Chapter five

Growing the Enterprise

5.1 Factors Influencing Success
To try to explain the success and failure of ventures, the researchers reviewed 31 other key
studies of technology ventures, and found only eight factors that were consistently found to
influence success:
 Value chain management: cooperation with suppliers, distribution, agents and customers.
 Market scope: variety of customers and market segments, and geographic reach.
 Firm age: number of years in existence.
 Size of founding team: likely to bring additional and more diverse expertise to the ventures
and better decision making.
 Financial resources: venture assets and access to funding.
 Founders’ marketing experience: But not technical experience, or prior experience of start-
ups (see below).
 Founders’ industry experience: In related markets or sectors.
 Existence of patent rights: In product or process technology, but R&D investment was not
found to be significant.
The first three factors were by far the most significant predictors of success. However, clearly
there is also some interaction between these effects, for example the founders’ marketing and
industry experience is likely to influence the attention to market scope and the value chain,and
patent rights make raising finance easier, and vice versa.
In addition, they found that some commonly cited factors had no effect, including founders’
experience of R&D or prior start-ups. The importance of other factors depended on the precise
context of the venture,
For example for independent start-ups R&D alliances and product innovation both had a
negative effect on performance, but for ventures of mixed origins R&D alliances and product
innovation both had a positive effect on performance

Page 1 of 6
TABLE 5.1 Initial conditions influencing the success of new ventures
Significance Condition

Most significant (5% level) Size of target market

Industrial experience of founders
Strength of social networks
Business management skills
Significant (10% level) Product attractiveness to target market
Ownership structure and governance
Not found to be significant Profit potential, Entrepreneurial attitude
Leadership skills, R&D and production planning
Market development Financial forecast
Innovative firms are more likely to grow, in terms of sales and employment, but are not
necessarily more profitable than non-innovators. Funding by venture capital has no effect on the
innovativeness of a start-up, but does have a positive influence on profitability, perhaps
reflecting the priorities of such investors. Financial constraints only have an effect on the
likelihood of survival of a new venture in the first few years, but continue to constrain
profitability and growth for a decade after foundation.
One of the challenges of developing a new venture is developing or gaining access to
complementary capabilities, assets and resources. For example, a start-up may have the technical
know-how or intellectual property but not be able to reach or support potential customers, or
conversely an entrepreneur may identify a market opportunity but not be able to provide the
product or service to satisfy this. This is one reason why firms created by pairs or small groups
of founders are significantly more likely to be successful than those formed by individual
entrepreneurs.
5.2 Funding
The initial funding to establish a new venture is rarely a major problem, as most are self-funded.
However, Peter Drucker suggests a new venture requires financial restructuring every three years.
Different stages of development each have different financial requirements:
 Initial financing for launch.
 Second-round financing for initial development and growth.
 Third-round financing for consolidation and growth.
 Maturity or exit
In general, professional financial bodies are not interested in initial funding, because of the high
risk and low sums of money involved. It is simply not worth their time and effort to evaluate and

Page 2 of 6
monitor such ventures. However, as the sums involved are relatively small typically of the order
of personal savings, re-mortgages and loans from friends and relatives are often sufficient.
The initial funding required to form a new venture may include the purchase of accommodation,
equipment and other start-up costs, plus the day to-day running costs such as salaries, utilities
and so on.
Research in the USA and the UK suggests that most begin life as part-time ventures and are
funded by personal savings, loans from friends and relatives and then bank loans, in that order.
Around half also receive some funding from government sources, but in contrast receive next to
nothing from venture capitalists
Venture capital is typically only made available at later stages to fund growth on the basis of a
proven development and sales record. Given their strong desire for independence, most
entrepreneurs seek to avoid external funding for their ventures. However, in practice this is not
always possible, particularly in the later growth stages.
Venture capitalists are keen to provide funding for a venture with a proven track record and
strong business plan, but in return will often require some equity or management involvement.
Moreover, most venture capitalists are looking for a means to make capital gains after about five
years.However, almost by definition entrepreneurs seek independence and control, and there is
evidence that some will sacrifice growth to maintain control of their ventures. For the same
reason, few entrepreneurs are prepared to go public to fund further growth. Thus, many
entrepreneurs will choose to sell the business and found another.
For example, the typical technology entrepreneur establishes an average of three ventures in their
lifetime. Therefore, the biggest funding challenge is likely to be for the second-round financing
to fund development and growth. This can be a time-consuming and frustrating process to
convince venture capitalists to provide finance. The formal proposal is critical at this stage.
Professional investors will assess the attractiveness of the venture in terms of the strengths and
personalities of the founders, the formal business plan and the commercial and technical merits
of the product, typically in that order.
Venture capitalists can play two distinct roles. The first is to identify or select those NTBFs (new
technology based firms)that have the best potential for success that is ‘picking winners’ or
‘scouting’ The second role is to help develop the chosen ventures, by providing management
expertise and access to resources other than financial that is a ‘coaching’ role. Distinguishing

