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Case Study „The Big Issue“

Development of this case study based on: www.bigissue.com

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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.

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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

9-898-171 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 reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, 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 5

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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

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Brandweek Article on Potential Transaction

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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.

VI. Literaturverzeichnis Acs, Z. J. und Mueller, P. (2008): Employment Effects of Business Dynamics: Mice, Gazelles and Elephants, in: Small Business Economics, 30(1), 85-100. Autio, E. (2007): GEM´s report 2007: Global report on high-growth entrepreneurship. London: Mazars / London Business School / Babson College. Barringer, B. R. und Jones, F. F. (2002): A Qualitative Study of the Managerially Controlled Attributes of Rapid-Growth Firms, in: 2002 USASBE Annual National Conference. Barringer, B. R.; Jones, F. F. und Neubaum, D. O. (2005): A Quantitative Content Analysis of the Characteristics of Rapid-growth Firms and their Founders, in: Journal of Business Venturing, 20(5), 663-687. Bartlett, C. A. und Nanda, A. (1990): Ingvar Kamprad and IKEA. Harvard Business School Case Study Nr. 390132-PDF-ENG, Boston: Harvard Business Publishing. Baum, J. R. und Bird, B. J. (2010): The Successful Intelligence of High-Growth Entrepreneurs: Links to New Venture Growth, in: Organization Science, 21(2), 397-412. Baum, J. R. et al. (2001): A Multidimensional Model of Venture Growth, in Academy of Management Journal, 44(2), 292-303. Birch, D., Haggerty, A. und Parsons, W. (1994): Entrepreneurial Hot Spots: The Best Places in America to Start and Grow a Company. Cambridge MA: Cognetics. Birch, D., Haggerty, A. und Parsons, W. (1995): Who’s Creating Jobs? Cambridge MA: Cognetics. Bloodgood, J. M. (1996): The Internationalization of New High-Potential U.S. Ventures: Antecedents and Outcomes, in: Entrepreneurship Theory & Practice, 20(4), 61-76.

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Carland, J. W., Hoy, F. Boulton, W. R. und Carland, J. A. (1984): Differentiating Entrepreneurs from Small Business Owners: A Conceptualization, in: Academy of Management Review, 9(2), 354-359. Cavusgil, S. T. & Knight, G. (2009): Born Global Firms: A New International Enterprise. New York: Business Expert Book. Cooper, A. C., Gimeno-Gascon F. J. und Woo, C. Y. (1994): Initial Human and Financial Capital as Predictors of New Venture Performance, in: Journal of Business Venturing, 9(5), 371-395. Davidsson, P. (1991): Continued Entrepreneurship: Ability, Need, and Opportunity as Determinants of Small Firm Growth, in: Journal of Business Venturing, 6(6), 405-229. Davidsson, P. (2005): Researching Entrepreneurship. New York: Springer. Davidsson, P. (2008): Strategies for Dealing with Heterogeneity in Entrepreneurship Research, in: Davidsson, P. (Hrsg.) (2008): The Entrepreneurship Research Challenge. Cheltenham, UK, Northampton, MA: Edward Elgar, 103-124. Davidsson, P. und Delmar, F. (1999): Zur Schaffung von Arbeitsplatzeffekten nach Firmengröße und -alter, in: Internationales Gewerbearchiv (heute ZfKE), 46(2), 219-233. Davidsson, P. und Henreksson, M. (2002): Institutional Determinants of the Prevalence of Start-ups and High-growth Firms: Evidence from Sweden, in: Small Business Economics, 19(2), 81-104. Davidsson, P. und Wiklund, J. (2001): Levels of Analysis in Entrepreneurship Research: Current Research Practice and Suggestions for the Future, in: Entrepreneurship Theory and Practice, 25(4), 89-99. Davidsson, P., Delmar, F. und Wiklund, J. (2002): Entrepreneurship as Growth: Growth as Entrepreneurship, in: Hitt, M. A. et al. (Hrsg.): Strategic Entrepreneurship: Creating a New Mindset. Malden MA u.a.: Blackwell Publishing, 328-342. Davidsson, P., Achtenhagen, L. und Naldi, L. (2010): Small Firm Growth, in: Foundations and Trends in Entrepreneurship, 6(2), 69-166. Davidsson, P., Delmar, F. und Wiklund, J. (Hrsg.) (2006): Entrepreneurship and the Growth of Firms. Cheltenham Uk und Northampton MA: Edward Elagr. Davila, A.; Foster, G. und Jia, N. (2010): Building Sustainable High-Growth Startup Companies: Management Systems as an Accelerator, in: California Management Review, 52(3), 79105. Delmar, F., Davidsson, P. und Gartner, W. (2003): Arriving at the High-growth Firm, in: Journal of Business Venturing, 18(2), 189-216. Dowling, M. und Drumm, H. J. (Hrsg.) (2003): Gründungsmanagement, Vom erfolgreichen Unternehmensstart zu dauerhaftem Wachstum, Regensburg: Springer. Eisenhardt, K. M. und Schoonhoven, C. B. (1990): Organizational growth: linking founding team strategy, environment, and growth among U.S. semiconductor ventures, 1978-1988, in: Administrative Science Quarterly, 35(3), 504-529. 11

