Innovative Start-ups in the United Kingdom and the Netherlands

Innovative Start-ups in the United

Kingdom and the Netherlands

An exploration of the differences in formation and growth

Innovative Start-ups in the United Kingdom

and the Netherlands

An exploration of the differences in the formation and growth of innovative start-ups

Author: Sebastiaan H.P. Dekkers Study: Technology Management (discrete technology) Student number: 1271172 E-mail: seb@4kids.nl Phone number: +31 (0)6 28534592 University: University of Groningen, the Netherlands Faculty: Faculty of Management and Organisation http://www.rug.nl/fmo First supervisor: Prof. Dr. Ir. F.P.J. Kuijpers Second supervisor: Dr. M.J. Brand Client: Ministry of Economic Affairs, Directorate-General for Enterprise and Innovation,

Office for Science and Technology; London, United Kingdom Organisation supervisor: Dr. H. Hoefdraad Heino, 4 July 2007 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without the permission of the author. This report is the sole work of Sebastiaan Dekkers, prepared for the purpose of fulfilling certain requirements towards obtaining a doctorandus degree from the University of Groningen. All information contained in this report has been gathered through research, real life and work experience.

Abstract

In this thesis a comparison is made between the United Kingdom and the Netherlands with respect to formation and growth factors of innovative start-ups and recommendations are made towards the Dutch government, universities and incubators to improve formation and growth of innovative start-ups. In order to do so, the Innovative Start-up Scoreboard is developed as a tool to compare both countries. Subsequently a framework is developed that connects formation and growth. Additionally the various roles universities, governments and incubators can play to stimulate formation and growth are identified, and British and Dutch examples that stimulate formation and growth of innovative start-ups are discussed.

In this report an innovative start-up is defined as a newly formed firm that develops and sells new products or services.

This research is justified by the fact that a serious gap exists between the Netherlands and the United Kingdom with respect to the amount of innovative start-ups and the amount of high growth start-ups. On top of this the recent publication of various reports shows Dutch initiatives are only stimulating formation and not growth of innovative start-ups. The need for this study is emphasized by the growing and sometimes disruptive influence growing innovative start-ups have on present business life and the economic benefit they can create.

For the comparison of the United Kingdom and the Netherlands the Innovative Start-up Scoreboard is developed. Eleven different factors that lead to the formation of innovative start-ups are divided in supply of and demand for opportunities. The outcome of this comparison is that the United Kingdom outperforms the Netherlands with a score of 6-4. Especially the amount of small starters (<250.00USD investment) is very low in the Netherlands. Furthermore eleven growth factors are divided into the categories human resources, financial resources and goals and strategies of entrepreneurs. The United Kingdom defeats the Netherlands here with a score of 7-1. Only on global focus the Dutch start-ups perform better. On four indicators the Dutch score equal to the British.

The main interpretation that is given to these scores is that small opportunities to grow result in low amounts of start-up formations, and therefore formation and growth are connected.

The framework that is subsequently developed therefore presents a connected perspective on the formation and growth of innovative start-ups. The framework presents a cycle with the following successive steps: entrance, connectivity, growth, exit and re-entrance.

Based on an analysis of the various roles universities, governments and incubators can play to stimulate formation and growth and British and Dutch examples, the following recommendations are

made to these organisations. Three important recommendations are made for the Dutch government. Reduce the difficulty to fire redundant employees and make a feasibility study for the development of a network of broadly accessible, growth focussed incubators inside the clusters defined by the program Pieken in de Delta. Thirdly, add entrepreneurs and start-up experts to the Innovatieplatform thinktank. Three recommendations are made towards universities. Build relations with business partners and investors to develop a spin-out process. Build international bridges to learn from foreign universities about successful spin-out partnerships. Attract experienced entrepreneurs to the academic environment to create an entrepreneurial atmosphere and add entrepreneurial knowledge.

For incubators the following recommendations are made. Stimulate a global strategy and an ambitious culture among starters through for example the implementation of stage-gate schemes. At last, synchronize the supplied services with the needs of start-ups.

Preface

After having exploited several entrepreneurial opportunities and having set up one real start-up myself, the topic of my graduation project was just meant to be. I learnt a lot during this project and am very pleased to present this report. With this report there comes an end to almost six years of studying technology management (five year curriculum, discrete technology) and student life.

What factors make one start-up more successful than another and why do I see so few successful starting entrepreneurs around me? How come my study doesn’t tell me how to start a business and why keeps everybody asking where I’m going to apply for a job when I graduate (“You can’t be seriously considering working for yourself, can you? You can work everywhere, why take the risk!?” Is what I heard a lot.). These are just some questions I ran into the last couple of years and through this research I tried to clear the blurry picture that is called entrepreneurship a bit.

I would like to thank Henk, Zusaan, the fellow trainees and colleagues from the Dutch Embassy for giving me the opportunity to experience all the nice facets of diplomatic and student life in London. It truly has been an unforgettable experience!

I would like to thank my supervisors from the University of Groningen, prof. Kuijpers and ms. dr. Brand for their guidance and their ambitions to ask the most of my academic skills.

At last I would like to thank my colleagues and business partner at 4Kids for their flexibility in the evenings and the weekends during my stay in London and their efforts to make the company a leading player in the field over the last year. My parents for their unconditional faith in my skills and ambitions to work at two fronts and Cathelijne for the lovely time we had together in London and Utrecht.

Of course I would not have got anywhere without the interviewees who shared their vision and experience with me unconditionally, the people from GEM and all others whom I bothered with phone calls and emails to get information. Thank you all so much.

