Revenue = Productivity x Number of Employees
4.3.5 A Bracket Model of New Technology Venture Development Venture Development
4.3.5.1 The Bracket Model
The following approach will focus on NTBFs, young technology ventures in no more than the first twelve years of their existence (ch. 1.1.1.1). It takes the position of an ob- server and identifies and utilizes mechanisms and drivers of changes of states of a new firm entrepreneurs being a part of.
Phased firm growth in the sense of GST is a result of a relation-oriented pur- poseful process of development in which a linear or circular interacting series of changes from inside or outside the firm lead irregularly to new development states associated with increases (or decreases) of appropriately selected ob- servable indicators of the developing entity.
That means, the approach focuses on the firm and its relevant super-systems, such as the economic and political systems, and consequently switches between macro- and micro-levels.
The model follows a teleological approach emphasizing often not “why things happen”
but emphasizing ways of behaving and asking What can it do? (the resources) What does it do? (the phased process) How does it proceed to reach the goal?
What can be expected with regard to reaching the goal – often providing “rea- sons for thinking that” (Figure I.2)?
Necessary resources during the pursuit of the entrepreneurial goal(s) are specifically given in Figure I.120 and Figure I.121, Figure I.125, Figure I.126 and Figure I.130.
“That something is ‘predictable’ {“expectable” in our context (ch. 4.1)} implies that there exists a constraint.” [Ashby 1957:132] (Braces added). The below presented
“bracket model” of development of NTBFs takes time as an implicit variable (states at given times, usually on a year-by-year basis) and focuses on some fundamental con- straints for a hierarchy of taxonomies (Figure I.128):
Firm type RBSU (“spin-outs from academia”) versus “other academic NTBF”
and “other NTBFs” (Table I.2)
Full and majority ownership and control versus minority ownership, little (al- most no) control (VC-based NTNFs; Table I.74)
VC-based NTBF do not only affect ownership and control, but also endow- ment with large financial resources and change in terms of management and organizational structure and probably strategy as well as execution following closely approaches used by large firms (ch. 1.2.7.2, Figure I.126, Figure I.134; A.1.1).
Differentiation of organic and non-organic growth (Figure I.127).
It is to be noted that concerning VC-based NTBFs the emphasis will be on combined ownership, control and financial endowment. Other types of (large) investments, for in- stance, for large-scale production-oriented NTBFs, may decouple these categories, for instance, through association with “silent partnerships” in the NTBF.
Furthermore, there may be always cross-roads when NTBFs with full and majority ownership and control change over to VC-based firms (Figure I.52). Prototypes of VC- based NTBFs will catch capital often during or at the end of the startup thrust phase (Figure I.125) or within the first five to eight years of existence. Several new biofuels firms were started immediately with venture capital (A.1.1).
The differentiation between organic and non-organic growth may be a “moving” typo- logy. For its growth and a restricted phase of its development an NTBF may switch between both modes (Figure I.123). Non-organic growth exposes a firm usually to in- tegration risk. While having a stake in another firm mostly improves revenue opportu- nities. Full acquisition improves often revenues, but iintegration risks means issues of management, coordination and performance.
Development of new firms is irregular. It proceeds via states of different life-times and modes of development. These exhibit three basic observable types of development (growth) as displayed in Figure I.107 depending on the founders’ goals and cha- racteristics of the firm which can be measured by appropriate indicators, for instance,
Linear growth which may be “high” (steep) or “low (cf. Figure I.123, Figure I.137, Figure I.141, Figure I.149);
Exponential (or hyperbolic) growth, which is typically “super high” and pro- ceeds often very fast (EGCs, “gazelles”; for instance, Figure I.145, Figure I.159) or occurs after a delay (Figure I.143, Figure I.144, Figure I.154);
Asymptotic growth, which will express “non-growth” situations.
Furthermore, as growth will be “perturbed” or interrupted, respectively, by firm-internal or external factors or both and associated with “transition states” (Figure I.133) change between different phenotypes of growth may occur (cf. delayed growth in Figure I.107). NTBFs with large-scale production will usually show significant growth patterns only after five to eight years of development and scale-up.
Basically, we assume to be sufficient that for growth dynamically stable states exhibit only (continuously and monotonously increasing) linear, slightly curved or exponential behavior for an observable interval <t1, t2> (Figure I.133).
If we can associate two subsequent dynamically stable states to the intervals <t1, t2>
and <t5, t6>, then the life-time of the in-between transition state (or states) will be attributable to <t3, t4>. For instance, for the German WITec GmbH (Figure I.123) the interval <2000,2002> would relate to a transition state (cf. also Figure I.156). This indicates that transition states of new firms may have life-times which are comparable in duration with dynamically stable states.
