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Making the Transition From Entrepreneur to Large Company WILLIAM R. HEWLETT Three major problems must be overcome in order for a small, technically innovative company to survive the transitional stage of growth that separates small from large companies. They involve (1)management,(29fin~ncing of growth,and(3jprodllct-line depth. These are all problems of economics, some knowledge of which is essential to directing the program of a modern corporation. There is something almost ironic about my being a contributor to this volume. Somewhere above, there must be someone quietly chuckling to himself over the fact that I am involved in this book that deals with engi- neering and economics. When I was at Stanford, I took a course in engi- neering economics from the then authority on Hat subject, Eugene Grant. It was the only course I failed in college. As I study other chapters on entrepreneurship in this volume (e.g., those by Gordon E. Moore and Robert A. Swanson) and consider Ruben F. Met- tler's discussion of technological innovation in major corporations, I sense that there is a serious transitional stage that must be successfully negotiated in order for grass-roots-level firms in technical innovation to continue to grow. How does a company move from the level of the individual entre- preneur to that of a very large technically innovative company? First, let me note that no two companies are necessarily the same in their approach to this transitional problem, so it is very difficult to generalize. For example, Genentech may have a very different set of problems from those of Intel. Let us go back about 25 years to a time when this transitional process can be seen in simpler form. At that time, a mlmber of people observing the process referred to the "$10-million syndrome," reflecting their observation 441
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442 WILLIAM R. HEWLETT that many technically oriented companies reaching about that size ran into serious problems. The problems were severe enough that management could not handle them, and those companies either went out of business or were acquired by larger organizations. I believe that there were at least three problems that, occurring simulta- neously, tended to cause this cnsis. The first had to do with management itself. Small, technically innovative firms were typically started by engineers or scientists whose primary skills were in technical fields. Their attitude was that management functions would take care of themselves. Unfortunately they do not, and the entrepreneurs would suddenly realize that the organi- zation they had created was not capable of meeting the challenges of the future. The effect of management weakness is cumulative. The second problem was Hat of financing growth. The financial problems of a small company are very different from those of a large one. Initial capital is often available from the individuals themselves, from associates or friends, and (certainly in small amounts) from banks. However, these funds are quickly swallowed up by the basic working-capital needs of a growing com- pany. It is therefore essential that stress be put on the principle of financing grown from earnings, and if that is not done, the company will not survive. The third problem involves product-line depth. A new, innovative product has a logical life. Having demonstrated the viability of such a new concept, a company soon meets competition from over companies attempting to exploit its ideas, or, as it often happens, newer technologies invalidate earlier inventions. It is essential, then, that if a company is to survive, its product line be expanded and strengthened. This speaks to continuing, research and development efforts, which again need to be financed. In 25 years, there has been a major change in one aspect of the transitional problems faced by small innovative films. That change is one of degree: we have gone from a $10-million critical level to somewhere around a $100- million to $200-~iillion critical level, win the associated increase in risks. Other Han that, the three problems discussed above come into play today just as they did 25 years ago. We Sell have the same problems with man- agement and management development. Modern financing, such as venture capital, has taken some of the importance away from a company's financing its own grown, but venture capital "is not freed' and unless it is carefully controlled, it may pose more problems than it solves. And, finally, with far more competition existing in technically innovative fields, the question of product-line obsolescence is of increasing importance. Viewed from another angle, these are all problems of economics, because technically innovative companies, large and small, are equally affected by the economic environment in which they exist. Some knowledge of econom- ics is essential to directing the pro:,~n of a modern corporation.