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How does the gestation process differ for technologically intensive & innovative start-ups compared to less sophisticated ventures?
An empirical study into gestation activities, decision-making strategies, growth expectations and subsequent founding success.
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How does the gestation process differ for technologically intensive & innovative start-ups compared to less sophisticated ventures?
How does the gestation process differ for technologically intensive & innovative start-ups compared to less sophisticated ventures?
An empirical study into gestation activities, decision-making strategies, growth expectations and subsequent founding success.
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How does the gestation process differ for technologically intensive & innovative start-ups compared to less sophisticated ventures?
An empirical study into gestation activities, decision-making strategies, growth expectations and subsequent founding success.
Drepturi de autor:
Attribution Non-Commercial (BY-NC)
Formate disponibile
Descărcați ca PDF, TXT sau citiți online pe Scribd
How does the gestation process differ for technologically
intensive & innovative start-ups compared to less sophisticated
ventures?
An empirical study into gestation activities, decision-making strategies, growth expectations and subsequent founding success.
Combined Master Thesis Programs: Entrepreneurship & New Business Venturing / Business Information Management Student: Paul Diekema Student #: 295033 E-Mail: diekema@student.eur.nl Date: 27 September 2012
Coach: Rein Denekamp, Department of Organization and Personnel Management Co-Reader: Dr. Peter van Baalen, Department of Decision & Information Sciences
2 MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 Preface This master thesis is written for the fulfilment of the master programs in Entrepreneurship & New Business Venturing, and Business Information Management. My affinity with the dynamics of both entrepreneurship and Information Technology triggered me to look into the processes at which technology-based and innovative ventures come into existence. When starting with this research topic I largely had in mind what to study and how to do it, but along the process I learned that is difficult not to diverge too much. In the end my efforts resulted in a very extensive piece of research with which I hope to have contributed to existing theories, as well as inspired others to explore avenues for future research. With the completion of this master thesis comes the end of an era as a student at the Erasmus University/ the Rotterdam School of Management. Throughout these years I have collected quite the intellectual baggage and developed a multitude of competencies. Both proved to be of great help during the process of writing this research. The process was not easy and at times asked a lot of myself and the people close to me. On a personal level I have had to overcome more obstacles than I care for, but I am happy to have pulled it off. Special thanks go out to my coach, Rein Denekamp, who was there to turn boring theory into relevant practical examples. His business experience combined with academic know-how appeared to be a welcome addition. Despite that the central topic of this research is aimed at entrepreneurship, I want to thank my co-reader Peter van Baalen, who was nevertheless very interested in the research topic and who was able to give relevant feedback on my writings. For now, enjoy reading!
Paul Diekema
The copyright of the Master thesis rests with the author. The author is responsible for its contents. RSM is only responsible for the educational coaching and cannot be held liable for the content.
MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 3 Executive Summary The importance of technology-based and innovative ventures for the development of economies is rather undisputed. Schumpeter (1934) was among the first economists to acknowledge the critical role of creative destruction that these types of ventures engage in. By making existing product offerings obsolete or shape new markets altogether, technology-based ventures create value for themselves and spur progress for incumbents. Research about technology ventures is far from new, neither are studies on the entrepreneurs behind those ventures. Yet studies of how technology ventures come into existence are scarce. In fact, not only research on the creation of technology ventures is scarce, research on nascent entrepreneurship in general has been absent because of lacking research methodologies. With the arrival of the Panel Study of Entrepreneurial Dynamics empirical research on nascent entrepreneurship is made accessible. Besides juxtaposing nascent ventures based on their levels of technological intensity and innovativeness, this thesis introduces Sarasvathys theory of effectuation. Specifically this study focused on the likelihood of becoming a new firm, the number and type of gestation activities used throughout the process, and the time that start-ups need to become a new firm. Effectuation and causation constructs are introduced as possible moderating factors on the odds of successful firm founding. Additionally, start-ups are studied on their aspiration and expectations towards future performance. The context in which technology-intensive and innovative ventures are created is more dynamic, uncertain and complex than the environment of less sophisticated start-ups (Liao & Welsch, 2003b). The intensity of embedded knowledge, the types of knowledge needed and the infrastructure to create product offerings are different for high vs. low technology industries (Oakey, Rothwell and Cooper, 1988). The need to be adaptive following from changing external conditions is most prone for ventures characterized by high levels of uncertainty and environmental dynamism. Liabilities of newness and smallness (Stinchcombe, 1965) make legitimacy building an important issue faced by technology entrepreneurs. TBVs also need more resources, both tangible and intangible, than their counterparts (Liao & Welsch, 2003b). Aldrich & Martinez (2001) find that routines and competencies vary significantly for TBVs and NTBVs: innovative organizations have to pay rather serious attention to learn new roles, setting on operating procedures, creating a culture of learning the skills and efforts to make relations with employees. Ventures in these kind of environments are confronted with complex information-processing requirements that are such that it requires organizational designs (including strategic processes, control systems, and communication patterns and structures) allowing real-time fast information collection and interpretation (Atuahene-Gima & Li, 2004). Technology-intensive and innovative ventures are hypothesized to reach the new firm status less often than less sophisticated start-ups, they take longer to become a new firm and they need more and different gestation activities. With greater uncertainty comes greater risk, so it is hypothesized that they expect greater absolute levels of revenue and employees, as well as greater relative growth. Additionally technology-intensive and innovative ventures are hypothesized to be more willing to grow their companies as large as possible compared to less sophisticated start-ups. The boundary conditions in which TBVs are founded suggest that entrepreneurs do well by following an effectuation approach, introduced by Sarasvathy (1998). The emphasis that start-ups place on control over prediction, or vice versa, can be regarded on a spectrum of which pure causation and effectuation processes are the (conceptual) extremes.
4 MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 Sarasvathy (2001) provides a high-level definition: Causation processes take a particular effect as given and focus on selecting between means to create that effect. Effectuation processes take a set of means as given and focus on selecting between possible effects that can be created with that set of means. The hypothesized relations are tested using the Panel Study of Entrepreneurial Dynamics, which found its origin in the mid-90s in the United States and has evolved to the most extensive dataset on early-stage entrepreneurship. The dataset accurately reflects the start-up population in the US. Data-collection took place between 2005 and 2011, and more than 1200 nascent entrepreneurs were interviewed on a yearly basis. Statistical analyses were carried out for 998 observations. A series of bivariate methods and a multinomial logistic regression yielded interesting results. No support was found that technology-based and high-newness ventures succeed less often in becoming a new firm. Also the technology-based and high-newness start-ups that became a new firm did not significantly take longer than less sophisticated counterparts. What is interesting though is that a disproportionate number of technology-intensive start-ups were still trying as an active start-up at the end of the research program. Combined with findings from other studies (point of diminishing founding success) this either means that a disproportionate number of the active TBV start-ups will eventually fail, or it means that the gestation period on average is indeed longer. Technology-based and high-newness ventures furthermore are found to need more gestation activities in total, and more legitimacy-building and planning activities. Findings are also highly significant for the growth willingness, expected revenues and expected number of employees. Finally there was no support for a moderating effect of effectuation or causation strategies. Rather interestingly, technology-based and high-newness ventures were found to use a causation approach more often than effectuation and neutral approaches. Also, following a causation approach is positively correlated with becoming a new firm, contrary to neutral and effectuation strategies. The most important conclusion of this study is that the extent to which start-ups are technologically intensive and innovative (newness) has an effect on the way that new firms come into existence, and on the expectations and aspirations towards future performance. Despite having a more complex founding process, high-sophistication start-ups compensate for the difficulties they encounter. Combined with findings of other studies into nascent entrepreneurship it can be concluded that these ventures compensate with their levels of human and social capital, but also by using more planning and legitimacy-building activities. By actively downplaying the uncertainties that these ventures encounter they are able to relatively get a good founding success rate vis--vis less sophisticated start-ups. Moreover this study provided solid confirmation for existing literature regarding expectations toward future performance and growth aspiration. An important focal point, but yet explorative part of this thesis was the incorporation of the decision- making strategy of nascent entrepreneurs. In conjunction with Hamel & Prahalads (1989) corporate imagination theory this study concludes that prediction and control should be regarded as two decoupled phenomena. Start-ups use both planning and learning elements depending on their quest for resources, legitimacy and the right product-market combinations. This however does not undermine Sarasvathys notion of effectuation. Rather on a variety of dimensions, start-ups should find a balance that fits their needs at that time. The effectual or causational entrepreneur does not exist rather there is an infinite number of combinations that changes as ventures go through different phases.
MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 S
MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 9 Introduction 1echno|ogy-8ased Ventures & Nascent Lntrepreneursh|p Technology-based ventures (TBVs) and non-technology based ventures (NTBVs) encounter different issues on their path towards establishing successful organizations. Though the absolute majority of firms that come into existence reflect low-key, imitative business concepts, technology-based ventures play a critical role in the economy since they generate a disproportionate share of the wealth and new jobs (Allen & Stearns, 2003). It has since long been believed that technology is the driving force of rising standards of living and the performance of nations (Schumpeter, 1934). Research about technology ventures is far from new, neither are studies on the entrepreneurs behind those ventures. Yet studies of how technology ventures come into existence are scarce. However this would be a valuable addition to scholarly research since gaining insight into the gestation processes of technology based ventures may help to better understand, and hence shape, the circumstances under which these ventures successfully come to be. In fact, not only research on the creation of technology ventures is scarce, research on nascent entrepreneurship in general has been absent because of lacking research methodologies. Capturing the sequencing and timing of gestation activities by nascent entrepreneurs implicates that these entrepreneurs have to be identified before they have actually started a firm. Since no legal entity has been registered yet, a certain population should be screened in order to determine who is in the process of starting up a firm. This clearly is a resource-consuming process, which explains the scarcity of empirical evidence on nascent entrepreneurship. With the arrival of the Panel Study of Entrepreneurial Dynamics empirical research of nascent entrepreneurship is made accessible. The PSED will serve as a conduit for mapping the performance differences between TBVs and NTBVs in this study. This study also specifically focuses on the decision-making strategy of nascent entrepreneurs: those individuals who are in the process of starting a firm. More importantly, this study juxtaposes firms based on their level of sophistication; that is, in terms of technological intensity and newness. Lntrepreneursh|p & Strategy The ever-present challenge of how firms have to run their business in order for them to become successful has interested many scholars to date. Not unoften the question of what to do next goes unanswered and firms keep on doing the same until something unexpected occurs, be it opportunities or threats. Despite the fact that firm strategy and performance have been around as research topics for as long as we study business and economics there seem to be several contrasting views. Overall consensus does seem to exist with regard to strategy being a key driver of firm performance (Sandberg & Hofer 1987). Interaction and alignment between firm strategy and industry dynamics, and environmental forces and internal processes are of critical importance (Edelman et al., 2005; Hough & White, 2003 in: Garonne et al., 2010). In their work on the prediction of venture performance, Sandberg & Hofer (1987) concluded that there is no single determinant explaining performance differences. However they have identified environmental dynamism and uncertainty measures as important possible moderators in the strategy performance relationship. Now strategy research has traditionally focused on established organizations, while firms that are just coming into existence have been kept out of the discussion. The answer to the question of why some start-ups are doing particularly well, while others fail seems to be the holy grail of entrepreneurship research. Though start-up failure rates vary across industries, fact of the matter is that the majority of new firms do not make it through the first five years. Stinchcombe (1965) pointed out that this
10 MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 propensity to fail exists because young firms have not established effective work roles and relationships and because they lack a track record with outside buyers and suppliers; he calls it the liability of newness. Also start-ups vary considerably in their access to resources and stable relationships, and these variations may lead to differences in their early fates (Baum, 1996). 1he start-up - performance parad|gm Garonne et al. (2010) pose that emerging firms experience difficulties organising and aligning their resources with their objectives, because those objectives may be blurred, undetermined and uncertain while resources are scarce. In order for start-ups to manage uncertainty, entrepreneurs may choose to embrace different strategies, some more iterative, or learning-oriented, and others more focused at planning. At the heart of the debate lies the distinction between control and prediction. In their paper on the strategic decision-making process of angel investors, Wiltbank et al. (2009) distinguish between two types of strategies: prediction-based strategies and non-predictive strategies. In order for decision makers to be in control they look for systematic ways to reach favourable results. Prediction plays an important part here: if an organization can predict the near future then it knows how to prepare and position itself. The written business plan might be the best tangible example here of a prediction-based strategy; competitor analysis, market research and detailed financial models can help a firm to succeed. In their advocacy for business planning, Delmar and Shane (2003) pose that planning contributes to the development of organizations by making more efficient use of resources, increasing the speed of decision-making and supporting of flexible actuation. The underlying logic of these prediction-based strategies is: to the extent we can predict the future we can control it. Not all situations however call for prediction-based strategies. What if circumstances are so dynamic or new that no accurate predictions can be made? High levels of uncertainty ask for alternative methods to stay in control over the outcomes. Technology-based ventures operate in such environments and may benefit from more control-oriented decision-making. Sarasvathy (2001) introduced the notion of effectuation strategies, which go by the logic of: to the extent we can control the future we do not need to predict it. According to Perry et al. (2011), scholars assume that entrepreneurs use rational goal-driven behaviours in the pursuit of entrepreneurial opportunities. It is no surprise that most business schools with programs on entrepreneurship predominantly use a goal-driven, deliberate model of decision making. In this view of planned behaviour, individuals engage in an active search for entrepreneurial opportunities after they have decided to launch a business, and subsequently follow a prediction-based strategy, i.e. by writing a detailed business plan. Without going into much detail on the found versus made nature of entrepreneurial opportunities, an opposing situation to the above would be where individuals stumble upon opportunities. An individual without any entrepreneurial ambition or intention might identify a (personal) need that has not yet been fulfilled by the market. From the resources at his or her immediate disposal, the individual may satisfy a generalized aspiration without having an overall objective clearly envisioned. These contrasting examples introduce an important topic of interest for this research: effectuation and causation. Introduc|ng effectuat|on & causat|on In her seminal work on the existence and creation of economic artefacts like organizations and markets, Sarasvathy (2001) introduces the notion of effectuation, as an opposing set of processes to the
MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 11 traditional view of causation. The emphasis that start-ups place on control over prediction, or vice versa, can be regarded on a spectrum of which pure causation and effectuation processes are the (conceptual) extremes. Sarasvathy (2001) provides a high-level definition of both causation and effectuation: Causation processes take a particular effect as given and focus on selecting between means to create that effect. Effectuation processes take a set of means as given and focus on selecting between possible effects that can be created with that set of means. To make a clear distinction between causation and effectuation processes, Sarasvathy (2001) uses the analogy of a chef cooking dinner for a guest. In the traditional causation view of entrepreneurship, the guest would choose a dish featured on the menu, after which the chef shops for groceries to prepare the meal using a pre-defined recipe. In this situation, the end is given and the chefs focus lies on selecting and acquiring the means, or resources, to reach favourable outcomes. Using effectual reasoning, the chef would prepare a meal based on the ingredients and kitchen utensils that are at his disposal. This is a means-driven approach and it might involve changing course based on unexpected events during the process. Sarasvathy (2008) exemplifies effectuation processes in her latest book along five pillars, or principles: the pilot-in-the-plane principle, the bird-in-hand principle, the affordable loss principle, the crazy (or patchwork) quilt principle, and the lemonade principle. The first principle, that of the pilot-in-the- plane, plays a pivotal role in the underlying logic of effectuation processes. It expresses the extent to which individuals believe they can actively shape the future rather than passively predicting it (Kraaijenbrink & Ratinho, 2010). The other pivotal pillar, the bird-in-hand principle, reflects the starting point of entrepreneurial actions; whether entrepreneurs emphasize means or ends. As mentioned earlier, the effectual process is clearly distinguished by taking means as a starting point, whereas causation is characterized by goal setting, hence working towards a pre-defined end. The crazy quilt principle is about engaging in actively building a network of self-selected stakeholders instead of using competitive analysis. Creating stakeholder commitment is one of the important tools of the effectuation process. The effectual entrepreneur is a socially embedded entrepreneur who co-creates his venture with partners, thereby developing new means and ends. Another important theme is the affordable loss principle: effectual entrepreneurs show a pre-disposition towards investing based on the amount one can afford to lose rather than investing based on expected return. This clearly demonstrates an investment strategy that is focused on control over prediction. The final theme, the lemonade principle, reflects the notion that effectual entrepreneurs acknowledge and appropriate contingencies by leveraging surprises rather than trying to avoid them, overcome them, or adapt to them (Sarasvathy, 2008). This notion is somewhat similar to the bird-in-hand principle, since it emphasizes that the course of action might change because of contingencies: hence, means over ends.
Figure 1 - Effectuation & Causation pillars In her collection of seminal and conceptual work on effectuation, Sarasvathy has portrayed the two sets of processes as opposing phenomena, or as two dichotomous ends of a continuum (Kraaijenbrink & Ratinho, 2010). In her book it is put that effectuation is the inverse of causation, however adding that empirically both causation and effectuation processes can go together, but for conceptual reasoning the two should be considered inverses. Throughout this thesis, causation and effectuation will be treated as opposing phenomena for explanatory reasons. In the measurement section of the concepts however I will go into further detail about the underlying constructs of causation and effectuation processes.
MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 13 kesearch goa| & re|evance Existing studies assume a uniform venture creation process regardless of the type of venture, while numerous entrepreneurship scholars indicate significant differences between technology-based ventures and their not-so-sophisticated counterparts (Liao & Welsch, 2003a). For instance technology ventures, particularly those in knowledge-intensive industries, rely on the accumulation of, and learning from, novel information and knowledge, where non-technology based ventures use more static external resources (Liao & Welsch, 2003b). The growing role of technology ventures in local, national and global economies makes studying nascent technology entrepreneurs a relevant research goal. Understanding the circumstances under which these ventures are created allows for policy making to foster entrepreneurship. There are still questions waiting to be answered on nascent entrepreneurship in general, the differences between nascent technology entrepreneurs & non-technology entrepreneurs, and the effect of strategy making. Research on nascent entrepreneurship is scarce because of the constraints put on identifying nascent (technology) entrepreneurs and monitoring the gestation processes. This research will attempt to fill in a part of the equation using a unique U.S. database on nascent entrepreneurship. Besides the distinction between technology and non-technology ventures, the notion of effectuation is highly relevant for entrepreneurship research and education, since traditionally we have looked at the entrepreneurial process through a causation lens. Effectuation questions these established theories; Perry et al. (2011) state that effectuation theory represents a paradigmatic shift in the way that we understand entrepreneurship. Despite the fact that effectuation was first introduced in 1998 (Sarasvathy), empirical research is only just beginning to emerge. When we look at other paradigm-shifting articles in the field of management theory (resource-based view, punctuated equilibrium model), we can see that it also took several years before empirical evidence started to arrive there. The effectuation theory develops in a similar manner, and the theory is only in its infancy. Perry et al. (2011) have carried out an extensive study into the development of effectuation articles, and they conclude that the time is ripe for more empirical articles to emerge. In the past few years a select group of scholars has published conceptual work and it was not until Chandler et al. (2011) published their validation study of causation and effectuation constructs that more empirical work started to arise. The vast amount of research that aims at explaining entrepreneurial success demonstrates that the issue is very complex, yet relevant, and that numerous factors play a role here. There is no single theory that holds the holy grail of entrepreneurship explaining why firms fail, where others are successful but rather there are multiple theories in multiple disciplines that each load on one of those numerous factors. The goal of this research is to provide empirical evidence for the existence of causation and effectuation processes, and the impact of these processes on new venture performance in the context of technology- based ventures. In other words, the goal is to discover whether there are significant differences between the gestation processes and decision-making strategies of TBVs and NTBVs and how these differences affect venture performance. To provide such empirical evidence, I will use the Panel Study of Entrepreneurial Dynamics an extensive, longitudinal dataset that maps the new venture start-up process of nascent entrepreneurs in the United States. Instead of focusing solely on high-tech start-ups, or other distinct categories, using this database will provide insight into the decision-making process of the average entrepreneur: ranging from suburban hair salons to future Silicon Valley software start-ups. The PSED, which will be
14 MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 elaborated on into more detail later, is a unique dataset that provides countless research opportunities. It is highly valuable because it gives researchers the opportunity to get insight into the decisions nascent entrepreneurs make throughout the start-up process. Hence, there are two unique selling points: longitudinal data, which is relatively scarce in entrepreneurship research; and data on nascent entrepreneurs, those that took the plunge and are in the process of starting a company. The research goal is twofold: " To empirically investigate the differences in gestation processes between technology-based ventures and non-technology-based ventures and the effect of these differences on gestation outcomes, and " To empirically investigate the moderating effect of nascent entrepreneurs decision-making strategy on the relation between the type of venture and gestation outcomes. kesearch quest|on Following from the research goals that have been discussed in the previous section, the main research question throughout this thesis is the following: How does the gestation process differ for technology-intensive and high-newness start-ups and to what extent is this relation affected by nascent entrepreneurs decision-making strategy? 1hes|s out||ne In order for this thesis to arrive at a solid starting point, the next section will dive more deeply into existing theories of venture creation processes, start-up performance, the strategy performance linkage, environmental dynamism and uncertainty, and effectuation versus causation processes. Throughout the process of laying the theoretical groundwork I will identify avenues for exploration that is, testable hypotheses. After the theory section I will elaborate on the conceptual framework with its underlying concepts and relations. In the methodology section I will explain the research design, the data gathering and the PSED, the measurement of the concepts and the plan for data analysis. The analyses section shows the statistical analysis of the data and the subsequent results. These results will be elaborated on in the discussion section. Finally I will draw conclusions and discuss the implications and limitations of this research.
16 MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 Theoretical framework In the next section of this thesis the most relevant literature will be reviewed in order to establish a solid theoretical framework that will contribute to answering the research question. Key concepts and their linkages will be explained, resulting in a series of testable hypotheses and a graphical representation in the conceptual model. Lntrepreneursh|p The central domain of interest throughout this thesis is that of entrepreneurship, defined by Schumpeter (1934) as the process of carrying out new combinations. This definition seems to stem from the literal translation of the French word entreprende, which means so much as to undertake. Schumpeter considered entrepreneurship as a new combination of factors of production in order to make a profit out of it. The other Austrian economist, Kirzner (1973), describes entrepreneurship as a process of discovery: agents who identify market-imperfections (opportunities) and exploit these as a means for creating value. Another rather simplistic, yet often used, definition of entrepreneurship is given by Gartner (1988), who considers it as the creation of new organizations. He notes that the entrepreneur is not a fixed state of existence, rather entrepreneurship is a role that individuals undertake to create organizations. An important contribution to theory is that by Shane & Venkatamaran (2000), who take a Kirznerian, discovery-based approach towards explaining entrepreneurship. They define it as situations in which new goods, services, raw materials, and organizing methods can be introduced and sold at greater than their cost of production. Moreover they note that entrepreneurial opportunities differ from the larger set of all opportunities for profit, particularly opportunities to enhance the efficiency of existing goods, services, raw materials, and organizing methods, because the former require the discovery of new means- ends relationships, whereas the latter involve optimization within existing means-ends frameworks. It becomes apparent that Shane & Venkatamaran (2000) consider that entrepreneurial opportunities exist a priori, and are waiting to be discovered. Shane & Venkatamaran are advocates of a rational approach of entrepreneurship, arguing that economic agents make calculated decisions weighing the opportunity costs of various options in the pursuit of entrepreneurial opportunity discovery and exploitation. Though of importance for conceptual reasoning, the framework by Shane & Venkatamaran (2000) has not had a profound impact in empirical studies. In his work on the process of opportunity discovery and exploitation, Bhide (2000) shows that the sheer majority of entrepreneurs do not attempt a systematic search and evaluation of opportunities. What also follows from the definition above is that it is aimed at innovative opportunities, while most firms that are started are routine, or reproducers (Aldrich & Ruef, 2006. Wennekers & Thurik (1999) propose yet another definition of entrepreneurship, taking the entrepreneur as a focal point: Entrepreneurship is the manifest ability and willingness of individuals, on their own, in teams, within and outside existing organizations, to: 1) perceive and create new economic opportunities (new products, new production methods, new organizational schemes and new product- market combinations) and to 2) introduce their ideas in the market, in the face of uncertainty and other obstacles, by making decisions on location, form and the use of resources and institutions.
MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 17 The definition by Wennekers & Thurik (1999) fits, more or less, all the previously mentioned views and also takes into account the role of the environment, considering it as uncertain and hence, unpredictable. The entrepreneurial process is characterized by events that are unaccounted for, and that require adaptive skills and creativity to be successful. This definition of entrepreneurship by Wennekers & Thurik (1999) will function as an anchor point throughout this thesis. Lntrepreneur|a| Stag|ng & 1he Nascent Lntrepreneur Analogous to biological creation, the creation of new firms can be considered as a process that consists out of four stages: conception, gestation, infancy and adolescence (Reynolds & White, 1997). As soon as one or more individuals with a valid business idea start to commit time and resources to starting up a firm they have begun the transition from the conception stage to the gestation stage. The definition of nascent entrepreneurs as put forward by Reynolds & White (1997) requires this process to be initiated by independent individuals, so not backed by an existing organization, otherwise they would be deemed nascent intrapreneurs. When the gestation process is completed, either when an official entity has been established and the organization starts to have an on-going operation, or when the gestation process is prematurely terminated, the firm transits to the infancy stage. The final transition would be when the firm shifts into adolescence and when an established new firm has been successfully come into existence (Wagner, 2004). Consistent with the definition used by the Panel Study of Entrepreneurial Dynamics (PSED) a nascent entrepreneur is defined as a person who is now trying to start a new business, who expects to be the owner or part owner of the new firm, who has been active in trying to start the new firm in the past twelve months, and whose start-up did not have a positive monthly cash flow that covers expenses and the owner-manager salaries for more than three months (Wagner, 2004). Since this study will be empirically based on the Panel Study of Entrepreneurial Dynamics, the aforementioned definitions will be used. With regard to the entrepreneurial staging, this study will solely focus on the gestation process the process of the creation of new economic artefacts (Sarasvathy, 2001) and the nascent entrepreneur. The Panel Study of Entrepreneurial Dynamics maps the decision- making process of these nascent entrepreneurs over a timespan of three years, covering the gestation process until the transition to the infancy stage. Wagner (2004) mapped the gestation activities put forward by several scholars in their research on nascent entrepreneurship. Reynolds (1997) reported the following start-up activities as frequently mentioned by nascent entrepreneurs: serious thought about business; looked for facilities/equipment; initiated savings to invest; invested own money in the new firm; organized start-up team; written business plan; bought facilities/equipment; sought financial support; license, patent, permits applied for; developed first model or prototype; received money from sales. Gartner & Carter (2003) used the first wave of data of the PSED to research the first signs of entrepreneurial behavior, and concluded that 57 % of the 715 nascent entrepreneurs spent a lot of time thinking about starting business, followed by 16 % who took classes or workshops on starting business, 15 % saving money to invest in business, 14 % invested own money in business, and 12 % developed model or procedures for product/service (in: Wagner, 2004). The Research Design section will feature a detailed elaboration of the PSED and the information it contains.
