Sourcing Start-up Success

Table of Content

1 Introduction
1.1 Aim of the paper
1.2 Structure of the paper
1.3 Methodology and sourcing of information

2 Tapping the global farm for business ideas
2.1 Influence of globalization
2.2 Influence of the Internet
2.3 Imitation and copycatting

3 Success factors of start-ups
3.1 The business model
3.2 Business planning
3.3 The team as key asset
3.4 The power of the network
3.5 Funding as growth driver

4 The cultural environment
4.1 Hofstede’s cultural dimensions
4.2 Cultural differences and their effect on start-ups

5 The institutional environment
5.1 The effect of the institutional context on success factors
5.2 Legal issues as a stumbling block

6 Case study: the daily deal mania
6.1 The couponing market pre Groupon
6.2 The new business model
6.3 The hype starts
6.4 The European clone wars
6.5 Big money for fast scaling
6.6 Groupon’s shopping spree and outlook

7 Case study part 2: adaption difficulties
7.1 Institutional context
7.2 The cultural context

8 Developing the model

9 Conclusion
9.1 Limitations
9.2 Case study key findings and discussion

10 Glossary

11 Bibliography

1 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 (Schutjens and Wever 2000: 135). 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 (Song, Song and Parry 2010: 131). 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”^[1] 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.

1.1 Aim of the paper

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.

1.2 Structure of the paper

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.

1.3 Methodology and sourcing of information

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.

2 Tapping the global farm for business ideas

Never has it been easier to start up a business – especially a web-based venture. Tools like Webly or Wordpress enable setting up a website without any specific knowledge, while cloud-based services allow you to host your own domain and servers for relatively low monthly fees. Google, Yahoo and other search engines facilitate access to a sheer endless pool of information and resources. Moreover, specific blogs, forums or services like answers.com or Quora.com complement the accessibility of how-to’s and expert advice. In addition, the use of social networking sites and social media comes with different benefits to kick-start one’s start-up. Professional networks such as LinkedIn or Xing present a great way of reaching out to industry experts and potential hires, while Facebook, Twitter and the likes represent an opportunity to spread the word, engage with customers and gain awareness. Furthermore, entrepreneurship events that connect like-minded and investors with fresh founders are taking place on a regular basis all over the world. At the same time, incubators to propel the freshly founded start-ups to the next stage are mushrooming. In other words, the cost of starting a web-based business is ever decreasing.^[2]

But where do all the start-ups utilizing the great advances of our times get their ideas from? A study conducted in the late 1980s reveals that the source of roughly half of all business ideas back then was the founder’s prior job, followed by interest or hobby (Cooper, Woo and Dunkelberg 1989: 326). Furthermore, the passive discovery of entrepreneurial opportunities has been linked to the possession of prior knowledge relevant to the specific opportunity (Shane 2000: 449). Although these two factors certainly still influence the creation of new businesses largely, it shall be argued in the following that a global farm for ideas has emerged. Any would-be entrepreneur can tap into this farm that is facilitated by globalization and the Internet and has a special characteristic: ideas do not have a price tag and are free to pick up. However, it will be important to prove that free also relates to quality since it has been shown that source, clarity, and breadth of the business idea are significantly related to success of the new venture (Van den Ven, Hudson and Schroeder 1984: 95).

2.1 Influence of globalization

Undeniably, globalization has altered life in many ways. A definition by the director of the World Trade Organization, Pascal Lamy, describes globalization as:

“a historical stage of accelerated expansion of market capitalism, like the one experienced in the 19th century with the industrial revolution. It is a fundamental transformation in societies because of the recent technological revolution which has led to a recombining of the economic and social forces on a new territorial dimension” (Lamy 2006).

It is argued that the current wave of globalization is facilitated by the four flows of capital, technology, information, and know-how (Samli 2006: 150). However, it has become apparent that these flows have been unbalanced and have not benefited world population equally. This is corroborated by facts such as that an estimated 1.2 billion people live on less than one dollar a day, that 51 of the largest 100 economies in the world are corporations, or that the sales of GM and Ford surpass the total GDP of sub-Saharan African states (Samli 2006: 153, 150). Therefore, while acknowledging that “globalization has reinforced the strong ones and weakened those that were already weak” (Lamy 2006), the effect on entrepreneurship has to be ascertained.

