The shape of a business

  The ``shape of a business'' is manifested in its form of organisation, capital requirements, methods and patterns of growth, personnel requirements, and the risks to and yield from the capital invested. Businesses in the same industry will tend to have the same shape; significant deviations, unless clearly manifestations of obvious success, usually mean something is wrong within the business. This shouldn't be surprising: businesses evolve within the pattern of competition and cooperation of the marketplace much as organisms evolve within an ecosystem. Just as biology tends to find similar solutions to similar problems from many different starting points, the market tends to drive businesses with the same fundamentals to the same optimal operating ratios.

The shape of a business is often a consequence of the ultimate constraints on growth of the enterprise. Most businesses are constrained by capital costs, material cost and availability, product development cost, manufacturing capacity and costs, and market size and demographic factors. The tradeoffs among these constraints are well understood, and capital can be deployed to ameliorate any of them.

The shape of a business is reflected in the financial aggregates that measure its performance. Within a given industry, operating ratios tend to converge upon the same results. These results, in turn, can be interpreted to identify the key resources on which the growth of the business relies. In the Nineteenth century, one of the epochal events was the building of the web of railroads that interconnected each continent. Constructing a railroad required rights-of-way, largely secured by government concessions through the right of eminent domain, access to large amounts of capital to finance construction and initial operation, and labour where required for construction. Railroads were thus largely a creature of the debt market and government policy, and it was railroads which first introduced the concept of 100 year bonds and, in a few cases, perpetual bonds to the credit markets. Much of what we now call ``heavy industry'' similarly depended upon debt financing--wherever a massive physical plant had to be constructed before revenues could flow, debt was at the heart of the business.

Each business finds its own shape, and with that shape, the mechanisms for financing its development and growth. The intimate association of private venture capital pools with semiconductor-based high technology is a consequence of the ratio of the start-up capital costs and business development times characteristic of that business compared to the cash-out time and expected yield. Businesses with comparable 10-year risk/reward ratios, such as private satellite launching, new information utilities, and desktop chip fabrication must seek funding through other channels because the shapes of their businesses are incompatible with funding mechanisms which co-evolved with the development of more conventional businesses with which they contend for funding.

The growth of a New Technological Corporation, however, is largely constrained by the availability of talent. It is talent that identifies opportunities created by technological growth, defines and develops products to exploit them, and markets and sells the products to establish them before the niche is occupied by competitors.