Delivering a systematic framework for the selection and evaluation of startups

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Delivering a Systematic Framework for the Selection and

Evaluation of Startups

AMSTERDAM BUSINESS SCHOOL

MSc. Business Administration Digital Business Track

Master Thesis

Author: Ece Erdogan 11658053 ece.erdogan@student.uva.nl Supervisor: Dr. Somayeh Koohborfardhaghighi s.koohborfardhaghighi@uva.nl Second reader:

Prof. dr. Peter van Baalen

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ABSTRACT

The literature shows that the failure rate of startups is around 90%. Therefore, it is crucial for investors and financial advisors to be able to spot the 10% which eventually generates higher return rates and bring in greater revenues (Krishna et al., 2016). Investors are highly interested in determining the common features of the successful startups which are able to bring an inno-vation into a marketplace. Within the context of co-creation of value, big corporations such as Google and Salesforce have devised tools (i.e., digital services) to help firms in selecting which companies they should invest in or form a strategic alliance with. However, the absence of a general conceptual framework in the literature which would help with the selection of startups is quite visible. In this research, critical success factors for strategic alliance making between startups and large sized companies are identified and possible selection methods are discussed. Second, based on our findings a conceptual framework is presented for the selection of suc-cessful startups. Semi-structured interviews are conducted at a large scale financial tech com-pany to evaluate our proposed framework.The results of our expert interviews indicate that all the managers who were involved in the selection process of startups agree on the fact that the team experience and the startup’s position within its network are highly related to the success of the startup in the future. Furthermore, characteristics of the lead entrepreneur, competitive advantage of the firm’s products and the valuable resources the startup has are also ranked among the criteria which managers look into and have strong influence on their decision mak-ing. The outcome of this research is beneficial for large corporations as it aims to find a roadmap for corporations when they are taking on new partnerships. The proposed conceptual framework can be integrated with existing digital services to evaluate startups systematically.

Keywords: Strategic Alliance, Startups, Digital Service, Value Co-Creation, Expert

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Statement of Originality

This document is written by Ece Erdogan who declares to take full responsibility for the con-tents of this document.

I declare that the text and the work presented in this document is 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 comple-tion of the work, not for the contents.

Ece Erdogan

Student ID: 11658053

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The literature suggests that the failure rate of the startups is around 90%. Although there may be several reasons behind this rate, including but not limited to lack of financial funds or simply bad management, it is crucial for investors and financial advisors to be able to spot the 10% which eventually generates higher return rates and bring in greater revenues (Krishna et al., 2016). Being able to spot the successful startups, is even more important for larger corporations who are willing to take on a partnership with a startup. This is owing to the fact that when a startup enters in to an alliance with a corporation, they tend to stay with their partners and the startup’s growth eventually contributes to the success of their larger counterparts. Additionally, today one of the most discussed topics among the investors are startups which are qualified as tech disrupters. Investors are highly interested in determining the common features of the successful startups which are able to bring an innovation into a marketplace . How these startups can be spotted at their early stages is also an important topic concerning large corporations seeking a partnership with a startup. In order to answer this question, Gal-loway (2017) suggests that it is essential for a company to create a product which disrupts the market they are operating in. Taking the example of the most successful companies today, he indicates that their common feature was to bring an innovation or operate differently from the incumbent firms which would simply create a disruption.

For example in the case of Amazon, the tech giant managed to acquire millions of customers with a disruptive technology (Galloway, 2017). Amazon achieved this by creating a business environment where Amazon does not own the marketplace itself. However their initial business plan of bringing the demand and supply in to one single website helped the customers to con-duct their businesses in a much cheaper and simpler way compared to other services available in the market (Galloway, 2017).

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On the other hand startups such as Uber and Airbnb also stand as good examples within this context (Galloway 2017). Uber challenges other means of transport by offering a simpler and cheaper version of transport. Additionally, Airbnb offers a cheaper accommodation where cus-tomers can customize their stay according to their preferences and with the help of technology (Galloway 2017).

The question then arises as: Is creating a disruptive technology the only common feature of the successful startups?

As there are various literature around the business models that startups have followed to grow as big as they are now, there is a gap in the literature on which criteria can large businesses select the startups to form strategic alliances with. Another gap in the literature is that, how come these strategic alliances that the startups form with large corporations might help them grow and sustain their success. In this thesis, we aim to address the following research question: What considerations should the large corporations look into for assessing whether or not a startup will be successful in the future?

It has been stated that strategic alliances are essential in creating a competitive advantage over the other players in the market (Das & Teng, 2000). The resource based view which was first cornered by Barney (1991), also indicates that having a strategic alliance is essential in obtain-ing other firms’ resources, which would be difficult to a acquire without a partnership (Das & Teng, 2000). However, choosing the right partner to enter into a strategic partnership with, has been one of the most discussed topics. Assessing which partner is going to be successful in the future and whether the suggested strategic alliance will be beneficial for both parties are one of the key areas where every enterprise is trying to assess in order to make the best decision. Additionally, it is also important to think about value creation when deciding to take on a part-nership with a business. Co-creation of value is important in creating value for all of the

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corporations operating within the same business eco-system (Payne et al., 2008). Therefore, when taking on a partnership with a startup, it is also essential for larger enterprises to assess how their alliance with a startup will create value for all of the partners within the business environment.

Forming strategic alliances has been proven to be very beneficial for the startups. These stra-tegic alliances with large enterprises may help startups with having strong grounds to build their enterprise on at the very beginning. Having a secure partnership with a large enterprise may also help startups in reducing the impact of a project failure at the early stages (Comi & Eppler, 2009). These strategic alliances also help the startups with acquiring resources such as technical, social and financial which would originally require them to acquire many years (Baum et al., 2000, Comi & Eppler, 2009). Additionally, forming an alliance with a reputable firm is important for startups, as with a successful partnership with a large firm, they may have access to new markets with a greater ease (Kinyenje, 2016).

Currently the members of large corporations are finding it difficult to assess which startups they should select to form partnerships with. Selecting right startups to partner with is as im-portant for large corporations as well. Once these startups grow, they do not tend to switch to other competitors due to high switching costs. Therefore, in the longer period of time, if the startups manage to stand out over their competitors, they may generate higher returns on in-vestment for their initial partners.

