst bids?
Lastly, Tom Scott and Tom First wondered how to structure the potential transaction. Theyboth believed strongly in the upside potential of their company but were also concerned aboutholding the stock of a different company. Should they negotiate the best cash deal possible without along-term management responsibility or should they negotiate for acquirer stock in order toparticipate in the company’s continued upside? How would the chosen strategy affect the valuedemployees who had helped build the company? With all these issues swirling around in their minds,Tom Scott and Tom First turned their attention to the potential valuation of their company.
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Valuation Analysis
Beyond the numbers and the marketplace, the founders wondered what significant assetsand skills within Nantucket Nectars drove their corporate value. The founders decided to holdinternal brainstorming sessions to analyze why Nantucket Nectars succeeded and therefore deserveda premium for the brand. The founders came up with the following list of value drivers:
• Great product: great tasting, all natural product• Current management team• Value of the brand: quirky, eccentric and
memorable
• Geographic expansion capabilities: current salesbase and future sales base
• Management’s knowledge of and experiencewith the single-serve business: ability to addvalue to large player rolling out new single-serve products
• Guerrilla marketing skills
• Ability to exploit small, rapidly changing marketopportunities
• A more appealing story than any other juicebeverage company (great material for a companywith a large marketing budget and moredistribution power);
• A stabilizing cost structure• Access to 18-34 market• Last good access to single-serve distribution in
the New Age beverage market• Best vehicle for juice companies to expand into
juice cocktail category without risking their ownbrand equity
The founders wondered how all these assets were reflected in the pro formas and the actualvaluation of the company. They decided to analyze the valuation in three different ways: discountedcash flow, comparable acquisitions and comparable trading. They wondered if these analysesprepared them for the potential negotiations with the buyers. As Tom First described the situation,“this kind of analysis tells us nothing about what certain buyers can do for Nantucket Nectarsconcerning improved cost structure or increased sales through wider distribution. The difficultquestion is how do we figure out what the value of Nantucket Nectars is to someone else, not justus.” The founders believed that most acquirers would provide scale economies on costs of goodssold decreasing costs approximately 10% to 20% depending on the acquirer. See Exhibit 10 forcomparable trading, Exhibit 11 for comparable operating statistics and Exhibit 12 for comparableacquisitions. Exhibit 13 shows a basic discounted cash flow based on company pro formas.Furthermore, Nantucket Nectars had rolled out a larger-sized bottle (36 ounce bottle) for thesupermarkets but the company was having difficulty securing shelf space in the larger supermarketchains.
Sales Aftermath
The founders were also very concerned with the outcome after a sale. Nantucket Nectarscurrently has 100 employees of which there were 15 accountants, 20 marketers, 57 salespeople, 5 salesadministrators and 3 quality control people. Depending on the structure of the potential transaction,what would happen to these people?
Another major concern was that the culture of the firm would change drastically dependingon whether a transaction was consummated and with whom. Nantucket Nectars still maintained anon-formal dress code; it was very uncommon to see anyone dressed in business attire. Theorganization of the firm was still non-hierarchical with all employees able to approach the two Toms.See Exhibit 14. Tom First described this concern: “Destroying the entrepreneurial spirit that hasmade the company special is one of my biggest fears. Once you start departmentalizing, you losethat. It is essential that we maintain our culture so that work is still fun.”
The founders were also concerned about the management involvement of any potentialstrategic partner. Both founders wanted to continue to run the company if possible. Lastly, thefounders did not want to have their effective sales and marketing story negatively affected because ofownership issues. Would consumers continue to enjoy the Nantucket Nectars story if the companywere actually owned by a large public company?
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Exhibit 1 Brandweek Article on Potential Transaction
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Exhibit 2 Historical Financials of Nantucket Nectars ($000s)
December 31 of each year 1991 1992 1993 1994 1995 1996
Total Revenue $233 $379 $978 $8,345 $15,335 $29,493
Cost of Sales 172 317 765 6,831 11,024 20,511
Gross Profit 61 62 213 1,514 4,311 8,982
Marketing and Advertising 0 0 0 320 875 2,581
General and Administrative 82 62 90 3,290 3,344 5,432
Total Expenses 82 62 90 3,610 4,219 8,013
EBITDA -21 0 123 -2,096 91 969
Amortization and Depreciation 0 4 0 104 137 247
EBIT -21 -4 123 -2,199 -45 722
Interest Expense 0 5 7 53 139 301
Earnings before Taxes -21 -9 116 -2,252 -184 421
Income Tax Expense 0 0 0 0 16 52
Net Income (Loss) -21 -9 116 -2,252 -200 369
Exhibit 3 IPO Data from SDC
Company Description IPO DateProceeds(millions)
OfferPrice
SharesOffered
(millions)
MarketValue at
IPO(millions)
FYEaSales in
IPO Year(millions)
FYE EBITin IPOYear
(Millions)
LTMbSales at
IPO(millions)
LTM EBITat IPO
(millions)
CurrentMarketValue
(millions)
Saratoga
Beverage
Bottled
Spring Water
6/23/93 6.00 $5.00 1.20 10.4 6.2 -2.5 NA NA 6.3
Panamerican
Beverages
Bottles
Spring Water
9/21/93 293.3 $25.5
0
11.5 854.6 1110.8 122.0 1060.5 NA 3249.2
Odwalla Juice 12/15/93 6.3 $9.00 .700 13.5 12.6 -.16 17.1 NA 38.3
Redhook Ale
Brewery
Specialty
Beer
8/16/95 38.3 $17.0
0
2.25 114.3 25.9 5.4 19.9 NA 49.0
Pete’s
Brewing
Specialty
Beer
11/06/95 62.1 $18.0
0
3.45 248.9 59.2 2.8 51.5 1.9 52.5
Boston Beer Specialty
Beer
11/20/95 71.3 $20.0
0
3.56 491.5 151.3 10.6 142.1 NA 153.2
Lion Brewery Specialty
Beer
5/02/96 11.3 $6.00 1.88 21.9 26.4 3.1 25.2 NA 14.6
American
Craft Brewing
Specialty
Beer
9/11/96 10.0 $5.50 1.82 18.9 0.43 -.36 .42 -.10 4.6
Independenc
e Brewing
Specialty
Beer
2/11/97 4.5 $5.00 .900 12.1 0.51 -.85 .51 -0.9 1.5
aFYE stands for Fiscal Year Ending.bLTM stands for Last Twelve Months.
Nantucket Nectars 898-171
13
Exhibit 4 Résumés of Tom Scott and Tom First
Tom Scott
Born in Alexandria, VA in 1966, Tom spent his childhood in Chevy Chase, MD. He attended LandonSchool in Bethesda, MD where he lettered in football, basketball and lacrosse. He continued hiseducation at Brown University in providence, RI. Brown offered Tom the opportunity to pursue hisvarious interests including Varsity Football, theater and outdoor leadership programs. Whilegarnering accomplishments in these areas, Tom also managed to earn a degree in AmericanCivilization and start a business during his summers on Nantucket Island.
In the summer of 1988, Tom founded Nantucket Allserve, a boat business which serviced boats inNantucket Harbor; he was soon joined by his current partner, and college friend, Tom First. Fromthis first business, grew their second venture and most notable accomplishment to date, NantucketNectars.
Tom currently lives in Boston and Nantucket and is accompanied at all times by his dog, Becky.
Tom First
Tom first was born in Boston in 1966 and raised in Weston, MA. He attended Concord Academy andplayed soccer, basketball and baseball. He continued his education at Brown University inprovidence, RI where he met his current partner and close friend, Tom Scott. While earning a degreein American History at Brown, Tom spent some of his time at the neighboring art institute, RhodeIsland School of Design, aspiring to continue on to architecture school. In addition to these academicendeavors, Tom First enjoyed playing lacrosse and sailing for Brown. During the summer betweenhis junior and senior year, Tom First joined Tom Scott in Nantucket and helped get their thenfledgling business, Allserve, up and running. After graduating from Brown in 1989, the two Tomsmoved to Nantucket and concentrated on strengthening their boat business. Tom First is creditedwith the initial Nantucket Nectars inspiration. Driven by a passion for cooking, he was determinedto recreate the taste of a peach nectar that he had sampled during his travels in Spain. After mixingfruits in a blender, both Toms were thrilled with the results. With no business experience to speak of,the two embarked on a true adventure which has now developed into a company that boasts everincreasing sales and national as well as international distribution. Tom resides in Cambridge andNantucket with his wife Kristan and dog, Pete.
898-171 Nantucket Nectars
14
Exhibit 5 Nantucket Nectar Sales Credo
Nantucket Nectars 898-171
15
Exhibit 6 Nantucket Nectars Collateral
Exhibit 7 Nantucket Nectars Typical Bottle Cap
898-171 Nantucket Nectars
16
Exhibit 8 New Age Beverage Product Selection, Christy's of Harvard Square
Product Selection at Christy’s, New Age Beverages
Apple Quenchers (Very Fine line extension)Arizona Iced TeaBokuCrystal LightChillers (Very Fine line extension)EvianFruitopiaGatoradeJones SodaLiptonMinute MaidMisticNesteaOcean SprayOranginaPoland SpringsPoweradeSnappleTropicana Season’s BestVery Fine
Nantucket Nectars 898-171
17
Exhibit 9 List of Potential Buyers and Strategic Match
Potential Bidder Strategic Match
Seagram(Tropicana)
Tropicana maintains the strongest distribution in the grocery segment for juices whichshould provide Nantucket Nectars with a strong platform to expand. Furthermore,Tropicana’s strength in the Northeast US (70% market share) matches NantucketNectar’s business perfectly. Given Tropicana’s strategic push into the single-servebusiness, the company should have interest in exploring an acquisition of NantucketNectars. From Tropicana’s 1996 annual report: “Strategic direction is to continuegrowing its North American market share in chilled juices, broaden its product mix,expand its presence in attractive global markets and diversify into new distributionchannels.”
Tropicana has also made a strong international push with the acquisition of Dole asalmost 20% of revenues come from abroad with increased cheaper productioncapabilities overseas (China). Furthermore, Tropicana has restructured its operationssince its purchase of Dole in 1995. This cost improvement makes Tropicana perhapsthe best platform to wring big savings out of Nantucket Nectars. Tropicana also couldhelp the cost structure of Nantucket Nectars by having the strongest buyer power in thejuice business (e.g. 25% of FLA. orange crop each year).