A search for literature on this issue quickly reveals the scarce research conducted so far, with only a few articles focusing on the linkage of globalization to entrepreneurship in emerging economies (Samli 2010, Hill and Mudambi 2010). However, the following line of arguments shall illustrate a general relation between globalization and entrepreneurship. The premise is the notion of entrepreneurship as being the identification and exploitation of opportunities under high uncertainty and risk by employing new factor combinations (Long 1983: 54). Facilitated by decreasing barriers, more and more people are able to travel, work, or get an education in a different country and culture. This experience is likely to alter one’s mindset, broaden one’s horizon and enables a change of perspective. Consequently, this enhances an entrepreneurial mindset that is able to connect old patterns in new ways, adopt solutions to analogue problems, or simply take a great idea to one’s home country. In short: globalization enables would-be entrepreneurs to tap into the global farm for ideas.

Apart from this effect on the idea creation stage, globalization subsequently influences the way new ventures operate. While some decades ago new firms usually took a long time before expanding abroad, now entrepreneurs often do so right away:

“They hunt for the planet’s best manufacturing locations because political and economic barriers have fallen and vast quantities of information are at their fingertips. They also scout for talent across the globe, tap investors wherever they may be located, and learn to manage operations from a distance – the moment they go into business” (Isenberg 2008: 107).

Furthermore, opting out of globalization is no longer really an option as supply chains are tied to global markets (Bernstein 2008: 40). In fact, the global supply chain might be the cornerstone of a business opportunity (Isenberg 2008: 110). With more and more entrepreneurs riding on the waves of globalization into distant markets, Samli (2006: 160) argues for a second big wave of globalization – with entrepreneurs at the heart and the potential to decrease the deficiencies and inequalities of the first wave of globalization.

When identifying the factors that have accelerated globalization so far, decentralization, deregulation, privatization, and cyberspace development seem to be key (Samli 2006: 151). Out of these, the Internet is argued to be the most influential to entrepreneurship.

2.2 Influence of the Internet

The Internet has turned into an omnipresent medium of information exchange and communication in its various forms. Or as described in the book “Groundswell”:

“The Internet is not some sandbox that can be walled off anymore – it is fully integrated into all elements of business and society” (Li and Bernoff 2008: 7).

There has never been a technological innovation more fruitful to entrepreneurs and start-ups than the Internet. Numerous start-ups have thrived by circumvention of traditional intermediaries, disintegration of traditional industries, re-intermediation of buyers and sellers in both existing and new markets, or establishing innovative market mechanisms (Amit and Zott 2001: 495). In turn, each and every new disruptive way of creating value by means of the Internet creates new opportunities. Furthermore, the vast flow of information has boosted the expansion of international trade, communication, and research, while at the same time facilitating fast internationalization and stimulating consumer demand world-wide (Samli 2006: 150). As it would otherwise go beyond the scope of this paper, only a short insight into the Internet’s function as a facilitator of business idea creation and opportunity discovery will be given.

As argued earlier, a global farm for business ideas has emerged. Without doubt, the Internet has several critical roles in this context. Firstly, it serves as the farm’s vast and fertile land. Secondly, it facilitates constant supply of new ideas and provides fertilizers to grow those ideas. Thirdly, the Internet connects these ideas with thousands and thousands of visitors to this farm. Here is an example of how an idea spreads to thousands of other people online within an extremely short period of time (“How much traffic does one tweet from Ashton Kutcher get you?”): Grumo Media is a relatively new, small agency that produces product demo videos that are fun and easy for everybody to understand. On January 7 2011, the founder posts his latest video on YouTube. One day later, movie star Ashton Kutcher has somehow come across the video and shares it on Twitter with the comment “this might be my favourite instructional video ever”^[3]. The fact that just about six million people follow Ashton Kutcher on Twitter propels the views of this video from under a hundred to a skyrocketing 13,000 within five hours.

This example illustrates well the incredible leveraging powers at work when “cool stuff” or good ideas start to go viral. The exposure of this business idea to thousands of people worldwide might well trigger a few entrepreneurial minds to adopt this idea to their situation or even simply copy it.

Moreover, influential blogs such as Gizmodo, TechCrunch, Engadget, Gigaom, or TheNextWeb greatly enhance the spreading of new ideas and business concepts as they expose them to their huge number of readers. These blogs are frequently updated with new posts and links, and thus form, in combination with their reader’s comments, “an Internet-based, networked community centered around a theme or idea, product, industry, activity, hobby, or any other subject” (Droge, Stanko and Pollitte 2010: 66). Directories as well as rankings of the most influential blogs, such as those available at Technorati.com, enable a search of the blogosphere for one’s interests. Moreover, blogs have been shown to impact new product development (Droge, Stanko and Pollitte 2010: 81).