18 MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 Interpret|ng entrepreneur|a| performance One of the caveats of nascent entrepreneurship research is the interpretation of performance. It is implicitly assumed that successfully establishing a new firm is the most favourable outcome of the process. But what if a nascent business that is doomed to fail persists to establish the new firm? Even though the venture creation process can be considered successful, the new firm might not endure very long. And what if an entrepreneur decides to quit the venture creation process to pursue even more promising career opportunities? An abandoned creation process is too easily regarded as a failure, and careful consideration is warranted in this matter. The issue of performance interpretation for small business research has been addressed by Per Davidsson (2005); his research shows that changes in ownership, legal form or geographical location lead to contaminated data and an over reporting of business closures. Firm failure figures are often exaggerated and do not inspire individuals to start a new business, while results are in reality not that bad. Headd (2003) shows that almost a third of business owners reported their discontinuance as successful. Also Carter, Gartner and Reynolds (1996) show that the event sequencing of those who got their business operational vs. those who discontinued were rather similar. This again proves that interpretation of survival as a performance indicator is difficult. Davidsson (2005) puts it that ..if business start-ups are regarded as experiments with uncertain outcomes, the only failed cases are the experiments that never lead to a conclusive answer. What makes this issue even more complex is that success or performance may entail very different things for different individuals. Gimeno, Folta, Cooper and Woo (1997) found that entrepreneurs vary in their thresholds towards acceptable levels of performance. So when looking at growth as a performance indicator, it is important to assess the entrepreneurs attitude towards growth. Growth implies a changing situation for the entrepreneur, such as trading freedom and flexibility for managing a big organization, which might not be what the entrepreneur considers as successful. However positive correlations have been found between new venture growth and survival on the long term (Kirchhoff, 1994). Entrepreneurs fears that are associated with a growing venture (f.i. more vulnerable in times of crises) are thus not always legit. Davidssons research (2005) shows that entrepreneurs should strive for profitable growth and that researchers are better off using multiple performance indicators and not solely survival. Yet ideally, when using survival researchers should identify the reasons for discontinuation and distinguish between voluntary and non-voluntary closure (Delmar & Shane, 2002). Unfortunately not all data allows for this distinction. A more elaborate discussion of the performance indicators used in this study can be found in the measures section in the methodology chapter. 1echno|ogy-based Ventures vs. Non-1echno|ogy-based Ventures Studies on the creation of new ventures have largely neglected the influence of the context of process, like the nature of the start-up (Liao & Welsch, 2003b). In their 1989 book, Van de Ven et al. state that entrepreneurship researchers should study 1) how a business idea emerges over time; 2) when and how different functional competencies are created to develop and market the first proprietary product; 3) when and how these functional competencies are redeployed; and 4) how these business development efforts both influence and are constrained by organization and industry contexts. The context in which TBVs are created is more dynamic, uncertain and complex than the environment of NTBVs (Liao & Welsch, 2003b). The intensity of embedded knowledge, the types of knowledge needed and the infrastructure to create product offerings are different for high vs. low technology
MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 19 industries, according to Oakey, Rothwell and Cooper (1988). An important issue for nascent entrepreneurs is the need to be adaptive following from changing external conditions. This need is most prone in industries characterized by high levels of uncertainty and environmental dynamism: technology intensive industries. The pace at which offerings are renewed and products become obsolete make technology entrepreneurs need to focus on the continuous assessment of technological advantage and new market opportunities. The aforementioned liabilities of newness and smallness make legitimacy building another important issue faced by technology entrepreneurs; establishing a legitimate market position is important for securing vital resources. Research has shown that technology based ventures need more resources, both tangible and intangible, than their counterparts (Liao & Welsch, 2003b). Also since the product offerings by TBVs are more sophisticated the marketing and sales efforts are likely to be different. Moreover, Aldrich & Martinez (2001) find that routines and competencies vary significantly for TBVs and NTBVs: innovative organizations have to pay rather serious attention to learn new roles, setting on operating procedures, creating a culture of learning the skills and efforts to make relations with employees (Semasinghe, 2011). In 2004, the Academy of Management Journal published an article by Atuahene-Gima and Li, featuring their empirical research into strategic decision comprehensiveness and its effect on performance in new technology ventures. The authors note that ventures in highly turbulent environments are confronted with complex information-processing requirements that are such that it requires organizational designs (including strategic processes, control systems, and communication patterns and structures) allowing real-time fast information collection and interpretation. Furthermore, the uncertainty that technology ventures have to deal with imposes challenges on firms capabilities. In line with Aldrich & Martinez (2001), Tushman & Nelson (1990) found that technology ventures experience a disrupted balance between the resources they need and those that are available. Combining all the above evidence leads us to believe that technology-based ventures have a harder time establishing a company than NTBVs. With greater uncertainty comes greater risk, so it can be hypothesized that higher technological intensity decreases the chances of successfully establishing a company: Hypothesis 1a: The higher the technological intensity associated with a venture, the less likely it is that this venture becomes a new firm. Gestat|on act|v|t|es The term gestation activities has been coined already a few times in this study, but it has not been properly defined. They are specific behaviors that are considered to be demonstrative of being in an active venture creation phase. Reynolds & Miller (1992) have found that the total number of (a certain set of) gestation activities is positively correlated with the likelihood of successfully becoming a new firm. The specific set of activities that they found contains mostly operational activities: commitment of personal time and resources, outside funding, hiring employees. Carter, Gartner and Reynolds (1996) found similar results, in that successful entrepreneurs can be distinguished from unsuccessful ones by the extent to which activities generate patterns of interlocked behaviors among the various parties involved. These studies however do not distinguish between the characteristics of the firm. Gartner (1985) noted that activities like developing the product, acquiring human resources and finding funds take place to a different extent, at different phases and in a different order for various types of firms. In a similar vein, Delmar and Shane (2002) note that the pattern of start-up activity evolution differs on three points for different firms: 1) not all activities are needed; 2) because of limited cognitive
20 MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 capabilities entrepreneurs cannot do all activities at the same time; 3) activities may be dependent on each other, influencing the order in which they are performed. Gestation activities can be subdivided in several categories. Katz & Gartner (1988) identified four categories: intentionality, resources, boundary, and exchange. These are much alike the ones put forward by Delmar & Shane (2002): operational and planning activities. Operational activities consist of legitimacy building, resource transformation and market & promotion. Planning activities entail events that enable coordination, and are similar to intentionality. Exemplar activities are writing a business plan, making financial forecasts and doing market research. Legitimacy building activities (boundary) involve events that give the new firm some sort of right of existence, of which exemplars are the actual registration of the firm, getting a tax number and joining an industry association. Resource transformation activities speak for themselves: they involve combining and transforming physical, financial, human and technological resources into a sellable product or service. In his study on market dynamism and new firm formation, Newbert (2005) reasons that the gestation process should become simpler (fewer activities) the more dynamic the market is. Since there are few situations in which existing knowledge and experience will guide the entrepreneurs actions in a dynamic market, there are also fewer activities needed to prepare for those situations. Paradoxically, he reasons that because companies in dynamic markets have greater resource needs they are likely to engage in more planning activities. The activities mentioned also include legitimacy building. Newbert (2005) thus expects that in dynamic markets start-ups need more planning and legitimacy building activities, but not more resource combination or sales & promotion activities. The author finds significant results to accept the hypothesis that the new firm creation process consists of fewer activities when the velocity of the market increases. In addition he found that more planning activities does not contribute to the odds of becoming a successful new firm. Elfring & Hulsink (2003) have studied the dynamics behind networking efforts in both Schumpetarian (radical innovation) and Kirznerian (incremental innovation) technology ventures. They conclude that building legitimacy is one of the single most critical aspects of launching a technology venture, especially for radical innovations (high newness). Radical innovations require new ways to combine resources or enter new markets and create conditions of high uncertainty. These situations call for an increased network of weak ties. Low technology and low newness start-ups however may rely on exploiting their strong ties. Expanding a network of weak ties takes time and effort, thereby adding to the expected number and length of gestation activities. Liao & Welsch (2003b) show that TBVs are more engaged in scanning the external environment, assessing business opportunities, defining organizational boundaries, need more resources, and are more active in exchanging with internal and external stakeholders. From Penroses theory of growth of the firm (1959) it is known that new ventures start by assessing the initial set of resources and set to acquire those tangible and intangible assets currently not in possession. For TBVs specifically the acquisition and refinement of intangible assets like technologies and know-how takes time, which suggests that it is likely that the gestation process of TBVs is probably lengthier. On top of that the uncertainty involved in creating technology ventures implies more trial-and-error processes compared to NTBVs, also adding to the duration and number of gestation activities, as well as the number of iterations of those gestation activities. Moreover the liability of newness is bigger for technologically intensive and/ or high-newness start-ups. One of the most important aspects on which TBVs (are expected to) differ is the need for
MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 21 legitimacy. Because these firms often need funding, gaining legitimacy with possible investors and other parties is important. It is thus expected that technologically intensive firms (and also high-newness firms) need more legitimacy building activities than other start-ups. Because of the order of magnitude of the resource base that is needed for these types of firms it is also expected that the amount of planning activities is more extensive. Outside funding requires solid business cases and financial forecasts since investors are looking for a return on the long term. They expect from the entrepreneur that he engages in long-term planning. Resource transformation activities, like developing a product, filing for a patent or making pre-agreements with suppliers are also likely to be more extensive for technology intensive and high-newness firms. Low-tech and low-newness firms often offer relatively simple products or services that require fewer activities to reach the commercial (sellable) stage. Finally, it is also hypothesized that high-tech and high-newness firms need to engage in more sales & promotion activities. These types of firms offer more sophisticated products and services and therefore need to go at greater lengths to sell and promote. In addition, these firms are expected to have higher expectations for growth, possibly in a geographic manner also. This would add to the amount of sales effort that is needed. In sum it leads to believe that technology intensity and newness of start-ups are both positively correlated to the total number of gestation activities that is needed to successfully start a new firm. Second, it is also believed that the positive correlation mentioned above goes for all four subcategories of gestation activities. Hypothesis 1b: There is a positive relationship between the technological intensity associated with a venture and the number of gestation activities. Hypothesis 1c: There is a positive relationship between the technological intensity associated with a venture and the length of the gestation process. The term technology ventures has been coined throughout this section, yet it has not been formally defined. Various studies mention high-tech as a term but it appears to be used rather loosely. Allen & Stearns (2003) mention some examples of definitions of high-tech in their study on TBVs: dependent upon innovation in science and technology, firms engaging in activities that have high rates of change, R&D expenditures, and innovative products, and technology that obsoletes previous technology, as in breakthrough or radical innovation, to name a few. When referring to technology or high-tech ventures, studies roughly describe three types: those inventing and developing truly radical innovations, those improving existing technologies, and those using technology to facilitate business processes. Allen & Stearns (2003) have identified three types of technology ventures: first movers, practitioners, and innovators. The first mover usually moves disruptive technology from the development stage to the commercial stage. Clearly it is associated with the highest risk of the three categories and is thus most prone to failure, but also offers the most promising returns. Commercialization of such novel technology is difficult because user acceptance is hard to predict; the market has yet to be convinced of the value of the technology. The second category are practitioners; ventures that take on existing technologies and improve them by combining products or services into new unique offerings. Practitioners are driven by the changing needs of customers and thus impose less risk than the first mover; it actually sails on the R&D efforts incurred by first movers and innovators. Innovators are much alike: they use technological know-how to incrementally improve existing technologies. Allen & Stearns (2003) show that ventures can deploy a single strategy, or combine two or even all three. Their findings show that technology ventures clearly differ in their technological intensity, whereas previous studies would just distinguish between high-tech and low/ no-tech.
22 MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 The research of Allen & Stearns (2003) uncovers some interesting results with regard to the differences between TBVs and NTBVs. Technology entrepreneurs are most likely to be men, and are younger then non-technology entrepreneurs. Moreover TBVs are significantly more often established by teams. Surprisingly, NTBVs develop prototypes of their product or service more often during the start-up process yet this might be explained by the time and resources needed for technology-based prototypes to be developed. NTBVs also show to hire employees quicker than technology ventures (yet not necessarily more employees), whereas the latter are more likely to seek advice through assistance programs. With regard to strategic intentions, technology ventures show a higher desire to grow and to satisfy unmet needs by customers. Overall, TBVs appear to be more strategically oriented than NTBVs. Following from Chan & Heide (1993), technology entrepreneurs more often engage in strategic alliance making to fill the gaps in knowledge and capability. Technology licensing, access to marketing and distribution channels, and equity investments are but a few reasons for technology ventures to partner with incumbent firms (Allen & Stearns, 2003). Technology ventures obviously act in a different arena than most other startups. The pace at which technology changes and new products become obsolete implies greater uncertainty. New ventures are only willing to face this uncertainty with greater potential rewards at stake. The research by Allen & Stearns (2003) provides initial empirical evidence for the positive relation between technology intensity and new venture (revenue) growth expectancy. Medcof (1999) has shown that technology-based ventures have greater potential to reach above-average growth rates, and this is reflected by overall revenue growth. Using technology-intensive and/ or new, disruptive products and services, ventures can explore new markets or expand existing ones. Disrupting the status quo means making existing offerings obsolete and clearing the way for accelerated sales. It seems safe to assume that high-technology and high-newness firms have greater growth expectations with regard to revenues, but literature is less conclusive on employee growth figures. In fact, there is very little to find about employee growth (expectations). Allen & Stearns (2003) only show that TBVs hire employees later on in the process, but not necessarily less than NTBVs. This might be due to the fact that TBVs spend more time in the beginning developing the product before going live, and that it is only when going operational and realizing cash flow the firm has (financial) room for extra human resources. However it is believed that there is a positive correlation between revenue growth and employee growth; there are only very few products or services where growth in sales is combined with a stagnating employee count. Eventually all firms reach a state where the product cannot further evolve without adding human resources. It can thus be summarized that technology-based ventures have higher expectations for future growth and also have a higher intention to grow than NTBVs. The following can be hypothesized: Hypothesis 1d: There is a positive relationship between the technological intensity associated with a venture and the revenue expectancy of the nascent entrepreneur. Hypothesis 1e: There is a positive relationship between the technological intensity associated with a venture and the employee count expectancy of the nascent entrepreneur. Hypothesis 1f: There is a positive relationship between the technological intensity associated with a venture and the growth willingness of the nascent entrepreneur.
MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 23 Venture Newness A notion that is more or less embedded in the theoretical section on TBVs vs. NTBVs is the newness, or innovativeness of the venture idea. Therefore we will not go too much into depth on the topic. Yet it is important to touch upon this subject because there are distinct differences between ventures introducing higher degrees of newness and other ventures that are mere replicators, or imitators. This distinction is important for researchers, policy makers and business founders because problem and solution may be way off mark when applied incorrectly (Samuelsson & Davidsson, 2012). In their empirical work they find support for their notion of different venture creation processes for different degrees of newness. Innovative ventures are more associated with creative change; equilibrium- breaking and genuine uncertainty. They are therefore likely to be more complex and in need of more efforts to legitimize the emerging venture. This is a likely reason why more gestation behaviors are undertaken per time unit for such ventures. Moreover, they find that: the building up of instrumental social capital during the venture creation process is an important determinant of making continued progress in that process. This result also gives empirical support to the not yet empirically validated theory of effectuation. Looking at effectuation in a nutshell it obvious that, who you know, is of great importance for progress in the nascent venturing process. It thus becomes apparent that the venture creation processes differ for entrepreneurs developing new and innovative product offerings. From the same line of reasoning for the technological intensity of the new firm a series of hypotheses can be developed for the level of newness. Entrepreneurs introducing greater newness have a smaller reference framework to help build their new firm. This greater level of uncertainty implies a smaller chance for successful gestation of a firm, therefore: Hypothesis 2a: The higher the degree of newness associated with the venture idea, the less likely it is that this venture becomes a new firm. Every entrepreneur introducing a new product or service is hoping to launch a big hit and change the status quo of the market. Again, with greater risk also comes greater reward. Therefore it is expected that: Hypothesis 2b: There is a positive relationship between the degree of newness associated with a venture and the revenue expectancy of the nascent entrepreneur. Hypothesis 2c: There is a positive relationship between the degree of newness associated with a venture and the employee count expectancy of the nascent entrepreneur. Hypothesis 2d: There is a positive relationship between the degree of newness associated with a venture and the growth aspiration of the nascent entrepreneur. Samuelsson and Davisson (2012) have shown that creative change that is associated with innovative ventures implies more effort is needed to successfully start a firm, and hence more (extensive) activities. Also, in line with hypothesis 1c, the process is expected to take longer: Hypothesis 2e: There is a positive relationship between the degree of newness associated with a venture and the number of gestation activities. Hypothesis 2f: There is a positive relationship between the degree of newness associated with a venture and the length of the gestation process.
24 MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 Venture Soph|st|cat|on & erformance What became apparent from Allen & Stearns framework (2003) is that technological intensity and venture newness are two concepts that go hand-in-hand. Other studies speak of the level of sophistication of a firm, a term that will be adopted in this study as well. Besides measuring intensity and newness as two separate variables, a combined variable will be developed that reflects the differences in uncertainty and dynamism encountered by different ventures. By testing for the combined effects of technological intensity and newness we will get an idea of the level of venture sophistication and its effect on the outcomes of the gestation process. It is thus also hypothesized that: Hypothesis 3a: The higher the degree of sophistication associated with a venture, the less likely it is that this venture becomes a new firm. Hypothesis 3b: There is a positive relationship between the degree of sophistication associated with a venture and the revenue expectancy of the nascent entrepreneur. Hypothesis 3c: There is a positive relationship between the degree of sophistication associated with a venture and the employee count expectancy of the nascent entrepreneur. Hypothesis 3d: There is a positive relationship between the degree of sophistication associated with a venture and the growth willingness of the nascent entrepreneur. Hypothesis 3e: There is a positive relationship between the degree of sophistication associated with a venture and the number of gestation activities. Hypothesis 3f: There is a positive relationship between the degree of sophistication associated with a venture and the length of the gestation process. While the literature provides interesting results, it still remains unclear what factors foster or hinder the gestation process of technology ventures. We therefore turn to the strategy literature, and more specific to theories that fit the moderating role of dynamic and uncertain environments in which technology ventures operate. Strategy Roughly two schools of thought have split the strategy literature: the learning school and the planning school. Firms should either try harder to predict better (rational approach towards planned strategy) or move faster to adapt better (adaptive approach towards a learning strategy) (Wiltbank et al., 2006). In his 1994 book, Mintzberg states that firms use strategy in a variety of ways: 1. Strategy is a plan, a "how," a means of getting from here to there. 2. Strategy is a pattern in actions over time; for example, a company that regularly markets very expensive products is using a "high end" strategy. 3. Strategy is position; that is, it reflects decisions to offer particular products or services in particular markets. 4. Strategy is perspective, that is, vision and direction.
Earlier, in 1972, Mintzberg had defined strategy as a pattern in a stream of decisions within a firm. Organizations learn from their actions and by experimenting in situations of uncertainty they become
MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 2S flexible and adaptive so they are able to respond quickly to unexpected events and grasp new opportunities (Mosakowski, 1997; in: Garonne et al., 2010). Combining means and ends is no longer a sequential process, but rather can be done simultaneously; this is the definition of incremental planning (Garonne et al., 2010). Earlier on I mentioned that new firms have difficulties organising and aligning their resources with objectives, especially in conjunction with changing market conditions. Instead of working with a set of means towards predefined ends, new firms may engage in incremental, or emergent strategies to be successful. In uncertain situations, the planning process is regarded a waste of precious (management) time, slowing down the adaptation process and flexibility of the firm, while at the same time blinding the firm for environmental changes (Mintzberg, 1990). Wiltbank et al. (2006) show that there is ample empirical support for the learning approach. Where Mintzberg was a clear advocate of the learning school of strategy, Ansoff and Porter vow for a more planning oriented approach. In both dynamic and stable environments, a rational process towards formalized and detailed planning would result in superior performance (Ansoff, 1979). Planning results in more efficient use of resources, increased decision-making speed, and the support of flexible actuation (Delmar & Shane, 2003). Wiltbank et al. (2006) carried out an extensive research into the planning performance literature and conclude that a decent amount of work has provided empirical support in favour of the planning school. Short cuts like heuristics and intuition are heavily biased and systematic planning helps to eliminate these inconsistencies. The key thought behind Porters strategy is about being different it means deliberately choosing a different set of activities to deliver a unique mix of value (Porter, 1980). Understanding the driving forces behind markets and positioning the firm accordingly results in superior competitive performance. Porter argues that strategy is about competitive position and planning on the combination of ends (goals) and ends (policies). In Ansoff and Porters definition, more attention to situational detail, more frequent analysis, more scanning for trends, and evaluation of more alternatives guide the firm to their best possible strategy going forward (Wiltbank et al., 2006). A third view on strategy, possibly to be considered as a third school of thought, is given by Hamel & Prahalad (1989). The planning versus learning debate is based on the prediction control trade-off, where the planning school takes a rational prediction based approach towards strategy making and the learning school advocates flexibility and adaptability to stay in control. Hamel & Prahalad (1989) however pose that firms can both emphasize their need for control and prediction. It is about understanding an organizations own strengths and building on internal capabilities to be successful: the strategists goal is not to find a niche within the existing industry space, but to create a new space uniquely suited to the companys own strengths, space that is off the map (Hamel & Prahalad, 1989: p74). In their 2006 seminal paper, Wiltbank et al. (2006) make a case for non-predictive strategy and propose a framework where control and prediction can be seen as independent dimensions, rather than mutually exclusive phenomena. Whichever type of strategy a firm decides to use is dependent on the confidence it has in its abilities to predict the environment. Key to both schools of thought is the acknowledgement of an exogenously given environment in which the firm has to position itself. The primary difference between the two is how they handle that given uncertainty (Wiltbank et al., 2006). It is argued that the practical usefulness of prediction as a means of control depends crucially on certain features of the environment (Mintzberg, 1994). Critical to understanding the trade-off between prediction and control and eventually disbanding prediction from control is the framework by Knight (1921). He identified three types of uncertainty: 1) uncertainty arising out of known distributions
26 MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 and unknown draws; 2) uncertainty from unknown distributions and unknown draws; and 3) non- existent distributions where the instances are unclassifiable (Wiltbank et al., 2006). The third type is also dubbed Knightian uncertainty, and in such environments, prediction and control are conceptually at odds. It occurs when economic artefacts such as markets have not yet been created, and hence cannot be predicted. This opens the case for decoupling prediction and control: influencing an endogenously created environment may result in favourable results. Whereas planning and learning strategies are about positioning the firm, another stream of strategies can be regarded as construction approaches. The figure below (source) displays the framework proposed by Wiltbank et al. (2006).
Constructive approaches are characterized by a high emphasis on control, and are based on means ends relationships instead of firm environment positioning. Constructive approaches assume either the non-existence of key elements of the environment (presenting opportunities for constructing them), or the organizations ability to affect the evolution of those elements in significant ways (Wiltbank et al., 2006: 989). The authors distinguish between visionary and transformative approaches. Earlier on, one example of a visionary approach has been given: the framework by Hamel & Prahalad. The focus for the remainder of this research however will lie on the bottom-right quadrant of the matrix: transformative strategy, and more specifically on the effectuation theory by Sarasvathy (2001). Figure 3 - Overview Strategy Schools
MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 27 Introduc|ng Causat|on & Lffectuat|on Sarasvathy (1998) first introduced the notion of effectuation theory as an alternate view to the traditional causal theory in her doctoral dissertation, where she used think-aloud protocols of 27 expert founding entrepreneurs of companies ranging from $200 M to $6.5 B in value to find out how they solved problem sets regarding the start-up of a new firm. It appeared that almost two thirds of the entrepreneurs used effectual decision-making more than 75% of the time, thereby demonstrating that expert entrepreneurs have a clear preference for effectual reasoning. Sarasvathy (1998) also supports the notion of Shane (2000), who posed that individuals recognize and exploit different entrepreneurial opportunities based on their prior knowledge and experience. The expert entrepreneurs in Sarasvathys experiment built radically different (virtual) companies and markets while they were given the same technological innovation to begin with. Causat|on What distinguishes causation from effectuation is the set of choices; causation involves creating a particular effect and choosing the means accordingly, while effectuation is about using a particular set of means and choose among a variety of possible effects. Sarasvathy (2001) reasons that both causation and effectuation processes are integral parts of human reasoning that can occur simultaneously, overlapping and intertwining over different contexts of decisions and actions. As was mentioned earlier, both processes are juxtaposed, or deliberately regarded as opposing and mutually exclusive throughout this theoretical framework to enable clearer positioning. Entrepreneurs following a causation approach when creating a new firm systematically search for opportunities in an existing or developed market that meet the objectives they have defined upfront. Market opportunities are evaluated based on the maximum expected return they can generate, after which the most promising one is exploited. Entrepreneurs then use careful rational planning and analysis to make a roadmap for their venture, using their expertise and resources (Chandler et al., 2011). The theoretical framework for causation can be traced back to neo-classical micro-economics and more specifically the notion of economic agents making rational, utility maximizing choices based on all available information (Simon, source). Most of the existing entrepreneurial literature falls back on causal reasoning (Chandler et al, 2011). A clear example of the institutional conformity to causal reasoning is the widespread use of business planning in entrepreneurship education, while empirical results on the use of the written business plan are, at best, mixed (Honig & Karlsson, 2004; Liao & Gartner, 2006; Chandler et al., 2011). In their validation study Chandler et al. (2011) identified four dimensions on which causation and effectuation processes differ: 1) Causation focuses on predicting an uncertain future by defining the final objective up front. 2) Causation focuses on maximization of expected returns 3) Causation emphasizes business planning and competitive analyses to predict an uncertain future. 4) Causation focuses on exploiting pre-existing capabilities and resources. Moreover, causation processes assume excellent competencies at exploiting knowledge and hence, are more useful in static, linear and independent environments (Sarasvathy, 2001). Causation processes are displayed here at their very (conceptual) extremes; the other extreme of the continuum sketched by Sarasvathy is effectuation, which will be discussed in more detail throughout the next section.