Sebastiaan Dekkers Heino, 2 July 2007

Index

Abstract ... 4

Preface ... 6

Index ... 7

1 Introduction ... 9

1.1 The relevance of innovative start-ups ... 10

1.2 Problem statement ... 12

1.3 Methodology ... 13

1.4 Principal and guides ... 14

1.5 Road map of this thesis ... 14

2 Research Framework ... 15

2.1 Description of the innovative start-up ... 15

2.2 Start-up formation factors... 18

2.3 Start-up growth factors ... 22

2.4 Design of the Innovative Start-up Scoreboard ... 27

2.5 The roles of governments, universities and incubators ... 28

2.6 Conclusions ... 31

3 Findings ... 32

3.1 General scores ... 32

3.2 Formation factor scores ... 32

3.3 Growth factor scores ... 45

3.4 Results on the Innovative Start-up Scoreboard ... 57

3.5 Interpretation of the Scoreboard performance ... 58

3.6 Overview of the British initiatives ... 58

3.7 Conclusions ... 59

4 Redesign and Recommendations ... 60

4.1 Connecting formation and growth ... 60

4.2 Improving the entrance levels ... 62

4.3 Improving the connectivity of start-ups ... 63

4.4 Improving the levels of growth ... 65

4.5 Conclusions ... 66

5 Conclusions ... 68

5.1 Development of the research framework... 68

5.2 Scoreboard results and British initiatives ... 69

5.3 Connecting formation and growth and addressing Dutch bottle-necks ... 70

6 Discussion ... 72

6.1 Implementing the recommendations ... 72

6.2 Further research into the Innovative Start-up (Policy) Scoreboard ... 72

6.3 From national to regional ... 72

6.4 The true value of growth readiness ... 73

6.5 Development of the Research framework ... 73

6.6 Process ... 73

7 Bibliography ... 75 Annex 1 – Outputs GEM Data ... Fout! Bladwijzer niet gedefinieerd. About GEM ... Fout! Bladwijzer niet gedefinieerd. About the dataset ... Fout! Bladwijzer niet gedefinieerd. Performed tests ... Fout! Bladwijzer niet gedefinieerd. Output 1: The amount of TEA... Fout! Bladwijzer niet gedefinieerd. Output 2: The amount of starting entrepreneurs exploiting an innovative product or service ... Fout! Bladwijzer niet gedefinieerd.

Output 3 : Correlation know starter – own expectations to start Fout! Bladwijzer niet gedefinieerd. Output 4: Total amount of money needed ... Fout! Bladwijzer niet gedefinieerd. Output 5 : Correlation between amount of money needed and supplied by entrepreneur self ... Fout! Bladwijzer niet gedefinieerd.

Output 6: Business angels - Supply of business angel capital .... Fout! Bladwijzer niet gedefinieerd. Output 7: skills of starters ... Fout! Bladwijzer niet gedefinieerd. Output 8: Growth of start-ups ... Fout! Bladwijzer niet gedefinieerd. Output 9: start-up team-size ... Fout! Bladwijzer niet gedefinieerd. Output 10: Start-ups exporting ... Fout! Bladwijzer niet gedefinieerd. Output 11 - correlation export – degree of innovation, team size, money needed, amount of employees in 5 years (only Netherlands) ... Fout! Bladwijzer niet gedefinieerd. Annex 2 – Interview analysis and curricula ... Fout! Bladwijzer niet gedefinieerd. Respresentability of interviewees ... Fout! Bladwijzer niet gedefinieerd. Curricula vitae ... Fout! Bladwijzer niet gedefinieerd. Annex 3 – Start-up Scoreboard Construction ... Fout! Bladwijzer niet gedefinieerd.

1 Introduction

This thesis is about the formation and growth of newly formed firms that develop and sell new products or services. This type of firms is called innovative start-ups.

Every year many people decide to start a new firm. Part of these new entrepreneurs develop a new product or a new service to introduce on a market. The new product or service can give the start-up a competitive advantage over other start-ups that do not introduce a new product or service and existing firms whose product or service is being attacked. If the product fulfils a need of potential customers and the customers are buying the product there is a base for growth of the start-up. A very famous example of an innovative start-up that introduced a new product and subsequently grew massively is Google. This company was founded in 1998 and developed a revolutionary internet search service. Nine years after the formation of the firm, Google reports total revenues of $10 billion (2006), an index of over 8 billion web pages, market leadership in the internet search service business and finally the total value of the firm exceeds $ 100 billion (April 2007). The firm is competing with giant ICT firms like Yahoo and Microsoft and has a broad portfolio of products. This example shows that a successful innovation that is exploited to the most by a start-up can bring progress to many users and prosperity to its exploiters.

On the other hand there are vast amounts of start-ups that deliver new products or services as well, but never grow bigger than the founder or the founding team. Or even worse, revolutionary ideas are kept in people’s heads and these people are not planning to start a new firm, develop the idea to a product and bring the product to the market.

It would be valuable to investigate why certain countries have more innovative start-ups than other countries and why the growth paths of these starters are steeper than starters in other countries. Therefore this report presents a model, the Innovative Start-up Scoreboard, to analyze this matter on an inter-country level and a comparison is made between the Netherlands and the United Kingdom. These are both industrialized countries, but with different entry and growth rates of innovative start-ups. From the results of the scoreboard a new model is built that delivers a connected approach towards formation and growth of innovative start-ups. Furthermore this report presents British examples that stimulate the entry and growth of start-ups and recommendations towards Dutch universities, incubators and the government to improve the amount of innovative start-ups and their growth rates.

In the following paragraphs the importance of research into innovative start-ups is explained, starting with a historical comparison between strategic management and entrepreneurship. Subsequently a brief note is being made about the interaction between innovative start-ups and their environment and policies to stimulate the amount and growth of innovative start-ups. This forms the basis of the

research goal and questions of this report that are explained thirdly followed by the methodology. After this the principal and guides are introduced. Finally a roadmap of this thesis is presented.

1.1

The relevance of innovative start-ups

1.1.1 The history of strategic management versus entrepreneurship

This paragraph displays a contrast between the rise of the classic view on firm growth which is represented by the stream of strategic management and the competition it experienced since the 1970’s from the rising of a new wave of start-ups and research into entrepreneurship.

The second industrial revolution, which is roughly defined as the period from 1850 to 1910, brought many radical innovations still in use today (automobiles, aeroplanes, telephones) together with a high entry rate of new businesses which we also still know nowadays (AT&T, General Electric and Boeing) (Wennekers, 2006; p. 12).

With the ending of the second industrial revolution a new era arose, the one of the managerial revolution. In this period management was separated from ownership with the introduction of the listed and limited liability companies. Together with this development business scale grew massively, firms could have multiple units, and managerial hierarchies were created. This period continued until the late 1970s and was accompanied by a steady decline of entrepreneurial activity (Chandler, 1977). Through the creation of massive capital intensive production facilities and high amounts of money spent on internal R&D, together with the attraction of talented personnel and balanced processes, sustainable advantages were created. This was necessary for the survival of the organization and bringing benefit to its customers. This period has also been the period of the development of strategic management sciences.

