Knowledge that Transforms

In this article, the sectorial and environmental forces that facilitate or inhibit the creation of venture capital companies are studied in the three European countries where the industry is most developed: the United Kingdom, France, and the Netherlands. The focus is on the start-up phase of the industry, the period from 1970–1990. The founding of firms can be studied on four different levels: entrepreneurial, organizational, population, and macroeconomic. In this study, a population approach is taken; this implies that we do not attempt to explain any single founding, but rather the aggregate number of foundings that occur in an industry in a certain period in a certain country. According to the organizational ecology theory, the population density (i.e., the total number of organizations in a population) is the major environmental factor that affects the founding rate through two processes. Initially, when the density is low, each founding eases new foundings, because the simple prevalence of a form tends to give it legitimacy (thereby spurring imitations), the training ground for qualified personnel grows and the supporting networks are widened and strengthened. The legitimation process does not grow forever: once enough organizations of a certain kind exist, legitimation attains a ceiling. As the number of organizations increases, the second process becomes dominant: the competition for resources (raw material, personnel, customers, capital) grows, leading to a negative relationship between the density and the founding rate, everything else being equal. Thus, the founding rate declines as the number of organizations increases, once a threshold is reached. The major hypothesis that is tested here is that the population density has an inverted U-shaped effect on the founding rate of venture capital organizations. In addition, the effect that the venture capital firms of the three countries have on each other is studied. Two populations are said to interact when the populations affect each other's growth rate, but the interaction need not be symmetrical. The second hypothesis, tested in this study, is that populations in different countries have a positive effect on each other and not a competitive effect because the legitimating effect does not halt at geographical borders. Yet, the competition for resources (capital, people, deals) among geographically different populations is limited in this industry. This study is valuable because until now, the existing ecological studies focus on long-established industries. Testing, the theory in a young industry that emerged only in the seventies (in Europe) has merits in its own right, because the technological progress after the Second World War has altered the organizational environment tremendously. The communication and transportation revolutions may have especially influenced the way in which organizations interact with each other and with the environment. The venture capital firms are furthermore special in the way they are organized with the dual structure of management company and investment fund(s). If the theory holds in this young industry, important additional evidence will be given that the theory is truly applicable to “populations of all types, in any time period, and in any society” (Carroll 1988, p. 18). Finally, this study extends the theory by giving evidence on how industries in different countries may interact upon each other. We show empirically that the major factor that influences the overall founding rate in each of the three countries is the density of the industry, i.e., the number of organizations that already exist in the industry; this confirms the population ecology theory. When the density is low, adding a new organization to the industry raises the probability of a subsequent founding; when the density is high, the contrary is true. The institutional changes considered here, such as the establishment of tax transparent legal entities or state guarantees against losses (in the Netherlands) and the establishment of secondary stock markets, do not significantly influence the founding rate in any of the three countries. Moreover, the Dutch foundings are positively influenced by the British density and the French foundings by the Dutch density; the British foundings are, on the contrary, negatively influenced by the Dutch density. The competitive effects between the Netherlands and the U.K. are thus more important than initially thought. The relationship between the density and the founding rate is the strongest, most consistent, and most significant relationship found in this study. Thus, the number of organizations that already exist in an industry is very important in explaining the founding of organizations, apart from, for example, the personality of the entrepreneur or from the networks in which he or she is involved. This indicates that, when trying to explain the founding of organizations, the industry structure, and more specifically the number of organizations that exist at the moment of the founding, cannot be ignored.

This study is a follow-up on three others, published in Strategic Management Journal, 1987, 1989, and 1991. A sample of tenured business policy scholars, with significant track records in publishing, rated key management journals with respect to their appropriateness as outlets for scholarly research in the business policy field. The results of the survey are reported.