Apart from blogs, directories listing start-ups or web tools developed by start-ups, such as killerstartups.com or gotoweb20.net, make it possible for would-be entrepreneurs to actively search for great ideas. In Germany, the information platform foerderland.de, targeted at entrepreneurs and investors, even explicitly reports on great start-up ideas from other countries in order to trigger imitation.^[4]

2.3 Imitation and copycatting

In search of promising business ideas, entrepreneurial minds basically have two ways of actively hunting for them. As illustrated above, many would for example follow blogs that inform about cutting-edge technologies, gadgets, software, or solutions. This can be seen as an attempt to keep abreast of new developments and changes in technical, societal, legal, or economical areas. As such changes are likely to open gaps and new windows of opportunities, a lot of entrepreneurs could probably be classified as early adopters. Early adopters are, according to Rogers (2003: 281), the 13.5 percent that adopt innovations right after the innovators.

The second, more pragmatic, approach is to directly search for business concepts, which are often already proven, to copy and adapt them. Especially the web 2.0 start-up environment has seen a mushrooming of German copycats (“Web 2.0 in Germany”). Although such copycatting activity is often “anchored by a sense of derision”, it can be an effective and profitable strategy since the opportunities and risks are already at a clearer stage (Pennington 2006: 22). In fact, research has shown that roughly 98 percent of the value generated by innovations go to the imitators (Shenkar 2010). It is also argued that learning-by-imitating augments the stock of knowledge within a certain industry – an entrepreneurial activity that is key to economic growth (Schmitz 1989: 724). Furthermore, entrepreneurial activity is likely to be reinforced by cross-national role modeling (Alhorr, Moore and Payne 2008: 912).

One of the key advantages of copycatting seems to be the hence acquired “proof-of-concept”. As Aldrich and Fiol (1994: 645) point out:

“Founding a new venture is risky business under any conditions, but especially so when entrepreneurs have few precedents for the kinds of activities they want to found. Early ventures in the formative years of a new industry face a different set of challenges than those that simply carry on a tradition pioneered by thousands of predecessors in the same industry”.

Although in most cases of copycatting, there are only a few predecessors, the business concept has often been proven viable by these few. Disregarding the fact that this does not necessarily implicate profitability, the imitators automatically gain legitimacy. As will be shown in section 3, legitimacy is key to accessing certain resources such as funding.

Considering the arguments brought forward in favour of imitation, it is understandable that the rate of imitation is speeding up facilitated through globalization and the Internet (Shenkar 2010). A recent example is the question and answer platform Quora.com that saw itself being cloned in China within less than a year (“ZhiHu: Quora clone”). After all, it is argued that “good imitators don’t wait; they actively search for ideas worth copying. And they often look far from their industry or home country” (Shenkar 2010).

A potential drawback, on the other hand, could be a loss in true innovative capacity as venture capitalists increasingly insist on a proof-of-concept (“My Brands geht offline”, “Is Groupon buying CityDeal a disaster”). A crowding-out effect of radically but riskier innovations that remain unfunded might be the result.

3 Success factors of start-ups

When taking a closer look at some of today’s big and buzzing brand names such as Google, Facebook, YouTube or Amazon, it has to be considered that these multi-billion dollar companies started out as wholly new ventures. They were neither developed as branches of already existing companies nor were they already born as established businesses. However, every year probably thousands of newly created ventures fail to cope with the challenges that are characteristic of the start-up environment. Thus the question arises whether there are factors that enhance or even guarantee the success and survival of a new firm.^[5]

Literature on success factors of start-ups is limited, as the focus on research into new firms has a relatively short history. For a long time, there had been no clear distinction between established businesses and new firms and according to Schutjens and Wever (2000: 135, emphasis added) “start-ups have been a popular research topic since Birch (1979) concluded that small firms create more new jobs than large firms”. Later on, Reynolds (1987: 236) specified and underlined this resulting importance with his findings that as for the USA, between 60-80 percent of all new firms’ new jobs, sales and exports are owed to those 30 percent of newly established firms that experience high growth. Even in times of crisis, start-ups contribute a vital part to new job creation – 560,000 in the case of Germany for 2009 (“Firmengründer schaffen über 500.000 Jobs”). Moreover, small firms have been linked to faster growth compared to larger companies (Dunne and Hughes 1994: 137) and consequently attracted special interest, as they are much more likely to obtain a variety of financial products and advisory services than firms with small growth (Storey 1994: 112).

Acknowledging the importance of new businesses to economies, various studies have shown that many start-ups fail within the first few years. Only slightly more than half of new ventures survive 1.5 years – a number that shrinks to 25 percent when it comes to firms surviving 6 years (Van de Ven, Hudson and Schroeder 1984: 87). A newer study confirms these findings and shows that more than half of newly founded ventures fail within two years (Song, Song and Parry 2010: 131).