Currently the firms decide on which startups to partner with according to various criteria in-cluding but not limited to the startup’s growth rate and the initial funding that they may have received. However, the initial comments of the employees of a large enterprise have indicated that, there should be a conclusive list of criteria which would help with the selection of startups as partners. This list would also be beneficial for any size of corporation a strategic alliance will be formed with.

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Within the context of co-creation of value, big corporations such as Google and Salesforce have devised tools to help firms in selecting which companies they should invest in or form a strategic alliance with. Google’s market finder digital services enable large corporations to narrow down their search for a strategic partner (Google 2018). Google’s market finder tool sends its partner possible leads and partners that they might be interested in forming a strategic alliance with.

Having such digital services also provide benefits to all the parties who are involved in the strategic alliance and the business eco-system. This is owing to the fact that the data and the platform that these digital tools provide, benefit all the actors of the business eco-system in finding the best fit for their partner selection. The figure 1 indicates the relationship between the large enterprises, the startups and different sized entities and how they are connected through the digital services provided by the large enterprises.

Figure 1: Digital services of large enterprises can be useful in the selection of startups.

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The contribution of this thesis is twofold. First, critical success factors for making strategic alliance between startups and large sized companies will be identified and possible selection methods will be discussed. Second, based on our findings a framework will be presented for the selection of successful startups. In order to answer our research question, semi-structured interviews will be conducted at a large scale financial tech company to answer our research question.

The research presented in this thesis has the following implications. First, this research will be beneficial for large corporations as it aims to find a roadmap for corporations when they are taking on new partnerships. Secondly, it investigates the importance of the identified criteria within our proposed framework from the point of view of managers who are involved in the process of startup selections.

The rest of this thesis is organized as follow: In chapter 2 the relevant literature review on the topic of strategic alliance is presented. In chapter 3, the proposed framework and an extensive explanation of the research design are delivered. The results of our analysis are presented in chapter 4. In chapter 5 and 6 we provide the conclusion and discussion over our findings. The limitations and future research directions are also presented in chapter 7.

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2. LITERATURE REVIEW

The literature review is going to be divided in to three sections. Firstly, the formation and

importance of strategic alliances in general will be analyzed. Secondly, the selection criteria of the startups will be evaluated. Thirdly, the literature around the value co-creation will be investigated.

2.1 Importance and formation of strategic alliances

There has been an exponential increase in the number of strategic alliances formed within the last fifteen years (Gulati, 1995). The literature has thus focused on the reasons why firms de-cided to form strategic alliances recently. Although there has been various discussions around it, one of the main reasons why firms decide to take on such partnerships was to learn new skills or gain knowledge about a specific market (Gulati, 1995). On the other hand scholars from the field of strategy has focused on that firms may decide to enter into new partnerships in order to better position themselves strategically within an industry (Gulati, 1995). In his work in 1999, Gulati defines strategic alliances as an agreement intentionally initiated among several firms in pursuance of exchange of resources such as financial and technological (Gulati, 1999). It is also stated in the literature that it is highly important in today’s business environment to form strategic alliances as it increases the opportunity to gain access to re-sources such as knowledge in other firms (Muthoka & Kilika, 2016).

2.1.a The advantages for forming strategic alliances.

As we mentioned in the previous section, strategic alliances will help firms in acquiring re-sources such as financial and technological. Strategic alliances are also important in determin-ing the performance and the strategy of a company as these features can better be understood through the partnerships and the strategic alliances a firm may have formed (Gulati, 2000). Additionally the strategic alliances that a company might have formed give them an

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opportunity to reach more insights into a market that they might want to operate in. It also gives them the chance to reach more information and technology with an extra opportunity to in-crease their learning and scaling opportunities within a market (Gulati, 2000). It is also indi-cated within the literature around strategy that forming strategic alliances allows firms to re-duce risks and give them possible opportunities of outsourcing within their value-chain (Gulati, 2000).

The Resource Based View also indicates that there are a lot of benefits of forming strategic alliances as a firm might be able to obtain resources that they might have been missing at the first place such as information on a particular market or access to technology and human re-sources (Gulati, 2000).

When firms decide to enter in new industries, forming partnerships with the right partners can increase the technological capabilities of a firm by accessing their resources (Muthoka & Kilika, 2016). It can also bring them economic benefits by achieving economies of scale and can lead them to access to knowledge through acquiring new employees. Similarly an addi-tional benefit could be to reduce the financial requirements of new investments and risks as-sociated with new markets (Gulati, 2000). Additionally forming new alliances may eventually help them challenge the competition within a market (Muthoka & Kilika, 2016). As it is indicated forming strategic alliances bring in various benefits and thus it should be managed strategically. Before entering into any type of strategic alliance, the firm need to an-alyse the company that they are entering into partnership with and also assess whether it is the correct decision for them to enter in to the strategic alliance (Muthoka & Kilika, 2016). On the other hand entering into a strategic alliance with the wrong partner may have severe conse-quences as it may lead to decrease in the profitability of a company in the long term (Gulati, 2000). Thus it is highly important for the companies to enter into the right partnerships from the beginning. In his paper in 2000, Gulati introduces the lock-in theory where he states that

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when a firm enters into an alliance, it may eventually limit them from entering into different alliances within the same industry. This may not be legally specified but can be expected from partners in regards of loyalty (Gulati, 2000). This is also important as it can close all of the opportunities of the firm to from strategic alliances with other firms and may lead to decrease in their profitability in the future (Gulati, 2000).

The literature around strategy and specifically Porter’s work in 1980 has a focus on obtaining competitive advantage through advertising, growth rate and product differentiation and lacks a clear research on the benefits of forming strategic alliances for the companies to gain compet-itive advantage (Porter, 1980 stated in Gulati, 2000).

Although the product differentiation and other concepts are important in creating value for a firm within a marketplace, it is also essential to search the positioning of a firm with all of its strategic alliances. This analysis will give a broader understanding on how to increase the firm’s competitive advantage through their partnerships (Gulati, 2000). Applying these find-ings on the strategic factor market theory developed by Barney in 1986, it can be stated that it is also important to have successful alliances within a market as strong partnerships may even-tually increase the market power of an industry and raise the barriers to entry for new compet-itors into the market (Gulati, 2000). For instance, the automobile industry in USA is highly dependent on the strategic alliances that the firms form with each other. Therefore, it is one of the features that is necessary to have a competitive advantage over the competitors (Gulati, 2000). With the increase of more strategic alliances within the automobile industry, the overall market eventually had fewer suppliers and long term relationships which benefited all of the players in the market, increased the market power and created high barriers to entry for other firms(Gulati,2000).

