Revenue = Productivity x Number of Employees
4.3.5 A Bracket Model of New Technology Venture Development Venture Development
4.3.5.2 The Bracket Model for Framing Empirical Observations and Explaining NTBF Development Observations and Explaining NTBF Development
Observation of actual and continuous development (growth) among NTBFs requires a long period (ten to twelve years) of investigation. But to deal with survival and growth of new firms the startup thrust and early development phases of NTBFs, particularly the initial configuration (ch. 4.3.2), will provide appropriate quantitative variables and parameters and criteria.
The bracket approach provides a way to a systematic analysis of a firm’s ability to resist external shocks: “If there is a high probability of any negative event occurring and the hardship it imposes are generic, then one can incorporate the effect of ran- dom events through the venture’s capacity for withstanding a common set of probable difficulties” [Woo et al. 1994:520]. In this sense the menu of (positive and negative) events in Table I.76 can be seen as a conceptual basis for the following discussion.
The bracket approach boils down to “curve analysis” (“curve resolution”), origins of change and discussions of dynamic stability intervals of growth.
For instance, when encountering a significant (positive) jump in an early linearly in- creasing growth curve, as is observed in Figure I.137 for the German nanocoatings firm Nano-X GmbH (founded in 1999), the most straightforward assumption would be to associate the bracket with a remarkable sales activity. The earlier increase of the number of employees to prepare the related sales success (a further “reason why we think that”) indicates such an effect. And, indeed, this is the case. However, the actual cause of the jump, what the bracket represents, can only be grasped by switching to inspection on the firm level.
In 2004 Nano-X (B.2) captured a very big order for a new innovative product including this order to provide continued demand in the near future. The firm’s first reaction was expanding production capacity and manpower (2003/2004 bracket of the employees’
curve). The second (2004/2005) bracket is the reflection of the revenues’ jump, dou- bling revenues. The product concerned surface coating (scale protection of metal sheets avoiding high-temperature oxidation) with the automobile industry as the end- user. The product is sold to German steel producer Thyssen-Krupp delivering the coils nano-coated by Nano-X technology for several types of metal sheets for the car body of the Volkswagen Passat model.
The Nano-X case shows that future revenues and profits of young firms cannot be foreseen reliably and single big orders may exhibit tremendous influence – in the positive or negative sense if the firm depends on big orders of one of very few cus- tomers (Figure I.115).
A jump in revenues like that of Nano-X is also observed for German ATMgroup AG from 2008 to 2009. Without detailed knowledge about the firm’s internalities there cannot be a straightforward explanation – as in the case of Nano-X. The individual
details for an explanation are as follows: The firm was founded as ATMvision AG in 2005 and in 2008 it acquired two other firms to become ATMgroup (B.2) which expresses the jump as a “resulting explosion” through non-organic growth (Figure I.127). Other examples of non-organic growth (Figure I.141) do not show such a marked effect.
Figure I.137: German Nano-X GmbH with a jump of otherwise linear growth periods (dotted line replaces missing data points).
A linear growth curve changing over into much steeper “linear” shape after a disrup- tive innovation (Figure I.138) can be seen in the historical example of intrapreneurship of the German firm Henkel AG & Co. KGaA (Henkel & Cie. at that time). Founded in 1876 in 1878 the firm’s first branded washing material “Henkel’s Bleich-Soda”
(Henkel’s Bleaching Soda) entered the market. Almost linear growth of production from 1902 to 1907 (Figure I.138) is observed. Sales of the “Bleaching Soda” from 1884 (239,000 German Reichsmark (RM) to 1900 (1,155,000 RM) [Feldenkirchen and Hilger 2009] showed roughly exponential growth over the period. For comparison in 1914 the value of the US dollar had a factor of ca. 4.2 to the German Reichsmark [Runge 2006:473,474].
The total production increase after 1907 is due to the Persil innovation [Feldenkirchen and Hilger. 2009]. A rather steep exponential growth of Henkel’s revenues due to sales of Persil, the first “self-acting detergent,” was prevented by a very long lasting, terrible global event, World War I (WWI; Figure I.139). On the other hand, the devel- opment in Figure I.139 reveals that even an extremenly strong force can be largely balanced by an extremenly successful innovation assumed to exhibit exponential de- velopment (indicated by the dotted curve progression): Henkel’s revenue curve pla- teaued during WWI, rather than showing a marked dip.
Figure I.138: The bracket of Henkel’s Persil innovation in Germany (production of glycerin ca. 1% of total neglected).
Figure I.139: Bracketing observed for Henkel’s revenues by an extremely severe global factor.
