Entrepreneurship

A Definition of Entrepreneurship

The concept of entrepreneurship has a wide range of meanings. On the one extreme an entrepreneur is a person of very high aptitude who pioneers change, possessing characteristics found in only a very small fraction of the population. On the other extreme of definitions, anyone who wants to work for himself or herself is considered to be an entrepreneur.

The word entrepreneur originates from the French word, entreprendre, which means "to undertake." In a business context, it means to start a business. The Merriam-Webster Dictionary presents the definition of an entrepreneur as one who organizes, manages, and assumes the risks of a business or enterprise.

Schumpeter's View of Entrepreneurship

Austrian economist Joseph Schumpeter 's definition of entrepreneurship placed an emphasis on innovation, such as:

• new products
• new production methods
• new markets
• new forms of organization

Wealth is created when such innovation results in new demand. From this viewpoint, one can define the function of the entrepreneur as one of combining various input factors in an innovative manner to generate value to the customer with the hope that this value will exceed the cost of the input factors, thus generating superior returns that result in the creation of wealth.

Entrepreneurship vs. Small Business

Many people use the terms "entrepreneur" and "small business owner" synonymously. While they may have much in common, there are significant differences between the entrepreneurial venture and the small business. Entrepreneurial ventures differ from small businesses in these ways:

1. Amount of wealth creation - rather than simply generating an income stream that replaces traditional employment, a successful entrepreneurial venture creates substantial wealth, typically in excess of several million dollars of profit.

2. Speed of wealth creation - while a successful small business can generate several million dollars of profit over a lifetime, entrepreneurial wealth creation often is rapid; for example, within 5 years.

3. Risk - the risk of an entrepreneurial venture must be high; otherwise, with the incentive of sure profits many entrepreneurs would be pursuing the idea and the opportunity no longer would exist.

4. Innovation - entrepreneurship often involves substantial innovation beyond what a small business might exhibit. This innovation gives the venture the competitive advantage that results in wealth creation. The innovation may be in the product or service itself, or in the business processes used to deliver it.

Sample Business Plan Outline

Title Page

Name of company, date, contact information, etc.

Table of Contents

Executive Summary

1. Business Concept
2. Company
3. Market Potential
4. Management Team
5. Distinct Competencies
6. Required Funding and its Use
7. Exit Strategy

Main Sections

I. Company Description

• Mission Statement
• Summary of Activity to Date
• Current Stage of Development
• Competencies
• Product or Service
• Description
• Benefits to customer
• Differences from current offerings
• Objectives
• Keys to Success
• Location and Facilities

II. Industry Analysis

• Entry Barriers
• Supply and Distribution
• Technological Factors
• Seasonality
• Economic Influences
• Regulatory Issues

III. Market Analysis

• Definition of Overall Market
• Market Size and Growth
• Market Trends
• Market Segments
• Targeted Segments
• Customer Characteristics
• Customer Needs
• Purchasing Decision Process
• Product Positioning

IV. Competition

• Profiles of Primary Competitors
• Competitors' Products/Services & Market Share
• Competitive Evaluation of Product
• Distinct Competitive Advantage
• Competitive Weaknesses
• Future Competitors

V. Marketing and Sales

• Products Offered
• Pricing
• Distribution
• Promotion
• Advertising and Publicity
• Trade Shows
• Partnerships
• Discounts and Incentives
• Sales Force
• Sales Forecasts

VI. Operations

• Product Development
• Development Team
• Development Costs
• Development Risks
• Manufacturing (if applicable)
• Production Processes
• Production Equipment
• Quality Assurance
• Administration
• Key Suppliers
• Product / Service Delivery
• Customer Service and Support
• Human Resource Plan
• Facilities

VII. Management and Organization

• Management Team
• Open Positions
• Board of Directors
• Key Personnel
• Organizational Chart

VIII. Capitalization and Structure

• Legal Structure of Company
• Present Equity Positions
• Deal Structure
• Exit Strategy

IX. Development and Milestones

Time may be specified on a relative scale rather than specific calendar dates. Milestones may include some or all of the following:

