Case Study
„The Big Issue“
Development of this case study based on: www.bigissue.com
Contents:
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Presentation of the Case Study .................... Fehler! Textmarke nicht definiert.
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Questions ..................................................... Fehler! Textmarke nicht definiert.
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Presentation of the Case Study
The magazine The Big Issue is a weekly entertainment and news magazine styled
like a commercial magazine which is sold on the streets of many British cities by
homeless people. The aim is to provide work for them so they can earn their own
income. This is intended to raise their awareness for their own situation and poverty
and their willingness to take over control of their lives again. Another (indirect) aim
is to call attention to social grievances. The magazine is positioned through the
quality of the thematic contents. It is not just designed as a means to the end of
collecting donations. The magazine is sold on the streets exclusively and not in shops
or newspaper kiosks. When customers are asked if they want to buy the magazine
they find themselves in a face-to-face situation with the vendor. The price of the
magazine is 2 GBP (2,50 Euros approximately). The street vendors buy the magazine
for 1 GBP from the Big Issue Ltd. and sell it at a price of 2 GBP to the customers on
the streets. Each (certified) new vendor receives short instructions for the sale of the
magazine and 5 free copies (in London 10). Copies which are not sold cannot be
returned and no money is refunded. Any further turnover of the magazine, for
example from advertisements, is realized directly by the Big Issue Foundation.
The organization behind The Big Issue is divided into two parts: On the one hand,
there is Big Issue Limited Company (Big Issue Ltd), which produces the magazine
and sells it to a street vendor network. On the other hand, there is the Big Issue
Foundation, a non-profit foundation which aims at helping the street vendors regain
control of their lives. The Big Issue Foundation offers counseling services and
references in the areas housing, health, financial independence and (career)
expectations.
The Big Issue organization is supported by the government only to a minimum
extent. The whole organization depends almost exclusively on (voluntary) donations.
Without the generosity of the individual donors and charitable organizations the
magazine and the counseling services could not be provided.
Currently the organization supports 2,900 homeless people all over Great Britain.
Every week 670,000 copies of The Big Issue are sold. This magazine in its present
form is (almost) unique in Great Britain at the moment.
2
Questions
The managing director of the Big Issue Ltd. is not happy with the present business
model and the company´s development. He hires you to (further) develop the
business model in order to create a company that can support itself almost alone. The
aim is to reduce the dependence on donations and to become more economically
oriented. In this context, the following tasks and questions will have to be dealt with:
(You can make realistic assumptions to support your answers.)
(a)
Outline the current business model of The Big Issue in a short survey (use a
model you know as basis for your argumentation).
(b)
For the further development of the business model you are expected to make
suggestions for a growth strategy. Present a short sketch for a growth-oriented
(re-)positioning of The Big Issue. Use your entrepreneurship knowledge to find
holistic but well-structured arguments on the basis of the (current) business
model. (What would you (have) to change in order to reduce the dependence
on donations? Sometimes this may involve questions with regard to products
and innovations. In general: How do you want to earn your money?)
Harvard Business School
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Rev. December 11, 2000
Nantucket Nectars
Well, we knew we were in an interesting position. We had five companies express
interest in acquiring a portion of the company. Sometimes you have to laugh about how
things occur. Tropicana (Seagram) and Ocean Spray became interested in us after reading an
article in Brandweek magazine that erroneously reported that Triarc was in negotiations to
buy us. (See Exhibit 1 for a copy of this article.) At the time, we hadn’t even met with
Triarc, although we knew their senior people from industry conferences. We have no idea how
this rumor began. Within weeks Triarc and Pepsi contacted us. We told no one about these
on-going negotiations and held all the meetings away from our offices so that no Nectars
employee would become concerned. It was quite a frenetic time.
The most memorable day was just a few days ago actually. Firsty and I were in an
extended meeting with Ocean Spray, making us late for our second round meeting with
Pepsi. Ultimately, Tom and I split up: Firsty stayed with Ocean Spray and I met with Pepsi.
Ocean Spray never knew about the Pepsi meeting. Tom and I have learned under fire
throughout our Nectars experience, but this experience was a new one for us.
—Tom Scott, co-founder of Nantucket Nectars
Research Associate Jon M. Biotti prepared this case under the supervision of Professors Joseph B. Lassiter III and William A.
Sahlman as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative
situation.
Copyright © 1998 by the President and Fellows of Harvard College. To order copies or request permission to
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used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying,
recording, or otherwise—without the permission of Harvard Business School.
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It was certainly exciting to have some companies interested in acquiring Nantucket Nectars.
But, should the founders sell at this time? They had originally planned to take the company public.
The company was doing great, better than they had ever imagined. See Exhibit 2 for historical
financials and Exhibit 3 for recent valuations of initial public offerings. But, many people,
particularly company founders who were running their newly public companies, were telling them
that going public wasn’t a completely positive experience. They wondered whether the company was
even ready to go public. Regardless of their decision about going public, should they continue
negotiating with potential buyers to find out the market value of their company? Ultimately, they
needed to decide whether to sell the company or begin the initial public offering process. Of course,
operating Nantucket Nectars as a stand alone company was always an option.
Background
Tom Scott and Tom First met while students at Brown University. (See Exhibit 4 for their
résumés.) During their summers, the two created Allserve, a floating convenience store serving boats
in the Nantucket Harbor. The founders decided to return to Nantucket after graduation to continue
this service business. At the time, they sold ice, beer, soda, cigarettes and newspapers and performed
services such as pumping waste and delivering groceries and laundry for boats in the Harbor. The
founders did not even sell juice at that time. As First recalled, “we started what was basically a
floating 7-Eleven.” 1
During the winter of 1990, First recreated a peach fruit juice drink that he had discovered
during a trip to Spain. The drink inspired the two founders to start a side-business of making fresh
juices. In the spring of 1990, the founders decided to hand bottle their new creation and sell them off
their Allserve boat. “We started by making it in blenders and selling it in cups off the boat. But we
also put it in milk cartons and wine bottles—there was a wine guy on the island—basically anything
that we could find. 2” Everyone loved the product, prompting the founders to open the Allserve
General Store on Nantucket’s Straight Wharf. Soon thereafter, other Nantucket stores started
carrying the product. In its first year, Nantucket Allserve sold 8,000 cases of its renamed juice,
Nantucket Nectars, and 20,000 the following year.
Financing
In the first two years, the two founders invested their collective life savings, about $17,000, in
the company to contract an outside bottler and finance inventory. For the next two years, Nantucket
Nectars operated in an undercapitalized state on a small bank loan. Tom Scott recalled the situation:
We were scraping along. Everything was going back into the company. By
early 1993, our few employees hadn’t been paid in a year, never mind that Tom and I
hadn’t paid ourselves in three and a half years. But we worked all sorts of odd jobs
on the side, especially during the winter. It was especially tough because we could
see the juice really taking off.
Ultimately, the two founders and Ned Desmond, who would later become the Regional
Director of Sales and Marketing, persuaded Mike Egan to invest $600,000 in Nantucket Nectars in
exchange for 50% of the company. The founders originally met Mike Egan while serving his boat in
Nantucket Harbor during the early days of Allserve. Mike Egan was the founder and former CEO of
Alamo Car Rentals and still maintained 93% of that company’s stock. While the founders were
1 Beverage Aisle, February 1996.
2 Beverage Aisle, February 1996.
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concerned about ceding a controlling share to an outsider, they needed the money and had no other
options.
Egan performed the function of trusted advisor while not meddling in the day-to-day
operations of the business. As Egan explained, “I really made the investment because it makes me
wake up in the morning and feel like I’m twenty-five again, trying to grow another company.”
The founders used the capital to improve distribution and increase inventory. First, they
secured better, independent bottlers. Given their lack of credit history and Snapple’s fantastic
growth, which utilized the majority of good bottler capacity, Nantucket Nectars previously had
difficulty finding quality bottlers at an affordable price. Secondly, they built their own distribution
arm with the equity capital. The founders needed to decide how to distribute their beverages in the
early days, deciding between three options:
•
•
•
implement a large advertising campaign to build brand awareness while
moving their product through an independent distributor channel which
would carry multiple brands at the same time;
contact retailers directly to create trade promotions; or,
distribute the product yourself.
Given that Nantucket Nectars could not afford the first two strategies, the founders created a
unique private distribution strategy where they themselves sold, delivered, and stocked the product.
Ned Desmond explained:
We were doing it all. We leased some warehouse space, bought an old van,
and went up and down the street selling Nantucket Nectars and our passion to make
the brand succeed. The retailers immediately loved our story and enjoyed seeing us
stock the shelves ourselves. Becoming our own distributor allowed us to control the
positioning of the product. We often rearranged the shelves to ensure that Nantucket
Nectars was better positioned than Snapple.
In order to speed up their growth, the founders obtained the exclusive rights to distribute
Arizona Iced Tea in Massachusetts. Boston was one of the top 5 New Age beverage markets in the
United States and Arizona Ice Tea needed a strong Boston position in its own race with Snapple.
While hoping to harness the "on-the-street, upstart energy" of the Nantucket Nectars team, Arizona
Iced Tea was more than prepared to cancel the contract if Nantucket Nectars did not perform.
The founders wanted to piggyback off the strong brand and higher volumes of Arizona Iced
Tea to build their own distribution arm and to get more outlets for their own products in the market.
Within three months the distribution division grew from seven to one hundred employees and from
2,000 to 30,000 cases sold per month. At the same time, the founders repackaged and reformulated
their own product while convincing small stores to carry Nantucket Nectars along side the red-hot
Arizona Iced Tea. By the end of 1994, revenues surpassed $8 million.
Marketing and the Creation of a Brand
Most New Age 3 beverage companies must have clear differentiation because undercapitalization did not allow traditional, expensive advertising strategies and slotting charges for
garnering shelf space. Nantucket Nectars relied on creative packaging, rapid and original product
introductions, word-of-mouth and a memorable story line. Achieving this combination of low-priced
but effective marketing was extremely difficult. Knowing this difficulty, the founders decided to
focus on a simple vision without the help of any outside agencies: create a high quality product and
3 Term given to trendy, more healthy beverages such as ready-to-drink teas, sports drinks and juices.
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sell a persona. The result was the creation of a unique brand personality based on the start of the
company on Nantucket. In the early days, Nantucket Nectars focused on creative but mundane ways
of creating name recognition at a minimal cost. The company set up samplings, giveaways,
sponsorship for road races and summer sports leagues which usually required only donation of
product. In addition, the company set up publicity stunts including salespeople dressed up as fruits.
With the increased capital raised from Egan, the founders segued into radio ads as a means to
push the Nantucket “story.” The founders described early mishaps in radio ads and placed messages
underneath their bottle caps in order to attract consumer interest. See Exhibit 5, Exhibit 6 and
Exhibit 7. For example, an early radio ad described how Ned Desmond, on the first sales trip to
Boston, crashed the Nantucket Nectars van on Storrow Drive destroying all the juice. Another radio
ad explained how early employee Larry Perez accidentally dropped the proceeds from the first sale
into the harbor.
