Needs of Global Start-up companies (Deliverable 2) GlobalStart wp1 Studies Deliverable 2 Needs of Global Start-up Companies Table of contents p
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- Identified needs from the case studies
- Research Development
- Table 2: Specific Research Development Needs related to the ‘capitals’
- Market development / sales
- Table 3: Specific Market development / sales Needs related to the ‘capitals’
- Production / operation
- Table 4: Specific Production / operation Needs related to the ‘capitals’
- Organisation and governance
- Table 5: Specific Organisation and Governance Needs related to the ‘capitals’
- Finance / administration
- Table 6: Specific Finance / administration Needs related to the ‘capitals’
- Needs and the Four Capitals: testing the hypotheses
- Table 7 Capital Contributions pre and post foundation
MethodFollowing a specifically created protocol a series of case studies were conducted among the consortium members of the European Union project GlobalStart. The case studies explored the specific problems encountered during the development of the firm, from pre-venture to the present day, and the key factors which have helped them to succeed based upon available university and regional support. The method employed was interviews with the founding entrepreneurs, supported by document analysis of secondary sources. The current analysis includes 22 technology firms representing different industry sectors and based in 6 different countries (Table 1). Table 1. Overview of the Case Companies
The consortium members selected their case studies based on the expert opinion of the director’s of their respective technology transfer offices³. These people are deemed as being best placed to judge the global potential of the companies as they have regular contact with the spin-off companies. All the interviews were reported in English and in a universal manner. The analysis of the case studies was conducted by a central source, which communicated with the individual partners the need to collect further data to ensure the homogeneity and comparability of the case studies. Results To assess the needs of the companies, the case studies were analysed with respect to five critical functional areas: research & development; production/operation; market development/sales; organisation and governance; finance/administration. The specific needs identified in each area were then related to the capital requirement which they address; these results are reported in Tables 2-6. Identified needs from the case studiesThe analysis of the cases focuses on five functional areas of relevance to starting entrepreneurs, namely: research & development; production/operation; market development/sales; organisation and governance; finance/administration. The following section gives a general overview of the needs as related to each of these functional areas. The specific needs identified in the cases, related to the ‘capital’ they address are reported in Tables (2-7). Research & DevelopmentFor early stage high tech firms, knowledge is possibly the single most important resource (Arenius & Autio, 2002). Acquisition of valuable know-how, learning and keeping up to date with the newest evolutions in the field are essential ingredients for success in these firms. It is important, therefore, that the founding team consists of people who are authorities in their fields of research as they provide scientific excellence, reputation and networks of scientific and technical partners to the firm. The majority of the case study companies are based on university knowledge or knowledge gained by the founder(s) while working at a university research group. For some of the case companies especially in the biotech firms, access to a global network of “world-class” scientists etc. was not necessary as the entrepreneurs are these experts. From the cases the other identified needs related to logistical and strategic implementation of research and development issues (see Table 2). Table 2: Specific Research & Development Needs related to the ‘capitals’
Market development / salesThe case studies revealed that marketing, and especially international marketing, is a problem area for the start up companies (see Table 3). Developing adequate sales and marketing strategies can be problematic for all start up firms. The firm must be able to see possibilities on the market related to customers’ needs and desires and have the capacity to exploit them within the firm’s current context (Klofsten, 1998). This is especially true for high tech firms whose domestic market is limited because of their technology offering, who therefore need to gather information on both foreign and domestic markets, customers and competitors. Rialp-Criado et al. (2002) claim that market knowledge and market commitment are important ingredients for a new venture’s success. Oviatt and McDougall (1995) suggest that one way in which new ventures might overcome the liability of smallness and newness is by being the first to market with a distinctively valuable product or service, there is ample evidence of this in the case companies. Table 3: Specific Market development / sales Needs related to the ‘capitals’
Production / operationLittle is written or known about the production decision of early stage high tech companies in the international entrepreneurship literature. The literature suggests that internationalisation is more focused on commercialisation of products and services rather than production (Burgell & Murray, 2000). From the cases it can be seen that production requirements differ among start-ups depending on the technology used. Many companies spend their early years focused solely on research, product development and testing, with no requirement (yet) for large production facilities. While the data shows several companies with manufacturing requirements in their early stages and that these companies employed several different solutions to tackle their needs with respect to both technical and product development and design and also with regards to manufacturing decisions. Some of the methods employed by the case companies include: outsourcing to partner companies; licensing the technology in; contracting university staff; and, entering into OEM (original equipment manufacturing) agreements with international companies. Some of the more specific problems relating to these decisions are outlined in Table 4. Table 4: Specific Production / operation Needs related to the ‘capitals’