During the past decade, increasing attention has been given to the widespread use of research and development (R&D) strategic alliances and cooperative interorganizational relationships. This research has addressed a variety of inter-firm relationships ranging from joint ventures to informal networking. However, most of this literature is based on research involving large established firms. More recently, researchers have recognized that small firms or new ventures are also adopting cooperative R&D strategies with increasing frequency. A variety of reasons for the increasing use of R&D cooperative arrangements in new ventures has been offered, including the need to complement a new venture's existing internal resources, the need to quickly gain the technical capabilities to compete in rapidly changing markets, and the desire to minimize the fixed costs associated with acquiring capital assets. This paper reports the results of a study of new high-technology ventures that examined the relationship between performance, the experience of a venture's management team, and its use of R&D cooperative arrangements. The central proposition of this research was that the effectiveness of R&D cooperative activities is associated with the level of combined expertise possessed by the new venture's management team. Specifically, it was anticipated that new ventures with management teams possessing more experience with the industry and/or with similar technologies would be better able to successfully engage in R&D cooperative activities. The primary data analysis technique was moderated regression. The data was collected from Security and Exchange Commission initial public offering registration statements and other archival documents filed by 210 new ventures in three high-technology manufacturing industries. The results of the regression analysis revealed that sales growth was associated with the use of R&D cooperative arrangements. More important, the results also indicated that this relationship was positive when the new venture's management team was relatively more familiar with the industry, markets, and/or with similar technologies. In other words, our results indicate that the relatively more experienced managers were more proficient at using R&D cooperative activities to strategically position their respective firms vis-à-vis their less experienced counterparts. Evidently, these managers were better able to identify the risks and benefits of engaging in such cooperative activities. Additionally, we provide preliminary evidence that the greater knowledge possessed by the management teams may have allowed the new ventures to reduce the costs associated with R&D market transactions. These findings are important because they suggest that prior managerial experience in similar industries and/or with similar technologies is an important prerequisite for the successful use of R&D cooperative arrangements by new high-technology ventures. Management's knowledge of customer needs, product characteristics, and/or the specific idiosyncracies of the industry and/or technology seems to significantly enhance a new technology-intensive venture's ability to effectively engage in R&D cooperative activities.

Research on the innovation process has shown that the presence of an innovation champion—Someone who takes a personal risk to overcome organizational obstacles to innovation—is an important part of the new business development, new technology development, and organizational change processes. Champions play six valuable roles in the innovation process. They provide autonomy from the rules, procedures, and systems of the organization so that innovators can establish creative solutions to existing problems. They gather organizational support for the innovation by building coalitions between managers in different functional areas of the organization. They create loose monitoring mechanisms that allow innovators to make creative use of organizational resources. They establish mechanisms for making consensus decisions on innovations. They use informal methods to persuade other members of the organization to provide support for the innovation, and they protect the innovation team from interference by the organizational hierarchy. Some,but not all managers believe in the desirability of these championing roles.Existing research suggests that managers willing to serve as champions differ in many ways from those who are not. However, almost all of the existing research on championing has been conducted in the United States. This raises two fundamental questions: First, do champions and non-champions differ in their preferences for championing roles? Second, are these differences universal or limited to American culture? This study attempts to answer these questions by comparing the preferences for the six championing roles of individuals with championing experience and those without across 43 organizations and 68 countries. The study shows that individuals with championing experience have significantly different preferences from individuals without championing experience for five of these championing roles—building cross-functional ties, establishing autonomy from organizational norms and rules, enabling innovators to circumvent organizational hierarchy, using informal means to persuade others to support the innovation effort, and building a decision-making mechanism that includes all organization members. These differences exist after controlling for differences in the national culture of the respondents, the companies in which they work, and demographic characteristics. The results of this study suggest that differences in the preferences of champions and non-champions for the behaviors that champions adopt are consistent across cultures.

