1. Initial Public Offering
A. “Strategies for Going Public”
(Summary) Going public transforms a company from being a closely held entity with a handful of shareholders to a company with a large number of holders of its stock, which can be easily bought or sold through a stock exchange or in the OTC market. A major benefit of going public is the additional capital infused to the company which it can use to finance growth and expansion efforts. Another major benefit that motivates owners to take their companies public is the increased personal wealth it brings. Other benefits are as follows: improved financial position of the company, less dilution as compared to other forms of equity financing, enhanced ability to raise equity, liquidity and valuation brought about by being publicly tradable, improved credibility with business partners and better employee morale and productivity (since it facilitates incentive plans like stock options that allows employees to share in the company's success). Along with the mentioned advantages, going public also has a number of disadvantages which are as follows: disclosure of information which is required for publicly held corporations, increased demands on management (from the shareholders, press, etc.), pressure to maintain growth patterns that may lead to decisions promoting short-term gains at the expense of long-term prospects, less control (since there will be many shareholders), greater legal exposure, enhanced corporate governance (i.e. regulations that a public company needs to comply with) and the substantial financial cost of going public. The process of deciding to go public must include an honest assessment of the interest that the company is likely to generate in the public market. These considerations must factor in the company's maturity and potential future earnings. For instance, it must be taken into account that for early-stage companies (typically, these are companies that have reached the point in their development where most of the technological, manufacturing, and marketing risks have been substantially reduced, and their stock can command a higher price than venture capitalists are willing to offer), the market looks for a company that 1) is in an industry that can support significant growth, 2) has a potential to lead the industry, and 3) has an experienced management team that can deliver and maintain the anticipated growth and leadership position and that on the other hand, for high-growth companies (typically, companies that has matured beyond the “startup phase” to attain a certain level of revenues and profitability), the market looks for robust sales, proven profitability, growth and management track-record. The decision to go public must also consider the readiness of the market to absorb an IPO. The market is influenced by a variety of factors, including economic forecasts, political events, international trends, interest rates, and inflation. It is also important to have a detailed and thorough business plan that contains future operating projections, such as budgets and forecasts, that are not contained in the registration statement but that will be essential to you as you communicate with investment bankers and potential investors. Going public requires long-term planning and the concerted efforts of several groups of professionals that functions as a team. A qualified, competent team will include the company's management, board of directors, audit committee, accountants, auditors, attorneys, underwriters, financial printers, financial public relations, transfer agents and registrar. The process of going public includes pre-public planning, underwriting, registration, pre-selling (during the waiting period) and closing the sale/deal. Pre-public planning includes preparation for increased formalization (e.g. maintaining and updating company records, making presentations, etc.), audit requirements, costs of going public and corporate housekeeping. Underwriting includes selection of underwriter, determining size and price of the offering. It is during the registration process where the prospectus is created. It is the preliminary prospectus called the “red herring” that is usually distributive to prospective investors during the waiting period. Road shows and presentations are also conductive during the waiting period to attract investors. Closing the deal includes signing the underwriting agreement, finalizing appointment of stock registrars and transfer agents, formalizing lock-up agreements and finally exchanging documents, certifi cates, checks, and receipts in a formal meeting that would mark the conclusion of the IPO.
(Reaction) For many entrepreneurs who seek the challenge and fulfillment that comes with finding new opportunities and starting new ventures, going public may be a very good exit strategy as it allows them to cash out and get the funds needed to pursue yet another venture. However, for entrepreneurs who wish to grow, nurture and continually improve his business, going public may not be as attractive as the entry of new shareholders might loosen his control over the business and impede his ability to innovate and pursue new opportunities within the business (for even if he remains the majority shareholder, opposition from minority shareholders could still be enough to hinder or slow down the creative process that allows him spot and act on opportunities quickly). But this does not mean that going public is not an option for such entrepreneurs. Provided the entrepreneur has the necessary skills, influence and reputation (character is already a given by definition) to remain in-charge and unchallenged, going public would still prove beneficial since it would allow access to huge amounts of capital that can be used entrepreneurially.