Growth
The early days were extremely frustrating for the two founders. While customers clearly
liked the product, Nantucket Nectars only had three flavors—Cranberry Grapefruit, Lemonade and
Peach Orange—and the founders were completely unsure of how to grow the business. Tom Scott
explained: “The frustrations that we dealt with were immense. We didn’t know what point-of-sale
was, we didn’t know what promotion was, we didn’t know what margin we should be making.4”
Product development
As a means to differentiate, Nantucket Nectars committed to creating high
quality, all natural juice beverages without regard for the margins; the quality of the product came
first. This strategy translated into replacing high fructose corn syrup with only pure cane sugar. The
founders believed that using pure cane sugar would improve the taste without leaving the consumer
thirsty like other sweetened beverages. Furthermore, the founders used four times the juice of other
major brands to improve on their mantra of quality and taste. The founders also differentiated their
product by introducing a proprietary 17.5 ounce bottle to complement their existing 12 ounce line as
compared to competitors’ standard 16 ounce bottle. From the original three juice flavors, Nantucket
Nectars developed 27 flavors across three product lines during the first three years: 100% fruit juices,
juice cocktails and ice teas/lemonades.
Sales and distribution Having started out as a "floating 7-Eleven," the founders had been
distributors long before they had been suppliers and marketers of juice. At first, the founders
structured their in-house distribution arm to target delis, sandwich shops, small markets, gourmet
food shops, convenience stores and food service cafeterias. The Arizona Iced Tea contract and their
own self-confidence lead them to launch a broader distribution business with the hopes of carrying
multiple brands and higher volumes at lower costs into the New England market. This new business
allowed them to penetrate even more of the small outlets and to begin building up a presence in the
larger stores and chains. They learned the "ins and outs" of the distribution business and forged
relationships with many independent distributors around the country. Unfortunately, they also
learned that the economics of the distribution business really required one of the "big brands" or you
just could not carry the overhead. Having "made every mistake in the book," the founders gained a
new respect for the talent and time it took to scale up a business. In 1995, the founders sold their
distribution arm after losing $2 million in the previous year. They believed that their brand was
firmly entrenched on the shelves and were confident that any adverse effects on revenue growth
caused by selling the distribution business would be small. The founders concentrated on marketing
their own product and developing the Nantucket Nectars brand name. The priority at Nantucket
Nectars was “moving the juice.”
4 Beverage Aisle, February 1996.
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The company switched the distribution of Nantucket Nectars to a combination of in-house
salesforce and outside distributors. The company granted exclusive rights to sell Nantucket Nectars
products within a defined territory while allowing those distributors to carry other beverage
products as well. The company wrote multi-year agreements with most of its distributors. When an
order was placed at company headquarters from the outside distributor, the company selected an
outside trucking source to pick up the products from the bottler of the beverage to deliver to the
appropriate distributors. The distributors then sold and delivered the product to retail outlets from
their warehouses using their own salespeople and delivery drivers. The company initiated incentive
programs aimed at distributors and their salespeople to promote Nantucket Nectars through
stocking, merchandising and retail sales deals. These programs, which were budgeted individually
by territory, were meant to gain shelf space and visibility.
With the direct salesforce, Nantucket Nectars called the store accounts to sell the product.
The salesforce also employed the strategy of visiting all small retailers to make sure that the product
was displayed well, “eye to thigh” and also to check the distributor’s work. The strategy was to build
steadily a sustainable organization through strong relations with either the best distributors or
individual vendors. As Tom Scott explained, “we were not trying to build a house of cards, we
wanted solid long-term growth.”
Consumer Tastes and Preferences
Nantucket Nectars was fortunate to have caught a new wave emerging in the beverage
industry, the “New Age” segment, including ready-to-drink teas, water, juices and sports drinks.
Tremendous growth occurred in this segment from 1992 through 1995:
Table A
Three Year Compound Annual Growth Rate for New Age Beverage Segments
Category
Ready-to-Drink Teas
Water
Juices
Sports Drinks
Three Year CAGR (1992-1995)
24%
34%
32%
12%
Driving this strong growth were trendy young consumers pursuing healthier lifestyles yet
faced with fast-paced lifestyles and shortened lunches. For these reasons, they appreciated large,
single-serve packaging of New Age beverages and the “gulpability” of lighter, non-carbonated,
natural fruit juices.
Competition
Competition surfaced in three major ways in the New Age beverage world. First, a
competitor might simply undercut in pricing to flood the market while also offering a high quality or
innovative product. The second way of competing involved image and brand strength: brand
advertising, packaging, trade and consumer promotions. Lastly, brands competed, especially the
large players in the beverage industry, by blocking the smaller, less powerful players from the retailer
shelf space. At Christy’s in Harvard Square, the New Age beverages held over 75% of the chilled
beverage space with the remainder controlled by traditional carbonated beverages. The proliferation
of brands and flavors confused and distracted even the most loyal juice drinker. Promotions, new
flavors and even new brands tempted the consumer to try new products. See Exhibit 8 for a list of
New Age beverages at the Harvard Square Christy’s. So far, more than 100 companies from
traditional beverage companies like Coca Cola to regional start-ups like Arizona launched New Age
beverages hoping to capture shifting consumer tastes. Product innovation was a critical element of
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competitiveness and created an incredibly fierce battle for shelf space, especially among regional
companies focused on differentiating themselves through flavors, packaging and image.
Commenting on this competition, Tom First stated:
If we had known how unattractive the industry dynamics were before we
started our business, we probably would not have started Nantucket Nectars.
However, now that we’re in the business, we think that the odds of someone
replicating what we did are very slim. The industry dynamics and the fast-paced
changes within the industry really decrease the probabilities of an early entrant’s
success.
Many industry analysts believed that competition would increase as New Age beverages
became the latest battle ground in the Cola Wars. Coke, Pepsi and Seagrams were all fighting to
become the best “total beverage company” to serve the masses while also responding to new
beverage trends. New Age beverages were an opportunity to bolster flattening cola and alcohol
businesses with short-term profits, and to improve their competencies at serving niche markets.
These firms supported a portfolio of beverage brands with expensive marketing and sophisticated
distribution skills. Their access to supermarkets through controlling shelf space, vending machines,
convenience stores and fountain distribution channels combined with mass marketing and brand
awareness provided them with distinct advantages in developing brands even though their
procedures and image inhibit their ability to exploit non-traditional, rapidly changing market
opportunities. Furthermore, scale lowered a beverage company’s cost structure by decreasing the
cost of per unit ingredients and distribution.
Meanwhile, the customer clearly had many substitutes from which to choose (water,
carbonated sodas, alcoholic beverages, sports drinks, and other fruit juices and ready-to-drink teas)
and had no switching costs. Furthermore, some people questioned the sustainability of any New Age
beverage brand given the “fad” status of this segment.
Profitability and Cost Management
Fiscal year 1995 represented the first year of profitability for the company. The company’s
margins were among the lowest in the New Age beverage category given the founders’ emphasis on
quality. Unfortunately, high sales growth forced the founders to focus on increasing production to
meet high demand, rather than delivering quality at a favorable cost. Their lower margins were a
result of higher quality ingredients in the juices and limited futures contracts in commodity
procurement. All natural juice beverages depended on commodities for their raw inputs, placing
their margins at risk to the markets. Furthermore, Nantucket Nectars juice cocktails were made with
real cane sugar which was more expensive than the high fructose corn syrup used in most
competitive products. The company also used four times more fruit juice in its products instead of
relying on water and artificial flavorings. Lastly, unlike many competitors, the company offered a
full line of 100% unsweetened juices.
The company’s rapid growth and emphasis on quality ingredients accentuated its
competitive disadvantages in raw material procurement and plant scheduling. Because of difficulty
in predicting growth, the founders were unable to institutionalize future contracts on ingredients. As
a consequence, the company was heavily dependent on the harvests as competitors were more likely
to secure products if there were a shortage. For example, due to the poor 1995 cranberry harvest,
Nantucket Nectars got no cranberries because Ocean Spray controlled all the supplies. This
competitive disadvantage in procurement had an even greater impact on Nantucket Nectar’s margins
because of the higher fruit content in their products.
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Nantucket Nectars’ Strategy
In August 1997, responding to the launch of competitors’ new product lines, Nantucket
Nectars launched a new line of beverages, called Super Nectars, which were herbally enhanced and
pasteurized fruit juices and teas. Four of the six new flavors were made from no less than 80% real
fruit juice while the remaining two were naturally steeped from green tea and flavored with real fruit
juice and honey. Each Super Nectar was created with a concern for both great taste and good health.
Table B
List of Super Nectars
Product Name
Description
Chi’I Green Tea
green tea and ginseng mix flavored with white clover honey, lemon, gardenia; offered
the health benefits of traditional green tea and the revitalizing powers of ginseng.
Protein Smoothie
combined the power of natural soy protein with the great tasting juices of strawberries,
bananas, oranges, and coconuts. Super Nectars Protein Smoothie offered the nine
essential amino acids that the body cannot manufacture on its own.
Vital-C
100% real fruit juice made primarily from the acerola berry, a fruit native to the West
Indies and known as a vitamin C powerhouse. Acerola was blended with the juices of
other fruits including strawberries, kiwifruits, and oranges to offer 140% of the
recommended daily allowance of vitamin C.
Ginkgo Mango
blended with 100% orange and mango juices, offered the health benefits of ginkgo, an
ancient Chinese medicinal herb derived from the ginkgo biloba tree. The medicinal
uses of ginkgo can be traced back to ancient healing practices where it was valued for
its ability to benefit the brain.
Green Angel
combined the valued herbs of spirulina, echinacea, wheat grass, and angelica with the
juices of white grapes, bananas, and pineapple. Echinacea was an herb known to
enhance the immune system and spirulina was one of nature’s richest protein foods.
Wheat grass was a natural vitamin supplement that offered minerals, amino acids,
and enzymes, and angelica was valued for its ability to promote healing and balance.
Red Guarana Tea
an herbal tea mixed with white clover honey, cranberry juice, and guarana nut berry, a
plant native to the Amazon region. Guarana was naturally high in caffeine and a
valuable source of energy.