Ocean Spray The founders knew the Ocean Spray senior management from industry conferences andbelieved that there was a good match of culture. Ocean Spray was private which wouldallow Nantucket Nectars to operate in a similar fashion: less disclosure, less hassle, andless short-term pressure to hit earnings. The founders also knew that Ocean Spraygenerated a good internal cash flow which could be used to fund Nantucket Nectargrowth. They also knew that Nantucket Nectars might be able to exploit Ocean Spray’sloss of Pepsi distribution which might cause them to bid aggressively. Ocean Spray isthe world’s largest purchaser of non-orange fruit juice, especially berries, tropicals andother exotics. Lastly, Ocean Spray maintained a network of five captive bottling plantsplus several long term arrangements with bottlers giving secure, national manufacturingcoverage at advantageous cost and quality control.
The founders were worried by the loss of Pepsi distribution. Industry experts believedthat the distribution agreement would terminate in May, 1998 with 50% of current single-serve distribution handled by Pepsi-owned bottlers (approx. $100MM) with another$100MM handled by Pepsi franchisees.7 Thus, Ocean Spray could lose as much as$200 million in sales (from a base of $1.05 billion) if they could not find a good distributoror could not distribute effectively themselves. Ocean Spray, however, maintained strongpower on the grocery shelves, especially in the Northeast.
Pepsi Pepsi seems more prepared to take risks with new products in the New Age segment.Pepsi recently terminated its distribution arrangement with Ocean Spray which will takeeffect sometime in early 1998. Many industry insiders believe that Pepsi entered intothis distribution arrangement to learn as much as possible about single serve New Agebeverages before entering the market themselves. Skip Carpenter, a Donaldson, Lufkin& Jenrette equity analyst, described the action as a “move that clearly signals a bold newway in which PepsiCo will compete in the juice segment going forward.”8
In late 1996, Pepsi launched a cold, ready-to-drink sparkling coffee drink with Starbuckscoffee called Mazagran. In 1995, Pepsi also launched Aquafina, a bottled water drink.One major concern for the founders was that Pepsi has a history of downscaling thequality of products, such as Lipton Brisk Tea, in order to achieve higher volume.
7 DLJ Research report, July 14, 1997.8 Donaldson, Lufkin & Jenrette Beverage Industry Report; Skip Carpenter; July 14, 1997.
898-171 Nantucket Nectars
18
Potential Bidder Strategic Match
Triarc (Snappleand Mistic)
The founders believed that Triarc provided the best platform to grow the NantucketNectars business the most over the next two years. Through ownership of Snapple, RCCola and Mistic, Triarc has immediate access to a national single-serve () network topush the Nantucket Nectar product.
One concern was that Triarc would want to replace many of Nantucket Nectar’sdistributors because of redundancy. While the written contracts with the distributorswere favorable concerning termination without too much cost, Nantucket Nectars worriedabout reprise from distributors (similar to what happened to Quaker Oats after theybought Snapple, which created the term “Snappleization”).
Cadbury(SchweppesGinger Ale)
Cadbury owns Schweppes Ginger Ale, 7 Up and Dr. Pepper. The firm has come underpressure in the past two years to improve its management team, set up a successionplan and to reduce its dependence on the Cadbury family. Stagnant sales in thecarbonated soda segments, a vulnerable production structure and perceived lack ofdirection have created takeover rumors. The sheer size of Cadbury makes a takeoverunlikely. The production strategy is to use an assorted group of independent bottlers aswell as long-term agreements with Coke and Pepsi.
While there have been no public indications to date, Cadbury might have plans todiversify its beverage portfolio away from slow-growing carbonated sodas toward thefaster growing New Age beverage segments. While Cadbury has deep pockets tooperate a New Age beverage company appropriately and for strategic reasons mightdecide to bid aggressively for Nantucket, there current company strategy does not createmuch operating improvements or increased distribution strength.
Starbucks Nantucket Nectars had recently consummated an agreement with Starbucks calling forall Starbucks coffee shops to carry the Nantucket Nectar product. While Starbucks wasclearly not in the New Age beverage business, Howard Schultz was considered tounderstand the tastes and trends of the new generation. Throughout the negotiationswith Starbucks, Schultz expressed that he very much liked the Nantucket Nectars brandand that maybe there was something more which could be done between these twocompanies.
Welch’s Welch’s was very similar to Ocean Spray, private with a cooperative of grape farmers asthe parent. Founded in 1868, the company maintained sales in the $600 million range,with grape frozen concentrate as the company’s main product. Welch’s rolled out newproduct lines in 1997: a shelf-stable concentrate that did not require freezing and a fullcomplement of single-serve, 16-ounce product. Flavors included white grape peach,apple cranberry, guava peach, apple, watermelon strawberry, strawberry kiwi, fruitpunch, pink grapefruit, tropical punch, apple orange pineapple and white graperaspberry.
Concerning product innovation, Welch’s has maintained a strong philosophy of reactingto the marketplace. CEO Dan Dillon described corporate strategy: “The whole industryseemed to be going in one direction, with faddish kinds of products. We have gone in adifferent direction, by giving the consumer products that have got substance to them.With our grape-based items, that means providing a very distinct, robust-tastingproduct.”
Coca-Cola The Nantucket Nectars founders were uncertain about Coca Cola’s interest in the NewAge beverage market given their lack of success with the Fruitopia product. Coca Colaspent $180 million developing Fruitopia of which $60 million was spent on the 1994product launch. Coca Cola has demonstrated strong concern in the past about acquiringbusinesses with smaller margins than their core carbonated soda business.
898-
171
-
19-
Exh
ibit
10
Lat
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wel
ve M
onth
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isti
cs fo
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ltip
les
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ket
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898-
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-
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s O
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898-
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erag
es, s
prin
g w
ater
----
NM
--N
M05
/06/
96E
agle
Sna
cks
Inc.
Pro
cter
& G
ambl
e C
o.P
rodu
ce n
uts,
pot
ato
chip
s--
--N
M--
NM
06/0
5/96
Sun
shin
e B
iscu
itsK
eebl
er (
Uni
ted
Bis
cuits
PLC
)P
rodu
ce b
iscu
its a
nd s
nack
s--
--N
M--
NM
07/2
9/96
Cas
cadi
an F
arm
sT
refo
il na
tura
l Foo
dsP
rodu
ce g
rape
s--
--N
M--
NM
08/1
4/96
Ral
corp
Hol
ding
s-B
rand
ed C
erea
lG
ener
al M
ills
Inc.
Pro
duce
cer
eals
and
sna
ck fo
od57
030
01.
9--
NM
09/1
9/96
Han
sen
Juic
es In
c.F
resh
Jui
ce C
o. In
c.P
rodu
ce, w
hole
sale
juic
es8
110.
7--
NM
11/1
8/96
Lend
ers
Bag
el B
aker
y In
c.K
ello
gg C
o.P
rodu
ce, w
hole
sale
bag
els
455
275
1.7
--N
M12
/04/
96M
othe
r’s C
ake
& C
ooki
e C
o.P
resi
dent
Inte
rnat
iona
l Inc
.C
ooki
es a
nd c
rack
ers
130
--N
M--
NM
03/2
7/96
Sna
pple
Bev
erag
e C
orp.
Tria
rc C
os. I
nc.
Pro
duce
, who
lesa
le s
oft d
rinks
300
550
0.5
--N
M
05/0
2/97
Bum
ble
Bee
Sea
food
s In
c.In
tern
atio
nal H
ome
Foo
ds In
c.M
anuf
actu
re c
anne
d se
afoo
d pr
oduc
ts20
3--
NM
--N
M05
/07/
97C
ampb
ell S
oup-
Mar
ie’s
Sal
adD
ean
Foo
ds C
o.P
rodu
ce s
alad
dre
ssin
gs--
35N
M--
NM
05/1
2/97
Kra
ft F
oods
-Log
Cab
inA
uror
a F
oods
Inc.
Man
ufac
ture
map
le-f
lavo
red
syru
p22
010
02.
2--
NM
Ave
rage
1.4
x17
.5 x
Med
ian:
1.2
x16
.2 x
Ran
ge:
0.4-
5.1
x7.
0-31
.4 x
898-
171
-
22-
Exh
ibit
13
Dis
coun
ted
cas
h Fl
ow A
naly
sis
und
er S
tand
alon
e Sc
enar
io
1997
1998
1999
2000
2001
2002
Rev
enue
s$5
0,02
6$6
9,71
7$9
3,70
0$1
22,9
81$1
48,4
99$1
74,6
35
Gro
wth
94.1
%30
.0%
28.0
%25
.0%
15.0
%12
.0%
Gro
ss P
rofi
t17
,246
26
,634
35,7
96
46
,982
56,7
30
66
,715
Gro
ss M
argi
n34
.5%
38.2
%38
.2%
38.2
%38
.2%
38.2
%
EB
ITD
A2,
234
4,61
0
7,45
9
11
,344
15,4
61
20
,139
EB
ITD
A M
argi
n4.
5%6.
6%8.
0%9.
2%10
.4%
11.5
%
Val
uati
onV
alua
tion
EB
IT
Dis
coun
t Rat
eE
xit M
ultip
leD
isco
unt R
ate
Ter
min
al G
row
th R
ate
9.0
x10
.0x
11.0
x4.
0%6.
0%8.
0%
Equ
ity V
alue
Equ
ity V
alue
12.0
%$1
06,8
77$1
17,7
67$1
28,6
5812
.0%
$74,
634
$98,
243
$145
,460
14.0
%$9
7,64
6$1
07,6
14$1
17,5
8114
.0%
$56,
094
$69,
291
$91,
286
16.0
%$8
9,32
3$9
8,46
1$1
07,5
9816
.0%
$43,
874
$52,
081
$64,
391
18.0
%$8
1,80
6$9
0,19
5$9
8,58
418
.0%
$35,
255
$40,
730
$48,
394
Sale
s
Dis
coun
t Rat
eE
xit M
ultip
le
1.0
x1.
