Master Thesis, MSc BA Small Business and Entrepreneurship Lieke Fidom January 2017

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What are desired personal characteristics for potentially successful co-founders in the context of a startup studio?

Master Thesis, MSc BA Small Business and Entrepreneurship

1

Lieke Fidom

2

January 2017

Word count3_{: 25741}

First supervisor: Dr. F. Wijbenga / University of Groningen / Business

Generator Groningen

Co-assessor: Dr. E.P.M. Croonen / University of Groningen / Coordinator

Master Small Business & Entrepreneurship

1_{University of Groningen, Faculty of Enomics and Business, 9700 AV, Groningen, The Netherlands} 2_{Lieke.fidom@student.rug.nl, s2077752, Steenhouwerskade 1a20, 9718 DA, Groningen, The Netherlands} 3_{Appendices and references excluded}

Keywords: Startup studio, Venture builder, Startup Factory, Startup Foundry, personal

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ABSTRACT

This study aimed to serve as a starting point to both the conceptual and practical domain of startup studios by solving a business problem and (main) research question(s) that are linked to one another. In order to achieve this goal, this research draws on a qualitative in-depth single case study and includes insights from four experts with different backgrounds and experience in the field of startup studios, entrepreneurship, innovation ecosystems, startups and cooperation between startups and corporates. In order to solve the business problem and answer the main research question (divided into three sub research questions), an exploratory research approach and academic problem solving approach is used. Based on existing academic literature, a theoretical framework was developed on the topic of startup studios. This study analyzes the new phenomenon of startup studios, provides a definition and conceptualization, and zooms in on the desired personal characteristics for co-founders in the context of startup studios.

ACKNOWLEDGEMENT

I would like to thank my supervisor Dr. F. Wijbenga for guiding me throughout this thesis process. Thanks to his feedback I was challenged to perform at my best. Also I would like to thank the founders of Company X4 for our inspirational meetings each week and their insights and knowledge regarding entrepreneurship and the innovation ecosystem of the Northern Netherlands. I have learned unbelievably much which made the internship very valuable to me. It has been very interesting to see Company X been built up and developing from the start and I am very grateful that Company X’ founders have involved me with almost every aspect of their new big challenge. Moreover, I would like to thank all experts for their input, without their help this research would have been impossible. This also accounts for all the conversations I have had with other actors in the innovation ecosystem of the Northern Netherlands which I have not used for this research but still helped me to move forward. Lastly, I would like to thank my family (special thanks to my grandparents) since it has not always been easy to be around me when I was frustrated or stressed about writing this thesis.

4_{For reasons of confidentiality it is opted to use fictitious names in this version.}

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1. INTRODUCTION

This section gives an introduction to the present master thesis consisting of several paragraphs. First, the venture for which the study is conducted is introduced and the business problem is described. Second, the theoretical relevance of studying the stated business problem is defined and the literature gap is presented. Third, it is clarified how this study aims to both close this literature gap and solve the business problem, followed by the main research question and three sub research questions. Lastly, an overview of the study is provided.

1.1. Company X: An introduction

The Northern Netherlands is more than a collection of successful startups5_{: different parties work}

closely together on important social issues, such as food, water, sustainable energy, healthy ageing and digitalization6. The region is turning more and more into a thriving ecosystem fueled by collaboration and innovation: ideas, inventions, research, startups at various stages, scale-ups, investors, mentors, advisors, universities, incubators, accelerators, co-working spaces, service providers, event organizers, networks, crowdfunding portals, other funding providers and facilitators – it is all there. However, the venture for which this study is initially conducted, Company X, reviews this ecosystem critically.

First, Company X acknowledges that the Northern Netherlands is growing fast in terms of startups but it argues that the region still has too little fast-growing scale-ups with the ambition to innovate radically. High-skilled entrepreneurs are lacking as students often leave the region after they graduate, and other individuals do not want to dive into the risky world of startups when they have the security of their current job. Even when they are willing to take the risk, they would struggle to turn their ideas into a viable and scalable business.