Furthermore, there was evidence to suggest that Nantucket Nectars should maintain their
growth for at least the next five years:
Table C
Projected U.S. Retail Sales of New Age Beverages, by Product Category from 1991 to 2000
(in millions)5
Category
1991
Alternative Fruit Drinks
Gourmet/Natural Sodas
Flavor-essenced Waters
Juice Sparklers
$236.8
371.9
304.1
232.9
$857.0
627.7
329.7
238.4
$1,328.8
697.5
259.2
231.2
21.1%
7.2
(1.8)
(0.1 )
$1,145.7
$2,052.8
$2,516.7
9.1%
Total
1995
2000
CAGR (1991-2000)
5 Beverage Industry, March 1997, p. 51.
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Table D
Nantucket Nectars
Location of All New Age Beverages Sold, 19966
Location
Percentage Sold
Supermarkets
Convenience Stores and Smaller Mass-Volume Stores
Health/Natural Food and Gourmet Stores
55%
35%
10%
Total
100%
As one compares the channel location of all New Age beverages sold with Nantucket
Nectar’s current sales, one sees the tremendous upside with supermarket distribution:
Table E
Sales Location (Channels) for Nantucket Nectars, 1996
Location
Percentage Sales
Supermarket Channel
Convenience Chains
All Others (delis, educational institutions, etc.)
1%
6%
93%
Total
100%
This apparent growth potential was also demonstrated by the potential geographic
expansion capabilities of the Nantucket Nectars brand. The following table represented the current
geographic sales of the brand:
Table F
Current Geographic Sales Percentages
Location
Northeast US
Mid Atlantic/Southeast US
Midwest
West
International
Total
Sales Percentage
38%
29%
9%
9%
15%
100%
Based on these growth opportunities, the founders wondered whether a buyer would
possibly pay an appropriate price given the negative publicity associated with the Snapple
transaction, a previous high growth beverage company.
The founders were also aware that their success to date was accomplished through the more
fragmented channels like convenience stores, delis, educational institutions and health and gourmet
stores which demanded single-serve product. They also wanted to market their product through the
supermarket channel which demanded multi-serve product.
6 Beverage Industry, March 1997, Page 50.
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The Snapple deal Outside of macro-economic conditions and the stock market jitters of October
1997, the Snapple deal profoundly affected the New Age beverage market. In November, 1994,
Quaker Oats purchased Snapple from Thomas Lee for $1.7 billion. By 1997, Quaker Oats conceded its
defeat, selling Snapple to Triarc for $300 million, while firing their chief executive officer, William
Smithburg. Industry experts blamed Snapple’s decline on Quaker’s problems with Snapple’s
distributors as well as a new marketing strategy. Quaker Oats replaced Howard Stern and “Wendy
the Snapple Lady” with the corporate “Threedom is Freedom” advertising campaign. Quaker Oats
also attempted to take away the most profitable distribution business from the distributors in order to
utilize its own Gatorade distribution arm. Due to expensive legal agreements called “Take or Pay”
contracts, Quaker Oats was forced to keep their old distributors or pay exorbitant fees to break away
from them. Ultimately, they decided to stay with the old distribution system. However, the old
distributors by that time had relegated Snapple to secondary status causing Snapple sales to decline
precipitously. Quaker’s strategy to drop their old distribution network became known as
Snappleization within the distribution industry: a distributor lost its distribution contract after a
beverage company was acquired by a bigger player. The acquirer moved distribution either in-house
or simply to larger distributors after the first distribution network helped build the market for the
beverage.
Corporate Strategy
The founders wondered what to do with the company. They wanted to grow the company
but were worried about the associated risks. Given their growth needs, they needed to decide
whether to sell a part or all of the company, operate under status quo, or undergo an IPO. Mark
Hellendrung, Nantucket Nectars CFO, described the consensus of senior management: “The decision
was difficult because we felt comfortable operating our company independently with our current
capital structure, under an IPO scenario, or with a strategic partner making an investment in our
company.”
If they decided to proceed with a sale, they wondered how to handle the negotiations in
order to maximize the price. How could they hold all the meetings so that their employees would not
find out prematurely about the transaction? The founders also worried about whether the ownership
structure of the company helped or hindered the negotiation process. By the time of the case, Mike
Egan, the individual investor, had aggregated 55% of the company due to follow-on investments
which permitted early operating losses.
With all these issues, Tom and Tom wondered if they needed advisors to help them with the
process? If so, should they hire a local investment banker from Boston or a large investment bank
from New York? Should they organize a full blown auction of Nantucket Nectars? Would there be
any adverse effects if, after a high profile auction, the founders decided not to sell? Should they pick
two strategic players and ask them for a preemptive offer for the company? Or should they identify
six or so potential bidders and contact them to assess their interest in entering a bidding process. See
Exhibit 9 for descriptions of major potential bidders. Also, how should the founders handle the
beginning of a negotiation: should they specify a minimum bid or force the buyers to submit their
first bids?
Lastly, Tom Scott and Tom First wondered how to structure the potential transaction. They
both believed strongly in the upside potential of their company but were also concerned about
holding the stock of a different company. Should they negotiate the best cash deal possible without a
long-term management responsibility or should they negotiate for acquirer stock in order to
participate in the company’s continued upside? How would the chosen strategy affect the valued
employees who had helped build the company? With all these issues swirling around in their minds,
Tom Scott and Tom First turned their attention to the potential valuation of their company.
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Valuation Analysis
Beyond the numbers and the marketplace, the founders wondered what significant assets
and skills within Nantucket Nectars drove their corporate value. The founders decided to hold
internal brainstorming sessions to analyze why Nantucket Nectars succeeded and therefore deserved
a premium for the brand. The founders came up with the following list of value drivers:
•
•
•
•
•
•
Great product: great tasting, all natural product
Current management team
Value of the brand: quirky, eccentric and
memorable
Geographic expansion capabilities: current sales
base and future sales base
Management’s knowledge of and experience
with the single-serve business: ability to add
value to large player rolling out new singleserve products
Guerrilla marketing skills
• Ability to exploit small, rapidly changing market
opportunities
• A more appealing story than any other juice
beverage company (great material for a company
with a large marketing budget and more
distribution power);
• A stabilizing cost structure
• Access to 18-34 market
• Last good access to single-serve distribution in
the New Age beverage market
• Best vehicle for juice companies to expand into
juice cocktail category without risking their own
brand equity
The founders wondered how all these assets were reflected in the pro formas and the actual
valuation of the company. They decided to analyze the valuation in three different ways: discounted
cash flow, comparable acquisitions and comparable trading. They wondered if these analyses
prepared them for the potential negotiations with the buyers. As Tom First described the situation,
“this kind of analysis tells us nothing about what certain buyers can do for Nantucket Nectars
concerning improved cost structure or increased sales through wider distribution. The difficult
question is how do we figure out what the value of Nantucket Nectars is to someone else, not just
us.” The founders believed that most acquirers would provide scale economies on costs of goods
sold decreasing costs approximately 10% to 20% depending on the acquirer. See Exhibit 10 for
comparable trading, Exhibit 11 for comparable operating statistics and Exhibit 12 for comparable
acquisitions. Exhibit 13 shows a basic discounted cash flow based on company pro formas.
Furthermore, Nantucket Nectars had rolled out a larger-sized bottle (36 ounce bottle) for the
supermarkets but the company was having difficulty securing shelf space in the larger supermarket
chains.
Sales Aftermath
The founders were also very concerned with the outcome after a sale. Nantucket Nectars
currently has 100 employees of which there were 15 accountants, 20 marketers, 57 salespeople, 5 sales
administrators and 3 quality control people. Depending on the structure of the potential transaction,
what would happen to these people?
Another major concern was that the culture of the firm would change drastically depending
on whether a transaction was consummated and with whom. Nantucket Nectars still maintained a
non-formal dress code; it was very uncommon to see anyone dressed in business attire. The
organization of the firm was still non-hierarchical with all employees able to approach the two Toms.
See Exhibit 14. Tom First described this concern: “Destroying the entrepreneurial spirit that has
made the company special is one of my biggest fears. Once you start departmentalizing, you lose
that. It is essential that we maintain our culture so that work is still fun.”
The founders were also concerned about the management involvement of any potential
strategic partner. Both founders wanted to continue to run the company if possible. Lastly, the
founders did not want to have their effective sales and marketing story negatively affected because of
ownership issues. Would consumers continue to enjoy the Nantucket Nectars story if the company
were actually owned by a large public company?
10
Nantucket Nectars
Exhibit 1
898-171
Brandweek Article on Potential Transaction
11
898-171
Exhibit 2
Nantucket Nectars
Historical Financials of Nantucket Nectars ($000s)
December 31 of each year
1991
1992
1993
1994
1995
1996
Total Revenue
$233
$379
$978
$8,345
$15,335
$29,493
Cost of Sales
172
317
765
6,831
11,024
20,511
61
62
213
1,514
4,311
8,982
Marketing and Advertising
0
0
0
320
875
2,581
General and Administrative
82
62
90
3,290
3,344
5,432
Total Expenses
82
62
90
3,610
4,219
8,013
EBITDA
-21
0
123
-2,096
91
969
0
4
0
104
137
247
-21
-4
123
-2,199
-45
722
0
5
7
53
139
301
-21
-9
116
-2,252
-184
421
0
0
0
0
16
52
-21
-9
116
-2,252
-200
369
Gross Profit
Amortization and Depreciation
EBIT
Interest Expense
Earnings before Taxes
Income Tax Expense
Net Income (Loss)
Exhibit 3
IPO Data from SDC
Offer
Price
FYE a
Sales in
IPO Year
(millions)
FYE EBIT
in IPO
Year
(Millions)
LTMb
Sales at LTM EBIT
IPO
at IPO
(millions) (millions)
Current
Market
Value
(millions)
Proceeds
(millions)
6/23/93
6.00
$5.00
1.20
10.4
6.2
-2.5
NA
NA
6.3
9/21/93
293.3
$25.5
11.5
854.6
1110.8
122.0
1060.5
NA
3249.2
.700
13.5
12.6
-.16
17.1
NA
38.3
2.25
114.3
25.9
5.4
19.9
NA
49.0
3.45
248.9
59.2
2.8
51.5
1.9
52.5
3.56
491.5
151.3
10.6
142.1
NA
153.2
Description
Saratoga
Bottled
Beverage
Spring Water
Panamerican
Bottles
Beverages
Spring Water
Odwalla
Juice
12/15/93
6.3
$9.00
Redhook Ale
Specialty
8/16/95
38.3
$17.0
Brewery
Beer
Pete’s
Specialty
Brewing
Beer
Boston Beer
Specialty
0
0
11/06/95
62.1
$18.0
0
11/20/95
71.3
Beer
Specialty
Market
Value at
IPO
(millions)
IPO Date
Company
Lion Brewery
Shares
Offered
(millions)
$20.0
0
5/02/96
11.3
$6.00
1.88
21.9
26.4
3.1
25.2
NA
14.6
9/11/96
10.0
$5.50
1.82
18.9
0.43
-.36
.42
-.10
4.6
2/11/97
4.5
$5.00
.900
12.1
0.51
-.85
.51
-0.9
1.5
Beer
American
Specialty
Craft Brewing
Beer
Independenc
Specialty
e Brewing
Beer
aFYE stands for Fiscal Year Ending.
bLTM stands for Last Twelve Months.