Organisation and governanceMany early stage high tech firms, especially university spin-offs are started by technically skilled and motivated researchers, who are generally young and lack business and management experience (Luostarinen & Gabrielsson, 2002). This was supported in the case findings, where the entrepreneurs, especially those starting for the first time and academic entrepreneurs expressed that they had some deficiencies in dealing with organisational issues and also especially the academic entrepreneurs intimated that they were lacking with respect to some managerial capabilities. To make up for this the entrepreneurial team should consist of people with complementary expertise across the various functions required in the venture (Rialp-Criado et al., 2002; Oviatt & McDougall, 1995). Another way in which early stage high tech companies supplement their lack of managerial and organizational skills is through the support of advisory boards (Luostarinen & Gabrielsson, 2002) and boards of directors. Boards of directors have been shown to assist start up companies with their organisational development, providing credibility to the company as well as providing advice and counsel, and playing stewardship and monitoring roles (Deakins & Boussouara, 2000; Keasy et al., 1994; Hambrick and D’Aveni, 1992). Many of the case studies provide examples of the arrival of new management members with complementary capabilities to those already existing in the firm. The case studies also clearly illustrate the evolutionary nature of boards of directors as new members are added as the ventures experience new organisational challenges. The specific needs relating to organisation and governance are illustrated in Table 5. Table 5: Specific Organisation and Governance Needs related to the ‘capitals’
Finance / administrationNew ventures traditionally begin with limited financial resources. Also, in the early stages of the company, especially for high tech firms who require heavy research and development investments as they are still in a development or testing phase revenue flows from sales are often weak or nonexistent. Therefore, attracting sufficient financial resources is a prerequisite for start up companies. A distinction can be made between three types of capital required at different stages in the firms’ development. Pre-seed capital is the capital required at the very early stage, i.e. before the foundation of the company; seed capital is required to perform further research and development and to develop the product after the establishment of the company; while growth capital is required for the production and/or the commercialisation of the company’s product and/or services. All the cases highlight the need for funding at all stages of the company’s development and illustrate that the case companies look for funding from all available avenues, both public and private, e.g. international, regional & local venture capitalists; government backed funds; university funds, e.g. through technology transfer offices; national enterprise organizations; private equity; and, grants & loans. Several companies also emphasised the need for having at least one cash generating product or service to help overcome the lack of funding at seed phase. The specific needs with respect to financing are outlined in Table 6. Table 6: Specific Finance / administration Needs related to the ‘capitals’
Summary of the Needs The tables highlight the needs of the start up companies with respect to the five functional areas of importance to early stage high tech firms. When matched to the capitals it can be seen that the needs address all four of the capitals. In three of the five functional areas there is a direct link to a specific capital: production/operation and market development/sales relate directly to strategic needs and organisation and governance relate to cultural needs. With respect to finance/administration and research and development there is evidence of multiple capital requirements: finance/administration highlights economic and cultural needs, while research and development has the most diverse requirements with strategic, cultural, and social needs reported. Form the case data it appears that social needs are under reported, with only one problem area highlighted, namely identifying and relating to (global) networks of “world-class” scientists, experts, technical and/or industrial partners. However, from previous research we have seen that these firms are embedded in social networks and through their relationships with their strong partners have access to both local and international networks, which are necessary for acquiring the required capitals (Kirwan et al., 2005). Needs and the Four Capitals: testing the hypothesesTo test the hypotheses the following methods were employed. Table 7 reports on the capital contributions as identified in the cases. The first three columns, i.e. capital contribution of the founding entrepreneur(s), capital contribution of the strong partner(s), and, desirable resources introduced by contacts of the strong partner all relate to the pre start up phase and can be used to test the first hypothesis. The fourth column capital contributions of other partners post founding identifies those needs, that arise as the company develops, which cannot be met by the capital combination of the founding entrepreneur(s) and the strong partner(s). Table 7 shows that in every case the entrepreneur(s) at least contribute cultural and social capital, these are the knowledge and experiences gained throughout their careers and their personal networks4. Hypothesis 1 states that the initial capital contributions of the starting entrepreneur(s) and the strong partner(s) will provide a core base to establish the venture. In 15 of the 22 cases it can be seen that the starting entrepreneur(s) and their strong partner(s) provide a contribution to each of the capitals which proved sufficient to launch the venture. However, in seven of the cases there is a evidence of a lack of a specific capital in the pre venture phase: in five of the cases economic capital is lacking and in one of these there is also a want for cultural capital and in the other two cases there is a deficiency in strategic capital. This would suggest that there is no support for the hypothesis and that the central assumption of the entrepreneurship in networks approach is flawed. With respect to the cases where strategic capital was lacking it can be seen that strategic input came post foundation from amongst others participation in a university spinout programme. Further, with relation to the five cases where the economic capital was missing, analysis of the cases reveals the economic capital was present at founding and it was even referred to as the start capital. In these cases the founding entrepreneurs were continuing their work in research groups during the pre venture phase, and because they were financed from a variety of sources, including venture capital funds (in four of the five cases the founders were among those contributing to the capital), the official foundation occurred only once this finance was secured, and the economic capital is therefore reported in the foundation rather than the pre venture phase. In the instance where there was a deficiency in cultural capital, this related to a transfer of intellectual property (IP) from the university, which occurred once the economic capital was secured and the company founded. These results suggest that a refinement of the hypothesis is necessary as the initial capital contributions of the starting entrepreneur(s) and the strong partner(s) provide a sufficient core base to attract the necessary capitals to establish the venture. Table 7 Capital Contributions pre and post foundation