4x
1.8
Equ
ity V
alue
12.0
%$1
07,9
60$1
53,6
66$1
93,3
0314
.0%
$104
,706
$140
,986
$177
,266
16.0
%$9
6,30
1$1
29,5
59$1
62,8
1818
.0%
$88,
709
$119
,243
$149
,777
898-
171
-
23-
Exh
ibit
13
(con
tin
ued
)In
com
e St
atem
ent (
000s
)
His
tori
cal F
isca
l Yea
rs E
nded
Dec
embe
r 31
,P
roje
cted
Yea
rs E
ndin
g D
ecem
ber
31,
1994
1995
1996
1997
1998
1999
2000
2001
2002
Tot
al R
even
ue
8,34
5
15
,335
29
,493
50,0
26
69,7
17
93
,700
12
2,98
1
148,
499
17
4,63
5
Cos
t of
Sal
es6,
831
11,0
24
20,5
11
32
,780
43
,083
57,9
04
75,9
99
91,7
69
107,
920
Oth
er E
xpen
ses/
Adj
ustm
ents
-
-
-
-
-
00
00
Tot
al C
ost o
f S
ales
6,83
1
11
,024
20
,511
32,7
80
43,0
83
57
,904
75,9
9991
,769
107,
920
Gro
ss P
rofi
t1,
514
4,31
1
8,
982
17
,246
26
,634
35,7
9646
,982
56,7
3066
,715
Mar
keti
ng &
Adv
erti
sing
320
87
5
2,58
1
5,60
19,
238
11,5
2914
,069
15,8
1917
,345
Gen
eral
& A
dmin
istr
ativ
e3,
290
3,34
4
5,
432
9,
410
12,7
8516
,808
21,5
6925
,450
29,2
31
EB
ITD
A(2
,096
)
91
96
9
2,
234
4,
610
7,
459
11,3
44
15,4
61
20,1
39
Am
orti
zati
on a
nd D
epre
ciat
ion
104
13
7
247
209
33
1
495
71
0
763
94
7
EB
IT(2
,199
)
(45)
72
2
2,
025
4,27
9
6,
964
10,6
3314
,698
19,1
92
Inte
rest
Exp
ense
N
otes
Pay
able
8.5%
00
033
732
332
332
332
332
3
C
urre
nt M
atur
itie
s8.
5%0
00
00
00
00
In
tere
st I
ncom
e (E
xces
s C
ash)
5.0%
00
0(3
4)(9
5)(1
87)
(345
)(6
01)
(996
)
S
ubor
dina
ted
Deb
t9.
0%0
00
102
204
204
204
204
204
Tot
al I
nte
rest
Exp
ense
/(In
com
e)53
139
301
405
432
340
182
(74)
(469
)
Ear
nin
gs B
efor
e T
axes
(2,2
52)
(1
84)
42
1
1,
620
3,
847
6,
624
10
,451
14
,772
19
,661
Inco
me
Tax
Exp
ense
39.6
%-
16
52
641
1,52
32,
623
4,13
95,
850
7,78
6
Net
In
com
e (L
oss)
(2,2
52)
(2
00)
36
9
97
8
2,
324
4,
001
$6
,312
$8,9
22$1
1,87
5
898-
171
-
24-
Exh
ibit
13
(con
tin
ued
)B
alan
ce S
heet
(000
s)
AS
SE
TS
His
tori
cal
Fis
cal
Yea
rs E
nded
Dec
embe
r 31
,P
roje
cted
Fis
cal
Yea
rs E
nded
Dec
embe
r 31
,
Cur
rent
Ass
ets
1994
1995
1996
1997
1998
1999
2000
2001
2002
C
ash
$109
$38
$2$1
00$1
39$1
87$2
46$2
97$3
49
E
xces
s C
ash
(Plu
g)$0
$0$0
$1,3
46$2
,455
$5,0
25$8
,769
$15,
260
$24,
590
I
nven
tori
es1,
139
1,32
84,
754
5,40
96,
032
6,94
89,
120
11,0
1212
,950
A
ccou
nts
Rec
eiva
ble
772
1,35
62,
063
4,38
26,
106
8,20
710
,772
13,0
0715
,296
P
repa
id E
xpen
ses
145
105
145
200
209
281
307
297
349
O
ther
Cur
rent
Ass
ets
7111
533
550
069
793
71,
230
1,48
51,
746
T
otal
Cur
rent
Ass
ets
2,23
52,
942
7,30
011
,937
15,6
3921
,586
30,4
4441
,358
55,2
81
Pro
pert
y, P
lant
& E
quip
men
t, g
ross
322
332
680
1,03
01,
518
2,17
43,
035
4,07
55,
297
Acc
umul
ated
Dep
reci
atio
n(9
9)(1
37)
(204
)(4
10)
(739
)(1
,232
)(1
,940
)(2
,701
)(3
,645
)
Pro
pert
y, P
lant
& E
quip
men
t, n
et22
319
547
762
077
994
31,
096
1,37
41,
652
Oth
er A
sset
s99
4985
100
139
187
123
148
175
Goo
dwil
l &
Int
angi
bles
077
9289
8785
8280
78
$2,5
57$3
,263
$7,9
53$1
2,74
7$1
6,64
4$2
2,80
1$3
1,74
5$4
2,96
1$5
7,18
6
LIA
BIL
ITIE
S &
EQ
UIT
Y
Cur
rent
Lia
bili
ties
N
otes
Pay
able
1,30
31,
438
4,13
03,
800
3,80
03,
800
3,80
03,
800
3,80
0
A
ccou
nts
Pay
able
66
71,
078
2,15
73,
442
4,52
46,
080
7,98
09,
636
11,3
32
A
ccru
ed E
xpen
ses
270
382
428
950
1,32
51,
780
2,33
72,
821
3,31
8
C
urre
nt M
atur
itie
s0
00
00
00
00
C
apit
al L
ease
Obl
igat
ions
016
470
00
00
0
Tot
al C
urre
nt L
iabi
liti
es2,
240
2,91
46,
762
8,19
29,
648
11,6
6014
,116
16,2
5718
,449
Cap
ital
Lea
se O
blig
atio
n51
00
00
00
00
Oth
er D
ebt
00
017
617
617
617
617
617
6
Sub
ordi
nate
d D
ebt
00
02,
094
2,09
42,
094
2,09
42,
094
2,09
4
Tot
al L
ong
Ter
m D
ebt
510
02,
270
2,27
02,
270
2,27
02,
270
2,27
0
Oth
er L
ong
Ter
m L
iabi
liti
es0
2218
430
041
856
273
889
11,
048
Exc
ess
Deb
t (P
lug)
00
00
00
00
0
Tot
al L
iabi
liti
es2,
292
2,93
56,
946
10,7
6212
,336
14,4
9217
,124
19,4
1721
,767
Sha
reho
lder
s’ E
quit
y
C
omm
on S
tock
11
11
11
11
1
A
ddit
iona
l P
aid-
In C
apit
al2,
282
2,28
22,
282
2,28
22,
282
2,28
22,
282
2,28
22,
282
R
etai
ned
Ear
ning
s(2
,019
)(1
,956
)(1
,277
)(2
99)
2,02
56,
025
12,3
3821
,260
33,1
35
Tot
al S
hare
hold
ers’
Equ
ity
265
328
1,00
61,
985
4,30
88,
309
14,6
2223
,544
35,4
19
T
otal
Lia
bili
ties
& E
quit
y$2
,557
$3,2
63$7
,953
$12,
747
$16,
644
$22,
801
$31,
745
$42,
961
$57,
186
898-
171
-
25-
Exh
ibit
13
(con
tin
ued
)St
atem
ent o
f Cas
h Fl
ows
(000
s)
Fis
cal
Yea
r E
nded
P
roje
cted
Yea
rs E
ndin
g D
ecem
ber
31,
1994
1995
1996
1997
1998
1999
2000
2001
2002
Cas
h F
low
fro
m o
per
atin
g ac
tivi
ties
N
et i
ncom
e (l
oss)
(2,2
52)
(2
00)
36
9
978
2,
324
4,00
1
6,
312
8,92
2
11
,875
Adj
ustm
ents
mad
e to
rec
onci
le n
et i
ncom
e (l
oss)
to n
et c
ash
used
by
oper
atin
g ac
tivi
ties
D
epre
ciat
ion
and
amor
tiza
tion
104
13
7
24
7
209
33
1
495
71
0
763
94
7
D
efer
red
Tax
es0
00
00
00
00
Cha
nges
in
oper
atin
g as
sets
and
lia
bili
ties
:
N
et a
sset
s av
aila
ble
for
sale
00
00
00
00
A
ccou
nts
Rec
eiva
ble
(584
)(7
07)
(231
9)(1
725)
(210
1)(2
565)
(223
5)(2
289)
I
nven
tory
(189
)(3
426)
(655
)(6
23)
(917
)(2
171)
(189
2)(1
938)
P
repa
id e
xpen
ses
40(4
1)(5
5)(9
)(7
2)(2
6)10
(52)
O
ther
cur
rent
ass
ets
(45)
(220
)(1
65)
(197
)(2
40)
(293
)(2
55)
(261
)
A
ccou
nts
Pay
able
411
1079
1285
1082
1556
1900
1656
1696
A
ccru
ed E
xpen
ses
112
4652
237
445
655
648
549
7
O
ther
Non
-Cur
rent
Lia
bili
ties
2216
211
611
814
417
615
315
7
N
et c
ash
used
by
oper
atio
ns(2
98)
(249
0)(8
3)16
7533
2245
9976
0710
631
Cas
h f
low
s fr
om i
nve
stin
g ac
tivi
ties
N
et a
ddit
ions
to
prop
erty
and
equ
ipm
ent
(10)
(348
)(3
50)
(488
)(6
56)
(861
)(1
039)
(122
2)
P
roce
eds
from
ext
raor
dina
ry i
tem
s0
00
00
00
0
N
et a
ddit
ions
(pa
ymen
ts)
on c
apit
al l
ease
obl
igat
ions
(36)
31(4
7)0
00
00
N
et a
ddit
ions
on
LT
Ass
ets
51(3
6)(1
5)(3
9)(4
8)64
(26)
(26)
5(3
53)
(412
)(5
27)
(704
)(7
96)
(106
5)(1
249)
Cas
h f
low
s fr
om f
inan
cin
g ac
tivi
ties
I
ncre
ase
in n
otes
pay
able
135
2692
(330
)0
00
00
I
ncre
ase
in w
orki
ng c
apit
al f
acil
ity
00
(0)
00
00
0
I
ncre
ase
in o
ther
deb
t0
017
60
00
00
I
ncre
ase
in s
ubor
dina
ted
debt
00
2094
00
00
0
D
ivid
end
Pay
men
ts0
00
00
00
0
S
tock
Rep
urch
ases
00
00
00
00
P
roce
eds
from
iss
uanc
e of
com
mon
sto
ck87
115
00
00
00
N
et c
ash
(use
d) s
uppl
ied
by f
inan
cing
act
ivit
ies
222
2807
1939
00
00
0
1995
1996
1997
1998
1999
2000
2001
2002
Tot
al c
hang
e in
cas
h(7
1)(3
6)14
4411
4826
1838
0365
4293
82
Cas
h at
the
beg
inin
g of
per
iod
109
382
1446
2594
5213
9015
1555
7
Cas
h at
end
of
peri
od38
214
4625
9452
1390
1515
557
2493
9
898-
171
-
26-
Exh
ibit
13
(con
tin
ued
)D
isco
unte
d C
ash
Flow
s (0
00s)
CA
SH F
LO
W F
OR
EC
AST
SH
isto
rica
lPr
ojec
ted
Yea
rs E
ndin
g
1995
1996
1997
1998
1999
2000
2001
2002
Tot
al R
even
ues
15,3
35$
29,4
93$
50
,026
$
69
,717
$
93
,700
$
12
2,98
1$
148,
499
$
17
4,63
5$
EB
ITA
(45)
722
2,02
54,
279
6,96
410
,633
14,6
9819
,192
Inco
me
Tax
es (
Ben
efit)
on
Unl
ever
ed I
ncom
e(1
8)28
680
21,
695
2,75
84,
211
5,82
07,
600
Unl
ever
ed N
et I
ncom
e (E
BIA
T)
(27)
436
1,22
32,
585
4,20
66,
423
8,87
811
,592
Dep
reci
atio
n13
724
720
933
149
571
076
394
7
Wor
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Nantucket Nectars 898-171
27
Exhibit 14 Boston Globe Article on Nantucket Nectar Culture
Reprinted courtesy of The Boston Globe, © 1996
898-171 Nantucket Nectars
28
Exhibit 14 (continued) Boston Globe Article on Nantucket Nectar Culture
1
„Gazelles“ – Rapidly Growing Young Enterprises:
Definitions, Research, Directions und Implications
Saßmannshausen, Sean P. & Volkmann, Christine, K.