12
Nantucket Nectars
Exhibit 4
898-171
Résumés of Tom Scott and Tom First
Tom Scott
Born in Alexandria, VA in 1966, Tom spent his childhood in Chevy Chase, MD. He attended Landon
School in Bethesda, MD where he lettered in football, basketball and lacrosse. He continued his
education at Brown University in providence, RI. Brown offered Tom the opportunity to pursue his
various interests including Varsity Football, theater and outdoor leadership programs. While
garnering accomplishments in these areas, Tom also managed to earn a degree in American
Civilization and start a business during his summers on Nantucket Island.
In the summer of 1988, Tom founded Nantucket Allserve, a boat business which serviced boats in
Nantucket Harbor; he was soon joined by his current partner, and college friend, Tom First. From
this first business, grew their second venture and most notable accomplishment to date, Nantucket
Nectars.
Tom currently lives in Boston and Nantucket and is accompanied at all times by his dog, Becky.
Tom First
Tom first was born in Boston in 1966 and raised in Weston, MA. He attended Concord Academy and
played soccer, basketball and baseball. He continued his education at Brown University in
providence, RI where he met his current partner and close friend, Tom Scott. While earning a degree
in American History at Brown, Tom spent some of his time at the neighboring art institute, Rhode
Island School of Design, aspiring to continue on to architecture school. In addition to these academic
endeavors, Tom First enjoyed playing lacrosse and sailing for Brown. During the summer between
his junior and senior year, Tom First joined Tom Scott in Nantucket and helped get their then
fledgling business, Allserve, up and running. After graduating from Brown in 1989, the two Toms
moved to Nantucket and concentrated on strengthening their boat business. Tom First is credited
with the initial Nantucket Nectars inspiration. Driven by a passion for cooking, he was determined
to recreate the taste of a peach nectar that he had sampled during his travels in Spain. After mixing
fruits in a blender, both Toms were thrilled with the results. With no business experience to speak of,
the two embarked on a true adventure which has now developed into a company that boasts ever
increasing sales and national as well as international distribution. Tom resides in Cambridge and
Nantucket with his wife Kristan and dog, Pete.
13
898-171
Exhibit 5
14
Nantucket Nectars
Nantucket Nectar Sales Credo
Nantucket Nectars
Exhibit 6
Nantucket Nectars Collateral
Exhibit 7
Nantucket Nectars Typical Bottle Cap
898-171
15
898-171
Nantucket Nectars
Exhibit 8
New Age Beverage Product Selection, Christy's of Harvard Square
Product Selection at Christy’s, New Age Beverages
Apple Quenchers (Very Fine line extension)
Arizona Iced Tea
Boku
Crystal Light
Chillers (Very Fine line extension)
Evian
Fruitopia
Gatorade
Jones Soda
Lipton
Minute Maid
Mistic
Nestea
Ocean Spray
Orangina
Poland Springs
Powerade
Snapple
Tropicana Season’s Best
Very Fine
16
Nantucket Nectars
Exhibit 9
898-171
List of Potential Buyers and Strategic Match
Potential Bidder
Strategic Match
Seagram
(Tropicana)
Tropicana maintains the strongest distribution in the grocery segment for juices which
should provide Nantucket Nectars with a strong platform to expand. Furthermore,
Tropicana’s strength in the Northeast US (70% market share) matches Nantucket
Nectar’s business perfectly. Given Tropicana’s strategic push into the single-serve
business, the company should have interest in exploring an acquisition of Nantucket
Nectars. From Tropicana’s 1996 annual report: “Strategic direction is to continue
growing its North American market share in chilled juices, broaden its product mix,
expand its presence in attractive global markets and diversify into new distribution
channels.”
Tropicana has also made a strong international push with the acquisition of Dole as
almost 20% of revenues come from abroad with increased cheaper production
capabilities overseas (China). Furthermore, Tropicana has restructured its operations
since its purchase of Dole in 1995. This cost improvement makes Tropicana perhaps
the best platform to wring big savings out of Nantucket Nectars. Tropicana also could
help the cost structure of Nantucket Nectars by having the strongest buyer power in the
juice business (e.g. 25% of FLA. orange crop each year).
Ocean Spray
The founders knew the Ocean Spray senior management from industry conferences and
believed that there was a good match of culture. Ocean Spray was private which would
allow Nantucket Nectars to operate in a similar fashion: less disclosure, less hassle, and
less short-term pressure to hit earnings. The founders also knew that Ocean Spray
generated a good internal cash flow which could be used to fund Nantucket Nectar
growth. They also knew that Nantucket Nectars might be able to exploit Ocean Spray’s
loss of Pepsi distribution which might cause them to bid aggressively. Ocean Spray is
the world’s largest purchaser of non-orange fruit juice, especially berries, tropicals and
other exotics. Lastly, Ocean Spray maintained a network of five captive bottling plants
plus several long term arrangements with bottlers giving secure, national manufacturing
coverage at advantageous cost and quality control.
The founders were worried by the loss of Pepsi distribution. Industry experts believed
that the distribution agreement would terminate in May, 1998 with 50% of current singleserve distribution handled by Pepsi-owned bottlers (approx. $100MM) with another
$100MM handled by Pepsi franchisees. 7 Thus, Ocean Spray could lose as much as
$200 million in sales (from a base of $1.05 billion) if they could not find a good distributor
or could not distribute effectively themselves. Ocean Spray, however, maintained strong
power on the grocery shelves, especially in the Northeast.
Pepsi
Pepsi seems more prepared to take risks with new products in the New Age segment.
Pepsi recently terminated its distribution arrangement with Ocean Spray which will take
effect sometime in early 1998. Many industry insiders believe that Pepsi entered into
this distribution arrangement to learn as much as possible about single serve New Age
beverages before entering the market themselves. Skip Carpenter, a Donaldson, Lufkin
& Jenrette equity analyst, described the action as a “move that clearly signals a bold new
way in which PepsiCo will compete in the juice segment going forward.” 8
In late 1996, Pepsi launched a cold, ready-to-drink sparkling coffee drink with Starbucks
coffee called Mazagran. In 1995, Pepsi also launched Aquafina, a bottled water drink.
One major concern for the founders was that Pepsi has a history of downscaling the
quality of products, such as Lipton Brisk Tea, in order to achieve higher volume.
7 DLJ Research report, July 14, 1997.
8 Donaldson, Lufkin & Jenrette Beverage Industry Report; Skip Carpenter; July 14, 1997.
17
898-171
Nantucket Nectars
Potential Bidder
Strategic Match
Triarc (Snapple
and Mistic)
The founders believed that Triarc provided the best platform to grow the Nantucket
Nectars business the most over the next two years. Through ownership of Snapple, RC
Cola and Mistic, Triarc has immediate access to a national single-serve () network to
push the Nantucket Nectar product.
One concern was that Triarc would want to replace many of Nantucket Nectar’s
distributors because of redundancy. While the written contracts with the distributors
were favorable concerning termination without too much cost, Nantucket Nectars worried
about reprise from distributors (similar to what happened to Quaker Oats after they
bought Snapple, which created the term “Snappleization”).
Cadbury
(Schweppes
Ginger Ale)
Cadbury owns Schweppes Ginger Ale, 7 Up and Dr. Pepper. The firm has come under
pressure in the past two years to improve its management team, set up a succession
plan and to reduce its dependence on the Cadbury family. Stagnant sales in the
carbonated soda segments, a vulnerable production structure and perceived lack of
direction have created takeover rumors. The sheer size of Cadbury makes a takeover
unlikely. The production strategy is to use an assorted group of independent bottlers as
well as long-term agreements with Coke and Pepsi.
While there have been no public indications to date, Cadbury might have plans to
diversify its beverage portfolio away from slow-growing carbonated sodas toward the
faster growing New Age beverage segments. While Cadbury has deep pockets to
operate a New Age beverage company appropriately and for strategic reasons might
decide to bid aggressively for Nantucket, there current company strategy does not create
much operating improvements or increased distribution strength.
Starbucks
Nantucket Nectars had recently consummated an agreement with Starbucks calling for
all Starbucks coffee shops to carry the Nantucket Nectar product. While Starbucks was
clearly not in the New Age beverage business, Howard Schultz was considered to
understand the tastes and trends of the new generation. Throughout the negotiations
with Starbucks, Schultz expressed that he very much liked the Nantucket Nectars brand
and that maybe there was something more which could be done between these two
companies.
Welch’s
Welch’s was very similar to Ocean Spray, private with a cooperative of grape farmers as
the parent. Founded in 1868, the company maintained sales in the $600 million range,
with grape frozen concentrate as the company’s main product. Welch’s rolled out new
product lines in 1997: a shelf-stable concentrate that did not require freezing and a full
complement of single-serve, 16-ounce product. Flavors included white grape peach,
apple cranberry, guava peach, apple, watermelon strawberry, strawberry kiwi, fruit
punch, pink grapefruit, tropical punch, apple orange pineapple and white grape
raspberry.
Concerning product innovation, Welch’s has maintained a strong philosophy of reacting
to the marketplace. CEO Dan Dillon described corporate strategy: “The whole industry
seemed to be going in one direction, with faddish kinds of products. We have gone in a
different direction, by giving the consumer products that have got substance to them.
With our grape-based items, that means providing a very distinct, robust-tasting
product.”
Coca-Cola
18
The Nantucket Nectars founders were uncertain about Coca Cola’s interest in the New
Age beverage market given their lack of success with the Fruitopia product. Coca Cola
spent $180 million developing Fruitopia of which $60 million was spent on the 1994
product launch. Coca Cola has demonstrated strong concern in the past about acquiring
businesses with smaller margins than their core carbonated soda business.
12.00
10.00
21.13
46.75
20.47
18.50
Cott Corp.
Dreyers Ice Cream
Robert Mondavi
Starbucks
Weider Nutrition
9.38
Boston Beer
Celestial Seasonings
$12.88
Ben & Jerry’s
Price
per
Share
Mean
8.2
156.7
7.5
26.8
63.9
8.1
16.2
6.4
Shares
Outstanding
As of 7/31/97:
152
3,208
349
566
639
97
152
$ 82
Market
Cap
0.74
0.80
2.02
0.60
0.54
1.44
0.35
$0.50
CY1997E
0.95
1.10
2.36
1.42
0.73
1.65
0.40
$0.65
CY1998E
Earnings per Share
26.9 x
25
51
23
NM
19
17
27
26 x
CY1997E
22.5 x
19
37
20
30
14
15
23
20 x
CY1998E
P/E Multiples
Latest Twelve Months Trading Statistics for Selected Comparable Companies ($MM)
Food and Beverage
Growth Brands
Company
Exhibit 10
25%
28
38
17
NM
35
15
14
30%
(1997-98)
Growth
Rate
0.9 x
0.70
1.00
1.20
NM
0.40
1.00
1.60
0.70 x
1998
P/E to
Growth
1.2 x
0.7
3.9
1.2
0.6
0.6
1.2
0.8
0.5 X
Cap/LTM
Net
Revenue
Market
10.1%
21
8
13
1
13
13
10
2%
ROE
3.8 x
5.7
7.5
3.5
5.8
1.8
2.3
2.9
1.1 X
Cap/
Book
Value
Market
898-171
-19-
6/97
4/97
6/97
6/97
3/97
5/97
3/97
Celestial Seasonings
Cott Corp.
