What is the entrepreneurial life cycle?
The Entrepreneurial Life Cycle repeats itself in businesses of all sizes, from start-ups in a garage to corporate entrepreneurship activities in global Fortune 500 companies. It starts with an entrepreneur who perceives an opportunity, creates an organization to pursue it, assembles the required resources, implements a practical plan, assumes the risks and the rewards, all in a timely manner for all involved. We present the seven stages in the Entrepreneurial Life Cycle.
Entrepreneurs are directly involved in the dynamic, and very complex, interrelationship between financial management and business strategy. This is the significant difference that sets entrepreneurial management apart from all business management practices. In almost all cases, the person making the decisions has personal risk at stake. The worst-case scenario for folks “at work” is getting fired. The worst case for entrepreneurs is losing their home, personal credit, and lifestyle, as well as the destruction of family relationships.
Defining Entrepreneurial Management: Peter Drucker remarked that for the existing large company, the controlling word in the phrase “entrepreneurial management” is “entrepreneurial.” In any new business venture, the controlling word is “management.” Therefore, for the purposes of our work we lean toward “management” as a discipline for entrepreneurs. We define entrepreneurial management as the practice of taking entrepreneurial knowledge and utilizing it for increasing the effectiveness of new business venturing as well as small- and medium-sized businesses.
The heart of entrepreneurial management is continually juggling these vital management issues:
- What is this venture about? (mission and values statement)
- Where should it go? (goals and objectives)
- How will it get there? (growth strategy)
- What does it need to get there? (people and resources)
- What structure is best? (organizational capabilities)
- How much money does it need and when? (financing strategy)
- How will it recognize the final destination? (vision of success)
These vital entrepreneurial management issues and activities play out in what we call the entrepreneurial life cycle. The entrepreneurial life cycle repeats itself in businesses of all sizes, from start-ups in a garage to corporate entrepreneurship activities in global Fortune 500 companies.
It starts with an entrepreneur who perceives an opportunity, creates an organization to pursue it, assembles the required resources, implements a practical plan, assumes the risks and the rewards, all in a timely manner for all involved. It was once said that entrepreneurship is a lot like driving fast on an icy road. We prefer to think of entrepreneurship as less reckless and more methodical.
Entrepreneurship is a continual problem-solving process. It is like putting together a huge jigsaw puzzle; at first pieces will seem to be “missing,” obscure, or not clearly recognizable.
Not all entrepreneurial life cycles follow a single process, but our research suggests that the stages we present below are common in the most successful emerging growth ventures. Size, profitability, commitment, complexity, scale of organizational structure, decrease in risk, increase in value, and decrease in founders’ involvement characterize each stage.
We believe that by knowing and understanding these stages entrepreneurs, business managers, investors, and consultants will be able to make more informed decisions, and most of all, be prepared themselves for challenges that lie ahead.
The Seven Stages in the Entrepreneurial Life Cycle
Stage 1. Opportunity Recognition
This “gestation” period is quite literally the “pre-start” analysis. It often occurs over a considerable period of time ranging from one month to ten years. At this stage it is important to research and understand the dimensions of the opportunity, the concept itself, and determine how to decide whether it is attractive or unattractive. The individuals need to look internally and see if they are truly ready for entrepreneurship. The vast majority of people, including almost all inventors, never move off of this stage and remain just “considering” entrepreneurship.
Stage 2. Opportunity Focusing
This is a “sanity check,” a go/no-go stage gate for part-time entrepreneurs because it fleshes out shaky ideas and exposes gaping holes. Venture capitalist Eugene Kleiner, of Kleiner Perkins Caufield & Byers, says, “Focus is essential; there can be the possibility of the business branching out later, but the first phase of a company should be quite narrowly defined.” It is important to include objective, outside viewpoints because different people can investigate the same opportunity and come to opposite conclusions.
Stage 3. Commitment of Resources
Most entrepreneurs see commitment as incorporating their business or quitting their day job. But this stage actually starts with developing the business plan. There is a huge difference between screening an opportunity and researching and writing a business plan. Writing an effective business plan requires a new level of understanding and intense commitment. The process will take between 200 to 300 hours, so squeezing that amount of time into evenings and weekends can make this stage stretch over three to twelve months. A common mistake entrepreneurs make is skipping the business plan; commit other resources, start the venture, then follow up and try to determine exactly what the focus will be for the venture.
Stage 4. Market Entry
Profitability and success define the market entry stage. The entrepreneur is committed with a very simple organization, the resources were correctly allocated according to the business plan, and the first sales were made. This is what defines success in the very early stages. If the business model was profitable, reasonable objectives were met, and the venture is on track for attaining true economic health, then the entrepreneur can chose between a capital infusion for growth or remaining small with self-financing (bootstrapping).
Stage 5. Full Launch and Growth
At this stage, the entrepreneur needs to choose a particular high-growth strategy. Upon considering such alternatives, quite often the entrepreneur chooses to remain a small business and never passes this stage or perhaps opts to remain operating as a sole proprietor. Or the venture could remain small for the simple fact that not all small ventures can or will become big companies. They are not fast growth potential because there is not enough room in the market for growth, their production and management systems are not scalable, or they will not scale because the rate is too great of a challenge to the management.
Stage 6. Maturity and Expansion
Now the venture is a market leader at cruising altitude. The growth becomes a natural extension of the venture through professional management practices. This professional management team is implementing the venture’s growth strategy through global expansion, acquisitions, and mergers as cash is plentiful and inefficiencies are completely flushed out.
Stage 7. Liquidity Event
This harvesting stage is focused on capturing the value created in the previous stages through a business exit. Typical exits are an initial public offering (IPO) or being acquired by a larger publicly traded corporation. Unfortunately, most of the literature in entrepreneurship has concentrated on the earlier stages. Little attention has been given to exits. We know from experience that the opportunity to exit successfully from a venture is a significant factor in the entrepreneurial life cycle, both for the entrepreneur and for any investors providing investment capital along the way.