28 MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 Lffectuat|on In developing effectuation theory, Sarasvathy was influenced and inspired by a great deal of important scholars, among whom where Knight, March and Weick. Knights (1921) work on the unknowable, or uncertainty arising out of yet uncreated artefacts, was already introduced. Knightian uncertainty is closely coupled to effectuation theory; in situations where the instances are not yet established, like in entrepreneurship where new firms and/ or new markets are created, prediction is impossible. The assumption of an endogenously created environment asks for different decision-making strategies. Entrepreneurs creating new markets often have no reference framework to put their product into perspective, so making rational and fully informed decisions (or predictions) is not an option. A systematic approach towards business planning, using for instance forecasting techniques, does not work in such uncertain environments. A second precursor of effectuation theory was found in the work of March (1991), and the notion of goal ambiguity being essential in organizational decisions. According to Cohen, March and Olsen (1972) an organization is a collection of choices looking for problems, issues and feelings looking for decision situations in which they might be aired, solutions looking for issues to which they might be the answer, and decision makers looking for work". Making a particular decision is more or less dependent on fate; decision-making is highly unpredictable and the relations between stakeholders, problems, solutions and alternatives are highly susceptive to chance. This model, also known as the garbage can model, together with Herbert Simons (1991) model of bounded rationality shows that goal ambiguity and limited rationality are essential in organizational decision-making. One of the primary assumptions of effectuation theory is that goals are initially ambiguous and gradually become more specific (Kraaijenbrink & Ratinho, 2011). Third, there is Weicks (1969) theory of enactment and sensemaking: organizations or other phenomena come into existence because people talk about it. Decision makers are key sources of selection by enacting with their environment; entrepreneurs select and create the environment through their actions, rather than facing an exogenously given environment (Kraaijenbrink & Ratinho, 2011). These theoretical frameworks are fused into the theory of effectuation: a decision-making model for situations where economic artefacts are unpredictable (Knightian uncertainty), the agents (entrepreneurs) are bounded in their rationality, goals become more specific over time and the environment can be shaped, or constructed by the entrepreneurs. A central notion to effectuation is the use of means as a starting point, and more specifically three categories of means: Identity, or Who am I?; Knowledge, or What do I know?; and Network, or Whom do I know?. To move back to the control prediction paradigm: the above three categories solely reflect factors that can be influenced, and hence, can be used to control future events. This focus on means-driven action rather than goal-oriented action is the first important principle of Sarasvathys (2001) model; it is also dubbed the bird-in-hand principle. With these categories of means at their disposal, individuals may pursue a business opportunity, which does not necessarily have to be concrete yet. The next step is to gather input from people in their surroundings on how to continue and what possible effects can be created. At this point there may be people willing to commit time, effort and other resources to the growing organization, thereby becoming stakeholders. Unlike in a causation approach, it is not their willingness to submit to a predefined vision that counts, but rather their willingness to commit with their own means to shape a
MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 29 vision together (Wiltbank et al., 2006). Eventually the process of expanding means comes to a stop because an increasing set of constraints converges around the network of stakeholders. Subsequently, path dependence takes over and goals will become less ambiguous. Stakeholder commitment forms the second important principle of the effectuation model; it was mentioned in the introduction as the crazy quilt principle, after a set of stakeholders gradually expanding a quilt by adding pieces of patchwork. This principle demonstrates a cooperative view on outsiders, whereas the causation model takes competitive analysis as a starting point (Porter, 1980). Looking at Porters five forces model, effectuation would involve engaging in strategic alliances and pre- commitments from stakeholders in order to downplay uncertainty and to erect entry barriers. The third principle is that of using affordable loss instead of expected return as a basic assumption for investment decisions. Effectual stakeholders only invest what they can afford to lose. In causal reasoning, selecting between investment alternatives is a rational process of choosing the optimal strategy, since accurate predictions of the expected return can be made. In the effectual process it becomes gradually apparent what the size of the pie will be, so at first no accurate predictions can be made of the future (and current) value of the pie, not to mention the share that would belong to every stakeholder. Therefore expected return is not an effective tool to make investment decisions. Instead, stakeholders each decide what they are affording to invest, and possibly lose, thereby keeping them in control. Leveraging contingencies rather than exploiting pre-existing knowledge reflects the fourth principle (the lemonade principle). Unexpected events will keep on happening, be it a technological breakthrough or unfavourable legislation, and instead of bracing the company for impact through hedging practices it should focus on being flexible so it can capitalize on such occurrences. Unexpected events may undermine the value of current means ends relationships, but they can also create new (more) valuable relationships. The final principle, which reflects the central tenet of effectuation theory, is the pilot-in-the-plane principle: controlling an unpredictable future rather than predicting an uncertain one (Sarasvathy, 2001). This principle overlaps most of the other principles and provides merely a reflection of the role of effectuation in the control paradigm. Lffectuat|on & Causat|on: emp|r|ca| ev|dence It was argued earlier that the development of effectuation literature follows a similar pattern as other paradigm shifting models, and being little over ten years old it is no surprise that empirical evidence is only just starting to arrive. So far there has been a decent amount of theorizing and conceptual thinking, but with the validation study of effectual constructs published by Chandler et al. (2011) empirical work will most likely evolve rapidly. This study will be discussed in the Research Design section more closely. Chandler et al. (2011) developed a survey instrument to measure causation and effectuation, with which they validated the constructs that make up causation and effectuation strategies. One of the most cited works is by Dew, Read, Sarasvathy and Wiltbank (2008), who studied the decision framing process of expert entrepreneurs and MBA students. The study was in fact a sequel to Sarasvathys dissertation experiment (1998), although in this version the expert entrepreneurs were put up against MBA students. In starting a new venture, expert entrepreneurs used analogical reasoning, were more likely to think holistically about business, weighed predictive information less, were more means-driven, were less concerned with expected return, and were more interested in developing
30 MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 partnerships than MBA students (Dew et al., 2008 in: Perry, 2011). This again shows that expert entrepreneurs have a preference for effectual decision-making. Earlier, in 2005, Sarasvathy and Dew had conducted a study of expert entrepreneurs and the way in which they predict uncertain future preferences. They preferred a logic of identity (who are you) over a logic of preferences; a logic of action (what you know) over a logic of belief; and a logic of commitment (whom you know) as opposed to a logic of transaction thereby providing empirical evidence for the three categories of means that effectual entrepreneurs use. Using the same data on MBA students and expert entrepreneurs, Read et al. (2009) prove that expert entrepreneurs use effectual decision-making logic when framing marketing decisions. They were less likely to believe market data, used analogical reasoning, were more likely to think holistically about business, were focused on affordable loss, thought about unmentioned markets, used skim pricing and were more likely to make initial sales themselves. The studies mentioned above all use verbal protocol (think aloud) analysis of entrepreneurial decision- making. An important field study carried out by Wiltbank et al. (2009) shows that in situations of uncertainty, investors do better when emphasizing control strategies than when they would use prediction strategies. In managing an investment portfolio, angel investors using control-based logic (effectuation) experienced fewer failures while maintaining homeruns, or successful investments. Investors using prediction-based strategies made significantly larger investments but did not experience superior returns. In highly uncertain contexts (those of early stage ventures/ opportunities) this proves that control-based strategies result in fewer failures while maintaining success rates. Moreover, when interviewing a network of entrepreneurs in the streaming video industry, Sarasvathy and Kotha (2001) found that when entrepreneurs are faced with Knightian uncertainty they rely more on effectual logic than on causal logic. Also the stage of the entrepreneurial venture seems to be of importance. Harting (2004) shows that entrepreneurs rely on effectual decision-making in the earlier phases of the new ventures development, whereas causal reasoning is used more in later stages. Harmeling et al. (2004) show similar results: goal flexibility and the incidence of contingency exploitation decrease over time. Both notions confirm the conceptualization of goal ambiguity becoming less apparent gradually throughout the development of the venture. Thus, in cases of uncertainty and goal ambiguity, effectual logic is used more. Honig and Samuelsson (2009) studied 419 nascent entrepreneurs over a six-year timespan to examine whether nascent entrepreneurs use effectual or causal action, and to what extent the planning decisions impact venture performance, both in high and low growth firms. Causal strategies (planning) in high growth firms (over 20% annual employee + revenue growth) had little relation to gestation activity, survival or performance, whereas effectuation did thereby supporting the use of effectuation strategies. For high growth ventures the study clearly supports effectual strategies rather than causal, planning- based strategies. Findings for the low growth firms are more mixed: using causation strategies and formal planning is negatively related to gestation activities and survival. Nascent, low growth firms are more likely to disband when planning more formally. However in terms of performance, more planning in the early stages of low growth firms and less planning later on seems to be beneficial. The authors argue that this might be because of the type of organizations; since the bulk of start-ups are replication- based businesses like nail-salons and coffee shops. Less change, thus less uncertainty, calls for more causation based strategies. These results are fairly contradicting, yet they do support that effectuation is
MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 31 better suited for uncertain environments that are characterized by innovative, technology based organizations. A second longitudinal study of nascent entrepreneurs and their decision-making strategies was done by Garonne et al. (2010) in Australia. From a random sample of 625 nascent entrepreneurs, the authors drew the conclusion that in uncertain environments those entrepreneurs using effectual strategies were more likely to reach the operational stage than their causal counterparts. Overall, causal logic shows positive results for reaching the operational stage, however effectuation is not negatively related. Though the two types of strategies are conceptually at odds, empirically they are not. When uncertainty and the degree of newness of the venture idea are incorporated, effectuation appears to be significantly more suited in getting operational; that is when uncertainty and newness are high. Causal strategies are better in situations of low newness, and hence low Knightian uncertainty. The empirical evidence that has been published to date is largely delivered by a select group of scholars. Results show that, although evidence is not crystal clear yet, effectual reasoning is beneficial in certain situations. The studies by Garonne et al. (2010) and Honig & Samuelsson (2009) are the first to relate the effectuation model to performance in nascent firms. This thesis will contribute to this empirical stream of research by attempting to measure effectual and causal constructs in an early phase of the entrepreneurial process. From Sandberg and Hofer (1987) we know that start-up performance is a product of the entrepreneurs attributes, the strategy that is used and the industry characteristics. The liabilities of smallness and newness (Stinchcombe, 1965; Baum et al., 1995) make start-ups face specific issues. Not having established working routines, stable relationships and market legitimacy makes that start-ups need to develop different strategies in terms of planning, goal definition, market entry, alliances, investment and the product portfolio, to name a few (Garonne et al., 2010). Moreover, we have seen that those liabilities are different for TBVs and NTBVs. In the next section I will work towards a set of testable hypotheses where venture sophistication (newness and technological intensity), the decision-making strategy and the outcomes of the venture creation process come together. Venture Soph|st|cat|on, Strategy & erformance Knight argued that economic scholars had to make a distinction between risk and uncertainty. The predictability of the environment and the distribution of information among decision makers are key to this distinction. When the outcomes of actions in an environment are known and the distribution of probabilities of the outcomes are also known, the environment is simply characterized by risk. Through a rational calculation process this risk can be determined and a corresponding investment strategy can be deployed. In situations where the distribution of probabilities is not known, historical outcomes can be analysed to calculate an estimated distribution. Whenever the outcomes and probabilities however cannot be put into perspective, prediction based strategies have no use. Effectuation strategies might thus be a beneficial alternative to causation strategies. But when exactly does Knightian uncertainty occur? Research by Kim and Mauborgne (1997) shows that radical innovations have a large and positive impact on the benefits of the firm while incremental innovations have a positive impact on revenue but not much on benefits. Risks and uncertainty in developing such a radical innovation are also greater and by definition radical innovation is not as common as other types of innovation. Developing high degrees of newness may impose serious constraints on firms, since no
32 MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 probabilities of success or failure can be assigned ex ante. Previous research has reported that sophistication of the firm such as the level of technology being developed influences the venture process by delaying it (Liao and Welsh, 2008). Nascent firms engaging in newness development provide more sophisticated products or services, and as a result they may experience a longer time to realize those products or services and launch them into the market. They also have to interact with a large range of contacts to diffuse and increase the awareness of their newness while decreasing their liability of newness. High degrees of Knightian uncertainty are thus related to more radical innovations and more sophisticated products or services, mostly based on technological advancements. What does this mean for nascent entrepreneurship and the strategies deployed? Since radical innovation does not occur as often as incremental the majority of new firms are replication based most nascent ventures will be characterized by low levels of newness. In this situation a causation strategy, by using planning and prediction tools, is preferred over an effectuation strategy. Based on the discussion above the following can be hypothesized: Hypothesis 4a: Effectuation positively affects the chance of becoming a new firm for ventures with a higher degree of technological intensity. Hypothesis 4b: Effectuation positively affects the chance of becoming a new firm for ventures with a higher degree of newness. Hypothesis 5a: Causation positively affects the chance of becoming a new firm for ventures with a lower degree of technological intensity. Hypothesis 5b: Causation positively affects the chance of becoming a new firm for ventures with a lower degree of newness.
MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 33 Research Methodology This chapter describes the research methodology that will serve as a conduit for the empirical analysis of the proposed conceptual framework. In the first section the appropriate research strategy will be discussed. Next, the Panel Study of Entrepreneurial Dynamics will be introduced and the method for data collection and sampling will be described in detail. Section X describes the variables and the way in which they are measured. The last section contains the data analysis methodology. kesearch Strategy After having thoroughly discussed the existing empirical evidence on effectuation processes and antecedents of the effectuation model it became apparent that empirical evidence in this field is just starting to develop. Insight into the start-up processes and decision-making of entrepreneurs who are currently in the process of starting up a venture is valuable, yet rare because of severe research implications. Mapping nascent entrepreneurship and decision-making is difficult and resource consuming, let alone the collection of longitudinal and preferably real-time data that does not suffer from recall biases. The past decade in effectuation theory development was primarily aimed at conceptual thinking. Now that the constructs that load onto effectuation processes have become validated (Chandler et al., 2011) the time is ripe for quantitative analysis in order to test the proposed theories. From Bryman and Bell (2007) we know that qualitative data and conceptual works serve primarily for theory generation. A quantitative approach however would allow for using a larger sample, applying formal measurements, and analysing the data using statistical analysis methods (Ghauri and Gronhaug, 2005). Quantitative methods though are often criticized for its reliance on instruments hindering the connection between research and everyday life something particular important to the field of entrepreneurship. This stresses the importance for careful interpretation of the findings in this study and to make accurate translations to the real world of entrepreneurship. The limitations for nascent entrepreneurship in terms of data collection that were mentioned above introduce the discussion of primary versus secondary data. Primary data would involve collecting the data by the researcher himself and for the research objectives only. Secondary data does not involve the researcher collecting the data; instead the data was gathered for other purposes. Especially in the field of entrepreneurship research, using secondary data is not uncommon; sharing highly sensitive information is something entrepreneurs do not do very often, and therefore data is re-used. Clearly the limited resources available throughout this thesis trajectory ask for some adaptation. A primary need for this study mapping the decision-making strategy over time limits the possibilities for using primary data. The decision to use secondary data was therefore made. Again, Bryman and Bell (2007) argue that this data is very much likely to be of high quality because of sampling procedures and the experience level of the primary data collectors (researchers). Clearly secondary data has its limitations, since it was not intended to measure the concepts they are now re-used for. The Panel Study of Entrepreneurial Dynamics is a well-known database in the field of entrepreneurship research; in fact it is the most extensive dataset available on the start-up processes of entrepreneurs. The sheer size of the sample and the amount of questions asked make it a dataset with endless possibilities. According to Cassar (2006) it offers: 1) a representative sample of nascent entrepreneurs; 2) does not suffer from survivorship or recall biases; and 3) offers a wide range of measures. Moreover, the data is up to date, since data was collected between 2005 and 2011.
34 MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 Data Co||ect|on & Samp||ng: ane| Study of Lntrepreneur|a| Dynam|cs The Panel Study of Entrepreneurial Dynamics was already initiated in the early 1990s by several researchers, amongst whom Gartner, Reynolds and Curtin. The study in its current form consists out of two versions, or cohorts. Data collection for PSED I took place between 1998 and 2005, and after some changes were made to the research design, a second cohort of nascent entrepreneurs was interviewed for PSED II between 2005 and 2011. Besides methodological improvements, one of the main reasons for identifying a second cohort was that the PSED I was initiated during the dot com frenzy, when significantly more firms were started (Reynolds & Curtin, 2007)). The identification of the second cohort took place in 2005 and 2006, a more typical period. Also the popularity of the first cohort and the high number of factors affecting the outcomes (calling for multivariate analyses) would benefit from a larger sample: PSED II more than doubled the sample size to 2044 nascent entrepreneurs. The ideal data set for the study of business creation would provide complete coverage of all types of business creation, provide details on the entire process from conception through firm birth to growth trajectories, be a representative sample (or a complete census), and provide a broad range of factors or variables reflecting all processes considered to have an impact. Perhaps most important, it should include initiatives that do and do not complete the start-up process to allow assessment of the unique features of those start-ups that become new firms (Reynolds & Curtin, 2007). Existing research projects simply do not offer these options. They either have a large sample and a limited number of variables, or they feature a detailed study of a small sample of success stories. The scale at which the PSED is exploited makes it possible to combine both: different types of venture creation, a substantial level of detail, a large number of independent variables, and capturing the gestation process in a continuous matter. The researchers were interested in everything that revolves around starting a business. Personal characteristics, demographics, business climate, social networks, business planning and start-up funding are but a few of the topics covered in the interviews. The new venture creation process is an extensive series of activities, and because of this the amount of information in the dataset is enormous. An important point of departure for the researchers was to capture the process in a continuous matter, in order to minimize recall bias by the entrepreneurs as much as possible. Recall bias means that respondents might answer questions differently than they have actually happened because of memory issues; the act can be simply too long ago for the respondent to remember correctly (Hartman et al, 2002). According to Cassar (2007), recall bias frequently occurs in entrepreneurship or other social studies, for instance when companies have been in business for years and the entrepreneurs are asked to recall specific things about the start-up process. By questioning the respondents while they are still in the process, the effect of recall bias is minimized in the PSED. Another important matter when studying (entrepreneurial) performance is how to deal with survivorship; the tendency for failures to be left out of the sample. If you would simply take established firms and measure performance to extrapolate the results to a population, the sample does not truly reflect the reality. Those that have failed during the process are left out. The PSED overcomes survivorship bias because it includes also those that terminate during the gestation process.
MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 3S Samp|e Three phases can be identified in the research procedure; it starts off with the identification of a representative sample of nascent entrepreneurs. A screening process using telephone interviews was initiated in October 2005 and lasted till January 2006. 31.845 individuals were contacted in this period, using random digit dialling procedures. This so-called probability sampling design makes it possible that every possible member of the population has a nonzero chance of getting selected. Random digit dialling also has the advantage that telephone numbers that are not listed in phone registries are taken into account. The sampling design of the PSED makes it possible to extrapolate results that are achieved using PSED data to the entire US population. Out of the 31.845 screened individuals, 1.214 were identified as nascent entrepreneurs using the following prerequisites (Reynols & Curtin, 2007): " Individuals consider themselves as involved in the firm creation process, " They have engaged in some start-up activity in the past 12 months, " They expect to own all or part of the new firm, and " The initiative has not progresses to the point it may be considered an operating business. The identified nascent entrepreneurs represent an estimated nascent entrepreneur population of 12 million individuals between 18 and 74 years old. A commercial survey firm, whose researchers on average took 2 minutes to complete the screening, carried out the screening phase. The second phase consisted of telephone interviews with the nascent entrepreneurs to cover a range of topics dealing with the initiation of a new firm. This initial interview and the range of follow-up interviews were conducted by researchers of the University of Michigan Institute for Social Research. The first telephone interview, referred to as Wave A, took 60 minutes; the topics that were covered throughout the different waves can be seen in the following figure, adapted from Reynolds & Curtin (2007). The third and last phase involves a series of follow-up telephone interviews. Exactly 52 weeks after the initial interview the first follow-up interview took place, resulting in Wave B of data. Subsequent interviews all took place with 52-week intervals, for a total period of six years (Wave A Wave F). The topics covered during the follow-up interviews varied per respondent based on the status of their business. Those that have reported their business effort as quit received different questions, for instance with regard to the reasons of their disbanding from the gestation process. After completing these questions the entrepreneurs who quit were removed from the cohort for future follow-up interviews. Nascent entrepreneurs that completed the process and successfully started a new firm received some extra questions specifically aimed at newly founded firms. Most topics that were covered during the initial (Wave A) interview reappeared in the other waves so that case-reports could be updated to reflect new activities or changes in the business. Before the interviews were conducted, an advisory committee consisting of influential academics (among who Aldrich, Burton, Davidsson, Gartner, Honig etc.) field- tested and provided feedback on the research design.
Figure 4 - Topics covered in PSED Based on some additional criteria, a number of respondents were removed from the database: " Positive monthly cash flow covering expenses and salaries in previous periods and appearing to be reactivating a previous start-up effort. " Only involved in one or two start-up activities and not appearing to be very involved. " Involved in three or more start-up activities but not two in a single 12-month period and considered not to be very active. " Initiation of the nascent enterprise more than 10 years prior to the first interview.
Additionally, in this study only independent, nascent entrepreneurs as opposed to intrapreneurs will be used. Individuals or teams that are starting a firm and who are backed by an existing company are removed from the database.
MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 37 Independent var|ab|e: techno|og|ca| |ntens|ty In the literature section it became apparent that there is no unambiguous agreement on what exactly entails a technology-based venture. These ventures have other resource dependencies than non- technology-based ventures in that they rely on innovation in science and technology. Terms like R&D, patents and intellectual property are often coined. Also the environment in which TBVs are operating is ought to be different and more demanding. The dynamism associated with the environment is directly related to the degree of newness a firm is introducing, and will therefore be discussed in more detail in the next section. For measuring the technological intensity a perceptual measure is used; more specifically, participants in the PSED were asked: TI1: Do you consider your business start-up to be high tech? This question represents a dichotomous variable since participants were able to answer with either Yes or No. Because the term high tech has been used rather loosely and participants might have different perceptions on what entails the technological intensity of their firm the framework by Allen & Stearns is partially adopted to come to a more sophisticated measure of technological intensity. We do not only want to distinguish between technology-based and non-technology-based ventures, but also grasp the intensity within the group of technology-based ventures. Allen & Stearns (2003) find the following statistically significant characteristics of technology intensity: " Uses technical and scientific experts " Seeks a patent or other intellectual property " Develops a new product technology " Uses a new process technology " Tries to keep up with new technology The PSED interview codebook was thoroughly reviewed to find questions that reflect the characteristics found by Allen & Stearns with regard to technological intensity. This resulted in the following questions: TI2: Will spending on research and development be a major priority for this new business? TI3: Has this new business developed any proprietary technology, processes, or procedures that no other company can use, will it develop proprietary technology, processes, or procedures in the future, or is this not relevant to the new business? TI4: Has an application for a patent, copyright, or trademark relevant to this new business been submitted, will an application be submitted in the future, or is this not relevant for the new business? Other studies than the one mentioned by Allen & Stearn (2003) have also identified the development of intellectual property and the development of new product/ process technology as significant indicators of the technological intensity of the firm (Liao & Welsch, 2003; Garonne et al., 2010; Samuelsson & Davidsson, 2012; Semasinghe 2011). The answers to the three questions above given by the respondents are therefore considered to provide a valid measure of technological intensity. The first question is simply answered with yes or no. There were three answering possibilities for the latter two questions: yes; not yet but will in the future; and no, not relevant.