Reasons for these seriously high failure rates are naturally of a wide array and can without doubt range from the failure of individuals at the firm level to market failures of a whole industry. As this is a very blurry and unspecific description of causes for start-up failure, literature provides two generally applicable challenges almost every new venture has to cope with. The “liability of newness” (Freeman, Carrel and Hannon 1983: 692) and the “liability of smallness” (Brüderl and Schüssler 1990: 532; Witt 2004: 394) can be regarded as liabilities the new start-up is already burdened with, even before operatively starting business activity. The “difficulties of ‘establishing a reputation’ and the need to develop markets", termed as shortages of demand combined with the second problem of skill shortages was also found and described by Storey (1985: 333). To overcome these initial hurdles, the new venture has to obtain reputation amongst the agents it interacts with and embark on a growth path. If this is considered the way to success, then success factors can subsequently be described as the set of different characteristics, strategies and actions that facilitate turning the initial liabilities into an advantage. This transformation is especially interesting in light of a study which found, for its sample of UK companies in the 1970s and 80s, that “the smallest companies were growing faster than the larger ones” (Dunne and Hughes 1994: 137).

In quest of success, the interest of many entrepreneurs lies therefore in finding and employing these success factors. Undeniably, to be at the right place at the right time and meet the right people, as well as a portion of luck, all influence a start-up's success. Start-ups also differ a lot from each other and might have different starting positions. Whereas some entrepreneurs might start their business while still being employed, others might start their business with a full-time commitment right from the beginning. This will make particular success factors more relevant for the one part and less relevant for the other. Understandably, research has also had an interest in exploring success drivers of new ventures. Over the years, researchers and scholars have examined a considerable number of factors in order to uncover the secrets of successful start-ups. The approaches and results that link certain characteristics or actions to success vary widely in their theoretical background as well as in the impact and practical relevance generated. While Delmar and Shane (2003) have, as opposed to prior research, shown that business planning contributes positively to new venture survival, Davila, Foster and Gupta (2003), and Sahlman (1990) showed a link between outside funding and higher success rates. Furthermore, Hochberg, Ljungqvist and Lu (2007), following popular network theory research, have recently shown that the networking activities of investors influence their portfolio companies’ success. In the field of leadership theory, Schneider, Dowling and Raghuram (2007) link empowerment to a start-up’s success.

Obviously and without doubt, the entrepreneur, along with certain character traits and his exhibited set of skills and expertise, represents an essential part in start-up success, for he “must often act as the central brain and agent” (Van den Ven, Hudson and Schroeder 1984: 94). However, this paper does not aim at listing the different types of personalities and personality traits that are inherent to entrepreneurs. As it attempts to provide valuable insight with practical implications to aspiring entrepreneurs, any definition of the term entrepreneur would therefore go beyond the scope of this paper.

Out of the plentiful array of success factors, this paper will explore a few selected ones in depth – both theoretically in the following sub-chapters as well as practically in the case study. The choice is not a random pick, but a sound selection of factors linked to facilitating success, frequently discussed in literature. Furthermore, the featured factors represent a balanced mixture of characteristics as suggested by Schutjens and Wever (2000: 148) who argue that “success requires a special mix of both entrepreneurial, firm, and external characteristics”.

A classification by Pena (2002: 184) also distinguishes between human capital of the entrepreneur and firm start-up characteristics, but more precisely specifies external characteristics as industry environment, geographical location and public policies. Each of these main characteristics can be regarded as comprising a subset of success factors. Following this classification, the selected factors representing the categories are: founding team and business planning with regard to the entrepreneur-associated category, while the impact of funding, as well as a venture’s network will consider the firm-associated category. The external category will be examined within the two sections “The Cultural Environment” and “The Institutional Environment”. In addition, the following sub-chapter will shed some light on the basic of every business: its business model.

However, prior to a closer examination of the selected critical success factors within the following sub chapters, a question that remains is “what is success?” A clear definition is a common problem encountered by researchers, as success is normally a highly subjective term. While for policy makers, success of a start-up might be best expressed in the creation of jobs and value added to the overall economy of the region, the most important definition of success for an entrepreneur might be the realization of his dream. By contrast, for a venture capitalist invested in the start-up, success will most likely be ultimately defined as a fast and highly profitable exit. Often, success is merely expressed in terms of staying in business (Van Praag 1999: 330) but common operationalizations also comprise profit, value added, growth of turnover, return on investment or even a substantial income generation for the entrepreneurs and their families as an overview by Schutjens and Wever (2000: 137) suggests. Moreover, researchers have combined and adjusted measures as Reid and Smith (2002: 169-170) did with employment growth, return on capital employed and labour productivity, compared to percentage increase in sales, percentage increase in employees, and increase in absolute number of employees used by Cooper, Woo and Dunkelberg (1989: 328).