Dreyers Ice Cream
Robert Mondavi
Starbucks
Weider Nutrition
Wholesome and
Hearty Foods
Hambrecht & Quist
6/97
Boston Beer
Source:
3/97
Ben & Jerry’s
40
219
827
301
886
1,015
78
186
$165
Mean:
2
37
117
67
51
95
12
13
$11
1
30
60
55
22
59
10
10
$3
EBIT
1
17
41
28
1
47
6
6
$2
Net
40.4%
49
37
53
45
22
16
62
50
30%
Gross
11.3%
4
17
14
22
6
9
16
7
7%
5
2%
EBIT
7.7
2
14
8
18
2
6
12
Margins
EBITDA
4.4%
2
8
5
9
0
5
7
3
1%
Net
57
508
3,593
912
857
851
101
168
$94
Value
Enterprise
Enterprise Value/LTM
1.7 x
1.43
2.32
4.34
3.03
0.97
0.84
1.29
0.90
0.57 x
Revs.
16.7
37.3
13.7
30.7
13.6
16.9
8.9
8.2
12.7
8.7 x
EBITDA
29.6 x
71.4
17.0
52.3
16.6
39.8
14.4
10.5
17.1
27.6 x
EBIT
A/R
40.6
36
58
9
60
36
45
46
41
34
DSO
Inv.
6.2 x
NA
3.6
5.1
1
15.4
NA
4.2
7.0
6.9 x
Turns
18.9%
0
11
5
24
44
39
7
6
34%
Cap.
Mkt.
EBITDA
Latest Twelve Months
Revenue
Twelve
Months
Debt/
-20-
Latest
Latest Twelve Months Operating Statistics for Selected Comparable Companies ($MM)
Food and Beverage
Growth Brands
Company
Exhibit 11
898-171
Date
Announced
08/11/92
08/31/92
09/17/92
11/16/92
11/23/92
03/08/93
03/25/93
07/26/93
07/23/93
09/08/93
09/28/93
10/08/93
11/01/93
04/18/94
05/23/94
07/19/94
08/29/94
09/12/94
10/18/94
11/02/94
11/28/94
01/01/95
01/04/95
01/06/95
06/27/95
11/22/95
12/01/95
02/15/96
04/08/96
05/06/96
06/05/96
07/29/96
08/14/96
09/19/96
11/18/96
12/04/96
03/27/96
05/02/97
05/07/97
05/12/97
Exhibit 12
Name
Lincoln Snack (Sandoz Nutrition)
Stella D’Oro Biscuit Co.
Famous Amos Chocolate Chip
RJR Nabisco Holdings-Ready-to-Eat
Isaly Klondike Co.
Per Inc.-Whitman’s Chocolates
M. Polaner Inc.
Mother’s Cake & Cookies, 7 Other
Italgel SpA
Kraft General Foods-Ice Cream
Freia Marabou
Hillside Coffee of California
Kraft General Foods-Birds Eye
Universal Foods-Frozen Foods
Gerber Products Co.
Martha White foods (Windmill)
Brock Candy Co.
Borden Inc.
Fantastic Foods Inc.
Snapple Beverage Corp.
Pace Foods
Pet Inc.
Dole Food Co-Juice Business
Continental Baking (Wonder, etc.)
Mistic Beverage Co.
Wine World Estates (Nestle S.A.)
Millstone Coffee Inc.
Earth’s Best Inc.
Koala Springs International
Eagle Snacks Inc.
Sunshine Biscuits
Cascadian Farms
Ralcorp Holdings-Branded Cereal
Hansen Juices Inc.
Lenders Bagel Bakery Inc.
Mother’s Cake & Cookie Co.
Snapple Beverage Corp.
Bumble Bee Seafoods Inc.
Campbell Soup-Marie’s Salad
Kraft Foods-Log Cabin
Acquirer Name
Investor Group
Nabisco Foods Group
President Banking Co.
Kraft General Foods
Thomas J. Lipton Inc.
Russell Stover Candies Inc.
American Home Products Corp.
Specialty Foods (Specialty)
Nestle SA
Unilever U.S. Inc.
Jacobs Suchard (KGF)
Gourmet Coffee of America Inc.
Dean Foods Co.
ConAgra Inc.
Sandoz AG
Pillsbury Co. (Grand Met PLC)
Brach Acquisition Co.
Kohlberg Kravis Roberts & Co.
Trefoil Investors II LP
Quaker Oats Co.
Campbell Soup Co.
Pillsbury Co. (Grand Met PLC)
Seagram Co. Ltd.
Interstate Bakeries
Triarc Cos. Inc.
Investor Group
Procter & Gamble Co.
H.J. Heinz Co.
Nestle Beverage (Nestle USA)
Procter & Gamble Co.
Keebler (United Biscuits PLC)
Trefoil natural Foods
General Mills Inc.
Fresh Juice Co. Inc.
Kellogg Co.
President International Inc.
Triarc Cos. Inc.
International Home Foods Inc.
Dean Foods Co.
Aurora Foods Inc.
Selected Food and Beverage M&A Transactions
Business Description
Produce, whole pre-popped popcorn
Produce breakfast treats
Produce cookies
Ready-to-eat cereal business
Produce ice cream
Produce and whole chocolate
Produce fruit spreads, spices
Produce cookies, cake, bread
Produce ice cream
Produce ice cream
Produce candy and chocolate
Produce coffee
Produce frozen vegetables
Produce frozen foods
Manufacture baby foods and products
Produce flour and cake mixes
Produce candy
Produce dairy prods. snacks
Manufacture instant soups, grain prod.
Produce, wholesale soft drinks
Produce pickled vegetables
Dairy products, canned foods
Produce, wholesale juice beverages
Produce bakery products
Produce soft drinks
Produce wine
Wholesale coffee products
Produce baby food
Produce beverages, spring water
Produce nuts, potato chips
Produce biscuits and snacks
Produce grapes
Produce cereals and snack food
Produce, wholesale juices
Produce, wholesale bagels
Cookies and crackers
Produce, wholesale soft drinks
Manufacture canned seafood products
Produce salad dressings
Manufacture maple-flavored syrup
1.4 x
1.2 x
0.4-5.1 x
Range:
Value/
LTM
Sales
0.4 x
1.5
0.8
2.0
1.5
0.4
1.1
0.5
1.5
0.6
1.5
1.5
0.6
0.8
3.2
1.2
1.0
0.9
NM
2.4
5.1
2.1
0.9
0.5
0.6
1.7
NM
1.4
NM
NM
NM
NM
1.9
0.7
1.7
NM
0.5
NM
NM
2.2
Median:
Net Sales
LTM
($ mil.)
$ 30
65
75
230
101
85
65
2,100
489
500
905
28
250
239
1,203
137
145
4,000
30
700
220
1,573
325
2,000
150
210
90
28
----300
11
275
-550
-35
100
Average
Value of
Transaction
($ mil.)
$ 12
100
61
450
155
35
70
1,100
715
300
1,374
42
140
202
3,823
170
140
3,606
-1,703
1,115
3,225
285
1,021
94
350
-40
----570
8
455
130
300
203
-220
LTM
EBIT
($ mil.)
-----------6
-184
-8
115
-127
42
217
---40
--------------
7.0-31.4 x
16.2 x
17.5 x
Value/
LTM
EBIT
NM x
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
7.0
NM
NM
20.8
NM
17.5
31.4
NM
13.4
26.5
14.9
NM
NM
NM
8.8
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
898-171
-21-
Exhibit 13
12.0%
14.0%
16.0%
18.0%
Discount Rate
EBITDA
EBITDA Margin
Gross Profit
Gross Margin
Revenues
Growth
$106,877
$97,646
$89,323
$81,806
9.0
12.0%
14.0%
16.0%
18.0%
Discount Rate
$117,767
$107,614
$98,461
$90,195
EBIT
Exit Multiple
x
10.0
x
Equity Value
Valuation
2,234
4.5%
17,246
34.5%
1997
$50,026
94.1%
11.0
4,610
6.6%
26,634
38.2%
1998
$69,717
30.0%
$107,960
$104,706
$96,301
$88,709
1.0
$128,658
$117,581
$107,598
$98,584
Discounted cash Flow Analysis under Standalone Scenario
12.0%
14.0%
16.0%
18.0%
$153,666
$140,986
$129,559
$119,243
Sales
Exit Multiple
x
1.4
x
Equity Value
x
Discount Rate
7,459
8.0%
35,796
38.2%
1999
$93,700
28.0%
15,461
10.4%
56,730
38.2%
2001
$148,499
15.0%
20,139
11.5%
66,715
38.2%
2002
$174,635
12.0%
$193,303
$177,266
$162,818
$149,777
1.8
$74,634
$56,094
$43,874
$35,255
$98,243
$69,291
$52,081
$40,730
$145,460
$91,286
$64,391
$48,394
Terminal Growth Rate
4.0%
6.0%
8.0%
Equity Value
Valuation
11,344
9.2%
46,982
38.2%
2000
$122,981
25.0%
898-171
-22-
8.5%
5.0%
9.0%
Current Maturities
Interest Income (Excess Cash)
Subordinated Debt
Net Income (Loss)
Income Tax Expense
Earnings Before Taxes
39.6%
Total Interest Expense/(Income)
8.5%
Notes Payable
Interest Expense
EBIT
Amortization and Depreciation
(200)
(2,252)
(184)
(2,252)
16
139
53
-
0
0
0
0
0
0
0
(45)
(2,199)
0
137
91
(2,096)
104
875
3,344
320
3,290
Marketing & Advertising
General & Administrative
EBITDA
4,311
1,514
Gross Profit
-
11,024
11,024
6,831
6,831
15,335
1995
8,345
1994
369
52
421
301
0
0
0
0
722
247
969
5,432
2,581
8,982
20,511
-
20,511
29,493
1996
Historical Fiscal Years Ended December 31,
Income Statement (000s)
Total Cost of Sales
Other Expenses/Adjustments
Cost of Sales
Total Revenue
Exhibit 13 (continued)
978
641
1,620
405
102
(34)
0
337
2,025
209
2,234
9,410
5,601
17,246
32,780
-
32,780
50,026
1997
2,324
1,523
3,847
432
204
(95)
0
323
4,279
331
4,610
12,785
9,238
26,634
43,083
-
43,083
69,717
1998
Projected Years Ending December 31,
4,001
2,623
6,624
340
204
(187)
0
323
6,964
495
7,459
16,808
11,529
35,796
57,904
0
57,904
93,700
1999
$6,312
4,139
10,451
182
204
(345)
0
323
10,633
710
11,344
21,569
14,069
46,982
75,999
0
75,999
122,981
2000
$8,922
5,850
14,772
(74)
204
(601)
0
323
14,698
763
15,461
25,450
15,819
56,730
91,769
0
91,769
148,499
2001
$11,875
7,786
19,661
(469)
204
(996)
0
323
19,192
947
20,139
29,231
17,345
66,715
107,920
0
107,920
174,635
2002
898-171
-23-
0
0
$2,557
Total Liabilities & Equity
$3,263
328
(1,956)
265
(2,019)
1
2,282
1
2,935
0
22
0
0
0
0
2,914
16
0
382
1,078
2,282
Total Shareholders’ Equity
Retained Earnings
Additional Paid-In Capital
Common Stock
Shareholders’ Equity
2,292
Excess Debt (Plug)
Total Liabilities
0
Other Long Term Liabilities
51
Subordinated Debt
Total Long Term Debt
0
Other Debt
51
0
Capital Lease Obligations
Capital Lease Obligation
0
Current Maturities
2,240
270
Accrued Expenses
Total Current Liabilities
667
1,438
$3,263
$2,557
1,303
77
49
195
(137)
0
Accounts Payable
Notes Payable
Current Liabilities
LIABILITIES & EQUITY
Goodwill & Intangibles
99
223
Property, Plant & Equipment, net
Other Assets
(99)
Accumulated Depreciation
332
2,942
2,235
322
Total Current Assets
Property, Plant & Equipment, gross
115
105
1,356
1,328
$0
$38
1995
71
145
Prepaid Expenses