Formally, transition states may show up as an overlay on the overall growth pattern which let a gross observable indicator appear its indicator function to keep continuity, but not necessarily with increasing character.
If strong change is associated with a very short “life-time” of the transition state, the growth function will exhibit a “jump” as illustrated in Figure I.21 and seen for the reve- nue curves in Figure I.137, Figure I.139 as well as Figure I.140, where a basically exponential growth pattern of Nanophase Technologies between 1994 and 2000 is interrupted at 1997.
The bracket model is resource-oriented as well as activity- and process-oriented where “events” trigger a corresponding change of the state of the firm including the state(s) of the involved persons or groups of persons, respectively (Equation I.14, Equation I.15).
We define a (business) bracket as a generally observable, but also expected (Figure I.136) impact of a transform or a transformation into a new state of a firm in a specific business area. The associated observable quantity, reflecting the time development of the impact, will start with a usually difficult to detect onset, then there will be a peak-like or wider, skewed bell-shaped center re- presenting the essence of the impact, and finally a very long-tail characteriz- ing formally a slowly but continuously reducing effect of the transform or trans- formation, respectively (Figure I.135).
A business bracket will be represented by a graphical map of an event, the
“perturbation” of the time-development of a properly selected observable quantity characterizing a change into a firm’s transition state whose life-time ends when a following new dynamically stable state can be detected by an observable regular shape of the indicator function (Figure I.135, bottom).
That means one may identify a “front bracket” rather well, but principally never an “end bracket.” For practical purposes and special cases one could “declare” an end bracket with regard to the point when the impact of the transform/transformation is assumed to become so small that it can be viewed as having no further significant influence on the measurement result – and this may be the end bracket to coincide with the emer- gence of a new bracket.
Business brackets originate
externally from non-controllable effects or internally (controllable or uncontrol- lable) ones or
from unintentionally or intentionally effects – initiated by firm-internal decisions and actions.
Structurally, a bracket refers to a relation associated with a change of a systemic state of the entity under consideration. A long tail of a bracket map simulates artificially that a “bracket event” leads to a new state of the affected entity which will also influence future states, for instance, in terms of decision-making, actions and behavior. In this regard it simulates “organizational memory” (Figure I.136, Figure I.129) which actually corresponds to an “Ashby memory” [Ashby 1957:115-117], a theoretical construct evoked to explain behavior of an incompletely observable system by reference to an event in the past.
“If a determinate system is only partly observable, and thereby becomes (for that observer) not predictable, the observer may be able to restore predictabil- ity by taking the system’s past history into account, i.e. by assuming the exis- tence within it of some form of ‘memory’.” [Ashby 1957:115] Ashby provides a very illustrative example of reference to “memory” for a “living system.” 84 A business bracket reflects a business event which may affect a company’s competi- tive position in a positive or negative direction. It reflects influences on the develop- ment of a (new) firm as it affects measurably what a firm has, can, gets, owns, does (also as a response to external effects) or delivers (Figure I.130) in relation to the firm’s mission and goals.
Business bracketing emphasizes the micro (entrepreneur and firm) level of entrepre- neurship with the issue of connection to the macro level.
It relies on observations at the firm level to reveal mechanisms and processes of growth to be operative and focus on dynamics – through sequencing of events and their interactions and mutual reinforcements (Figure I.114, Figure I.115).
It provides explanatory guidance to make sense of the mechanisms and pro- cesses that give rise to new firms’ developments.
The business bracket concept has to be differentiated from the concept of “bracketing”
of social theory and sociology, in particular, temporal brackets (ch. 1.2.2). Here, brack-
eting would be a process related to the entrepreneurial person(s) in the context of the venture’s development, specifically a focus on people.
Temporal brackets, for instance, refer to cognition when a company-internal process or event will start (the front bracket) and an expectation how long an event or process will take to complete (end bracket) or, after a period of time, the cognition of an event that will start a subsequent event or an intentional start of a new bracket in anticipation of an event to occur. Their identification requires observation and direct inquiry into entrepreneurs’ intentions, decisions and behavior. Defining front and end brackets means the entrepreneur is largely in control of the bracket.
Temporal brackets can, for instance, be related to strategic actions or decisions taken by actors or to planning. That is, each temporal phase started either by cognition of a significant exogenous or endogenous event and a related or an unrelated endogenous decision and action taken by organizational decision-makers. Some of these brackets get formalized into timetables such as business plans. Some critical brackets associ- ated with pacing may be made explicit as sub-goals or milestones. Hence, temporal brackets may structure venture development, which is at least partially controlled by the entrepreneur [Bird 1992].