Recurring methodological problems are the specific period determining survival or not, the difference between absolute and relative growth rates as well as the issues of trade-off between growth and profitability as pointed out by Witt (2004: 397). A good example of the latter is Facebook. Foregoing profits or not focusing on profits but instead on customer growth was key essential to open up the business model to monetization options. In such a case, the approach to distinguish between perceived and realized performance and thus using a firm's stock market value as quantifier of success rather than ROI or ROA seems more appropriate (Zott and Amit 2007: 187).

As “there is no single agreed-upon definition of business success or business failure” (Rogoff, Lee and Suh 2004: 365), it is left to the context and specific purpose of research to choose the most suitable definition of success. Reid and Smith (2000: 168) also expressed it as: “There is no unique way in which the performance of a business can be evaluated. One approach to performance evaluation is entirely relativist”. However, “performance measures for company startups must differ from traditional measures of performance” (Van den Ven, Hudson and Schroeder 1984: 90, emphasis added). In this paper, which is directed rather at entrepreneurs and investors than at policy makers, success will therefore ultimately be defined in a high ‘Return on Investment’ and profitability. Towards this goal, a combination of survival (stay long enough in the game) and growth rate measured in sales and/or customers seems best suitable as an “intermediary” definition of success, following also the proposed development phase-model by Witt (2004: 399). It is to be noted, however, that especially in the Internet and e-commerce business, core financial data is often kept undisclosed. A common measure of development within the B2C area, thus, seems to be an examination of the number of unique browsers and total visits.^[6]

3.1 The business model

Underlying any operating business, the business model can be regarded as the backbone or prerequisite – without it, there is no justification for the existence of the business. The specific design of the business model is not only in the control of the entrepreneurial founder, but also “a key decision for a new firm entrepreneur” (Zott and Amit 2010: 216). When referring to the business model, often only one dimension – how to generate revenue – is discussed. However, it is not solely about the creation of a money-making means, but rather about a whole set of dimensions that are incorporated in the model:

“A business model depicts the content, structure, and governance of transactions designed so as to create value through the exploitation of business opportunities” (Amit and Zott 2001: 511).

This generic definition relates three dimensions of business transactions to the raison d’être of the business which is the exploitation of opportunities in order to create value. Another, slightly adjusted definition, implies that the specific conceptual embodiment and implementation of the business model is in the hands of the entrepreneur and will, if done well, ultimately lead to the creation of competitive advantage:

“A business model is a concise representation of how an interrelated set of decision variables in the areas of venture strategy, architecture, and economics are addressed to create sustainable competitive advantage in defined markets” (Morris, Schindehutte and Allen 2005: 727).

Consequently, a business model does not only define what value is created, but also addresses how, for whom, by what means and how to monetize. Petrol stations provide a clear example, as in their value being the only convenient whole-sale supplier of petrol. They provide this value to every driver of a motorized vehicle (electro cars and bicycles excluded) and monetize on this transaction by charging them a premium. Moreover, extending the analysis it will become clear that also their location along highways, in sparsely populated areas and their relatively long opening hours make it possible to generate an additional value and revenue stream by cross-selling different products and services

As previously mentioned, the issue of monetization addressed in the revenue model is only one aspect of a broader approach and can be seen as a complement to the business model that is “geared toward total value creation for all parties involved” (Zott and Amit 2010: 218). In an attempt to establish an integrative framework of economic, operational and strategic complements, Morris, Schindehutte and Allen (2005: 730-732) introduce three levels of increasingly specific decision-making. Furthermore, each of the three levels, which are termed foundation, proprietary and rules level, comprise key components in order to depicture the complete criteria set of a business model. The following table gives an explanatory overview of the three levels, as well as key components that need to be considered on each level.

Abbildung in dieser Leseprobe nicht enthalten

Table 1:Business model decision-making levels and key components. Adapted from Morris, Schindehutte and Allen (2005: 729-731) and Osterwalder (2004: 157).

As proposed, there is a considerable degree of control the founder(s) can exercise on the design of a business model according to this framework. Once the model has undergone this developmental and transformational process, it will not only have aligned the key components in harmony, but also turned into an intangible asset or form of intellectual property (Morris, Schindehutte and Allen 2005: 734). It is noteworthy, however, that designing the business model is not a one-time task. Iterations are likely to occur not only initially but also over time as external changes can undermine it. In this case “it typically cannot be recalibrated; a new model must be constructed” (Morris, Schindehutte and Allen 2005: 733).

