Thursday, May 28, 2009

Why Do Most Entrepreneurs Fail to Scale?

6:55 PM Monday April 13, 2009

Anthony Tjan

One of my recent blogs discussed the DNA of great entrepreneurs as a mix of three simple things: smarts, guts, and luck. But what about the characteristics of entrepreneurs that can hinder success and prevent their companies from getting to the next level? …

Consider the strengths and weaknesses of the following entrepreneurial traits:

Persistence and stubbornness. … Perseverance is an admirable quality of great entrepreneurs. However, when perseverance is confused with unhealthy stubbornness the outcome is not likely to be great. … So how can you tell the difference? It's tricky, but here's a tip: Be persistent in your vision when you are sure you are right and have some proof to back that up, but also acknowledge when you need help or redirection.

Controlling interest. During the early stages of a company, the entrepreneurial vision is critical and is typically embodied by the founder. It can therefore make sense early on for the entrepreneur to [have as much] control of the operations as possible. … But as a company grows, entrepreneurs need to demonstrate not only that they can do the task (i.e. no task is too small or beneath them), but also that they can appropriately delegate. Fast growing businesses quickly move beyond the ability of one person to manage without proper delegation, founders can unknowingly limit the start-up's growth potential.

Team loyalty. … What has to be recognized is that the loyalty and relentless commitment that helped get a company to a certain stage might cloud judgment in determining the capabilities and skill gaps required as a business scales. To be clear, loyalty should be recognized and is culturally important, but it cannot be confused with the performance and future needs of the organization. As a start-up becomes a full-fledged business, an entrepreneurial leader has to be prepared to deal with difficult and inevitable personnel situations where business decisions need to be made for the interest of the company and not personal or historical reasons.

Some of these and other factors that hold a business back from realizing full potential are described well in the 2002 HBR article by John Hamm "Why Entrepreneurs Don't Scale." I also touched on similar themes in a lecture on entrepreneurship I delivered for the School of Management at Boston University.

Thanks again for all the comments on the prior blogs that helped shaped my thinking on this entry.

Now, what growth challenges do you face and why do you think many entrepreneurs fail to scale?

Wednesday, May 6, 2009


Yahoo! Finance

by Kimberly Lankford Thursday, April 9, 2009

provided byKiplinger'sPersonalFinance

Since President Obama signed the economic-stimulus package into law February 17, I have received many questions about its provisions. And I've noticed that there are a lot of misconceptions about the plan. Here's the lowdown.

Misconception #1: Most people will get their stimulus money as a check this year.

Instead of receiving a check from the government, most single taxpayers will see an adjustment to their tax withholding in their paychecks in 2009 and 2010, giving them about $45 extra per month for the rest of this year (married workers will receive an extra $65). …

The stimulus also provides a one-time payment of $250 to recipients of Social Security, Railroad Retirement and Veterans Administration benefits.(People who applied for any of these benefits for the first time after January 31 don't get the money; only those on the rolls in November and December 2008 and January 2009 are eligible.) …

Misconception #2: The adjustment to withholding will have to be paid back when you file your tax return next year.

Wrong -- the stimulus is actually a tax credit of 6.2% of taxable wages in 2009 and 2010, to a maximum each year of $400 for single taxpayers and $800 for married couples filing jointly. The credit is refundable, which means that you can still receive the full credit even if it is worth more than your total tax liability.

Paychecks are being adjusted now to get more money into the economy faster. You'll claim the credit when you file your return next year, so your tax bill should adjust in line with the stimulus money (and you might get some extra money at tax time if your withholding wasn't adjusted enough to account for the extra credit during the year, which may happen for some married people in single-earner households).

But not everyone qualifies for the credit. It begins to phase out for single filers with adjusted gross incomes of $75,000 or higher, or $150,000 for married couples filing jointly, and it disappears entirely for single filers with AGIs of $95,000 or more, or $190,000 for joint filers.

Misconception #3: The first-time home buyer's credit needs to be repaid.

You may not have to repay the credit, depending on when you bought the house.

If you buy a house between January 1, 2009, and December 1, 2009, you could receive a credit for 10% of the home's purchase price, up to $8,000. This credit does not have to be repaid as long as you own the home for at least three years.