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Additional literature around strategy states that, the partner selection is proven to be affected by the various criteria such as competition within the market, macro economy and technologi-cal innovations (Muthoka & Kilika, 2016). This is mainly because these topics are within the interest area of the top management and the managers take into account these criteria when they are selecting a partner in order to create a competitive advantage (Muthoka & Kilika, 2016).

Additionally, it is suggested that firms may choose to partner up with firms within the same social circles as they do or with the indirect partners. Therefore, the partners that a firm possess, has a great influence on their next alliances as well (Gulati, 1999). From the strategy point of view, the performance of the companies have no indication of whether they will be successful in the alliance with other firms. However, it has been proved that if the firms have different liquidity, it is more common for them to enter into a strategic alliance with. This is why firms generally seek partners in different sizes than themselves (Gulati, 1999). The field of strategy lastly advises that when a company is selecting a partner to enter into a strategic alliance with, they should focus on the goals of the company instead of the overall goals of the industry in order to create a competitive advantage (Schmidt & Ochan, 1977). Although it has been stated that it is highly important to select the right partner to enter into a strategic alliance with, one of the most common problems that the companies have indicated is the lack of information on the companies that the strategic alliances are going to be formed with (Muthoka & Kilika, 2016). The costs of obtaining information on the possible partners have also been found to be very expensive (Muthoka & Kilika, 2016).

The literature answers the above question by indicating that the companies can only get infor-mation on the companies that they will be forming strategic alliances with once the partnerships are formed. Thus, once the partnerships have been made, then the companies can start

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accumulating information on each other. Simultaneously this is when they start and grow their business by building trust on each other (Gulati, 1999). Over the course of their partnership, the accumulation of information might diminish and might even disappear as well (Gulati, 1999).

2.1.b Formation of strategic alliances with startups

It has been found out that out of all different size of enterprises, startups are tend to enter into more strategic alliances compared to the larger corporations (Comi & Eppler, 2009). On the other hand, large enterprises are more inclined to enter into a partnership with a startup or invest in them, when they would like to invest in innovation projects or when they would like to enter into new markets (Comi & Eppler, 2009). Thus, entering into a strategic alliance with a tech driven startup, is considered to be essential for large companies seeking to increase their market power and competitive advantage (Comi & Eppler, 2009). Specifically, in high tech industries, the corporate culture in large organisations makes it difficult to assess disruptive ideas. This makes it particularly difficult for large corporations to create innovative projects in isolation (Comi & Eppler, 2009). In 1996, Powell et al have stated that when in a market the knowledge is dispersed, the best strategy to innovate is through forming strategic alliances (Powell et al., 1996 stated in Comi & Eppler, 2009). Therefore their main motivation in form-ing these strategic alliances with startups is to better implement their new product ideas or take on an innovation project in a new market (Comi & Eppler, 2009). Consequently, the fact that the companies do not want to be isolated through their innovation projects might have directly influenced the sudden increase of 20% of the number of strategic alliances formed per year, in last two decades (Comi & Eppler, 2009).

These strategic alliances are especially common for the tech-based companies as the firms need to tackle innovative projects very often in order to protect their competitive advantage over

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their competitors (Comi & Eppler, 2009). As the technological firms are very competitive within the innovation industry, it is also important for them to form the correct partnerships with the startups (Comi & Eppler, 2009). Thus, there has been found a positive relation between the technological capabilities of an industry and the amount of partnerships that are being taken on in that industry (Comi & Eppler, 2009).

In the case of small to medium sized businesses, it has been found out that the SMB’s are not making as much as strategic alliances as big corporations. Although this is not due to a specific reason, it is mainly because of a lack of information on how these alliances can improve their businesses (Hoffmann & Schlosser, 2001). Another reason for the tendency of the SMBs to not form strategic alliances as much as large corporations is the fact that they often lack the neces-sary resources which may cause financial constraints (Hoffmann & Schlosser, 2001). With the fast change in the technology and the globalisation, the SMB’s are not able to invest as much as big corporations in forming strategic alliances with the startups. (Hoffmann & Schlosser, 2001)

Similarly, forming strategic alliances have a great role in bringing opportunities to the startups at the early stages of their growth (Baum & Silverman 2004). These strategic alliances not only help the startups access the resources they need but they also provide the startups the knowledge and the other assets that are once unavailable to have a competitive advantage over their competitors (Baum & Silverman, 2004).

2.1.c Sustainable partnership with a startup

Managing a sustainable partnership is as important as forming a strategic alliance with the right partner. According to a study, only 50% of the partnerships have proven to be successful in a particular market where other studies also proved the same results (Brouthers et al., 1995). Although this risk can be considered to be high, it is still necessary for firms to enter into

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strategic alliances in order to gain the financial or technological resources they might be miss-ing initially (Brouthers et al., 1995).

In order to achieve a sustainable partnership, there are a few features that were found to be crucial by the literature which are shared among all the successful alliances. In his work, Broth-ers et al., described these as following; 1)complementary skills that the companies can bring into the partnership, 2)how the cultures of both companies fit together, 3)the future goals of both parties and 4) levels of risk both parties are willing to take on (Brouthers et al., 1995). These features are essential in analysing in a partner before entering in an alliance in order to have a sustainable and long term partnership. Over the past decade, these 4 common features have proven to be successful for partnerships. For instance when IBM, Siemens and Toshiba have formed a partnership to create the revolutionary computer chips, they paid particular at-tention in sharing risks among partners by sharing fabrication costs of the innovation of one billion dollars. They also built their successful partnerships on the premise of sharing the com-plementary resources they might have been missing individually (Brouthers et al., 1995). In the search of a successful partnership which would eventually help both parties, there are various points in the literature which might be taken into consideration. It is for example crit-ical for both parties to decide on how the activities that are going to be done in the partnership will help them grow in their separate areas (Lorange et al., 1992). This should be reflected on a business plan which would eventually be beneficial for both parties through the partnership. Additionally the partnerships should also be strengthened by asking questions regarding the short and long term goals of both parties at the very beginning of the alliance (Lorange et al., 1992). On which tasks both parties will focus on should also be discussed at the very beginning, in order to avoid any possible conflicts of interest in the future (Lorange et al., 1992).

