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Beyond V2C: Entrepreneurs Risks and Returns in the Era of Networked and Global Business
Jukka Ala-Mutka1; Hamid Etemad2
Helsinki School of Economics, Finland (jukka.ala-mutka@hse.fi) and 2PhD, McGill University, Canada (hamid.etemad@mcgill.ca)
Ala-Mutka & Etemad EBRF+ICEB 2006 V2G
Research Question: SMEs and Consistent Rapid Growth? When firms are resource-deprived, relatively young, inexperienced and at the earlier stages of their life cycle, at least three families of questions are not clear:
i) which factors are present and influential, ii) how are they brought to bear at the early stages of a young firms life-span, and iii) which combination of factors can put the younger smaller firms on the higher growth paths, especially

Enduring Great Company?

Playing Solo
Pushed by Venture Capital
Source: Sepp & Nsi 2001 Also Rasila, Sepp & Hannula 2002 and Rasila 2004

Accelerated by V2C

A Summary Highlights of the Selective Characteristics of the Studied Case-Firms
Company Name 1.AirIQ Inc. 2.Carmanah Technologies Inc. 3.DTI Dental Technology Inc. 4.Extreme CCTV Inc. 5.Garda World Security Inc. 6.Pethealth Inc. 7.TLC Vision Inc. 8.Western Financial Group Inc. Average

Five year growth rate

Revenue 2005 Canadian $
Foundation IPO or Listing 1996 1999
3,014% 3,669% 2,570% 12,735% 9,452% 8,306% 28,938% 9,647%
$40 million $39 million $35 million $24 million $259 million $14 million $303 million $64 million

3,5 years 3,5 years

The Knowledge and Information gap
Need for assistance Capital and Knowledge gap Need for capital
Supplied by VC financiers

Investable

Required by Start-up companies
Knowledge and involvement

Prospective

Source: Rasila, Sepp and Hannula 2002

Gap Reduction Approach

Entrepreneurial-Managerial Gap
Shortcomings in both the mindset and the required qualities of the starting entrepreneurs in the beginning for the growth venturing to proceed (Penrose 1959, Kotter & Sathe 1978, Covin & Slevin 1997, etc)

Resource-Capability Gap

Equity Gap (Rasila, Sepp and Hannula 2002) It is ironic that there is no shortage of capital now; but there is a shortage of small-enough doses of it (Sepp & Nsi 2001)
Information-Knowledge Gap
Knowledge Gap (Rasila, Sepp and Hannula 2002)

Structure-Governance Gap

A structure-conduct-governance paradigm, where the changes in equity capital or ownership structure influence the governance principles of the enterprise (Ala-Mutka 2005)
Source: Etemad & Ala-Mutka 2006
The Entrepreneurial Choice
Historically, entrepreneurs have created jobs for themselves and family members, employment for others, and their regions as a whole gradually. Successful family firms, such as Medicis, Farnese, Della Rovere, Rothschilds, Armstrongs, Chippendales and Parsons, Ford, Carnegies and Rockefellers Creation and preservation of family wealth has been the primary objective over time Serial or professional entrepreneurs and coentrepreneurs The choice in the selection of entrepreneurial team
Four States of Personal-Company Risk Trade-Offs Based on the Range of The Entrepreneurial Choice

Company Risk

High growth
Speculative growth Personal Risk
Comfortable growth No growth ambitions Slow growth (risk-averse)
Findings #1: Returns of Entrepreneur
Average salary $101,000 of senior executive in Canada Average compensation $288,00 (Profit Listed growth companies) Year before IPO: top executives earn same than average SME executive Year after IPO: $286,000 and median $195,000 Fifth year after IPO: $350,000 and median $279,000. Examples Founder-director of TLC Vision Inc. $850,000 per year versus average annual income of $140,000 for typical doctors in Canada Founder and CEO of TLC Vision inc. with BBA Certificated Accountant was $450,000 per year vs. average salary for CAs with approximately 10 years' experience of $104,000 Gardas founder-CEO annual compensation were $135,000 in third year after listing and $883,000 in sixth year. In 2005 Non-exercised options value $4 million (shares). 4,9 million shares (19 %), at present stock value $110 million
Findings #1: Personal View to Success and Failure

Performance

$ 15m Salary, bonus, stock options and shares (exit) as entrepreneur D3
$1,5m Success trajectory $0,5m $150k A $70k

IPO / listing

D1 B A C1
Salary (as employee) Failure trajectory C2

Exercised stock options

Full or partial exit (as owner)
Findings #2 Risk of the entrepreneur and firm
The founders average ownership share declines from 35% before listing to 21% in the year of IPO and to less than 14% in five years after IPO (median 10%). ii. At the same time, they lowered their personal risks as well as company risks when they capitalize their entrepreneurial capital iii. The firm had raised funds from VC or stock market via IPO and private placements as early as possible.

VCs role was more important in the seed and start-up stages, became less important in the real growth stage. At the high growth stage the ventures were able to raise funds from banks as the earlier success worked as collateral. Funds from banks were certainly cheaper than those from VC (for example, 6,5 % interest rate from Bank than 12 % from VC)

High A

Professional

Y C X D Low Low

Ala-Mutka & Etemad EBRF+ICEB 2006 V2G Life Style

Traditional

Personal Risk
Findings #3 Towards Venture-to-Growth model (V2G) Expand their ownership-base earlier; ii. Go public early-on and; iii. IPO is not the main exit route for entrepreneurs, V2C actors or even venture capitalists (VC).
IPO and listing on stock exchanges seem to be a working mechanism for early stage financing, incremental and partial exit for all stakeholders, incentives for entrepreneurs and V2C actors and a measure of early, but not the ultimate, success.
Findings #3 Towards Venture-to-Growth model (V2G)
100% Seed-financier Investors through stock market Institutional investors

Co-Entrepreneurs

Ownership
Founder 0% Prospective Investable in 1 year Listable in 3 years V2C VC Global Gazelle in 6-12 years Stock market

Entrepreneur

Founders reduce their personal risks by exchanging part of their ownership stake for higher salaries, stock options and partial exits during the growth. Founders will gradually face similar incentives to those of the co-entrepreneurs as well as the hired managers Support long-term commitment and the separation of the key roles: manager, director/board member and owner This evolution is actually required by the formal and institutional investors It resonates with good governance principles requested by stock exchanges. The Structure-Governance-Paradigm is fundamental element of the rapid growth ventures beyond V2C.
V2G model points out three proposals
1. it examines risks and returns from
entrepreneurs individual viewpoint 2. it explores risks and ambitions between individual and enterprise 3. it describes the importance of the ownership development of the enterprise and development of the value of the enterprise

Thank You! Questions?

Growth path of Garda World Security Inc.

10 years

Growth Wave 1 Growth Wave 2

20000 18000

Size / Regional

Customer / Global

One-stop-shop of One-stop-shop of security services security services

5 years

Growth point 2

2000 Rev enue C$

Growth point 1

$2004 2005

Employees