• Financing Commitments
• Product Development Milestones
• Prototype
• Testing
• Launch
• Signing of Significant Contracts
• Achievment of Break-even Performance
• Expansion
• Additional Funding
• Any other significant milestones

X. Risks and Contingencies

Some common risks include:

• Increased competition
• Loss of a key employee
• Suppliers' failure to meet deadlines
• Regulatory changes
• Change in business conditions

XI. Financial Projections

• Assumptions (Start date, commissions, tax rates, average inventory, sales forecasts, etc.)
• Financial Statements (Balance Sheet, Income Statement, Cash Flow Statement)
• Break Even Analysis
• Key Ratio Projections (quick ratio, current ratio, D/E, D/A, ROE, ROA, working capital)
• Financial Resources
• Financial Strategy

XII. Summary and Conclusions

Appendices

May include:

• Management Resumes
• Competitive Analysis
• Sales Projections
• Any other supporting documents

The Business Model

To extract value from an innovation, a start-up (or any firm for that matter) needs an appropriate business model. Business models convert new technology to economic value.

For some start-ups, familiar business models cannot be applied, so a new model must be devised. Not only is the business model important, in some cases the innovation rests not in the product or service but in the business model itself.

In their paper, The Role of the Business Model in Capturing Value from Innovation, Henry Chesbrough and Richard S. Rosenbloom present a basic framework describing the elements of a business model.

Given the complexities of products, markets, and the environment in which the firm operates, very few individuals, if any, fully understand the organization's tasks in their entirety. The technical experts know their domain and the business experts know theirs. The business model serves to connect these two domains as shown in the following diagram:

Role of the Business Model

Technical Inputs

Business Model

Economic Outputs

A business model draws on a multitude of business subjects, including economics, entrepreneurship, finance, marketing, operations, and strategy. The business model itself is an important determinant of the profits to be made from an innovation. A mediocre innovation with a great business model may be more profitable than a great innovation with a mediocre business model.

In their research, Chesbrough and Rosenbloom searched literature from both the academic and the business press and identified some common themes. They list the following six components of the business model:

1. Value proposition - a description the customer problem, the product that addresses the problem, and the value of the product from the customer's perspective.

2. Market segment - the group of customers to target, recognizing that different market segments have different needs. Sometimes the potential of an innovation is unlocked only when a different market segment is targeted.

3. Value chain structure - the firm's position and activities in the value chain and how the firm will capture part of the value that it creates in the chain.

4. Revenue generation and margins - how revenue is generated (sales, leasing, subscription, support, etc.), the cost structure, and target profit margins.

5. Position in value network - identification of competitors, complementors, and any network effects that can be utilized to deliver more value to the customer.

6. Competitive strategy - how the company will attempt to develop a sustainable competitive advantage, for example, by means of a cost, differentiation, or niche strategy.

Business Model vs. Strategy

Chesbrough and Rosenbloom contrast the concept of the business model to that of strategy, identifying the following three differences:

1. Creating value vs. capturing value - the business model focus is on value creation. While the business model also addresses how that value will be captured by the firm, strategy goes further by focusing on building a sustainable competitive advantage.

2. Business value vs. shareholder value - the business model is an architecture for converting innovation to economic value for the business. However, the business model does not focus on delivering that business value to the shareholder. For example, financing methods are not considered by the business model but nonetheless impact shareholder value.

3. Assumed knowledge levels - the business model assumes a limited environmental knowledge, whereas strategy depends on a more complex analysis that requires more certainty in the knowledge of the environment.

Business Model for the Xerox Copier

Chesbrough and Rosenbloom illustrate the importance of the business model with a case study of Xerox Corporation's early days in the copy machine business with its Xerox Model 914 copier. (Before changing its name to Xerox Corporation, the company was known as the Haloid Company and then Haloid Xerox Inc.)