Second, Company X recognizes that corporates7 in the Northern Netherlands are often ahead of competition when it comes down to technologies in existing industries but have difficulties with internationalization, crossovers, digitalization and agile entrepreneurship. Corporates know their business domain and customer pain points better than anyone else but struggle to bring new ideas to life. Also, when these ideas are not part of their core business, they are put aside relatively quickly. Meaning, it is possible that there are many good ideas present at these corporates, just waiting to be implemented.

Third, Company X points out that investors in the region are constantly searching for the next big thing and are willing to help great initiatives – also by investing (pre) seed capital – as long as they

5_{The city Groningen has the largest number of successful startups after Amsterdam, and is the only city with a consistently growing number}

of listed companies in the Deloitte Fast50 since 2012. ( http://www2.deloitte.com/nl/nl/pages/technology-media-and-telecommunications/articles/rankings-technology-fast50.html?icid=nav2_rankings-technology-fast50)

6_{See for examples:}_www.snn.eu_,_{www.sernoordnederland.nl}_,_www.nom.nl_,_{www.vno-ncwnoord.nl}_,_{www.noordelijkeonlineondernemers.nl}_, www.provinciegroningen.nl, www.samenwerkingnoord.nl

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are certain of traction which might be difficult for startups to show in the very early stages of a business. According to Company X, the region would improve its success rate significantly if these corporates, startups/entrepreneurs and investors would combine their strengths in a more efficient way.

That is exactly why Company X is founded. Their core idea is to act as the needed glue between the three actors: startups/entrepreneurs, corporates and investors, to help the region with bringing more innovative ideas successfully to the market. To make the idea more visual, a graphical representation of Company X’s concept is presented in figure 1 below.

Figure 1. A graphical representation of Company X’s concept: a binding factor between (potential) entrepreneurs, investors

and corporate partners in the innovation ecosystem

This could be done by a classic incubator or accelerator, however, Company X aims to help them in a novel way. Whereas classic forms of incubators or accelerators are focusing on providing infrastructure and startup facilities in exchange for cash, mentoring and accelerating startup teams, or investing into them in exchange for equity stakes, Company X’s long-term vision is to provide an entrepreneurial end-to-end venture building platform, including human and financial capital, a network, ideas and opportunities. It aims to build successful startups in parallel, and to reshape the existing industries and sectors in the Northern Netherlands. Company X focuses on maturing the high potential, scalable ideas that emerged at corporate partners in the region. Additionally, for each startup, Company X’s first purpose is to find an external, independent entrepreneur to execute the ideas. These entrepreneurs act as a co-founder and create – together with Company X – a new venture at a private location completely outside the corporate partner. Nothing new so far, but in most cases

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the corporate gains an equity stake in the new startup, which is not Company X’s preferred way of working. Company X strongly believes that this does no good to disruptive innovation and success. Instead, Company X itself takes a stake in the startup; in exchange for its extensive and detailed business consultation during a period of approximately six months.

“Why would a corporate voluntarily give away their idea?”, one could ask oneself. This is a logical question, and the answer in this case is simple: because they have a call option. Meaning, when the new venture passed the early stages (approximately after two-three years) and the startup is successful, the corporate has the right to buy itself back in. As previously mentioned, this is a huge chance for corporates as they are often not able to bring the ideas to a success themselves (e.g. due to high innovation costs, long decision making process, difficulties with changing the corporate culture).

Some people call organizations like Company X a startup studio, whereas others refer to “startup factories”, “foundries”, “venture builders” or “company builders”. There are only slight nuances between each of these appellations (see section two). In this thesis, the term “startup studio” will be used to refer to the novel organizational form of Company X:

“A venture that creates startups in a factory-like manner, i.e., with a focus on

efficiency and scale, and by using standardized processes and shared

resources” (Szigetti, 2016).

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1.2. Business problem

The basis of Company X’s business problem lies in the fact that (academic) information about startup studios is lacking, as it is a novel organizational form. Company X is still in its startup phase and would like to gain more information about the startup studio concept in general. Moreover, Company X expects that its biggest challenge will be to find the right co-founder for each startup it will build. As one might know from experience or academic research in the field of entrepreneurship, entrepreneurial talent is scarce and hard to define. Nevertheless, without these co-founders, Company X cannot operate as a successful startup studio. It cannot afford to make many mistakes in selecting its co-founders, since this will lead to less efficiency and highly probably to a lower success rate.