For ventures to emerge as recognized and reliable entities with a competitive advan- tage, the timing must be right. For this to happen, the entrepreneur needs to be aware of and understand the time requirements of the different events and processes.
Entrepreneurial growth of NTBFs will be described by periods of dynamic stability of states interrupted by transition states (Figure I.122, Figure I.133) initiated by business brackets.
With regard to observable indicators maping a business bracket and its time-depen- dency to a “wave” with positive or negative amplitude (the event’s impact) has the consequence that, for a curve, overlapping “waves” may exhibit, for instance, a dip or may even “extinguish” each other (“balanced forces”), as is seen for the interference effect of light. This is illustrated for the case of a bracket by an economic recession with a negative impact in Figure I.135 (for an example cf. also Figure I.123).
Depending on the subject under observation it is important to select an adequate indi- cator as a bracket may show up for one indicator, but not for another. To reveal an in- dicator Figure I.89 demonstrates this effect referring to the example of choosing the right indicator to demonstrate a relevant macro-trend. For this reason the current bracket approach to NTBF growth will usually consider both, revenues and numbers of employees (cf. Figure I.149) – and productivity.
Mapping the time-dependent impact of a business bracket to a specifically shaped “wave”
How resulting growth is reduced by the effect of a recession
Figure I.135: Defining a bracket’s time-dependent development concerning its impact and how brackets with negative impacts add up through overlap resulting in an observable dip in an observable growth curve.
For instance, recession stems primarily from the (enlarged) economic system and may affect (almost) any kind of an entrepreneurial firm. It is a general bracket. If only a particular kind of NTBF is affected, for instance, of a specific industry or market, we have a special bracket.
Concerning observability and meaning the bracket approach depends on an (almost) complete data set for the relevant effects (transforms, transforma- tions) whose collection for NTBFs is generally a challenging exercise.
Brackets may, or usually will, affect the whole system relevant for (technology) entrepreneurship (Figure I.13), but will often be associated with only a particu- lar sub-system’s states due to limitations of access to relevant needed data (viewing “pars pro toto”; Equation I.15).
According to the bracket model entrepreneurship appears as a series of transforma- tions accompanying a new firm’s development into a viable small or medium-sized firm. Each transformation corresponds to a bracket generating a transition state. The transition state is a critical period of the firm’s development into a new dynamically stable state involving decision, actions and activities of change to respond adequately to the initiating bracket or brackets.
As brackets represent relations, between an operator and an operand (or a firm and a market/customers or a firm and the economic system in a reces- sion) they will exhibit regional dependencies concerning their impacts.
Differences, for instance, in sales effects to customers may be due to different cultures, attitudes and preferences in different countries. An example for the global level would be: An internationally operating food company introduces a new product based on genetically modified objects (GMOs) and increases distinctly its revenues specifically through this product in the US. On the other hand, in Germany the product may be rejected largely by the public – and, moreover, the firm’s reputation may decline generally in Germany so that revenues for all its other products also decrease.
And there may even be country-specific regional differences. A case of introducing one kind of innovative self-cleaning roof tiles in Germany by the firm Erlus Baustoff- werke AG from the south of Germany [Runge 2006:237-239] is an intentional bracket generation. If considered as one bracket for whole Germany, it would have a distinct regional impact – fewer sales than potentially possible. The reason is, there are clear regional differences for color preferences for roof tiles in Germany: In the north pre- ferences are for grey/black, whereas in the south red/brown is preferred.
Focusing on the above growth and bracket indicators (measured revenues, number of employees, probably profit and productivity) sometimes does not allow to detect a bracket by an observer – though the firm “feels” all its impact. This is illustrated in Figure I.136 for a growth situation where two brackets occur within a rather short pe- riod of time, and the latter having at least the same impact as the previous one.
Inspecting simultaneously several indicators may be a clue that may reveal the impact of the latter one. This applies to two positive, but also negative brackets.
An example that several brackets occur which will not be resolved by our common in- dicators is shown in Figure I.144. The brackets may occur so fast after one another that the in-between phases cannot be observed. If the time period between the two bracket events is larger, the corresponding growth curve may exhibit a “shoulder” of the clearly emerged latter bracket.
A final remark concerning brackets and their time dependencies should be made. A bracket and its time development is a representation of an individual, single event which will not change sign of the amplitude (impact) over time (Figure I.135). It reflects a change of a firm’s state in one direction, by a positive or negative impact.