1.1.2 The resurrection of entrepreneurship

Recent history (late 1970s-now) teaches us that entrepreneurship figures are recovering in the western world, beginning with the US and the UK. Entrepreneurship is also getting more attention from policy makers and social scientists. More and more start-ups are responsible for breakthrough innovations. Start-ups are not only developing world changing inventions but are also capable of bringing these products to the market more successful than long existing multinationals are able to. One only has to think of the example of Google to understand the impressive results start-ups can achieve in a short period of time.

The Global Entrepreneurship Monitor Consortium (GEM) that conducts research into the early stage entrepreneurial activity of countries, identified a correlation between the calculated early stage entrepreneurial activity rate of developed countries and their Gross Domestic Product (GDP) per capita (Presentation R. Harding, GEM Executive Director, 19 Jan. 2007, GEM Forum London). This statement is partly supported by empirical research of Wong, Ho and Autio (2005), among others, who also used GEM data but only identified a positive correlation between the amount of high growth

start-ups and the growth of the GDP of the country they originate. In the Netherlands a recent report (Bangma, 2007) states that approximately 40% of new jobs come from new and relatively young firms (younger than 15 years) and young firms have a higher probability of being marked as high growth (based on EIM-growth foot) than mature firms. Other researchers, for example Almus and Nerlinger (1999), found a positive correlation between the question if a start-up is innovative or not and its growth perspective, because a new product or service can be the pillar of a future competitive advantage.

From this evidence can be concluded carefully that the entry and the subsequent growth of new firms and especially innovative firms have a positive effect on the prosperity of a country. In the following paragraph the effects of the increasing weight of innovative start-ups on the environment are discussed as well as some initiatives that try to enforce the role of innovative start-ups.

1.1.3 The environment is anticipating

The growing magnitude of innovative start-ups and the opportunities they create makes them an area of ongoing interest and research for academia, governments, research consortia and not in the last place mature companies.

Research organisations and mature firms are interested in the formation and growth of innovative start-ups, because of the opportunity start-ups create to exploit intellectual property developed by research consortia and mature firms. In this way start-ups can be used to serve a new market or erect a new production process that doesn’t fit the holding company (Chesbrough, 2006). Data of EIM (Bangma, 2007) shows that the amount of subsidiary start-up registrations as a portion of the total amount of registrations grew massively over the last twenty years. From 5.000 (17% of total registrations) in 1987 up to 22.200 (29% of total registrations) annual registrations in 2005. Besides this, a report of Bernardt, Kerste and Meijaard (2002) found that corporate spin-offs appear to grow faster and are more innovative than their competitors. 60% Of the parent firms only saw positive effects from the spin-off while only 13% distinguished just negative effects. So it seems that organizations discovered the advantages of starting subsidiary firms.

On the other side start-ups can also form a serious threat for established industries in a short period of time. Schumpeter gives a theoretical explanation for this process, called creative destruction. Schumpeter (1942, according to Aghion and Howitt, 1992) thought entrepreneurs are people who start new companies that are able to produce in a more efficient way and with better methods than existing companies. New organisations will grow and diminish less efficient organisations. The entrance of new organisations to the economy is seen by him as the driving force behind sustainable economic growth.

The positive influence innovative start-ups can have on the economies of countries clarifies the interest into the topic from different governments. The EU Commission (2003) and the Dutch Ministry of Economic Affairs developed targets to improve the amount and growth rates of innovative

start-ups. The Dutch Ministry of Economic Affairs formulated targets for innovation and entrepreneurship in the National Reform Program 2005-2008. One of them is to double the total turnover of innovative start-ups from 1,3 billion euro in 2003 to 2,6 billion euro in 2010. This goal makes a rapid increase of the amount of innovative start-ups and growth of the existing innovative start-ups a necessity.

Unfortunately the way the entry rate and growth of innovative start-ups are stimulated by these ‘environmental factors’ is not always effective. Too many governments emphasize the factors that stimulate the entry of start-ups (Bridge, O’Neill, Cromie, 1998) and underestimate the importance of subsequent growth. Bangma (2007) concludes that the measures taken by the Dutch government in the last twenty years to stimulate entrepreneurship had a positive effect on the entry rate of start-ups, but hardly influenced their growth perspective. A report of Enter (2006) about innovative start-ups formed around the University of Twente, a leading university in the Netherlands with respect to entrepreneurship and innovative start-ups concludes that start-ups from the University of Twente are formed at a high pace but their growth is absent or limited. A third report of Dekker (2005) about Dutch starters and incubators found that there is only a little synchronization between demand and supply of incubator services in the Netherlands.

1.2

Problem statement

The importance of innovative start-ups is growing and it is clear that the environment is trying to deal with this change with variable success. To see how the Netherlands is performing on an international level first of all two models will be created that describe the drivers of formation and growth of innovative start-ups on a country level. The delivery of these models will result in the construction of the Innovative Start-up Scoreboard, that has to contribute to the development of a coherent model to explain the differences between countries in formation and growth rates of innovative start-ups. Subsequently this report will make a comparison between the Netherlands and the United Kingdom with respect to these drivers of formation and growth. The United Kingdom is chosen because it is an industrialised country like the Netherlands with a comparable income per head of the population and a comparable score on the European Innovation Scoreboard (an index to measure the advancements of countries as a national innovation systems). But the United Kingdom beats the Netherlands in terms of the entry of innovative start-ups (GEM, 2003) and the growth of start-ups (FORA, 2006). From the United Kingdom examples will be presented that stimulate the formation and growth of innovative firms. Finally recommendations will be made towards the Dutch government, universities and incubators to improve the formation and growth of innovative start-ups.

Research goal

• The delivery of a comparison of the drivers of formation and growth of innovative start-ups between the Netherlands and the United Kingdom and the formulation of recommendations towards the Dutch government, universities and incubators how to stimulate formation and growth of innovative start-ups.

Research questions

In order to reach these goals the main research question is:

• How can the formation and growth rate of innovative start-ups in the Netherlands be increased?

The sub questions that are formulated to answer the main research question are: • What is an innovative start-up?

• Which drivers influence the formation and growth of an innovative start-up on a country level?

• What roles can governments, universities and incubators play to increase the formation and growth rate of innovative starting firms.

• How well do the Netherlands and the United Kingdom perform with respect to the formation and growth drivers?

