MASTER THESIS
ENTREPRENEURSHIP AND INNOVATION
The influence of a venture’s network on its
marketing performance
Author Saruul Krause-‐Jentsch Student number 10825037
Date of submission June 29th 2015
Qualification MSc. in Business Administration Track Entrepreneurship and Innovation
Institution Amsterdam Business School –
Universiteit van Amsterdam
Supervisor Roel van der Voort
Second Supervisor Tsvi Vinig
Statement of originality
This document is written by Student Saruul Krause-‐Jentsch who declares to
take full responsibility for the contents of this document.
I declare that the text and the work presented in this document are original
and that no sources other than those mentioned in the text and its
references have been used in creating it.
The Faculty of Economics and Business is responsible solely for the
supervision of completion of the work, not for the contents.
Abstract
New ventures act under time and budget constraints and they aim to follow a fast growth path. Entrepreneurs therefore often leverage their networks in order to benefit from a more readily access to external resources. Entrepreneurial marketing differentiates itself from marketing in established firms by a stronger network orientation, by the lack of organizational structures for marketing and by the use of more unconventional means and tools. Flexibility and cooperation are two imperatives of entrepreneurial marketing. It is therefore of interest, how networks actually influence the marketing performance of new ventures and how new ventures should compose and use their networks in order to achieve optimal marketing outcomes. This research sheds light on what structural and relational factors positively influence marketing performance and in what ways networks can best support new ventures. In order to study these relationships, a quantitative survey strategy was employed. An online questionnaire was thus sent out to entrepreneurs and founders of new ventures that are involved with network actors, who provide marketing support. The entrepreneur’s network size, the network’s diversity, the degree of internationality of the venture’s network and the value of the supplied marketing resources were found to have a significant and positive influence on marketing performance. This research therefore helps marketing practitioners in building valuable networks and hence achieving marketing success. Furthermore, the mentioned future research propositions contribute to the progress in entrepreneurial marketing theory.
Key words:
Entrepreneurial Marketing, Networks, Marketing performance, strong ties, structural embeddedness, relational embeddedness, network diversity, network centrality
Table of Content
Page 1. Introduction 5 1.1. Research question 6 1.2. Academic relevance 6 1.3. Practical relevance 8 1.4. Research objective 9 1.5. Structure of the thesis 10
2. Literature review 11
2.1. Entrepreneurship 11
2.2. Entrepreneurial marketing 15 2.3. A venture’s network: Social capital, network structure and actors 19 2.3.1. Social capital 19 2.3.2. Network structure 21 2.3.3. Network actors 23 2.3.3.1. Venture capital firms 24 2.3.3.2. Angel investors 25 2.3.3.3. Governmental programs and institutions 26 2.3.3.4. Supplier, distributor, competitors
and customer organizations 27 2.3.3.5. Human capital, friends and family 28 2.4. Relational and structural embeddedness 30 2.5. Strong and weak ties 31 2.6. A venture’s network and marketing performance 33 2.6.1. Entrepreneur’s network size and marketing performance 36 2.6.2. Network diversity and marketing performance 37 2.6.3. Relational embeddedness and marketing performance 39 2.6.4. Network resources and marketing performance 40
3. Research Methodology 42 3.1. Conceptual model 42 3.2. Data collection method 45 3.3. Definition of variables 46 3.3.1. Control variables 46 3.3.2. Independent variables 47 3.3.3. Dependent variables 49 3.4. Research population and sample 50 3.5. Analytical strategy 51 3.6. Validity and reliability 55
4. Data Analysis 56 4.1. Entrepreneur’s network size and marketing performance 57 4.2. Network diversity and marketing performance 60 4.3. Strong ties and marketing performance 64 4.4. Network resources and marketing performance 69 4.4.1. Number of supplied marketing tools 69 4.4.2. Value of marketing resources 72
5. Discussion and Conclusion 76 5.1. Entrepreneur’s network size and marketing performance 77 5.2. Network diversity and marketing performance 79 5.3. Network internationality and marketing performance 80 5.4. Strong ties and marketing performance 82 5.5. Supplied marketing resources and marketing performance 83 5.6. A venture’s network and marketing performance 87 5.7. Limitations and future research recommendations 88
6. References 91
“Succeeding in business is all about making connections. […] For an entrepreneur, the ability to forge connections is the greatest asset.”
