Sourcing Start-up Success

Magisterarbeit von Adrian Rößler

Introduction:

What are the common denominators of big buzzing brands such as Google, Facebook, Groupon, Twitter, PayPal, YouTube, or LinkedIn? First of all, they are all web-based to a large extent. Google allows you to search the web. Facebook and LinkedIn lets you connect to your friends or business contacts online. Twitter allows you to absorb and share information in an unprecedented manner. PayPal facilitates millions of payment processes on the web. YouTube is the largest resource of videos online, and Groupon allows people to team up via the web and strike deals with high discounts for local services. Second, they are all relatively young compared to companies such as Microsoft, Dell, or Apple. In fact, Google and PayPal are the seniors with 13 years, while Groupon has not even celebrated its third birthday. Third, these companies have established a global presence through the impact of the lightning fast development of the Internet and effects of globalization. With Twitter as the only exception, they are pulling in millions and millions of revenue and are valued at several billion dollars.

Start-ups are an important factor contributing to economic growth. They create new jobs, new or improved services and products and thus enhance general welfare. Since Birch concluded in 1979 that small firms create more new jobs than large firms, several research streams have started to examine this phenomenon. However, every year probably thousands of newly created ventures fail to cope with the challenges that are characteristic of the start-up environment. In fact, research has shown that more than half of newly founded ventures fail within two years. Hence, a strong interest of both practitioners and research scholars has been to identify success factors and shed more light on the ecosystem of start-ups and the processes that still largely take place in a black box. The approaches and results that link certain characteristics or actions to success vary widely in their theoretical background as well as the impact and practical relevance generated.

Recently, the ‘worldwide’ financial and economic crisis has given rise to a renewed call for more entrepreneurship and support for start-up and innovation culture. In the wake of the crisis, opinion leaders, public policy, and media have started to look again at entrepreneurial activity and start-ups as a promising provider of growth. Also web-based start-ups that had lost their reputation after the burst of the dotcom bubble face renewed attention and interest.

Germany, traditionally a risk-avoiding culture, witnessed a founder boom that continued even after the crisis. In 2010, about 750,000 new ventures were registered, representing a 4 percent increase (‘Gründerboom erfasst Deutschlands’). A quick look at the start-up environment in Berlin reveals a newly developing European hot spot for innovators, creative professionals, and entrepreneurs. With so many innovative start-ups created, it is thus of interest to question the source and origin of the underlying ideas.

The purpose of this paper is three-fold. First, it is intended to establish a new framework by combining literature streams on start-up success with research on cultural and institutional environments. Although a wide array of literature on start-ups, cultural and institutional literature exists, connecting research is underdeveloped. This paper hence sets out to bridge these differing streams of literature.

Second, drawing upon the impact of globalization and the Internet, new implications for the sourcing of business ideas will be generated. A lot of attention has been paid to the development of start-ups and the characteristics of entrepreneurs. However, the step in the development chain where the idea is generated has received comparably low attention. This paper thus tries to explore some sources and mechanisms evolved through globalization and use of the Internet.

Third, a case study designed to explore the above-mentioned new framework and implications is expected to support the development of a new model. It is therefore the overall purpose of this paper to produce a theoretically grounded and practically applicable model. A model that should cover the most important aspects when copying and implementing a business concept from a different country.

The structure of this paper is as follows. This first section serves as an introduction to the topic and the purpose of this paper. It outlines the structure and gives an overview of the methodology employed.

The second part of the paper consists of four sections and represents the extensive theoretical building block. It comprises a brief theoretical introduction into the field of globalization and the impact on entrepreneurial activity in combination with the advancements of the Internet. This section is also intended to generate new implications for the new venture creation process by exploring the sources of new business ideas. It is followed by an in-depth analysis of several start-up success factors that have been extensively covered by both theoretical and empirical research. Drawing upon this extensive literature, the key findings for each success factor will be condensed and critically examined. In the final two sections of this second part, both the cultural and the institutional context in which new ventures operate will be described. Based on the argument that these environments are not nonchalant to start-ups, these sections will relate interesting findings to the entrepreneurial context.

In the third part of this paper, the case study will be presented. The case study, which is based on an ecommerce start-up, is divided into two sections. The first section introduces the subject of the case study, gives an overview of the background, and describes the developments and events along this case. Thereafter, the second section of the case study goes into depth with the case to reveal more details and issues encountered when copycatting.