Other Current Assets
772
1,139
$0
$109
1994
$2
$0
$7,953
1,006
(1,277)
2,282
1
6,946
0
184
0
0
0
0
6,762
47
0
428
2,157
4,130
$7,953
92
85
477
(204)
680
7,300
335
145
2,063
4,754
1996
Historical Fiscal Years Ended December 31,
Balance Sheet (000s)
Accounts Receivable
Inventories
Excess Cash (Plug)
Cash
Current Assets
ASSETS
Exhibit 13 (continued)
$12,747
1,985
(299)
2,282
1
10,762
0
300
2,270
2,094
176
0
8,192
0
0
950
3,442
3,800
$12,747
89
100
620
(410)
1,030
11,937
500
200
4,382
5,409
$1,346
$100
1997
$16,644
4,308
2,025
2,282
1
12,336
0
418
2,270
2,094
176
0
9,648
0
0
1,325
4,524
3,800
$16,644
87
139
779
(739)
1,518
15,639
697
209
6,106
6,032
$2,455
$139
1998
$22,801
8,309
6,025
2,282
1
14,492
0
562
2,270
2,094
176
0
11,660
0
0
1,780
6,080
3,800
$22,801
85
187
943
(1,232)
2,174
21,586
937
281
8,207
6,948
$5,025
$187
1999
$31,745
14,622
12,338
2,282
1
17,124
0
738
2,270
2,094
176
0
14,116
0
0
2,337
7,980
3,800
$31,745
82
123
1,096
(1,940)
3,035
30,444
1,230
307
10,772
9,120
$8,769
$246
2000
$42,961
23,544
21,260
2,282
1
19,417
0
891
2,270
2,094
176
0
16,257
0
0
2,821
9,636
3,800
$42,961
80
148
1,374
(2,701)
4,075
41,358
1,485
297
13,007
11,012
$15,260
$297
2001
Projected Fiscal Years Ended December 31,
$57,186
35,419
33,135
2,282
1
21,767
0
1,048
2,270
2,094
176
0
18,449
0
0
3,318
11,332
3,800
$57,186
78
175
1,652
(3,645)
5,297
55,281
1,746
349
15,296
12,950
$24,590
$349
2002
898-171
-24-
Net income (loss)
411
112
Accounts Payable
Accrued Expenses
0
Cash at end of period
38
109
Cash at the begining of period
2
38
(36)
1996
1995
(71)
2807
115
0
0
0
0
0
2692
222
Total change in cash
Net cash (used) supplied by financing activities
87
Stock Repurchases
Proceeds from issuance of common stock
0
0
Dividend Payments
0
Increase in other debt
Increase in subordinated debt
0
Increase in working capital facility
Increase in notes payable
135
(353)
5
Cash flows from financing activities
(36)
51
Net additions on LT Assets
31
0
(348)
(2490)
(36)
0
(10)
(298)
162
46
1079
(220)
(41)
(3426)
(707)
0
0
247
369
1996
Net additions (payments) on capital lease obligations
Proceeds from extraordinary items
Net additions to property and equipment
Cash flows from investing activities
Net cash used by operations
22
(45)
Other current assets
Other Non-Current Liabilities
40
(189)
Prepaid expenses
Inventory
0
0
137
(200)
(584)
0
104
(2,252)
1995
Accounts Receivable
Net assets available for sale
Changes in operating assets and liabilities:
Deferred Taxes
Depreciation and amortization
to net cash used by operating activities
Adjustments made to reconcile net income (loss)
1994
Statement of Cash Flows (000s)
Cash Flow from operating activities
Fiscal Year Ended
Exhibit 13 (continued)
1446
2
1444
1997
1939
0
0
0
2094
176
(0)
(330)
(412)
(15)
(47)
0
(350)
(83)
116
522
1285
(165)
(55)
(655)
(2319)
0
0
209
978
1997
2594
1446
1148
1998
0
0
0
0
0
0
0
0
(527)
(39)
0
0
(488)
1675
118
374
1082
(197)
(9)
(623)
(1725)
0
0
331
2,324
1998
5213
2594
2618
1999
0
0
0
0
0
0
0
0
(704)
(48)
0
0
(656)
3322
144
456
1556
(240)
(72)
(917)
(2101)
0
0
495
4,001
1999
2000
9015
5213
3803
2000
0
0
0
0
0
0
0
0
(796)
64
0
0
(861)
4599
176
556
1900
(293)
(26)
(2171)
(2565)
0
0
710
6,312
Projected Years Ending December 31,
15557
9015
6542
2001
0
0
0
0
0
0
0
0
(1065)
(26)
0
0
(1039)
7607
153
485
1656
(255)
10
(1892)
(2235)
0
0
763
8,922
2001
24939
15557
9382
2002
0
0
0
0
0
0
0
0
(1249)
(26)
0
0
(1222)
10631
157
497
1696
(261)
(52)
(1938)
(2289)
0
0
947
11,875
2002
898-171
-25-
436
(315)
(2,864)
39.6%
(27)
137
(185)
(295)
(371)
39.6%
Unlevered Net Income (EBIAT)
Depreciation
Working Capital Requirements
Capital Expenditures
Free Operating Cash Flow
Tax Rate
(3,232)
247
286
722
29,493
(18)
$
1996
Income Taxes (Benefit) on Unlevered Income
15,335
Historical
(45)
$
1995
Discounted Cash Flows (000s)
EBITA
Total Revenues
CASH FLOW FORECASTS
Exhibit 13 (continued)
$
39.6%
(350)
(402)
(1,484)
209
1,223
802
2,025
50,026
1997
$
39.6%
(488)
1,291
(1,137)
331
2,585
1,695
4,279
69,717
1998
$
39.6%
(656)
2,680
(1,365)
495
4,206
2,758
6,964
$
39.6%
(861)
3,614
(2,658)
710
6,423
4,211
10,633
122,981
2000
$
Projected Years Ending
93,700
1999
39.6%
(1,039)
6,319
(2,283)
763
8,878
5,820
14,698
148,499
2001
$
39.6%
(1,222)
8,916
(2,401)
947
11,592
7,600
19,192
174,635
2002
898-171
-26-
Nantucket Nectars
Exhibit 14
898-171
Boston Globe Article on Nantucket Nectar Culture
Reprinted courtesy of The Boston Globe, © 1996
27
898-171
Exhibit 14 (continued)
28
Nantucket Nectars
Boston Globe Article on Nantucket Nectar Culture
„Gazelles“ – Rapidly Growing Young Enterprises:
Definitions, Research, Directions und Implications
Saßmannshausen, Sean P. & Volkmann, Christine, K.
-
Unpublished Working Paper –
Under Review at ZfKE, Distribution etc. strictly prohibited
Copyright by the authors
Summary
Rapidly growing young enterprises – often called „gazelles“ – are of particular importance for
the positive economic effects which are generally associated with entrepreneurship. However,
the term “gazelle” is far from having been consistently defined in the literature. This paper
will present and analyze the main definitions. Four general lines of research will be identified
which have established themselves in the context of “gazelles”: (1) phaenomenological descriptions, (2) economic consequences, (3) framework conditions for the creation of gazelles
(external success factors), and (4) start-up and growth management (internal success factors).
A survey of the literature is given to facilitate the first access to the topic. Our final implications will include definitional postulations, problems in the choice of samples and recommendations for future research into rapidly growing young enterprises.
Abstract
High growth new ventures are particularly relevant for the positive effects associated with
entrepreneurship. However, there is no well-established definition of the term “high growth
new venture” (or, in short “gazelle”). Indeed, definitions are quite dissimilar. This article will
introduce the most common definitions. We will then critically analyze those definitions and
develop suggestions for their improvement. We identify four major themes of “gazelles” research: (1) phenomenological approaches, (2) economic impact, (3) environmental and institutional preconditions (external factors of success), and (4) foundation and growth management (internal factors of success). An overview of the literature is provided. We end with implications addressing the improvement of definitions, sampling issues in empirical research,
and future research challenges.
1
I. Introduction
Rapidly growing young enterprises, which are often called „gazelles“ in international entrepreneurship research, greatly contribute to qualitative and quantitative structural changes as
well as to direct and indirect job creation (Birch et al. 1995; Davidsson and Delmar 1999;
Henrekson and Johansson 2010). Lesonsky (2007) states that only 2 % of U.S. companies are
to be classified as growing rapidly, but that these had created 68 % of new jobs. Hence it
seems to be worthwhile to analyze the term “gazelles” from the point of view of entrepreneurship research (cf. Davidsson et al. 2002 and Davidsson 2005, 80ff.).
The aim of the present paper is to give a first survey of the research area. First, we will analyze and evaluate selected definitions. Then four categories for the systematization of research
papers in the context of “gazelles” will be presented. A short survey of the literature aims at
facilitating further orientation in this field. By way of conclusion, the survey will allow us to
deduce implications for future work on the topic of rapidly growing enterprises.
II. Definition of the term
In this chapter we will present 21 definitions which were presented between 1990 and 2011
(cf. table 1). These were on the one hand chosen by the frequency of their citation (according
to Google Scholar). On the other hand, we carefully selected heterogeneous examples in order
to create a wide base for discussion. Having analyzed these definitions, we can distinguish
structural, quantitative and performance-oriented criteria. The structural aspects can in turn
be summarized in four postulations which are not mutually exclusive. These require that gazelles are
(1) owner-operated enterprises,
(2) Small or medium-sized enterprises (SME),
(3) independent enterprises,
(4) start-ups or young companies.