(Richard Branson)
1. Introduction
Entrepreneurial marketing is a relatively new field of study within the Entrepreneurship and Marketing research fields (Kraus et al., 2011). The thesis aims to analyze start-‐up specific marketing approaches with an emphasis on the non-‐monetary contributions of a venture’s network to its marketing performance. Every new venture starts with a small to non-‐existing customer base and without any marketing or brand assets (Mauer & Grichnik, 2011). Building a brand and gaining a significant customer base are crucial for a new venture in order to gain commercial success (Magretta, 2002). But since all new ventures act within budgetary and time constraints, they make use of very resource efficient marketing tools and activities (Al-‐Laham & Souitaris, 2008). They gain external resources and intangible assets from a strong network, which is an important asset in itself for new ventures.
Entrepreneurial marketing differs from conventional marketing approaches (Hills & Hultman, 2006). Network assets play an important role in establishing a new venture (Miles et al., 2014; Merrilees, 2011). Within constraints of time, monetary resources, market expertise and in an environment of high uncertainty; external financial and intangible support is crucial in order to reach fast growth (Al-‐Laham & Souitaris, 2008). The strength of a venture’s network is an important antecedent to achieving long-‐term
success (Elfring & Hulsink, 2003). A start-‐up’s network consists of many different stakeholders such as incubators, investors, business angels and institutional entrepreneurship subsidies such as the Start-‐up Europe program. The existing theory is centered on entrepreneurial marketing tools and the efficient use of resources. However, with the growing influence of incubators (Gilbert et al., 2008) and investors (Wiltbank et al., 2009) on venture’s decisions, a discussion on their influence on marketing outcomes would be of interest. Yet, the current literature lacks an integral examination of the impact of a venture’s network and their non-‐monetary contributions to entrepreneurial marketing activities and its success. This research therefore analyzes in what ways and to what extent a venture’s network influences its marketing performance.
1.1 Research question
The research will examine how a venture’s network contributes to its marketing performance and what the impact of a venture’s network on its marketing success is. Therefore, two main questions will lead the structure of this analysis:
How does a venture’s network influence its marketing performance? Do networks lead to positive outcomes for a new venture’s marketing performance?
1.2 Academic relevance
The thesis explains the specificity of marketing for start-‐ups that act in an environment with specific challenges and constraints. The focus on network actors such as investors, accelerators, incubators, governmental institutions and their influence on the marketing
performance complements the existing research, as there is little research on non-‐ financial support of a venture’s network to entrepreneurial marketing efforts.
The relevance of social networks for entrepreneurs has already been studied by several researchers (Thomas et al., 2013). Greve and Salaff studied the social network approach by focusing on the relationships between entrepreneurs and others that provide the resources that are important in establishing a business (2003). The idea of a social network providing various resources is prevalent (Greve, 1995). Mosey and Wright for instance stress the importance of support initiatives in achieving superior company performance and attracting other industry partners (2007). Likewise, the structure of social networks and social capital has been reviewed in the entrepreneurship context by researchers in the past (Gabbay & Leenders, 1999; Burt, 1992).
But there is little research on the non-‐financial contribution and support of a new ventures network to its marketing and consequently to the success of the respective marketing efforts. A theoretical discussion on the relationship between the surrounding network of a new venture and their marketing performance is therefore needed in order to explore further on the value creation process in start-‐ups. A framework can help in creating a theoretical basement for the influence of a venture’s network on marketing performance. This research will therefore add new insights to the network theory of entrepreneurial marketing. The research will identify the tools and non-‐ monetary assets that a venture’s network supplies and the ways, in which a network can facilitate marketing success for new ventures. By analyzing the factors that contribute to marketing success from a network perspective, it will help in understanding how a network can be efficiently and effectively used in order to create
value for entrepreneurs and start-‐ups. This research can thus add value to the emerging field of research of entrepreneurial marketing by its focus on non-‐monetary network effects.
1.3 Practical relevance
Baldridge et al. conceptualize the practical relevance of scientific research by the existence of a certain level of ‘justification’ and ‘interestingness’ (2004). These dimensions measure whether a research represents a significant contribution to the practice of management (‘justification’) and whether the ideas of the research are novel and interesting or whether they extend the knowledge of a management issue (‘interestingness’) (Baldridge et al., 2004).