Based on the preceding findings and insights from the case study, the fourth part is intended to develop a model for successful intercultural transfer and adaption of a foreign business concept. Although it is not the aim of this model to present a recipe for success, the model will be designed to serve two-fold. On the one hand, the model should point out interesting areas for future research. On the other hand, it is intended to guide entrepreneurs in the process of intercultural copycatting and raise their awareness for critical factors.

Finally, this paper will critically assess its limitations and summarize the key points and findings.

This paper employs a combination of literature review and real-life case study to approach the broad and complex topic in research. As it seeks to develop a model for successful intercultural copycatting of a foreign business concept, the model should be well-grounded in theory. Therefore, a large part of this paper draws upon diverse streams of literature, summarizes the key findings, and condenses them into the model. Additionally, a case study of an explorative nature is intended to serve as practical and empirical support for the theory that is applied to the model.

Consequently, this paper is of qualitative and explorative nature. Moreover, the case study processes longitudinal data and information as it covers the development of the case subject from the beginning and over a period of 13 months. In detail, the case study comprises both publicly available resources as well as extensive insights the author gained due to his involvement in one of the case study subjects. Concrete numbers supporting some of the arguments brought forward cannot currently be made available due to the competitive situation. However, they might become available on request once they have turned irrelevant for competitors.

The extensive literature reviewed comprises both theoretical and empirical papers from different streams of literature. In order to secure high quality and relevance, it is intended to solely employ papers published in high quality journals or articles that have been cited frequently. Furthermore, regarding the relatively young tradition of research of start-ups, focus is put on academic articles instead of books. These articles are all accessed via databases such as Ebsco Business Source Premiere or ABI/Inform Global/T&I ProQuest. These data bases offer the additional benefit of showing the frequency a specific article was cited within the database. A good indicator to ensure the quality of these scholarly articles is the quality of the journals they were published in. For this matter, a ranking of journals published by The Association of Business Schools (2010) was used as a starting point.

Table of Contents:

Text Sample:

Chapter 3.4, The power of the network:

‘Entrepreneurship is a relational task, a combinatorial problem’.

‘Whom you know matters’ is the title of a paper by Hochberg, Ljungqvist and Lu and a statement that seems difficult to argue against. As outlined in section 2.2 new technologies have led to a highly interconnected, fast-moving world, where information is exchanged at high speed. The increased speed in combination with new tools that facilitate the activity of extending and cultivating one’s network such as LinkedIn, Xing, Facebook, or simple online forums, have given rise to a new consciousness of networking importance. A general notion can be observed that a network or vitamin C (connection) can prove more useful than education. This notion has also been pushed forward by the ever-increasing amount of books, seminars and both authentic and self-proclaimed networking gurus populating this world.

Considering all these factors, it can be assumed that a start-up’s network also contributes greatly to the new venture’s success. Several questions arise in this context: How to define a start-up’s network? By what means does a network enhance success? What kinds of network characteristics are most favorable?

Especially in the beginning, a start-up’s network will be congruent with the founder’s, respectively the founders’ network, and could thus be regarded as an entrepreneur-related success factor. With the start-up developing, however, it can be argued that the different personal networks of founders, employees, advisors, investors and also virtual networks like a company’s Facebook fan page or twitter followership, aggregate and become the start-up’s network. Also in literature, one line of study has focused on the personal network of entrepreneurs, while another line has tried to capture a business’ organizational network. As this gap needs to be bridged and since, in the end, success will be influenced by a whole organizations’ networking activities rather than only the network of an individual entrepreneur, network as a success factor will be attributed to the firm-associated category of success factors.