When linking the design of a business model to the success of the new venture, it has to be noted that early decisions are likely to have a lasting effect. Once in operation, resistance against change and idleness will make it difficult to adjust the initial model (Zott and Amit 2010: 217). Hence, it will be central for any business model designer to carefully align the key components with a strategic outlook. Success factors unveiled by literature on best practices in business model design can prove valuable insight. As the definitions mentioned earlier consider transactions as the basic interaction unit of a business model, it can be logically concluded that enhancing transaction efficiency will likely affect success positively. Indeed, it has been shown that there are several ways to do so, e.g. assisting the consumer to save time, reducing supplier costs, making transactions more convenient or reducing the information asymmetry (Zott, Amit and Donlevy 2000: 468). Moreover, especially in e-commerce, the importance of a firm’s ability to capture and retain customers, termed ‘stickiness’, is key to success (Zott, Amit and Donlevy 2000: 471). Common opinion states that it is always easier to sell to an already existing customer than to a new one, therefore underpinning the ‘stickiness’ aspect. From his own experience, the author can tell that signing-up for a web-based service or e-commerce does not automatically imply usage. Cleverly designed incentives, reminders and calls-to-action can help to re-engage the customer or user. Furthermore, re-use can be encouraged by rewarding customers for loyalty, building communities around the product/service, personalizing and customizing it, and by establishing trust (Zott, Amit and Donlevy 2000: 471).

An additional factor enhancing, but usually rather impeding success, is linked to the type of business model. In the line of business model research, two generally different types have been identified. While novelty-centered business models are built around new ways of economic exchange (Zott and Amit 2007: 184), efficiency-centered business models are built on the purpose of reducing transaction costs (Zott 2007: 182). Now, although these two types are not automatically mutually exclusive, incorporation of both types at the same time bears the potential risk of diseconomies of scope due to suboptimal resource allocation (Zott and Amit 2007: 186).

In conclusion, a sound, carefully designed business model has to be regarded as a prerequisite for success, although it has been difficult to prove a quantitative correlation with success to date. This is mainly due to various different approaches and definitions within a relatively young line of research (Osterwalder, Pigneur and Tucci 2005: 3).

Last but not least, it has to be pointed out that a business model “cannot be successful per se”, but requires successful implementation, i.e. translation into concrete structures, processes, infrastructures and systems (Osterwalder, Pigneur and Tucci 2005: 8). The next chapter will therefore deal with the planning aspect of a business.

3.2 Business planning

The act of business planning can be considered the logical, further in-depth development of the rudimentary but quintessential business model. Where the business model covers the most important dimensions and their inter-correlations, business planning can be described generically as a process of gathering and analyzing business opportunity related data in order to aggregate the findings in a plan about the exploitation of the opportunity (Castrogiovanni 1996: 803). This process is supposed to yield possible benefits in the three categories of symbolism, learning and efficiency (Castrogiovanni 1996: 804)

As an interesting fact on the side, it is common knowledge amongst entrepreneurs and business plan researchers that some of the most successful start-ups like Apple, Microsoft, Dell, Google and Wal-Mart started without written business plans. Yet the art of business planning is given high priority in the field of entrepreneurship education (Lange et al. 2007: 238) and numerous business plan competitions seem to underline the importance. Therefore, this chapter is intended to state the most important pros and cons of business planning and to provide a conclusion based upon this balanced view.

Normally, the outcome of the activity of business planning is a formal document – the business plan. While a formal document is most often a prerequisite for obtaining outside capital from any investors (Lange et al. 2007: 240) other than family, friends or fools, already the act of planning should help founders in their decision-making in a more efficient way than with trial-and-error. It enables them to anticipate bottlenecks in resource supply and demand; and to set concrete operative tasks to reach formerly abstract goals (Delmar and Shane 2003: 1166). Another interesting function can be seen in a business plan serving as a knowledge base that enhances a start-up’s legitimacy, as Aldrich and Fiol (1994: 652) point out that “founding entrepreneurs must build a knowledge base that outsiders will accept as valid”. This argument is also backed by the impact effect of a business plan in an extension of the resource base by providing information to third parties (Burke, Fraser and Greene 2007: 395).