Considering the contribution to the management practice, the proposed framework and guidelines for the integration of a venture’s network in entrepreneurial marketing will be very relevant for future entrepreneurs, Chief Marketing Officers and marketing managers. They can use the findings to direct their decisions in order to benefit from leveraging their network. A venture’s network is a very effective and valuable asset to raise awareness and therefore sales revenues (Merrilees, 2011; Miles et al., 2014;). Understanding how a venture’s start-‐up can contribute best to its commercial success and what tools are most effective can lead to a better planning and application of network structures. Information on what type of investors lead to higher marketing outcomes or what type of supplied tools is most effective can be used in order to optimize the investor’s portfolio for instance. Thus actionable input on the research topic will be useful for every start-‐up.
The research will shed light on a novel aspect of entrepreneurial marketing theory, which is the influence of non-‐financial assistance and support of networks on entrepreneurial marketing. Networks are an important factor for success in entrepreneurship (Mosey & Wright, 2007; Greve & Salaff, 2003; Miles et al., 2014). But most of the research focuses on the impact of networks and network resources and entrepreneurial outcomes or overall company performance. The distinctive particularity of this research lies in the focus on the relationship between networks and marketing, which will expand the knowledge on the connection between networks and entrepreneurial marketing theory.
1.4 Research objective
Even though there’s a lot of scientific evidence for the positive influence of a strong network on a start-‐up’s overall performance (Hoang & Antoncic, 2003, Brüderl & Preisendörfer, 1998), the impact of networks on marketing performance have been not been studied to a deeper extent so far. This issue has certainly not been explored in depth and therefore deserves the attention of this research.
The thesis will find out, what type of network actors has a positive influence on the marketing success of a new venture, what type of tools these network actors supply and in what way the value and diversity of the supplied marketing tools and assets facilitate a venture’s marketing success. In focus of the research are the structure of a venture’s network, the respectively supplied resources and assets and their influence on a venture’s marketing success. The aim is to find a distinct correlation between specific
actors and their impact on marketing performance as well as a correlation between the value and diversity of these tools and marketing performance.
With these findings, the thesis will provide a framework of network and marketing performance in entrepreneurship. Finally, managerial implications for founders and entrepreneurs will be deducted and hence affirm the practical value of this research.
1.5 Structure of thesis
The thesis is structured as follows. First, the introduction provides the problem definition, the practical and academic relevance, the aim and the structure of the thesis. An extensive literature review on entrepreneurship theory, entrepreneurial marketing, network structure, network actors and social and relational embeddedness dimensions of social networks follows the introduction. The literature review also introduces the hypotheses that relate to the outlined research. The subsequent methodology section contains the conceptual model, the data collection method, an overview of the sample, a description of the questionnaire development, the analytical strategy and the reliability and validity claim of the research. Then, a chapter on the research results and data analysis will state the main findings. Finally, the discussion and conclusion include the framework, an answer to the research question as well as managerial implications and research limitations.
Figure 1: Visualization of the thesis structure
2. Literature review 2.1. Entrepreneurship
Many authors stress the fact that the theory of entrepreneurship does not supply a valid and widely accepted definition of Entrepreneurship (Baumol, 2005; Bruyat & Julien, 2000; Ucbasaran, Westhead, & Wright, 2001, Watson, 2001; Kobia & Sikalieh, 2009). Even though entrepreneurship “is known to play a critical role in reality”, economists are concerned “whether it fits into theory” (Baumol, 2005). There are different reasons for this lack of generalizable theory. Firstly, there are many different forms that entrepreneurship can take: For instance a start-‐up, a new venture, corporate entrepreneurship, social entrepreneurship, self-‐employment, SMEs, founders, venturing, and opportunity entrepreneurship are some of the concepts associated with entrepreneurship (Sharma & Chrisman, 1999). Secondly, the term entrepreneurship has different inherent meanings in different languages and countries. It is in general
characterized by a high degree of complexity, heterogeneity (Bruyat & Julien, 2000) and discontinuity of relationships (Baumol, 2005). Thirdly, it is a multi-‐disciplinary concept that isn’t limited to established boundaries of the field of entrepreneurship, as it integrates theories of economics, business, psychology, sociology, technology and innovation for instance (Bruyat & Julien, 2000).
One of the first definitions of entrepreneurship originates from Richard Cantillon in 1731 (Hébert & Link, 1988; Bruyat & Julien, 2000; Ahmad & Seymour, 2008), which defined the entrepreneur as an economic agent that engages in exchanges for profit while exercising business judgments in the face of uncertainty (Hébert & Link, 1988). Assessing risks and making profits are the main aspects of Cantillon’s early definition (Bruyat & Julien, 2000).