Joint venturing is recommended to avoid some of the obstacles to successful business venturing, such as capability limitations and organizational resistance. However, the high dissolution rates for joint ventures suggest a need to learn how to utilize this cooperative strategy more effectively. Two frequently reported problem areas in joint venturing are unrealistic corporate expectations and inadequate planning. Thus, this study sought to examine the impact of strategic intent on joint venture success as measured by partner goal achievement and satisfaction. A review of the literature on strategic goals and goal consensus suggested that two variables are likely to affect joint venture performance: the number of partner goals pursued and the overlap in partners' goals. The type of goals pursued may also affect performance; that is, some goals may be more achievable through joint venturing than are other goals. The purpose of this research was two-fold: (1) to empirically explore the relative importance of a variety of partner goals for their joint ventures, and (2) to determine if goal disparity, and the number and type of goals pursued affected joint venture success. This approach draws attention to the expectations of partners rather than to the venture itself, the traditional focus in entrepreneurship. The hypotheses and exploratory propositions were tested using data from U.S. firms involved in manufacturing joint ventures. A categorization of partner goals was developed through factor analysis, in which five categories of goals emerged: knowledge transfer, market power, financial performance, efficiency, and financial structure. Partners were found to have pursued multiple goals simultaneously, with knowledge transfer and market goals being most frequently rated as critically important. These findings suggest the need to expand traditional performance measures to account for the diverse and nonfinancial nature of partner goals. When examined separately, it was found that a large goal set facilitated partner goal achievement and satisfaction, and that an overlap in partners' goals promoted partner satisfaction. The large goal set was argued to be necessary in the volatile environments that are often attractive for joint venturing. A large goal set reflects adaptation to environmental change and facilitates prudent strategy selection by subjecting alternatives to multiple goal hurdles. The overlap in partners' goals reflects a meshing of individual partner goals and helps to minimize conflict, which could stall strategy development and drain resources. However, when an integrated model was developed from multiple regression findings, the overlap in partners' goals became a moderator variable. This model exposed the negative as well as the positive effects of the overlap in partners' goals. Analysis further suggested that the joint venture strategy may be better suited to achieving efficiency goals than financial goals. Possible explanations for the difficulty in achieving financial goals include: insufficient time (or short lifespan of the joint venture), the complex structure inherent in joint ventures, and the possibility of disagreement between the partners about how the financial goals should be achieved. On the other hand, efficiency goals, such as vertical integration and economies of scale, require expansion or extension of operations and thus fit well with the pooling of skills and resources that are characteristic of joint venturing. Further, both partners contribute to and gain from efficiency goals, unlike with market access or knowledge transfer goals where one firm contributes more than it gains or vice versa for that particular goal. Additional analysis revealed that the goal types explained more variance in partner goal achievement and satisfaction than did the size of goal sets or the extent of overlap in partners' goals. Taken in combination, the various aspects of partners' goals explained 26% of the variance in partner goal achievement and 38% of the variance in partner satisfaction. When partner goal achievement was included in the multiple regression model for partner satisfaction, the amount of explained variance increased to 69%. The results suggest that a partner firm may be able to significantly enhance its chances of judging a joint venture to be successful if its goals focus on efficiency rather than revenues and profits, if it has a relatively large goal set, and if it concentrates on achieving the set of stated goals.

This study examines if firm performance and the associated patterns of management vary with the owner-manager's mode of entry into the firm in owner-started (OS), buyout (BO), and family firms (FF). Prior research suggests that these three types of firms differ on certain managerial characteristics but has not examined the role of the owner-manager's mode of entry in determining firm performance on the one hand and its influence on the firm's management pattern on the other. We collected data from 345 firms, employing four to 99 employees, operating in four northeastern states. Self-reported return on assets (ROA), annual sales, business strengths, competitive strategies, and management practices were compared for OS, BO, and FF firms. Performance was found to vary with owner's mode of entry. The 227 OS firms' average ROA was significantly higher than that of the 61 family firms and the 57 BO firms. Successful start-up owners may have enjoyed greater profits because they assumed greater risk compared to those who opted to buy an existing venture or took over a family firm. Annual sales were highest for FFs, second for OS firms, and the lowest for BOs. In terms of management patterns, owner-started firms rated themselves significantly higher on business strengths and tended to have higher self-ratings for competitive strategies and operations strengths than did FFs or BOs. All of these differences were significant after controlling for the age and size differences among the firms, indicating that mode of entry did directly impact performance as well as the management patterns. Examining the impact of mode of entry versus management patterns on venture performance, we found that while the OS mode of entry was associated with greater ROA, this was primarily due to the different management patterns adopted by the OSs. Looking at annual sales, the FF mode of entry was associated with higher sales, and this was independent of the types of management patterns adopted by the firms. A priori, BOs would appear to be in a better position to achieve superior performance, but this was not so in this sample. Further analysis revealed different paths to profitability for the three entry modes. For OS firms, high ROA was associated with operating in the service and retail sectors, developing a broad range of business strengths, and offering competitively priced but higher quality customized products. For OSs, ROA was also enhanced by using informal and personalized management practices. Sales performance was greatest when OSs employed trained staff for functions such as budgeting and sales. For FFs, ROA was enhanced by broad-ranging strengths, but it was hurt by price and quality competitiveness—mainly because on average, their lower prices were not supported by a competitive cost of goods. Sales performance was greatest when FFs had owner-managers with extensive industry experience, were conservative in adding workers, emphasized product customization, relied on written reports, but avoided long-range operations planning. Management patterns of BOs were not related to their ROA, but their annual sales were marginally higher when the acquiring owners had extensive industry background and employed a large workforce. Thus, this study confirms our hypotheses that performance and management patterns vary across mode of entry as does the effectiveness of strategic management patterns. Further, our findings concurred with previous studies which suggested that sales performance and profitability were likely to be influenced by different management actions. This study demonstrates that owner's mode of entry is an important explanatory variable for variations in performance as well as management patterns. Venture CEOs need to recognize that different management approaches may be needed for success depending upon whether they founded, purchased, or inherited their firms.