If you bought a first home between April 9, 2008, and December 31, 2008, you are eligible for a tax credit of 10% of the home's purchase price, up to $7,500 -- but the credit must be repaid over 15 years, starting two years after you claim the credit. If you sell the home before you finish paying back the credit, the balance is due in full the year of the sale.

The 2008 and 2009 credits begin to phase out if your modified adjusted gross income is more than $75,000 (or $150,000 if you're married filing jointly). …You are considered a first-time home buyer if you (and your spouse, if you are married) didn't own a primary residence in the past three years. The credit does not apply to rental property and vacation homes.

Misconception #4: You can't get the 2009 first-time home-buyer tax credit until you file your tax return next year.

…To get the money into the economy faster, the federal government is giving you a choice of claiming the first-time home-buyer credit on either your 2008 or your 2009 tax return…

If you have already filed your 2008 return, you can use Form 1040X to amend it. …

Misconception #5: You need to apply through the government to get the COBRA health-care subsidy.

Contact your former employer, not the government, to take advantage of the COBRA subsidy. …

Misconception #6: You can receive the COBRA subsidy the entire time you're covered by COBRA.

Federal law requires most companies with 20 or more employees to let former employees keep group health-insurance coverage for up to 18 months after they leave their jobs. But the 65% COBRA subsidy lasts for only nine months. …

The subsidy ends if you find a job and your new employer offers health-care coverage or you become eligible for Medicare. And COBRA does not apply if the company stops offering health coverage to current employees or shuts down entirely.

Misconception #7: The number of weeks you can receive emergency unemployment benefits has been extended.

The stimulus does not provide additional weeks of benefits for people who use their 33 weeks of emergency unemployment-compensation benefits; it just expands the dates that the program will be available….

The emergency unemployment-compensation program was scheduled to expire on August 27, 2009, and the last day to apply for benefits was originally set to be March 31, 2009. As a result of the stimulus law, unemployed people who exhaust their regular state benefits now have until December 31, 2009, to apply for extended benefits and can receive compensation until May 31, 2010.

Copyrighted, Kiplinger Washington Editors, Inc.

Monday, May 4, 2009

The crisis: Timing strategic moves

Timing is key as companies weigh whether to make strategic investments now or wait for clear signs of recovery. Scenario analysis can expose the risks of moving too quickly or slowly.

The McKinsey Quarterly

APRIL 2009 • Richard Dobbs and Timothy M. Koller

Source: Corporate Finance Practice

Corporate Finance, M&A Article, timing strategic moves

In This Article

It may be a nice problem to have, but even companies with healthy finances face a quandary: should they pursue acquisitions and invest in new projects now or wait for clear signs of a lasting recovery? On the one hand, the growing range of attractive—even once-in-a-lifetime—acquisitions and other investment opportunities not only seems hard to pass up but also includes some that weren’t possible just a few years ago. … On the other hand, many indicators suggest that the economy has yet to hit bottom. Companies that move too soon risk catching the proverbial falling knife, in the form of share prices that continue to plummet, or spending the cash they’ll need to weather a long downturn.

… How quickly the world economy returns to normal—and indeed, what “normal” is going to be—will depend on hard-to-predict factors such as the fluctuations of consumer and business confidence, the actions of governments, and the volatility of global capital markets. … In previous recessions, as many as six rallies were followed by market declines before the eventual troughs were reached.1 During the current downturn, market indexes fluctuated by an average of 20 percent each month from November 2008 to March 2009.

… And while better timing of acquisitions, and therefore the prices paid for them, can make a big difference in their ability to create value, the best way to minimize risk is to ensure that investments have a strong strategic rationale.

… To illustrate the risks, we conducted an analysis of a hypothetical acquisition. Real US market and economic data allowed us to build a range of scenarios embodying different assumptions about future US economic performance.2 We found that even scenarios assuming conservative levels of market performance (as indicated by the experience of past recessions) suggest that many industries may be reaching the point when acting sooner would be as appropriate as—if not better than—acting later. …

Analyzing scenarios

… Long-term profits are tightly linked to the economy’s overall performance: over the past 40 years, they have fluctuated around a stable 5 percent of GDP3 (Exhibit 1). … For our scenarios, we assume that US corporate profits will revert to some 5 percent of US GDP, although that estimate could be a conservative one if the trend to higher profits in the years leading up to the crisis resulted from a structural change in the economy. …