Knight along with Cantillon stressed the uncertainty that entrepreneurs bear, while they attempt to predict and act upon change within markets (Knight, 1942; Ahmad & Seymour, 2008).
Schumpeter established some of the earliest building blocks of the modern interpretation of entrepreneurship by defining entrepreneurship as a new combination of already existing economic means (Schumpeter, 1934). He distinguishes between the circular flow of economic life representing the incremental change by managers and the economic development, which is linked to new combinations and a change from within (Schumpeter, 1934; Gunter, 2012). According to Schumpeter, entrepreneurship represents the difference between these two concepts (Schumpeter, 1934) and the Schumpeterian entrepreneur therefore is an innovator, who implements entrepreneurial change in markets using innovative approaches to exploit entrepreneurial opportunities (Ahmad & Seymour, 2008). Knudsen & Swedberg extend
this view by defining ‘capitalist entrepreneurship’ as a process: The act of creating new combinations changes economic orders and clears the way for a new economic order. It links entrepreneurship to creative destruction and the unmaking of economic orders in order to make profit (2009). Audretsch and Lehmann describe it in that matter as the missing link in the process of economic growth as it facilitates knowledge spill over (2005).
It is very apparent that entrepreneurship is often linked to innovation and creativity. Baumol linked entrepreneurship to the theory of investment and defined it this context as an innovative activity which can be considered as a form of investment and therefore be analyzed and studied as a form of investment for which theory and formal models exist (2005). Likewise Kao et al. define Entrepreneurism as a “process of doing something new (creative) or different (innovative) for the purpose of creating wealth for the individual and adding value to society” (2002). It can therefore be argued that the price for entrepreneurship and innovation is the disruption of existing industries and the profit of it is the creation of wealth for society.
According to Drucker, the entrepreneur is always in search for change, he responds to it and exploits it as opportunity (1985). Shane also emphasizes the entrepreneurial opportunity in his definition of entrepreneurship (2003). An entrepreneurial opportunity is a situation in which a person can create a new means-‐end framework for recombining resources that the entrepreneur believes will yield a profit (2003). Walras (1954), von Mises (1962) and Kirzner (1973) identify the entrepreneur as arbitrageur that recognizes opportunities for making profit and acts upon them. Kirzner defines the essence of entrepreneurship as alertness to profit opportunities (Kirzner, 1973; Hébert & Link, 1988).
Entrepreneurship still cannot be wholly confined to traits, entrepreneurial behaviour and opportunity definition without controversy (Kobia & Sikalieh, 2009). Gunter attempts at a generalizable definition of entrepreneurs as “individuals who, in an uncertain environment, recognize opportunities that most fail to see, and create ventures to profit by exploiting these opportunities” (2012).
In a more recent definition, the OECD relates entrepreneurship to three basic themes: Enterprising human activity; leveraging creativity, innovation and identifying opportunities; the creation of value. Entrepreneurs are therefore “those persons (business owners) who seek to generate value, through the creation or expansion of economic activity, by identifying and exploiting new products, processes or markets” (Ahmad & Seymour, 2008). While entrepreneurship is the phenomena associated with entrepreneurial activity. “Entrepreneurial activity being the enterprising human action in pursuit of the generation of value, through the creation or expansion of economic activity, by identifying and exploiting new products, processes or markets” (Ahmad & Seymour, 2008).
It becomes evident that entrepreneurship is related to new venture creation, but not limited to it. It also encompasses a mindset and orientation for innovation, creativity and newness in an uncertain environment. Apart from the creation of an organisation, entrepreneurial processes include opportunity recognition and resource mobilisation (Shane & Venkataraman, 2000). The value creation in new starting companies will be in focus in the following analysis as the thesis aims to identify how entrepreneurs create marketing value through effective use of their network assets.
2.2 Entrepreneurial marketing
Entrepreneurial marketing is considered to be a research field that will attract a lot of research within the next years (Grichnik & Harms, 2007). There are three reasons for the emergence of entrepreneurial marketing: 1) Marketing in new ventures and small enterprises demands for different instruments and tools than the existing marketing theories for corporations (Eggers, 2009). They act under different and more limiting circumstances. 2) The marketing discipline changes to a more service-‐dominant logic, which implies a deeper understanding of customer orientation and interaction (Kraus et al., 2011). 3) Entrepreneurs strongly acknowledge the significance of customer orientation for the success of their venture (Morrish et al., 2010). These factors demonstrate that entrepreneurial marketing will gain more importance and is significant for the Marketing and Entrepreneurship theory.