It is not uncommon that some few (fast) growing firms exhibit steep exponential growth keeping yearly revenue increase of fifty percent to one hundred percent from startup. Such companies achieve one billion dollar (euro) in revenues in just a few
years, usually less than ten years, as achieved by Cisco (Figure I.145), Q-Cells (Figure I.152, Figure I.153) or Google (Figure I.159, Figure I.160; ch. 4.3.6).
More than often assignment of brackets to entrepreneurship-related effects, however, may become tough as the below Figure I.140 shows referring to Nanophase Techno- logies Corp. Nanophase was founded in 1989 as a spin-out of Argonne National Laboratories. In the early years, Nanophase ramped up manufacturing technologies to commercial scale and established a viable manufacturing facility. In 1996 revenues were still quite small (approximately $600,000).
From its inception in November 1989 through December 31, 1996, the firm was in a development stage of scale-up. Since January 1, 1997, the Company has been en- gaged in commercial production and sales of its nanocrystalline materials, and the firm no longer considered itself in the development stage. It went public at the end of 1997 and the common stock traded on the NASDAQ.
The example of Nanophase Technologies shows the fundamental risk of new firms, namely dependency of revenues on very few customers. Nanophase shows both as- sociated effects – much gain and much loss.
Furthermore, the example stresses an important issue of the current and almost all approaches to growth of new firms relying on revenues and/or number of employees – the longer-term viability of a firm without positive cash flow and, moreover, rather than profit generating having net losses over years. Here patterns of decreased net losses follow essentially increased revenues.
Figure I.140, continued.
The dip at 2001 of the curve is obvious – the Dot-Com Recession. It is not clear, however, whether there is a (negative) dip between 1997 and 2000 and how to as- sign it. There is no straightforward explanation for one bracket of such a markedly negative effect which stops an exponential growth till 1997.
Comparisons with other firms concerning the period 1996-1998 does not provide a clue. Hence, either there is a large one-time negative influence or the curve repre- sents a one-time large addition to revenues which, for the 1996 – 1998 – 2000 pe- riod, would show exponential growth. The last option is indeed is the case.
Revenues from BASF and CIK constituted approximately 68.5 percent and 10.0 percent, respectively, of the company’s 2000 revenues.
The reduction of 2009 revenues to the level of 2005 could be a huge effect of the 2009 Great Recession. The decrease of the revenue curve starting already after 2007 and its tremendous magnitude in comparison to revenue reductions of other firms during the recession suggests the existence of an additional (negative) effect.
The cause is revealed by inquiry on the firm level.
Since 1996 Nanophase’s number of employees was hovering around fifty five (with a peak of 61 employee in 1997 and currently around 55).
Figure I.140: Revenues and net losses of Nanophase Technologies.
The actual financial state of a firm and its overall “health” is not generally reflected by revenues. The assumption of revenues to be an appropriate indicator for the new firm’s financial state or number of employees to reflect viability of growth is generally associated with some implicit premises – and the non-accessibility to more appro-
priate data unless dealing with the few NTBFs which are already publicly traded at a stock exchange.
Usually, one takes the “income state” (revenues) in the sense of “pars pro toto” as an indicator of a firm’s financial state to be sufficient for further growth. But, ideally at least the “loss state” (net loss) and “financial reserves” (cash, equity, or number of basic and diluted shares outstanding) should be taken into account.
Patterns of non-organic growth (Figure I.127), which is essentially growing by having stakes in or acquiring other firms or establishing joint ventures (JVs), provide complex cases. But, for the few cases under consideration, related NTBFs do not show speci- fically significant patterns. An illustration is presented by the two German NTBFs Nanogate AG and JPK Instruments AG (Figure I.141). These do not only belong to the same competitive group as Nano-X GmbH (Figure I.137) or WITec GmbH (Figure I.123), respectively, but are structurally very close – also with regard to years of firms’
foundation, being subjected to the Dot-Com Recession.
In particular, WITec GmbH and JPK Instruments AG show comparable education and leadership structures of the entrepreneurial team (Table I.41; Figure I.73) and for both the founding team is the owner or majority owner, respectively, with full control of their firms. They both are university spin-outs (of physics departments) and offer nanotools (“nano-analytics”) on the basis of optical microscopy for research purposes address- ing essentially “hard” substrates versus “soft” substrates like cells and provide “ena- bling technologies” for use in industrial R&D departments and private or public re- search organizations.