But before further investigating the latter, this study agrees with Company X that it is needed to obtain a greater understanding of the startup studio model in general. Therefore, the first part of the business problem is developed as follows: “What defines a startup studio and its context?” For the second part of the business problem, it is decided to focus on the desired personal characteristics of co-founders in this specific context (see section 1.4 for further explanation). It may be that personal characteristics are not the only requirements for the selection of a certain person, however, since this study needs to focus it takes this as a starting point. Accordingly, the second part of the business problem is formulated as: “What personal characteristics of co-founder applicants does Company X

need to assess to increase the chances of success for its startups?”

1.3. Theoretical relevance, literature gap and research objective

The past twenty years many new forms of entrepreneurship have arisen. Many firms are experimenting with ambidextrous structures or practices like open innovation to help them reconcile efficiency and innovation (Puranam, Alexy & Reitzig, 2014). Existing corporates have engaged in corporate venturing whereby they seek to create a suitable environment for the stimulation of innovations and their commercialization (Venkataraman, MacMillan & McGrath, 1992; Sharma & Chrisman, 2007). Alternatively, these corporates have divested high-tech activities in the form of management buy-outs once recognized that they do not possess the skills to grow these particular innovations (Robbie, Wright & Albrighton, 1999; Schildt, Maula & Keil, 2005; Sharma et al., 2007). Also, the transfer of knowledge and technology from the public to the private sector resulted in a new variant of entrepreneurship and is increasingly viewed as playing a significant role in new venture creation and scaling up existing businesses (Matkin 1990; Parker & Zilberman 1993), as done by surrogate entrepreneurs8_{(Radosevich, 1995; Franklin, Wright & Lockett, 2001).}

Among all the above-mentioned forms of entrepreneurship, incubators and accelerators play a significant role to support these initiatives (Cohen, 2013; Pauwels, Clarysse, Wright & Van Hove,

8_{A surrogate entrepreneur is an entrepreneur from outside the originating organization that takes on a leading role to seize an opportunity}

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2016). Nevertheless, only a small amount of scientific literature exists on both organizational forms, and the literature that does exist is relatively vague. Incubation and acceleration have increasingly become overarching words, referring to a heterogeneous and ambiguous reality where no two incubators or accelerators are the same (Allen & McCluskey, 1990; Bøllingtoft & Ulhøi, 2005) and where terms are used interchangeably. Since the phenomenon of startup studios is argued to come closest to these organizational forms, it is needed to make all models more transparent to be able to find similarities and differences between them. Besides, startup studios have received much attention in the practitioner literature recently (e.g. Rao, 2013; Scott, 2014), whereas academic work is definitely lagging behind. To the best knowledge of the researcher, startup studios has not been investigated on a scientific level yet.

To conclude, the first research objective is to better understand the startup studio model in conceptual terms and to make startup studios more transparent, in such a way that it might help Company X and other startup studios to improve their strategy and execution. The second research objective is – relating to the second part of the business problem as stated in the previous section – to gain an understanding of the personal characteristics that are required for co-founders in the specific context of a startup studio.

1.4. Linking the conceptual domain to the practice

Studying the case of Company X will both shed light upon the business problem and the literature gap. Based on a systematic literature review, a theoretical framework is developed on the topic of startup studios. Even though the literature about “traditional” incubation and acceleration models is not very extensive and somewhat confusing, the theory that does exist is used to study how these supporting mechanisms function within innovation ecosystems and how they differ from one another and the startup studio as new organizational form. Another theory that is used is that of surrogate entrepreneurship, which is about the phenomenon that in some situations external independent entrepreneurs need to be recruited as people do not have the time, wish or skills to become fully committed or lead the venture successfully (Kassicieh, Radosevich & Umbarger, 1996; Vohora, Wright & Lockett, 2004). Surrogate entrepreneurship is central to the startup studio model.

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makers will find out how they can help startup studios and how to boost the startup output at an ecosystem level.

1.5. Research question

Based on the literature gap identified in the paragraphs above, the main research question (RQ) of the study is formulated as follows:

RQ: “What are desired personal characteristics for potentially successful co-founders in the context

of a startup studio?”