2
Table 1:
21 Definitions of the term „Gazelles“ from Entrepreneurship research
Eisenhardt &
Schoonhoven (1990)
Siegel, Siegel & MacMillan (1993)
Birch et al. (1994)
Malizia & Winders (1999)
Timmons (1999)
National Commission on
Entrepreneurship (2001)
Storey (2001)
Delmar et al. (2003)
Kauffman Center (zit.
Dowling & Drumm 2003)
Littunen & Tohmo (2003)
Barringer & Jones (2002)
Barringer et al. (2005)
Nicholls-Nixon (2005)
Hoffmann & Junge (2006)
EUROSTAT-OECD
(2007)
Lesonsky (2007)
Autio (2007) (Global
Entrepreneurs. Monitor)
Moreno & Casillas
(2007)
Acs & Mueller (2008)
Baum & Bird (2010)
Davila, Foster & Jia
(2010)
Goedhuys & Sleuwaegen
(2010)
100 Mio. USD annual turnover and an average annual growth rate of at
least 20%
Annual growth in sales of at least 25 % in three successive years
Companies with an annual turnover growth of at least 25%
At least 20 new jobs within the first 5 years after business formation
At least 1 Mio. USD annual turnover and annual turnover growth rate
of 30%
At least 15 % increase in number of employees within 5 successive
years or general growth of at least 100 % within 5 years
Annual growth rates of at least 25 % over 4 years for companies with
an annual turnover of 5-10 million BGP or at least 15 % for companies
with a turnover of 10-100 million GBP
Companies which rank among the top 10 % of all companies with regard to at least one of six growth indicators, which are: 1) absolute
increase in number of employees (total), 2) absolute increase in number
of employees (from organic growth processes), 3) absolute turnover
growth, 4) relative increase in number of employees (total), 5) relative
increase in number of employees (from organic growth processes) 6)
relative turnover growth
At least 30% annual growth and /or annual increase in number of employees of at least 20 % over 3 years
Companies which at least double their size with a 4 year period
Average annual growth rate of at least 80% over 3 years
At least 20 % annual growth over at least 4 successive years
At least 60 % increase in number of employees within three years
Average annual growth rate of at least 20% in turnover or number of
employees, and at least ten employees 3 years after business formation
Owner-operated companies which earn an average annual turnover of
at least 233.757,00 USD per employee regardless of the company´s age
or number of employees
New companies (< 5 years), which are still owner-operated and have
reached a number of at least 20 employees
SME according to the EU definition which increase their turnover by at
least 100 % within a maximum period of 3-4 years
Companies which were founded as independent entities (no subsidiary
enterprises) and had 20-499 employees right from the start
Owner-operated companies where the owner was also the founder of
the company; the founders intend to employ more than 100 people by
the end of the first 10 years
Independent companies which are younger than 10 years and have
grown to at least 50 to 150 employees (depending on the branch of
industry)
Companies which are younger than 5 years and have grown by at least
10 % p.a. over a period of 3 years (with regard to turnover and /or
number of employees) and had 5 employees by the end of their second
year at the latest
3
Source: Own representation.
Not all definitions refer to all four structural aspects. Some of the definitions listed in table 1
do not even explicitly mention the fourth aspect “start-up or young company” but this aspect
becomes implicitly clear from the whole context of the publications from which the definitions were extracted (e.g. Eisenhardt and Schoonhoven (1990); Siegel et al. (1993); Birch et
al. (1994); Timmons (1999) and Storey (2001)). For a few other definitions, this aspect is of
lesser importance; instead, it is substituted by the term “SME” (Moreno and Casillas 2007), or
the aiuthors refer to the company´s independence (Acs and Mueller 2008), the role of the
owner/manager (Lesonsky 2007), or no structural aspects are mentioned at all.
With regard to qualitative aspects, these are mainly defined through explicit requirements
concerning growth and size. Growth is always related to a relative or absolute increase in
turnover or number of employees, while size refers to absolute turnover and numbers of employees. Performance-related aspects are hardly ever included in the definitions. If that is the
case, the authors for example investigate the relation of turnover and number of employees,
i.e. they refer to efficiency aspects (Lesonsky 2007).
III. Evaluation of the definitions
The minimum requirements with regard to quantitative growth or size criteria seem to have
been selected rather randomly and consequently are quite different. For example, the definitions listed above mention a minimum turnover ranging from 1 million USD to 100 million
USD. The same applies to expectations with regard to the number of employees which range
from at least five, ten or 20 – 50 to 100 or even 499. The annual turnover growth rate varies
from 20% to 100% and is to be achieved within a period of three to five years. With regard to
growth rates the question always is at which level such growth starts. For a company which
started with a turnover of 200,000 Euros this may be a success. However, even with an annual
growth rate of 25 %, turnover would be “only” about 600,000 Euros. Would such a company
be called a “gazelle”? Ex post investigations have shown that only very few gazelles had consistently high growth rates over a period of several years: „[…] most of gazelles do not follow
an unbroken or linear growth path. Research has shown that growth rates speed up, slow
down or undergo more radical changes“ (St-Jean et al. 2008, 162; cf. Garnsey and Heffernan
2005 as well as Storey 2011).
In this context it is worth noting that almost all definitions can only classify a company as a
gazelle ex post, i.e. after growth has taken place. On the one hand, this is comprehensible, but
4
it may lead to difficulties in current empirical studies if researchers needed to identify gazelles
ex ante (on the problem of ex ante and ex post sampling in entrepreneurship research cf. Davidsson 2005, chapters 1 and 2). Only Baum and Bird (2010) appreciate an entrepreneur´s
mere intention to generate fast growth.
Another aspect which is underestimated is that size should be viewed in relation to the respective industry (Davila et al. 2010; Moreno and Casillas 2007 and Birch as early as 1987). A
delicatessen retail company or a handicraft business which reach a number of 50 employees in
a very short time certainly must be regarded as gazelles in their respective industries, while an
automobile manufacturer with 500 employees is probably only a small specialist company in
an area such as tuning or sports cars. The average company sizes of the respective branches
should therefore be taken into account (Moreno and Casillas 2007).
The aspect of the independence of new companies often leads to classification problems in the
statistical operationalization of the definitions because this aspect is hard to identify in given
data (cf. for example Mitusch and Schimke 2010). For example, spin-offs from large companies (such as Infineon or T-Systems) may in some studies lead to statistical falsification. On
the other hand, not all start-ups in which a capital company is involved will have to be classified as dependent..
With regard to the definition of the term “gazelle” it is desirable to find classifications which
are less randomly chosen. For example, the SME criteria of the EU could offer orientation.
The implicit assumption of a linear growth in many definitions also seems to be unrealistic,
and the respective industry branches should be taken into account to a greater extent (Moreno
and Cassilas 2007; Davila et al.). It will be almost impossible though to reach one generally
accepted definition of the term because any definition will always depend on the respective
research question, the research context and the available data.
We do, however, suggest to add qualitative aspects to the definitions which so far are only
based on quantitative data (Volkmann et al. 2010). This would allow us to reflect the impact
of “gazelles” on the change of branches and structures. Some attempts in this direction have
already been made in the literature, for example by Carland et al. (1984). Following them, a
new company´s degree of innovation according to Schumpeter (1911) could be used as a qualitatively distinguishing factor between small businessmen and entrepreneurs. However, objective, statistically measurable and empirically applicable criteria which could be used for
this purpose remain to be determined.
5
In the traditional German entrepreneurship research, for example, one can observe a concentration on technological innovations. This is probably a result of the organizational neighborhood of “Innovation Management” and “Entrepreneurship” as fields of research, which is
different from the U.S., where “Entrepreneurship” is rather close to “Strategic Management”
(cf. Gartner et al. 2006; Zahra and Dess 2001). On the other hand, this may also be due to the
focus of governmental support programs for spin-offs from universities which address mainly
technology based projects (for example EXIST research transfer).
Schumpeter (1911), however, did explicitly mention organizational innovations in addition to
the exploitation of technical inventions. Zu Knyphausen-Aufseß et al. (2006) emphasize the
aspect of organizational innovation and its impact on the change of industry branches. They
explain how revolutionary actions (i.e. activities that violate the unwritten laws of a branch
and its typical value creation configurations) influence growth, branches and structures, and
they use this aspect as a distinguishing factor. IKEA´s success for example is mainly based on
organizational innovations. When IKEA was founded it was not just another furniture retail
chain but it violated and sustainably changed the unwritten rules of the branch at that time
(Bartlett and Nanda 1990). Today, most furniture stores follow IKEA´s example; the structure
and processes of the whole branch have changed fundamentally, and the choice of reasonably
priced furniture has greatly improved. Gavetti (2011, 121) coined the term von „cognitively
distant opportunities“ for business ideas which are far beyond the status quo.
IV. „Gazelles“ as a Topic of Entrepreneurship Research
Research on the “gazelles” phenomenon so far has developed into four directions. Note, however, that “growth” can be interpreted either as an independent (rows I and II in table 2) or a
dependent parameter (rows III and IV).
Table 2:
Four dominant research directions in the context of „gazelles“
I Acknowledgement and description of e.g. Siegel, Siegel and MacMillan 1993; National
the phenomenon
Commission on Entrepreneurship 2001; Littunen and
Tohmo 2003; Delmar et al. 2003; Barringer et al.
2005; Hoffmann and Junge 2006; Autio 2007; EUROSTAT-OECD 2007; Moreno & Casillas 2007
II The impact of gazelles, e.g. on em- e.g. Birch et al. 1995; Davidsson and Delmar 1999;
ployment, structural changes and eco- Autio 2007; Acs and Mueller 2008; Henrekson and
nomic development
Johansson 2010
III Prerequisites of gazelles, e.g. institu- e.g. Eisenhardt and Schoonhoven 1990 (also IV);
tional framework, availability of ven- Birch et al. 1994; Storey 2001; Davidsson and
ture capital etc. (external success Henreksson 2002; Mitusch and Schimke 2010
6
factors)
IV Start-up and (successful) management e.g. Eisenhardt and Schoonhoven 1990; Davidsson
of gazelles and their growth by entre- 1991; Cooper et al. 1994; Bloodgood 1996; Malizia
preneurs (internal success factors)
and Winders 1999; Timmons 1999; Baum et al. 2001;
Barringer and Jones 2002; Nicholls-Nixon 2005;
Knyphausen-Aufseß et al. 2006; Lesonsky 2007; StJean 2008; Baum and Bird 2010; Davila et al. 2010;
Goedhuys & Sleuwaegen (2010)
Source: Own representation.