The Model 914 used the relatively new electrophotography process, which is a dry process that avoids the use of wet chemicals. In seeking potential marketing partners, Haloid repeatedly was turned down by the likes of Kodak, GE, and IBM, who had concluded that there was no future in the technology as seen through the lens of the then-prevalent business model. While the technology was superior to earlier copy methods, the cost of the machine was six to seven times more expensive than alternative technologies. The model of selling the equipment below cost and making up the difference by large margins in the sale of supplies was not viable because the cost of the supplies was about the same as that of the alternatives, so there was little room to maneuver.

Xerox then decided to market the new product itself and developed a new business model to do so. The new model leased the equipment to the customer at a relatively low cost and then charged a per copy fee for copies in excess of 2000 copies per month. At that time, the average business copier produced an average of only 15-20 copies per day. For this model to be profitable to Xerox, the use of copies would have to increase substantially.

Fortunately for Xerox, the quality and convenience of the new copy technology proved itself and companies began to make thousands of copies per day. As a result, Xerox sustained a compound annual growth rate of 41% over a 12 year period. Without this business model, Xerox might not have been successful in commercializing the innovation.

The Entrepreneurial Advantage

Chesbrough and Rosenbloom observe that a successful business model such as that of Xerox tends to build momentum and the company becomes confined to its successful model. However, new technologies often require new business models.

Because start-up companies are free to choose or develop a new business model, in this regard start-ups have an advantage over more established firms. In addition to the risk incurred in the technological and the economic domains, an unproven business model adds additional risk, and entrepreneurial ventures usually are more prepared to accept this risk than would be a large, well-entrenched firm.

In fact, many venture capitalists see themselves as investing in a business model. Consequently, it often is the VC that pushes for a change in the business model when it becomes apparent that the original model is not working.

Attracting Stakeholders

A new business requires resources such as funds for R&D, equipment, marketing, and inventory. These funds are obtained by attracting stakeholders. Financial stakeholders are most at risk - these include banks, bond holders, investors, and venture capital firms. However, employees, customers, and suppliers of a business also are at risk. Employees may not receive some of their pay if the business fails, and they may have given up lucrative positions to which they no longer can return. Customers may find that they are stuck with a non-supported product, and suppliers may lose the opportunity to recoup their development costs or to receive their accounts receivable. Because of the risk of failure, attracting stakeholders is more difficult for a new venture than for an established, successful company.

Minimizing Downside Exposure

One way to make a new venture more attractive to potential stakeholders is to minimize their downside exposure to the fullest extent possible. For example, non-transferable R&D costs can be reduced by using off-the-shelf technology wherever possible. Investment in capital equipment can be made somewhat reversible by using more general machines that can be used for other purposes, thereby enhancing their liquidation value. The initial marketing expenditures can be reduced by marketing to people who are in a position to influence the opinions of many other decisions makers, thus reducing promotion cost. Employee risk can be reduced by using standard tools of the trade so that they easily can be out-placed, and by choosing a location that has many opportunities for the employees should they need to find another job. Customer risk can be reduced by designing a product to use standard components and to be compatible with other products. Taking such measures to reduce stakeholder risk may increase variable costs and compromise the product - this is a tradeoff that must be considered when making such decisions.

Finding Risk-Tolerant Stakeholders

Stakeholders must be found who are willing and able to accept the downside risk. Such stakeholders tend to be diversified, have experience with start-ups, have excess capacity, and be risk-seeking. Diversified financiers are those who invest in multiple businesses. Diversified distributors are those who carry many other products. Diversified customers are those who use multiple suppliers on whom they can fall back if necessary. Those stakeholders who have experience with start-ups are more comfortable with the downside and better understand the potential rewards. Stakeholders with excess capacity incur less opportunity cost and therefore have less risk from participating in the start-up. A engineer who has time in the evening or a manufacturing firm that has upgraded its production capacity are examples of stakeholders with excess capacity. Finally, risk seekers who enjoy the uncertainty associated with start-ups are potentially good candidates for stakeholders; however, if a start-up portrays too strong of a risk-taking image, more conservative stakeholders will be scared away.

