Frontiers of Entrepreneurship Research
1997 Edition


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Mark P. Rice
William C. Stitt

Lally School of Management & Technology
Rensselaer Polytechnic Institute
Troy, NY 12180

Telephone: 518-276-8398
Fax: 518-276-8661

Principal Topics

This paper focuses on managerial practices associated with sustaining high growth in mid-size public companies and with managing the tension between two strategic goals: supporting the stock price and sustaining high growth through venturing.

With respect to startup ventures, much has been written about various forms of risk capital including angel, seed, venture and IPO capital. With respect to corporate ventures, conventional wisdom suggests that large, established firms ($1 billion in revenues and larger) have sufficient internal resources to support venturing activity. Recent research, however, indicates that, even in this domain, acquisition of substantial external financial support from government or industry partners plays a critical role in the survival (and, in some cases, resurrection) of corporate ventures. But what of mid-size, high-growth, public companies? These firms have sufficient financial resources to invest in the internal development of discontinuous innovations that can be the basis for major new product lines and / or businesses. Nonetheless, conversations with founders and senior managers of these firms indicate that they are caught in a dilemma. On the one hand, they face pressure to support the price of the stock by meeting the market demands for short term performance, conforming with industry norms and fulfilling the expectations of analysts. On the other hand, they recognize the need to sustain continued growth through new venturing activity that consumes risk capital.


Given the exploratory nature of this study, we propose to conduct in-depth interviews with a half dozen CEOs of high growth, public companies. In the construction of our sample, we are controlling for firm size, industry segment and rate of growth. In particular our goal is to select firms from two industry segments (information technologies and health care) and to interview three CEOs from each segment. Firms included in the sample will range in size from $50 million to $2 billion in revenues and will have average growth rates in excess of 20% during the past three years.

The framing questions for the study include the following. (1) To what extent is continued development of breakthrough (or discontinuous or radical) innovations of strategic importance to senior managers of high growth, mid-size firms? (2) What challenges do senior managers of these firms face in financing high-risk, high-uncertainty new venturing activity related to discontinuous innovations? (3) How do senior managers attempt to overcome these challenges? Which approaches have worked, which haven't, and why?

Major Findings

Finding # 1: Development of breakthrough innovations is of strategic importance to the senior managers of all five companies in this study.
Finding #2: The difficulty of financing the development of discontinuous innovations varies by industry.
Finding #3: The difficulty of sustaining entrepreneurial intensity in personnel involved in the development of discontinuous innovation varies by industry.
Finding #4: The usefulness of separating discontinuous innovation activities appears to vary as a function of size of company.


For the information technology / services companies, it may be useful to attempt to follow the pattern of the medical device companies and to invest in attempting to convince industry analysts and other thought leaders of the wisdom of accepting a marginal reduction in short term profitability in exchange for the investment in development of discontinuous innovations that can be the basis for sustaining long term competitive position, and to thereby avoid the decline in stock price that comes with a decline in short term profitability. If successful, these companies will then face the classic corporate venturing challenge of managing the coexistence of day-to-day operations involving incremental innovation and of relatively long term projects aimed at technical breakthroughs. If unsuccessful, they must continue to refine their techniques for maximizing the impact of mergers, acquisitions and joint ventures on discontinuous innovation development. Given the apparent high cost of "buying" R&D results by paying high multiples for small start up companies, there may be an opportunity to extend the work of Norton (1991), who explored financial management in small public firms with respect to capital structure.

The insights for medical device companies are less clear. Both medical device companies in our sample are relatively small, i.e. less than $250 million in revenues. Company #4 has so far been very successful in sustaining its internal capacity to develop and commercialize discontinuous innovations. For researchers it could be fruitful to develop a panel of similar firms and to study the impact of changes in the competitive environment (increased competition) and firm characteristics (increase in size) on productivity of discontinuous innovation activities. Company #5, operating in a more competitive environment with two much larger competitors, has opted to be acquired. Pre-merger it was able to sustain its entrepreneurial management orientation. It may be useful to assemble a panel of firms of similar size in one or more industries and to conduct a longitudinal study of the impact on innovation productivity, particularly with respect to discontinuous innovations, on the acquirer and acquiree.

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