We have discussed the current literature on the benefits of forming strategic alliances and how to have a sustainable alliance with a partner. As discussed above, in literature, there has been

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quiet a focus on how the large corporations decide to take on partnerships. However there is a lack of focus in the literature around how they select the startups they will be forming alliances with. In the second part, we will be discussing the current literature around on which criteria the startups are being selected by different entities such as large corporations, venture capitals, SMB’s and investors.

2.2 Selection criteria for selecting startups

As with the increase of technological focus of the companies and the innovation projects the firms want to take a part in increases, more alliances are being formed with the startups (Comi & Eppler, 2009). As it was indicated before, startups make it easier for firms to man-age their innovation projects and enter in to new markets where technological capacities are a must. Thus, interest in forming alliances with startups have increased recently (Comi & Ep-pler, 2009).

Selecting the right startups to partner with is essential in future growth and return on investment for the partners who are within the partnerships with them. Thus, it is important to choose the correct business to form a strategic alliance with.

According to a recent research in literature there are three characteristics that differentiate a successful startup from the others. Firstly, the characteristics of the lead entrepreneur is an important indicator of their future success. Secondly, the processes that are taken up during the initial growing stages of the startup are highly important. Lastly, the strategic decisions the startups make once they start to grow and become scale ups are also important factors that affect their future success and growth rate (Duchesneau & Gartner, 1990). Another factor that differentiates successful startups from other ventures are the long term plans and goals of the entrepreneurs and their vision for the future growth of the startups (Gelderen et al., 2005). Gelderen, additionally emphasizes that the social connections of the lead entrepreneur and their psychological state might also influence their entrepreneurship skills (Gelderen et al., 2005).

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Thus, when entering into a strategic alliance with a startup these factors should be taken into consideration.

Although various research has been done on searching the similar features of successful startups, only a few focused on which criteria large corporations can select which startups they should be forming a strategic alliance with. Therefore, the selection criteria of startups and how different entities such as large corporations, venture capitals, SMB’s and investors assess the future success of startups are explained below.

2. 2. a Selection Criteria of Large Corporations

Before entering into a partnership with a startup, large corporations find it important to analyse the intellectual capability of a startup as an indicator of their future success as a partner (Comi & Eppler, 2009). This is mainly because it has been found in the literature that existing re-sources of a venture is an important indication of a suitability of a partner in a strategic alliance (Comi & Eppler, 2009). Furthermore, the large corporations find the connections of the found-ing team of the startup and the financial investments they have acquired at their growth rate as an important criteria when selecting them as partners (Comi & Eppler, 2009).

2. 2. b Venture Capitals

In a different research focusing on the selection criteria on which the venture capitalists choose the startups to partner with or decide to invest in, it has been found that they focus on the early partnerships that the startup might have (Baum &Silverman, 2004). Additionally, they take in to consideration any patents that these startups might have acquired as they are an indicator of the technical abilities of the startups (Baum & Silverman, 2004). Additionally, in the same research it has been found that the venture capitalists may specifically look in to the capabilities of the founding team (Baum &Silverman, 2004).

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Additionally, it has been found that the venture capitalists look in to the intellectual capability of a startup and also the strategic alliances they have in order to determine how successful they will become in the future (Baum & Silverman, 2004). Another study indicates that the venture capitalists look into the investment activities, due diligence activities and information that the startups have in order to decide which one to form a strategic alliance with (Zinecker & Bolf, 2014).

In a relevant literature around the selection criteria of venture capitalists on startups, it was found out that asking cognitive questions at the selection process might help acquiring more information on startups. This might eventually lead to better understanding of the success rate of startups in the future (Csaszar et al., 2006). Asking cognitive questions to the founders of startups is also essential in case there is not enough information on the startups and if the startups have not provided enough data when approaching the investors and other entities for funding options (Csaszar et al., 2006).

Venture capitalists suggest that it is not possible to predict the success rate of a startup by completely as there are unknown variables that cannot be taken into account. However, ana-lysing a startup with the aid of asking questions might eliminate risks and help the investors have better understanding of the future success rates of the startup. The authors suggested that these questions should be relevant to the fields of strategy, teams and finance (Csaszar et al., 2006).

2. 2. c SMBs

From the SMB’s point of view in addition to the above criteria, the SMB’s find the trust and the personal relationships between the SMBs and the startups as one of the most important criteria on the selection process of startups that they enter in to an alliance with (Hoffmann & Schlosser, 2001). This is mainly because the trust to the capabilities of the lead entrepreneur

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and the founding team are important credentials in the determining the future success of the startups. Additionally, the initial interviews with the members of the fin tech company have indicated that although the project or the product can always be changed with a more promising one, the team cannot be replaced and it may be more difficult to find a highly qualified founding team.

2. 2. d Investors

In literature, other criteria were evaluated by the investors when selecting startups to invest in. For the investors, having a liaison with a venture capitalist play an important role in shaping the growth of the startups (Baum & Silverman, 2004). Therefore, they take into account in which startups the venture capitalists have initially invested in. Although they assess this as an important criteria, they not only focus on this aspect and also assess the intellectual capability of the startups (Baum &Silverman, 2004).

Investors also take into account the Initial Public Offering(IPO) stages of the startups when they are assessing the future growth rate of the startups. The success rate of the internet startups especially at the stage of their initial public offerings also depends on three criteria. Firstly, the investments from reputable financial institutions and the venture capitals are important as they provide a sense of trust for the future investors. Additionally, the startups can enjoy further effects of the success of these financial institutions in their next alliances (Chang, 2004). Sec-ondly, the startups who make strategic alliances with big corporations is an indicator of future growth, as they can access the important resources such as social and technological (Chang, 2004). These resources will eventually help the startups to grow within their industries. Lastly, it has been proved that these alliances improve the performance of both sides and reduces the risk of having to produce something new (Chang, 2004). Therefore, it is stated by Chang that having strategic alliances increases the chances of having a successful IPO process for the

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technology startups (Chang, 2004). It has also been proved that the amount of strategic alli-ances that has been formed by the startup and also the reputation of the firms that the startup has formed a partnership with are also important criteria (Chang, 2004). Therefore, these are the additional criteria that the investors take in to account when they are assessing which startups they should be investing in.