The terms of an investment by venture capitalists are the result of cooperative bargaining between the project originators (owners or entrepreneurs) and the financiers. This study examines conditions under which bargains can be consummated, the nature of the bargains, and the way in which bargains are both influenced by venture fund size and also contribute to a theory of fund size. As much as possible, the theory of fund size and earnings is related to required rate of return concepts, with the objective of explaining relative variations in the value of venture capital funds, and of incorporating such investments within the general body of finance theory. The most basic form of contract is a simple bilateral bargain between owners and fund managers, with the shares of financing and earnings as the bargaining variables. Agency and other considerations can be factored into the resulting project value to be financed and partitioned. An Edgeworth box construction is used to establish the efficient (Pareto optimal) set as the contract curve. The two endpoints of the contract curve correspond respectively to the monopoly solution, where there is one fund and many owners, and to the competitive solution. The Nash bargaining solution of game theory can also be exhibited within this framework, although we are careful to remain agnostic about whether or not this constitutes the only or even the best solution. A first requirement is that some basis for agreement exists so that mutually beneficial bargains can actually be struck. Conditions most favorable to existence arise where (1) owners who cannot properly diversify their own investments are more risk-averse or else suffer from some other financing impediment; or (2) owners are more optimistic than fund managers on the prospects for the project. Fund size, operating via the cost of capital, can also affect the existence of solutions. Given that contracting is mutually beneficial, the precise terms depend upon the relative bargaining power of funds versus owners. This may depend upon required rates of return. It also depends upon market structure—the environment may be more conducive to monopoly surplus if search impediments exist for owners, as they might for technological projects or if the market is in an early stage of development. Bargains are often asymmetric, wherein the fund derives a higher share of earnings than pro-rata with its share of financing. Fund size and bargaining power are related especially where fund investors or managers rely on the fund for portfolio, or internal, diversification as opposed to external diversification, in which they invest extensively in other assets. With internal diversification, the fund's cost of capital is size-dependent, in terms of the number of projects on the books. Larger funds acquire bargaining power via a lower cost of capital, leading to higher rates of actual returns and therefore higher fund value. Such effects are not present where investors have external diversification. Because fund returns are generally asymmetric, arising from the significant risk of project failures, it is sometimes thought that the asymmetry constitutes a factor to be priced. As the asymmetry is size-dependent, this would make the cost of capital size dependent as well. However, it turns out that the asymmetry is not in fact priced and that standard CAPM arguments continue to hold. Thus, for external diversification, fund size is mainly a matter of economies of scale in administration, evaluation, and monitoring. In all cases, fund size can be described in terms of equality at the margin between required and available rates of return, and we describe the influences that impinge on both schedules. Generally speaking, the kinds of bargains actually observed, as well as the rates of return and variations therein across funds and over time, are all consistent with predicted bargaining features. They appear also to be consistent with basic finance theory, suggesting that “special” features, such as failure to maximize the expected utility of monetary returns, are not really needed.

This research seeks to predict the performance of new ventures based on factors that can be observed at the time of start-up. Indicators of initial human and financial capital are considered to determine how they bear upon the probability of three possible performance outcomes: (1) failure, (2) marginal survival, or (3) high growth. Four categories of initial human and financial capital are examined. General human capital, represented here by the entrepreneur's education, gender, and race, may reflect the extent to which the entrepreneur has had the opportunity to develop relevant skills and contacts. Management know-how, embodied in the entrepreneur or available through advisors or partners, reflects management-specific skills and knowledge, without regard to the kind of business. Industry-specific know-how reflects specific experience in similar businesses. Financial capital is one of the most visible resources; it can create a buffer against random shocks and allow the pursuit of more capital-intensive strategies, which are better protected from imitation. The study utilizes a longitudinal study of 1053 new ventures, representative of all industry sectors and geographical regions. The research departs from most previous studies in considering different measures of performance (marginal survival and growth) and in considering explicitly whether the factors contributing to marginal survival differ from those contributing to high growth. It was found that measures of general human capital influenced both survival and growth (except for gender, with women-owned ventures being less likely to grow, but just as likely to survive). Management know-how variables had more limited impact. Having parents who had owned a business contributed to marginal survival, but not to growth. Number of partners contributed to growth but not to survival. Management level, prior employment in non-profit organizations or not having been in the labor force, and the use of professional advisors did not have significant effects. Industry-specific know-how contributed to both survival and growth. Amount of initial financial capital also contributed to both. The usefulness of the model is enhanced by the fact that the resource variables considered are relatively easy to assess and all can be considered at the time of start-up. Although some of the human capital variables cannot easily be changed, the benefits or risks associated with each can be assessed. In some cases, potential problems can be identified so that plans can be modified to improve prospects. Overall it appears that, using a model based upon the initial human and financial capital of the venture, it is possible to predict the performance of new ventures with some degree of confidence.

