How Do New Businesses Grow?

MASTERING MANAGEMENTHow Do New Businesses Grow? BOSTON (Aug. 9, 2007) - Ninety percent of all new ventures fail. Moreover, just 10 percent of newly founded firms in the United States grow to a size of more than 10 employees. Newer firms, whose chief competitive assets are narrowed to their founders' talents or skills, rather than easily expandable assets such as equipment, can easily find the scale of their growth limiting. There's also a difference between a new firm planning for growth versus survival.  Those are sobering bookends for any new entrepreneur. Mukti Khaire, an assistant professor in the Entrepreneurial Management unit at Harvard Business School, says it's not hard to see why. The reality is that start-ups often lack vital resources, must compete against established companies, and have little or no track record with which to woo customers and investors.  So how do those one-out-of-10 firms grow into successful, sustained enterprises? "My findings suggest that for new firms in established industries, there is value to doing some non-technical, symbolic things in the manner that is widely accepted, and to adhering to industry norms and culture," she says. Khaire says she believes that small companies can grow by developing intangible social resources such as legitimacy, status and reputation because all economic transactions are embedded in a social supra-structure. Because most young firms are financially constrained, intangible assets that do not require outlays of financial resources are especially critical to new ventures. They also convey credibility to prospective clients. In an interesting twist, Khaire's research suggests that these intangible resources may be best acquired by following a road of conformity in how your company is organized and presented to the outside world. "In start-ups in established industries, the presence of conventional job titles, a workplace with a professional appearance, even a receptionist, increases the legitimacy of a young firm with an unproven track record and improves its credibility," she states. An alternate way of acquiring status is through high-status affiliations, other peer businesses, suppliers or key customers and contacts. "These social resources are acquired by mimicking the structures and activities of established firms, and by affiliating with high-status customers respectively," she adds. (Source: Harvard Business School Working Knowledge e-Newsletter, July 30, 2007)