*Companies were assigned numbers to protect the confidentiality of the case companies ** The ‘what’s missing’ section is reported in italics and reports on the capital not present at the pre-venture phase. The desirable resources introduced by the strong partner reports those resources gathered through contacts initiated by the strong partner in the pre venture phase Hypotheses 2 states that post foundation companies have needs in those areas where specific capitals are lacking. As the company develops, so to does its store of capitals. New responses in strategy, development and implementation have to be addressed (Karagozoglu & Lindell, 1998), which requires increased management capabilities such as skills, attitude, knowledge and behaviour. Increased management capabilities were seen to be realised through the recruitment of additional staff and the appointment of new board members provided strategic support. The firms can further develop their own store of capitals with training, coaching and networking (Kirwan et al., 2004). However, the case companies don’t produce enough capitals to be self-sufficient and in all cases there is evidence of other partners meeting the needs of the company at different stages after foundation. In 20 of the cases there is evidence of the need for economic capital post foundation, this comes from a wide variety of sources including, for example, both government supported and commercial venture capital funds, existing shareholders, research subsidies. This striking need for economic capital is to be expected as most of the firms were still in a development phase at founding and were not generating income from sales. The second most reported need post foundation were strategic needs, this is not surprising as most of the starting entrepreneurs had academic backgrounds and generally lack business and management experience, supporting the earlier observation of Luostarinen and Gabrielsson (2002). These needs were again met by a variety of sources including networking organisations, relationships with established industrial partners, government agencies and continuing cooperation with the university as a strong partner. Cultural capital is reported as a need in only seven of the cases. Cultural needs are most often addressed with the recruitment of new staff and six of the firms report hiring in experienced staff, from new CEOs to technical staff, at different stages of development to improve the know-how within the company. A pertinent reason why cultural capital is underreported as a need is because the firms under observation are high tech firms that for the most part conduct their own research and technological development. One of the cases did outsource their technical development to the university, while another relies on development teams from outside the company. Social needs are again the least reported, only arising in six of the cases. Firms report joining networking organisations and taking part in European projects to gain access to potential customers and knowledge which they don’t possess themselves. As mentioned earlier one of the possible reasons why social needs are underreported is because these firms are already embedded in networks and their strong partners have provided access to the capitals or contact with organisations who have been able to provide the necessary capitals. Another reason could be that because network development is organic that the entrepreneurs don’t report it as a need. The network evolves through everyday business dealings and only when a specific contact outside the network is required does the entrepreneur(ial) team realise that a need is present. All in all these findings provide support for the second hypothesis. It is quite clear that post foundation companies have needs in those areas where specific capitals are lacking. Notes ¹ For information on the GlobalStart project see www.globalstartups.org ² Strong partner: In her dissertation Wakkee (2004) proposes that the presence of a domestic or international partner with international contacts is a critical success factor for global start-up firms. In this paper we refer to that partner as the “strong partner,” i.e. that partner who contributes most to the development of the firm. Yli-Renko et al. (2001) studied the effects of key customer relationships examining the effect of the largest customer, i.e. the one that accounts for the highest proportion of sales revenue, on knowledge acquisition and knowledge exploitation. In this paper the strong partner relationship is viewed in similar terms, however, its relevance is focused on the acquisition of further “capitals.” ³ The Twente case companies were taken from the list of TOP (www.utwente.nl/top) companies formed after the 1st of January 2000. This gave a possible sample of 56 firms. Following discussions with the two directors of the TOP programme this list was reduced to 11 firms, which because of their technology/product offerings and their knowledge of the companies and their business plans, the directors deemed to have global potential. To further assist in the selection process the authors used the 12 propositions as to what constitutes a global start up (see Wakkee, et al., 2004) to further examine the global potential of these firms, this was completed using company websites and other available public information. As this published information did not in all cases provide sufficient to assess the global potential of the firms it was decided to carry out preliminary telephone interviews to ascertain the necessary information. Following these interviews five companies with global potential were chosen for in-depth study. 4 Personal Network: Here the personal network of the entrepreneur includes all those family, friends, and acquaintances with whom the entrepreneur relates to primarily on a social level (Szarka, 1990) and those network contacts the entrepreneur has from his educational and work experience prior to starting the enterprise. 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