Although the above literature focuses on how different entities assess the future success of the startups, they rarely focus on the selection criteria they have on which startups to have a part-nership with.

Therefore, our main goal is to create a conceptual framework for assessing the selection criteria that should be used by a firm when entering into a strategic alliance with a startup. We believe this will be an important contribution to the literature as the conceptual framework that we will be creating will include all of the selection criteria stated in the literature by different entities such as large enterprises and SMB’s. Therefore, it will give an opportunity to evaluate a startup comprehensively.

Additionally, there is a gap in the literature around how having these strategic alliances with other parties and also with the startups can create a value for all of the players within the busi-ness environment. When taking on a new partnership, how this is going to create value for both parties and for all the other players within a business environment should also be evaluated. Therefore, in the next stage, we will analyze the current literature around the value co-creation in the field of digital business. This will lead us to better understand the current research and the gap within the literature.

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2.3 Digital Value Co-creation

When the concept of strategic alliances is being discussed, the co-creation of value should also be taken into account as it is crucial to make use of the digital services provided by large com-panies such as Salesforce when selecting a partner before entering in a strategic alliance with. This is important as the correct use of such services and the Big Data provided by them, may eventually create value for all of the players within a business environment and the partners entering in a strategic alliance.

Data plays a crucial role in today’s digitalized world and the data generated by big corporations can be used to create value for all of the members of the business environment. According to Xie et al, the usage of big data has given rise to businesses which specifically use disruptive technologies (Xie at al., 2016). As big data allows firms to track down the customer behaviours, it has an indirect effect on the increase of disruptive innovations where understanding the cus-tomer is key (Xie et al., 2016). In their recent article, Xie at al. states that the amount of data generated within the last 2 years consist of 90% of all data generated (Xie et al., 2016). As the data is mainly generated by the customers and recorded frequently, it can be used by enterprises in order to increase the customer satisfaction. Thus, the startups and the other enterprises have a larger chance of creating value through the generated data for all of the players in their busi-ness environment. Taking this into account, using the big data as a ‘cooperative asset’ would be beneficial for all the partners entering into a strategic alliance with a disruptive technology ( Xie et al., 2016).

Although in the past the term value co-creation was solely used to define the manufacturing processes, in today’s digitalised and customer centric business environment, it is essential to

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include the customers in the new definition of value co-creation (Alves et al., 2016). As the definition of value co-creation has changed various times over the last decades, with the in-crease of the service design business models it is essentially defined as creating value for all of the participants in a business environment (Alves et al., 2016)

The co-creation of value is firstly defined in the management literature by Prahalad and Ra-maswamy’s article (Alves et al., 2016). After their initial approach and definition, several other authors also seek to define the co-creation of value for their own purposes. Service sci-ence perspective and innovation management are amongst the few approaches the academici-ans take to define the co-creation of value. It is also evident that the definition of co-creation of value changes with the new business concepts such as business marketing and branding every year (Alves et al., 2016).

In their article in the pursuit of re-defining the co-creation of value, Prahalad and Ramaswamy emphasises two recent trends which have changed the service design businesses (Prahalad and Ramaswamy, 2004). They have stated that the consumers lately has more options to choose from however they are still seem to find the services and products available to them inadequate. Similarly, the firms invest in more product innovations however they are still not able to dif-ferentiate themselves from their competitors (Prahalad & Ramaswamy, 2004). Therefore, they suggest to redefine the value co-creation in order to suit the market needs better.

Additionally, in their article Prahalad and Ramawamy have found that currently the value cre-ated within a market place is shifting from products to experiences that the consumers have (Prahalad and Ramawamy, 2004). Therefore, all of the players in the market should be willing to distribute the value created among all of the players in the market and also with the custo-mers as well. Alongside with the distribution of value, the interactions between the custocusto-mers and other firms also become as important (Prahalad & Ramaswamy, 2004). Thus, the strategic alliances that the firms form between each other and with startups become crucial in the

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creation and the distribution of value. Prahalad and Ramaswamy defines the new market in which these strategic alliances are formed as a place of alliances and interactions among diffe-rent firms and consumers (Prahalad & Ramaswamy, 2004).

Today another distinction with the traditional sense of value creation is that in the past, the consumers and other partners were kept outside the firm and the value creation was solely within the firm and within its own activities. The consumer and the corporation had separate roles of consumption and manufacturing (Prahalad and Ramaswamy, 2004). Alongside with the distinct definition of customers, the market within which the firms were located had no effect on the value created nor the alliances they have formed among each other (Prahalad and Ramawamy, 2004). The sole role of the market was to provide a means of transaction between the consumers and the firms (Prahalad and Ramawamy, 2004). The creation of value was very limited with the boundaries of a firm. Therefore, the partnerships and other kind of strategic alliances were not highly important in the creation of value (Prahalad & Ramaswamy, 2004). However, once the companies realised that they could only achieve competitive advantage with creating high quality interactions, strategic alliances and with other partners within the market, they managed to unlock new resources and create a competitive advantage over other firms (Prahalad & Ramaswamy, 2004). Therefore, in today’s world, alongside with the customers, the strategic alliances that the firms form with each other became important contributors of the co-creation of value in a business environment.

The new definition of the co-creation of value also indirectly changed the definitions of demand and supply within a market. In the past the value was solely dependent on the product that was manufactured by the firm. However, with the shift of value from the product to experiences, demand became unpredictable (Prahalad & Ramaswamy, 2004). This resulted in creation of value through the experiences that the customers will have. However, as these experiences are unpredictable by the consumer, the firms should focus more on scaling up options and capacity

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planning (Prahalad & Ramaswamy, 2004). This is essential in case the demand in the market instantly increases due to the success of the experience the consumers have, the firms should be able to meet the new demand. Additionally, the value is co-created at multiple places of interaction within this re-defined market and the core definition of value is changed to be a co-creation experience (Prahalad & Ramaswamy, 2004).