Typically, a business plan encompasses three levels: the normative, which deals with vision, values and culture, the strategic, which deals with the market entry and the operative, which deals with aspects of networking and presentation (Gruber et al. 2002: 2). As far as the content of the business plan is concerned, it is broadly and commonly agreed to comprise chapters dealing with idea-origin and vision, product/service, market and competitive analysis, marketing and sales, founding team, organization, network and strategic alliances, SWOT, finance plan, funding and an executive summary (Gruber et al. 2002: 9). From the author’s point of view, the plan should also incorporate an evaluation of exit strategies in accordance with the business model’s key component ‘ambitions of time, scope and size’ as depictured in Table 1.

While there seems to be broad agreement on the content of a business plan, the effect of formal planning on firm performance has been a controversial topic amongst researchers for a long time (Robinson and Pearce II 1983: 197) and discussion has continued in the specific field of start-ups as well. Criticism has in particular been formulated by scholars following Mintzberg’s stance that strategic planning often corrupts the vision and cannot replace strategic thinking, which involves intuition and creativity (Mintzberg 1994: 107). According to him, the peril lies within the three fallacies of prediction, detachment and formalization (Mintzberg 1994: 110-111). And indeed, the prominent example of the start-up Iridium depictures the drastic and epic outcomes a planning fallacy can have. With a promising market outlook this company managed to raise (and eventually burn) USD 5.2 billion. In the 11 years of technological development after the initial business plan had been approved, the whole world was radically changing and Iridium found itself in bankruptcy only 9 months after its final launch - “a business plan frozen in time” (Blank 2010).

A common critical stance on planning also questions the outside effect of this activity in comparison to a more sound commitment such as buying facilities and equipment (Carter, Gartner and Reynolds 1996: 154). This means that a potential partner, customer or investor might interpret the unwillingness of a founder to commit more than just time to write a business plan as a signal of low confidence. However, it should be considered that many start-ups operating in the web/application industry hardly need more than their human capital working on electronic devices, thus making such a commitment irrelevant. Finally, a study conducted by Lange et al. (2007: 239) found no significant difference between writing a business plan prior to start-up or not in regards to subsequent revenue, number of employees and net income. Nevertheless, a closer examination of their results yields two interesting facts: (1) founders with previous start-up experience did again write business plans for their next venture and (2) this sample outperformed the sample that was less likely to write business plans (Lange et al. 2007: 24).

Adding to the controversy, scholars in support of planning have produced evidence for the importance of business planning. Delmar and Shane (2003) critically examined previous literature and concluded by empirical support in favor of business planning that it reduces the hazard of cessation of activities to develop the new venture, while enhancing business organizing activity and product development. Especially for their sample of ventures in the first year, which is definitely a hot phase of any new venture, planning reduced the hazard of disbanding significantly by 60 percent (Delmar and Shane 2003: 1178).

In addition, not only the risk of involuntarily ceasing business activities can be effectively reduced. A study by Smith (1998: 869) shows a clear link between effective strategic planning and small firms that perform higher than those that do not employ this proactive approach. Furthermore, better business plans enhance chances of getting funded (Shane and Cable 2002: 374) and already the act of planning correlates positively with receipt of external capital (Delmar and Shane 2003: 1175). On top, with regard to a formal document, Burke, Fraser and Greene (2007: 401, 403) point out that written business plans contribute to faster and higher annual growth.

It is of importance to acknowledge that writing a business plan should never be a linear, sequential process but rather an iterative planning process (Gruber et al. 2002: 7). In addition, the result of a study carried out by Reid and Smith (2000: 177) shows positive influence of long range planning but connects pure formal planning with a negative impact on performance, thus implicating the importance of using the plan to look ahead and modify it if necessary. Without doubt, in addition to the effect of the planning process, a not yet researched aspect regards what to do with the plan. The result of a study by Van den Ven, Hudson and Schroeder (1984: 104) indicates that entrepreneurs of successful firms spend less time writing formal plans but develop clear outlines and approach more people for feedback instead. Therefore, it can once again be concluded that more factors than solely writing a business plan are responsible for a positive impact of business planning on new venture performance.

One of the most recent and extensive studies was conducted by Brinckmann, Grinchnik and Kapsa (2010), who used the method of evidence-based research to synthesize 46 prior studies. Their finding supports the link between both business planning and formal business plans, and increased performance, but points out that certain contingencies such as uncertainty can limit the benefits (Brinckmann, Grinchnik and Kapsa 2010: 25).