The entrepreneurial marketing research dates back to the mid 1980s, when Hills et al. (1984) conducted the first empirical study on the intersection between entrepreneurship and marketing in Frontiers of Entrepreneurship Research. Following that, Morris and Paul published the first research article on “the relationship between entrepreneurship and marketing in established firms” in a highly ranked peer-‐reviewed journal -‐ the Journal of Business Venturing (1987). The American Marketing Association (AMA) then initiated the institutional legitimization of Entrepreneurial Marketing by launching a AMA task force in order to investigate the overlap of Entrepreneurship and Marketing. Since then, different authors have published research on the intersection of Entrepreneurship and Marketing (Carson et al., 1995), leading up to the founding of the first academic Journal of Research in Marketing and Entrepreneurship in 1999. Since
then many business schools and universities have adopted this research branch into their curricula, which underlines once more the rising significance of the research field (Kraus et al., 2011). But even though there were many advances in the field, the research findings are still “extremely fragmented […] and there is no integrated analysis or comprehensive theory of entrepreneurial marketing” (Gruber, 2004).
Since entrepreneurial marketing trespasses upon both entrepreneurship and marketing disciplines and the research field is growing very fast (Kraus et al., 2011; Kraus et al., 2010), there are various definitions of entrepreneurial marketing.
A recent definition by Hills et al. describes it as “a spirit, an orientation as well as a process of pursuing opportunities and launching and growing ventures that create perceived customer value through relationships, notably by employing innovativeness, creativity, selling, market immersion, networking or flexibility” (Hills et al., 2010). It is characterized by marketing limitations, the influence of the entrepreneur and the lack of formal organizational marketing structures (Jones & Rowley, 2011). It thus tends to be responsive, proactive and opportunistic in nature (Carson et al., 1995). This way ventures rather create and shape new markets than serve existing ones (Morrish et al., 2010).
As Hills and Hultman explain, “entrepreneurs are often successful in marketing in unconventional ways” (2006). New ventures act within strict time and budgetary constraints (Lingelbach et al., 2012) and have the ambition to follow a fast growth path. It differs from conventional marketing by the fact that new ventures need to attain the
highest possible reach by using restricted means and unconventional tools (Miles et al., 2014; Lingelbach et al., 2012) such as guerilla marketing (Rößl et al., 2009; Morrish et al., 2010), viral marketing (Rößl et al., 2009), social media (Lingelbach et al., 2012) or buzz marketing (Kraus et al., 2011; Rößl et al., 2009). Entrepreneurial marketing is a distinctive approach to marketing that is characterized by a range of factors including “an inherently informal, simple and haphazard approach” (Jones & Rowley, 2011). It is proactive in identifying and exploiting opportunities for acquiring and retaining profitable customers through innovative approach to risk management, resource leveraging and value creation (Morris et al., 2002; Morrish et al., 2010)
Entrepreneurs usually follow an effectuation-‐based approach to their marketing activities (Wiltbank et al., 2009; Mauer & Grichnik, 2011; Lingelbach et al., 2012). Since they act under various uncertainties, their marketing approach is very different to the one of established firms (Miles et al., 2014; Mauer & Grichnik, 2011; Jones & Rowley, 2011). Identifying the “right” market and the potential target audience under conditions of resource scarcity are main challenges that an entrepreneurial approach to marketing and branding has to adapt to (Lingelbach et al., 2012).
Entrepreneurial marketing therefore seeks for a stronger network orientation (Read et al., 2009; Hills & Hultman, 2005; Martin, 2009; Thomas et al., 2013) and usually involves many different stakeholders and facilitators (Miles et al., 2014; Lingelbach et al., 2012). Zontanos and Anderson even explain that the main difference between ‘formal’ marketing and entrepreneurial marketing are next to the active role of the entrepreneur (2004): Networks (Thomas et al., 2013). Entrepreneurial marketing is
consequently highly dependent on social capital (Jones & Rowley, 2011). Ventures “leverage resources and relationships to expand their restricted resource base while incurring minimal costs” (Miles et al., 2014; Lingelbach et al., 2012). Even though there is a lot of research on the monetary contribution of various facilitators such as venture capitalists (Large & Mügge, 2008), the non-‐financial value that a start-‐up’s network adds marketing activities tends to be neglected in research so far.