2. Corporate Entrepreneurship
A. “Managing Internal Corporate Entrepreneurship: An Agency Theory Perspective”
(Summary) Entrepreneurship exists only in the context of uncertainty. Uncertainty exists when there is imperfect foresight or human inability to find the best solution to complex problems such that the probabilities of alternative outcomes cannot be determined a priori (as distinguished from risk where there is knowledge of probabilities of potential outcomes such that the future state of affairs is to some degree, even if only probabilistically, still predictable). The entrepreneur is the noticer and organizer of uncertainties. He creates value by coming up with creative combinations or innovations that reorganizes the relationship between factors of production and market opportunities. In this context, entrepreneurship is the process by which entrepreneurs (individuals or firms) notice opportunities and act to creatively organize transactions between factors of production and the entrepreneur profit is the surplus value (over and above that paid for the factors of production involved ) created by this process. Typically, once an opportunity has been acted upon, internal forces begin to take place in the entrepreneurial process that changes the entrepreneurial context such that management (in terms of monitoring, controlling and rewarding functions or factors of production inside the firm) and entrepreneurship become distinct. Since the act of managing the firm in itself is not part of entrepreneurial behavior (the reward for managerial activities is normal rent or salary, not entrepreneurial profit), this distinction may lead to agency problems. Agency problems arise whenever there is a conflict between the party delegating decision-making authority (i.e. the principal) and the party to whom the authority is being delegated to (i.e. the agent) due to (a) the difficulty or high cost for one party to evaluate the performance of the other and (b) the differing motives of the parties such that each has an incentive to act in a different or incompatible way. The factors that make it difficult or expensive to evaluate the performance of the other party are due to the existence of uncertainty in environmental, organizational, or task conditions. The parties have incentives to act differently because they have different risk preferences, or because they may have different propensities to act opportunistically. Thus, it can be said that the difference in the risk or opportunistic preferences of the parties is the source of the agency problem. The key to understanding the agency problem is to understand how entrepreneurial context changes as the firm grow and mature. Initially, when the entrepreneur establishes a new venture, he is both principal and agent and there is no agency problem because the entrepreneur is the residual claimant for all profit obtained. However, as the firm grows, the entrepreneur assumes the management of the firm and his risk preference changes. He becomes more inclined towards less risky projects favoring normal returns over entrepreneurial profit. That is, as the entrepreneur becomes the manager (i.e. starts to function as an agent rather than as a principal), the level of internal corporate entrepreneurship declines. Finally, when a firm becomes large and complex, a new category of principals usually arises – the shareholders. The shareholders are the new residual claimants but they delegate responsibility to top management for entrepreneurship and expect returns from bearing uncertainty. However, the top management as agents, though expected to organize entrepreneurship, typically receive an agent's salary instead of being residual claimants. Thus, it becomes in the best interests of managers to be risk averse since though they have to bear the uncertainty of entrepreneurial activities, they are only rewarded on the basic of undertaking risk--normal salary (the agent's reward). Furthermore, engaging in highly uncertain ventures may lead to bankruptcy and thus, loss of employment. In short, the root of the agency problem is the misalignment of the interests of principals or entrepreneurs and agents or managers which results in a loss in a firm's entrepreneurial ability. Moreover, when entrepreneurship gets delegated to managers or agents with little or no incentive to behave entrepreneurially, the tendency for opportunism rises. That is, managers tend to actively shirk their responsibilities and put forth sub-optimal effort that leads to sub-optimal results and further lowering of the level of internal corporate entrepreneurship. This situation arises from the inability of principals to monitor the behavior of agents because it is impossible or prohibitively expensive to monitor entrepreneurial behaviors. The decline in internal corporate entrepreneurship leads to an increase in outside entrepreneurship. This is because as the firm loses its ability to notice and act on opportunities, outside firms get more chances to do so. Furthermore, the difficulty that large firms have in aligning rewards to employee entrepreneurs engaging in internal corporate entrepreneurship, frustrate them and pushes them to seek better prospects outside the firm and start their own ventures. Again, this lowers the firm’s internal entrepreneurship (since they are losing entrepreneurial employees) and increasing outside entrepreneurship (since the entrepreneurial former employees are starting entrepreneurial firms). To prevent this from happening, firms must provide the incentive structure for (entrepreneurial) agents to act as principals, or more generally the incentives for managers to act as entrepreneurs. This implies identifying and addressing organizational factors that promote agency problems and curtail inside entrepreneurship. It has been noted that as organizational size, age, and complexity increase inside entrepreneurship decreasing. The firm must therefore introduce innovations in organizational structure such as moving the firm from a functional structure, to a product structure, and eventually to a multidivisional structure as its size and complexity increase as the latter is faster and more efficient in acting upon opportunities. Other innovations that will increase visibility and accountability (i.e. allow agents to take responsibility for entrepreneurship and get recognized and rewarded appropriately) is through establishing a new venture division and a corporate venture fund. Aside from structural innovations, firms also need to introduce innovations in organizational control and rewards to align the interests of agents with the principal. Since monitoring entrepreneurial behavior is very difficult and expensive, the firm's control and rewards system need to be outcome or results-oriented. That is, agents should share the same rewards as the principals. They too must become residual claimants. One way to do this is to give successful innovators equity stake in the firm through stock options. Another way is to use career paths to reward the activities of internal corporate entrepreneurs so that they match the reward of partnership or residual claimancy.
(Reaction) It is true that to keep a firm entrepreneurial, employees (e.g. managers) that are expected to act entrepreneurially (i.e. spot opportunities, innovate, make decisions in uncertain contexts) should be rewarded entrepreneurially as well (i.e. they should be made residual claimants and share in the entrepreneurial profit). However, it is also important to strike a balance and not encourage the kind of unbridled risk-taking brought about by un-moderated greed and desire for excessive profit; the kind that precipitated the recent global financial crisis. This is the kind of risk-taking that people can afford to do if they have little or nothing personally at stake. The possibility of reward must therefore always come with accountability.
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