To further explore the main research question, three research sub questions (SRQ) are formulated. First, it is needed to gain a better understanding of the startup studio model before investigating the desired personal characteristics of a co-founder in this context. Since a startup studio lies in line with the theory and practice of incubators and accelerators, it is a logical and required step at the beginning of this study to outline the differences with these two organizational forms. Therefore, the first sub research question is formulated as follows:

SRQ 1: “What characterizes a startup studio, and how does it differ from an incubator or

accelerator?”

This study aims to answer this question by reviewing existing academic literature about incubators and accelerators, by collecting and analyzing secondary data sources regarding startup studios, and by having a deeper look at Company X’s inspiration source Compnay Y (by means of an exploratory case study). This is further explained in the methodology section. Second, it is necessary to gain insight about the desired personal characteristics for successful entrepreneurs in general. The focus of this study is limited to personal characteristics (also including personality traits) and does not include factors such as entrepreneurial experience, age, knowledge and (educational) background (e.g. Busenitz et al., 2003; Rauch et al., 2007). This study acknowledges that just having the desired personal characteristics is not sufficient for successful entrepreneurship and the researcher is aware of the importance of other factors, although it can be argued that factors such as experience are less important within this context because a startup studio provides an environment that can offset the inexperience of first-time entrepreneurs. Since it is the first academic research about this new organizational form, this study can serve as an exploratory research and a starting point for further academic investigations that can further analyse other factors which may also be relevant for this context. Accordingly, this study has developed a second sub research question:

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This question is attempted to be answered by reviewing existing literature about personal characteristics of entrepreneurs in general, which is the (main) topic of many academic articles. The outcome of these studies are also discussed with experts in the field of entrepreneurship, startups, and incubation or acceleration (see methodology for the research design). Finally, this study expects that the specific context of a startup studio results in different personal characteristics for co-founders than those proposed by the general entrepreneurship literature. There may be some additional personal characteristics that need to be considered and it may be possible that some personal characteristics are less (or un-)important. Therefore, the third and last sub research question is formulated as:

SRQ 3: “When considering the context of a start-up studio, what personal characteristics should be

emphasised on, and what personal characteristics can be left aside or need to be added?”

This study seeks to answer this question by analyzing the specific startup studio context once again (i.e., by reviewing the answer to the first sub research question) and, in addition, by highlighting aspects of this context that may lead to different personal characteristics needed for co-founders. Moreover, this is discussed with the same experts mentioned earlier and by researching the case of Company Y9_{(see methodology section for further explanation).}

1.6. Research overview

The remaining part of the study proceeds as follows. Section two begins by laying out the theoretical dimensions of the research and presents a graphical representation of the theoretical framework. The third section is concerned with the research design and methodology used for this study. Section four presents and analyzes the results of the case study, of the interviews with other experts, and of the collected secondary data. Section five addresses the discussion. A solution design will be provided in a separate document, and will be presented to Company X. This will not only discuss the answer to the main research question but also other important findings and recommendations which the researcher hast been found during this study will be explained. Then, section six deals with the theoretical and managerial implications as well as limitations and suggestions for further research. The managerial implications consist of implications for startup studios in general and practical implications for Company X as an answer to the business problem. The conclusions of this study are demonstrated in section seven, and lastly the references and appendices are covered respectively in sections eight and nine.

2. THEORETICAL FRAMEWORK

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To analyze the research questions a theoretical framework will be developed. Based on existing literature about incubators and accelerators, semi-structured information that originated from the founders from Company X and their inspiration source Company Y, and information found on relevant web sites (e.g. websites maintained by startup studios themselves) the first sub question – what characterizes a startup studio and its context, and how does it differ from an incubator or accelerator – will be answered. The second part of this section elaborates on the existing entrepreneurship literature, and provides an answer to the question of how to define successful entrepreneurs by means of their personal characteristics. Additionally, this section discusses what personal characteristic should be emphasized on, which ones can be left aside or need to be added, when assessing the potential of a co-founder in the specific context of a startup studio. Finally, a graphical representation of the theoretical framework is given.