Selling Potential Stakeholders on the Venture

Once potential stakeholders are identified, they must be sold on the venture. To do this, the entrepreneur must have faith in the venture and show enthusiasm for it. A record of success helps, but the main thing is that he has honored past promises and has not abandoned a venture in mid-stream when it encountered difficulties. A common problem for start-ups is securing the commitment from stakeholders who are waiting for other stakeholders to sign on first, or "ham and egging". The ideal way to do this is to convince each of the stakeholders simultaneously that the others have signed-on or are very close to signing on. An alternative method is to get a small commitment from one stakeholder and use that to get a small commitment from another and so forth. It helps to have a "bell cow" - someone who has the reputation of being a leader with foresight. When acquiring the commitment of stakeholders, one needs to have a schedule, know what the start-up needs, be able to anticipate and handle objections, and deal with withdrawals after sign-on. A schedule is important so that the entrepreneur can measure whether the stakeholders really have committed to the venture as evidenced by the intermediate milestones. The entrepreneur needs to understand the actual needs of the venture in order to negotiate for that and only that.

Potential stakeholders may voice objections and concerns before committing. Many of these can be dealt with by openly discussing issues such as the "fume date" (the date at which the venture is to run out of cash) and by presenting well-thought-out contingency plans.

Maintaining Stakeholder Commitment

There may be cases in which a stakeholder wants to back-out of a commitment. For example, a talented employee who signed-on to the venture may have a counter-offer to remain with his employer. The entrepreneur constantly must follow up with the stakeholders to prevent such problems and to deal with them when they occur.

The VC Pitch

Some Tips for Success

Acquiring venture capital funding can consume a large amount of valuable time and effort. Here are a few tips that can help you secure funding and get on with the process of building your company.


Choose the Right VC

Carefully research your potential investors. Learn about their focus areas and their philosophy. Then, go to venture capitalists who have financed firms similar to your own; they will understand what you are saying. Some VC's are very hands-off, whereas others regularly become quite involved with the operations of their portfolio companies. Be sure to talk to those that more closely match your needs. Once you have identified a good match, be sure to talk to the right person within the firm. For example, if your idea is in the realm of medical technology, be sure that you are speaking to those people in the VC firm.


Business Plan

A VC likely will spend only a few minutes looking through your business plan. Illustrate concepts using diagrams so that one does not have to read the plan to figure it out. Assume that the VC will not read the entire plan, because he/she probably won't read it. A full business plan may have 50 pages or more, but the VC probably will not be interested in that level of detail during the initial review. As such, it is a good idea to have an executive summary of no more than 10 or 20 pages.


Build Credibility

Focus on the results of your team, showing any demonstrations at the beginning of your presentation. An initial demo helps to eliminate any questions that may otherwise linger throughout the presentation and distract from your pitch. Many start-ups originate from a team of students, but it is wise to recognize that you will need a broader team with more experience and contacts, so it is not a good idea to list a team of only students. A team that already has worked together has a better chance of securing funding. In this context, working together means having done a similar business project together. If you have no team, you may do better by seeking an incubator; a major job of incubators is to help you build a team. While venture capitalists may spend time helping their portfolio companies to recruit, VC's do not want to be your HR person.


Partner Firms

Use the logos of your partners and potential partners on the opening page of your presentation. Use big names if possible. VC's are clubbish and would like to be able to associate with your high-profile partners. However, if a potential partnering firm already has decided not to work with you, be sure to remove it from the list.


Competitors

When listing potential competitors, it is not a good idea to mention giants like Cisco Systems or Microsoft, or any other competitors that are heavily funded. Even if they currently are far behind, they have the resources to quickly take the lead. Don't forget how Microsoft overtook Netscape's huge lead in the browser market.


Revenue Model

Be sure that you are prepared to clearly articulate how you will make money. VC's like proven models, for example, one that signs up customers and automatically hits their credit card each month for a certain amount. Such a model often is considered superior to one that requires you constantly to have to encourage people to use your service.


Customer Acquisition Costs

You should have an estimate of your customer acquisition costs. If you have a web site, know how many people will visit the site per dollar spent to get them there. If you do not know this number, take the time to come up with a rough estimate because you likely will be asked.


