Usually short on funds, entrepreneurial firms manage their business frugally and efficiently and seem to succeed even as large corporations run into trouble.

In the past three decades or so, across sectors as diverse as pharmaceutical and life sciences, information technology and more traditional areas such as recruitment, education, training and entertainment, entrepreneurial firms seem to have innovated more effectively. Why do entrepreneurial firms succeed better and more often when it comes to innovation? How can large organisations learn from entrepreneurial firms? These are questions that management scholars have been trying to answer for some years now.

Books such as The Money of Invention by Josh Lerner and Paul Gompers and more recently The Lean Startup by Erich Ries have documented the distinctive approaches of entrepreneurial firms that seem to make them more successful at innovating. The key features of such approaches seem to be:

‘Power of Penury’

One, entrepreneurial firms have access to limited financial capital that makes them use funds parsimoniously. James Clayton, Bradley Gambill and Douglas Harned, consultants at McKinsey, described it as “the power of penury”. Penury constrains firms to be relentlessly focussed on getting the core product or service to the market.

Second, limited funds make start-ups collaborate with partners up and down the value chain. Thus, a technology product development firm would partner with manufacturers, designers and sales and distribution houses in a carefully crafted set of strategic partnerships. Commentators cite the PalmPilot as one of the early examples of this approach and contrast it with the story of the Apple Newton. Apart from conserving scarce equity such a strategy enables the entrepreneur to seek a validation of the firm’s business thesis from the strategic partner as the latter commits its resources to the venture.

Third, managements of start-ups work with performance metrics that are different from that of an established firm. Milestones relating to product development, customer acquisition targets and so on are critically relevant to a start-up rather than sales or cash flow targets that are commonly used in established companies.

Fourth, investors in start-ups hold the feet of the management teams to the fire of performance by tying their wealth and continued control over the management of the firm to the achievement of identified milestones.

Finally, start-ups are increasingly moving away from the traditional “linear evolution” model from ideation to business plan to prototype building, beta test and commercial sales, considering it to be too slow and costly. Instead, start-ups focus on getting to market quickly with early versions of their product and dynamically redesign their product/business model based on customer feedback.

In sum, there seems to be a broad acknowledgement that entrepreneurial firms manage their business differently from their larger counterparts. And these differences are quite possibly the reason they seem to succeed where large corporations seem to run into trouble. This wisdom is no longer confined to the realms of arcane academic theories. Corporations in North America and Continental Europe have been incorporating these principles into the design of their innovation programmes. Many of them have started or reactivated their strategic investment programmes to learn from the early stage investment management practices of venture capitalists and angel investors, by co-investing with them.

Shift in engagement

Corporate India has traditionally engaged with entrepreneurial firms as suppliers, distributors or as outsourcing partners. It is perhaps time now for a different level of engagement, involving a process of learning from the latter’s style of management.

This shift in engagement cannot happen overnight. First of all, corporate executives need to acknowledge that there is merit in the entrepreneurial style of management. That is a big chasm to cross. Corporate executives often seem to think that entrepreneurs “speak a different language”, as a corporate CEO who tried dabbling with the entrepreneurial world remarked recently.

Not surprisingly, he soon went back to head the Indian operations of a large Asian multinational. Second, a staged approach would perhaps help ensure an orderly and successful learning experience.

Working with VC firms and incubators as co-investors or mentors may be a good start in that direction.

In short, shifting to a more strategic engagement with entrepreneurial firms is inevitable for corporate India. It is a question of how to approach it and not whether.

(The author is on the faculty of Indian Institute of Management Bangalore and Chairperson, N. S. Raghavan Centre for Entrepreneurial Learning. Views expressed are his own.)

(This article was published on January 12, 2014)
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