In the more recent literature the definition of value co-creation not only includes the alliances but also the value created by the technological platforms developed by the large enterprises within the new age of digitalisation (Ramaswamy & Ozcan, 2018).

In their paper Ramaswamy and Ozcan discusses that, it is more important to focus on the value co-creation as a principle of distribution of value for all of the members of the business en-vironment. The authors suggest that the literature before hand had only focused on the value in use by the firms instead of the value created through the strategic alliances between the members(Ramaswamy & Ozcan, 2018).

In their recent article, Ramaswamy and Ozcan offer a new approach of co-creation of value where the market is defined as an interactive environment. In this newly defined market, any kind of activity is defined as a value distribution system which also includes any kind of alli-ance the firms form with each other (Ramaswamy & Ozcan, 2018). With this new approach the concept of co-creation of value changes its role within a business environment (Ramas-wamy & Ozcan, 2018). They further add on the previous research on value co-creation by changing the conception that value co-creation is solely dependent on the value created by the individual firms. Instead, it is the generation of value through interactions and alliances between the firms as well ( Ramaswamy & Ozcan, 2018).

Additionally, the rise of the service based businesses also created a chance to increase the value creation within a business environment. The case of IBM who has changed their busi-nesses from manufacturing based to service based busibusi-nesses is an example of how firms

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started to use the consulting services as a means of creating value for their customer base (Maglio & Spohrer, 2013). With the introduction of service based businesses, especially the consulting industry, it became essential to create value for all of the stakeholders within a bu-siness environment. In their article, Maglio & Spohrer have indicated that these primary stake-holders can be classified as customers, providers, authority and competition. Thus, when the co-creation of value is taken into account, all of these entities and their connections should also be taken in to consideration (Maglio & Spohrer, 2013).

As discussed above, the new definition of value co-creation has made it essential to take in to account the value created by the strategic alliances that the firms form within a business en-vironment. Therefore, it is very crucial for the firms to be able to select the right partners to enter into a strategic alliance with.

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3. RESEARCH DESIGN 3.1 Proposed Framework

Our proposed conceptual framework has been presented in Table 1. As we can see 27 factors have been selected during our literature review.

In order to develop our conceptual framework which would yield a list of criteria for the selec-tion of startups, we performed a literature review to determine the right set of factors which influences the selection process. A brief description of each factor has been presented in the following. All references related to the presented items are listed in Table 1.

Economic factors; any external economic situation that may have an overall effect on the

stra-tegic alliance that is going to be formed with the startup.

Political factors; any external political situation that may have an overall effect on the strategic

alliance that is going to be formed with the startup.

Relational factors; any previous relationship the partnering company might have with the

startup.

Number of Startup’s strategic alliances; the overall number of the alliances the startup may

possess prior to forming an alliance. As the large enterprises often want to be exclusive, the high number of alliances a startup may possess, may deteriorate the alliance.

History of past alliances; this criteria refers to the previous alliances the startup might have

had. This criteria also refers to how successful the previous partnerships the startup had.

Reputation of Participating Venture Capitals; the participating venture capitals in the funding

and endorsements of the startups have a strong effect on the likelihood of having a strong strategic alliance with a startup.

Governance Mechanism; This criteria refers to how the startup manages to handle its core

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Startup’s Alliances; According to literature it is important to know with whom a certain firm

has an alliance. Having strong connections puts a firm in a strong position when entering into another strategic alliance.

IPO events; how successful the IPO event of a startup might have passed has an overall

indi-cation of how successful a startup will be in the future. Thus, the literature suggests it is an important criteria to take into account when entering into an alliance.

Cognitive Criteria (interviews); conducting interviews before entering into an alliance might

have an overall indication of the future success of a partnership. Thus, it is considered to be an important selection criteria in the literature.

Strategic Compatibility; how well the future goals fit together with a startup and how well the

overall strategic goals fit together is an important indication of the future success of an alliance with a startup. The interviewees also ranked this criteria as one of the highest in selecting a startup to form a strategic alliance with.

Team Experience; Team experience represents the previous experience of the founding team

of the startup. Thus, it represents the likelihood of how their previous experiences can influence their current success. All of the respondents have indicated that it is crucial to take this criteria into account.

Startup’s positioning within its own network; This represents where the startup is suited

among its own strategic alliances.

The characteristics of the lead entrepreneur; This criteria represents the personal

character-istics of the lead entrepreneur and how they handle the strategic decisions of the startup.

Competitive advantages of the startup’s products; was found to be critical among the

inter-viewees as in the technological industry the capabilities of the product represents a strong ad-vantage over the competition. The user experience and the design of the product also

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considered to have importance over the competition. Thus, this criteria includes the overall features of the product that the startup may have.

Valuable resources; According to the literature, it is an important factor in the success of

startups. It represents the total amount of resources a startup may possess. This umbrella crite-ria includes resources such as technological, human capital and such. This critecrite-ria was found to be relevant in various literature by with different means. Thus, it was generalized to make it easier for the interviewees.

Intellectual Capital; Any kind of patents a startup might have at their early stages of

entrepre-neurship, were found to be among the highest raked selection criteria by large enterprises. The interviewees have indicated the patents the startups might possess give an indication to the large enterprises of how capable the startups are in producing innovative projects and complet-ing them.

The processes undertaken during founding; it represents any kind of strategic decision the

founders of the startup might take whilst they are founding the startup.

Management’s familiarity with the target market; Another criteria that was found in the

lit-erature was how familiar is the partnering company with the market that the startup is operating in. If the two markets are very familiar to each other, the partnering company might have an overall prediction of the future success of the startup as an alliance.

The growth rate of the target market; is an indication of how fast the market in which the

startup is located is growing.

Initial funds or investments; The initial funds or investments represent any financial funds the

startup may have received from large corporations at the initial stages of their founding. It may also include investments from venture capitals.

Financials raised by the startup; the initial financials raised by the startup and how they

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interviewee has indicated that if the startup choose to spend on the redundant investments, the partnering company may change their opinion on the startup.

Characteristics of top management; this criteria represents the capabilities and the personal

traits of all of the members of the founding team.