38 MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 It is assumed that the answer not yet, will in the future describes the entrepreneurs intention to either file for a patent or develop proprietary technology and hence reflects higher technological intensity than the answer no, not relevant. Collapsing the first two answer categories is therefore believed to be justified. Hence a dichotomous category will be created with the value 0 reflecting the answer no, not relevant and value 1 reflecting the collapsed answer possibilities yes, and not yet but will in the future. Moreover, the participating entrepreneurs were asked about various competitive strategies and their perception on the one being most important for their business. Participants had to assess the importance of the particular strategy, ranging from lower prices and superior location to technical and scientific expertise. The answers were given on a five-point Likert scale ranging from strongly agree to strongly disagree and a not relevant category. From the PSED, the following three competitive strategies were selected and considered as adding up to higher technological intensity. Developing new or advanced product technology or process technology for creating goods and services is important for this business to be an effective competitor. Development of intellectual property such as a patent, copyright or trademark is important for this business to be an effective competitor. The technical and scientific expertise of the start-up team is important for this business to be an effective competitor. To assess the relative importance of the various competitive strategies, respondents were asked to mention the single most important competitive strategy: TI5: You have mentioned a number of things that might be important for this (new) business to be competitive. Which of these is the single most critical thing for the survival of this business? A new variable is then created termed Technology Competitive Strategy; when respondents mentioned one of the three competitive strategies above as being most important value 1 was given. In any other case, value 0 was assigned indicating that technology is not an important requisite to be competitive. We end up with a new variable called Technology Intensity, which consists of the questions described above. Technology intensity thus encompasses the following five items: the perceptual measure of considering the business to be high tech, the importance of research & development, the development of proprietary technology, processes or procedures, the application of a patent, and a competitive strategy that puts technology central. Combining these five items creates a valid spectrum for assessing the role technology plays in a nascent firm. The first two items were simply answered by the respondents with yes or no, thus being a dichotomous item. Dichotomous means that the whole consists of two non-overlapping parts or possible answer categories that are mutually exclusive and jointly exhaustive. The second and third items though were not by itself dichotomous but were transformed in order to make combining the items possible. The fourth item, technology competitive strategy, was created in a dichotomous manner so that all items can be equally measured. The combination of the four items leads to an ordinal scale of technology intensity, ranging from 0 to 5. Theoretically a nascent entrepreneur could answer the questions regarding the five items all affirmative (hence a score of 4 and thus high technological intensity), or all negative (score of 0 and thus lowest possible technological intensity). This new spectrum is ordinal because we can rank-order the data, but cannot describe the relative degree of difference; e.g. a
MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 39 respondent affirming four out of four items is not twice as technology intensive as a respondent affirming only two items. Independent var|ab|e: venture newness What became apparent from Allen & Stearns (2003) framework of technological sophistication is that the degree of newness is unmistakably connected to technology-based ventures. The three types of technology ventures they identified, the first-mover, practitioner, and innovator are distinguished based on the degree of newness they are introducing. Clearly the nascent firm deploying a first-mover strategy is introducing the highest form of newness, since disruptive, novel technology has moved to commercialization. The practitioner uses new technology to improve products, services or processes. The innovator in turn aims at improving existing technologies to make viable product offerings. Newness, or novelty, is a phenomenon that has been widely used throughout entrepreneurship research. Rogers (1995) defined it as the degree to which a venture idea is perceived by firm founders as new to the industry. There may however be various degrees of newness. In his theory on creative destruction Schumpeter (1934) posed that entrepreneurs can introduce new products, new processes, tap into new (geographical) markets, and/or use new methods of organization. Earlier the distinction between radical and incremental innovations was discussed, as well as the difference between innovators and imitators (Aldrich & Martinez, 2001; Davidsson & Samuelsson, 2009). Most research investigating degrees of newness defines it on four different aspects, in line with Schumpeters definition: product/ service newness, process/ production methods/ sourcing newness, promotion/ sales newness and market newness. Semasinghe et al. (2011) used three items for all four indicators to identify the following degrees of newness: imitative, substantially improved, new to the market, and new to the world. Garonne et al. (2010) use a fairly similar approach; they started off with asking respondents the following questions: 1) Is the product/ service entirely new to the industry?; 2) If yes at Q1: is the product/ service entirely new to the world or entirely new just in the places where you are active?; 3) If no at Q1: if not entirely new is the product/ service somehow substantially different compared to what other businesses have offered before?. The fourth question they posed refers to market creation: Do you focus on customers or targets that other businesses have totally neglected?. If yes to the fourth question, respondents were asked Does that mean that you focus on serving customers or target markets that no other businesses focus on or those that most other businesses fail to serve?. If no to the fourth question, they were asked Is your selection of customers or target markets somehow substantially different from what other businesses apply?. The authors then classified newness in three different dimensions, similar to Semasinghe et al. (2011): very high (new to the world), medium (substantially different), and low (imitative). Samuelsson & Davidsson (2012) distinguish between imitative and innovative ventures, however they do acknowledge that there is not true dichotomy between the two. Weber (1947) found that extreme types are rarely found in empirical research. It is more likely that other hybrid forms are found on the continuum between the two extremes, like incremental innovation, competence-enhancing innovation or sustaining innovation. Samuelsson & Davidsson (2012) used four dichotomous indicators to identify whether a ventures was innovative or imitative: 1) Has an application for a patent, trademark or design protection been filed?; 2) Is the companys strategy characterized by an R&D focus?; 3) Does the company feel it is alone in the market with its particular offering?; and 4) Does the company feel that it has no direct competitors?. With these indicators the authors offer a composite measure of
40 MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 innovativeness that harnesses both technological intensity and newness. In addition, they mention that using only R&D data tends to underestimate the importance of innovative activity in small firms, and that using only product/ service uniqueness is likely to be overestimated among small firms but as a complement it is useful as an indicator of innovativeness. More recently, Dahlqvist & Wiklund (2012) presented a validated list of 8 items to measure newness. It reflects whether or not the business initiative is/ has: New to firm No equivalence to product or service in community No equivalence to product or service nationwide No equivalence to product or service worldwide New to firm's customers Customers not served with similar products by firms in community. Customers not served with similar products by firms in country. Customers not served with similar products by any firms in the world. In their study on complexity dynamics and patterns of entrepreneurial activity using the PSED I, Lichtenstein et al. (2007) measured newness-to-market based on the perceptual item Were the products and services to be provided by your new business available in the marketplace five years ago?. In this study the following items from the PSED questionnaire have been selected, as I believe them to reflect newness: NE1: Will all, some, or none of your potential customers consider this product or service new and unfamiliar? NE2: Right now, are there many, few, or no other businesses offering the same products or services to your potential customers? NE3: Were the technologies or procedures required for this product or service generally available more than five years ago? The last item is dichotomous, whereas the first two have three possible answers. Actually, there is a fourth category available, dont know, but these results will be left out of the analysis. Now to enable statistical analysis of the data all answers have to be assigned a value in order to establish a scale of newness. Ideally all three questions reflect dichotomous items, yet this is not the case. Therefore the following assumption is made: in question NE1, the answer all implies the greatest form of newness and is therefore valued 1. Consequently, the answer none implies no such thing as newness and is therefore valued at 0. Despite that the underlying distances between all, some and none cannot be estimated, the answer some is valued at 0,5. The same line of reasoning applies to question NE2. No other reflects high degrees of newness and is therefore valued 1, many equals low degrees of newness and hence a value of 0. Consequently few is valued at 0,5. Question NE3 is formulated similarly: if yes was answered it implies lower degrees of newness and hence a value of 0. Respondents answering with no were recoded to 1.
MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 41 The values are then added up to come to a scale of newness. Yet a remark must be placed here: although this scale represents some ordinality, the distances between the categories cannot be estimated. In theory a respondent could have a maximum score of 3 and a minimum score of 0, but a respondent scoring 3 degrees of newness is not introducing twice as much newness as a respondent scoring 1,5 degrees of newness. The outcomes shall thus be treated as categories.
42 MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 Dependent var|ab|es The main objective of this study is to increase our understanding of the start-up process of aspiring entrepreneurs, and more specifically in terms of the outcomes of the process. Measuring performance of nascent entrepreneurs was already discussed in the literature section, and so have the difficulties accompanied with it. Most important when assessing performance outcomes of nascent entrepreneurship is the combination of various performance measures. The single most important measure is business status, which gives us an idea about the current status of the startups efforts. Dependent var|ab|e: 8us|ness Status Liao & Welsch (2003) have suggested four criteria for determining if a firm has been fully established: personal commitment in both time and resources, financial support from outside the firm, revenue from sales, and hiring employees. The validity of hiring and financial support being a prerequisite are highly questionable though; nascent entrepreneurs can deliberately choose to not hire employees and finance solely based on personal resources. Other scholars (Hansen and Wortman, 1998) argue that the first commercial sale marks the emergence of a new organization; it is considered a last-step event in the venture creation process. Yet the definition given by Reynolds earlier in this section is ought to be suitable for determining the emergence, and non-emergence of new ventures.
Throughout the PSED interview sessions the entrepreneurs were asked about the current status of their business, and hence if they have successfully completed the start-up process. The variable is a reflection of interviewer checkpoint #A50, where the interviewer asked the entrepreneur whether the firm of the respondent could be considered to be a new firm, an active startup, or to have quit.
A firm is considered to be a new firm if it meets the following three criteria: o The firm has generated income in 6 months of the past 12 months o This income covered all monthly expenses o This income covered the salaries and wages of the owners
A firm is considered to be an active start-up if it meets the following three criteria: o The founders have devoted more than 160 hours in the past 12 months o The founders expect to spend more than 80 hours in the next 6 months o The founders consider the new business to be a major focus of their work career in the next twelve months
A firm is considered to have quit if it meets the following criteria: o The firm does not have the new firm or active startup status o The founders consider themselves disengaged from the business startup
We thus have three categories for the business status variable and clearly those entrepreneurs that have reached the new firm status are considered to be most successful. The entrepreneurs that are still actively involved in starting up their firm are considered to have survived and are more successful than those that reported to have quit their efforts in starting up. As was explained earlier, the first wave of data was gathered in 2005. Subsequent interviews were held for the next five years. Business status is measured at the end of the PSED study, more specifically after Wave F of data gathering was completed in April 2011.
MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 43 Dependent var|ab|e: 8us|ness Growth Frederic Delmar (2003) acknowledges that researchers have not put enough emphasis on the reliability and validity of growth measures in entrepreneurship research. In his study he investigated the use of various growth measures throughout 55 studies on entrepreneurial performance and concluded that most measures are not deliberately chosen but just because the data was available. Furthermore he states that it is better to use objective measures such as growth in employees or sales volume, than more subjective measures as market share or performance indicators where respondents are asked to rate their company against close competitors. What also became apparent is that growth of employees and revenue are the most widely adopted, since they are easily available and relatively uncontroversial. The PSED is characterized by a high variety of firms; it reflects the population of newly started ventures in the U.S. and therefore it is required to select growth measures that are not bound to within-industry comparisons. Other measures, such as physical output or changes in assets only say something about specific types of firms, for instance with regard to capital intensity. Since starting ventures are often still in the development phase profitability might not be an appropriate measure (Hart, 1995). The same goes for return on capital or investment, since many companies fail or take years before generating any profit. In their influential study on performance of technology-based ventures, Lee, Lee and Pennings (2001) acknowledge that using revenue growth figures and organizational growth (employee growth) would have been the preferred measures for business growth, yet their data did not allow for this. Other important studies in this field (Bruderl and Preisendorfer, 2000; Delmar et al., 2003) confirm the importance of these measures for comparing nascent entrepreneurial performance throughout different industries. Delmar (2003) argues that with different indicators for growth, a researcher focuses on different stages in the growth process. Whenever an entrepreneur notices a change in demand, it enters the first phase of growth. This change in demand, will lead to a change in sales/ revenue; Sales can be seen as an intermediate variable, showing the existent trade-off between the demand and supply forces. The final phase in the growth process involves the changes in the organization: hiring new employees. Being the final variable, employee growth is also the least volatile since entrepreneurs wait with hiring until the sales/revenue growth is stable. In the literature section it has been discussed that measuring performance of nascent ventures is problematic because of the lacking track record of new ventures. In the PSED survey, entrepreneurs were asked about their realized revenue and profit, yet since these ventures are still in the starting phase most have not reached any operations. Comparing venture performance based on realized growth is thus a difficult thing. Rather this study will use growth expectancy and growth willingness as an indicator for nascent ventures growth. During the PSED interviews, respondents were asked about their attitude towards growth and their expectations in terms of revenue and employee growth. Earlier it was discussed that not all entrepreneurs have a pre-disposition towards growth, for various reasons. In the Handbook of Entrepreneurial Dynamics, Gartner et al. (2004) discuss the expectancy theory and business growth being a conscious decision. The willingness to grow is defined by the expectations an entrepreneur has about the outcome of his actions and the alignment between the outcome and the entrepreneurs goals. Research has shown that a positive predisposition towards growth leads to actual growth. Theories like the theory of planned behavior (Ajzen, 1985), expectancy theory (Vroom, 1964) and the theory of
44 MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 reasoned action (Ajzen & Fishbein, 1980) explain that individuals make their decisions on a combination of the perceived value of the outcomes and the probability that those outcomes will be accomplished. Gundry and Welsch (2001) acknowledge this positive relation between drive towards growth and realized business growth. Also Wiklund and Shepherd (2003) found empirical support for the positive relation between growth aspirations and realized growth. In preparation of developing the PSED, Gartner et al. (2004) note that a vast amount of researchers is using intentions, expectations and aspiration towards business growth to measure performance. There are some important differences between the two that will be used in this study; intentions reflect the extent to which the individual entrepreneur intends to put effort in reaching his goals, while expectations go beyond the individual level and take the outcome of the behavior into account. From this line of reasoning, I believe it is justified to use the growth expectations and growth willingness of entrepreneurs to measure growth performance. Expected Revenue Growth In the PSED surveys, the respondents were asked about the expected absolute annual revenue after the first 12 months of operation and after five years of operation. From Delmars (2003) study it became apparent that in over fifty per cent of the studies in his sample, growth was measured in a relative manner. In roughly one third of the cases absolute changes were used. In the remainder of the studies the dependent growth variables were logarithmized in order for them to correct for possible skewness. Clearly when studying nascent entrepreneurs the smallest ventures fare better when using relative measures; for instance when a company grows from 1 to 6 employees within a year, it has a 500% growth rate. When another company hires 5 employees when it already had 20 it only grows by 25%, while having the same absolute growth rate. Off course the same reasoning goes for revenues. So regardless of the used measure, growth will be dependent on the size of the firm. Yet because in the PSED we study nascent independent entrepreneurs who have all started from scratch, that is: with no revenues and only themselves or a small team as founders, the effect of this will be marginal. Therefore the absolute growth in revenue and employees will be used. Consequently this means that by deducting the expected annual revenue after five years of operation from the expected annual revenue after twelve months of operation we will get the absolute growth in yearly revenue. This number will then be treated as an ordinal variable. Expected Employee Growth The same reasoning applies to the expected employee growth; by taking the expected number of employees after five years and subtracting the number of employees after one year we find the absolute growth in employees. This will also be treated as an ordinal variable. Growth Willingness Growth willingness is a perceptual measure: respondents were asked to what extent they would like to grow their company. The answering possibilities were I want my company to be as large as possible, or I want a size I can manage by myself or with a few key employees. Subsequently the first category is characterized with high growth willingness, and the latter with low growth willingness. The variable is
MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 4S treated as a dichotomous (nominal) variable, were high growth willingness is coded 1, and low growth willingness 0. Dependent var|ab|e: |ength of the gestat|on process The time that nascent entrepreneurs need to get their firm up and running is likely to be different based on the type of firm, or in this study: on the level of sophistication of the firm. Entrepreneurs introducing greater levels of newness and/ or technological intensity are expected to take a longer time starting up a firm. In the dynamic process of new firm formation, entrepreneurs undertake a variety of activities that add to the gestation of a new venture. Securing resources, gaining legitimacy through f.i. firm registration, developing a product or service and making the first sale are some of these activities. In the PSED a list of common start-up activities is identified, which can be seen in Table X. Following Liao & Welsch (2008) and Reynolds & Miller (1992), the length of the gestation process is considered as the time in months that has elapsed between the occurrence of the first start-up activity and the last start-up activity, regardless of the nature of the events. The methodology for calculating the gestation duration is adapted from Liao & Welsch (2008): 1. Identify the earliest year and the last year in which the activities took place that the entrepreneur engaged in. 2. Convert the interval between the first and last activity from years to months. In some cases the respondents could not remember in what month an activity took place, so the interviewer asked about the time of year (season). The options were converted as follows: spring = March, summer = June, fall = September, and winter = December. 3. Calculate the difference between the earliest and latest occurrence of start-up activities. 4. Create a new variable with a timestamp for every respondent. Dependent var|ab|e: number of gestat|on act|v|t|es The PSED dataset contains a list of the following 33 start-up activities: Gestation Activity Category Began development of model, prototype of product/ service Resource Combination Began talking to customers Market & Promotion Began defining market opportunity for product/ service Planning First use of physical space Resource Combination Purchased materials/ supplies/ inventory/ components Resource Combination Initiated business plan Planning Began to collect information on competitors Planning Purchased or leased a capital asset Resource Combination Began to promote the product/ service Market & Promotion Receive income from sales of product/ service Market & Promotion Determined regulatory requirements Planning Open a bank account Legitimacy Established phone book or internet listing Legitimacy Developed financial projections Planning
46 MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 Began to devote full time to the start-up Resource Combination Established supplier credit Resource Combination Legal form of business registered Legitimacy Sought external funding Resource Combination Hired an accountant Legitimacy Liability insurance obtained for start-up Legitimacy Initiated patent, copyright, trademark protection Resource Combination Hired a lawyer Legitimacy Hired an employee Resource Combination Received first outside funding Resource Combination Joined a trade association Legitimacy Proprietary technology fully developed Resource Combination Initial positive monthly cash flow Market & Promotion Acquired federal Employer Identification Number Legitimacy Filed initial federal tax return Legitimacy Filed for fictitious name Legitimacy Paid initial federal social security payment Legitimacy Paid initial state unemployment insurance payment Legitimacy Filed for listing with Dun and Bradstreet Legitimacy Table 1 - Overview Gestation Activities Each respondent was asked (throughout all interview waves) whether or not an activity had occurred, and if so, when that activity had taken place. Dummy variables (dichotomous indicators) will be created for each activity, with value 1 meaning that an activity took place, and value 0 when the activity has not occurred. Another variable named Total number of gestation activities is then created by simply adding up the values of the previously created dummy variables for the start-up activities. In line with the research of Liao and Welsch (2003) four underlying variables have been created. We are interested in differences in planning activities, resource combination activities, market & promotion activities, and legitimacy building activities. Each of the start-up activities was assigned one of the four activity categories (see table 1), and dummy variables indicate whether or not an activity had occurred. Similarly to above, a new variable with the total number of activities per category was created.
MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 47 Moderat|ng var|ab|e: Venture dec|s|on mak|ng strategy The current state of research around effectuation and causation strategies has been extensively discussed throughout the literature section. In the past decade a stream of conceptual studies has emerged, and lately empirical articles have also started to appear. Most of these studies have deliberately juxtaposed expert entrepreneurs and less experienced entrepreneurs. The setups of these studies were experiments where think-aloud protocols were used to gather evidence from small samples. Petty et al. (2011) show that the research conducted so far has used open-ended data that need to be interpreted for meaning, and that most of the studies used 90 participants or less. The authors highly recommend measuring effectuation using larger sample sizes. Yet those studies specifically designed their research to measure effectual and causal reasoning, whereas in this thesis an existing dataset will be used. This thesis is the first attempt to use the Panel Study of Entrepreneurial Dynamics for measuring effectuation, and also the first study to measure effectuation in a large sample that represents the entire entrepreneurial population of a country. Having a very limited reference framework means that the measurement of the effectuation and causation constructs is rather experimental yet challenging. In the next section the measurement of the constructs will be discussed. Lffectuat|on The extent to which nascent entrepreneurs rely on effectual decision-making will be assessed by selecting questions that were asked throughout the six waves of data collection in the PSED. Starting point for selecting these questions are the measures of effectuation developed by Chandler et al. (2011). To sum up the pillars of effectuation: when entrepreneurs use effectuation processes they experiment with alternatives in which potential losses in the worst-case scenario are affordable, they use pre- commitments and strategic alliances in an attempt to control an unpredictable future, and they remain flexible so they can take advantage of changing environmental contingencies. Chandler et al. (2011) validated a series of items during two field studies and concluded that effectuation is a formative, multidimensional construct with three associated sub-dimensions: experimentation, affordable loss and flexibility. The fourth item, pre-commitments, also loaded on the causation measures, which means that it is shared by both effectuation and causation strategies. The explanation that Chandler et al. (2011) provide for this shared construct is that the effectuator (entrepreneur using an effectuation strategy) uses pre-commitments to reduce uncertainty, minimize cost of experimentation, and maintain flexibility. The causation approach uses pre-commitments and alliances as a way to acquire essential resources and implement plans. Components of the causation processes as described by Sarasvathy (2001) include envisioning the end from the beginning, maximizing expected returns, business planning and competitive analyses to predict an uncertain future, and exploiting pre-existing knowledge. The questions that have been selected from the PSED interview codebook contain both information on activities of the firm and personal characteristics of the entrepreneur. Especially in the starting phase of the venture it is believed that the entrepreneur reflects the actions of the venture and vice versa. Therefore I believe it is justified to assume that questions in the PSED that entail personal characteristics of the entrepreneur reflect the (decision-making) strategy of the start-up. The following figure features the items validated by Chandler et al. (2011):
Figure 5 - Causation & Effectuation constructs As mentioned, the interview protocols for the PSED have been studied to find questions that approximate the items identified by Chandler et al. (2011). Per question, the corresponding item from Chandler et al.s (2011) framework will be mentioned, as well as a rationale why I think that it adequately measures effectuation. Moreover, only those questions in the PSED that are MECE, or mutually exclusive and collectively exhaustive, are considered. No open questions were selected. For all 13 items a score is assigned to each answer category; an effectual answer is scored +1, a causational answer -1 and neutral answers are scored 0. Finally the total score for all items is computed, after which the following division has been made: a total score between -3 and +3 is a neutral strategy, any score above 3 is an effectual strategy, and any score below -3 is a causational strategy. From the total score a new categorical variable has been computed that resembles the three possible decision-making strategies. Item 1 PSED question: What is the current form of your business plan? Is it unwritten or in your head, informally written, or formally prepared? Construct Chandler et al.: We designed and planned business strategies Effectual answer: Unwritten or in your head, Informally written Neutral answer: - Causational answer: Formally prepared Rationale: Causation is characterized by a carefully planned linear process. Business planning is one of the most tangible aspects of the causation strategy. A formally prepared business plan therefore is a good example of a causation approach. Plans that have been informally written, or that have not been written at all indicate an effectual approach. Informal plans (or no plans at all) leave room for ambiguity, flexibility and adaptability.
MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 49 These are characteristics that go hand-in-hand with an effectuation strategy.
Item 2 PSED question: Has an effort been made to collect information about the competitors of this new business, will an effort be made to collect information about competitors in the future, or is this not relevant to the new business? Construct Chandler et al.: We researched and selected target markets and did meaningful competitive analysis Effectual answer: No Neutral answer: Not relevant Causational answer: Yes Rationale: In the literature section it has been discussed that one of the key points of the causation strategy is competitive analysis. Mapping the competitive forces and finding ways to eliminate them is characteristic for causation. Effectuation on the other hand has more of a stakeholder perspective. It looks at what qualities the venture has and how to make the most of it, instead of looking at how others do it.
Item 3 PSED question: Has an effort been made to define the market opportunities for this new business, will an effort be made to define market opportunities, or is this not relevant for this new business? Construct Chandler et al.: We researched and selected target markets and did meaningful competitive analysis; We designed and planned production and marketing efforts Effectual answer: No Neutral answer: Not relevant Causational answer: Yes Rationale: Effectuation means taking advantage of opportunities when they arise, being flexible and adaptive. The effectual entrepreneur anticipates as soon as an opportunity comes up, where the causational entrepreneur tries to think of opportunities in a systematic way. Defining opportunities upfront is therefore an example of the causation approach, not defining them is effectual.
Item 4 PSED question: Have financial projections, such as income or cash flow statements or break-even analyses, been developed, will financial projections be developed in the future, or is this not relevant for the new business? Construct Chandler et al.: We analysed long run opportunities and selected what we thought would provide the best returns; We organized and implemented control processes to make sure we met objectives Effectual answer: No Neutral answer: Not relevant
S0 MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 Causational answer: Yes Rationale: This item is in line with the business planning item. Causational entrepreneurs carefully calculate the expected returns whereas effectual entrepreneurs live by the affordable loss principle. Making financial projections is thus associated with a causational approach towards entrepreneurship.