Valuation

The entrepreneur instinct usually is to give up as little equity as possible in exchange for funding. As a result, entrepreneurs all too often will arrive a pre-money valuation that is grossly unreasonable. If you insist that your start-up is worth $150 million pre-money, you will lose credibility. Unless otherwise indicated, the assumption will be that you have only an idea. (If you already have 2000 man-hours in software development, be sure to mention it in the pitch.) Seed funding often assumes a $1 million to $2 million valuation. The first round may be in the $5 million to $10 million range. You may consider omitting the pre-money valuation from the pitch altogether, or giving a genuinely conservative number to build credibility.


Presentation Style

VC's want to see visionaries who are passionate about their idea. As such, you should be able to talk without using notes or looking at the projector screen. The VC is investing in vision and passion, so show it. Your style is important because you have to able to sell. Even if you secure the first round of financing, if your company is going to go public you will need additional rounds. You have to be able to sell to investors, partners, and customers. When you are giving the pitch, project confidence by not speaking too quickly. Show preparedness by including answers to expected questions in the presentation. Finally, project the image that the train is leaving, and if the VC's do not get on now they will miss out.

Dealing with the Press

When dealing with the press, it is important to realize that the outcome will not necessarily be like you think it should be. Rather than controlling the press, it is better to think in terms of managing it. The following covers some basics and serves as a primer on managing the press.

Know With Whom You Are Dealing

If you are contacted by a reporter, the reporter should identify herself and the organization that she is representing. Be sure to have a clear understanding of which media you are dealing with, i.e. a trade publication, newspaper, or television. Provide responses that the reporter will understand. For example, a Wall Street Journal reporter probably will have a better understanding of business issues than will a smaller town newspaper reporter, so be sure to tailor your responses accordingly. Also consider who will be the ultimate audience.

Building the Relationship

Your relationship with reporters is very important and is the basis of your interaction with the media. These relationships take time to develop, and this time should be viewed as a long-term investment.

If you are heading a start-up company that has not established a relationship with the local press, read the local publications and get the names of the reporters who cover your specific topic. Check out the online version of the publication and search for articles by those reporters. It would be good to discern whether the reporter is skeptical about the type of company you are running, for example, if the last start-up he covered went bankrupt. Note any articles that are particularly interesting to you and contact the appropriate reporter and offer to buy a cup of coffee so that you can introduce yourself, mentioning that you enjoyed the article that you found so interesting. Often your offer will be accepted; because journalists constantly are looking for news, they are more approachable than many people think. Don't expect an article to result; rather, the purpose of the meeting is to start building the relationship for when there may be some news.

To avoid appearing as though you only are seeking free publicity, consider "trend" stories. Reporters like trend stories and you increase your chance of coverage if your company can be used as an example to illustrate a trend. If your company is doing something in response to other news, it could make a great article. Even if your company is not the main topic, it nonetheless can be valuable to be mentioned in the story.

Declining to Comment

In some cases, you may not want any press coverage. In the interest of a good relationship, keep in mind that reporters expect you to answer their calls and do not like to be ignored. If for some reason you do not want to be interviewed, you should be aware that refusing to talk to them may result in a report that you refused their calls.

Taking the call but providing no comments may result in a report that you "declined to comment." Think about whether declining to comment will be perceived negatively by the public in the particular situation. Keep in mind that by talking, you have the opportunity to better define the issue. If you decline to comment and somebody else comments instead, you are letting someone else define the issue. If you must decline and you have a good relationship with the reporter, you may consider informing him or her that you can't talk about it now, but suggest getting together in a few weeks and you'll tell all about it. In any case, the reporter still has the right to say that you declined to comment.

Terms of Engagement

Before talking to the reporter, be sure to have an understanding of the rules of engagement. A reporter's aim in life is to find out as much as possible, and you should think of talking to a reporter as talking directly to the public. You always should understand the context in which you are being interviewed:

· On-the-record : As long as the reporter identifies himself as a reporter, the assumption is that everything is "on the record." On-the-record means that your name and everything that you say can be reported.