However, brackets may sometimes apparently appear to be reflexive. Envision a pharma firm having launched a new “blockbuster” drug in the market that made $700 million in sales over the first two years – product sales associated with a positive bracket. But, in the third year, after critical lethal side-effects were detected, the firm was subjected to a number of lawsuits, the cost of related litigations amounting to say
$600 million (in the US; cf. the Vioxx and Lipobay cases, Table I.66). This seems to be a conversion of the original bracket, a change to a “negative wave” induced in the firm and by the same set of customers that generated the positive impact.
However, we encounter here decoupled brackets! The impact of the first positive bracket, being an intrinsic part of a relation (to customers), means the firm has changed its state and when the firm encounters the negative effect it meets the impact (of the customers) in a different state: these are separate, different brackets by con- cept.
The result of a bracket in the current understanding and GST approach to initiate a firm’s new state has the consequence that its development (and growth) corresponds to an irreversible process.
There is no “fall-back position” to the previous state (status quo ante) as a strategic option for decision-making. What can principally be re-established is an “empty shell,” a constellation which will be used by persons and agents of the system who, however, will have changed knowledge, attitudes, decision- making potential etc. for initiating actions.
Figure I.136: Burying a bracket from observation such as revenues resulting from im- pacts within a short time difference.
The bracket approach is a “perturbation theory” treating firms’ developments and associated states as essentially dynamically stable growth, for instance, with innova- tion and investment and productivity persistence and appropriate sets of input, re- sources, activities and decisions, etc. to be perturbed by company-internal or external effects.
In this way the notion “back on track” has a particular meaning: After a perturbation of a dynamically stable state the firm will proceed to a new dynamically stable state which, however, may or may not be structurally comparable to the previous one (linear – linear; Figure I.133, left) or (almost linear – exponential; Figure I.133, right).
The bracket model is an irregular phase model of new firm development contrasting the common stage-based views, such as that of Greiner (Table I.68) which associates growth with a set of structurally and operationally predefined phases initiated by a very small set of given initiators and related generic activities to proceed through the re- lated phase.
We shall proceed assigning a variation in the measured/observable curve to changes of the particular state of the firm (Equation I.11; Figure I.135, Figure I.136) by one or
more unbalanced forces and providing the reasons for thinking that the observed changes are due to particularly significant effects out of a set of conceivable effects.
These possible effects are derived either from empirical facts, cases, experience and/or rules of thumb established for NTBFs or existing large firms or from general theories like Porter’s Five Forces Model and the Encapsulated Six Forces Model (ch.
1.2.5.3; Figure I.33, Table I.16, Table I.18 ) and reference to firms’ failures (Figure I.114, Figure I.115) and finally hazards and risks for NTBFs (Table I.65, Table I.66).
A key role will be played by generally known effects (of super-systems) affecting NTBF growth like an economic recession or, for instance, the “silicon cycle” affecting specifically the semiconductor and photovoltaic industries as well as legislation for policy-driven markets (CleanTech like wind and solar power or biofuels). In this line, the recent (March 2011) Earthquake/Tsunami catastrophe of Japan affected, at least in certain countries like Germany, the nuclear power industry and attitudinal markets.
It should be noted, however, that for new firms endowed usually with only little re- sources brackets may emerge which will affect medium-size and large firms to only a little extent.
The first business bracket of entrepreneurship has been attributed to firm’s foundation with aspects of initiating the legal form of the firm and ownership and control (Table I.74). This event induces a startup state which can be viewed as a transition state (Figure I.133) which including its duration (life- time) corresponds to the startup thrust phase of the initial configuration (ch.
4.3.2, Figure I.125).
Firm’s foundation is particularly also a fundamental temporal bracket for the founder person(s) implicitly represented in Figure I.15 (firm’s birth) and Figure I.16, the transition from intention to deed.
Instability of that very early state may be due to the formation process of agreement concerning the new firm’s mission, roles and responsibilities of the leadership team and, if present, functions of employees and formation of the firm’s culture. This state may also require, for instance, to relief initial group tensions as described specifically for a team in Figure I.70.
The startup thrust phase may also be associated with financing issues and establish- ing network connections, such as building the firm’s advisory board or setting up co- operative connections with other firms. And there may be intentional changes of the original business idea or goal – becoming aware of a false start (ch. 4.3.2; 3M, NanoScape) – or revealing a new opportunity to be pursued.
A probably incomplete list of corresponding perturbations of NTBF growth will be sum- marized in Table I.76 in a structured manner referring partially also to risk classes for technology entrepreneurship (Table I.65).