This article is based upon the premise that the personal network of the owner-manager is the most important resource upon which he or she can draw in the early days of the firm's development. This is particularly the case as the concept of personal networks is sufficiently general to include dimensions that include, for example, attention to customers, understanding of the business, market orientation, or stress on quality. As such, it is intuitively obvious that the nature and use of these networks must impinge upon the resultant strategy adopted in the firm, albeit often implicit rather than explicit. However, as yet there is no empirical evidence to support this conclusion. Therefore, this article probes one question: how do the characteristics of the owner-manager's network relate to the competitive strategy of new ventures? Clearly, within this, we expected to find relationships that were logically consistent. The research was conducted in two counties in England that possessed similar industrial structures and equal rates of new firm formation. A list of firms was obtained from local business directories, and all 629 firms that fit the criteria were contacted by telephone. Validation of the firms at this point resulted in a significant reduction in those that fit the sampling criteria.Four hundred twenty-three firms were mailed an 11-page questionnaire resulting in a 52% response rate. Preliminary analysis of the strategy variables identified six components that were consistent with previous literature. These were labeled as marketing differentiation, product innovation, market segmentation, distribution, growth through outside capital, and differentiation through quality. Correlation of these components with the networking characteristics of propensity to network, network activity, network density, network intensity, and content of network exchanges supports our proposition that entrepreneurs differ in their networking activities according to the competitive strategy pursued by the firm. Further classification of the owner-managers into strategic clusters demonstrates that most firms appear to follow multiple patterns of strategic behavior. Moreover, the comparison with the networking characteristics shows that owner-managers appear to differ in a logical manner in the use of their networks. Bailey, Montera, and Cardow (1992) argue that a firm's resource base consists of financial, physical, and human resources, and that the manner in which those resources interact is determined by the firm's strategy. Previous research on entrepreneurial networks has shown the amount of time and energy the owner-manager devotes to the development and maintenance of contacts. The underlying assumption of social-network theory is that through a personal network, the owner-manager of a new venture gathers access to critical resources, which for a variety of reasons the new firm does not possess internally. Consequently, this research has argued that this resource base cannot be ignored when attempting to understand the concept of “strategy” among new and small firms. In fact, this resource base may play a dominant role in formulating as well as implementing “strategy.”

Based on a survey of 405 principal owner-managers of new independent business in Great Britain this paper explores two research questions— are there any differences in the reasons that owner-managers articulate for starting their businesses, and, if there are, do they appear to affect the subsequent growth and size of the businesses? The results of the study indicate an affirmative answer to the first question. From the 23 diverse reasons leading to start-up that were identified in the literature, an underlying pattern emerged via the Principal Components Analysis. Moreover, these were similar to those found in earlier studies. Thus, five of the seven components identified by the model correspond to those identified by Scheinberg and MacMillan (1988) in their eleven-country study of motivations to start a business: “Need for Approval,” “Need for Independence,” “Need for Personal Development,” “Welfare Considerations,” and “Perceived Instrumentality of Wealth.” Two further components were identified by this current study. The first vindicates the decision to add a question not included in the previous study that related to “Tax Reduction and Indirect Benefits,” and the second, the desire to “Follow Role Models” was identified by Dubini (1988) in her study in Italy. In order to take account of possible multiple motivations in the start-up period, cluster analysis was used to provide a classification of founder “types.” The seven generalized “types” of owner-managers were named as follows—the insecure (104 founders), the followers (49 founders), the status avoiders (169 founders), the confused (15 founders), the tax avoiders (18 founders), the community (49 founders), and the unfocused (1 founder). Further, evidence from the final discriminant analysis model suggested that the seven-cluster classification of owner-managers was appropriate and optimal. However, despite these clear differences between clusters, this was not found to be an indicator of subsequent size or growth, as measured by sales and employment levels. The answer to the second research question would be in the negative. Therefore, we conclude that, whereas new businesses are founded by individuals with significantly different reasons leading to start-up, once the new ventures are established these reasons have a minimal influence on the growth of new ventures and upon the subsequent wealth creation and job generation potential. This result is important for investors and policy-makers. It suggests that strategies for “picking winners” solely based upon the characteristics of owner-managers and their stated reasons for wanting to go into business are not supported. Thus, for example, targeting scarce resources to those with high opportunistic and materialistic reasons for venture initiation would miss those with a wider sense of community or those with personal needs for independence who establish similarly sized businesses with comparable levels of wealth creation.