- Unpublished Working Paper –
Under Review at ZfKE, Distribution etc. strictly prohibited
Copyright by the authors
Summary
Rapidly growing young enterprises – often called „gazelles“ – are of particular importance for
the positive economic effects which are generally associated with entrepreneurship. However,
the term “gazelle” is far from having been consistently defined in the literature. This paper
will present and analyze the main definitions. Four general lines of research will be identified
which have established themselves in the context of “gazelles”: (1) phaenomenological de-
scriptions, (2) economic consequences, (3) framework conditions for the creation of gazelles
(external success factors), and (4) start-up and growth management (internal success factors).
A survey of the literature is given to facilitate the first access to the topic. Our final implica-
tions will include definitional postulations, problems in the choice of samples and recommen-
dations for future research into rapidly growing young enterprises.
Abstract
High growth new ventures are particularly relevant for the positive effects associated with
entrepreneurship. However, there is no well-established definition of the term “high growth
new venture” (or, in short “gazelle”). Indeed, definitions are quite dissimilar. This article will
introduce the most common definitions. We will then critically analyze those definitions and
develop suggestions for their improvement. We identify four major themes of “gazelles” re-
search: (1) phenomenological approaches, (2) economic impact, (3) environmental and insti-
tutional preconditions (external factors of success), and (4) foundation and growth manage-
ment (internal factors of success). An overview of the literature is provided. We end with im-
plications addressing the improvement of definitions, sampling issues in empirical research,
and future research challenges.
2
I. Introduction
Rapidly growing young enterprises, which are often called „gazelles“ in international entre-
preneurship research, greatly contribute to qualitative and quantitative structural changes as
well as to direct and indirect job creation (Birch et al. 1995; Davidsson and Delmar 1999;
Henrekson and Johansson 2010). Lesonsky (2007) states that only 2 % of U.S. companies are
to be classified as growing rapidly, but that these had created 68 % of new jobs. Hence it
seems to be worthwhile to analyze the term “gazelles” from the point of view of entrepreneur-
ship research (cf. Davidsson et al. 2002 and Davidsson 2005, 80ff.).
The aim of the present paper is to give a first survey of the research area. First, we will ana-
lyze and evaluate selected definitions. Then four categories for the systematization of research
papers in the context of “gazelles” will be presented. A short survey of the literature aims at
facilitating further orientation in this field. By way of conclusion, the survey will allow us to
deduce implications for future work on the topic of rapidly growing enterprises.
II. Definition of the term
In this chapter we will present 21 definitions which were presented between 1990 and 2011
(cf. table 1). These were on the one hand chosen by the frequency of their citation (according
to Google Scholar). On the other hand, we carefully selected heterogeneous examples in order
to create a wide base for discussion. Having analyzed these definitions, we can distinguish
structural, quantitative and performance-oriented criteria. The structural aspects can in turn
be summarized in four postulations which are not mutually exclusive. These require that ga-
zelles are
(1) owner-operated enterprises,
(2) Small or medium-sized enterprises (SME),
(3) independent enterprises,
(4) start-ups or young companies.
3
Table 1: 21 Definitions of the term „Gazelles“ from Entrepreneurship research
Eisenhardt &
Schoonhoven (1990)
100 Mio. USD annual turnover and an average annual growth rate of at
least 20%
Siegel, Siegel & MacMil-
lan (1993) Annual growth in sales of at least 25 % in three successive years
Birch et al. (1994) Companies with an annual turnover growth of at least 25%
Malizia & Winders (1999) At least 20 new jobs within the first 5 years after business formation
Timmons (1999) At least 1 Mio. USD annual turnover and annual turnover growth rate
of 30%
National Commission on
Entrepreneurship (2001)
At least 15 % increase in number of employees within 5 successive
years or general growth of at least 100 % within 5 years
Storey (2001)
Annual growth rates of at least 25 % over 4 years for companies with
an annual turnover of 5-10 million BGP or at least 15 % for companies
with a turnover of 10-100 million GBP
Delmar et al. (2003)
Companies which rank among the top 10 % of all companies with re-
gard to at least one of six growth indicators, which are: 1) absolute
increase in number of employees (total), 2) absolute increase in number
of employees (from organic growth processes), 3) absolute turnover
growth, 4) relative increase in number of employees (total), 5) relative
increase in number of employees (from organic growth processes) 6)
relative turnover growth
Kauffman Center (zit.
Dowling & Drumm 2003)
At least 30% annual growth and /or annual increase in number of em-
ployees of at least 20 % over 3 years
Littunen & Tohmo (2003) Companies which at least double their size with a 4 year period
Barringer & Jones (2002)
Barringer et al. (2005) Average annual growth rate of at least 80% over 3 years
Nicholls-Nixon (2005) At least 20 % annual growth over at least 4 successive years
Hoffmann & Junge (2006) At least 60 % increase in number of employees within three years
EUROSTAT-OECD
(2007)
Average annual growth rate of at least 20% in turnover or number of
employees, and at least ten employees 3 years after business formation
Lesonsky (2007)
Owner-operated companies which earn an average annual turnover of
at least 233.757,00 USD per employee regardless of the company´s age
or number of employees
Autio (2007) (Global
Entrepreneurs. Monitor)
New companies (< 5 years), which are still owner-operated and have
reached a number of at least 20 employees
Moreno & Casillas
(2007)
SME according to the EU definition which increase their turnover by at
least 100 % within a maximum period of 3-4 years
Acs & Mueller (2008) Companies which were founded as independent entities (no subsidiary
enterprises) and had 20-499 employees right from the start
Baum & Bird (2010)
Owner-operated companies where the owner was also the founder of
the company; the founders intend to employ more than 100 people by
the end of the first 10 years
Davila, Foster & Jia
(2010)
Independent companies which are younger than 10 years and have
grown to at least 50 to 150 employees (depending on the branch of
industry)
Goedhuys & Sleuwaegen
(2010)
Companies which are younger than 5 years and have grown by at least
10 % p.a. over a period of 3 years (with regard to turnover and /or
number of employees) and had 5 employees by the end of their second
year at the latest
4
Source: Own representation.
Not all definitions refer to all four structural aspects. Some of the definitions listed in table 1
do not even explicitly mention the fourth aspect “start-up or young company” but this aspect
becomes implicitly clear from the whole context of the publications from which the defini-
tions were extracted (e.g. Eisenhardt and Schoonhoven (1990); Siegel et al. (1993); Birch et
al. (1994); Timmons (1999) and Storey (2001)). For a few other definitions, this aspect is of
lesser importance; instead, it is substituted by the term “SME” (Moreno and Casillas 2007), or
the aiuthors refer to the company´s independence (Acs and Mueller 2008), the role of the
owner/manager (Lesonsky 2007), or no structural aspects are mentioned at all.
With regard to qualitative aspects, these are mainly defined through explicit requirements
concerning growth and size. Growth is always related to a relative or absolute increase in
turnover or number of employees, while size refers to absolute turnover and numbers of em-
ployees. Performance-related aspects are hardly ever included in the definitions. If that is the
case, the authors for example investigate the relation of turnover and number of employees,
i.e. they refer to efficiency aspects (Lesonsky 2007).
III. Evaluation of the definitions
The minimum requirements with regard to quantitative growth or size criteria seem to have
been selected rather randomly and consequently are quite different. For example, the defini-
tions listed above mention a minimum turnover ranging from 1 million USD to 100 million
USD. The same applies to expectations with regard to the number of employees which range
from at least five, ten or 20 – 50 to 100 or even 499. The annual turnover growth rate varies
from 20% to 100% and is to be achieved within a period of three to five years. With regard to
growth rates the question always is at which level such growth starts. For a company which
started with a turnover of 200,000 Euros this may be a success. However, even with an annual
growth rate of 25 %, turnover would be “only” about 600,000 Euros. Would such a company
be called a “gazelle”? Ex post investigations have shown that only very few gazelles had con-
sistently high growth rates over a period of several years: „[…] most of gazelles do not follow
an unbroken or linear growth path. Research has shown that growth rates speed up, slow
down or undergo more radical changes“ (St-Jean et al. 2008, 162; cf. Garnsey and Heffernan
2005 as well as Storey 2011).