Item 5 PSED question: In terms of current work activity, are you working for others for pay? Construct Chandler et al.: We were careful not to commit more resources than we could afford to lose Effectual answer: Yes Neutral answer: - Causational answer: No Rationale: Causational entrepreneurs follow a linear path towards a predefined goal. They save up to start their own company and take certain risks in order to reach their goals. A characteristic of effectual entrepreneurs is that they try to limit their possible losses by balancing out against other opportunities. The causational entrepreneur has a longer preparation period and wants to launch a perfect product from the start. The effectual entrepreneur starts with an idea and shapes that idea along the process. In other words, he or she just starts. Once causational entrepreneurs start with their venture, they go for it all the way, and are likely not to have any on-the-side jobs. Effectual entrepreneurs however may work for others to balance out the (financial) risks while simultaneously working on their start-up. Item 6 PSED question: There is no limit as to how long I would give maximum effort to establish this new business. (five-point Likert) Construct Chandler et al.: We were careful not to commit more resources than we could afford to lose; We had a clear and consistent vision for where we wanted to end up Effectual answer: 1,2 Neutral answer: 3 Causational answer: 4,5 Rationale: Causation and effectuation can be clearly contradicted here; the causational entrepreneur works towards a predefined goal and does not leave that path. The effectual entrepreneur works according to the affordable loss principle and would thus only put effort in it to the extent that the potential losses are bearable. Also, the effectual entrepreneur will always make the best of the situation, so if a better opportunity arises he or she will venture into a new direction. Upfront it is thus hard to define when the effectual entrepreneur will quit its efforts. Item 7
MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 S1 PSED question: My personal philosophy is to do whatever it takes to establish my own business. (Five-point Likert) Construct Chandler et al.: We were careful not to commit more resources than we could afford to lose; We had a clear and consistent vision for where we wanted to end up Effectual answer: 1,2 Neutral answer: 3 Causational answer: 4,5 Rationale: The same reasoning as with item 6 applies here. The effectual entrepreneur will choose the option/ opportunity that is most appealing, yet the causational entrepreneur will do whatever it takes to reach his goals. Item 8 PSED question: I enjoy having a clear and structured mode of life. (Five-point Likert) Construct Chandler et al.: We organized and implemented control processes to make sure we met objectives; We avoided courses of action that restricted our flexibility and adaptability Effectual answer: 1,2 Neutral answer: 3 Causational answer: 4,5 Rationale: Entrepreneurs with a clear and structured personality are likely to engage more in planning and forecasting activities, and are likely to consider the entrepreneurial process as a rational process. Effectual entrepreneurs do not lead their venture in a bureaucratic way, yet they are likely to do it more intuitively. It is therefore believed that a clear and structured mode of life is associated with a causation approach. Item 9 PSED question: I enjoy the uncertainty of going into a new situation without knowing what might happen. (Five-point Likert) Construct Chandler et al.: We avoided courses of action that restricted our flexibility and adaptability; We were flexible and took advantage of opportunities as they arose Effectual answer: 4,5 Neutral answer: 3 Causational answer: 1,2 Rationale: Effectuation and causation can be clearly contradicted through this statement. The causational entrepreneur wants to make fully informed decisions and does not like surprises. The effectual entrepreneur on the contrary has a preference for uncertainty and thrives on opportunities as they arise. Item 10 PSED question: I dislike it when a persons statement could mean many different things. (Five-point Likert) Construct Chandler et al.: We were flexible and took advantage of opportunities as they arose
S2 MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 Effectual answer: 1,2 Neutral answer: 3 Causational answer: 4,5 Rationale: One of the characterising aspects of effectuation is the preference for ambiguity (which is exactly what the statement above entails). Effectual entrepreneurs will interpret the situation so that it results in the best outcome for them. Causational entrepreneurs are more rigid and want clarity so that they can make fully informed decisions. Item 11 PSED question: When thinking about a problem, I consider as many different opinions on the issues as possible. (Five-point Likert) Construct Chandler et al.: We experimented with different business models/ products. We tried a number of different approaches. (Effectuation). We had a clear and consistent vision for where we wanted to end up. (Causation). Effectual answer: 4,5 Neutral answer: 3 Causational answer: 1,2 Rationale: An important aspect of the effectuation approach is the stakeholder orientation. Any person or idea can contribute as long as it adds to the greater good of the venture. So as long as there are opinions considering the sake of the venture, the entrepreneur would like to hear them. Causation means focus, straight to the end zone. The goal is pre-defined, and other opinions are ought not to disturb reaching that goal. Item 12 PSED question: To fulfill a personal vision. (To what extent was that important - no extent, a little, some, a great, or a very great extent?) (Five-point Likert) Construct Chandler et al.: We had a clear and consistent vision for where we wanted to end up. Effectual answer: 1,2 Neutral answer: 3 Causational answer: 4,5 Rationale: The same reasoning applies as with item 11. Item 13 PSED question: To have the power to greatly influence an organization. (To what extent was that important - no extent, a little, some, a great, or a very great extent?) (Five-point Likert) Construct Chandler et al.: We had a clear and consistent vision for where we wanted to end up. Effectual answer: 1,2 Neutral answer: 3 Causational answer: 4,5 Rationale: The same reasoning applies as with item 11. It is not the entrepreneurs goal to greatly influence an organization. Anyone can influence the organization as long as the main purpose is to make the idea behind the venture stronger.
MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 S3 Analysis Data Ana|ys|s The University of Michigan and the PSED research program have made the PSED datasets freely available for scholars. The sheer size of the dataset however requires some work to be done before the data is ready for analysis. Over the course of the PSED research program, a tremendous amount of data has been gathered. Six waves of one-hour interviews per respondent have generated over 8000 variables, of which only a fraction is needed in this study. To test the proposed relations and hypotheses the Statistical Package for the Social Sciences (SPSS, version 20) has been used. The first step in the process after loading the dataset into SPSS is cleaning the dataset. Using the PSED II codebook (containing the interview questions), and the variables and underlying items a new dataset had been created consisting of little under 200 variables. Subsequent actions involved the actual computation and recoding of the variables that are to be tested. What was already mentioned in the methodology chapter is that only independent start-ups shall be taken into account in this study, and that start-ups with some precedent in an existing company are left out of the dataset. Based on the nature of the variables and distribution of the data, a selection of statistical tests has been made. The conceptual model in this study involves a multitude of data types: pure categorical variables (business status, growth willingness, decision-making strategy), composed ordinal variables (technological intensity/ newness), count data (number of gestation activities), and continuous data (length of gestation process, revenue & employee growth). The emphasis in this study lies on researching the gestation process and the differences based on technological intensity and innovativeness, and the possible influence of a decision-making strategy. The initial focus lies on testing direct relationships between the independent and dependent variables. In case any significant relationships are found regression models will be made to account for control variables. Before a selection of statistical tests can be made, the continuous data should be tested for normality and the nature of the distribution; more about this later. The tests that will be used in this study are cross tabulations (Chi-square correlations) for relationships between two categorical variables; one-way Anova for relationships between categorical independent variables and continuous dependent variables where the data is assumed to be normally distributed; Kruskal-Wallis and Mann-Whitney tests for relations between categorical independent variables (resp. >2 and 2 categories) and continuous dependent variables where the data is assumed to be not normally distributed; Poisson regression for analysing count data; two-way Anova and OLS for the relations between independent variables, control variables and continuous dependent variables; and multinomial logistic regression for the relations between independent variables, the moderating variable and the discrete dependent variables. We|ghts One of the appealing aspects of the PSED dataset is that it accurately represents the start-up population in the United States therefore generalization to the entire US population is justified. The researchers in the PSED program have compared the demographics of the respondents to the demographic characteristics of the US population. Based on this comparison post-sampling stratification weights have been given to each respondent so that the sample matches the US population in age, race, gender and educational level. When using the PSED dataset for empirical purposes the weights should be applied to
S4 MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 the data to ensure generalizability (Gartner et al., 2004). Two other benefits of applying the weights is that they account for sampling biases and differential non-response (Schjoedt and Shaver, 2007). Data d|str|but|on and out||ers Before diving into the statistical tests the continuous data should be (visually) inspected to get to know the distribution and account for possible outliers. Normality plots and Q-Q plots have been used to visually identify outliers and the nature of the data distribution. Grubbs test (also called Extreme Studentized Deviate) has been applied to identify outliers. Furthermore Shapiro-Wilks tests have been used to test for normality. When results of this test are significant the null-hypothesis that the data is normally distributed should be rejected. Each continuous variable is checked for normality and outliers in this section. It is a given that this process is subject to subjectivity and that one should not blindly follow the statistical procedures/ plots. A reality check is applied to each variable before it is decided to exclude data from further analysis. Lxpected emp|oyee count after f|ve years Grubbs test for outliers looks for the most extreme value and decides whether or not it is too far removed from the other observations. Problematic with this method, is that repeated iterations of this test almost always result in more outliers. When the test is applied to the expected employee count, outliers are detected up to 30 employees. This means that any venture with an expected employee count of over 30 after five years is considered to be an outlier. Consequently, this would mean that 58 observations should be removed from the dataset, 6% of the data. In this study US start-ups are researched, and initial descriptive results show that the absolute majority are low-growth oriented ventures which explains why observations are quickly considered to be outliers. However a reality check shows that an expected employee level of 30 is not unthinkable over a course of five years. Visual interpretation shows that several observations have an expected employee count of 200; then there are nine observations with values of 300 to 5000. These are considered to be outliers and will not be taken into account. Next, tests for normality are conducted. Shapiro-Wilks significance levels show that the null-hypothesis should be rejected the data is not normally distributed. Visual interpretation shows that the data is positively skewed, with a skewness of 5,573. A rule of thumb is that skewness greater than 1 is considered not-normally distributed. These tests have both been conducted with and without taking outliers into account, and the results are similar. Log transformation of the data would be a possible outcome for making the data approximately normal. To deal with zeros a log+1 function has been conducted; every observation is increased with 1 to get rid of zeros. The same tests for normality and skewness have been conducted again however results show that data is still not normally distributed. This means that parametric tests are not appropriate for this variable: non-parametric tests like Kruskal- Wallis, Mann-Whitney and Poisson regression are more appropriate. Lxpected emp|oyee growth Inspection of the employee growth plots shows that also this variable is positively skewed and not normally distributed. Skewness values and Shapiro-Wilks significance levels confirm this. Log transformation has been applied, after which the data resembles closer to a normal distribution. Skewness value is now lower than 1 however Shapiro-Wilks is still significant. Outliers have been detected following the same procedure as above, after which seven observations are considered outliers
MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 SS (>1,60). Despite that skewness is now within acceptable levels, the data still seems not normally distributed. Again, non-parametric will be primarily used for this variable. Lxpected revenue after f|ve years Initial tests of non-logarithmized data show that also expected revenue is positively skewed and not normally distributed. Log transformations however clearly improve the distribution. The histogram shows a relatively normally distributed dataset, and Q-Q plots confirm this. Shapiro-Wilks however is still significant. Both parametric and non-parametric tests will be conducted to see if there are any differences in results. Considering outliers, when the 5% trimmed mean is analysed there is no big difference compared to the original mean (5,06 vs. 5.08). Boxplots however show that there are twelve outliers, ranging from 50.000.000 to 500.000.000 in expected revenues (log value: 7.7 8.7). Lxpected revenue growth Similar to the variable above, the data is log-transformed to better resemble a normal distribution, since it was also positively skewed. Boxplots and Q-Q plots show outliers both on the right (upper) and left (lower) side of the distribution. Four observations on the upper side (log value: 2.15 3.00) and two observations on the lower side (log value: -1.46 1.48) are considered outliers. Repeated normality tests show that skewness is still present and that the distribution is not normally distributed. Therefore non- parametric tests will be used. Length of the gestat|on process Also this variable has been log transformed because the initial variable did not resemble a normal distribution. Despite the fact that the converted variable looks better, and skewness is eliminated, the distribution is not normal considering the Shapiro-Wilks value. The histogram shows a relatively normal distribution, yet the Q-Q plots do not. Both on the upper and lower sides some outliers have been detected. Three observations had a gestation period of 0, which is not possible realistically. Six observations have a gestation period of more than 290 months, or 24 years. These observations will not be taken into account. Grubbs test for this variable shows that any observation with more than 165 months should be discarded. This however would result in deleting too much data. Also one should be aware when repeatedly using Grubbs test. The only pure outliers that have been visually identified will be discarded. For this variable visual interpretation of the transformed variables histogram shows a relatively normal distribution, yet Shapiro-Wilks proves otherwise. Again, both parametric and non- parametric tests will be used to see if there are any differences in results.
S6 MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 Results Descr|pt|ve resu|ts The initial PSED II dataset contains 1214 observations. However conform what was earlier discussed, only observations that resemble independent start-ups are taken into account in this study. Consequently, the remaining observations that qualify are 998. These 998 start-ups have been followed on a yearly basis over a course of six years. In this period 198 startups, or 19,8% succeeded to become a new firm. 470 start-ups (47,1), or almost half of the respondents quit their effort without reaching the new firm status. The remaining 239 (23,9%) were still active start-ups after six years and neither reached the new firm or quit status. Then there were 91 respondents who participated in the interviews but for some reason their business status could not be identified. When looking at growth aspiration, 818, or 82% of all cases prefer a business size that is manageable by the entrepreneur or with a few key employees. Only 174 (17,4%) wants to grow as large as possible. The absolute majority of firms (629, 63%) is founded by men. Only one quarter of the respondents starts the firm before they are 35 years of age, while more than half of the entrepreneurs is between 35 and 54 years old. For 55% of the respondents this venture is their first effort at starting a business. 27 entrepreneurs have started more than five businesses and for 81% this is the only business initiative that is currently worked on. One-fifth of the entrepreneurs already owns one or more businesses. Most entrepreneurs have either finished high school (22%), college (24,3%) or have a bachelor degree (23,7%). Out of all business initiatives, 22,6% consider themselves high-tech. Roughly the same number (22,8%) think their business is characterized by high research & development intensity. 21% has developed proprietary technology that no-one else can use, and almost 29% has filed for a patent. In order to measure technological intensity the competitive strategy has been asked for: 12% of all cases thinks that developing advanced product/ process technology, developing intellectual property, or the scientific expertise of the start-up team is most important for being a successful competitor. To sum up, over 40% of the firms have nothing to do with technology whatsoever, 27% has answered positive to one of the above items, and 30% answered positive to two items or more. Subdividing the scores into high and low technology intensive firms, exactly 70% is considered low-technology and 30% high-technology. 17% of all start-ups offer a product or service that is completely new or unfamiliar to their customers, whereas half of all start-ups offer no innovative product or whatsoever. Looking at the market newness and competition, one-fifth of the start-ups mention that there are no other businesses offering the products or services in their market, around 50% state that there are some other competitors and the remaining 34% has many businesses offering the same product or service. 22,5% of the respondents indicates that the technology or procedures for making the product/ service were not around more than five years ago, meaning that they offer a relatively new product. To sum these items up: 65% of all start- ups have little to do with product or market newness, while 35% does. When it comes to the time that entrepreneurs spend (trying to) establishing their firm, the average gestation length is 44,6 months, more than 3,5 years. This however does not take into account the status of the start-up effort. On average it takes entrepreneurs 32 months to reach the new firm status, and 35 months to call it quits. At the end of the PSED II research program, the entrepreneurs who were still trying had already spent 73 months on their business.
MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 S7 There seems to be a big spread in revenue expectancy for the respondents; although earlier discussed outliers have been neglected in performing the analysis, non-logarithmized data shows a skewed distribution. The average revenue expectancy after five years of operations is $611.000, yet the 5% trimmed mean is $277.000. Looking at the measures for central tendency shows the following: both the mode and median are $100.000, and 75% of all respondents expect to make less than $300.000. The same reasoning applies to the expected number of employees. Over 40% thinks that in five years their business will consist out of the founder and one or two key employees. The average expectancy is 9,4 employees, where the 5% trimmed mean is 5,26 employees. Most entrepreneurs see themselves still as the sole employee in five years, whereas one-quarter of the start-ups think they will have more than eight employees. In terms of founding activities, those entrepreneurs that succeeded in establishing a new firm on average needed 20 out of 33 possible start-up activities, subdivided in 5,2 out of 11 activities related to resource- combination, 3,8 out of 5 planning activities, 3,8 out of 4 market/ promotion activities and 7,5 out of 15 legitimacy building activities. 8|var|ate ana|ys|s 1echno|og|ca| Intens|ty * 8us|ness Status For answering hypothesis X we are interested in the relationship between the technological intensity of a new business effort and the status of the business at the end of the research program. It was hypothesized that technologically intensive firms succeed less often in establishing a new firm compared to their less sophisticated counterparts. For measuring technological intensity, five items were scored for each respondent, leading to an ordinal scale from 0 to 5. Yet because scores 3,4 and 5 are scarcely represented in the dataset it was chosen to recode to scale to a binary variable: scores 0 and 1 indicate a low technological intensity and 2 to 5 indicate high technological intensity. Both variables reflect categorical measurement scales, which require cross tabulation. Pearsons chi-squared test looks whether the frequency distribution of events in an observed sample is consistent with a distribution that is theoretically expected. Below are the results for the chi-squared analysis:
Table 2 - Startup Status * Technology Intensity The asymptotic two-sided significance level (p = .002) of Pearsons chi-square test indicates that there are significant differences between the observed and expected counts for the category combinations. The null hypothesis that the event frequencies follow a theoretically expected distribution should therefore be rejected. Based on this significance level we cannot indicate a direction of the results, for that we should look at the observed versus the expected counts. What comes to notice is that for technology intensive firms that have reached new firm status the expected count is higher than the observed count; for low technology exactly the opposite. There seems to be a disproportionally high number of high-technology firms that still is an active start-up. Also low technology intensive firms seem to quit more often and high technology start-ups less often. Differences for these latter two groups between expected and observed counts however are relatively small. Before we conclude this first analysis however we should question what we would like to know. We are interested in differences in gestation outcomes based on technological intensity. When thinking logically, the active start-up group has not yet reached an outcome in the gestation process and can therefore not be compared to the new firm and quit status. The tables below show the same analysis for start-ups who have completed the gestation process:
Table 3 - Startup Status (without Active) * Technology Intensity In this case, Pearsons chi-square does not yield any significant results. The p-value is .204, well above the alpha-level of 0.05. Although the differences in expected and observed counts show that technologically intensive start-ups quit more often than expected and reach new firm status less often then expected (and exactly the opposite holds for low-tech start-ups), the results are not significant. Based on the two analyses performed so far, we can conclude that there are no significant differences in completing the gestation process and the technological intensity. The reason why the first analysis came out with significant results must therefore lie in the active start-up group; this was also where differences between observed and expected counts were greatest. Although this is not the discussion section yet, a preliminary thought would be that technology intensive firms have a longer gestation period. More about this later, when the length of the gestation process is analysed. Newness * 8us|ness Status Similar to the relationship between technological intensity and business status we test for possible effects of the degree of newness on business status. It was hypothesized that start-ups who are introducing greater degrees of newness less often reach the new firm status than those with a less extent of newness. To test this hypothesis (2a) we turn to cross tabulation and Pearsons chi-square analysis again. Below are the results:
Table 4 - Startup Status * Newness The results above indicate that the observed counts come fairly close to the expected counts, which becomes also evident from the high p-value: .408. There are thus no significant differences based on the newness associated with a start-up. Although this test does not give significant results we should apply the same line of reasoning as with the technological intensity and only test for start-ups who have completed the process (either new firm or quit). The chi-square analysis is repeated for firms with business status new firm or quit:
Table 5 - Startup Status (without Active) * Newness What was to be expected is that based on two categories for business status the relationship is still not significant (p = 0.298). Differences between observed and expected counts do indicate that higher newness implies less often new firm status and more often quit status, yet because the results are not significant no statistical proof exists for the directionality of the data. The null hypothesis is to be maintained: there is no relation between the level of newness and business status. To see whether or not the individual items had some correlation with business status, they were also cross-tabulated; this neither led to significant results. Venture Soph|st|cat|on * 8us|ness Status Besides the individual effects of newness and technological intensity we are interested whether or not there is a combined effect between the two. Testing for this effect can be done in two ways; most common would be to build a multinomial logistic regression model, that could also include multiple control variables. However since we are dealing here with two independent variables with two categories each an easier approach would be to build a new categorical variable that combines both. Consequently we end up with a variable with four outcomes: 1) low newness, low technological intensity, 2) low newness, high technological intensity, 3) high newness, low technological intensity, and 4) high newness, high technological intensity. These categories can then be tested against the business status variable using a cross tabulation and chi-square analysis. The results are shown below:
Table 6 - Startup Status (without Active) * Sophistication The results show that the expected and observed counts are quite close and that the p-value of .522 confirms that there is no significant relation. This was to be expected since the previous analysis revealed that newness does not correlate with business status. The earlier mentioned multinomial logistic regression was also carried out, of which the results confirmed that there is no significant relation. 1echno|og|ca| Intens|ty * Lxpected kevenue Here we are interested in whether there is a significant relationship between the technological intensity of the start-up and its revenue expectancy after five years of operations. Earlier in this chapter we have seen that the variable expected revenue was positively skewed in its raw form; log transformation clearly improved the distribution however. Since tests for normality did not give exhaustive results, both parametric and non-parametric tests will be used here. First we assume that the data is assumed to be not normally distributed. Because we have an independent categorical variable (with two outcomes) and a non-normally distributed continuous dependent variable, Mann-Whitney U is the appropriate test. The results are shown below:
Table 7 - Technology Intensity * Revenue The first table shows the number of observations per category and the mean rank. Because the high category clearly has a higher mean rank this indicates that there is a positive relation between the two variables. Then when we look at the test statistics we see that the asymptotic two-sided significance level is .000 or highly significant with an alpha-level of .05. The null hypothesis that the distributions in both independent samples (high vs. low) are equal should thus be rejected. To clarify the directionality of the relationship between technological intensity and revenue expectancy even more, table 39 (appendix) shows the result of a Kruskal-Wallis analysis performed when technological intensity is measured on a five-point scale. The results indicate that the mean rank neatly increases with the level of technological intensity. The p-value of .000 again indicates a highly significant relation. Then finally a one-way Anova test was carried out under the assumption that the data is normally distributed. The results can be found in table 40 (appendix). They confirm that a higher technological intensity is paired with higher revenue expectancy. When measured on a scale, the post hoc tests of the Anova analysis show that the results are especially significant between values 0 and 1 on the one hand, and values 2, 3, 4 and 5 on the other. The results become less significant between higher values, yet an explanation for this might be the low number of observations. To conclude: both parametric and non-parametric tests show highly significant positive correlations between technological intensity and revenue expectancy.
64 MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 Newness * Lxpected kevenue The table below shows the results of the Mann-Whitney analysis between the degree of newness and the expected revenue after five years of operations. It was hypothesized that a higher degree of newness was paired with higher expected revenues. With a p-value of .025 the null-hypothesis is rejected and we conclude that the samples are not evenly distributed. The high newness group has a significantly higher mean rank than the low group. When the Kruskal-Wallis test is performed on newness as a scale variable, the results are a Chi-square of 7.893 and a p-value of .048 (see table 45), which is just within the .05 rejection level. The results show an increasing mean rank for all scores.
Table 8 - Newness * Revenue Venture Soph|st|cat|on * Lxpected kevenue The expected relation that higher sophistication (combined newness and technological intensity) leads to higher expected revenue can be tested with a Kruskal-Wallis test, of which the results are shown below. They show some interesting results; the samples are not evenly distributed judging the significance level of .000. The group with high technological intensity and high newness has the highest mean rank, followed by the high TI low NE group. Technological intensity thus seems to be more important to expected revenue than newness, also because the gap in mean rank between the two categories with high technological intensity is big compared to the two categories with low intensity (526 and 512 compared to 427 and 414). Assuming that the data is relatively normally distributed, Oneway Anova was carried out, of which the results are in table 46. The results show a significant difference between the means of the groups, yet post-hoc test results warrant care. The mean differences between groups are only significant for high technological intensity. Differences between the High TI High NE and High TI Low NE are not significant, which leads to believe that the only reason this test yields significant results is because of the effect of technological intensity.
Table 9 - Sophistication * Revenue 1echno|og|ca| Intens|ty * kevenue Growth Lxpectancy Based on the analysis we can say something about the order of magnitude regarding revenue expectancy, yet it does not say anything about expected growth over the years. In this paragraph we measure the growth expectancy between the first and fifth year of operations an link it to technological intensity. The statistical tests used are similar to the previous paragraph.
Table 10 - Technology Intensity * Revenue Growth Above are the results for the non-parametric Mann-Whitney test. The high technological intensity group has a higher mean rank (497,59 vs. 410,79) than the low group, and this relation is statistically
66 MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 significant looking at the p-value of .000. The null-hypothesis that the samples are evenly distributed should thus be rejected. Result of the Kruskal-Wallis test and Oneway Anova both show highly significant correlations. They can be found in table 42/43. The Kruskal-Wallis shows an increased mean rank for every score from 0-5. Posthoc results of the Oneway Anova show that the differences between scores 0 and 1, and the rest are highly significant. Newness * kevenue Growth Lxpectancy There also seems to be significant correlation between the degree of newness and the revenue growth expectancy. The mean rank of the high newness group is significantly higher than the low group, judging the .001 significance level. The null hypothesis that revenue growth expectancy is not significantly different for both samples should thus be rejected. Again a Kruskal-Wallis analysis has been carried out to consider the effects when newness is measured on a scale, of which the results prove (Chi- square = 23,021 and p-value = .000) that the mean ranks for revenue growth expectancy neatly increase with the newness scores (table 48). Finally, the Oneway Anova that has been done under the assumption that data is normally distributed confirms that the means are significantly different (p=.005, see table 49) across groups.
Table 11 - Newness * Revenue Growth Venture Soph|st|cat|on * kevenue Growth Lxpectancy The same analysis description that was given for the relation between venture sophistication and revenue growth expectancy is applicable here. Initial results from the Kruskal-Wallis test below show that the mean ranks are significantly different (p= .000). The groups with high technological intensity also have the highest mean ranks. Then there seems to be an effect of newness also, because the mean rank for Low TI High NE is higher than the rank for Low TI Low NE. With Oneway Anova and post hoc testing (under the assumption that the data is normally distributed) we can test whether the mean
MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 67 differences between groups are statistically significant. The table in Appendix 52 shows that technological intensity clearly has the strongest effect on revenue growth expectancy, and that despite the fact that newness seems to have some positive effect, this effect is not significant. We must thus conclude that the reason why the venture sophistication venture yields positive significant results is largely because of the technological intensity effect.
Table 12 - Sophistication * Revenue Growth 1echno|og|ca| Intens|ty * Lmp|oyee Lxpectancy We hypothesized a positive relationship between technological intensity and employee expectancy. Earlier it was noted that employee expectancy is not normally distributed, even after log transforming the data. Thus to test for this possible effect we use non-parametric test methods: Mann-Whitney and Kruskal-Wallis. The result for the latter can be found in appendix 57, Mann-Whitney results are below:
Table 13 - Technology Intensity * Employees The test statistics show that there is a significant difference in mean ranks between the two samples. The high technological intensity group has a mean rank of 575, versus 438 for the low technological intensity group. The distributions are significantly differing (p= .000). Kruskal-Wallis confirms that increased intensity is paired with higher employee expectancy (p= .000, see Appendix 57). The mean ranks increase evenly with the score on the technological intensity score; except for score 5, but this might be due to the limited number of observations (n=10). Newness * Lmp|oyee Lxpectancy The null hypothesis here would be that across the different newness samples (high vs. low) the distributions over the dependent variable, employee expectancy, are equal. The results however indicate otherwise and rule in favour of the alternative hypothesis. The mean rank for high newness is significantly higher than that for low newness, with a p-value of .000. The results of the Kruskal-Wallis also indicate a (significant) positive linear pattern; mean ranks increase with the scores on the newness scale. For the Kruskal-Wallis results, see appendix 54.
Table 14 - Newness * Employees Venture Soph|st|cat|on * Lmp|oyee Lxpectancy Both newness and technological intensity have shown to have significant correlation with employee expectancy. We are also interested if the two variables have a combined effect; more specific if sub- samples that are characterized by different combinations of technological intensity and newness significantly differ from each other with regard to the extent of employee expectancy. We test this by using Kruskal-Wallis, of which the results can be found below. Despite that the normality-assumption was dropped for this variable, we will also run post hoc results together with a Oneway Anova to see what the between-groups differences are.
