Enterprise and Small Business Principles
Entrepreneurial and intrapreneurial ventures
Therefore, intrapreneurship does not merely mean the development of a small business within a large organisation, and there are significant differences between creating a new independent venture and establishing a corporate venture through intrapreneurship (McKinney and McKinney, 1989). These are most striking in the areas concerning the business environment, the decision to establish a new venture, sources and patterns of funding, and employment of staff.
14.5.1 The business environment
Whilst the entrepreneurial team within a new venture will gradually develop an understanding from which the right rules for running the business will evolve, staff within a corporate venture can be restricted by the parent corporation’s existing ‘rulebook’, which has contributed to past corporate and managerial successes. As a result (and not always deliberately) the corporation can severely restrict the new venture by assuming that it must operate under the same old rules as other developments in the organisation. Therefore, for the intrapreneurial venture to succeed, its parent company must grant it the flexibility required to adapt to a previously unexplored and undefined market.
There can also be considerable differences in the degree of freedom each type of business has to develop its potential. Whilst corporate ventures - when part of a larger corporation - must subordinate themselves to the parent firm’s goals, new independent ventures are usually free to compete in any market, develop any product and utilise any technology. For example, when an intrapreneurial venture wishes to compete in a market-place controlled by other parts of the firm, the intrapreneur, rather than being allowed to develop innovative advantages in any promising market, will, in the majority of cases, face severe resistance.
14.5.2 Establishing a new venture
One of the crucial resources for a new business is an adequate source of funding, both for start-up and further development as the business grows. Many independent entrepreneurs will approach sources of funding such as venture capital firms or business angels for this finance and, as Chapter 19 demonstrates, such funders will receive a high number of business plans from individual entrepreneurs each year, from which they will select only a few. On the other hand, the senior management of a large corporation will review only a few proposals for internal ventures every year. If the potential independent business is rejected by one source of funding, it can always apply to others who may understand their potential better. Within a corporate setting, rejected ideas have nowhere to go and thus a viable project may never realise its potential unless the intrapreneur takes the plunge, leaves the large organisation, and starts a new independent business.
Funding sources such as venture capitalists will tailor their criteria to the proposal when making the decision to invest in the independent new venture. However, internal corporate ventures will be subject to the same traditional corporate decisionmaking criteria as other projects, such as minimum sales volume, minimum acceptable return on investment and special restrictions on use of capital and personnel. Innovation, as a criterion for choosing the project, will usually have little significance. Whilst the entrepreneur has control of the business, with responsibility for its management and, ultimately, its eventual success or failure, the intrapreneur must share control with top management. Consequently, the intrapreneur will have to operate under managerial constraints that would not be present in many independent businesses. Indeed, any problems with the venture can result in top management taking ultimate control over its future.
14.5.3 Sources and patterns of funding
The amount of funding allocated to each type of venture can differ considerably. Within large organisations, the pressure for short-term gains can lead to too much early stage funding for intrapreneurial ventures. As a result, intrapreneurs may be tempted to commit resources before sufficiently understanding the new business area. (New businesses can take over five years to become established in the market-place.) This can lead to the corporate venture being terminated early, when top management does not receive the expected short-term results it expects. On the other hand, early-stage funding within independent new ventures is usually limited to the entrepreneur’s personal finances. This is because entrepreneurs are less willing to let in vast amounts of early equity funding, which can dilute their share of the company and thus their control of the management of the venture. In fact, new small ventures tend to be funded on a ‘milestone’ basis, rather than through traditional budgeting and resource allocation processes, as is found in established corporations. For example, developing a new product or appointing a new director are ‘milestones’ that can attract additional capital.
The source of funds for business development also differs between independent and corporate ventures. The corporate venture is usually limited to one source of funds - the parent company. With no legal commitment the funds may appear or disappear and funding is mainly dependent on the parent’s financial position. Within independent ventures, the entrepreneur negotiates a legal contract that guarantees initial funding with investors and sets guidelines for future funding. Should existing investors no longer wish to provide more funding, the entrepreneurial venture can seek additional funding from new investors.
A large organisation will recruit people to an internal venture on the basis of parent - company personnel in line for transfer or promotion, rather than on the basis of the needs of the venture. In contrast, an independent new venture is usually made up of eager qualified individuals who share the founder’s vision. Therefore, an important reward for leadership of an independent venture is control over the resources and strategic direction of the firm. Additional incentives can include financial gain, which is usually linked to the profitability of the business. In corporate ventures, long-term success can be linked to that of the parent corporation, rather than the venture, and developing an adequate reward system for intrapreneurs is one of the issues that will be discussed later in more detail.
Most independent ventures have a board of directors, made up of outside directors, experienced venture capitalists from investing firms and other experts. These people provide valuable and wide-ranging experience in the technical or market areas related to the innovation. In most cases, the intrapreneurial venture does not have a board of directors and thus lacks a valuable source of advisors. If the intrapreneurial venture reports to its management in the traditional hierarchical manner, its interests often lack adequate representation in the top management circles.
