Knowledge that Transforms

This study assesses the impact of intangible assets on the venture success of firms as they enter into industrial markets that are new to them. A “new” market is one that is geographically new for the firm or is a product market where this firm did not originally compete. The analysis is based on the Profit Impact of Market Strategy database, which contains information on 91 new ventures into industrial markets. Five hypothesis were tested in this study: 1.H1: High levels of intangible assets will be positively associated with performance of firms entering new markets.2.H2: High levels of intangible assets increase the likelihood of success, regardless of the timing of entry.3.H3: In explaining venture performance, there will be a positive interaction effect between promptness of entry and level of intangible assets. Pioneer entrants will benefit substantively more from high levels of intangible assets then will later entrants.4.H4: High levels of intangible assets enhance success irrespective of aggressiveness of entry.5.H5: In explaining performance, there will be a positive interaction between level of intangible assets and aggressiveness of entry—firms with high levels of intangible assets will gain substantively more from aggressive pricing, promotion, and high quality, than firms with low levels of intangible assets. One specific intangible asset (corporate image) is empirically analyzed, and the results support our hypotheses. A strong corporate image enables the firm to achieve greater success when they enter into new ventures, and the interaction of image with aggressive promotional, pricing, and quality strategies is significant in explaining this success. Implications for practioners are: high-image firms reap enormous benefits from increased promotional efforts, high quality, and aggressive entry. Low-image firms are severely penalized when they aggressively enter a market and may he better off entering the market slowly and at low prices.

A recent article by Low and MacMillan (1988) suggests that at the current stage of entrepreneurship research, empirical studies that “are not theory driven and do not test hypotheses are no longer acceptable” (p. 155). This paper is written in the spirit of this directive. It starts with an explicit theory of entrepreneurship developed by Israel Kirzner, and tests three hypotheses derived from the theory. The theoretical thrust of the paper emphasizes the role of information and information-seeking behavior as a central element of entrepreneurial behavior. Entrepreneurship is based on discovering of opportunities and resources to exploit them. Our interpretation of Kirzner's theoretical works leads to the formation of hypotheses regarding the differences that should exist in the way entrepreneurs as opposed to managers seek this information. These concern: (1) differences in the manner in which entrepreneurs and corporate managers expose themselves to information; (2) differences in the sources of information used; and (3) differences in evaluating information cues. In addition, we test the hypotheses that success and experience will erode the above differences between entrepreneurs and corporate managers. Our sample involved 51 founders of companies in New Jersey and 36 executives of a very large financial company. A questionnaire was used to gather the data, and scales were formed using principal component factor analysis with a varimax rotation. Differences were tested using univariate and multivariate statistical methods. Significant differences were found in five of the nine factors examined. Entrepreneurs spent significantly more time searching for information in their off hours and through nonverbal scanning. They employed different sources than executives and paid special attention to risk cues about new opportunities. Executives, on the other hand, tended to focus on the economics of the opportunity. These results are only partially consistent with a previous study comparing entrepreneurs and small companies' managers, suggesting a contextual contingency to the behaviors under study. The most persistent finding was regarding the time and “volume” of search for information, reinforcing the idea developed in the recent network theory of entrepreneurship that entrepreneurs are avid information-gatherers and opportunistic learners, but not necessarily, or not uniquely in a verbal, social-networking manner. Finally, with success and experience, the differences become smaller. It seems that success and experience reduce the need or desire of entrepreneurs to search for new opportunities. No such effect was found with our executive sample.