Table 15 - Sophistication * Employees
70 MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 Looking at the mean ranks for the different groups it becomes apparent that again the High TI High NE group comes out on top, and thus has the highest expected employee count. It is followed by the High TI Low NE group. Similar to previous analyses, technological intensity seems to be the main reason for the significance of the test. The High TI High NE group has a higher mean rank than the High TI Low NE, indicating that there is some effect of newness. Unfortunately the Kruskal-Wallis test does not allow for between-group analysis. From the post hoc results of the Oneway Anova analysis (appendix 55) we see that there is a significant difference in means across groups (p= .000). However, the High TI groups have significantly higher means than the other two groups. There seems to be a slight positive effect of newness, yet because the results of between-group analyses do not give significant results regarding high newness the results are somewhat difficult to interpret. The assumption of normality was dropped, so parametric tests may give incorrect results. When venture sophistication was tested against the dependent variables regarding revenue expectancy, post hoc testing with Oneway Anova was also used and yielded similar results. In that case the dependent variables more or less reflected a normal distribution so Oneway Anova could be used to support the non-parametric tests. Because results are somehow similar in this case it seems justified to believe that the positive effect of venture sophistication is again caused by technological intensity. 1echno|og|ca| Intens|ty * Lmp|oyee Growth Lxpectancy Employee growth expectancy appeared to be positively skewed and not normally distributed. After log transformation of the data the plots indicated that the data more closely resembled a normal distribution, but that still parametric have to primarily used. It was hypothesized that employee growth expectancy is positively correlated with the level of technological intensity. Below are the results of the Mann-Whitney test, which confirm that the null hypothesis should be rejected. The mean rank for high technological intensity (547) is significantly (p= .000) higher than that for low technological intensity (474). Also Kruskal-Wallis analysis confirms that an increased score on the technological intensity scale is paired with a higher mean rank for expected employee growth. Finally Oneway Anova was carried out, of which post hoc results (see appendix 58) indicate that most neighbouring scores are not significantly different (f.i. score 1 is not significantly different to 2, but it is to 3, 4 and 5). Based on the three tests we can thus conclude that the employee growth expectancy distribution is significantly different for different levels of technological intensity.
Table 16 - Technology Intensity * Employee Growth Newness * Lmp|oyee Growth Lxpectancy It was hypothesized that also greater degrees of newness positively correlated with the employee growth expectancy. To test this we again use Mann-Whitney and Kruskal-Wallis analyses. The results below show that the mean ranks are significantly different across samples: with a p-value of .040 the null- hypothesis should be rejected when using a .05 significance level. The mean rank for the high newness group is 509, compared to 471 for the low newness group. Higher degrees of newness thus seem to lead to higher employee growth expectancy. Kruskal-Wallis results (see appendix 60) are less conclusive: there is a marginally significant correlation between the two variables, considering the p-value of .081. The mean ranks for the different scores increase linear, however there is a limited number of observations (n= 27) on the upper end of the newness scale, which might explain the marginal significance that was found. So despite other analyses being more significant, also in this case the alternative hypothesis can be rejected: there is a positive correlation between the degree of newness of a start-up and the expected growth in employees.
Venture Soph|st|cat|on * Lmp|oyee Growth Lxpectancy To test whether there is a combined effect of newness and technological intensity we use the venture sophistication variable in conjunction with Kruskal-Wallis analysis. Results show that the underlying distributions per sample are significantly different (p= .000), yet they also show that the mean ranks are differently distributed compared to earlier analyses of venture sophistication (on revenue, revenue growth, and employee count variables). The mean rank of the High TI Low NE group is highest, contradictory to earlier findings were High TI High NE group came out on top. Both groups with high technological intensity both still have the highest ranks. Low TI High NE has a higher mean rank than Low TI Low NE, suggesting that there is an effect of the newness variable. To find out more we should look at the underlying between-group differences and significance levels, and we do this by looking at post hoc results of the Oneway Anova analysis (which can be found in appendix 64). The between-group differences are found to be significant with a p-value of .001. Post hoc testing shows that the greatest significant effect is between Low TI Low NE and High TI Low NE (p= .000). The second greatest effect is between Low TI Low NE and High TI High NE (p= .022). The third and last significant effect is found between Low TI Low NE and Low TI High NE (p= .032). All other between-group differences are not significant. The group with low levels of technological intensity and low levels of newness is significantly less prone to employee growth than all other groups. This group is also by far the largest subsample with 529 of all 991 respondents. It thus seems again that the level of technological intensity is most important for employee growth expectancy, but that there is also a positive correlation between newness and growth expectancy. Combined there seems to be no significant effect.
Table 18 - Sophistication * Employee Growth 1echno|og|ca| Intens|ty] Newness] Soph|st|cat|on * Growth W||||ngness To prevent this analysis chapter from becoming overly long, and because the required analysis for this test is rather simplistic, all three independent variables are discussed at once. Growth willingness is framed as a dichotomous variable, and since all predictor variables are categorical as well we use cross tabulation and Chi-square tests to analyse the possible correlations. For all three independent variables it was hypothesized that they positively correlate with growth willingness; that is, we expect that start-ups high in technological intensity, newness and subsequent overall sophistication tend to show a growth willingness where they would like their business to grow as large as possible (as opposed to keeping it manageable). By using cross tabulation we compare the expected and observed counts per combination of categories, and identify whether these observed counts follow a theoretically expected distribution. Below are the results. Looking at technological intensity we notice that Pearsons Chi-square is significant with a p-value of .000. The observed data thus not follows the expected pattern. Start-ups low in technological intensity have a higher observed count for a manageable size than what was expected, and a lower observed count for a large as possible size. The results for the high technological intensity group are exactly the other way around; large is observed more than expected, and manageable less often than expected. Conclusion: growth willingness is positively correlated with technological intensity.
Table 19 - Technology Intensity * Growth Willingness The same story that goes for technological intensity goes for newness; there is a significant difference in observed and expected counts. The null-hypothesis should be rejected, and judging by the same distribution of observed counts as above, the hypothesis that newness is also positively correlated with growth willingness holds here. Again, start-ups low in newness have a preference for their business to be manageable in size, whereas start-ups high in newness are observed to have a business size as large as possible more often than theoretically expected. Newness is thus positively correlated with the growth willingness of the entrepreneur. Finally it was hypothesized that newness and technological intensity together are positively correlated with growth willingness. We have seen that the individual variables are highly significantly correlated, so it is expected that the combined variable will yield no different results. Pearsons Chi-square shows a p- value of .000, indicating indeed another highly significant relation. Differences between observed and expected counts are greatest for the High TI High NE group, i.e. the one with the highest level of sophistication. The observed count for a business as large as possible is twice as much as the expected count, and the observed count for a manageable business is much lower than the expected count. The second greatest differences are in the Low TI Low NE group; results indicate that this group has a higher number of observations in the manageable category than expected. The differences for the two middle groups are less big, and therefore more difficult to interpret. The High TI Low NE group also fits in the pattern that higher technological intensity leads to higher growth willingness, however the Low TI High NE group shows a higher observed count for the manageable size. The big gaps regarding the two extreme groups rule in favour of what was hypothesized. The simplest of start-ups, those low in technological intensity and low in newness, have a relatively higher preference for manageable business sizes compared to what was theoretically expected. One-eighth (12,3%) of start-ups in the low-low category want a business size as large as possible, whereas one-third (33,5%) in
MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 7S the high-high group wants that. The most sophisticated start-ups have a relatively higher preference for business sizes that are as large as possible. In other analyses we have seen that the effect of sophistication is largely attributed to technological intensity, yet the great gap in the high-high group compared to f.i. the high TI low NE group shows that the combination of newness and technological intensity does matter. Venture sophistication is thus significantly positively correlated with growth willingness.
Table 21 - Sophistication * Growth Willingness 1echno|og|ca| Intens|ty * Length of Gestat|on rocess In the first analysis that was carried out we studied the effect of technological intensity on the outcome of the gestation process: business status. It was hypothesized that technological intensive start-ups less often succeeded in launching a new firm. Results of the analysis however proved that there was no significant correlation when judging those firms that had completed the gestation process: start-ups that either quit or reached new firm status. When all start-ups were taken into account, including the ones who were still trying, we found a disproportionate high number of technological intensive start-ups in the still trying phase. This would suggest that these firms take longer to start a firm. For the relationship between these two variables it was hypothesized that technological intensive firms take longer to reach the new firm status. The data is thus first split so that only firms that are new firm are included in the analysis. Following from the hypothesis we would only be interested in those start- ups that reached new firm status. However because of the interesting result when testing for business status, in this paragraph the gestation length shall also be tested for the quitters. Earlier it was identified that length of gestation process had to be log transformed to more closely resemble the normal distribution. However even after transformation the histogram and Shapiro-Wilks test contradicted each other. Both parametric and non-parametric tests will thus be used. The results of the Oneway Anova test can be found below:
Table 22 - Technology Intensity (new firms) * Gestation Length Of all 192 start-ups that reached new firm status, 44 are classified as high technological intensity and the remaining 148 as low technological intensity. Looking at the means for both groups, it becomes apparent that these are very close. In fact, the mean gestation length is a little lower for technologically intensive firms (as opposed to what was hypothesized). Anova shows a p-value of .977, indicating that the relation is not at all significant. The Mann-Whitney test yielded a p-value of .937, confirming that there is no significant correlation here. We must thus conclude that for start-ups reaching the new firm status, there is no difference in how long it takes to reach that status based on their technological intensity. In addition the same tests were performed while controlling for a full-time start-up effort. Both within the full-time and part-time groups the results are not significant. Next, the same analysis is performed for all quitters; do high-tech start-ups quit earlier than their counterparts or is the other way around? Below are the results:
Table 23 Technology Intensity (quitters) * Gestation Length Even though the results are not significant (p= .134), the gap in means is greater. Another test, Mann- Whitney yields a p-value of .140, thus also not significant. We must thus conclude that the results are not significant. Last, we test whether the still active group shows a longer gestation period for high tech firms. It is however difficult to say something useful about these results, since the gestation process has not finished yet. The results show that there are no significant differences (p= .657). Based on these three analyses we can thus conclude that the length of the gestation period does not differ significantly for technologically intensive firms. Those that reach the new firm status do not take longer to complete the process than simpler start-ups. The null-hypothesis can thus be sustained. It is hard to conclude something about the firms that are still trying based on the gestation length; however it is interesting that when testing for business status it appeared that there was a disproportionate high number of high tech start-ups in the still trying phase. What is also interesting is that (although at best marginally significant) there seems to be a slight difference in the time it takes start-ups to make the quit decision based on technological intensity. Combined with the finding of the high number of high tech start-ups that are still active start-ups, this might mean that technologically intensive firms keep trying longer before they give up.
Table 24 - Technology Intensity (Active) * Gestation Length Newness * Length of Gestat|on rocess Similar to the analyses above, the tests are carried out for the degree of newness of a start-up. Again we start by looking for possible correlations within the new firm subsample. The mean lengths for both high and low newness start-ups are very close, although high newness has a slightly higher mean. In absolute terms the mean for high newness firms is two months higher, yet the p-value of .829 tells us that there is no significant correlation. Mann-Whitney tests confirm these findings. Similar results are found for the quitters; there is no correlation between the degree of newness and the time from gestation to quit.
Table 25 - Newness (new firm) * Gestation Length Although realistically not of much meaning, the tests have also been done for the active start-up group, of which the results can be found in appendix 69. Both Anova and Mann-Whitney yield no significant differences based on the degree of newness.
80 MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 Venture Soph|st|cat|on * Length of Gestat|on rocess Despite that technological intensity and newness individually do not seem to correlate with the length of the process, they might have an interaction effect. It is hypothesized that more sophisticated ventures tend to take longer to reach the new firm status. Below are the results; the first two tables show the outcomes of the Anova test, the third table provides post hoc test results for the log data and the fourth table provides post hoc results for the raw data. The fourth table is not useful for testing significance, but is shows the absolute mean differences in months. When using a .05 alpha-level the null-hypothesis should be maintained, considering the p-value of .083. Yet we can consider this as marginally significant (p= < .10). The four categories thus seem to differ. Based on the post hoc results we can notice that the High TI High NE group takes significantly longer (p= .023, mean difference = 14,83 months) than the High TI Low NE group, and marginally significantly longer than the Low TI High NE group (p= .064, mean difference = 7,4 months). Now what does this tell us? The mean length to reach new firm status is longest for the most sophisticated start-ups: those with high levels of newness and technology intensity. Yet there are no significant differences with the start-ups lowest in sophistication. The only significant differences arise with high-low combinations. Start-ups high in technology intensity, but low in newness thus take 14,83 months less to start up a firm compared to start-ups high in both categories. Also, start-ups with low technology intensity but high newness take on average 9,9 months less long to reach new firm status. We must thus conclude that there is some interaction effect between the two underlying variables. We must be careful with these results, because they tell us that the most sophisticated ventures do not significantly differ in gestation length from the least sophisticated ventures. The null-hypothesis should thus me maintained.
Table 26 - Sophistication (new firm) * Gestation Length 1echno|og|ca| Intens|ty * Number of Gestat|on Act|v|t|es So far the independent variables were either measured on a categorical or continuous scale. The number of gestation activities is so-called count data, where the variable can take on any whole number from 0 to 33. Then the range of activities was subdivided in four categories: resource combination activities, planning activities, market & promotion activities and legitimacy building activities. In order to empirically test the effect of an independent variable on a dependent variable with count data there are several options. The one that is most often used is Poisson regression. It has a very strong assumption that the conditional variance is equal to the conditional mean. Data that is perfectly appropriate for Poisson regression is relatively hard to find. Another form that is a generalization of Poisson regression is negative binomial regression. It can be used for over-dispersed count data, that is when the conditional variance exceeds the conditional mean.
82 MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 However to test the proposed relation we might also consider simpler options. Regression is primarily used to model a series of variables and measure several effects at once. So far we have used bivariate testing methods, which can also be applied here. Count data is not normally distributed, although the histogram for the dependent variable resembles a normal distribution. Because count data can only take on positive, whole numbers it rather is a form of categorical data. However, it has been found that as the mean count increases the normal distribution can provide a good approximation of count data. Unfortunately this is not the case here, since we have a maximum of 33 events. We should thus use a non-parametric method. (Source) states that in situations of count data and a relatively low number of possible events Mann-Whitney analysis is appropriate. Noteworthy is that for this analysis we are only interested in the number of activities carried out by firms that have reached the new firm status. Below are the results for the Mann-Whitney test for the total number of gestation activities and the underlying four sub variables:
Table 27 - Gestation Activities - Descriptives The descriptive statistics above show that there are 198 firms that have become a new firm. On average they need 20 out of the 33 activities to reach that status. These consist out of 5,2 resource combination activities, 3,8 planning activities, 3,7 market & promotion activities and 7,5 legitimacy building activities. Now do the mean ranks of high and low technology intensity firms differ in conjunction with the number of activities needed?
Table 28 - Technology Intensity * Gestation Activities When looking at the total number of gestation activities we see that the mean rank for high technology intensity firms is 124,64 compared to 92,10 for low technology intensity firms. With an alpha-level of .05 the null-hypothesis that the means in both samples (high vs. low) are evenly distributed should be rejected: the p-value is .001 and thus significant. High tech start-ups need on average more activities to reach the new firm status than low-tech start-ups. From looking at the significance levels for the underlying four categories it becomes apparent that all activities except for market & promotion yield significant results. High tech firms need a greater amount of resource combination activities; the mean ranks are significantly different with a p-value of .002. The same reasoning applies to planning activities, with a p-value of .001 and to legitimacy building activities, which is also significant with p= .014. As said, only market & promotion activities do not significantly differ between high and low technology start-ups. Yet this correlation falls just outside the rejection level of .05 with p= .082, and may be regarded as marginally significant.
84 MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 It can thus be concluded that what was hypothesized, is confirmed by the data: start-ups that are characterized by high technology intensity need more activities across all four categories in order to reach the new firm status. Newness * Number of Gestat|on Act|v|t|es Similarly to above it is hypothesized that start-ups with greater degrees of newness need more activities to reach the new firm status. The same tests are conducted as above:
Table 29 - Newness * Gestation Activities The results show that on average the start-ups with greater degrees of newness need more activities to reach the new firm status, yet that the gap in mean rank is less big compared to the technological intensity test. The p-value of .087 shows that the data hints at a positive relation, yet that it is only marginally significant. Then looking at the underlying categories the only one that proves to be significant is the legitimacy building activities category, with p being .029. It can thus be concluded that start-ups with more newness need more legitimacy building activities, and that overall high newness firms need more activities, yet that this is only marginally significant.
MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 8S Venture Soph|st|cat|on * Number of Gestat|on Act|v|t|es Finally we test whether there is a combined effect on the number of gestation activities. It is hypothesized that more sophistication requires more gestation activities to become a new firm. Because the independent variable consists out of more than two categories we use Kruskal-Wallis instead of Mann-Whitney.
Table 30 - Sophistication * Gestation Activities From the mean ranks across all categories we see that the most sophisticated ventures (high high) tend to show the highest mean ranks. These differences are significant for the total number of gestation activities (.007), for resource combination activities (.016), for planning activities (.006), and for legitimacy building activities (.037). Only market & promotion activities is not significantly different across the two samples (p= .250). Although we are ought to use non-parametric tests here we can run a Oneway Anova and look at post hoc test results to learn about the between-group mean differences. The test results of the Oneway Anova show the same findings as above; overall, the number of activities differs, and all underlying categories are significantly different except for market & promotion activities.
Table 31 - Technology Intensity * Gestation Activities (Anova) The posthoc results show a similar pattern as in previous analyses. For the total number of gestation activities, the mean difference between Low TI Low NE, e.g. the least sophisticated group, and the High TI High NE group is greatest (-3.97) and most significant (p= .003). The second greatest, significant effect is found between the Low TI High NE and High TI High NE groups (mean difference -3.72, p= .018). Third, there is a mean difference of -2.77 between Low TI Low NE and High TI Low NE, which is significant at .048. These results thus show that the most sophisticated ventures clearly have the most gestation activities. Those ventures with high newness but low
MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 87 technological intensity use significantly less gestation activities than the most sophisticated group. Once again, the effect of technological intensity seems greater than the effect of newness. For the resource combination activities, there are four mean differences between groups that are found to be significant. The greatest and most significant mean difference is between the High TI High NE and High TI Low NE groups (-1.27, p= .011); start-ups low in newness and high in technological intensity have significantly less resource combination activities than start-ups high in both categories. Approximately the same effect is found for High TI Low NE and Low TI High NE (mean difference = -1.27, p= .015). The third significant effect is found between the two extreme categories (mean difference = -.96, p= .023). The group with high technological intensity and low newness also has significantly more activities than the low low group (mean difference = -.95, p= .033). For resource combination activities the effect is thus strongest for the two groups with high tech intensity. Surprisingly this effect is not strongest on the least sophisticated group, but on the group with high newness. There are less significant mean differences for planning activities; only the high high group uses significantly more planning activities than the low low group (mean difference = -.81, p= .007). Second, start-ups with high tech intensity and high newness use more planning activities than start-ups high in tech intensity and low in newness (mean difference = -.94, p= .008). When it comes to legitimacy building activities, there is only one significant (yet big) mean difference: between the most and least sophisticated start-ups. The mean difference is -1.99, with a p-value of .012. Start-ups with high newness and high technological intensity thus use more legitimacy building activities than start-ups low in both categories. Finally, the market & promotion activities category is not significantly different across sophistication categories, which is confirmed by the posthoc results. Now where does this bring us when combining the Kruskal-Wallis test and the posthoc results of the Oneway Anova? Overall it appears that venture sophistication is positively correlated with the total number of gestation activities that start-ups use to successfully become a new firm. Surprisingly, when narrowing down to resource combination activities, there seems to be a hindering effect of newness: the highest mean rank is found in the High TI Low NE group. It would thus appear that a combination of high degrees of tech intensity and newness requires fewer resource combination activities than when the start-up is only technology intensive. Third, it was hypothesized that planning activities are especially important for the most sophisticated ventures, and this is confirmed by the data. The same reasoning applies to legitimacy building activities. Here, venture sophistication is significantly positively correlated with the number of legitimacy building activities.
MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 89 Mu|t|var|ate ana|ys|s 8|nary Log|st|c kegress|on The final relation that we are interested in is that between the independent variables technology intensity and newness, the dependent variable business status, and a possible moderating effect of the variable decision-making strategy. Initially it was hypothesized that high-newness and high-technology firms less often become a new firm than less sophisticated ventures. Results of the bivariate analyses however proved this alternative hypothesis wrong: there seems to be no correlation between business status and the independent variables. A major part of interest in this study is the decision-making strategy of entrepreneurs in terms of causation and effectuation. Based on the available literature on the topic and the empirical evidence to date it is hypothesized that the relation between newness and technological intensity on the one hand, and business status on the other, is positively moderated by an effectuation strategy. In other words: high-newness and high-technology firms are expected to reach the new firm status more often when following an effectuation approach. Low-newness and low- technology are expected to reach the new firm status more often when following a causation approach. In order for us to test for possible correlation between two independent variables, a moderating variable, a dependent variable and a series of control variables we must turn to regression. The most commonly used form of regression is linear regression, where the condition is that the variables are continuous. Our data features mostly categorical data, except for some control variables, so we use logistic regression instead. Specifically we use binary logistic regression, because the outcome variable has two categories: new firm and quit. SPSS transforms the dependent variable into a logit variable so that it reflects the natural log of the odds of the dependent event occurring. The changes in the log odds of the dependent variable are then calculated, which are known as the odds ratios. These estimated odds ratios signal an increase or decrease in the probability of an event occurring. The dependent variable business status was recoded, so that quitting equals 0, and becoming a new firm equals 1, because new firm is the category we are most interested in. Before including the moderating and control variables we first test for a direct effect of newness and technology intensity on business status, using logistic regression. Earlier in the analysis section we have seen that non-parametric tests (Kruskal-Wallis and Mann-Whitney) proved that there is no correlation. Now with the regression analysis two blocks, or models, are tested: one with only a constant factor, and one with the chosen variables. To prevent this chapter from getting very long, only the tables of the final regression are included. The Chi-square result for the omnibus test of model coefficients shows if the chosen variables significantly better explain the variation in data than a random model does. As expected the model with only newness and technology intensity does not provide a better fit; the Chi-square of 2,166 with a p- value of .347 indicates this. Individual effects are measured by looking at the Wald-statistics and the accompanied p-values. When results are significant, one may look at the B-value, which shows the estimated effect on the log odds and indicates the direction and size of that effect. Again, the individual effects of newness (p= .443) and technology intensity (p= .315) are not significant.
90 MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 Next, we add the decision-making strategy variable to the equation. Note however that in this step it is just added as a covariate, so we do not test for a moderating/ interaction effect yet. The results are shown below:
Table 33 - Multivariate Analysis (block 0) When looking at the model fit we see that the proposed model with technology intensity, newness, and decision-making strategy significantly better fits the data than the random model with an intercept only. This is indicated by the Chi-square of 9.761, which is significant at .045 (assuming a 95% confidence interval/ ! = .05). Furthermore the Hosmer and Lemeshow Goodness-of-Fit test shows whether there are significant differences between frequencies in the observed data and the frequencies in predicted data by the model. The differences are not significant (.697) which means that model properly fits the data (Hosmer & Lemeshow, 1986). Then we look at the Wald-statistics per variable. These indicate that, although the model is significant, only the decision-making strategy significantly correlates with business status.
Table 34 - Multivariate Analysis (block 1) More specifically, causation was chosen as a reference category, neutral is dummy #1, and effectuation is dummy #2. No hypotheses were developed regarding the direct effect of strategy on business status, but the analysis yields some rather interesting results. Neutral and effectuation strategies apparently have a negative correlation with business status compared to causation. What is more, is that the Exp(B) tells us that following a neutral strategy means that the start-ups chance of becoming a new firm is .68 times smaller than when it were following a causation strategy. The odds for effectuation are even smaller: the chance of becoming a new firm is .53 times smaller than for causation. These results are confirmed by the cross tabulation analysis below. The differences in the distributions for the categories are marginally significant (Pearsons Chi-square = .054), while the differences between expected and observed counts show that new firms more often followed a causation approach and less often a neutral or effectuation approach. For quitters, the results are exactly the opposite. Those start-ups that followed a neutral or effectuation strategy are more observed in the quitting category than statistically expected.
Table 35 - Business Status * Decision-Making Strategy However to test if the decision-making strategy has an effect on the relation between the independent variables and the outcome variable we must specify an interaction effect between decision-making strategy and newness/ technology intensity. This can be done through the binary logistic regression menu in SPSS. The table below shows the outcomes for a model with an interaction effect, and the control variables age, education, industry experience, and entrepreneurial experience. Again we see that the chosen model better fits the data than a random model would do; the Chi-square for the model is 24.074 with a p-value of .007. The data however also proves that there is no interaction effect between newness and technology intensity on the one hand, and decision-making strategy on the other. Neither of the variables has a significant contribution to the model. Variables that do seem to have an important contribution to the model are industry experience and education. Industry experience has a very significant positive effect on becoming a new firm; results show a Wald-statistic of 12,282 with a p-value of .000. The beta (B) and Exp(B) show the direction and size of the effect: an Exp(B) means that an increase of industry experience with one year leads to an increased odds of becoming a new firm with 3.1%. Education is marginally significant (p= .058) and also has a positive correlation with becoming a new firm (Exp(B) = 1,116). These two findings are interesting, yet they are not part of the main conceptual model and will be left to other studies to explore. Based on this regression we must thus conclude that, although there is a correlation between the decision-making strategy and business status, the hypothesized interaction effect between strategy and technology intensity/ newness was proven inexistent.