• Which British examples stimulate the formation and growth of innovative start-ups and how do they do that?

• How can the obtained knowledge be converted into a model that connects the formation and growth of innovative starting firms?

• Which Dutch initiatives are already in place and what adjustments can be made to increase the formation and growth rate of innovative start-ups in the Netherlands?

1.3

Methodology

This research can be characterised as partly exploratory and partly comparison. The construction of the comparative model is based on a desk research and interviews. In order to make the comparison between the Netherlands and the United Kingdom a statistical data analysis with GEM data (2002, 2003) was executed and existing reports have been used. Furthermore Trendchart (2002-2006) and Eurostat data (2003-2004) have been used several times. The outcomes of the SPSS analyses can be found in annex 1.

The quantitative data is supported by interviews with twelve experts with different backgrounds. The possibility to talk to high quality interviewees creates three additional benefits. Firstly, it creates the opportunity to get hold of a high degree of knowledge about innovative start-ups on a country level and touch upon underlying relations between different factors. Secondly, it makes it possible to discuss their experiences and their knowledge of best practices. Thirdly, expert interviews create the opportunity to find out about differing world views in both countries, which influence the approach towards the start-up process. The expert interviews also bring in different British initiatives that stimulate the entry and growth of innovative firms.

The curricula of the interviewees as well as a discussion on the quality of the sample can be found in annex 2.

1.4

Principal and guides

The research was conducted on behalf of the Dutch Ministry of Economic Affairs, and in particular the Dutch Counsellor for Science and Technology in the United Kingdom and Ireland. The London based Counsellor for Science and Technology is part of a network of 15 counsellors around the world. They gather information about technology, technology policy in their region for Dutch companies, research organizations, universities and the government. The network is part of the Directorate General Entrepreneurship and Innovation of the Ministry of Economic Affairs.

This thesis is part of my final research project to graduate from the study Technology Management at the University of Groningen. The research was guided by the Counsellor for Science and Technology in London Dr. H. Hoefdraad and Professor Dr. Ir. F.P.J. Kuijpers and Ms. Dr. M.J. Brand, both supervisors, from the University of Groningen.

1.5

Road map of this thesis

Chapter two presents a desk research into a further clarification of innovative start-ups, factors that influence the entry and growth of innovative start-ups and the development of the Innovative Start-up Scoreboard. Additionally, the roles of governments, universities and incubators in formation and growth are discussed. In chapter three a comparison is made between the Netherlands and the United Kingdom, based on comparative data and expert interviews. The British examples will also be presented here. Chapter four presents a connected approach towards the entry and growth of innovative start-ups. Subsequently Dutch initiatives that influence the amount of entry and growth of innovative start-ups are discussed here and recommendations are made. The conclusions and discussion are finally presented in chapters five and six.

2 Research Framework

In this chapter the Innovative Start-up Scoreboard will be constructed to measure the formation and growth of innovative start-ups on an international level. In order to do so, some remarks need to be made about research into innovative start-ups. This will be done in the first paragraph. After that the Innovative Start-up Scoreboard will be developed in two steps. The first step contains the factors that influence formation and the latter the factors that influence growth of innovative start-ups. At last the potential roles of governments, universities and incubators on stimulating formation and growth of innovative start-ups will be discussed.

2.1

Description of the innovative start-up

In the introduction innovative start-ups were defined in the following way: newly formed firms that develop and sell new products or services. In this definition innovative can be defined as introducing new products or services and start-ups as new firms. The word new is used twice, and the questions that rise automatically are what is new and who defines new. This will be explained in the following paragraphs.

2.1.1 Start-up

In this report a new firm is defined as a new organisation with a financial profit goal that has been formed in the recent history. In many other reports new is defined in a quantitative way, for example: a start-up is a firm that has been formed X years ago or less. This kind of definition needs a formation point and a time boundary to be effective.

By time boundary is meant the amount of time that passes before a start-up becomes a mature firm. This differs in almost every research. For example Hoffmann and Junge (2006) use five years as a boundary while GEM uses 3,5 years as a boundary to group young firms (nascents and baby businesses). In international comparisons the start-up is however not only defined by the time that passes before the start-up becomes mature, but also by the formation point. Many times the formation point is based on the moment of registration at a certain desk. For example banks can define the formation point as the first time start-ups open a bank account, and governments use the first registration at the chamber of commerce (as is the case in the Netherlands) or the VAT registration (many times used in the United Kingdom). In the Netherlands to start a business at all a registration at the chamber of commerce is necessary while in the UK the VAT registration is only needed when a serious amount of turnover is reached. If the time boundary in all three cases is set at five years different sample sizes show up and there is a chance the characteristics of the samples vary too.

On top of this comes the fact that many times important founding work is done before the firm is officially registered, for example the construction of the business plan. This period in entrepreneurship research is often referred to as nascent entrepreneurship. Altogether this makes the period around the

formation quite a fuzzy one. To define what the formation point is, GEM asks the interviewees themselves if they think they are or have been active in setting up a new business or not. In an international perspective this seems a valid way to come to a comparable database.

For this report it is not possible to give a single definition of the formation point and the boundary, but it is important to mark the existence of different definitions. To make a valuable international comparison international data that defines new firms in a clear way is used as much as possible. In the interviews and the GEM data analysis the GEM boundary (of 3,5 years) and formation point is used.

2.1.2 Innovation

The term innovation is at least as fuzzy as the term start-up because of the high amount of different definitions. Wijnberg (2004, p. 1416) for example describes an innovation as something new which is presented in such a way that the value will be determined by its selectors. This description is rather broad because something can be anything, the selectors can be anybody and the value is not characterized as positive or negative. One thing Wijnberg is clear about is the fact that it needs to be introduced to its selectors in order to be called an innovation. In case of products or services, this makes a market introduction a necessity.

Schumpeter and GEM replace ‘something’ by a product or service, the most common output of a firm. The most logical selector would be the customer, because he is the one that is finally going to make the decision to buy the product or not and inherently grants value to the product. He makes the difference between life and death of the product or service.

There are two aspects that make it difficult to measure the innovativeness of a product or service in this way, because firstly customers are not always reachable for the researcher. GEM therefore uses the entrepreneur as a ‘representative’ and asks him or her if he/she thinks the customers consider his/her product as new. Secondly many start-ups use the first period of their lives to develop their product before they are actually able to introduce the product into the market. This development period can take some time and resources.