Mauer and Grichnik illustrate the entrepreneurial context to marketing in new ventures, which is characterized by factors such as “newness”, “smallness” (Jones & Rowley, 2011), “owner centeredness”, “growth” and external “uncertainty” (2011). Flexibility and cooperation are important parameters in that matter, which need to be investigated further in order to achieve a comprehensive view on what drives a new venture’s success (Mort et al., 2010). The non-‐financial contributions by investors, business angels, incubators and governmental support by subsidies and other factors thus have to be taken into account. Networks (Mort et al., 2010), free advertising and reputational benefits (Jones & Rowloey, 2011) are some of the network’s contributions to entrepreneurial marketing.
With the emergence of new digital technologies and new media, e-‐marketing has become prevalent to marketing theory (Miles et al., 2014; Morrish et al., 2010; Luo & Zhang, 2013). These new channels of communication can be a cost-‐effective option to reach wider markets and target audiences (Harrigan et al., 2011; Harrigan et al., 2012). Particularly, entrepreneurial firms have mastered to take advantage of new
technologies in order to leverage the venture’s resources and enhance value by customer co-‐creation (Harrigan et al., 2012).
As Kraus et al. (2011) state that it is important for the Entrepreneurial marketing discipline to operationalize its strategic orientation by making it possible to measure the success of entrepreneurial marketing in comparison to conventional marketing approaches. Therefore success parameters of entrepreneurial marketing tools will need to be empirically studied.
2.3 A startup’s network: Social capital, network structure and network actors 2.3.1 Social Capital
In order to be more concise on the definition and the impact of social capital on entrepreneurship, the following review will focus on networks in the new venture creation process and within small to medium-‐sized firms.
Many researchers argue that entrepreneurship can be modelled as a form of accumulation of human capital (Iyigun and Owen, 1998; Otani, 1996, Minniti, 2005). Economic action never takes place in an isolated environment but it is always embedded in social relationships and external cues (Hoang & Antoncic, 2003; Minniti, 2005). New ventures require various external resources and support in their early founding processes given various resource constraints (Smith & Lohrke, 2008; Granovetter, 2005).
The network of a start-‐up is generally speaking a stakeholder environment associated with the start-‐up in question (Rowley, 1997) and a set of linkages between these network actors (Hoang & Antoncic, 2003). It is strongly related to the concept of social capital. There is no generally accepted definition of social capital (Minniti, 2005), as the meaning derives a lot from its context. Social capital may therefore have various meanings. Smith & Lohrke relate it to mostly favourable and positive network ties with outside entities (2008). Minniti introduces the term of non-‐pecuniary externality, which describes the non-‐monetary contribution, influence and facilitation of external networks to entrepreneurship (2005). The following analysis will take an organizational view on social capital and utilize the definition of social capital as networks of relationships and network assets surrounding a start-‐up (Hoang & Antoncic, 2003).
Social networks and network embeddedness are crucial factors in the decision making process of entrepreneurs when acting under ambiguity and uncertainty (Minniti, 2005) and they have a considerable impact on economic outcomes (Granovetter, 2005) and the success of a new venture (Burt, 1992). Social networks affect the flow and quality of information and they raise trust, which are important success factors for new ventures (Granovetter, 2005).
Researchers found that broad and diverse social networks and their respective support increase the probability of success (Brüderl & Preisendörfer, 1998; Burt, 1992) as they “provide the entrepreneur with useful, reliable, exclusive, and less redundant information” (Smith & Lohrke, 2008), advice and emotional support (Hoang & Antoncic, 2003). Furthermore, networks and relationships can have a reputational and signaling
effect (Jones & Rowley, 2011). “Entrepreneurs seek legitimacy to reduce this perceived risk by associating with, or by gaining explicit certification from, well-‐regarded individuals and organizations” (Hoang & Antoncic, 2003). The probability of success is not only determined by the number of ties, but also depends on the quality of the configuration (Smith & Lohrke, 2008). The relational view on networks and social capital focuses more on the information and resources leveraged from personal and direct relationships of the entrepreneur with others “through a history of interactions” (Smith & Lohrke, 2008, Granovetter, 1992).