Table 36 - Multivariate Analysis with Control Variables Now before we finalize the analysis chapter and conclude on which hypotheses are supported or rejected, we make one sidestep. From the regression above it became apparent that the interaction effect is absent, yet that there is a relation between the moderating and the outcome variable. Although not hypothesized in the conceptual model, it would be interesting to know whether the moderating variable also correlates with the independent variables. To test this a simple Pearsons Chi-square test is conducted using cross tabulation:
MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 9S The tables above provide the results for technology intensity; Pearsons Chi-square (12,728) is significant judging the p-value of .002. This means that the underlying distributions for the various categories are significantly different from what is theoretically expected. When comparing the expected and observed counts some interesting results appear. It seems that technology intensive start-ups less often use an effectuation or a neutral approach, and more often a causation approach. Low-technology start-ups however use less often a causation strategy and more often an effectuation or neutral strategy. The big differences arise in the causation and effectuation categories; the differences between expected/ observed counts are not very big for the neutral strategy. Now the same test was carried out for newness against decision-making strategy, but this analysis yielded no significant results: Pearsons Chi-square = 2,231, with a p-value of .328. Companies with varying degrees of newness have no significant differences in the strategies they use. All this tells us that technology-intensive start-ups use a causation strategy relatively more often than neutral and effectuation strategies, and that low-technology start-ups use causation less often. On the other hand, start-ups that have reached the new firm status did so relatively more often by using a causation approach, whereas quitters more often relied on neutral and effectuation approaches. So decision-making strategy correlates with both the independent variable technology intensity and the outcome variable business status, but there was no interaction effect found. The hypothesis (4a) that technology-intensive start-ups following an effectuation approach have better odds of becoming a new firm must thus be rejected. The same goes for high-newness start-ups (hypothesis 4b); in fact, no correlation at all was found between newness and either decision-making strategy or business status. Since there was no interaction effect found, we must also conclude that alternative hypotheses 5a and 5b must be rejected. Although it seems that generally a causation approach leads more often to reaching the new firm status, we cannot conclude that is specifically the case for low-technology start-ups since. In other words, from the analyses it does not tell if low-technology start-ups following a causation approach do significantly better than low-technology firms following an effectuation or neutral approach.
96 MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 Summary This analysis chapter has proven to be very extensive due to the amount of (hypothesized) relations that were tested. This section serves to create an overview and conclude on the most important and interesting findings. The table below shows all the relations that have been tested: # Hypothesis Acceptance H1a The higher the technological intensity associated with a venture, the less likely it is that this venture becomes a new firm. Not supported H1b There is a positive relationship between the technological intensity associated with a venture and the revenue expectancy of the nascent entrepreneur. Supported H1c There is a positive relationship between the technological intensity associated with a venture and the employee count expectancy of the nascent entrepreneur. Supported H1d There is a positive relationship between the technological intensity associated with a venture and the growth willingness of the nascent entrepreneur. Supported H1e There is a positive relationship between the technological intensity associated with a venture and the length of the gestation process. Not supported H1f There is a positive relationship between the technological intensity associated with a venture and the number of gestation activities. Supported H2a The higher the degree of newness associated with the venture idea, the less likely it is that this venture becomes a new firm. Not supported H2b There is a positive relationship between the degree of newness associated with a venture and the revenue expectancy of the nascent entrepreneur. Supported H2c There is a positive relationship between the degree of newness associated with a venture and the employee count expectancy of the nascent entrepreneur. Supported H2d There is a positive relationship between the degree of newness associated with a venture and the growth aspiration of the nascent entrepreneur. Supported H2e There is a positive relationship between the degree of newness associated with a venture and the number of gestation activities. Partially supported H2f There is a positive relationship between the degree of newness associated with a venture and the length of the gestation process. Not supported H3a The higher the degree of sophistication associated with a venture, the less likely it is that this venture becomes a new firm. Not supported H3b There is a positive relationship between the degree of sophistication associated with a venture and the revenue expectancy of the nascent entrepreneur. Not supported H3c There is a positive relationship between the degree of sophistication associated with a venture and the employee count expectancy of the nascent entrepreneur. Not supported
# Hypothesis Acceptance H3d There is a positive relationship between the degree of sophistication associated with a venture and the growth willingness of the nascent entrepreneur. Supported H3e There is a positive relationship between the degree of sophistication associated with a venture and the number of gestation activities. Supported H3f There is a positive relationship between the degree of sophistication associated with a venture and the length of the gestation process. Partially supported H4a Effectuation positively affects the chance of becoming a new firm for ventures with a higher degree of technological intensity. Not supported H4b Effectuation positively affects the chance of becoming a new firm for ventures with a higher degree of newness. Not supported H5a Causation positively affects the chance of becoming a new firm for ventures with a lower degree of technological intensity. Not supported H5b Causation positively affects the chance of becoming a new firm for ventures with a lower degree of newness. Not supported Table 38 - Overview hypotheses & Support The three hypotheses regarding the predictor variables and business status were all found to be insignificant; technology intensity and newness do not correlate with the odds of becoming a new firm, nor does the combined variable sophistication. Higher technology intensity and/ or newness does not mean that ventures less often become a new firm. For technology intensity it was found that a disproportionate high number of start-ups remained in the still trying phase, which might indicate a longer gestation period. However when looking at ventures that either successfully (new firm) or unsuccessfully (quit) completed the gestation process, no differences were found based on their degree of technology intensity or newness. This leaves us with the question why at the end of the PSED research program a disproportionate number of start-ups was still trying to set up their firm. Surprisingly a significant effect was found between the most sophisticated venture types (high tech high newness) and intermediate sophisticated ventures (high tech low newness / low tech high newness), while no differences were found with the least sophisticated ventures. In terms of the gestation activities needed to establish a new firm, some interesting results were found. The data provides support for the hypotheses that technology intensive start-ups use more activities to reach the new firm status, both in total as on the four underlying categories. High tech start-ups use more planning, legitimacy-building, resource-combination and marketing & promotion (marginally significant) activities. For high newness start-ups only the legitimacy-building activities were found to be significantly correlated with becoming a new firm; there was no proof for the total number of activities. Then there is also proof for interaction between newness and technology intensity: results show that the most sophisticated ventures use significantly more activities than the least sophisticated ventures, both in total, and in the legitimacy-building and planning categories. Also the measures for revenue and employee expectancy provide some clear results. For both revenue and employee count two measures were used: the expected amount after five years of operation, to get a feeling for the order of magnitude; and the expected growth, to see whether there are differences in scaling up. Technology intensity proved to be significantly positively correlated with both revenue and
98 MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 employee expectancy, in absolute terms and in growth terms. The same findings apply to newness; high newness firms predict that their revenues and employee count after five years are higher than low newness firms do, and that they also will experience larger growth. Surprisingly, there was no significant interaction found between the two variables. Despite that the most sophisticated ventures predict the highest numbers, this effect is mainly caused by technology intensity. More or less in line with the previous paragraph are the results for growth willingness: high-tech and high newness firms have preference to grow their business as large as possible much more often than low-tech and low start-ups do. The latter group prefers to keep their business at a manageable size. There also was an interaction effect found; start-ups high in technology intensity and newness have greater growth willingness than the other three categories. The final analyses that were conducted involved one of the focus points of this study: entrepreneurs decision-making strategy. Some interesting significant results were found that were not part of the conceptual model, but do provide some good insight and matter for discussion. The decision-making strategy was found to correlate individually with both the predictor and the outcome variables. Start-ups that reached the new firm status more often did so by using a causation strategy, while quitters more often relied on neutral and effectuation approaches. Also, technology-intensive start-ups were significantly correlated with taking a causation approach. Start-ups low in technology however relied relatively more on neutral and effectual approaches. It must be added though that in absolute terms, the causation approach was used most often, both by new firms and quitters. Despite that there is individual correlation there was no interaction effect found between the decision-making strategy and the predictor variables on business status. Newness was not at all correlated with the decision-making strategy.
MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 99 Discussion In this chapter the results of the various analyses are discussed and put into perspective to build a solid base for answering the research question later on in the conclusion section. First we will elaborate on how the data fits or contradicts the conceptual and empirical literature from the theory section. The most important assumption of this study is that gestation is different for technology intensive and high-newness start-ups, both in terms of the process and the outcomes. Technology-intensive and innovative start-ups have been popular research topics over the past years, partly because they are simply more appealing, but also because their role in the economy cannot be underestimated. These companies engage in creative destruction, by either disrupting the status quo in existing markets or creating new markets altogether. Companies based on new ideas or new business models not only create value for themselves, but also spur innovation for other companies, since these incumbents cannot afford to fall behind. Other types of firms easily outnumber innovative and technology-based ventures, however they generate a disproportionate size of economic wealth and employment. Schumpeter (1934) was among the first economists to acknowledge the importance of technology and innovation for standards of living. He predicted that innovation would be a determining factor for the success of nations. Since the 1980s it is also commonly believed that innovation enables great efficiency improvements (Romer, 1986), and that technological change is the precipitator of most productivity gains in various nations (Allen & Stearns, 2003). The fact that these ventures are underrepresented is not strange by itself: the sheer amount of resource requirements both in terms of financial capital and knowledge makes starting an innovative venture not reserved for everyone. What is surprising though is that so little is known about the early stages of technology-based ventures. In this study however it is not why individuals (or teams) start these kinds of firms what we are interested in; it is whether there are any differences in the gestation process and in the outcomes of that process. The initial relations that were tested were between the characteristics of the venture (technology intensity, newness, sophistication) and the outcomes of the gestation process in terms of business status. For all three independent variables it was hypothesized that there is a negative correlation with becoming a new firm, considered as the most desirable status. Analyses were carried out in two ways: for all business statuses, and with the active start-ups group left out. When ignoring the active start-ups group, results indicate that neither technology intensity and newness, nor the combined variable sophistication significantly correlates with business status. Technology-intensive and/ or high-newness start-ups thus do not become a new firm or a quitter more often than less sophisticated start-ups. Many high- technology start-ups were still trying when the yearly interviews stopped, meaning that they have already been putting effort in their start-up for over five years. The only logical explanation for this is that the gestation period for high-tech start-ups is longer, however when looking at those entrepreneurs that did reach the new firm status it appeared that there are no differences between the two groups. Gestation length however will be discussed to greater extent later on. Ideally when identifying a sample and researching a process like entrepreneurial gestation the full life- cycle of that sample should be followed, until an outcome has been reached (either quit or new firm). Unfortunately the research program has only followed the start-up efforts for five years, and a large part of the initial sample was still trying at the end. It could thus be that the hypotheses are correct, but that
100 MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 the data for the ventures that finished the gestation period prior to the end of the PSED research contradict this. After all, evidence was found that a disproportionate high number of high-tech start-ups were still trying. Few studies (Lichtenstein, 2007) are known that have researched the relation between the length of the process and the likelihood of becoming a new firm, but literature indicates that there is point of diminishment. Start-up efforts that have been going on for at least five years are likely to never see the light of day. Off course developing technological and/or innovative products and services is more complex and is therefore likely to take more time, but due to the pace at which these offerings change, start-ups cannot afford to spend more than five years developing, because their offering will be obsolete at the time of market entry. This leads to believe that eventually a portion of the still trying high-tech start-ups will fail to become a successful new firm. On the other hand, the results show that the degree of newness is not at all associated with business status. The newness variable captures the perceived newness of customers, the market newness (competition) and the newness of the product/ service. High technological intensity is often associated with certain degrees of newness, but there was no interaction effect found to influence business status. High newness start-ups were also not overly represented in the active start-up group at the end of the PSED research program. So there might be some reason why technologically intensive start-ups were found a lot in the active start-up group (and high newness firms were not). This could be due to the fact that high-technology firms have greater resource constraints than high-newness firms, and that the first group is still trying to acquire sufficient resources. Studies (i.e. Elfring & Hulsink, 2003) have shown that what distinguishes great start-ups from not-so-great start-ups are the levels of human and social capital, which brings us to the section. In this thesis an approach towards clarifying performance differences was taken, but in a rather exogenous manner. Earlier it was said that several theories and areas of thought provide a small input to the equation that defines entrepreneurial success. An explanation for the fact that high-tech and high- newness start-up do not fail more often than more average start-ups (as was hypothesized) may not solely be due to exogenous aspects but rather more due to endogenous factors. The technological intensity and newness variables distinguish start-ups based on the market dynamics they have to deal with, like (Knightian) uncertainty and the resource constraints. A plausible explanation would be that the difficulties that these firms encounter are balanced out by endogenous factors like the human and social capital of the entrepreneurs. Hopp & Sonderegger (2009) have found that both human and social capital play an important role in starting the gestation process and completing it: Knowing what to expect from the process requirements significantly reduces ambiguity over picking tasks and devoting time and effort accordingly. As a matter of fact, nascent entrepreneurs with a higher level of human capital have more insights as to how the founding process evolve and are thus better able to anticipate future contingencies, react timely as well as with the adequate effort and therefore roll out activities more systemically over time. Human capital, measured as formal education and previous start-up activities, were found to be predictors of starting the gestation process, but not of successfully completing it. However other studies (Schultz, 1959; Mincer 1974, in: Hopp & Sonderegger, 2009) have shown that individuals with more or higher quality human capital have superior qualities in successfully exploiting entrepreneurial opportunities. Also know-how and know-what have a positive effect on gestation success. The first is related to previous experience, like entrepreneurial activity or industry experience, and the second may be built through formal education. High-tech, innovative ventures are started by entrepreneurs with either
MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 101 extensive know-how, know-what or both (Liao & Welsch, 2003). Extensive human capital may aid them in overcoming issues that are often associated with starting these types of ventures. The results of this thesis also provide support for education and industry experience being positively correlated to becoming a new firm, however entrepreneurial experience did not have any effect. So although several studies point to the positive relation between human capital and entrepreneurial activity/ success, these findings should be carefully interpreted because contradicting studies are easily found. A study by Gimeno et al. (1997) for instance has shown that the level of persistence may easily blur this effect. High levels of persistence of the entrepreneur may compensate for lacking human capital. A factor that might explain why introducing greater newness is not necessarily paired with smaller odds of becoming a new firm lies in persistence in conjunction with entrepreneurial motivation. Although no studies are known that have researched newness and entrepreneurial motivation/ persistence, one may think that when an entrepreneur that has a new/ innovative offering of which he/she is confident that it provides added value, that entrepreneur will be more thrived to bring the offering to the market (compared to an imitative business type). This once again points to the multitude of factors that are fostering and hindering entrepreneurial activity and success. Persistence is only one of an important array of psychological traits that have been found to be important in entrepreneurship, and entire books have been written about this topic. For example other personal characteristics that are likely to have an impact on the likelihood of completing the gestation process are risk-taking propensity, self-efficacy and entrepreneurial intention & motivation. Although traits are not explicitly researched in this study, the decision-making strategies effectuation and causation take some personal characteristics into account and will be discussed later. In other studies social capital is found to have significant effects on the gestation process. It is referred to as the ability of actors to extract benefits from their social structures, networks, and memberships (Hopp & Sonderegger, 2009). The discovery and exploitation of opportunities, and more importantly the identification, collection and allocation of resources are facilitated by the networks of which social capital is built up. In his seminal work, Granovetter (1973) explores the importance of both strong and weak ties. Weak ties promote the flow of information and give access to new resources. Strong ties on the other hand are more important for exploiting resources. For high-newness and high-tech start-ups resource constraints are present in multiple aspects: securing sufficient funding is the most important, but finding human resources, and building relations with suppliers and potential clients are also critical. Strong, weak and bridging ties are all very important, but to high-tech, innovative ventures especially the latter two are. Less sophisticated ventures are mostly able to make do with their existing network of strong ties, but this does not hold for their counterparts. This is why Elfring and Hulsink (2003) stretch the importance of networking for technology-intensive start-ups. Social capital is predicted to provide considerable resources when properly leveraged for the nascent entrepreneur, and may be of particular importance in environments of incomplete information and weak economic markets, such as new and nascent industries, products, markets an technologies (Leff, 1979; in: Hopp & Sonderegger, 2009). The importance of social capital for technology-intensive and innovative start-ups thus seems undisputed. This thesis has also shown that nascent technology entrepreneurs engage in more gestation activities than less sophisticated entrepreneurs. Both legitimacy-building and planning activities were particularly significant for high-tech and high-newness start-ups. The first category consists of several
102 MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 networking items and thereby indicates that high-tech and high-newness start-ups engage more in networking activities to become a new firm. Other studies have been conducted to research the impact of gestation activities and the pace and sequencing at which activities are done. Reynolds & Miller (1992) show that on average the more gestation activities a start-up engages in, the more it is likely that it becomes a new firm. Also the pace at which activities are undertaken is positively correlated with becoming a new firm (Giacomin et al., 2011). Hopp & Sonderegger (2009) add that as human capital of the founding entrepreneurs increases, the pace at which activities are undertaken also increases. Also the total number of activities is higher for entrepreneurs with higher human capital. Furthermore, Lichtenstein (2007) found that the speed and concentration of gestation activities is positively correlated to founding success. By concentration is meant the systematic approach towards undertaking activities; focusing on a limited number of gestation activities at a time is positively correlated with founding success. Also, legitimacy and planning activities were found to have a positive effect on founding success. Another interpretation for the over-representation of technology intensive start-ups at the end of the PSED study could be the escalation of commitment. When judging the group that reached new firm status, both high and low tech start-ups were evenly represented. The further down in the gestation process, the more idiosyncratic the required resources will be. It was already discussed that the ability to gather the required resources is what sets successful start-ups apart, and it could be that on-going technology start-ups simply do not have the capabilities to complete the resource-combination process and suffer from an escalation of commitment bias. They have already put in a lot of effort and are hesitant to make the quit decision. The previous sections have shown that human capital, and to a greater extent social capital play an important role in successfully finishing the gestation process. These factors may hold the explanation why high-tech and high-newness start-ups do not significantly differ in the outcomes of the entrepreneurial gestation process compared to less sophisticated start-ups. The conceptual model was extended with the decision-making strategy to learn more about the possible effects of effectuation and causation approaches. The decision-making strategy reflects multiple aspects of the way in which the entrepreneur runs his business. The underlying items used in this study feature key entrepreneurial characteristics, like the attitude towards uncertainty, risk-taking, persistence and flexibility. The items also reflected the extent to which the entrepreneur engages in planning and a systematic approach towards setting up his business. Bringing strategy into the model based on Sarasvathys (1998) work is new in the field of nascent entrepreneurship. We have seen that both effectuation literature and empirical research of nascent entrepreneurship are relatively young, so there is not a lot of empirical work to compare the findings to. The levels of technological intensity and newness seem not to be of influence on the likelihood of successfully starting a new firm and the results have indicated that strategy is not interacting in this relation. This does not mean however that the data did not yield interesting results. In the discussion above it became apparent that human and social capital might be better predictors of founding success than exogenous factors like technological intensity, innovativeness and the difficult market dynamics that come with it. Since significant bivariate relations were found between the supposed moderating variable decision-making strategy and the independent and dependent variables, it could also be that no results were found because of methodological limitations. It is a given that non-parametric testing
MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 103 methods are less robust than when working with full continuous data. All the variables used were discrete with a limited number of categories. Also because of working with an existing dataset and interview codebook, the items do not fully represent the framework of Chandler et al. (2011). Research into strategy in the field of recent start-ups is scarce, and in the field of nascent entrepreneurship virtually non-existent. Maybe strategy is the wrong terminology for starting entrepreneurs. When starting a business it is likely that the majority does not deliberately formulate a strategy by which they are going to run their business. Rather strategy for nascent entrepreneurs can be a reflection of their personalities and the way they are likely to make decisions, and this is also how the effectuation and causation constructs are formulated. From Garonne et al. (2010) it became apparent that emerging firms choose to use different strategies from the learning planning spectrum. Their primary difficulties lie in aligning resources and objectives, and this is where different strategic approaches may yield different results. A study by Honig et al. (2005) that has remained unpublished indicated that effectual processes and the learning strategy of nascent entrepreneurs are positively correlated to progress in new firm emergence. The explanation for why there was no interaction effect found for causation and effectuation remains unclear. The fact that these approaches seem to have an effect on business status could be interpreted in a way that they are important to successful firm gestation, but that the explaining factors like uncertainty and high dynamism markets do not hold. This would undermine Sarasvathys theory (1998), and most of the empirical evidence to date, and it seems more plausible to think of other reasons. For instance maybe the constraints in legitimacy and resource-combination make that effectuation is not suited for nascent entrepreneurs. After all, the study of Honig et al. (2005) indicated that the positive effect of an effectuation approach becomes more prevalent throughout firm emergence, and not at the very beginning stages. This is contradictory to the findings of Harting (2004) who notes that effectuation prevails in the early stages. Harmeling et al. (2004) found that goal flexibility and the incidence of contingency exploitation decreases over time. On the one hand it seem plausible to think that the early stages are suited for experimentation because there are no significant commitments yet, but on the other hand it comes at the expense of making decisions. There is thus no consensus regarding this matter. It might be that nascent entrepreneurs have a higher need for a linear, systematic process in which they can achieve the appropriate legitimacy levels and set to acquire the required resources for getting their start-up past a critical point. The results of this thesis show that causation is more positively correlated to new firm emergence than neutral and effectual approaches. Some of the underlying items for causation are formal business planning, making financial projections, (low) uncertainty appetite, and (low) preference for ambiguity. Getting over that critical point of becoming a new firm, making the first sales and getting a positive cash flow means that entrepreneurs make little room for experimentation and flexibility. However the methodological limitations of working with an existing dataset and adjusting the effectuation constructs accordingly should also be taken into account. Despite having tested for the approximate items validated by Chandler et al. (2011) it could very well be that items like the extent to which different business models were tested are not sufficiently incorporated and may downplay the positive effect that effectuation can have. High hanging fruits, opportunities that require substantial investments and risk-taking but also offer corresponding payoffs, require considerable levels of resources that can only be retrieved and organized with a planning methodology to convince stakeholders and mitigate the liability of smallness and
104 MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 newness. The need for substantial resources that need to be acquired at the market thus also imposes a causation strategy. There seems to be a bit of a paradox here since planning strategies (causation) introduce rigidity, which may act as an impediment to creativity and flexibility in the context of surprises that are common in newness development. Garonne et al. (2010) argue that a causation approach may be more adapted for firms situated at both ends of the spectrum: the imitative or low innovative firms operating in defined (known) markets, and the highly innovative firms that require large material, human and financial resources to develop cutting edge innovation and penetrate new markets. The reasons why there was a positive correlation found between technological intensity and following a causation process is highly likely caused by the resource requirements that these types of ventures have to deal with. Planning and legitimacy-building activities are important predecessors of acquiring sufficient (financial) resources, so preparing a formal business plan, making financial projections, researching the competition and defining the business opportunities are required activities to secure resources. The same explanation as earlier applies; technologically intensive start-ups need a systematic, linear process to eventually become a new firm. Only with a proven track record, a sellable product and positive cash flow can they engage in more flexible and experimenting approaches. In the literature section on strategy, two main schools of thought were juxtaposed: the planning school (try harder to predict better) and the learning school (move faster to adapt better). Despite the findings that causational constructs regarding planning positively affect the chance of becoming a new firm, it must not be concluded that planning is better. Based on the data and constructs it is difficult to view planning and learning as opposites. Rather the suggestion of Hamel & Prahalad (1989) and Wiltbank et al. (2006) to decouple control and prediction is more plausible. Firms have to create their own space that is suited to the companys strengths. Simultaneously using planning and learning constructs might better fit the dynamics of nascent entrepreneurship. Planning components are essential to secure resources for instance, but learning/ effectual components like building a stakeholder network in order to find the right product/ market combinations is also important to start-ups. In the previous sections the role of the different gestation activities was briefly discussed. Effectuation and causation for instance take for a large extent the various planning activities into account. Although the underlying items have not been tested separately, the findings do seem to point at a positive effect of a planning-based causation approach for reaching the new firm status. However the primary goal of this study is to find whether there are differences in processes between high technology and high-newness start-ups. The results have indicated that technology-intensive start-ups use more gestation activities overall to become a new firm, and they also use significantly more planning, legitimacy-building and resource-combination activities. There was weak support found for market & promotion activities. Furthermore, for high-newness start-ups the only significant finding was the number of legitimacy- building activities. Yet combined, there was an interaction effect: the overall sophistication level of the start-up is positively correlated with the number of activities. Now what does this tell us? The extent to which start-ups rely on gestation activities should be considered carefully. Delmar & Shane (2002) already noted that not every entrepreneur, and not every type of venture needs all activities. For instance it seems logical that technology-intensive start-ups need more resource-combination activities. After all, these ventures have the highest resource constraints; they need more funding, more knowhow and rely on the combination of physical products more often than average start-ups (Allen & Stearns, 2003). Newbert (2005) provides somewhat similar evidence; he finds that start-ups in dynamic
MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 10S markets need more planning and legitimacy-building activities, but not more resource combination or sales & promotion activities. Also the findings of Elfring & Hulsink (2003) are consistent with this study; technology ventures should rely on building superior legitimacy-building activities in order to become successful, and this effect becomes even stronger for radical innovations (compared to incremental innovations). This thesis also finds that legitimacy is important for high-newness (greater extent of innovation) start-ups to become a new firm. Planning activities were found not to be significant for high-newness firms. Now an explanation for this might be that start-ups introducing their offerings either in a new market or as a new product/ service do not take the time to go through a carefully planned process. Instead the success of high-newness start-ups might be more dependent on a quick market entry, rather than a perfectly worked out, but possibly too-late entry. Combined though, start-ups high in both technology intensity and newness appear to use the most gestation activities, also in planning. This means that the most sophisticated ventures have the greatest need for planning and legitimacy (although not in resource-combination or market & promotion). When a start-up brings a product to market that is both new and relying on technology, chances are that the entrepreneurs have a very small framework for estimating market acceptance. For these firms, building a solid business plan with a sound financial outlook and a proper definition of the opportunity that they have identified is thus very important. Additionally, legitimacy-building activities in terms of joining an industry or trade association, registering with various networks and business directories provides them with the ability to expand their level of weak ties and gain access to relevant resources. The fact that market & promotion activities were found not be significantly correlated is probably due to methodological reasons. Only four items (out of 34) were considered as market & promotion activities, and out of that four, two were pre-requirements for being a new firm (receive income from goods or services, have an initial positive cash flow). Overall though, the findings regarding gestation activities confirm existing literature. Liao & Welsch (2003b) already found that the process in terms of activities is significantly different for technology- based ventures. Evidence on the effects of the underlying categories on the likelihood of becoming a new firm is mixed, but it seems plausible to conclude that, since ventures differ in their product offerings, resource requirements and the industries they operate in, the specific set of activities is different for every start-up. This is in line with findings of Gartner (1985) and Delmar & Shane (2002). Legitimacy is important when start-ups have a small reference framework and need to make themselves known in order to get a foothold of the market. Planning is particularly important for securing (financial) resources (Delmar & Shane, 2003). Resource-combination activities are highly dependent on the type of venture, and other studies confirm that technology-based ventures have greater tangible and intangible resource requirements (Liao & Welsch, 2003b). It was also hypothesized that because the product offerings of technology based ventures are more sophisticated, they are likely to go at greater lengths in bringing their product to market. No support for market & promotion activities was found though, although this can be attributed to the weak methodological setup. Another reason for not engaging in more market & promotion activities is the background of the entrepreneurs; founders of technological ventures are likely to have a technical or engineering background, instead of a commercial one. Consequently they are likely to keep their focus on developing the product and postponing marketing activities to the end of the process. Additionally, these types of founders may be more likely to engage in a market pull strategy instead of pushing their product actively onto the market. They could think that a technically superior product will be able to sell itself.