In contrast to literature examining the influence of a business model on firm performance, theoretical and empirical literature on network theory has been prominent for a while. Based on thorough literature review, Hoang and Antoncic proposed that networks consist of three building blocks, namely network content, governance of relationships, and structure of the network. Considering content, Jenssen and Koenig point out that the social network approach is closely related to the resource-based view of a firm where certain resources generate sustained competitive advantage. Consequently, this ‘network success hypothesis’, as termed by Brüderl and Preisendörfer, states that by use of network contacts instead of normal market transactions, entrepreneurs can generate two benefits: firstly, they can obtain resources otherwise not available on the market and secondly, they can gain access to resources more cost-efficiently. Cheaper accessed resources could be represented by a friend offering tax or legal advice below market prices, while an otherwise unavailable resource could be found in reputation added by a reputable member on the board, who might on top help establish a partnership with a big company. Commonly identified reasons for the positive contribution of networks generally refer to (1) access to information, (2) access to customers and suppliers, (3) access to a broader set of financing possibilities, and (4) access to provision of emotional support. Put differently, Witt, Schroeter and Merz distinguish between personal contacts, experience and knowledge, physical resources, and financial resources obtained through the network.

With regard to gained access to financing, it has been shown that social ties facilitate information flow between an entrepreneur and an investor, thereby increasing the likelihood of obtaining financing. As will be laid out in section 3.5, financing has a strong positive impact on performance. Furthermore, this positive network effect can subsequently be traced at the next stage as well, where a start-up has already received funding. Following the results of an empirical investigation by Hochberg, Ljungqvist and Lu, founders are recommended to look for venture capitalists with high network centrality, as this improves the probability of receiving further funding or exiting successfully.

Information is another resource which is argued to be more easily and economically accessed through a firm’s network. Burt, who is also famous for initiating the discussion on structural holes, states with regard to information acquired and processed by a network:

‘The network becomes an important screening device. It is an army of people processing information who can call your attention to key bits – keeping you up-to-date on developing opportunities, warning you of impending disasters’.

Moreover, and relating to the above mentioned financing aspect, information asymmetry, which is one of the key obstacles in successful venture funding, is overcome through a mechanism provided by social ties. When attempting to provide more explanation on the diffusion of information within networks, literature is very likely to refer to Granovetter and his differentiation between strong and weak ties. Defining the strength of a tie as a combination of the characteristics emotional intensity, intimacy, reciprocity, and interaction, he proposes the strength of weak ties. On the one hand, information transfusing through weak ties is supposed to reach more people and travel a longer distance. On the other hand, it is argued that one’s weak ties, i.e. people one might interact with only occasionally, are active in other areas and are therefore exposed to different information. This argument was supported by a study by Shane and Cable validating this function of weak and indirect ties as provider of valuable information. In contrast, Jenssen and Koenig found no significant difference, yet confirmed the high flow of information through both kinds of ties. More specifically, a recent study by Pirolo and Presutti empirically confirms the importance of both strong and weak ties with main customers in order to increase economic performance. At the same time evidence is provided that strong ties affect innovation performance adversely, while weak ties enhance it.

This evaluation of weak, strong, indirect and direct ties has already led up to the third question stated earlier: What kind of network characteristics are most favorable? While the positive influence of the personal network on the venture’s success was generally validated, one could expect specific effects of network size, position, structure and composition. Firstly, including other entrepreneurs and all kinds of professional advisors, such as lawyers or accountants, in a personal network showed clear positive impact. Secondly, once the new venture starts to partner with investors or other organizations forming strategic alliances, these should be picked wisely. It has been shown that the initial alliance partner has an early imprinting effect on the venture’s subsequent network size, with network size in turn having a positive impact on performance. However, with regard to network size, big is not always beautiful. According to Uzzi ‘overembeddedness’, which describes a too strongly connected big network, can reduce the flow of new information, thus causing inefficiencies. Last but not least, the existence of structural holes and the start-up functioning as a connector yield performance boosts. Accessing these structural holes is argued to enhance internal firm capabilities, resulting in ‘network-enabled capabilities’ as termed by Zaheer and Bell.

In the end, the type of benefit and whether it can eventually be obtained through the new venture’s network ‘depends on the firm’s size, its absorptive capacity, and the reciprocity costs of utilizing personal relations for business purposes’. An important aspect, considering the networking efforts of founders, concerns the input-output ratio. Witt postulates an inversely U-shaped relation between success of a start-up and its network structure in terms of size and diversity. In other words, the larger the network is the more time-consuming and costly while less beneficial it becomes to extract an additional benefit. Finally, entrepreneurs should consider the following: although the founders’ initial network has a significantly strong influence in the early phase of a start-up, less networked founders with smaller endowment of social capital can still catapult their start-up into a favorable initial network position by high accomplishments.