If a start-up is looking for money to back the development process another representative has to decide if the future customers will consider the product as new. For example this can be a private investor that provides equity investment or a government body that provides subsidies for innovative projects. From the interviews was learned that many investors measure innovativeness by the fact if there is defendable intellectual property (IP). Registered IP is therefore in many situations crucial to become investment ready. This matter is further discussed in paragraph 3.3.2.

Having seen this, one has to conclude that in the end it all comes down to the customer to decide whether the product is new or not and if the product provides sufficient positive value for the proposed price, but the customer is not always there to give his opinion. The selected data in this report about the degree of innovation therefore has to come from the customer himself or at least a plausible representative.

2.1.3 Measuring firm growth

Firm growth and innovation in start-ups are linked in two ways. Firstly, because start-ups usually develop a limited amount of products it is easy to measure the success of one innovation in terms of firm growth. This separates small new firms from larger firms as the latter ones are better able to use a portfolio strategy towards their longer list of ‘ready to execute’ innovations. Some of the innovations of large firms are high, and some are low risk innovations, from which one or two winners will arise (Oakey, 1984; Rothwell and Zegveld, 1982).

The second link is illustrated by Wijnberg. According to him the successfulness of the innovation partly depends on the ability of the innovator to appropriate a part of the value and keep the rewards for him or herself (2004, p.1417). In grown up firms this is usually measured through the profit of the complete organisation or the business unit. While many new firms aren’t able to secure any of their value the first years, because of long development processes (Shane and Stuart, 2002) and delayed sales, it is rather difficult to measure firm growth through the profit of the organization. The success is therefore often measured by three variables: growth of employment, revenues and total invested money (Groen, 2006). The growth figures in this report therefore will be expressed in one of these three variables.

2.2

Start-up formation factors

In the earlier paragraph was mentioned that the period of formation can be quite misty. There is no clear path to walk and in every country measure points are placed on varying locations along the line of formation. And there will always be the discussion about what comes first: the entrepreneur, the money or the idea. Instead of discussing the time line it will be more comprehensible to discuss the different factors that influence the likeliness of innovative start-up formation. To do this a common description of entrepreneurship that is given by Shane and Venkataraman (2000: p217) will be used: Entrepreneurship is concerned with the discovery and exploitation of profitable opportunities.

The discovery of an opportunity implicates that there is a supply of opportunities that have to be accessible to their potential exploiters. The exploitation implicates a willingness towards and ability of the potential exploiter to exploit the opportunity. In this research the potential exploiters form the demand side for innovative opportunities. This can be for example a single person that wants to become an active entrepreneur or an investor that wants to participate in a new venture. A representation of the formation process is given in figure 2-1.

Figure 2-1: A representation of the formation factors, divided into supply of and demand for innovative opportunities.

2.2.1 Supply of innovative opportunities

In this model the supply of innovative opportunities is driven by three factors, namely the relative growth of the tertiary sector, firms collaborating on innovation and university-industry cooperation on innovation.

Relative growth of the tertiary sector

Probably the greatest driver of supply of innovative opportunities can be found in the domain of industry dynamics. For example technological inventions and changing customer demands can create new or growing industries, but also diminish others. New and growing industries create room for new firms that deliver new products or improve production processes, where stable or declining industries

welcome less new firms. A growing industry creates opportunities for new firms as the entry barriers are lower than in industries that are stable and where competitors have to fight for every single client (Porter, 1990). In new industries radically innovative new firms get opportunities to conquer a serious market share next to mature firms that also have to enter the new market.

In the economies of industrialized countries, like the Netherlands and the United Kingdom, one significant trend is going on for decades: the growth of the tertiary sector. The growth of the tertiary sector represents the growth of the service industries and is a signal of growing prosperity of nations (Acs, Audretsch and Evans, 1994). The tertiary sector is characterized by low initial capital requirements and thus relatively low entry barriers. Most of the firms in this sector are small sized and therefore the sector creates opportunities for self employment, in comparison to firms in the manufacturing industries (secondary sector) (EIM/ENSR, 1997). Therefore the growth of the tertiary sector is extra important for the entry of new firms. The growth of this sector will be measured for both countries.

Collaboration among firms and academia

A second and third driver for the creation of entrepreneurial opportunities are the amount of firms cooperating on innovation and the collaboration among firms and academia. This is explained from three perspectives.

The first perspective comes from Chesbrough (2006). He claims a growing pressure on the product and service development cycles forces firms to cooperate on innovation projects with other firms and academia. This increasingly leads to radical inventions that cannot be exploited inside one of the partnering organizations, but need to be exploited in subsidiary start-ups. In this way the formation of start-ups becomes a result of inter-firm and firm-university collaboration.

The second perspective focuses on the necessity for innovative start-ups to collaborate with other organisations to be able to start successfully. Almus and Nerlinger (1999) and Autio and Garnsey (1997) argue that building networks with suppliers, clients and partners in innovation is the most important factor to successfully form a start-up. The amount of collaboration among firms and universities gives an overview of the openness of firms and universities towards new cooperative initiatives with other firms. For innovative start-ups this openness is a very important factor to form successfully.

The third perspective comes from Stam (2006) and Stam and Schutjens (2006). They found that the probability entrepreneurs start another venture after earlier business failure increases significantly if entrepreneurs have developed a strong professional network of contacts and learned from their earlier experience. As a large amount of start-ups fail in the early period of life, the availability of network contacts can increase the amount of restarters and simultaneously the amount of starters significantly.

The opportunity to collaborate depends among others on the physical proximity of organisations, possibly concentrated in clusters. According to Porter (2000, p.16) a cluster is a geographically proximate group of interconnected companies and associated institutions in a particular field, linked by commonalities and complementarities.

The growing global competition which areas face makes it necessary for regions to focus on their core strengths to improve their sustainable competitive advantages. This implicates the focus on the innovative strengths of an area and therefore the focus on and support for the building of clusters. Next to that it is logical to build systems (clusters) of the blocks (organisations) that have the highest interaction and build other systems of other blocks with commonalities. Through the formation and growth of clusters innovative start-ups get the opportunity to enter a focus point of entrepreneurship and scientifical knowledge that fits their specific needs. Start-ups with different characteristics (for example ICT or pharmaceutical) need different forms of resources. The fact that they can locate themselves in a cluster that fits their needs will create a sustainable competitive advantage.