2.3.2 Network structure
The network structure is defined as “the pattern of relationships that are engendered from the direct and indirect ties between actors” that is created by the crosscutting relationships between actors (Hoang & Antoncic, 2003). There are different ways of thought to classify and evaluate a network. Overall it is evident that the structure of a network and the differential positioning of the start-‐up have a considerable influence on the entrepreneurial outcomes (Slotte-‐Kock & Coviello, 2010; Hoang & Antoncic, 2003). Many researchers agree on the fact that a network’s structure is mostly determined by its density, size and centrality (Vandekerckhove & Dentchev, 2005; Greve, 1995; Hoang & Antoncic, 2003).
A network’s density refers to an environment’s interconnectedness (Vandekerckhove & Dentchev, 2005), which describes “how tightly connected the entities in a network are to each other” (Greve, 1995). It is a measure of the “relative number of ties in the network that link actors together and is calculated as a ratio of the number of
relationships that exist in the network (stakeholder environment), compared with the total number of possible ties if each network member were tied to every other member” (Rowley, 1997). A higher density in a network is therefore characterized by efficient communication across the network (Gonzalez-‐Brambila et al., 2013; Vandekerckhove & Dentchev, 2005) and leads to a higher amount of overlapping information, i.e. redundancy of information (Greve, 1995). Fleming et al. observed an increase in one’s ability to generate novel knowledge in greater network density cases because network density leads to higher trust among network participants, which increases their willingness to share knowledge (Fleming et al., 2007 in Gonzalez-‐Brambila et al., 2013). A network’s density has mainly been conceptualized by analyzing clusters, in which actors are likely to have dense ties within the group (Hoang & Antoncic, 2003).
A network’s centrality is linked to an individual actor’s power in a network deriving from their position relative to other network actors (Vandekerckhove & Dentchev, 2005). The degree of centrality is determined by an actor’s position in a network (Al-‐ Laham & Souitaris, 2008). A central actor can therefore reach many actors at a short distance within the network as opposed to a peripheral actor, who may reach fewer entities in the same cluster (Greve, 1995). The greater the centrality of a firm as the focal point in a network, the easier a firm can resist stakeholder pressures and therefore have a more powerful position within the network as it is able to influence information flows (Vandekerckhove & Dentchev, 2005). The network’s size goes along with a network’s centrality measuring the amount of resources an actor can access (Hoang & Antoncic, 2003).
2.3.3 Network actors
Start-‐ups are embedded in a wider network of investors such as VCs, incubators, human capital, customers, suppliers and various other third parties (Hakansson & Snebota, 1995). The relationships among firms in a network are very diverse and include various actors (Hoang & Antoncic, 2003; Slotte-‐Kock & Coviello, 2010). They function as “motors” of the network (Koch et al., 2006). For the purpose of the analysis, only network actors that contribute tangible, monetary or intangible assets by investing time, effort and/or money are being taken into consideration.
The configuration of a venture’s network will be explained in more detail in the following sections. The structure of it is visualized in the figure below.
Figure 2: Visualization of network actors involved in a venture’s network
2.3.3.1.Venture capital firms
Venture capital firms usually take a function as active owners in the network of a new venture (Strömsten & Waluszewski, 2012). They usually acquire a seat in the board of directs and participate actively in the decision-‐making of the firms they finance (Jain, 2001; Strömsten & Waluszewski, 2012) and assist the management with advice and support (Merrilees, 2007).
Many researchers claim that venture capital is a key resource in a start-‐up’s journey to becoming an established company (Strömsten & Waluszewski, 2012; Powell et al., 2002). Big multinational companies such as Apple, Cisco, Intel, Microsoft, Yahoo and Amazon are often cited examples for the potential for success of a smart financial cooperation with a VC firm (Strömsten & Waluszewski, 2012).
As Strömsten and Waluszewski point out, VC firms provide a start-‐up with three critical resources: Money, knowledge, networks. The financial support that VC firms supply is for obvious reasons a crucial key resource for company growth and product development (Jain, 2001). Many “entrepreneurs would never attract the resources they need to quickly turn their promising ideas into commercial success” (Gompers & Lerner, 2001), which underlines the importance of a VC firm in a new venture aiming at a fast growth path. Experience, knowledge and relationships are among the non-‐ monetary contributions that VC firms offer to start-‐ups (Merrilees, 2007).