106 MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 Allen & Stearns (2003) found evidence that high tech nascents need more time to finish the gestation process. They note that external factors, like beta testing, trials, government approvals, securing funding and filing for intellectual property protection makes that the process takes significantly longer than for more average start-ups. The findings are supported by Liao & Welsch (2003b), who used an earlier version of the PSED dataset. They find support for the number of gestation activities, and also for the length of the entire process being longer for technology-based ventures. The number of activities did not correlate with the length of the process, suggesting that TBVs spend more time on each activity. In other words, they are more thorough at each activity, which in turn is confirmed by Aldrich & Martinez (2011) who say that innovative TBVs pay more attention to learning new roles and setting up operational procedures. In this thesis, no support was found that technology-based ventures need more time to reach the new firm status, and neither do high-newness start-ups. This could be due to the earlier discussed relation between gestation length and founding success. This thesis found a disproportionate high number of high-tech start-ups in the active start-up category, but not in the new firm category. It is probable that overall, technology-intensive start-ups take longer, but that the effect is blurred by only looking at the new firm group. Those TBVs that succeeded in becoming a new firm before the end of the PSED program could very well end up being more successful than the ones who were still trying. After all, Lichtenstein (2007) showed that the longer new firm creation takes, the less likely it is that the venture becomes successful. On the other hand, for less sophisticated ventures the entry barriers are lower so it is easier to become a new firm, but it is likely more difficult to maintain that position. This could mean that in the new firm category, there is a high number of average start-ups that eventually fail. Out of the TBVs that reached the new firm status, it is likely that a higher proportion survives, because they have already made it through a critical process of product development, resource combination and gaining legitimacy. Besides the outcome of the gestation process, the activities used and the effect of causation and effectuation strategies we looked into preferences and expectations towards growth. The differences between high-tech/ high-newness start-ups and less sophisticated start-ups were highly significant for all variables. Both (relative) growth measures and absolute measures were used; the latter to estimate the order of magnitude that start-ups are expecting to achieve, and the first to learn about relative growth over five years. It was already discussed that due to the absence of sufficient data on realized performance measures, we use expected measures. Other studies (Wiklund & Shepherd, 2003; Gundry & Welsch, 2001; Davidsson, 1989) have found that the expectations and aspirations towards specific performance levels are indicative for realized performance. The results of the growth willingness analyses were rather undisputed. Technology intensity, newness and the interaction term sophistication were all highly significantly, positively correlated with growth willingness. When technology intensity and newness were measured on a scale, the mean ranks neatly increased for higher scores. The categories with the highest degrees of technology intensity and newness also had the highest mean ranks in growth willingness, and the same holds for sophistication; those ventures high in both newness and technology intensity showed the highest mean rank. The results mean that a disproportionate high number of high-tech/ high-newness ventures has the willingness to grow the start-ups as large as possible. These findings are in line with existing studies (i.e. Allen & Stearns, 2003), which found a positive relation between innovativeness/ technology intensity and growth willingness.
MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 107 Liao & Welsch (2003b) found that greater growth aspiration for technology- and innovation-related entrepreneurs also follows from their levels of social capital. More specifically, social capital that is characterized by sparse, disconnected social networks coupled with strong social ties is beneficial to these types of ventures. Less sophisticated ventures on the other hand fare better with an extensive (dense) network with strong social ties. Liao & Welsch (2003b) suggest technology-based entrepreneurs benefit more from relational embeddedness the freer and greater exchange of non-redundant information. Non-technology-based entrepreneurs benefit more from structural embeddedness the extensiveness of a social network. Earlier in this section it was discussed that technology-intensive and high-newness start-ups are likely to have more weak ties/ sparse networks compared to less sophisticated start-ups because of their search for new information and resources. High-tech/ high- newness start-ups have greater social capital, and hence a better understanding of what is realizable growth. Another study by Kolvereid (1992) found that the level of education of an entrepreneur is positively correlated with growth willingness; entrepreneurial experience, gender and location however were not significant. We have already discussed that technology-intensive start-ups are often founded by people with significant levels of human capital, which in turn could (partly) explain why in this study a positive relation was found between technology-intensity and growth willingness. Founders with more human capital/ higher levels of education are likely to be superior at grasping the full potential of the markets they are active in compared to founders with lower levels of human capital. When the founder has better knowledge of the potential rewards (and risks) he or she is better able to adjust aspirations towards growth accordingly. From the study of Liao & Welsch (2003b) it also became clear that relational capital (the level of tie strength and trustfulness) and cognitive capital (the level of shared norms) are more positively correlated to growth willingness for TBVs than for NTBVs. When we turn this around we can say that because high-tech start-ups have greater growth willingness, this is (partly) caused by their levels of relational and cognitive capital. The question that follows from the discussion above is whether the positive relation between newness/ technology intensity and growth willingness is caused by the independent variables or if it is mediated by the underlying characteristics of high-newness/ high-tech start-ups, such as more social and/or human capital of the founder(s). Now growth willingness and expectations are two phenomena that are intertwined, but also very different. I believe that growth expectations are mainly caused by the product offering of the venture, and the extent to which the entrepreneur can accurately estimate performance. Growth willingness on the other hand is more a product of the entrepreneur, and is about the extent to which the entrepreneur trades off the desired levels of control and flexibility. Growth willingness is affected by the motivation that the individual has for being an entrepreneur. High-newness and high- tech entrepreneurs are not in it for the lifestyle, but for their passion for innovative products. Since these types of entrepreneurs believe in the quality of their product, they want to share it with as many customers (and therefore want to grow their venture as large as possible). Off course the characteristics of the product/ service are of great importance. This study has shown that the absolute majority of start-ups offer imitative, low-sophistication products or services. Despite that no difference was made between products and services, we know that most start-ups are service- oriented firms with the founder as sole employee. The nature of the product offering of these firms makes that growth willingness (and also growth potential) is likely to be lower than for high-newness/
108 MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 high-tech start-ups. The latter category offers more physical products and digital services, which are easier to scale (than say, restaurants or beauty salons). This interpretation can be largely extended to the performance and growth measures. Analyses have shown that the higher the degree of both newness and technological intensity, the higher the expected absolute number of employees, revenue, and the relative expected growth of revenues and employees during five years of operations. These results not only appeared between high and low categories, but also on respectively four and five-point scales. Combined however there were no significant results found, which might be explained by the bigger effect of technology intensity over newness. High technology intensity means that start-ups either consider themselves as being high-tech, dedicate effort to research & development, have a technology-related competitive strategy, have developed a patent, or have developed proprietary technologies. A higher score on this spectrum implies a combination of multiple of these items. Now why does an increased degree of technology intensity correlate positively with employee and revenue levels? A combination of factors is applicable here, some of which were already mentioned in the growth willingness discussion. Looking at the underlying factors it becomes clear that a technology-intensive start-up requires a certain level of human capital. Founders of these start-ups have invested both time and money in their own development, in terms of formal education and gaining specific expertise and experience. Second, they have invested significant effort in developing their venture. It is no secret that investing in research & development, filing for a patent or trademark, and/or developing proprietary technology that no other firm has is costly. This study has not looked into profitability, but it is common knowledge of economics that entrepreneurs (and possible investors) are looking for a return on investment. The investment is larger for a greater degree of technology intensity, and to make up for this investment a greater level of revenues is required. The findings in this thesis are consistent with both Allen & Stearn (2003) and Liao & Welsch (2003) who found that revenue expectations are greater for technology-based ventures. Since a greater level of revenues is required to ensure decent return on investment, either the pricing or volume (or both) should allow this. The nature of the products or services that are offered by technology-intensive firms generally allow for easy scalability or high pricing (Covin et al., 1990). Furthermore cost of (re) production is generally lower than for less sophisticated ventures products. Technology-intensive start-ups show also greater levels of revenue growth. Despite that results in this thesis were inconclusive, other studies have shown that the gestation length of technology-intensive firms is longer. According to Elfring & Hulsink (2003) growth is characterized by search and discovery to establish a fit between the technological possibilities and the demands of particular niche markets. During this process it is difficult to earn money and the financial requirements can be party explained by this period of minimal earnings. Also, according to Aldrich & Martinez (2011) technology-based ventures dedicate more time to learning new roles and organizational routines. It thus takes them longer to get to speed. The revenue growth measure used in this study reflects the difference between annual revenue in the first and fifth year of operations. The higher growth numbers expected by technology- based ventures can be explained by the fact that earning money in the early stages is troublesome, but that these firms experience relatively better scalability. On the other hand, less technology-intensive start-ups on average are faster up-to-speed because the products/ services they offer require less refinement and the fit between product possibilities and market demand is more easily achieved. Their growth curve is therefore flatter.
MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 109 Similar arguments hold for the relation between newness and revenue expectancy. Off course some of the characteristics of the underlying items for tech-intensity are reflected in the newness variable. Developing proprietary technology and filing for a patent for instance presume a certain degree of product newness. Again, developing a new product or service, or going into new markets implies uncertainty and greater risk. Market acceptance is not a given, and to compensate for the risk taken by the entrepreneur a greater return is expected. Every entrepreneur in the process of starting a company has the ambition and expectancy to reach operational status, and associates a certain revenue level with it. He or she expects to some extent that the product or service gets accepted by the intended audience. When launching a new product, or launching a product in a new market and it subsequently gets accepted, the context of business changes. There is a profitable discrepancy that others have not yet perceived and exploited (Cheah, 1990; in Elfring & Hulsink, 2003). Changing the conditions and making other product offerings obsolete implies that greater rents can be achieved. It thus seems plausible that high-newness start-ups have greater expectancies regarding future revenue. Also in terms of revenue growth, conditions are similar to technology-intensive start-ups. Because high-newness firms are to a certain extent changing the (rules of the) game, it takes time to reach market acceptance, and in conjunction with longer development and refinement there exists a longer period on minimal earnings. After take-off however, growth patterns of high-newness firms are far from flat (Almus & Nerlinger, 1999). Another reason why both high-tech and high-newness firms experience more growth is that they have greater potential for learning. It is said that ventures only start learning about their effectiveness after market entry, and that because of the complexity associated with technology-intensive and high- newness firms there is more room for improvement (Almus & Nerlinger, 1999). It has become clear that technology-intensive and high-newness have greater potential and greater willingness regarding future revenue. Earlier in this study it was argued that using more than one measure for performance is desirable, and therefore the expected employee count was also studied. The hypotheses were confirmed for both newness, technology intensity, but not for sophistication. These findings are consistent with Liao & Welsch (2003). Allen & Stearn (2003) found that technology-based ventures not necessarily hire more or less employees, but they do it in a different pattern. Rather importantly, they found that technology-based ventures are often founded in teams, whereas non- technology-based ventures are founded by individuals. This off course has implications for the pattern of hiring employees. A founding team is expected to have more diverse capabilities than an individual, and is therefore likely to make do longer without hiring someone. Allen & Stearn (2003) found that non-technology based ventures hire employees earlier in the process. This can also be linked to the fact that these firms are faster up-to-speed. Since employees are hired earlier in the process by non- technology-based firms, and growth willingness and expectancy is lower it is obvious that the growth pattern is flatter. There were no analyses conducted to test for interaction between employee and revenue levels, but other studies (i.e. Liao & Welsch, 2003) have indicated that they are positively correlated. Few companies manage to grow their company in terms of revenues with a stagnating number of employees. Product refinement, exploring new (geographical) markets, and a better-organized backend of the firm are examples that go hand-in-hand with company growth. These factors simply imply more work and more diverse capability requirements, and hence a need for more employees. A logical consequence of greater growth willingness, which is found for both technology intensity and newness, is thus a higher amount of expected employees.
110 MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 An interesting study by Autio & Lumme (1998) was found, who studied the effect of technological intensity and innovativeness on growth potential. They distinguished four types of firms: application innovators, market innovators, technology innovators and paradigm innovators. Their framework provides a good combination of various degrees of newness and tech intensity. The greatest potential for growth are paradigm innovators and market innovators. The first group is the most sophisticated; it has developed new product concepts based on new technology to create new, previously not existing markets. Market innovators on the other hand excel in developing new product concepts, but not necessarily with radically new technologies. Their findings show that the most sophisticated (paradigm shifting) ventures have the greatest potential for growth, similar to what was found in this thesis. Also the effect of product newness is stronger than that of market newness. Companies would thus have the greatest potential for growth with the development of new products and the creation of new markets. Also the innovativeness adds to growth potential; the more radical, the greater potential for growth.
MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 111 Conclusion This study set out to gain insight in the earliest phase of entrepreneurship - that of the gestation process. Despite that interesting results were found in this thesis the explorative nature of the research should be emphasized. The identification and surveying of nascent entrepreneurs is a time-consuming process, which explains the lack of a solid empirical base of studies to date. A small reference framework made it difficult at times to find and apply relevant literature. Little was known about differences in the gestation process of technology-intensive and high-newness start-ups versus less sophisticated ventures. Adding to the innovativeness of this study is the empirical testing of causation and effectuation strategies. A lot of relations were tested, and consequently several conclusions are to be drawn. In the next section the research question is answered, practical and theoretical contributions are identified, and finally limitations and suggestions for future research are brought forward. Answer to the kesearch uest|on The research question that was identified early in this thesis was as follows: How does the gestation process differ for technology-intensive and high-newness start-ups and to what extent is this relation affected by nascent entrepreneurs decision-making strategy? The most important finding of this study is that the extent to which start-ups are technologically intensive and innovative (newness) has an effect on the way that new firms come into existence, and on the expectations and aspirations towards future performance. A multitude of factors impacts the success of the firm founding process, of which some were incorporated in this study. Scholarly literature and this thesis have shown that to explain entrepreneurial emergence preferably a multidisciplinary model should be built. Levels of human and social capital, characteristics and traits of the entrepreneur, venture type and environmental context are some of these disciplines that add to the equation. This study found that the environmental dynamics, in terms of risk, uncertainty and resource requirements that are associated with technology-intensive and/ or high-newness start-ups do not significantly hinder the odds of becoming a new firm. Studies based on a similar PSED dataset (Allen & Stearn, 2003; Liao & Welsch, 2003; Gimeno & Cooper, 2011) have shown that the ground rules for establishing such firms are different though. So despite having a more complex founding process, high-sophistication start-ups somehow compensate. Combined with findings of other studies into nascent entrepreneurship we can conclude that these ventures compensate with their levels of human and social capital. High- sophistication start-ups are founded more often by teams (or highly educated individuals) and thus have more diverse human capital in-house. This greater degree of human capital leads to superior ability at overcoming important difficulties, like acquiring knowledge and gaining funding. Moreover these ventures have different social capital structures that enable them to gain access to various resources. In the light of this, this thesis provides interesting results regarding the gestation activities used to become a new firm. Both technology-intensive and high-newness start-ups spend more effort on legitimacy- building and planning activities. Networking and building social capital are important underlying characteristics of legitimacy-building activities. High-sophistication start-ups also spend more time researching competitors, defining market opportunities, making financial projections and writing (formal) business plans. So by actively downplaying the uncertainties that these ventures encounter they are able to relatively get a good founding success rate vis--vis less sophisticated start-ups.
112 MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 However what may undermine the conclusion above it the fact that a disproportionate number of high- technology start-ups is still trying after at least five years of gestation efforts. If relatively many of those ventures eventually quit, the founding success rate decreases. This leads to two possible conclusions: high-technology firms on average do have a longer gestation period, but do not fail more often to become a new firm. Or technology-intensive start-ups that eventually become a successful new firm do so in a comparable timespan to less sophisticated start-ups, and there is a point of diminishment after which the likelihood of successful gestation decreases. Future research might shed more light on these two alternatives. An important focal point, but yet explorative part of this thesis was the incorporation of the decision- making strategy of nascent entrepreneurs. Based on the conceptual pillars of effectuation theory, the environmental context of start-ups was taken as a focal point to test whether ventures differ in their use of effectuation and causation approaches and to what extent this impacts the likelihood of becoming a new firm. The effects that were found, yet not initially hypothesized do provide interesting information. Interestingly, technology-based ventures seem to use a causation-oriented strategy more often. In other words, they rely more on a linear, rational process were the venture works towards a predefined goal, instead of a process that is open to experimentation and flexibility. On the other end of the conceptual model, it appeared that a causation approach is more positively correlated with becoming a new firm than neutral and effectuation approaches. Apparently it is advisable for start-ups to get past a critical point that is labelled as having become a new firm by using a causation approach. Sarasvathy noted that empirically causation and effectuation cannot be regarded as the only options rather ventures choose a place on the spectrum. In conjunction with Hamel & Prahalads (1989) corporate imagination theory this study concludes that prediction and control should be regarded as two decoupled phenomena. Start- ups use both planning and learning elements depending on their quest for resources, legitimacy and the right product-market combinations. This does not undermine Sarasvathys notion of effectuation. Working towards a predefined goal is important (causation), but that does not mean that goals cannot be adapted (effectuation). Working with the means at hand (effectuation) is critical, but some resources must be deliberately acquired (causation). The vision and ideals of the entrepreneurs are key (causation), but the entrepreneur must be open to stakeholders input to find the right product-market combinations (effectuation). Financial projections are necessary to calculate the potential of the firm and maximize the expected return (causation), but even so is the definition of when to stop (effectuation). Start-ups should not on forehand avoid contingencies and opportunities that can improve the firm and its products (effectuation), but should prevent from engaging in too many experiments (causation). So on a variety of dimensions, start-ups should find a balance that fits their needs at that time. The effectual or causational entrepreneur does not exist rather there is an infinite number of combinations that changes as ventures go through different phases. Moreover this study provided solid confirmation for existing literature regarding expectations toward future performance and growth aspiration. Technology-intensive and high-newness start-ups more often have the ambition to grow their venture as large as possible than other ventures. Care is warranted for these findings though because most of the ventures started in the PSED are imitative service-oriented organizations where the entrepreneur is the sole employee. This also extends to future employee and revenue levels. In terms of absolute revenue and revenue growth, increased technology-intensity and newness impacts the entrepreneurs expectations positively. These ventures are looking for a positive return-on-investment that accounts for the risks taken and the potential to change the status quo of
MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 113 markets. Even when controlling for growth willingness, technology-intensive and high-newness start-ups expect to realize greater revenue and employees. An important remark must be placed on the importance of the predictor variables throughout this study. Obviously most emphasis has been placed on technological intensity. It has already been argued that technological intensity also incorporates newness to some extent, so findings are also largely applicable to the innovativeness of start-ups. Some of the analyses regarding the interaction term venture sophistication were not supporting the hypotheses, but this can be attributed to the relatively stronger effect of technology intensity over newness. 1heoret|ca| Contr|but|ons This study was both explorative and focused, and as such provided a contribution to the body of empirical research that is currently available on nascent entrepreneurship. It is one of the first studies to deliberately juxtapose nascent technology ventures and less sophisticated start-ups in the context of early entrepreneurship. Moreover, it is the first study that is known to empirically test the presence of causational and effectual constructs in the context of nascent entrepreneurs. In this light the thesis questions the applicability of effectuation theory for young ventures that have not yet come into existence. Moreover support is found for existing studies that proposed process differences exist between technology-based ventures and non-technology-based ventures. Also solid confirmation of existing theories on growth willingness and performance differences for different types of ventures (technology-based, innovative) is found. ract|ca| Contr|but|ons Decisive for the types of gestation activities used and the extent to which entrepreneurs rely on effectuation and causation approaches is the type of venture and the resource requirements associated with it. Gestation activities are highly dependent on industry dynamics, and required human, social and financial capital. Technology-based ventures are advised to invest in building legitimacy since this is found to be an important prerequisite for eventual success. In order for technology-based ventures to fulfil the resource requirements often a fair amount of planning activities is needed. It helps them at reducing uncertainty and opening and closing opportunities for securing for example financial investments. The importance of legitimacy and planning hints at going through a linear rationally carried out process in which there is little room for experimentation. Causation and effectuation should off course not be considered so black and white as they are in this thesis rather entrepreneurs are expected and advised to balance the best of both worlds depending on the requirement conditions and the phase of the venture. The rational and planning characteristics of causation can be needed to secure funding, but on the other hand can experimental processes aid in developing a good business model or finding a niche. Technology-based and innovative ventures are important drivers of economic growth, and the past years have shown that The Netherlands is losing its position on the world map as a country that generates these kinds of firms. Despite that The Netherlands has a solid educational system and an appealing entrepreneurial climate, the country is falling behind for instance Asian economies. A rise in so-called technology-transfer offices (TTOs) and university-incubators has been going on the past decade. Also more-and-more universities are offering entrepreneurship programs. Combined course programs (f.i. TU Delft technical students cooperating with RSM business students) are a good development. Too much innovation remains in the patent offices, and an explaining factor for this might be the lack of business
114 MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 background that technical students have. Entrepreneurial activity should be promoted amongst these students, but even so important is creating awareness under business students of how to look for and exploit technological/ innovative opportunities. Higher-educated students have the human capital, are used to working in teams and create dense social networks that are prerequisites to successful TBVs, however these characteristics also give them safe career options which act as an impediment to entrepreneurial activity. In economic times like these where students are having a harder time finding a job that fits their capabilities, founding innovative ventures is not such a bad idea. A concluding remark of the author would be that scholarly research on for instance strategy, and more specifically on effectuation is fond of putting definite labels on certain phenomena. Effectuation and causation are new, fresh labels to combine factors on strategy, decision-making, individual traits and environmental dynamics that might hinder the explanatory value of those underlying factors. These two labels should thus be applied carefully. L|m|tat|ons & Avenues for Iuture kesearch Limitations Clearly this thesis has become a very extensive piece of research that provides lots of opportunities for future research, but also has clear limitations. Researching nascent entrepreneurship in a master thesis setting requires the use of existing data sources. The PSED has proven to be a dataset with ample opportunities, but as with most secondary data one has to compromise on quality of the constructs. The measures for newness and technology intensity were self-thought of, but later also found in existing studies. The data allowed for good measurement of these constructs. For effectuation and causation however the items adapted from Garonne et al. (2011) had to be approximated and as such were not complete. Moreover the initial goal was to measure actual performance of the start-ups in terms of profit, revenue and employees. The data however did not allow for this; a very limited number of start-ups provided usable numbers. Instead the expected values were used. Although expected values can to some extent be used as substitutes, this resulted in a conceptual shift to working with expected instead of realized data. Also ideally the outcomes of the gestation process would be known for all respondents in the sample however an important portion of the start-ups was still trying to launch a firm when the research program ended. There was thus no conclusive outcome of the process, which makes interpretation difficult and yields multiple conclusions as plausible. Finally the limited availability of literature on nascent entrepreneurship, differences between technology- based and non-technology-based ventures, and effectual/ causational constructs made it difficult to provide persuasive theoretical backing to some findings. Future research The extensiveness of this research makes that there are more than enough areas for future research, that shall not all be mentioned here. Dedicated research should be carried out in the area of effectuation and nascent entrepreneurship. This study questions if the assumptions of effectuation theory also hold for young ventures and future research could tap into that by testing the exact items of Garonne et al. (2011) instead of using existing datasets. Also, in this study characteristics of the entrepreneur and actions of the venture are used when measuring strategy, and it would be interesting to see to what
MAS1Lk 1nLSIS - .L. DILkLMA - kSM LkASMUS UNIVLkSI1 11S extent effectuation and causation are deliberately chosen approaches, or that it is an intuitive process. Other studies have shown that the sequencing of gestation activities differs for technology ventures. Due to the high coupling between strategy and gestation activities it is interesting to look into the sequencing of effectuation and causation constructs. Maybe start-ups use causation more in the early phases and effectuation more in the phase after becoming a new firm. This study hinted at the different circumstances under which ventures come into existence. Dedicated research is needed in which the specific issues that TBVs and NTBVs encounter are set off against for instance the strategy used in terms of causation and effectuation. What is also argued to be of importance for successfully completing the gestation process is the motivation that entrepreneurs have for starting a company; this study has not looked into that, but for instance the level of perseverance and the push/pull motivation to becoming an entrepreneur are highly interesting phenomena. Also this study deliberately juxtaposed TBVs and NTBVs, but within those two categories are a lot of differences. Future research should not only use these categories, but should also look within. So for example do paradigm innovators differ from TBVs that are merely launching an existing technological product in a new market? A last limitation and suggestion for future research is the nature of the database; the PSED provides an accurate and generalizable sample of the US population of business start-ups. It is thus safe to extrapolate findings in the US. Entrepreneurship in the US however has different norms and values than in Europe, or in The Netherlands. Failure for instance is much less stigmatized, in contrast to failure in Europe. Extending the findings to for instance Dutch start-ups should thus be done carefully. Preferably a European database on nascent entrepreneurship should be built; currently the CAUSEE effort in Australia has mirrored the setup of PSED, AGSE has done so in Sweden and China also has a variant.
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