FOUNDING CONDITIONS AND BUSINESS PERFORMANCE:
"HIGH PERFORMERS" VS. SMALL VS. VENTURE CAPITAL-BACKED START-UPS
Robert H. Keeley
College of Business
University of Colorado at Colorado Springs
P.O. Box 7150
Colorado Springs. Colorado 80908-7150
This longitudinal study of high performing start-up companies explores the ways that the "founding conditions"---that is, the traits of the founders, their early goals and choices, and the processes they followed in forming a business-influence subsequent performance. The sample of companies is roughly equivalent to ReynoLds' (1993) "high performers." Such "high performers" fill a gap between venture capital backed start-ups (Keeley & Roure, 1993) and small start-ups (Keeley & Knapp, 1993) view it as complementary to Reynolds' cross-sectional study.
Reynolds (1993) studies the fastest growing two percent of a sample of
1400 young companies, and finds several characteristics that distinguish
them from the rest of the sample, including:
* more likely to be started by a team
* founders have more experience in the industry
* greater management emphasis on industry knowledge and on maintaining a network of contacts * a stronger commitment.
* the business founders are more likely to come from established firms
This study attempts to understand why those qualities are associated with high growth.
The study follows Eisenhardt's (1989) model of inductive research. The principal method for gathering data is a semi-structured interview with a founder of each business, in which the founder is asked to play the role of an objective historian for the business. The interviewers use a "checklist" of questions to assure that certain common information is obtained. The interviews, which emphasize objective events much more than value judgments, focus on the reasons and activities related to starting the business, on the major challenges and surprises, and on changes in size or focus of the business.
The companies are all located in Colorado and meet Reynolds' criteria of reaching $2 million in sales within 5 years and growing faster than 100 percent per year prior to reaching $2 million in sales. They are principally in manufacturing and business services -- a somewhat narrower set of industries than Reynolds' sample.
The analysis begins by looking for common elements within the sample as to characteristics of founders' stated motives for forming a company, the processes leading to formation, and the initial strategy of the company. It also looks for common events subsequent to formation that influence the company's success and are 1inked to the way in which the company was formed.
A second stage of the analysis compares these "high performers" with l9 small start-ups that did not become "high performers" and with 15 venture capital backed start-ups. The data for each group (small start- ups, "high performers," and venture capital backed) were gathered using the same semi-structured interview format.
The founders of "high performing" ccmpanies had diverse backgrounds. With respect to education, amount of business experience, experience in the same industry, and number of founders they varied. In this respect they are similar to an earlier sample of small start-ups, and not like the venture capital backed start-ups (whose founders generally appeared highly qualified from their backgrounds).
As to motives, the founders of "high performers" combined the qualities of small start-ups and of venture capital backed start-ups. They were drawn by the challenge, the independence and the desire not to simply hold a job. They also expressed their interest in money, a motive avoided by both small start-ups and venture capital backed start-ups.
The process of starting the company involved little exploration of options. The founder did not systematically search for a business idea, and did not develop a detailed business plan. Outside advisers or investors played essentially no role in the founder's choice of business or mode of entry. On the whole the founding process of small start-ups and "high performers" are similar. Venture capital backed start-ups engage in much more planning and have much more interaction with outsiders.
The early growth of the "high performers" was not constrained by shortages of capital, nor by difficulties in attracting key managers. In common with the small start-ups and the venture capital backed start ups, market size and competition were major constraints on growtn. The importance of on-the-job learning varied. Some had learned about their business from prior industry experience, but other began the company with no experience and simply learned as they went. The latter group expressed a greater tendency to rely on outside advisers/mentors- generally located after the formation of the business.
This study supports our earlier research in suggesting that small start- ups, "high performers" and venture capital backed start-ups can be understood within a common economic model based on rational decision making. On the other hand, the size of a start-up and the background of the founder(s) influences the specific "parameters" of the model and the outcome. The findings are generally consistent with Reynolds' conclusions about "high performers," but they highlight the diversity one finds in "high performers." That is, 'high performers' exhibit average differences from small start-ups that can be detected statistically, but the two groups overlap considerably on most dimensions. Most, of the variance in outcomes is probably traceable to the size of the market opportunity.
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