Only an interdisciplinary entrepreneurship research (especially economics, business administration, psychology, sociology) will be able to meet the requirements of these comprehensive
research interests. Especially projects / multi-level-studies which manage to combine two or
more of the research areas mentioned above, promise to provide helpful insights (cf. e.g. Eisenhardt and Schoonhoven 1990, more generally cf. Davidsson and Wiklund 2001). In the
future, the questions as to why, when and how companies do grow and why some do grow
faster than others (research directions III and IV) should be investigated more closely, while
the economic impact of the gazelles phenomenon has already been dealt with comprehensively. (McKelvie and Wiklund 2010). Also, a mere description of the phenomenon (research
direction I) seems to be less promising in view of the present state of the art. Such descriptions, however, may well serve as case studies for entrepreneurship research in the future, and
it would even be desirable to have more of them, but the aim of their use should always be to
transfer knowledge from the research directions III and IV).
V. Selected literature for a quick access to the topic
A comprehensive review of the results of growth research would go beyond the scope of this
paper. Instead, we will provide some reading recommendations to facilitate access to the topic. The edited volume „Entrepreneurship and the Growth of Firms“ (Davidsson et al. 2006)
seems to be suited for a first approach. The collected articles are distinguished into three parts
and deal with (1) methodological challenges of empirical growth research, (2) the role of the
entreprneneur and (3) with patterns, success factors and consequences of success. In addition,
the „Blackwell Handbook of Entrepreneurship“ (Sexton and Landström 2000) contains eleven
contributions on growth financing and on internal and external success factors and can be
regarded as a standard work.
7
There also is a wide range of research contributions in academic journals which can be easily
found via data base research. With regard to the number of citations, a contribution by Cooper
et al. (1994) which has been cited more than 900 times (according to Google Scholar) has
gained by far the greatest influence on research into growth as a dependent parameter. In that
paper, the authors prove an empirical correlation between the initial resources and later successful growth. A contribution by Baum et al. (2001) ranks second with 460 citations. Based
on an integrative analysis of numerous earlier research results, Baum et al. (2001) develop
and empirically test a comprehensive multi-dimensional model of factors which influence the
growth of young companies. Among the most cited works with more than 300 citations each
are also a study on the heterogeneity of growth paths by Delmar et al. (2003) (cf. table 1), an
investigation of the interrelation of internationalization and successful growth (Bloodgood et
al. 1996) and a paper by Davidsson (1991), who assumes that continuous entrepreneurial activity is a driving force for above-average growth.
Some research contributions provide good surveys on the current literature in addition to the
presentation of their own findings. Henrekson und Johansson (2010) for example sum up the
previous works on the impact of gazelles on the employment situation in a well-arranged
chart. Shepherd and Wiklund (2009) present a survey of numerous empirical research results
and ponder the question if the knowledge gained from them can already be summed up in a
general theory of growth companies. St-Jean et al. (2008) offer a compact survey of papers
which deal with growth as a dependent parameter. The distinguish between research on the
respective roles of (1) the entrepreneur or the founder team, (2) the strategic decisions, (3) the
access to resources, (4) organizational factors and (5) the changes of markets and the competition. A new and very comprehensive survey of current findings with essential implications for
future research can be found in a special issue of „Foundations and Trends in Entrepreneurship“ (Davidsson et al. 2010).
Many – but not all – textbooks on entrepreneurship deal with the growth topic intensely, for
example Hisrich et al. (2010), Volkmann et al. (2010), Fueglistaller et al. (2008), Roberts et
al. (2007), Volkmann and Tokarski (2006), Timmons and Spinelli (2003) as well as Dowling
and Drumm (eds.) (2003). Three text books explicitly deal with growth through internationalization: Hisrich (2010), Cavusgil and Knight (2009), and Kümmerle (2004). The latter, however, seems to be out of print and will not be reprinted according to information obtained from
the author, but it should still be available in the libraries.
8
VI. Conclusion
The present paper offers a first approach to the currently important topic of “gazelles”. These
rapidly growing (young) companies greatly contribute to the qualitative and quantitative economic development of countries or regions. Since they induce a qualitative structural change
at the same time, they are in the focus of economic policy in many countries, for example in
Germany. Programs such as „EXIST research transfer“ or the investment strategies of the
„Hightech-Gründerfonds“ (venture capital for young technology companies) result from the
insight that gazelles are of fundamental importance for economic development. The „European Forum for Entrepreneurship Education“ for example has made support of gazelles its
particular business (cf. Wilson (2008), also www.efer.eu).
The gazelles phenomenon should be emphasized even more in research and teaching. The
following research questions may serve as examples here: What do we know about rapidly
growing companies? How can entrepreneurs include growth plans at an early stage without
encumbering themselves and investors with incalculable risks? Which actions, decisions and
influences do have a positive impact on later growth? What is the role of international entrepreneurship in this context? How can scalable business models be developed? Should entrepreneurship education try to spark an interest in growth? These are just a few of the questions
which could be posed.
Another fundamental question concerns suitable research approaches and methods. McKelvie
und Wiklund (2010) give detailed suggestions which, however, can be supplemented by the
proposal of international comparative studies: If it is true that for example in the U.S. the proportion of gazelles among the new companies is higher than in the German-speaking countries
and Europe, such studies could extract reasons for this. Multi-Level-Studies could identify
causal connections which are unknown yet (Davidsson und Wiklund 2001). Storey (2011) is
of the opinion that external, unswayable coincidences play a dominant role in growth development. If this is true, an uncontrollable amount of residues and „statistical noise“ would have
to occur in empirical research, and qualitative, explorative and theory-building research approaches would have to be preferred to statistical analyses, at least until results from such
research provided an improved theoretical foundation for empirical (cf. McKelvie und Wiklund 2010).
When thinking about methodology, we should also question the common exclusion of spikes
from the samples: If such spikes, i.e. gazelles, are a systematic and characteristic phenome9
non of entrepreneurship, their exclusion from empirical research could lead to wrong conclusions, for example with regard to the impact of new companies on the job market (cf. Davidsson 2005, 80ff. as well as Davidsson 2010 on sampling problems in entrepreneurship research). It is to be expected from many studies that gazelles are indeed a regular phenomenon
because repeatedly 2 to even 17 % of all companies in the samples have been defined as gazelles (cf. Henrekson and Johansson 2010; Lesonsky 2007; Moreno and Casillas 2007; as well
as Malizia and Winders 1999). However, the resepective proportions of gazelles mentioned in
the literature can hardly be compared because they are based on widely differing definitions,
as has been shown earlier in this paper. This also means that results from different studies can
hardly be summarized in a theoretical framework (Shepherd and Wiklund 2009), which leads
us back to our initial postulation of a greater definitional convergence.
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12
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Die Autoren danken Frau Miriam Thielemann und Herrn Manuel Bartelt für die Durchsicht
des Manuskripts. Zwei namentlich nicht bekannten Gutachtern sei für eine Reihe wertvoller
Hinweise gedankt.
13
Case Study
„FlexCap Corsten&Green GmbH“
Authors:
Prof. Dr. Christine Volkmann
Prof. Dr. Kim Oliver Tokarski
Year:
2004
Research field:
Company Development
Company Growth
Industry:
Software Development
© 2004-2010 Volkmann/Tokarski
Case Study „FlexCap Corsten&Green GmbH“
Table of Contents:
Table of Contents:.........................................................................................................1
1
Presentation of the Case Study .................... Fehler! Textmarke nicht definiert.
2
Questions ..................................................... Fehler! Textmarke nicht definiert.
Prof. Dr. Volkmann | Prof. Dr. Tokarski
Bergische Universität Wuppertal | Berner Fachhochschule
-1-
Case Study „FlexCap Corsten&Green GmbH“
1
Presentation of the Case Study
The FlexCap Corsten&Green GmbH (FlexCap GmbH) was founded in the year
2000. The business idea was to develop and to sell software for the allocation of
computer processing capacities for the solution of calculation problems in networks.
The software can be used for a variety of tasks, for example for the distributed
calculation of CAD data and was designed to be tailored to the customers´ demand in
the respective final versions. The two managing directors of the FlexCap
Corsten&Green GmbH are 40-year-old computer scientist Josef Corsten und 43year-old network technician John Green. Prior to starting up their own company, the
two had worked as software developers for the well-known American network
specialist company Notel Networx for ten years. Josef Corsten was able to win over
two other former software developers and researchers of the same age as employees
for FlexCap Corsten&Green GmbH“. With the employees´ support, the technical
development of the first software version could be carried out within one year
because Josef Corsten and John Green had spent three years to prepare the software
during their spare time. In 2001, the first version was finished. However, due to the
entrepreneurs´ huge workload, they failed to file a patent for the software or parts of
it.
Josef Corsten took over all operative and strategic tasks in the fields of Marketing,
Finances, and Human Resources. In addition, he continued to work as chief designer
for the further development of the software. John Green completely concentrated on
the development and improvement of the software in cooperation with the other
employees. Accounting was outsourced and was not further attended to by the
founders.
At first, Mr. Corsten was solely responsible for the marketing of the product. He did
this with an almost omnidirectional cold calling strategy, making appointments with
potential clients whom he regarded as important and presenting the software to them.
This marketing strategy, however, did not correspond to John Green´s ideas
concerning this matter. Therefore he started a marketing cooperation with the
software company Softhouse AG in 2002, which sells networking software in
addition to many other products. The Softhouse AG, which also has its own small
software development department, included the software into its marketing portfolio
Prof. Dr. Volkmann | Prof. Dr. Tokarski
Bergische Universität Wuppertal | Berner Fachhochschule
-2-
Case Study „FlexCap Corsten&Green GmbH“
without defining detailed contractual conditions. However, FlexCap Corsten&Green
GmbH assigned all rights of sale to the Softhouse AG for three years.
Customers´ special requirements with regard to the software were received by the
marketing staff but not communicated properly. One reason for this may have been
that Mr. Corsten was not available for Softhouse AG´s marketing staff at all times
because of his software development activities.
The FlexCap GmbH´s company and turnover development continued in a positive
way after this decision. However, according to industry insiders who used the
software and observed the company´s development, it could have grown much faster.
Increasing turnovers encouraged the founders to launch the second version of the
software in a more systematic way. In order to achieve this, two more employees (39
and 40 years old) were hired for the software development. With their support, the
second version was finished in 2003 and distributed via the Softhouse AG. However,
the second version did not meet the customers´ expectations. They were disappointed
because this version did not present an added value to most practical users in spite of
the fact that more than 30 new functions had been added.
Turnover could only be increased slightly with the new software. Negative media
response and bad test reports can be mentioned as reasons here. In addition, The
Softhouse AG became less interested in marketing of the software because FlexCap
GmbH complained about the high margins of the marketing staff and wanted to
reduce these.
Into the bargain, it became known inofficially that Softhouse AG was busy
developing its own software solution…
2
Questions
1. Which growth mistakes were made by the FlexCap GmbH in your opinion?
2. Imagine that you were a corporate consultant. Please develop possible
strategies for a sustainable survival of the company and a steady growth.
Prof. Dr. Volkmann | Prof. Dr. Tokarski
Bergische Universität Wuppertal | Berner Fachhochschule
-3-