Furthermore, WITec and JPK have a large proportion of customers from life science (pharmaceuticals) which make them rather resistant against economic crises like the Dot-Com Recession or the Great Recession. Both exhibit dedicated innovation persis- tence and linear growth curve but have different CAGRs (JPG Instruments has 41 per- cent between 2002 and 2010, WITec 29 percent between 1998 and 2009), and show different productivities (WITec ca. €270,000 per employee, JPK Instruments ca.
€125,000 per employee).
Both firms show marked innovation persistence. Contrary to WITec (Figure I.123).
JPK Instruments (founded in October 1999) had it startup thrust phase during the Dot- Com Recession. It launched its first product into the market only in the fourth year after foundation (in 2002). It is not clear whether the strong increase in revenues of JPK between 2002 and 2004 (from €650,000 to €4.5 mio.) is the result of increasing sales of instruments or taking a stake in the firm nAmbition or both.
Furthermore, it is to be noted that, in terms of revenues, WITec and JPK do not show any effect due to the Great Recession in 2008/2009. The most likely reason is that both address to a large extent customers from public or industrial research areas which mostly did not encounter any significant shortages of their budgets during the crisis.
On the other hand, Nano-X GmbH (founded 1999) and Nanogate AG 87 (founded for- mally 1998), both having experienced leaders or managers, respectively (B.2), are active in nanotechnology for materials and materials’ surfaces (“chemical nanotechno- logy”) and are based essentially on “enhancing technologies” and less on “enabling technologies” for industrial and consumer applications.
Moreover, both are spin-outs from the same public research institute at almost the same time and both are located in close proximity. However, as Nano-X is a private company, Nanogate is VC-based, essentially a spin-out that resulted from a coopera- tion of the German Bayer AG and the public Institute for New Materials (INM) with immediate involvement of the VC firm 3i. Furthermore, it is to be noted that two of the founders from INM left Nanogate relatively soon after foundation.
Figure I.141: Revenue developments of German firms Nanogate AG (founded 1998) and JPK Instruments AG (founded 1999).
The linear growth of Nanogate until 2004 and then the steeper linear growth until 2008 do not exhibit any special remarkable effect driving revenue growth. However, the big jump out of the 2009 Great Recession is to be noted. Only knowledge of the non- organic growth strategy and results of Nanogate would provide the clue to assign the jump in revenues to acquiring stakes in other firms rather than acquiring a big cus- tomer as observed for Nano-X (Figure I.137).
Productivities of both firms differ markedly: Nano-X (ca. €120,000 per employee), Nanogate (ca. €180,000 per employee). On the other hand, JPK Instruments with a non-organic growth approach follows linear growth, similar to the technologically di- rectly comparable firm WITec (Figure I.123) without any indication about the role of its acquisitions or partial ownership of other firms.
For Nanogate the JV with Air Products and Chemicals from the US in 2004 opened up international markets the company might not have reached alone. But it is unlikely that the steeper increasing revenue after 2004 to be due to the JV event.
One may assume that building of different kinds of resource base involves different kinds of activity. And this may affect different development states and paths. Concern- ing financial resources for development, like cash flow, loans or equity provision with- out losing control versus equity from large, private investors, venture capitalists or IPOs, differences do not seem to be mirrored observably by the underlying growth indicators for WITec versus JPK but for Nano-X and Nanogate.
Also US NTBF Osmonics developed via non-organic growth [Runge 2006:91-94].
Considering also that Google in its early years took over another firm with no observ- able macro-effects (Box I.24; Figure I.159, Figure I.160) it seems that getting a stake in another firm with the possibility of revenues’ development to behave like a big order does or massive addition of employees or both do not necessarily show up as a bracket in a revenue curve. Furthermore, the discussion of PayPal indicates that also mergers must be considered.
Related to the relatively small sample of NTBFs discussed in this book, we feel that it is not clear whether NTBF development by non-organic growth should be taken into account as a development path with its own observable specifics if revenues or num- bers of employees are considered.
Nanogate exhibits a continuous pursuit of growth by both an internal and external fo- cus. If, however, there is a marked increase in number of employees it can be expec- ted to increase organizational pressure to integrate and consolidate, irrespective of whether it results from organic or non-organic growth.
As observed for NTBFs with organic growth also Nanogate shows a marked decrease in productivity when the number of employees increased significantly (here from 41 (2006) to 68 (2008) employees; Figure I.142). So far, a negative bracket has been associated with management and/or organizational issues. And this seems also to ap- ply here. Nanogate’s annual report 2007 tells us:
“As part of the implementation of the strategic growth programme NEXT, a new organ- isational structure was created, a management stratum was established and the cen- tral management strengthened with the addition of a commercial director and a man- agement position for the buildings/interiors business segment.”
