Page 173 - ENTREPRENEURSHIP Innovation and entrepreneurship

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166 THE PRACTICE OF ENTREPRENEURSHIP

division president, with the rank, compensation, bonuses, and stock
options appropriate to the level. This can be a sizable reward, and yet it
does not commit the company to anything except in case of success.
Another method—and which one is preferable will depend large-
ly on the tax laws at the time—is to give the people who take on the
new development a share in future profits. The venture might, for
instance, be treated as if it were a separate company in which the
entrepreneurial managers in charge have a stake, say 25 percent.
When the venture reaches maturity, they are bought out at a pre-set
formula based on sales and profits.
One thing more is needed: the people who take on the innovating
task in an existing business also “venture.” It is only fair that their
employer share the risk. They should have the option of returning to
their old job at their old compensation rate if the innovation fails.
They should not be rewarded for failure, but they should certainly not
be penalized for trying.
4. As implied in discussing individual compensation, the returns
on innovation will be quite different from those of the existing busi-
ness and will have to be measured differently. To say, “We expect all
our businesses to show at least a fifteen percent pre-tax return each
year and ten percent annual growth” may make sense for existing
businesses and existing products. It makes absolutely no sense for the
new project, being at once much too high and much too low.
For a long time (years, in many cases) the new endeavor shows
neither profits nor growth. It absorbs resources. But then it should
grow very fast for quite a long time and return the money invested in
its development at least fifty-fold—if not at a much higher rate—or
else the innovation is a failure. An innovation starts small but it
should end big. It should result in a new major business rather than in
just another “specialty” or a “respectable” addition to the product
line.
Only by analyzing a company’s own innovative experience, the feed-
back from its performance on its expectations, can the company deter-
mine what the appropriate expectations are for innovations in its indus-
try and its markets. What are the appropriate time spans? And what is
the optimal distribution of effort? Should there be a heavy investment of
men and money at the beginning, or should the effort at the start be con-
fined to one person, with a helper or two, working alone? When should
the effort then be scaled up? And when should “development” become
“business,” producing large but conventional returns?