Venture capital investing differs in important respects from investment decisions involving the securities of Fortune 500 companies, or decisions to purchase established companies, which are generally made in accord with widely recognized financial models. Investing in new ventures involves a high level of uncertainty as well as a high risk of failure. Venture capital investing is characterized by high variability in the outcomes of new ventures and in the performance of venture capital portfolios. Venture capital investing decisions are complicated by a general lack of quantifiable financial and market data for early-stage ventures, and investment decisions remain hostage to unanticipated competitors, market shifts, and financial cycles. Some observers have suggested that venture capital investment decisions are primarily subjective assessments. While the question of risk in venture capital investing has been addressed on an ad hoc basis in several empirical studies, there has been little effort to develop a theoretical framework of risk perceptions and risk-reduction strategies. Despite differences in investor experience, investment preferences, and tolerance for risk, venture capital managers share many common perceptions of the risks involved in investing in new ventures and the distribution of those risks over the venture-capital-funded phase of development. Venture capital managers also utilize many common behaviors and strategies in adapting to these risks. These perceptions and reactions to risk in investing, and strategies for controlling risk can, in theory, be used to construct a behavioral framework that can predict how venture capital managers will behave in choosing between various investment opportunities in order to minimize risk and to maximize potential returns. In an attempt to begin to identify various elements of such a behavioral framework of venture capital reactions to risk, the authors have drawn upon psychological risk theory of decision-making under uncertainty, including classic expected utility theory, later modifications to that theory by Kahneman and Tversky (1979). and Coombs and Huang's (1970) “portfolio approach” to risk, that are applicable to venture capital investing. These expected behaviors to risk have been used in conjunction with empirical studies of venture capital investment and portfolio outcomes, distributions of investments within portfolios, and venture capitalist perceptions of risk, to propose nine hypotheses about how venture capital managers behave in making investment decisions. These hypotheses include differences in variation and magnitude of returns for early-stage versus later-stage ventures, explanations of how risk distributions change over the stagewise development of new ventures, differences in the behavior of “aggressive” versus “conservative” investors in screening investment prospects, and strategies utilizing a lower “ideal level of risk” to reduce the chances of achieving negative or sub-normal final portfolio returns.

This article provides an empirical analysis of the costs of going public based on a sample of 1852 offerings during 1977–1987. The sample includes 1556 firm-commitment issues and 296 best-efforts issues. Three components of the cost of going public are examined: (1) direct cash expenses such as legal and accounting costs; (2) investment bank's commission; and (3) costs resulting from the investment bank practice of pricing initial public offerings below their market values. All of the cost components are significantly higher for best-efforts offerings than for firm commitments. In fact, best-efforts offerings are more than three times as expensive (on a percentage basis) than are firm commitments. In addition, there are marked economies of scale in the process of going public. The total costs of going public were 40% of gross proceeds for the smallest firm-commitment issues but only 15% for the largest. In dollar terms, we estimate that a typical, small-firm commitment offering of $2.5 million will cost approximately $800,000 (32% of gross proceeds), whereas a large issue of $25 million will cost approximately $4 million (16% of gross proceeds). The issuing firm's earnings, as well as the type of investment bank underwriting the issue, were also important cost determinants. The primary implication of our results for entrepreneurs is that it is quite expensive to attempt a public offering prematurely. The “marginal” issuer with a small capital requirement and a poor earnings history will be at a large cost disadvantage to more-established firms. More specifically, we advise that the firm have capital requirements of at least $10 million and positive operating income before attempting a public offering. Postponing a public offering until the issue will be well received by investors and investment banks is likely to be worth the wait. Until that time. alternative sources of funds will be more cost-effective.

Young, independent, technology-based ventures have an increasingly complex array of strategic choices about how they can grow while simultaneously competing on the basis of their technological capacity and skills in their markets. Given the central importance of these choices to the success of the venture, there should be a close, integral relationship among them. Similarly, financial strategy choices also enter this relationship. Growth and competition place tremendous resource demands on the young technology-based venture, and financial strategy choices therefore must also be factored into the choice-taking process. The choice-taking perspective is basic to this inquiry. As other researchers have pointed out, young entrepreneurial ventures typically do not utilize highly formalized strategic planning processes (Robinson and Pearce, 1983). Strategy formation in such firms tends to be informal and episodic. Strategy may be revealed best through the pattern or set of choices taken at a point in time and over time. From a choice-taking perspective, then, the critical questions become the following: (a) Are there identifiable patterns of growth, technology, and financial choices? (b) what factors shape or determine which choices are taken? and (c) are these patterns related to venture performance? These questions were explored by using data from a survey of 100 CEOs of young, independent, technology-based firms across three industries. The results generally support the idea that patterns of choices can be identified. Several of these patterns are related to the ventures' demographic characteristics, such as form of ownership and scope of sales. Importantly, stage of development was not related to those patterns, nor to the performance of the ventures. The highest-performing ventures were found to be pursuing internal innovation through R & D for product breakthroughs. This finding is surprising, since young ventures at the stage at which most were found in this sample would traditionally be expected to emphasize product extensions and modifications. We need to better understand why young ventures would choose to innovate internally for breakthroughs in their growth stages, and how well they are able to do so. A major implication of this research is that the CEOs of young technology-based ventures are being presented with a much larger “menu” or array of choices, at many points in time, than conventional stage-based models of venture development have postulated. One explanation of this possibility is that the firm life cycle is being compressed by relatively new conditions, such as the availability of more and earlier capital through joint venturing and alliances, and shorter product life cycles. Indeed, a follow-up survey a year later with 77 CEOs from this sample confirmed that joint ventures and alliances were the number-one choice being pursued to gain access to distribution channels and new markets. What is troubling about this possibility is that the skills and capacities of these young ventures may be limited in comparison with the richness and complexity of the available choices. In the follow-up survey, the sources of information that were by far the most relied upon for strategic decision making were other internal senior managers and board members, outsiders such as lawyers ranking distantly behind. The leaders of these ventures need to be fully supported in evaluating, negotiating, and managing these often highly complex relationships.