In this context it is worth noting that almost all definitions can only classify a company as a
gazelle ex post, i.e. after growth has taken place. On the one hand, this is comprehensible, but
5
it may lead to difficulties in current empirical studies if researchers needed to identify gazelles
ex ante (on the problem of ex ante and ex post sampling in entrepreneurship research cf. Da-
vidsson 2005, chapters 1 and 2). Only Baum and Bird (2010) appreciate an entrepreneur´s
mere intention to generate fast growth.
Another aspect which is underestimated is that size should be viewed in relation to the respec-
tive industry (Davila et al. 2010; Moreno and Casillas 2007 and Birch as early as 1987). A
delicatessen retail company or a handicraft business which reach a number of 50 employees in
a very short time certainly must be regarded as gazelles in their respective industries, while an
automobile manufacturer with 500 employees is probably only a small specialist company in
an area such as tuning or sports cars. The average company sizes of the respective branches
should therefore be taken into account (Moreno and Casillas 2007).
The aspect of the independence of new companies often leads to classification problems in the
statistical operationalization of the definitions because this aspect is hard to identify in given
data (cf. for example Mitusch and Schimke 2010). For example, spin-offs from large compa-
nies (such as Infineon or T-Systems) may in some studies lead to statistical falsification. On
the other hand, not all start-ups in which a capital company is involved will have to be classi-
fied as dependent..
With regard to the definition of the term “gazelle” it is desirable to find classifications which
are less randomly chosen. For example, the SME criteria of the EU could offer orientation.
The implicit assumption of a linear growth in many definitions also seems to be unrealistic,
and the respective industry branches should be taken into account to a greater extent (Moreno
and Cassilas 2007; Davila et al.). It will be almost impossible though to reach one generally
accepted definition of the term because any definition will always depend on the respective
research question, the research context and the available data.
We do, however, suggest to add qualitative aspects to the definitions which so far are only
based on quantitative data (Volkmann et al. 2010). This would allow us to reflect the impact
of “gazelles” on the change of branches and structures. Some attempts in this direction have
already been made in the literature, for example by Carland et al. (1984). Following them, a
new company´s degree of innovation according to Schumpeter (1911) could be used as a qua-
litatively distinguishing factor between small businessmen and entrepreneurs. However, ob-
jective, statistically measurable and empirically applicable criteria which could be used for
this purpose remain to be determined.
6
In the traditional German entrepreneurship research, for example, one can observe a concen-
tration on technological innovations. This is probably a result of the organizational neighbor-
hood of “Innovation Management” and “Entrepreneurship” as fields of research, which is
different from the U.S., where “Entrepreneurship” is rather close to “Strategic Management”
(cf. Gartner et al. 2006; Zahra and Dess 2001). On the other hand, this may also be due to the
focus of governmental support programs for spin-offs from universities which address mainly
technology based projects (for example EXIST research transfer).
Schumpeter (1911), however, did explicitly mention organizational innovations in addition to
the exploitation of technical inventions. Zu Knyphausen-Aufseß et al. (2006) emphasize the
aspect of organizational innovation and its impact on the change of industry branches. They
explain how revolutionary actions (i.e. activities that violate the unwritten laws of a branch
and its typical value creation configurations) influence growth, branches and structures, and
they use this aspect as a distinguishing factor. IKEA´s success for example is mainly based on
organizational innovations. When IKEA was founded it was not just another furniture retail
chain but it violated and sustainably changed the unwritten rules of the branch at that time
(Bartlett and Nanda 1990). Today, most furniture stores follow IKEA´s example; the structure
and processes of the whole branch have changed fundamentally, and the choice of reasonably
priced furniture has greatly improved. Gavetti (2011, 121) coined the term von „cognitively
distant opportunities“ for business ideas which are far beyond the status quo.
IV. „Gazelles“ as a Topic of Entrepreneurship Research
Research on the “gazelles” phenomenon so far has developed into four directions. Note, how-
ever, that “growth” can be interpreted either as an independent (rows I and II in table 2) or a
dependent parameter (rows III and IV).
Table 2: Four dominant research directions in the context of „gazelles“
I Acknowledgement and description of
the phenomenon
e.g. Siegel, Siegel and MacMillan 1993; National
Commission on Entrepreneurship 2001; Littunen and
Tohmo 2003; Delmar et al. 2003; Barringer et al.
2005; Hoffmann and Junge 2006; Autio 2007; EU-
ROSTAT-OECD 2007; Moreno & Casillas 2007
II The impact of gazelles, e.g. on em-
ployment, structural changes and eco-
nomic development
e.g. Birch et al. 1995; Davidsson and Delmar 1999;
Autio 2007; Acs and Mueller 2008; Henrekson and
Johansson 2010
III Prerequisites of gazelles, e.g. institu-
tional framework, availability of ven-
ture capital etc. (external success
e.g. Eisenhardt and Schoonhoven 1990 (also IV);
Birch et al. 1994; Storey 2001; Davidsson and
Henreksson 2002; Mitusch and Schimke 2010
7
factors)
IV Start-up and (successful) management
of gazelles and their growth by entre-
preneurs (internal success factors)
e.g. Eisenhardt and Schoonhoven 1990; Davidsson
1991; Cooper et al. 1994; Bloodgood 1996; Malizia
and Winders 1999; Timmons 1999; Baum et al. 2001;
Barringer and Jones 2002; Nicholls-Nixon 2005;
Knyphausen-Aufseß et al. 2006; Lesonsky 2007; St-
Jean 2008; Baum and Bird 2010; Davila et al. 2010;
Goedhuys & Sleuwaegen (2010)
Source: Own representation.
Only an interdisciplinary entrepreneurship research (especially economics, business adminis-
tration, psychology, sociology) will be able to meet the requirements of these comprehensive
research interests. Especially projects / multi-level-studies which manage to combine two or
more of the research areas mentioned above, promise to provide helpful insights (cf. e.g. Ei-
senhardt and Schoonhoven 1990, more generally cf. Davidsson and Wiklund 2001). In the
future, the questions as to why, when and how companies do grow and why some do grow
faster than others (research directions III and IV) should be investigated more closely, while
the economic impact of the gazelles phenomenon has already been dealt with comprehensive-
ly. (McKelvie and Wiklund 2010). Also, a mere description of the phenomenon (research
direction I) seems to be less promising in view of the present state of the art. Such descrip-
tions, however, may well serve as case studies for entrepreneurship research in the future, and
it would even be desirable to have more of them, but the aim of their use should always be to
transfer knowledge from the research directions III and IV).
V. Selected literature for a quick access to the topic
A comprehensive review of the results of growth research would go beyond the scope of this
paper. Instead, we will provide some reading recommendations to facilitate access to the top-
ic. The edited volume „Entrepreneurship and the Growth of Firms“ (Davidsson et al. 2006)
seems to be suited for a first approach. The collected articles are distinguished into three parts
and deal with (1) methodological challenges of empirical growth research, (2) the role of the
entreprneneur and (3) with patterns, success factors and consequences of success. In addition,
the „Blackwell Handbook of Entrepreneurship“ (Sexton and Landström 2000) contains eleven
contributions on growth financing and on internal and external success factors and can be
regarded as a standard work.
8
There also is a wide range of research contributions in academic journals which can be easily
found via data base research. With regard to the number of citations, a contribution by Cooper
et al. (1994) which has been cited more than 900 times (according to Google Scholar) has
gained by far the greatest influence on research into growth as a dependent parameter. In that
paper, the authors prove an empirical correlation between the initial resources and later suc-
cessful growth. A contribution by Baum et al. (2001) ranks second with 460 citations. Based
on an integrative analysis of numerous earlier research results, Baum et al. (2001) develop
and empirically test a comprehensive multi-dimensional model of factors which influence the
growth of young companies. Among the most cited works with more than 300 citations each
are also a study on the heterogeneity of growth paths by Delmar et al. (2003) (cf. table 1), an
investigation of the interrelation of internationalization and successful growth (Bloodgood et
al. 1996) and a paper by Davidsson (1991), who assumes that continuous entrepreneurial ac-
tivity is a driving force for above-average growth.
Some research contributions provide good surveys on the current literature in addition to the
presentation of their own findings. Henrekson und Johansson (2010) for example sum up the
previous works on the impact of gazelles on the employment situation in a well-arranged
chart. Shepherd and Wiklund (2009) present a survey of numerous empirical research results
and ponder the question if the knowledge gained from them can already be summed up in a
general theory of growth companies. St-Jean et al. (2008) offer a compact survey of papers
which deal with growth as a dependent parameter. The distinguish between research on the
respective roles of (1) the entrepreneur or the founder team, (2) the strategic decisions, (3) the
access to resources, (4) organizational factors and (5) the changes of markets and the competi-
tion. A new and very comprehensive survey of current findings with essential implications for
future research can be found in a special issue of „Foundations and Trends in Entrepre-
neurship“ (Davidsson et al. 2010).
Many – but not all – textbooks on entrepreneurship deal with the growth topic intensely, for
example Hisrich et al. (2010), Volkmann et al. (2010), Fueglistaller et al. (2008), Roberts et
al. (2007), Volkmann and Tokarski (2006), Timmons and Spinelli (2003) as well as Dowling
and Drumm (eds.) (2003). Three text books explicitly deal with growth through internationa-
lization: Hisrich (2010), Cavusgil and Knight (2009), and Kümmerle (2004). The latter, how-
ever, seems to be out of print and will not be reprinted according to information obtained from
the author, but it should still be available in the libraries.
9
VI. Conclusion
The present paper offers a first approach to the currently important topic of “gazelles”. These
rapidly growing (young) companies greatly contribute to the qualitative and quantitative eco-
nomic development of countries or regions. Since they induce a qualitative structural change
at the same time, they are in the focus of economic policy in many countries, for example in
Germany. Programs such as „EXIST research transfer“ or the investment strategies of the
„Hightech-Gründerfonds“ (venture capital for young technology companies) result from the
insight that gazelles are of fundamental importance for economic development. The „Euro-
pean Forum for Entrepreneurship Education“ for example has made support of gazelles its
particular business (cf. Wilson (2008), also www.efer.eu).