· Off-the-record : In some cases, the interview or part of it may be "off-the-record." The meaning of off-the-record is less precise, and you should not assume that you have the same understanding of it that the reporter has. Sometimes, off-the-record means that your name will not be disclosed; other times, it means that you will not be quoted. It is a good idea to clarify what off-the-record means if there is any doubt. When you provide information that is not to be quoted, the reporter should put down any writing instruments and turn off any tape recorder. In addition to reducing the chance that an off-the-record comment will be published accidentally, this action serves as a signal that the reporter acknowledges the off-record status of the comment.

· Background information : "For background only" means that the information you provide is simply to educate the reporter. If such information is included in a news story, it usually will not be attributed to the source. One should clarify with the reporter to what extent the source will be revealed. For example, rather than using your name the reporter may attribute the information to "a company executive."

You may want to tape the interview if it will cover some sensitive topics. Get the consent of the reporter before doing so. If you are concerned about being misquoted, you can ask the reporter to read back any quotes before they are published. In most cases, they will do so if you ask and if they have the time. However, don't expect the reporter to show you the story before it is run; some sources would want to edit everything if they viewed it before publication. In the interest of professionalism most reporters will not show the story beforehand. Misquotes may be a concern, but that is a risk that you take when you agree to be interviewed. You can manage the process to minimize errors and show your company in its best light, but do not attempt to control the process. Reporters like to feel independent and don't like to be pushed or manipulated.

There are times when a source says something that is published out of context. You should be very thoughtful about everything you say, realizing that it could be taken out of context. Be careful about making a joke; it might become the headline. If a mistake is made, you can ask for a timely publication of a correction, but most of the damage already would have been done. If you feel that there is a serious error, it might be a good idea to set up a meeting with the reporter and editor to discuss it.

Newspapers

Newspapers tend to be reporter-driven, decentralized organizations. The business side is quite different from the news operations, and executives of the company usually do not pretend that they are journalists. One part of the organization has little influence over the other parts. Sometimes editors will suggest a story, but most ideas come from the reporters. Therefore, your key relationships will be with the reporters who cover stories related to your topic. If a reporter thinks that something is newsworthy, he will convince the editor to let him cover it.

Contacting the Press

When contacting the press with a specific news item, be aware of the deadlines, which may arrive sooner than you anticipate. Make sure that the names of the people and their titles are up-to-date. If you contact a former reporter who now is performing some other job function, your message may be ignored.

Open Innovation

Innovation and entrepreneurship are at the heart of "creative destruction". In his book, Open Innovation, Henry Chesbrough describes a new paradigm of open innovation that is in contrast to the traditional closed model. To understand open innovation, it is worthwhile to review the older model of closed innovation.

The Closed Innovation Model

Under the concept of innovation that prevailed during most of the 20th century, companies attained competitive advantage by funding large research laboratories that developed technologies that formed the basis of new products that commanded high profit margins that then could be plowed back into research. This vertical integration of the research function meant that firms that could not afford such research were at a disadvantage. The vertically integrated concept of the research and development pipeline is depicted in the following diagram:

Closed Innovation Concept

In the above diagram, the red lines represent completed research projects, some of which may have resulted in patents, but that never made it to development. This often is the situation if the innovation is not useful to the company's core business. Such completed research projects often are shelved until a market opportunity arises to use them, if such an opportunity arises at all.

Chesbrough observed that this closed model began to change in the 1990's, when firms such as Cisco Systems competed very effectively with research-endowed companies such as Lucent Technologies (which inherited most of Bell Labs).

Erosion of the Closed Innovation Paradigm

There now are many famous cases in which companies have developed disruptive technologies but have nonetheless failed to capitalize on them. One reason for failure is that managers often wrongly assume that just because customers are fascinated by an innovation, there also exists a corresponding business model. Henry Chesbrough used the Xerox Palo Alto Research Center (PARC) as an example. The research from PARC spawned many successful products, but the shareholders of Xerox did not benefit as much as others did. Employees who worked on promising technologies departed to form start-up companies, many of which, such as 3Com and Adobe, acheived much success. In fact, the market capitalization of Xerox's spin-offs exceeded that of Xerox itself.