Page 3 of 6
between the effects of these two roles is critical for both the management of and policy for
NTBFs. For managers, it will influence the choice of venture capital firm, and, for policy, it will
influence the balance between funding and other forms of support.
5.3 Growth and Performance of New Ventures
There has been a great deal of economic and management research on small firms, but much of
this has been concerned with the contribution all types of small firms make to economic,
employment or regional development. Relatively little is known about innovative new ventures.
In most developed economies, around 10% of the economically active population engage in new
venture creation each year, a slightly higher proportion (15% or so) in the USA and Asia and a
little lower in Europe (excluding the UK) 6%. However, the rate of churn (i.e. new ventures
closed less those created) is high. Closure does not necessarily indicate failure, as a founder may
choose to change business or seek alternative employment. Survival rates are quite high, in the
UK after two years 80% survive, and 54% after four years. In the USA there are more short-term
failures, probably owing to the ease of establishing a business there, but similar rates of longer-
term survival: 66% survive two years, 50% four years and 40% more than six years.
A study of 409 SMEs examined the differences between the highest-growing, the gazelles(a
small fast growing company), and the lowest-growing companies over a four-year period, to
identify how innovation contributed to the growth. It found that, in addition to high growth, the
highest-growing companies also showed higher profitability, increased number of employees and
significantly higher market shares locally, nationally and internationally. Much of the research
on innovative small firms has been confined to a small number of high-technology sectors,
principally microelectronics and biotechnology.
Research over the past period or so suggests that the innovative activities of SMEs exhibit
broadly similar characteristics across sectors.
 They are more likely to involve product innovation than process innovation
 They are focused on products for niche markets, rather than mass markets
 They will be more common amongst producers of final products, rather than
producers of components
 They will frequently involve some form of external linkage
 They tend to be associated with growth in output and employment, but not necessarily
profit.

Page 4 of 6
The limitations of a focus on product innovation for intermediate markets in particular problems
associated with product planning and marketing, and relationships with lead customers and
linkages with external sources of innovation. Where an SME has a close relationship with a
small number of customers, it may have little incentive or scope for further innovation, and
therefore will pay relatively little attention to formal product development or marketing.
Therefore, SMEs in such dependent relationships are likely to have limited potential for future
growth and may remain permanent infants or subsequently be acquired by competitors or
customers.
The size and location of a venture also has an effect on performance. Geographic closeness
increases the likelihood of informal linkages and encourages the mobility of skilled labor across
firms. However, the probability of a start-up benefiting from such local knowledge exchanges
appears to decrease as the venture grows. This growing inability to exploit informal linkages is a
function of organizational size, not the age of the venture, and suggests that as ventures grow and
become more complex they begin to suffer from many of the barriers to innovation, and
therefore the explicit processes and tools to help overcome these become more relevant. Larger
SMEs are associated with a greater spatial reach of innovation related linkages and with the
introduction of more novel product or process innovations for international markets.
In contrast, smaller SMEs are more embedded in local networks, and are more likely to be
engaged in incremental innovations for the domestic market. It is always difficult to untangle
cause and effect relationships from such associations, but it is plausible that as the more
innovative start-ups begin to outgrow the resources of their local networks they actively replace
and extend their networks, which creates both the opportunity and demand for higher levels of
innovation. Conversely, the less-innovative start-ups fail to move beyond their local networks,
and therefore are less likely to have either the opportunity or the need for more radical
innovation
A high proportion of new ventures fail to grow and prosper. Estimates vary by type of business
and national context, but typically 40% of new businesses fail in their first year and60% within
the first two. In other words, around 40% survive the first two years. Common reasons for failure
include:
 poor financial control
 lack of managerial ability or experience
 No strategy for transition, growth or exit.

Page 5 of 6
There are many ways a new venture can grow and create additional value:
 organic growth through additional sales and diversification
 acquisition of or merger with another company
 sale of the business to another company, or private equity firm
 An initial public offering (IPO) on a stock market.
A lack of managerial experience and credibility in their founders can also be a major barrier to
funding and growing new ventures. In the early stage developing relationships with potential
customers and suppliers is the most critical, but as the venture grows the relationship and role of
partners in the network of a new venture will change. Later, external sources of funding need to
be cultivated, which can result in changes of ownership and the dissolution of some of the initial
relationships, and substitution for more mature partners in more stable networks.
Over time, the roles of different actors in the venture network become more specialized and
professional. Individual skills are essential in building and developing such relationships and
networks. These skills include
 Social and interpersonal communication: to build credibility and promote knowledge
sharing
 Negotiating and balancing skills: to balance cooperation and competition, and to
develop awareness, trust and commitment.
 Influencing and visioning skills: to establish roles, and shares of responsibilities and
rewards.
Therefore, the challenge is not only to simultaneously manage the more mature firm and its
relations but also to maintain the early focus on innovation. To conclude, new venture growth
is a consequence of the interaction of internal factors, such as the entrepreneurs’ personalities
and capabilities, and external factors such as social and physical network connections.
However, an entrepreneurial disposition is necessary but is not by any means a sufficient
condition for innovation or success.

Page 6 of 6