The gazelles phenomenon should be emphasized even more in research and teaching. The
following research questions may serve as examples here: What do we know about rapidly
growing companies? How can entrepreneurs include growth plans at an early stage without
encumbering themselves and investors with incalculable risks? Which actions, decisions and
influences do have a positive impact on later growth? What is the role of international entre-
preneurship in this context? How can scalable business models be developed? Should entre-
preneurship education try to spark an interest in growth? These are just a few of the questions
which could be posed.
Another fundamental question concerns suitable research approaches and methods. McKelvie
und Wiklund (2010) give detailed suggestions which, however, can be supplemented by the
proposal of international comparative studies: If it is true that for example in the U.S. the pro-
portion of gazelles among the new companies is higher than in the German-speaking countries
and Europe, such studies could extract reasons for this. Multi-Level-Studies could identify
causal connections which are unknown yet (Davidsson und Wiklund 2001). Storey (2011) is
of the opinion that external, unswayable coincidences play a dominant role in growth devel-
opment. If this is true, an uncontrollable amount of residues and „statistical noise“ would have
to occur in empirical research, and qualitative, explorative and theory-building research ap-
proaches would have to be preferred to statistical analyses, at least until results from such
research provided an improved theoretical foundation for empirical (cf. McKelvie und Wik-
lund 2010).
When thinking about methodology, we should also question the common exclusion of spikes
from the samples: If such spikes, i.e. gazelles, are a systematic and characteristic phenome-
10
non of entrepreneurship, their exclusion from empirical research could lead to wrong conclu-
sions, for example with regard to the impact of new companies on the job market (cf. Davids-
son 2005, 80ff. as well as Davidsson 2010 on sampling problems in entrepreneurship re-
search). It is to be expected from many studies that gazelles are indeed a regular phenomenon
because repeatedly 2 to even 17 % of all companies in the samples have been defined as ga-
zelles (cf. Henrekson and Johansson 2010; Lesonsky 2007; Moreno and Casillas 2007; as well
as Malizia and Winders 1999). However, the resepective proportions of gazelles mentioned in
the literature can hardly be compared because they are based on widely differing definitions,
as has been shown earlier in this paper. This also means that results from different studies can
hardly be summarized in a theoretical framework (Shepherd and Wiklund 2009), which leads
us back to our initial postulation of a greater definitional convergence.
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13
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Die Autoren danken Frau Miriam Thielemann und Herrn Manuel Bartelt für die Durchsicht
des Manuskripts. Zwei namentlich nicht bekannten Gutachtern sei für eine Reihe wertvoller
Hinweise gedankt.
Case Study
„FlexCap Corsten&Green GmbH“
Authors: Prof. Dr. Christine Volkmann
Prof. Dr. Kim Oliver Tokarski
Year: 2004
Research field: Company Development
Company Growth
Industry: Software Development
© 2004-2010 Volkmann/Tokarski
Case Study „FlexCap Corsten&Green GmbH“
Prof. Dr. Volkmann | Prof. Dr. Tokarski - 1 -
Bergische Universität Wuppertal | Berner Fachhochschule
Table of Contents:
Table of Contents:......................................................................................................... 1
1 Presentation of the Case Study .................... Fehler! Textmarke nicht definiert.
2 Questions ..................................................... Fehler! Textmarke nicht definiert.
Case Study „FlexCap Corsten&Green GmbH“
Prof. Dr. Volkmann | Prof. Dr. Tokarski - 2 -
Bergische Universität Wuppertal | Berner Fachhochschule
1 Presentation of the Case Study
The FlexCap Corsten&Green GmbH (FlexCap GmbH) was founded in the year
2000. The business idea was to develop and to sell software for the allocation of
computer processing capacities for the solution of calculation problems in networks.
The software can be used for a variety of tasks, for example for the distributed
calculation of CAD data and was designed to be tailored to the customers´ demand in
the respective final versions. The two managing directors of the FlexCap
Corsten&Green GmbH are 40-year-old computer scientist Josef Corsten und 43-
year-old network technician John Green. Prior to starting up their own company, the
two had worked as software developers for the well-known American network
specialist company Notel Networx for ten years. Josef Corsten was able to win over
two other former software developers and researchers of the same age as employees
for FlexCap Corsten&Green GmbH“. With the employees´ support, the technical
development of the first software version could be carried out within one year
because Josef Corsten and John Green had spent three years to prepare the software
during their spare time. In 2001, the first version was finished. However, due to the
entrepreneurs´ huge workload, they failed to file a patent for the software or parts of
it.
Josef Corsten took over all operative and strategic tasks in the fields of Marketing,
Finances, and Human Resources. In addition, he continued to work as chief designer
for the further development of the software. John Green completely concentrated on
the development and improvement of the software in cooperation with the other
employees. Accounting was outsourced and was not further attended to by the
founders.
At first, Mr. Corsten was solely responsible for the marketing of the product. He did
this with an almost omnidirectional cold calling strategy, making appointments with
potential clients whom he regarded as important and presenting the software to them.
This marketing strategy, however, did not correspond to John Green´s ideas
concerning this matter. Therefore he started a marketing cooperation with the
software company Softhouse AG in 2002, which sells networking software in
addition to many other products. The Softhouse AG, which also has its own small
software development department, included the software into its marketing portfolio
Case Study „FlexCap Corsten&Green GmbH“
Prof. Dr. Volkmann | Prof. Dr. Tokarski - 3 -
Bergische Universität Wuppertal | Berner Fachhochschule
without defining detailed contractual conditions. However, FlexCap Corsten&Green
GmbH assigned all rights of sale to the Softhouse AG for three years.
Customers´ special requirements with regard to the software were received by the
marketing staff but not communicated properly. One reason for this may have been
that Mr. Corsten was not available for Softhouse AG´s marketing staff at all times
because of his software development activities.
The FlexCap GmbH´s company and turnover development continued in a positive
way after this decision. However, according to industry insiders who used the
software and observed the company´s development, it could have grown much faster.
Increasing turnovers encouraged the founders to launch the second version of the
software in a more systematic way. In order to achieve this, two more employees (39
and 40 years old) were hired for the software development. With their support, the
second version was finished in 2003 and distributed via the Softhouse AG. However,
the second version did not meet the customers´ expectations. They were disappointed
because this version did not present an added value to most practical users in spite of
the fact that more than 30 new functions had been added.
Turnover could only be increased slightly with the new software. Negative media
response and bad test reports can be mentioned as reasons here. In addition, The
Softhouse AG became less interested in marketing of the software because FlexCap
GmbH complained about the high margins of the marketing staff and wanted to
reduce these.
Into the bargain, it became known inofficially that Softhouse AG was busy
developing its own software solution…
2 Questions
1. Which growth mistakes were made by the FlexCap GmbH in your opinion?
2. Imagine that you were a corporate consultant. Please develop possible
strategies for a sustainable survival of the company and a steady growth.
Entrepreneurship andBusiness Planning
Guest Lecture Kosice 2011
Prof. Dr. Christine Volkmann,
Dipl.-Ök. Holger Berg
Wuppertal UniversitySchumpeter School ofBusiness and EconomicsBergische Universität WuppertalGaußstraße 20 42119 Wuppertal
Overview
• Introduction
• Concepts of Entrepreneurship and the Entrepreneur
• Case I
• Business Planning, Ideas, Opportunities andInnovation
• Entrepreneurial Marketing
• Entrepreneurial Finance
• Growth and Growth Management
Teaching Goals
After today‘s course you should:
– Be able to define Entrepreneurship (3 Approaches)
– Know the difference between idea andopportunity
– Know how to scan for ideas and evaluate them
– Know how a business plan is structured
– Be aware of some business plan essentials
3
Page 4
DEFINITIONS AND PHENOMENAOF ENTREPRENEURSHIP
Entrepreneurship – An Introduction: Part I
Can you name some successful
entrepeneurs?
What makes an entrepreneur successful?
• The individual Entrepreneur
• New Business Entry
• Entrepreneurship as Innovation
• Creative Destruction
• SME Management and Ownership
• Family Enterprise
• Self Employment
• Franchising
Entrepreneurship Phenomena
Page 7
Case Study: Roxanne Quimby(Timmons/Spinelli 2003)
• How do you assess Roxanne and Burt as
entrepreneurs?
• Would you finance them?
• What would be your advice to them?
Three Groups of Definitions
Page 9
Entrepreneurship-Definitions
Functional Approach
Traits ApproachBehavioral Approach
„The Problem with these definitions is that though
each captures an aspect of entrepreneurship,
none captures the whole picture.”
Low & MacMillan 1988
Functional Approach
Page 10
Functional Approach
SchumpeterCarrying out Innovations
KirznerDiminishing Disequilibria
KnightDealing with
Market Uncertainty
Shane / Venkataraman
Recognizing and Exploiting
Opportunities
Page 11
ENTREPRENEURS “BORN OR MADE”: MOTIVATIONS FOR ENTREPRENEURIAL BEHAVIOR – AND PERSONAL PRE-CONDITIONS?
A Traits Approach:
What Motivates Human Behavior in General?
Page 12
ABCD!
a. The drive to Acquire
b. The drive to Bond
c. The drive to Comprehend
d. The drive to Defend
A. B. C. D.
Page 13Source: Nohira, Nitin et al. (2008): Employee Motivation: A Powerful New Model. In: Harvard Business Review, 7/2008.
Page 14
Outside Discouragements
Inside Encouragements
Disadvantages Opportunities
Motivation forEntrepreneurship
Motivators for Entrepreneurs (I)
Page 15
Motivators for Entrepreneurs (III)
Inside Encouragements
Inside Encouragements
• need for achievement
• risk taking propensity
• internal locus of
control
• tolerance for
ambiguity
• type A behaviorSource: MCCLELLAND, D. C. (1961): The Achieving Society. Princeton NJ: Princeton University Press. MCCLELLAND, D. C. (1965B): Achievement and entrepreneurship. In: Journal of Personality and Social Psychology, 1, S. 389-392. MCCLELLAND, D. C. (1987): Characteristics of Successful Entrepreneurs. In: Journal of Creative Behavior, Vol. 3, S. 219-233. MCCLELLAND, D. C. / WINTER, D. G. (1969): Motivation Economic Achievement. New York: Free Press.