The published literature relating to the location of a business tends to support two different kinds of theories: (1) that business locations are selected to minimize costs; or (2) that decision-makers select locations because of personal preferences. This study attempts to find explanations as to why certain communities have grown faster than others, and to provide a model for the location decision of a start-up business. We find a negative correlation of two entrepreneurship measures to environmental factors that are usually considered to be desirable, i.e., health care and the environment, climate and terrain, recreation, and low crime. We find a weak correlation between community attitudes and the entrepreneurship measures. We also find a positive correlation of entrepreneurship with a high number of college graduates; a negative correlation when a high proportion of the population is over age 65. Population mobility and low unemployment are also positively correlated with the measures, but those factors seem at least as likely to be results as to be causes of business births and business growth. We believe that start-ups are vital for any community that wishes to grow, therefore the location decision of start-up businesses seems important. We propose a model of the location decision of a start-up, a model that emphasizes the individuality of the decision maker and the specific success requirements of the business. The driving force behind a start-up can be a decision-maker's desire for personal gain, a problem that begs a solution, or a solution that is looking for a problem. In some cases, the reason for starting a business will dictate its location. In other cases, success requirements of the business will dominate. We believe that researchers can gain a true understanding of the location decision only by considering both the preference of the decision-maker and the requirements of the specific business.

In Hungary the superiority and the rationality of the centrally planned system had already been questioned in the mid-1950s and in lower or louder voice ever since. After the suppressed revolution and initiated systemic changes of 1956, the comprehensive economic reform of 1968 was an attempt to combine plan and market keeping basic characteristics of the system as dominance of state ownership, high centralization, the power of the single party, etc. Despite several new initiatives, this experiment failed. From these initiatives, four will be dealt with: the birth and flourishing of the second economy, the rise and fall of the intrapreneurial groups, the turn from toleration to promotion of private small business, and the start of the divestiture privatization. The four junctions of the special Hungarian “reform trajectory” nolens-volens prepared the fundamental systemic changes: the transition to a proper market economy—partly by introducing basic constitutents of the new system, and partly by contributing to the erosion and disintegration of the former system. The analysis of these historical lessons helps to understand the present situation of the Eastern European economies and in particular of Hungary. It facilitates the identification of the major tasks to stop stagnation and decline, to start revitalization of these economies, and instead of the use of routine International Monetary Fund and World Bank schemes, to elaborate adequate forms and methods of aid. In the European market economies, the share of small business in employment (measured by firms up to 100 employees) might be around 50%, in Hungary, about 20%, in Poland about 15%, and less in the other Eastern European countries. The development of entrepreneurship and small business is one of the major prerequisites of the transformation of these economies. The knowledge, however, about the actual situation, the conditions needed to increase the number of start ups, the rate of survival, and the growth potential of small and medium-sized enterprises is rather scarce. From the findings of the questionnaire survey, the following conclusions can be derived: 1. The increase of the share of the SMEs should be based on their better competitiveness in domestic and export markets; this is overshadowed now by the quantitative ambitions. 2. SMEs have advantages vis-à-vis the large enterprises as well as disadvantages. To counterbalance them, an accelerated development of the infrastructure for banking, training, consultancy, and information; preferential treatment (credits, taxation) in some cases, networking, and more services of the trade associations are needed. 3. In a declining, depressed economy, one cannot expect the renaissance of entrepreneurship and small business. Fighting high inflation, loosening restrictions, and a better management of the country's debt service should create a healthier economic environment—for small, medium, and larger enterprises equally.