Eurostat-OECD (2007): Eurostat-OECD Manual on Business Demography Statistics. OECD Selbstverlag. Fueglistaller, U., Müller, C. und Volery, T. (2008): Entrepreneurship: Modelle – Umsetzung – Perspektiven. 2. Aufl. Wiesbaden: Gabler. Garnsey, E. und Hefferman, P. (2005): Growth Setbacks in New Firms, in: Futures, 37(7): 675-697. Gartner, W. B., Davidsson, P. und Zahra, S. A. (2006): Are You Talking to Me? The Nature of Community in Entrepreneurship Scholarship, in: Entrepreneurship Theory & Practice, 30(3), 321-331. Gavetti, G. (2011): The New Psychology of Strategic Leadership, in: Harvard Business Review, 89(7/8), 118-125. Goedhuys, M. und Sleuwaegen, L. (2010): High-growth Entrepreneurial Firms in Africa: A Quantile Regression Approach, in: Small Business Economics, 34(1), 31-51. Henreksson, M. und Johansson, D. (2010): Gazelles as Job Creators: A Survey and Interpretation of the Evidence, in: Small Business Economics, 35(2), 227-244. Hisrich, R. D. (2010): International Entrepreneurship. Thousand Oaks: Sage Hisrich, R. D., Peters,M. P. und Shepherd, D. A. (2010): Entrepreneurship. 8. überarb. Aufl., New York: McGraw-Hill. Hoffmann, A. N. und Junge, M. (2006): Documenting data on high-growth firms and entrepreneurs across 17 Countries. Fora, Copenhagen: Mimeo. Knyphausen-Aufseß, D. Frhr. zu; Bickhoff, N. und Bieger, T. (2006): Understanding and breaking the rules of business: Toward a systematic four-step process, in: Business Horizons, 49(5), 369-377. Kuemmerle, W. (2004): Case Studies in International Entrepreneurship: Managing and Financing Ventures in the Global Economy. Boston: McGraw-Hill/Irwin. Lesonsky, R. (2007): Ahead of the Pack: Gazelle 2.0 Companies Growing by Leaps and Bounds, in: Entrepreneur magazine 35(1), 19-20. Littunen, H. und Tohmo, T. (2003): The High Growth in New Metal-based Manufacturing and Business Service Firms in Finland, in: Small Business Economics, 21(2), 187-200. Malizia, E. E. und Winders, R. M. (1999): Improving Creation Strategies: Tracking Gazelles in Georgia, in: Economic Development Review, 16(3), 9-12. McKelvie, A. und Wiklund, J. (2010): Advancing Firm Growth Research: A Focus on Growth Mode Instead of Growth Rate, in: Entrepreneurship Theory and Practice, 34(2), 261-288. Mitusch, K. und Schimke, A. (2010): Gazelles – High Growth Companies. Research Report, University of Karlsruhe, IWW, Selbstverlag. Moreno, A. M. und Casillas, J. C. (2007): High-growth SMEs versus non-high-growth SMEs: A discriminant analysis, in: Entrepreneurship and Regional Development, 19(1), 69-88. 12

National Commission on Entrepreneurship (2001): High-Growth Companies: Mapping America´s Entrepreneurial Landscape, Washington DC 2001. Nicholls-Nixon, C. L. (2005): Rapid Growth and High Performance: The Entrepreneur's "Impossible Dream?", in: Academy of Management Executive, 19(1), 77-89. Roberts, M. J., Stevenson, H. H., Sahlman, W. A., Marshall, P. W. und Hamermesh, R. G. (2007): New Business Ventures & the Entrepreneur. 6. Aufl., New York: McGraw-Hill Irwin. Schumpeter, J. A. (1911): Theorie der wirtschaftlichen Entwicklung. Eine Untersuchung über Unternehmergewinn, Kapital, Kredit, Zins und den Konjunkturzyklus, 9. Aufl. von 1997als unveränd. Neuaufl. der Aufl. von 1934, Berlin: Dunker & Humblot. Sexton D. L. und Landstöm, H. (2000): The Blackwell Handbook of Entrepreneurship. Malden MA: Blackwell Publishers. Shepherd, D. und Wiklund, J. (2009): Are We Comparing Apples with Apples or Apples with Oranges? Appropriateness of Knowledge Accumulation across Growth Studies, in: Entrepreneurship Theory and Practice, 33(1), 105-123. Siegel, R.; Siegel, E. und MacMillan, I. (1993): Characteristics Distinguishing High Growth Ventures, in: Journal of Business Venturing, 8(2), 1993, 169-180. St-Jean, E.; Julien, P.-A. und Audet, J. (2008): Factors Associated With Growth Changes In “Gazelles”, in: Journal of Enterprising Culture, 16(2), 161-188. Storey, D. J. (2001): A Portrait of Success: The Facts Behind High Growth Companies in the UK (London: Deloitte & Touche). Storey, D. J. (2011): Optimism and Chance: The Elephants in the Entrepreneurship Room, in International Small Business Journal, 29(online-first-Publikation am 26. April 2011). Timmons, J. A. (1999): New Venture Creation: Entrepreneurship for the 21st Century, 5th edition, Boston u.a.: McGraw-Hill. Timmons, J. A. und Spinelli, S. (2003): New Venture Creation: Entrepreneurship for the 21st Century, 6th edition, Boston u.a.: McGraw-Hill. Volkmann, C., Tokarski, K. O. und Grünhagen, M. (2010): Entrepreneurship: A European Perspective. Wiesbaden: Gabler. Volkmann, C. und Tokarski, K. O. (2006): Entrepreneurship: Gründung und Wachstum von jungen Unternehmen. Stuttgart: Lucius & Lucius (UTB). Wilson, K. (2008): Entrepreneurship Education in Europe, in: OECD Report “Entrepreneurship in Higher Education”, Chapter 5, 1-20. Zahra, S und Dess, G. G. (2001): Entrepreneurship as a Field of Research: Encouraging Dialogue and Debate, in: Academy of Management Review, 26(1), 8-10. 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.

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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.

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Questions ..................................................... Fehler! Textmarke nicht definiert.

Prof. Dr. Volkmann | Prof. Dr. Tokarski Bergische Universität Wuppertal | Berner Fachhochschule

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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

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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

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