PART I – INCUBATORS, ACCELERATORS, STARTUP STUDIOS 2.1. Incubators

In essence, startups supported by an incubator are “provided with office space in a building with other

startups and can make use of shared equipment, administrative services and other business related services” (Bøllingtoft, 2012) but other incubation models have appeared as well (Hackett & Dilts,

2004; Grimaldi & Grandi, 2005; Bruneel et al., 2012) and the processes, organizational forms, sectors of operation, and value-added elements can significantly differ (Ghasemizad, Kazemi & Abassi, 2011). For instance, several incubators provide introductions to financiers, and connections to legal, technology transfer, and accounting consultants (Hackett & Dilts, 2004). When they are affiliated with a university, they may offer services related to intellectual property (IP); e.g. the university may use them to transfer knowledge from faculty members to firms that are commercializing the university’s IP (Rothaermel & Thursby, 2005). Nevertheless, main components of “traditional” incubators can be found in table 1 below (Bergek & Norman, 2008).

Table 1. Main components of an incubator

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After careful consideration, the researcher decided not to go too much in detail about this. Nevertheless, four forms of incubation are discussed briefly: 1) Incubator with walls; 2) Incubator without walls (virtual); 3) International incubator and 4) Accelerator (Lewis, Harper-Anderson & Molnar, 2011). Definitions are presented in table 2 below. .

Table 2. Four forms of incubation

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in the incubator (Lewis et al., 2011). For these firms, virtual incubation or participation in an affiliate program at an incubation program with walls is a better option. However, encouraging networking among clients is challenging with this incubation form. Also, having clients located close to one another in an incubator makes it easier for the incubator staff to provide entrepreneurial support services (Lewis et al., 2011). The latter form of incubation10_{, an accelerator, is discussed more}

extensively in section 2.2.

2.1.1. The performance of incubators

What constitutes the performance of incubators and how to measure this performance, depends heavily on the intentions of its sponsor and the circumstances of graduation from the incubator. This mission can range from the assurance of new venture survival across the graduation of self-sustainable companies to accelerated firm growth (Aernoudt, 2004; Hackett & Dilts, 2004). In a study conducted by Vanderstraeten and Matthyssens (2010), it was shown that apart from differences in contributing factors, researchers have investigated incubator performance in different regions, with different stakeholders and at several organizational levels. This makes it very difficult to compare these studies. Also, scholars that focus on the survival and success of graduated new ventures as an indicator of performance, might draw other conclusions than those who take other indicators. Nevertheless, when reviewing the literature about incubator performance, one may conclude that it is frequently measured by the growth and financial performance of client companies at the time of incubator graduation. Operationally, there are five mutually exclusive outcomes when exiting the incubator (Hackett & Dills, 2004):

Table 3 – Outcomes when exiting an incubator

Overall, the literature proposed that the first three outcomes presented in table 3 are indicators of incubation success and the last two outcomes are indicative of failure (Hackett & Dilts, 2004). Next to these indicators, other ways to evaluate the performance of incubators are shown in the following table 4.

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Table 4 – Further ways to evaluate incubator performance

Best practices for incubators – based on the above – can be found in table 1 of appendix 1. 2.2. Accelerators

The history of accelerators is much shorter, originating from around 2005 (Christiansen, 2009; Miller & Bound, 2011). That year, the accelerator emerged as new incarnation of entrepreneurial support format when former entrepreneur Paul Graham invited the first batch of eight startups to go through a three-month entrepreneurial training program in Silicon Valley, called the Y-Combinator (Christiansen, 2009). Some of the most successful alumni today are Dropbox (2007) and Airbnb (2009), being worth billions. What started as an initiative of experienced entrepreneurs innovating in the field of early-stage investing and entrepreneurial support, has transformed into a global trend. Building on the work of Cohen and Hochberg (2014), one can define an accelerator as “a business

entity that makes seed-stage investments in promising companies in exchange for equity as part of a fixed-term, cohort-based program, including mentorship and educational components, that culminates in a public ‘demo day’” (Cohen, 2013; Cohen & Wright, 2014) where ventures pitch to a large

audience of qualified investors. More broadly speaking, “they help ventures define and build their

initial products, identify promising customer segments, and secure resources, including capital and employees” (Cohen et al., 2014: p.4). Accelerators use a selective application process to target

scalable, high-value, and high-growth startups (Dempwolf, Auer, D’Ippolito, 2014). Moreover, these programs help entrepreneurs commercialize sometimes underdeveloped business ideas, helping startups to go public, get acquired, or receive additional funding in a brief span of time (Dempwolf et al., 2014). This is done through offering educational and mentorship programs which can be extremely useful and valuable to entrepreneurs. Cohen et al. (2014) state that accelerator programs “vary in the