As ups grow, their networks grow and become more complex and eventually the needs of start-ups will expand. The building of inter-cluster bondages on a national and a global level will create the opportunity for growing start-ups to profit from scarce resources that are not available in their own cluster and creates the opportunity to learn from best practices in other clusters.

Regarding the importance of inter-firm and firm-university collaboration, the amount of firms collaborating on innovation as well as the amount of collaboration between academia and firms will be measured.

2.2.2 Demand for innovative opportunities

Amount of potential innovative entrepreneurs

The amount of potential innovative entrepreneurs is primarily dependent on two characteristics of people, namely attitudes, attention and education. Less important are the personality features of people and for that reason these won’t be discussed here (Cole, 1969; Brockhaus, 1982; Rauch and Frese, 2000).

It seems that the chance of people becoming an entrepreneur positively relates to the attitude towards entrepreneurship (Verheul, Wennekers, Audretsch and Thurik, 2001). The desirability of self employment depends on several material and immaterial factors. People in the European Union who prefer self employment (45%) do this because they mostly are expecting a higher level of self fulfilment, a better income, or they are expecting that self employment comes together with less adaptation to the environment (Taylor Nelson Sofres, 2004). On the other hand there are Europeans who prefer to be an employee (50%). The reasons they mostly give are the benefit of a regular, fixed income, stability of employment, not as risky as entrepreneurship and a higher level of social security.

Finally there is a group of people that prefer employee status but can be persuaded to become self employed in the next few years. This group can face barriers towards becoming self employed. The possible barriers are unfeasibility of self employed status, feared risks and difficulties to start (Taylor Neslon Sofres, 2004). For both countries the desirability of self employed status and employee status will be measured. The barriers to become self employed will be inspected as well.

Some interviewees thought the use of media can be a good way to introduce entrepreneurship as a favourable career step to large groups of people, to stimulate high growth and to introduce best practices. Therefore it will be analysed if a difference can be found between Dutch and the British opinion on the amount of positive entrepreneurship media attention.

The educational level of people influences the chance of becoming an innovative entrepreneur (GEM 2004 United Kingdom Report) because they are more likely to see new opportunities. The GEM 2004 report for the Netherlands shows that the education level of entrepreneurs is also related to the probability of starting a new firm that delivers a new product market combination, or a firm with products based on new technologies.

As there is sufficient evidence that the knowledge level as well as the earlier experience of people influences the probability of starting an innovative business these factors will be measured for both populations.

Amount of seed and start-up capital

In classic management literature financial capital is not considered to deliver firms a strategic competitive advantage, because it is available in high amounts and it is replaceable. This is true because not the fact that you have money, but the things you do with it decide if you will defeat your competitors or they defeat you. Nonetheless in the formation period of start-ups the availability can play a great role in the outcome of the formation process. In this period different resources need to be brought together to make a start. Resources that in some instances are only available for money. The chance of survival of a new firm is nonetheless low and for that reason it is not evident that money is available to starters in large quantities.

According to Lee, Lee and Pennings (2001) from different research articles is found that start-ups that are able to acquire more financial resources in the early beginning of the start-up are likely to accumulate a larger stock of strategic assets later on than start-ups with less financial resources. Heirman and Clarysse (2005) found that start-ups that failed to survive often point at the low availability of financial resources as primary reason for failure.

The money that is used in the first period of the life cycle is often referred to as seed capital and start-up capital. These are the first two rounds of a five round cycle of investment. First there is a need for seed capital which is meant to prove that the concept is viable and to finance feasibility studies.

Second there is start-up capital, also called first stage finance. This money is intended to achieve the first sales, through marketing and product development.

Different forms of investment can be used in every round. Three forms are distinguished. Inside equity, which can come from founders, is money that comes from people who have a personal relationship with the venture and is usually only available in the first two rounds. Outside equity, which can come from private investors, venture capital and public offerings, is supplied based on a professional relationship and could supply sufficient investment for the latter rounds. Outside equity investors are usually divided into two groups: business angels (informals) and venture capitalists (formals). According to Harrison and Mason (1992) both formal and informal investors appear to contribute in similar areas of the business with an advisory/sounding board role and financial advice being the most important ones.

The third form of funding is debt. This form of funding involves a repayment schedule at an interest rate. Debt funding is harder to get hold of because it usually requires collateral which is not always available in start-ups (Dollinger, 2003). Some business angels are active in this type of investment as well. Furthermore equity investors have to value the opportunity by the expected value of the start-up at the moment of sale (also called exit) of the firm and the return on investment, while the debt investors have to value the opportunity by the interest rate and the chance that the start-up is able to repay the debt.

For both countries the amount of investment needed will be measured in two categories (0-250.000 USD (small start-ups) and 250.000+ USD (large start-ups)). The amount of money supplied by inside equity, business angels and venture capitalists will be measured too.

2.3

Start-up growth factors

After the formation period hopefully a period of growth unfolds. Until now no clear-cut roadmap has been developed towards creating a high growth start-up. Life cycle models exist as the one of Greiner (1972), but these models are hardly able to explain the differences in growth tracks of firms. The model of Greiner for example only describes one way to develop and that is the way up, while most organisations don’t experience a single track of constant growth. A recent analysis of Garnsey, Stam and Hefferman (2006) for example, among British and Dutch starters revealed that a serious amount of starters experience growth setbacks, reach a plateau or experience delayed growth instead of continuous growth. On top of that Penrose (1995) stated that the different growth processes are universal, but not their phase manifestations. By these growth processes she meant the access to and the mobilization of resources followed by the further generation of resources through a sustainable system, the firm. It seems quite logical that a single growth path for the entrepreneur is not identifiable for the same reason why there is still no good formulation yet for the ideal characteristics of the entrepreneur: The field is too diverse and too many combinations have good and less good sides to come to one single path to growth.

An alternative view is delivered by the Resource Based Theory. This theory describes how entrepreneurs themselves build their businesses (a dynamic process) from the resources and capabilities they currently possess or can acquire. The resource based theory (RBT) also states that the nature and quality of the resources, capabilities and strategies entrepreneurs possess and can acquire, can lead to long term success and growth of the organisation.

The use of rare, valuable and hard to copy resources that have no good substitute together with favourable industry conditions provide a sustainable competitive advantage (Dollinger 2003). RBT is used often to research entrepreneurship processes because it focuses on the heterogeneity of resources and believes about their advantages. This heterogeneity can clarify differences in outcomes from different choices and the use of different resources (Alvarez, Busenitz, 2001).