Cooperative cultures; this criteria represents the likelihood of how well the startup

organisa-tion might fit with the partnering corporaorganisa-tion. This criteria is also found to be important as the large enterprises find it easier to work with similar companies to themselves.

Prior knowledge on partners; it represents the criteria of having adequate information on a

startup before forming a strategic alliance. Although the literature states this as an important criteria, the interviewees have not indicated that it is highly important in their own selection process.

Power dependency; this criteria represents how much of an influence it would have if the

startup would be more willing to enter into an alliance rather than the large enterprise. This is specifically found to be important by some interviewees who indicated that there have been various cases where the startups approached them.

Strategic behaviors after founding; it refers to the strategic decisions the founding team take

after the early stages of their entrepreneurship. This is considered to be an important criteria by the interviewees as it is an indication of the strategic behaviors after founding strategic alliance.

In addition to the identified factors from the literature review presented in chapter 2, additional selection criteria were identified by the interviewees which we will elaborate on each of them in the following.

• Global Scale of the Startup

An important addition to the literature regarding the selection criteria of the startups was the global scale option of the startups. The interviewees have indicated that it is highly important

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for a startup to be able to operate globally or have the option to grow globally. Most of the interviewees have indicated that this criteria is highly important because the project the startup is focusing on should be able to reach the users globally. Thus, it should not be a product or a project focusing only on a specific location. Each interviewee has indicated that having a global scale of a startup was an important determinant of their future success and possibility of form-ing an alliance with.

• The different background of founding team members

Another important addition to the literature was the roles of the team members. This was em-phasized by several respondents as the successful interaction among the founding team was an important determinant of the suitability of a startup as a partner. An interviewee who had a previous position as a venture capitalist has emphasized the importance of having two different team members within the founding team of a startup whose competencies can fit well with each other. It was indicated that a team member with a technical background and one with a business background is essential in a well-managed team. Thus, the roles of the founding team represent a strong criteria among the interviewees.

• Scaling Options

Another important point that was raised by the interviewees was that when partnering up with a technology startup, the large enterprises look specifically in to the scaling options of the startup. This is relevant within the case of tech companies because if the product that was manufactured by the startup becomes successful and if the partner company wants to take ad-vantage of the network effects, the startup will need to be able to produce it on a large scale in a fast way. This is because it is quite possible to miss the first mover advantage with a new product, if the startup is not fast enough.

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On the other hand, another interviewee has indicated that although it is always preferred for a startup to have the scaling options, the partnering companies may take the initiative of provid-ing the scalprovid-ing option to the startup only if the product idea is very good. This is essential only if the product provided by the startup meets the current market need and thus needs to be pro-duced in a very fast way.

In order to determine whether the partnering company should provide the scaling options to the startup, the corporations may follow the following strategic decision. If the Return on In-vestment of the relevant startup is projected to be within the next 3 to 5 years, then the invest-ment plan can be initiated by the large enterprise. If the ROI is found to be between 3 to 5 years, then a risk management should be initiated by the partnering company. Lastly if the ROI is projected to be after 5 years, then the partnering company can choose not to provide the scaling option to the startup.

• Size of the startup

The size of the startup has also been found to be an important discussion point among all of the interviewees. Majority of the respondents have indicated that they would rather choose to partner up with a startup who are reaching their scale up size. This is specifically important for the large enterprises who are more risk reverse in their investments. If a startup within its scale-up stage and have received investments from reputable firms, the large enterprises may take it as a positive criteria to take into account when selecting a partner.

• Maturity of the Product of the Startup

On the other hand, the interviewees who are specifically interested in finding innovative startups have stated that it is redundant to look in to the size of the startup as the product that the startup is working on is more important. As the corporations may choose to shape the

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product together with the startup, the maturity of the product represents a higher importance compared to the size of the startup.

• Selling Narrative

Another important criteria when the large enterprises are deciding with whom to start an alli-ance with is when considering where the product of the startup falls in the selling narrative of the enterprise. It is indicated that the product and the startup need to suit well with the selling narrative of the partnering company. Thus, if the focus area of the startup does not fit well with the partnering company, then it is not considered to be a good strategic decision.

• Partner Priority

One of the most difficult discussion points in partnering up with a startup is that the priorities of the startup might be different from the large enterprises. Therefore the partner priority is an important criteria to take into account. If the startup has other priorities when entering into an alliance, the partnering company should be aware of them in order to not have conflicts in the future.

• Timing of the partnership

Another important criteria was found to be the timing of the startup. If the growing rate of the startup by the time of partnership, is not similar to the growing rate of the partnering company, the alliance formed might have difficulties in the future. Additionally, if by the time alliance is formed, the product of the startup goes obsolete, the alliance formed with the startup might deteriorate. Therefore, the timing and especially when does the product of the startup goes in to the market is highly important when investing in a startup’s project.

• Feasibility of the startup’s product or solution

Another important criteria specific for the tech industry is the feasibility of the startup’s prod-ucts. This is especially relevant within the industry of fin tech and thus the relevant tests

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regarding the user experience should be conducted before the formation of an alliance. If the startup’s products do not meet the feasibility requirements or the user experience of the prod-ucts is not well developed, then the partnership options can be eliminated.

• The right spending of the funding by the startup

Another criteria that was indicated by one of the interviewees is to consider where the startup chooses to spend its initial funding that were received. If the founding team chooses to spend on redundant investments, then it might be an indication that the startup might not be a strong candidate to start an alliance with.

• Being the leader in the target market

Another important criteria is that when the firm wants to enter into a new market where they do not possess an initial presence, they choose to find a startup to partner up with to be able to have a strong entrance in to the new market. Thus, having a strong position within the target market may give the startup the possibility to have strong strategic alliances. In most of the cases, the interviewees have stated that they may focus on the market leader in a certain area when they are searching for a possible strategic alliance. Thus, the large corporations may initially start their search from the best performing startup in a certain market.

• Other criteria that were initially discussed in the literature

Among the various criteria that were found within the literature, a few were emphasized by the interviewees more often compared to the others. The funding the startup might have received from other reputable firms were indicated as a strong basis for the selection of a startup. This is due to the fact that the large enterprises believe initial checks are conducted by these inves-tors. Thus, provides a guideline for a strong startup to partner up with.