„The Big Five“
The Behavioral Approach
Page 16
Strategic Orientation
Commitment to Opportunity
Commitment of Resources
Control of Resources
Management Structure
Compensation / Reward
Policy
Entrepreneurial Management: Six dimensions to distinguish promoters and trustees (Stevenson 1983)
Page 17
Strategic Orientation
Commitment to Opportunity
Commitment of Resources
Control of Resources
Management Structure
Compensation / Reward
Policy
Entrepreneurial Management:
Eight dimensions to distinguish promoters and trustees
(Stevenson/Jarillo 1990)
Page 18
+ Entrepreneurial
Culture
+Growth
Orientation
Opportunities
Shane„s General Theory
Page 20September 2010
Individual Attributes:
• Psychological factors
• Demographic factors
Entrepreneurial
Opportunities
Environment
• Industry
• Macro-environment
Opportunity
Discovery
Opportunity
Exploitation
Execution:
• Resource
Assembly
• Organizational
design
• Strategy
Shane, Scott, A General Theory of Entrepreneurship, The Individual – Opportunirty Nexus, 2003, S. 10.
From a practical point of view, what can be done to enhance the likelihood of
Opportunity Discovery & Exploitation?
Idea or Opportunity?
Page 21
Idea
Opportunity
Business
From Idea to Opportunity
• An idea is just the first step, there has to be a product
or service that is sellable.
• The way from idea to opportunity is often one of trial
and error-processes
Invention Innovation Diffusion
!
When is an Idea an Opportunity?
“An opportunity has the qualities of being attractive, durable, and timely and is anchored in a product or service which creates or adds value for its buyer or end user.” (Jeffrey A. Timmons (1989), New Business Opportunities.)
• A “window-of-opportunity” exist
• Market entry is possible and feasible
• Competitive Advantage is achievable
• Profit and/or growth is possible
“There is no reason for any individual to have a computer
in their home.”
(1977, Ken Olson, President and Founder of Digital
Equipment Corporation)
“There is not the slightest indication that nuclear energy
will ever be obtainable. It would mean that the atom
would have to be shattered at will.”
(1932, Albert Einstein)
OPPORTUNITIES –
A REAL-TIME PHENOMENON:
Finding Ideas
25
Schumpeter„s FiveCategories of Innovation
1. New good or new quality of a known good
2. New, as of yet unkown method of production or sales
3. New or newly opened market area
4. New source of resources or intermediate goods
5. new internal or external organisation structures
Schumpeter, Joseph Alois, die Theorie der wirtschaftlichen Entwicklung, 9. Auflage, Berlin, 1997, S. 100f.
Finding Ideas
• Existing Companies
• Franchising
• Patents and other Property Rights
• Licences
• Research Institutes
• Industry- und Trading Contracts
Major Types of Discontinuities, Asymmetries, and Changes
• Technological Changes
• Regulatory Changes (e.g. telecommunication)
• Accelerated development processes e.g. 10 fold growth in 10
years or less (Moore‟s Law: e.g. computer chips)
• Reconstruction of value chain and channels of distribution (e.g.
internet sales)
• Proprietary or contractual advantage (e.g. franchising)
• Existing management/investors burned out/undermanaged (e.g.
turnaround)
• Entrepreneurial leadership
• Market leaders are customer obsessed or customer blind (e.g.
niche strategy)
• Market leaders are large and slowly operating companies
(cf. Jeffrey A. Timmons (1999), New Venture Creation.)
29
•Demographic change
• Individualisation reaches a
new stage
•Health thrives
•Women on the rise
•Cultural diversity
•New patterns of mobility
•Digital lifestyle
•Bio mimicry (learning from
nature)
•Ubiquitous intelligence
•Technology convergence
•Globalisation 2.0
•Knowledge-based economy
•Business ecosystems
•Changes in the work world
•New consumption patterns
• Energy and resource reversal
•Climate change and
environmental impacts
•Urbanisation
•New political world order
•Growing threats to
international security
Future Megatrends
Screening Criteria –Evaluation of an Opportunity
• Industry and Market (customers, USP, market size,
etc.)
• Economics (ROI, cash Flow, break even point, etc.)
• Competitive Advantage Issues (cost structure, control
over costs, prices, distribution, and entry barriers)
• Management Team (experience, creativity, etc.)
• Personal Criteria (goals, opportunity costs, risk
tolerance, etc.)
• Strategic Differentiation (service, pricing, etc.)
HOWEVER, FOCUS ON THE OPPORTUNITY!
Exercise: Being Great
31
Businessplanning
„The Businessplan will carefully
articulate the merits, requirements,
risks, and potential rewards of the
opportunity and how it will be seized.“
J. A. Timmons / S .Spinelli, S. 397
Planning
http://www.historic-uk.com/HistoryUK/England-History/Nelson.htm
Functions of Planning
Identify room for action
Coordination
Information
Control
Building Consensus
Reduce Potential for Conflict
Risk identification and Mitigation
Secure Effectiveness and raise Efficiency
Synergyeffects
Reduce Complexity
Vgl. u.a. Macharzina, 1999, S. 304, Staehle, 1999, S. 539ff., Horváth, 2002, S. 170f.
Idealtype Businessplan
• Executive Summary
• Business Concept: Product/Opportunity
• Legal Issues
• Entrepreneur/Team
• Market and Competition
• Marketing and Distribution
• Organization and Personnel
• Realization/Milestones
• Chances and Risks
• Financial Plans
Areas of Businessplanning
• Issue-related:
– Start-ups
– Take-overs
– Strategic and operational planning in existing companies
• Time-related:
– Planning
– Execution
– Ex post: control and documentation
• Field of application:
– all business and management concerns
Target Groups
• Initiator(s)
• (Potential) Partners
• Investors/ Supporters
Shareholders
Business-Angels
Banks
VCs
Public Finance
• Customers / Suppliers / Consellors
• Employees
• Media
(cf. Klandt 1999)
• Communication
Trust
Acquiring capital
Acquiring Customers
Supplier relations
Convince Employees
Convince Partners
• A Businessplan is an important door opener.
• But it is also a dinosaur in start-up management
up-to-dateness / reality-problem
External Tasks of a Businessplan
Directions / Modules
• Base plan:
For the Founder / Company
• Modified Plan:
Concerning specific target groups
Vary according to target group
But remain consistent and true
• Modify with regard to:
Size
Detail
Focus
Language, Layout
Demands
• Timely and consistent
• Clear and precise
• neutral
• Valid / reliable / trustworthy
• Homogeneous
• Optic
• Methodic
• To the point
• Complete / final
Traps
• Plan dependency
• Inconsistency
• Incompleteness
• Underlying data lacks quality
• Time needed for execution
• „Frittering“
• Naivity
• Incompleteness or major unknown variables
• Wrong interpretation of cause and effect
Business Concept / Customer Benefit
The Business Concept - Ingredients
• Clear Customer Benefit
• Market is sufficiently large
• Feasible and Profitable
• Sufficiently Innovative
Vgl.: Münchner Businessplanwettbewerb: Der optimale Businessplan; Handbuch Münchner Busiensspalnwettbewerb, http://de.mbpw.de/media.php?id=559, S. 9.
„The customer does not demand a
drilling machine, the customer
demands a hole!“
Measuring Customer Benefit
• How can you describe your product / service precisely
and in detail?
• Who is the targeted customer?
• What are the customer„s needs?
• How does your product / service contribute to the
fulfillment of these needs?
Vgl.: Münchner Businessplanwettbewerb: Der optimale Businessplan; Handbuch Münchner
Busiensspalnwettbewerb, http://de.mbpw.de/media.php?id=559. sowie: NUK-Businessplan-
Wettbewerb Handbuch 2007, www.n-u-k.de.
• What is necessary to make the customer benefit come
true?
• Do you require partnerships for this? What are the
chances and risks of cooperation?
• Are there competitors?
• What is your USP?
• Are there legal requirements?
Vgl.: Münchner Businessplanwettbewerb: Der optimale Businessplan; Handbuch Münchner
Busiensspalnwettbewerb, http://de.mbpw.de/media.php?id=559. sowie: NUK-Businessplan-
Wettbewerb Handbuch 2007, www.n-u-k.de.
Measuring Customer Benefit II
Checkliste für Geschäftsideen (eigene Darstellung)
Business Idea
1. What is your business idea?
2. Which customer benefit does your offer provide?
3. What do you offer that distinguishes you from your competitors,
what is your competitive advantage?
4. What is the state of the art? - What is your technical level?
5. How do you protect your business against imitation?
6. Why should anyone buy your product / service?
7. Do you have a Unique Selling Proposition („USP“)?
8. How well-known is your product?
9. What do friends think of your product?
10. Are there products available that provide a similar benefit?
Business Idea II
1. Who is your target group?
2. How will your product be sold?
3. Is your product easy to use?
4. Are there machines / programmes which can produce yourproduct?
5. Will you have to overcome special legal or bureaucraticobstacles?
6. Can you develop a wider product range from your product?
7. Who are your competitors?
8. What is your level of development? What are your futuremilestones?
9. In which way may your future development be at risk?
10. Which market phases will your business idea be confronted with?
Source: Ernst, Holger, Strategisches Intellectual Property Management, S. 296.
Realize your returns by
Instruments of Protection... Other instruments
Outcome orientedNon-outcome
oriented
Know-How Protection
Property RightsFactual
protection
•Gewerbliche Schutzrechte
• Copyright
•Secrecy
•Tacit knowledge
•Advantage of time (first mover)
•Cost advantages through learning curve effects
•Excellence in Marketing and Service
Protecting your idea
Exercise – Elevator Pitch
• Formulate a short presentation of your business
idea!
• What criteria did you employ?
Thanks for today!Any Questions?
52
Entrepreneurship andBusiness Planning
Guest Lecture Kosice 2011
Prof. Dr. Christine Volkmann,
Dipl.-Ök. Holger Berg
Wuppertal UniversitySchumpeter School ofBusiness and EconomicsBergische Universität WuppertalGaußstraße 20 42119 Wuppertal
Entrepreneurial Finance andFinancial Planning
What is the difference between financing entrepreneurshipand conventional fincaning?