Most new entrepreneurs lack foresight and experience in assessing risks their businesses are facing (Gompers & Lerner, 2001; Freeman, 1999), and VC firms can relieve some of the uncertainties in terms of market and competitive environment. The network that a VC firm provides is one of the most valuable resources as they can help in investment branding and B2B marketing efforts (Strömsten & Waluszewski, 2012;
Gompers & Lerner, 2001). Particularly for investors, direct network ties to venture capitalists and professional service organizations are crucial key factors in the respective investment rounds (Freeman, 1999; Hoang & Antoncic, 2003), since, as Smith & Lohrke explain, they generate a sense of obligation and trust (Shane & Cable, 2002; Smith & Lohrke, 2008). A highly recognized and renowned VC firm will attract a higher company valuation in consecutive rounds.
2.3.3.2 Angel investors
An angel investor describes typically a “wealthy individual who acts as an informal venture capitalist, placing his or her own money directly into early stage new ventures” (Wiltbank et al., 2007). An angel investor is thus a private investor helping new ventures to grow without having any family connections (Maxwell et al., 2009). Business angels prefer investing in early “seed-‐stage” investments by providing risk capital (Maxwell et al., 2009; Prowse, 1998). They usually play an important strategic role in the early decision-‐making of these ventures. Like conventional venture capitalists, they provide a new venture with knowledge and expertise (Wiltbank et al., 2007) and often exercise a formal participation in the board of directors of a new firm (Prowse, 1998).
As their investments are often early stage focused, they invest under high uncertainty concerning the technology, the organisational design, the target customers, the customer preferences, marketing channels, competition, and human resources (Wiltbank et al., 2007; Boeker & Wiltbank, 2005). Besides their financial investment for shares, they often provide personal loans or loan guarantees to firms. This is also why they can be essential for a new venture, which might struggle with attracting
institutionalized investors such as banks, venture capitalists or other governmental institutions to invest in seed or early stages of the new ventures (Maxwell et al., 2009). Business angels help in making market connections and building a network (Prowse, 1998). As they tend to be very engaged in the early development of a start-‐up, they usually have a very strong and intense affinity and affiliation for the ventures they found.
The angel investor can represent a critical success factor in the early stages of a start-‐up and can help boost a new venture and seize its full potential (Prowse, 1998).
2.3.3.3. Governmental programs and institutions
Business angels and investors with a good network and high reputation can increase the value of the venture by offering access to their assets. But they require a share of the company and depending on the entry timing of the investment, they may receive a considerable amount of the company’s share.
Governmental and institutional programs, such as Startup Europe or the Exist “Entrepreneurs from universities” founder subsidy by the European Union, provide selected new ventures with financial aid, office space, conference participation, coaching, and consulting services without demanding a share of the company. The purpose of publicly funded enterprise support programs is not only to benefit the start-‐ ups but also add value to the economy and society (Massey, 2003; Koch et al., 2006). Consultations, coaching and networking opportunities may compensate asymmetrically distributed resources and foster more diverse entrepreneurial structures (Koch et al., 2006). The contractual relationship between the parties usually remains on a grant basis.
The criteria to being chosen and supported are often very strict. The EXIST founder subsidy for example requests potential applicants to be associated with a university in order to be able to apply and will only found innovative and high technology oriented ventures or academic services.
The subsidies are granted for a specific amount of time and the benefits are monetary as well as non-‐monetary. There is little scientific research on the specificity of the relationship of governmental bodies and new ventures.
A theory by Koch et al. suggests that these public venture support networks may facilitate the coordination between the different institutions – financing institutions, business associations, business angels, consultants and solicitors – and therefore reduce confusion among potential entrepreneurs (2006). They may also enhance a new venture’s reputation by endorsing selected start-‐ups in entrepreneurial networks and contribute to an easier access to additional consecutive funding (Koch et al., 2006). These governmental network actors therefore fulfill the task of network coordinators in a start-‐up’s network (Winkler, 2002; Koch et al., 2006) by communicating the necessity and advantages of inter-‐organizational cooperation, motivating the actors involved in the network and coordinating network activities (Koch et al., 2006).
Their function is hence crucial as motor and allocator of network processes surrounding Entrepreneurship in the greater economic context.
2.3.3.4. Suppliers, distributors, competitors, customer organizations
A wide network of industrial contacts is considered highly valuable to new ventures (Strömsten & Waluszewski, 2012; Lingelbach, 2012). Hoang & Antoncic, 2003 stress that “ties to distributors, suppliers, competitors, or customer organizations can be