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Growth in the labor force and productivity drive the long-term growth of real GDP. Since it has historically grown in the range of 2.5 to 3.0 percent a year and returned to its former trend line in all US downturns from the Great Depression onward, with no permanent loss in GDP once the economy recovered, our base scenario assumes that both of those trends will continue. (We also examined scenarios reflecting the possibility that long-term GDP growth might be lower as a result of changing demographics, declining productivity growth, and the effects of the current financial crisis or that GDP might fall permanently by as much as 5 or 10 percent.) Finally, in normal conditions the market as a whole has a price-to-earnings ratio ranging from 15 to 17. We used that multiple in our 2.5–3.0 percent growth scenario and a lower one (14 to 16) in our 2.0–2.5 percent growth scenario. Both multiples are consistent with a discounted cash flow valuation of companies.4

Under the scenario that most resembles the course of previous recessions (no permanent loss of GDP and 2.5 to 3.0 percent long-term real growth), the stock market’s normal value in early 2009 (as measured by the S&P 500) would have been about 1,200 to 1,350. This implies that the stock market was trading, as of the end of March, at a discount of about 30 to 40 percent from its normal value (Exhibit 2). … You would have to expect a permanent GDP reduction of around 20 percent to see the March S&P 500 index level (around 800) as normal. A similar analysis for the performance of the stock market in previous recessions finds that at the trough of deeper recessions, it typically trades at a discount greater than 30 percent from its normal value (Exhibit 3).

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Current stock prices can be interpreted in several ways. … [The market] may assign a reasonably high probability to a large, permanent GDP decline, which can’t be ruled out even though it didn’t happen in past downturns since, and including, the Great Depression. Finally, given the different nature of this downturn, the old relationships among GDP, profits, and stock prices may no longer hold, or in the future investors will demand higher returns from the market.

Timing the recovery

… One common analysis calculates how many years must pass before the market will return to normal, assuming growth at the historical long-term average rate (10 percent a year). In past recessions, however, the stock market returned from the trough much more quickly, with cumulative returns, over the two years that followed it, of 50 percent to 130 percent (Exhibit 4).5 If this pattern holds in the current downturn, there’s a real danger that companies waiting too long will miss the upside of the rebound. …

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In this simplified example, only timing an investment perfectly, in six months under scenario two, would produce a net present value (NPV) meaningfully better than the one resulting from investing now (Exhibit 5). …

Much uncertainty surrounds the timing of the downturn’s end, but companies waiting for clear evidence of a turnaround may find that they have been recklessly cautious and missed once-in-a-generation opportunities to acquire or invest. Executives considering when to make their next strategic moves can learn much by examining the course of previous downturns—particularly how valuation levels were related to corporate earnings and how valuations and earnings were related to the economy as a whole.

About the Authors

Richard Dobbs is a partner in McKinsey’s Seoul office, and Tim Koller is a partner in the New York office.

The authors would like to thank Bing Cao, Ezra Greenberg, John Horn, and Bin Jiang for their contributions to this article.

This article is not intended to be used as the basis for trading in the shares of any company or for undertaking any other complex or significant financial transaction without consulting appropriate professional advisers. No part of this article may be copied or redistributed in any form without the prior written consent of McKinsey & Company.

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1As of the end of March 2009, the present downturn has seen five so-called bear market rallies. This downturn could be different from past ones, so there could be more than the earlier maximum of six such rallies. As of March 2009, the market was about 18 months past its peak. The time to trough was 32 months in the 2000 recession, 21 months in the recession of the 1980s, 21 months in the recession of the 1970s, and 35 months in the Great Depression.

2Managers using this approach for actual strategic decisions would need to refine it by country, economic sector, or both, or to reflect the peculiarities of investments such as capital, R&D, or marketing expenditures, as well as competitors’ moves and regulators’ changes.

3We’ve excluded financial institutions from this analysis because their recent profits have been highly volatile—way above average in 2005–06 and way below average in 2007–08. The inclusion of these companies would not change the results but would make it harder to interpret the long-term trends.

4For more on our model of market valuation, see Marc H. Goedhart, Bin Jiang, and Timothy Koller, “The irrational component of your stock price,”, July 2006.

5This analysis looks at share prices relative to the trough. Much more time may elapse before the market reaches the prior peak, partly because it wasn’t based on fundamentals.