3
4
Model Criterion DevelopmentApproach
Forms
Low-budget model:
Strategy follows finance
• Influence of the financing process on enterprise strategy
• Variant 1:“to start small and to remain small”
• frequency of occurrence: 85-90%
• Variant 2:“to start small and to grow”
• frequency of occurrence: 8-12%*
• Self-feeding approach
• Bootstrap-approach
Big-money model:
Finance followsstrategy
• Influence of the financing process on enterprise strategy
• “to start big and to grow”
• frequency of occurrence: 1-2%*
• Private investors
• BusinessAngels
• Venture capital
• Privateplacements
Debt equity Private equity
publicpublic private
Entrepreneurial Finance
Banks FFFBusiness
Angels
Venture
Capital
Taxonomy of Entrepreneurial Finance
Central Issues
Value Creation Customers
Employees
Shareholders
J. A. Timmons / S. Spinelli, 2003, S. 446
Central Issues
In Anhlehnung an:
J. A. Timmons / S. Spinelli, 2003, S. 443
Cope with risk Staged financing
Conservative planning
Control debt
Financial Strategy Framework
Opportunity
Financial strategy
Degrees of strategic
freedom:
Time to close
Future alternatives
Risk / Reward
Personal concerns
Business strategy
Marketing
Operations
Finance
Value creation
Sources and deal
structure
•Debt
•Equity
•Other
Financial requirements
Driven by:
Burn rate
Operating needs
Working capital
Asset requirements
Sales
J. A. Timmons / S .Spinelli, 2003
9
Criterion Equity Capital Mezzanine Capital Borrowed Capital
Legal positionLiability
• (Co-)owner
• Liability at least to the amount of the investment
• Various
• Liability possible depending on the form of contract
• Creditors
• No liability
Remuneration • Depending on success
• Participation in profit and loss(dividends or capital appreciation)
• Depending on form of contract
• Interest claim, possibly
• Participation in profit and loss
• Independent ofsuccess
• Interest claim
Possessory title(repayment obligation)
• Residual claim(no repayment obligation)
• Depending on the form of contract
• Nominal claim(repayment obligation exists)
Influence on enterprise • Controlling rights and votes
• Controlling rights and votespossible
• No controlling rights and votes
Availability offinancialresources
• Open-ended • Usually long-term • Usually timed
Ranking in case of insolvency
• Lower ranking(liability capital)
• Ranking after borrowed capital
• Prior ranking
Furnishingsecurities
• None • None or subordinated claim
• (Prior ranking) securities
Financial Planning
10
• Executive Summary
• Product / Service
• Entrepreneur / Team
• Market and Competition
• Marketing and Distribution
• Organization an Personnel
• Execution Roadmap
• Chances and Risks
• Financial Plans
12
procurement
planning
production
planning
sales
planning
turnover
planning
personnel
planning
depreciation
planning
planning of
other
expenditures
investment
planning
capital
requirement
interest and
financial
planning
financial
planning
pro forma
profit and
loss
statement
liquidity
planning
budgeted
balance
sheet
Plan
• Invests
• Costs (+auxiliary plans)
• Revenues
• Profit budget plan
• Capital Requirements
• Liquidity
Important: The plans have to be consistent! Numbers should be as
precise as possible.
Structure of a Financial Plan
Requirements for Financial Plans
• Clear and logical structure
• Predictions over three to five years (at least one year
beyond the break even point)
• Decreasing accuracy over time (plan year 1 and 2 with
more detail)
• All figures have to be supported by data and
consistent assumptions
• Consistency
Fundamental Principles: Liquidity
1. More Cash is better than less.
2. Early Cash is better than cash that needs a long time to beobtained!
3. Cash that is less risk is preferable to risky money.
4. The distribution of values (?) is as important as theircreation.
Cf. J. A. Timmons / S. Spinelli, 2003, S. 443
Vgl. MBPW: Von der Idee zur Unternehmensgründung, München, 2001, S. 56ff.
Summary: Which questions must be answeredby the finance plan as part of the business plan?
• How will turn-over, investments and sales develop?
• How will liquidity develop? When will the break-evenpoint be reached?
• What are the additional finance requirements of thebusiness in order to quarantee liquidity?
• On which assumptions is the the finance plan based?
• Which sources are available, which additional sourcescould be tapped?
• What is the benefit for potential investors? Which annualrate of return can they expect?
• How do investors realize their gain (exit)?
Acquiring Funding
17
„The right investor can make the
difference between a good and
and a great venture!“
J. A. Timmons / S. Spinelli, S. 398
Stages of Financing
Page 19
Early Stage
Expansion
Exit
Stages of Business Development Funding
Page 20
• External vs. Internal Financing
• Equity Capital vs. Debt Capital
Sources of Funding
Page 21
Typical Problems ConcerningAccess to Debt Equity
• Not enough private equity
(relation between debt and private equity unbalanced)
• Interest charge too high
(constant negative influence on Cashflow and Liquidity)
• Armortization of mortgage begins before the first returns are realized
(Liquidity constraint)
• Costs of capital too high
(administrative charges, disagio),
• Interest rate risk
• Entrepreneurial risk is too high
• Not enough securities
• Unfitting matching maturities
(time of repayment should correspond to time of economic utilization)
• Markets providing debt and equity to nonsecure financing
situations.
• Types of risk capital markets:
– Informal
– Venture-capital
– Public-equity
• All three can be a source of funds for stage-one financing.
– However, public-equity market is available only for high-potential
ventures.
Risk Capital Markets
Page 23
Entrepreneurial Finance - VC
Page 24
• A professionally managed pool of equity capital.
• A long-term investment discipline, usually occurring over
a five-year period.
• Found in the:
– Creation of early-stage companies.
– Expansion and revitalization of existing businesses.
– Financing of leveraged buyouts of existing divisions of major
corporations or privately owned businesses.
• Venture capitalist takes an equity participation in each of
the investments.
Venture Capital
Page 25
• Objective of a venture-capital firm: generation of long-
term capital appreciation through debt and equity
investments.
• Criteria for committing to venture:
– Strong management team.
– Product and/or market opportunity must be unique, USP and
strategic advantages are defendable (e.g. patents, knowledge
base, structural hole).
– Business opportunity must show significant capital appreciation.
– Business opportunity has a promising potential for growth
– Realistic exit opportunities exist
Venture Capital Criteria
Page 26
Venture Capital:
Risk and Reward Structure
Page 27
• Economic outlook- general and industry.
• Comparative data.
• Book (net) value.
• Future earning capacity.
• Dividend-paying capacity.
• Assess goodwill/intangibles.
• Previous sale of stock.
• Market value of similar companies’ stock.
Evaluation Criteria Finance
Page 28
• Terms of the transaction between the entrepreneur and
the funding source.
• Needs of the funding sources:
– Rate of return required.
– Timing and form of return.
– Amount of control desired.
– Perception of the risks involved.
• Entrepreneur’s needs:
– Degree and mechanisms of control.
– Amount of financing needed.
– Goals for the particular firm.
Guidelines for Dealing with VCs
Page 29
Exit-channels of the VC-Sector
• Trade Sale
• Initial Public Offering
• Secondary Purchase
• Buy Back
• Loss
Prepare a five minute presentation that covers thefollowing points:
What is your business idea?
What is the customer benefit?
How do you take it to the market?
How do you create a revenue stream?
What will it take to make your idea come true?
Your Venture: 5 Minute Presentation
31
Short Summary: Do‘s and Don‘ts
in Entrepreneurship
J. A. Timmons / S. Spinelli, S. 399
Do‘s
• Involve the whole team.
• Draw the plan logically, comprehensibly, readably and
as short as possible.
• Show your passion for the enterprise by investing time
and a little money in your plan.
• Show critical risks and assumptions and explain why
these can be tolerated.
• Mention urgent and current problems and potential
solutions.
• Identify alternative funding sources.
J. A. Timmons / S. Spinelli, S. 399
Dos II
• Show the investor how he can benefit.
• Be creative in gaining the investor s attention.
• The plan is not the business!
• Accept commercial operations which provide you
with a positive cash-flow.
• Know your potential investors.
• Be realistic.
• Develop your finances from the qualitative part, not
vice versa.
J. A. Timmons / S .Spinelli, S. 397
Don‘ts
• Do not include mysterious information or persons.
• Do not give imprecise or vague information, do not includewishful thinking.
• Do not get too technical, avoid (too much) expert knowledge.
• Do not waste time and money on glossy brochures etc., showthem where the steak is.
• Do not think you have a commitment because someone shookyour hand. The business and the investment are not safe untilthe money is in your account.
A Final Checklist
Make Your Point Quickly and Give Hierarchy to your Data – The
Details Matter!
• Hook the readers, especially in the executive summary, by having
a compelling opportunity where you can:
– Identify a need or opportunity in a large and growing market.
– Conceptualize a business that will fill that need, or take
advantage of that opportunity.
– Demonstrate that you have the know-how and the team to
effectively build a profitable and sustainable business (or
identify how you will create such a team).
J. A. Timmons / S .Spinelli 2003
A Final Checklist II
Prioritize the points you are making into three categories:
– Essential – without this the plan makes no sense.
– Good to know – directly supports and gives context to your essential points.
– Interesting – provides a higher level of understanding of market dynamics, industry, etc., but may not relate directly to the nuts and bolts of your business plan. Interesting information should be relegated to the appendix so it doesn’t get in the way of the reader.
J. A. Timmons / S .Spinelli 2003
A Final Checklist III• Articulate the size of your market: who are your customers, why
they will purchase your product or service, how they will buy at
what price.
• Include evidence of customers – this will increase your credibility.
• Discuss the competition, and why the customer will buy your
product or service versus the alternatives.
• Articulate your marketing strategy. How will customers become
aware of your product and service, and how will you communicate
the benefits?
• Be specific when discussing your team. Articulate what relevant
experience each brings to the business. If you can’t identify key
managers, you should outline the type of experience you want and
a plan for recruiting that person.
• Edit for the details – clarity and typos – a sloppy presentation says
a lot! J. A. Timmons / S .Spinelli 2003
A Final Checklist IV
• Articulate your marketing strategy. How will customers become
aware of your product and service, and how will you
communicate the benefits?
• Be specific when discussing your team. Articulate what relevant
experience each brings to the business. If you can’t identify key
managers, you should outline the type of experience you want
and a plan for recruiting that person.
• Edit for the details – clarity and typos – a sloppy presentation
says a lot!
Thank You for Your Attention!