In this part of the research different drivers of start-up growth are presented. The interviews pointed out that human and financial resources are highly important. Besides these resources, interviewees considered a growth goal, a large start-up team and a global focus highly important to realize growth. These are brought together by the group strategies and goals of innovative start-ups. The different growth factors are presented in figure 2-2.

Figure 2-2: Innovative start-up growth factors divided into three categories.

2.3.1 Human resources

In the human resource domain two different research streams identify a positive relation between human resources and firm growth. Research into founders delivers evidence that firms of better prepared founders are experiencing higher growth than firms with less prepared founders. On the other side, firms that experience growth have a great need for new workforce. The quality and availability of this workforce influences the growth perspective of start-ups.

Entrepreneurial knowledge and skills of starters

It seems that the ability of people to manage a new firm is positively related to the growth of a new innovative firm. Ability can be defined as an individual’s capacity to perform the various tasks in a job (Robbins, 1998: p. 46). The abilities entrepreneurs should obtain are broader than general management skills (Solomon, Duffy en Tarabishy, 2002). The entrepreneur should know about the first phase of the life cycle of a start-up and the challenges that come with this phase, like opportunity recognition, market entry, protection of intellectual property, the regulatory restrictions on start-up founding and the scarcity of resources can be divided into educational factors and earlier experience.

Earlier experience and education seem to influence the entrepreneurial abilities in a positive way. Earlier experience can be developed through labour market experience or the start-up or management of a previous business.

According to Hogan and Hutson (2005) owner-managers educated to degree level are more likely to be able to make their business grow. From this growth a greater need for external funding would be needed. Another point they mention is that well-educated founders are better equipped to negotiate with potential providers of finance and they may be more able to understand the trade-offs involved in accepting venture capital finance. A correlation between the level of the education of the entrepreneur and the chance of success of the organization is also found by Brinkman (2000). He identified a high level of skills and a high learning capacity as drivers of this correlation.

For the Scoreboard an assessment will be made of the earlier work experience in start-ups of people, the valuation of the entrepreneurial skills of entrepreneurs and the level of entrepreneurial education at colleges and universities.

Availability of highly skilled workforce and difficulty of hiring and firing

On the other side, firms that experience growth have a great need for new workforce. According to a recent analysis of EIM (2007) one of the biggest bottlenecks fast growing start-ups encounter in the Netherlands is the hiring of highly qualified workforce. Factors that can disturb the hiring process are a low amount of highly educated workforce and a low valuation of start-up jobs compared to jobs at mature or multi national firms. On the other hand start-ups are usually small firms and they are definitely young. Therefore it can be expected that they don’t have the same recruitment facilities and recruitment experience as mature firms. In this perspective bureaucratic rules can be an extra obstruction in hiring for start-ups, because of the time it takes to register workforce with the appropriate authorities. On the other hand firms can fear hiring new workforce if it will become difficult to get rid of them in case they hire the wrong people or experience a fall back. This is especially important for start-ups as they have fewer buffers to pay unneeded workforce or firing costs than mature firms do.

As a result of this the availability of highly qualified workforce will be measured as well as the hiring and firing barriers for both countries.

2.3.2 Financial capital

In the growth phase the availability of financial capital is again an important factor. Davila, Foster and Pennings (2001) found that the growth of start-ups is to a high extent dependent on timely refunding. Delayed funding can have a negative impact on the ability of start-ups to become successful because they cannot exploit their early mover advantages to the most. A distinction made often between various rounds of investment is second stage financial investment, third stage financial investment and initial public offering (IPO) (Dollinger, 2003). Second stage investment can be described as money that helps to ramp up the production and sales. Third stage investment includes the purchase of existing shares in a company to refinance for example bank debt or to bridge the period towards an eventual public offering. If a firm initiates a public offering the firm goes from privately held towards publicly listed. The company will be listed on a public stock market. This makes the shares accessible for a larger group of potential buyers. The amount of deals done in each round is dependent on the demand and supply of capital.

It would be valuable to measure the amount of second and third stage venture capital deals as an indicator for the growth opportunities for start-ups. Furthermore the market capitalisation of newly-listed companies should measure the need for and the supply of public capital for start-ups.

2.3.3 Strategies and goals of entrepreneurs

To exploit the opportunities to the most and to realize growth, resources can play a great role, but it is upon the start-up itself, or so to speak the entrepreneur or management team to make this happen. Therefore this study will take a look into growth ambition and international perspective of the entrepreneur(s) and the start-up team size.

Growth goal

According to Rauch and Frese (2000) too often it is expected that new entrepreneurs use a goal setting focussed on growth. In spite of the fact that growth is a legitimate goal to be able to survive, it is not always the motive of the entrepreneur. Rauch and Frese also identify the life style motive and the income motive. Other researchers (like Saemundson, 2003) talk about the willingness to accept growth and identify this factor as important to enable growth. The opportunity to grow usually shows up a period of time after formation of the start-up and needs to be dealt with. The willingness to deal with these consequences of growth is important. Among these consequences are increased formalisation, a more professional management style and difficulties in motivating the technical workforce.

More researchers found that an ambitious entrepreneur or management team can be a potential driver for growth. Wiklund and Shepherd (2003), Bellu and Sherman (1995), Kolvereid and Bullvåg (1996) investigated this relation for example empirically. Wiklund and Shepherd stated that growth implies

radical changes of the business characteristics. These changes may run counter to the founder’s initial goals of, for instance, personal independence (Wiklund, Shepherd, 2003: p. 1920). Therefore it is not a certainty that all entrepreneurs have a high growth ambition. They also found that growth is dependent upon more factors like abilities of the entrepreneurs, but these are already discussed somewhere else in this report. The ambition is many times investigated in combination with environmental factors. For example entrepreneurs that chase an opportunity also seem to grow faster than entrepreneurs that started a business out of a certain negative displacement (for example unemployed, or without money). Therefore the ambition level of entrepreneurs is investigated.