In conclusion, and with regard to the above collected and presented different evidence on the effect of business planning, the author wants to side with two opinions. First, the question of “in which business contexts and for which types of ventures are business plans most (and least) effective?” (Burke, Fraser and Greene 2007: 397) clearly indicates that there cannot be a single best rule. Second, business planning activities should be carried out while at the same time committing to other activities that create value, thus following a “concomitant and dynamic approach of planning, learning, and doing” (Brinckmann, Grinchnik and Kapsa 2010: 25). Both the activity of business planning and the formal written business plan can clearly enhance a venture’s success when the founders pay attention to possible fallacies and do not forget to push forward value-creating activities while business planning. This could already be achieved by taking the product or service out to potential customers in order to receive early feedback that can subsequently be used in the iterative business planning process. Even in the case of an existing proof-of-concept, founders might still single out critical factors and cover them in a short business plan. All of this should be undertaken prior to full start-up since operative activities will leave little time to write a business plan alongside. Finally, it is advisable not to stick too closely to a business plan but instead continuously iterate and continue an essential minimum of strategic planning. Otherwise, the boat will pick up speed but will lack a captain at the rudder.

3.3 The team as key asset

One important chapter in every business plan – and at the same time one of the key differentiators amongst hundreds of pitches given to business angels and venture capitalists – concerns the start-up team. It is a widespread belief that a mediocre idea executed by a great team will excel a great idea executed by a mediocre team. Founding the new venture in a team is a common phenomenon (Lechler 2001: 264) and increases the likelihood of its success to a large extent (Schutjens and Wever 2000: 151; Teal and Hofer 2003: 45; Lechler 2001: 265). From the resource-based view, it is often claimed that strong founding teams initially equip the start-up with higher legitimacy, which consequently facilitates gaining more initial resources (Packalen 2007: 886). Resources that can hence be used to attract talent, partnerships and develop a great product (Packalen 2007: 886). Furthermore, the heavy focus of venture capitalists on the team’s quality and skills underlines the significance of a capable team (Kaplan and Strömberg 2004: 2185). Considering that outside capital contributes largely to a start-up’s success, as documented in section 3.5, a confirming connection can be established between a great team and the success of the new venture.

Although there are examples of successful start-ups founded by a single person, such as the case of Jeffrey Bezos and Amazon.com, it seems especially for high-growth ventures that many are the result of at least two and sometimes more people partnering up to tackle the challenge together (Shrader and Siegel 2007: 894). Famous duos are Steve Wozniak and Steve Jobs (Apple), Paul Allen and Bill Gates (Microsoft), Sergey Brin and Larry Page (Google), Jerry Yang and David Filo (Yahoo!) or Peter Thiel and Max Levchin (PayPal). Additionally, we can suppose that also for start-ups founded by a single person the team will be one of the key factors in the successful execution of the initial idea. This is based on my argument that the benefits of co-founders are in such a case substituted by early employees who take on key roles in the development of the new venture. A practical example can be seen in Ebay founded by Pierre Omidyar, who was very soon joined by Jeffrey Skoll who was responsible for writing the initial business plan (Skoll Foundation).

Disregarding whether the start-up is founded by an individual entrepreneur or by a team, several success-enhancing factors can be subsumed. First of all, experience seems to be a logical factor contributing to success, and a stream of literature has consequently focused on examining the impact of different types of experience. A number of studies ascertained a positive correlation between industry experience and survival of the new venture (Shane and Delmar 2006: 217-218). Arguing that industry experience endows the start-up with vital information on industry practices and the landscape of intra-industry ties, Shane and Delmar (2006: 221, 236) find a significant increase in sales growth due to substantial industry expertise. This result is consistent with prior studies that positively link industry-specific experience to firm survival, as well as higher growth (Brüderl and Preisendörfer 1998: 222; Cooper, Gimeno-Gascon and Woo 1994: 390).

[...]

^[1] In fact, one has to bear in mind that although always termed a worldwide crisis, many developing countries and BRIC states have not been affected.

^[2] A small-scale study of web start-ups in 2011 showed that monthly operating costs in the beginning range between 50 to a maximum of 300 GBP (http://www.founderspeak.com/. Accessed on 23 January 2011.)

^[3] http://grumomedia.com/ashton-kutcher-made-my-day-thanks-internet/. Accessed on 13 January 2011.

^[4] In German: http://www.foerderland.de/419+M5e9f0b78578.0.html. Accessed on 20 January 2011. http://www.foerderland.de/419+M514440b29a5.0.html. Accessed on 20 January 2011.

^[5] It has to be noted that sometimes other outcomes than the survival of a firm can be regarded as success.

^[6] Definition: http://www.ifabc.org/pages/webmeasurement/visitmetrics.html http://www.ifabc.org/pages/webmeasurement/usermetrics.html. Accessed on 20 November 2010.