Furthermore, in 2008 Nanogate Advanced Materials GmbH, the JV with Air Products
& Chemicals, was fully acquired by Nanogate and in 2009 the related dip is addition- ally enforced which should be an effect of the 2009 Great Recession.
Figure I.142: Increase of number or employees and associated effects on productiv- ity for German Nanogate AG.
After having taken a general economic and other external effects, recession and WWI, into consideration we shall consider the industrial system, essentially early growth of particular new industries or markets (providing high growth opportunities). Macro ef- fects for the synthetic dye and automobile industries including the fast rise of gigantic firms like the German BASF, Bayer and Hoechst were cited by Runge [2006: 274-275]
in terms of entry and exit firms of the industry or given by the Ford and General Motors cases in the US [Bhidé 2000:245-247].
The birth of an industry (segment) usually induces a “boom” of firms’ foundation (cf.
the biofuels situation; A.1.1). It represents a special opportunity for entrepreneurship.
However, the particular “growth pushing events” for an individual new firm can rarely be foreseen or expected.
Basically, the growth curve of corresponding (very) successful firms has the pheno- type of “continuous – exponential” (Figure I.107). Birth of an industry (or a segment) means everybody is new in the business. And in such markets buyers have to deal with a new company or forgo the product or service altogether.
A first more recent example refers to the “mainframe computer age,” here the emer- gence of Enterprise Resource Planning (ERP) software and the German SAP AG (A.1.4) “grasping” the opportunity (Figure I.143). SAP had to overcome the recession of the first oil-price crisis around 1974, but actually could take advantage from a market-related infrastructural effect. Mainframe dominating IBM on which SAP’s soft- ware ran introduced a faster and cheaper model which enlarged the customer basis for SAP tremendously.
Early Growth of the Mainframe Computer-Based Enterprise Resource Planning (ERP) Industry Segment
SAP AG – Founded 1972; IPO 1988; (sources for data in A.1.4; compare pattern with that of Henkel, Figure I.138, Figure I.139); R/2 is a modular standard ERP soft- ware, the basis of SAP’s success (ch. 4.3.6) – cf. also Figure I.189.
Figure I.143: Brackets for the early growth of SAP AG.
Before being able to fully take advantage from the favorable market effect, SAP had to overcome a further recession. This explanation interprets the middle growth phase (1981-1985) as an overlap of the 1980 bracket and the ca. 1983 recession. This means an interpretation overcoming the recession rather than introducing two brack- ets at around 1981 and 1985. Further revenues developments of SAP are given in the Appendix (A.1.4). The quite linear revenue increase between 1976 and 1981 is associated with productivity data of SAP (Figure I.147) which are almost constant for the interval <1976,1979> and, hence, represent a dynamically stable state.
In a similar way, increased growth of Microsoft after 1986 is seen as a sharply expo- nential growth induced by a whole series of brackets between 1980 and 1985, some of them being listed in Figure I.144. Any revenues reducing bracket would be leveled off by these tremendous factors. Early revenue growth data are given in Table I.67.
Microsoft has been very responsive to the demands of IBM to secure the crucial order for the PC operating system MS DOS from IBM in 1980. After the success of the IBM PC Microsoft could drive hard bargains with PC manufacturers to consolidate its posi- tion in the existing PC operating system market to ultimately conquer the market.
As for SAP IBM with its new mainframe to run SAP’s application also for Microsoft IBM played a key role of “accelerating” the developments of the firm.
Early Growth of the PC-Based Industry
Microsoft Corp – Founded 1975; has been in the Inc. 500 List;
Many immediately following brackets and also the IPO in 1986, getting big orders and showing innovation persistence:
1980/1981: Huge contract with IBM to develop languages for their first PC including the operation system (DOS); arrival of the 16-bit IBM PCs.
Becomes the first major company to develop products for the Apple Macintosh.
1983: MS-DOS open to run on non-IBM machines; memory stretch beyond the ori- ginal 640K limits of the Intel 8086 chip; MS Word for DOS 1.0.
1984: Leading role in developing software for the Apple Macintosh computer, for instance, the Microsoft Excel spreadsheet for Macintosh; provided the essential technology basis for the Windows versions of Microsoft Excel a few years later.
1985: Graphical user interface (GUI) introduced (Windows).
Figure I.144: Bracketing during Micosoft’s early development (Sources of data from Note 88).
An example of early growth of a firm which did not suffer from any recession during its early growth phase is Cisco Systems, Inc. (Figure I.145). Furthermore, the Cisco ex- ample shows that productivity in addition to other growth indicators to be appropriate