Start-up team size

According to different articles, firms founded by a team grow faster than firms that are founded by a single person. This finding is based on the assumption that potential individual know-how deficits may be compensated for by other members of the founding team (Almus and Nerlinger, 1999; Eisenhardt and Schoonhoven, 1990; Reynolds, 1993; Storey, 1994). Furthermore Saemundsson (2003) shows that Swedish innovative start-ups that in a later stage of the maturity process acquired new owners are more willing to grow. He offers two explanations for this finding. First it could be that owners are willing to accept new owners to be able to acquire new resources, like professional management that enables further growth. Second it could be that companies that don’t want to grow don’t want to add new owners in order to grow, or find the conditions the new owners set too difficult to deal with. From these findings it would be justifiable to analyze the average size of the start-up team in both countries.

Global focus

For many innovative firms internationalization is the only way to gain access to sufficiently large markets. This is especially true for small countries with limited domestic markets like the Netherlands. In the globalizing world it is also becoming easier to scale up the market size to other countries or to attract resources from different countries. Not in the last place because of the rise of internet. Therefore it is not strange to find that previous research (Heirman, Clarysse, 2004) argues that internationalization provides firms with growth opportunities (Shrader Oviatt & McDougall, 2000; Autio Sapienza & Almeida, 2000).

Internationalization pivots could be dependent on the scope of the target market. If the company tries to focus on a niche market, there is a bigger chance that the domestic market isn’t big enough, than if the scope is on a broad market with many potential customers inside the country. Scholars present different views on this topic. Porter (1980) for example suggests that new ventures should concentrate on specialized products and market segments where customization and high levels of customer service create unique advantages for small firms, or opportunities too small to be of interest to larger, economies-of-scale oriented firms.

In contrary to Porters findings MacMillan and Day (1987) claim that new ventures with a broader more aggressive market strategy outperform start-ups with a focussed strategy.

Nonetheless an international market perspective should result in higher growth than a national perspective. Therefore the global focus of start-ups will be measured.

2.4

Design of the Innovative Start-up Scoreboard

All the factors mentioned above result into the development of the innovative start-up scoreboard. This scoreboard is divided into three parts, namely overall score, formation factors and growth factors. The scoreboard is filled with data from six years, 2001-2006. For many factors data is only available for one, two or three years. Nonetheless data that is available for more year has to be weighed. Every year closer to 2007 valued 0,25 point higher than the year before, starting with 1 in 2001. This means 2002 is weighed 1,25, 2003 1,5 up to 2,25 for 2006.

The values a country can score is + or 0. A + is awarded if the score is at least 10% higher than the score of the rivalling country. If the score is between -10% and +10% the country is awarded a 0. The variables in the scoreboard are presented in table 2-1.

Innovative Start-up Scoreboard Variables

Overall score

Amount of innovative start-ups

Amount of high growth start-ups

Formation factors

Relative growth of the tertiary sector

Amount of firms collaborating on innovation

Firm -university collaboration on innovation

Attitude towards self-employment

Amount of media attention for start-ups

Level of tertiary education

Level of S&E graduates

Amount of early stage finance needed 0-250.000 USD

Amount of early stage finance needed 250.000+ USD

Amount of early stage finance supplied by business angels

Amount of early stage venture capital deals

Growth factors

Earlier experience entrepreneurs

Valuation of own skills entrepreneurs

Level of entrepreneurship education

Availability of highly skilled workforce

Difficulty of hiring

Difficulty of firing

Amount of second and third round venture capital investment

Availability and accessibility of financial capital on stock

market

Growth goal setting of the entrepreneur

Start-up team size

Global focus of start-up

Table 2-1: The Innovative Start-up Scoreboard including the variables that will be tested in chapter 3.

2.5

The roles of governments, universities and incubators

In the previous paragraphs is explained which factors contribute to formation and growth ratios of innovative start-ups on a macro level. Several types of organisations can influence the performance of these factors on a meso level. In this report a distinction is made between universities, governments and incubators as environmental factors, because recommendations need to be made towards these orgnisations. In the introduction some studies were mentioned that investigated the role of these types of organisations and the problems they have in dealing with innovative start-ups. In order to understand these problems this paragraph explains a little more about the different roles governments, incubators and universities can play and which are effective and which are not. In the next chapter the types of roles will be coupled to various British examples that try to stimulate the formation and

growth of innovative start-ups and will be analysed if roles can be matched to formation or growth exclusively.

2.5.1 Governments

The focus of the earlier analysis of formation and growth factors was on supply and demand of opportunities, financial capital and knowledge and goals and strategies of entrepreneurs. The role of governments from an economic point of view is aimed at keeping balance between supply and demand of these factors and stimulating an ambitious culture. To create a balance, governments can create a legal framework. Secondly governments can restore market imperfections. Thirdly governments need to see to it that market parties act in accordance with the rules set. At last governments act as market parties themselves and in this way they can create or restore unbalanced situations. Based on theory of Verheul, Wennekers, Audretsch and Thurik (2001) and Bridge, O’Neill, Cromie (1998) a distinction is made between three types of policy measures to realize the aims of governments:

G1. Government intervention that impacts the type, number and accessibility of entrepreneurial opportunities. In this category one can find several forms of policies: stimulation of technological development (R&D subsidies), income policy (higher income disparity increases the diversity of demanded products), lowering entry barriers (competition policy and establishment legislation). G2. Government policies aimed at influencing the availability of resources, skills and knowledge of individuals. Skills and knowledge can be influenced through training and education. The availability of resources can be stimulated directly (in case of financial resources through grants and loan guarantees) or indirectly (policies aimed at development of a venture capital market).

G3. Government policies aimed at influencing the preferences, values and attitudes of individuals. Entrepreneurial values and preferences can be shaped through the educational system or through media attention. The preference for entrepreneurship can be influenced through for example social security policies.

2.5.2 Incubators

A big advantage mature firms have over starting firms is that they can count on their existing networks while starters need to start building these networks. A network of clients that need the product or service and a network of suppliers or partners that are able to deliver the services the firm needs are very important assets for firms. Various scholars (Almus and Nerlinger,1999; Autio and Garnsey, 1997) argue a firm’s early growth above all depends on effective external relations with other organisations. Subsidiary ups can benefit from the networks of the holding firm, but many start-ups are out there on their own.

A particular type of organisation to support start-ups in the formation process and to help to collect the resources start-ups don’t possess yet is the incubator. Since the 1990s the amount of incubators has been growing steadily because it has become a politically attractive and widely accepted initiative to increase the chances of survival for new business ventures. Unfortunately many times incubators are