The Xerox PARC example raises questions about the viability of the closed innovation model going forward in the 21^st century. According to Chesbrough, the closed innovation paradigm has eroded due to the following factors:

1. Increased mobility of skilled workers
2. Expansion of venture capital
3. External options for unused technologies
4. Increased availability of highly-capable outsourcing partners

Open Innovation Paradigm

Rather than being held closely within the firm, under the concept of open innovation research results are able to traverse the firm's boundaries. Other companies that are able to utilize a technology can license it, creating a win-win situation. Similarly, the firm may be able to license the technologies created by other firms. This concept of open innovation is illustrated in the following diagram:

Open Innovation Concept

This diagram uses dashed lines to illustrate that the boundaries of the firm are porous. The lines exiting the firm represent technologies that are licensed to other firms and that otherwise would have gone unutilized (they were the red lines in the closed innovation diagram). The lines entering the firm represent outside technologies that are licensed to the firm. These are technologies that did not originate in the firm's own research laboratories but nonetheless are useful in the firm's core business.

Internal Ventures

Established companies often view entrepreneurs and the venture capitalists who fund them as a threat. Chesbrough argues that they should be viewed as laboratories that test market real products to real customers. In a dynamic entrepreneurial economy, such information can be more useful than more hypothetical marketing research. Some large firms have taken the open innovation model further by forming alliances with start-ups or even acquiring them. The more progressive firms have formed their own internal venture groups to power their own innovation process.

Operating an internal new ventures group provides the firm with the following benefits:

· It allows the monetization of technologies that otherwise would go unused in the firm's own business.

· The venture process brings the technologies to market quicker.

· It provides valuable feedback by applying the technology to different uses in different markets.

When there is innovation in the business model itself, a ventures group is a tool for rapidly protoyping new business models.

Business Model for Innovation

Technology only has value when it is commercialized by means of a business model. The dot-com boom and bust illustrates this concept well, as there was much innovation but relatively few business models that could capture the potential value of the new technologies. According to Chesbrough, a firm can capture value from an innovation in the following three ways:

• Using the technology in its existing business
• Licensing the technology to other firms
• Launching a new venture that uses the technology

Given the complexities of products, markets, and the environment in which the firm operates, very few individuals, if any, fully understand the organization's tasks in their entirety. The business model serves to connect the entrepreneurial inputs to the economic outputs.

Intellectual Property and Open Innovation

In the historical model of vertically integrated research, new technologies were used in the firm's core business. Other potential uses of the technology did not unfold.

Under the model of open innovation, the same intellectual property can be applied to different markets. The firm creating the IP may license it to one firm for use in one market, and other firms for use in their respected markets.

Chesbrough used Millennium Pharmaceuticals as an example of a young company that built its business model around the concept of open innovation for the licensing of intellectual property. Millennium supplies information and analysis of biological compounds useful to large pharmaceutical firms in drug development.

Previous business models for such firms involved contracting the services. Those firms are known as contract research organizations, and they essentially performed the work on a contract basis with the pharmaceutical firms owning the resulting intellectual property. Two disadvantages of this model are:

1. the potential value of the intellectual property would not be unlocked since it would be confined to the market of the pharmaceutical firm paying for the services, and

2. the growth of such a pay-per-service firm is somewhat limited since there are few economies of scale.

Millennium Pharmaceuticals developed a business model whereby Millennium retained ownership of the IP that it developed and licensed the IP to the larger pharmaceuticals. Exclusivity was given for specific markets, but each biological target that resulted could be licensed to different firms for use in different markets, with exclusivity given for each market. The full potential value of the IP could be unleashed since it would not be hoarded for use in the core business of one firm. This model created a win-win situation whereby the potential value of the IP was distributed to both Millennium and the pharmaceuticals as follows:

· Millennium retained ownership of the IP and therefore could generate additional revenue by licensing it to other firms for use in other markets.

· The large pharmaceutical firms gained the intellectual property they needed at a cost lower than they would have incurred had they acquired complete ownership of it.

The example of Millennium Pharmaceuticals illustrates both the benefits of open innovation and the importance of the business model in unleashing value.