Another important point raised by the interviewees was that although the solution provided by the startup is important, it is more important to have a strong team rather than a strong product.

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This is mainly because it is more difficult to find a compatible and successful team rather than a product. In the most cases, the companies may offer the startup to work on a different project if they find the team successful. Lastly, the focused geography and the target market of the startup also represented as strong indicators of selecting a startup to partner up or not.

Another important point was raised by one of the interviewees who had a prior experience as a venture capitalist. The interviewee indicated that the venture capitalists may look specifically to see whether there is a market or could there be a new market which does not have a lot of clients or no clients at all right now. Focusing on this market and focusing if there're any startups working specifically in such markets may determine whether the startups will become successful or not in the future.

In order to test our proposed framework we conducted a case study which will be discussed in the next section.

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T abl e 1: O ur pr opos ed c onc ept ua l f ra m ew or k wi th a c onc lus ive lis t of cr it er ia f or the s el ec ti on of s uc ce ss ful s ta rt up s.

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3.2 Methodology

In order to answer the research question we will be conducting a qualitative analysis where we will be conducting interviews at a financial tech company based in Netherlands. The company is specifically selected to be in the fin-tech sector as this industry includes various disruptive and innovative projects led by the startups. The interviews will be conducted in one single company in order to get the full view of the firm’s partnership strategies among its different departments. If a case study is conducted correctly, it has the chance to be valuable for the literature (Baxter & Jack, 2008), thus we are confident that this research will be a crucial ad-dition to the literature. The case studies are found to be important when the researcher aims to answer questions such as ‘how’ and ‘why’ (Yin, 2003), thus conducting interviews will be essential in answering the specified research question.

The case study that we will be conducting can finally be classified as an exploratory and holistic case study. The case study is going to be focusing on three different topics and the questions will be divided in to three sections to answer these three cases which are classified as following; Selection Criteria of startups, Strategic Alliances, Co-Creation of Value. Therefore, it will be classified as a multi-case study. In addition, this study will be a combination of inductive and deductive. Firstly, the theory available in the literature available will be analyzed and plotted in a table and additionally through our interviews, the existing theory will be developed. The data collection method will be interviews. It will be mixed method study as we will also be handing out a survey for interviewees to fill out. The interviewees will be selected among different departments of the company in order to have a 360 degree view on the views of different managers on the selection criteria for their partners and startups. The number of the interviews will be 10 initially and will increase if more data is needed. The roles of the inter-viewees are reported in the table below.

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Table 2: Role of the Interviewees

The role of the Interviewee number of interviewees

The Vice president of Strategy 1

The manager of Strategic Alliances 1

The Senior Manager of Strategic Alliances 1

Analyst in Strategic Alliances 1

Analyst in M&A 1

Vice president of Product Innovation 1

Senior Manager in Partnerships Management 1

Manager in Product Management 2

Senior Manager of Product Innovation 1

The above interviews are selected among the same company in order to fully understand a large scale enterprise’s strategy on their selection criteria on startups and other entities as partners. Selection of the interviewees were mainly the senior managers who have managed the partner-ships and the strategic alliances of the fin tech company. Interviewing the Product Innovation and the M&A team were essential in determining what were the data selection process they have conducted to find the startups the company is currently working with as partners.

After the initial interviews at the fin tech company were conducted, an interesting comment by one of the interviewees led to further research and thus 3 other interviews were conducted in order to have a strong discussion point. These three interviewees were selected among the senior management team within strategy division as the hypothesis needed to look at a firm from a wider perspective in order to be tested. As the strategy team also has the overview of strengths and weaknesses of different team within an organization, it helped with concluding the discussion point.

These three interviews were conducted with three senior managers form the top management team of three different companies in three countries in order to understand whether this hy-pothesis would be suitable for three different markets where partnering with startups is one of the main value propositions of their core business. Below is list of the occupations of these interviewees.

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Table 3:Role of the second round of the interviewees

The role of the interviewee Country

Vice President of Strategy Netherlands

Director of Strategy United Kingdom

CEO Turkey

After conducting the interviews the transcripts of the interviews were written from the voice recordings and these transcripts were then collected in a single word document.

According to Miles and Huberman, in order to understand the research results in the best way possible, it is crucial to have a well-organized data. Therefore creating a table was very helpful to be able to have a short list of criteria which are mostly valued by all the participants (Miles & Huberman, 1984). Therefore, for this research, we prepared a table (please refer to appendix, Table 4) which includes all of the selection criteria and we asked the interviewees to rank them on how relevant they were during the selection process. We will discuss our findings in the next section.

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4. RESULTS

The case study conducted can be classified as a holistic case study and the data was collected by conducting in-depth interviews with the senior managers, including the vice president of the Fin tech company. We interviewed 10 managers within the company and during our inter-view we investigated the significance of the identified factors in the selection process of startups within the company’s routine. The results of our analysis have been presented in Figure 3. The results indicate that all the managers who were involved in the selection process of startups agree on the fact that the team experience and the startup’s position within its network are highly related to the success of the startup in the future. Furthermore, characteristics of the lead entrepreneur, competitive advantage of the firm’s products and the valuable resources the startup has are also ranked among the criteria which managers look into and have strong influ-ence in their decision making. As it can be seen almost 70 to 80% of the managers agree that intellectual capital (patents), strategic compatibility, strategic behaviors after founding, growth rate of the market, management's familiarity with the target, economic factors, relational fac-tors, cooperative cultures, power dependency, reputation of participating venture capitals are also among the interesting features that they might look into during a startup’s selection pro-cess. The further we move on the list it is unlikely that managers reach an agreement on the identified factors. The participants also ranked the IPO events, history of past strategic alli-ances, processes undertaken during founding and political factors as the least important factors they take into account when selecting a startup to enter into an alliance with.

Figure 2.A to 2.D show the results of our analysis in more detail and elaborate more on the obtained results per each criteria. Figure 2.A shows that most of the interviewees find the IPO events less relevant compared to the other criteria. The interviewees have indicated that this is due to the fact that the level of engagement of startups in IPO events did not influence their relationships with startups. In literature Chang (2004), had indicated that this might be an

Delivering a systematic framework for the selection and evaluation of startups