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Accelerators are somewhat similar to incubators. After all, accelerators aim to help nascent ventures during the formation stage as well. Nevertheless, an accelerator differs in several ways. As argued by Cohen et al. (2014), the most fundamental difference is the limited duration of the accelerator programs in comparison to the continuous nature of incubators. While the NBIA states on their website11_{that 93 percent of all incubators are non-profit organizations focused on economic}

development, accelerator programs may be for-profit as well. As Cohen et. al (2014, p.5) put it: “The

fixed length of the program, its intensity, the provision of a stipend and services and the cohort-based nature of accelerator programs distinguishes them from other entities such as incubators, which lack a fixed term, do not typically provide equity investment in return for cash, primarily focus on co-working space and shared office resources (internet, etc.), are not selective in admissions, and offer ad-hoc educational offerings and mentoring if at all.”

2.2.1. The performance of accelerators

Whereas no rigorous quantitative research has reported the positive influence of acceleration programs, anecdotal evidence and self-reported data suggest that between 60 and 70 percent of the accelerator graduates are able to attract funding after being part of the program (MacManus, 2010; Hoffmann & Radojevich-Kelley, 2012). A possible explanation for this might be that acceleration enables a large amount of its graduates to attract investors. Whether a startup attracts follow-up funding or not, can be an indicator of performance. However, different investor relationships between accelerators and their graduates can lead to different measures of performance (Chang, 2013) For example, some accelerators have established relationships with venture capitalists that guarantee to fund every startup that graduates from the program (Miller & Bound, 2011) making follow-on funding an arguable point. Furthermore, the founder of Y-Combinator stated that only the largest exits have a significant financial influence and offset failures and ventures that do not gain significant size. Success was therefore defined as an "exit", i.e. a liquidity event in which money is returned to the investors like an initial public offering or an acquisition by another organization (Chang, 2013). To some extent, it remains uncertain what makes accelerator programs (un)successful. It is believed, however, that the accelerator’s founder is an important contributing factor of performance; especially regarding his or her background, network and skills to provide meaningful support to startups (Christiansen, 2009). Besides, it is assumed that designing the accelerator program to be distinctive and compelling for entrepreneurs by leveraging unique capabilities and resources might positively impact performance and differentiates them from other programs (Christiansen, 2009). Interestingly, many of the startup accelerator programs today are hosted by existing corporates. The one thing these corporates have in common is that their industries have been heavily influenced by the internet and risk to be disrupted by startups they are now looking to support. This has resulted in skepticism regarding their ability and

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motives to help entrepreneurs, which might have a negative impact on its image and eventually on its performance (Kopytoff, 2012; Meyer, 2013).

2.3. Startup studio12

A startup studio is a lot like a Hollywood movie studio, except instead of making films a startup studio makes companies. In a movie studio one is making multiple movies simultaneously, thanks to a generally successful, repeatable process. And similar to the movie studio, the success of these startup studios is determined by the amount of hits and misses. But there is a degree of uncertainty around the terminology and criteria of what constitutes a startup studio. Simply defined: “A startup studio is an

organization that builds several companies in succession” (Szigeti, 2016). There are several ways of

how the model could be implemented, depending on the founders and their vision. Nevertheless, the formula is identical and one could identify some common steps to build a startup studio (Szigeti, 2016):

Table 5 – Common steps to build a startup studio

The founder of EFounders, Thibaud Elziere, provides a definition of the startup studio model, based on three criteria: “First, startups studios are not early-stage or hands-on VCs, they are company

builders: they must find ideas internally. Secondly, the same way that you are not an entrepreneur if you have not created your first company, you are not a startup studio before starting your second company. Thirdly, a startup studio must build a platform upon all the knowledge and experience you have gathered, the network of people you have built including the core team, and the tools you have created. The very value of a startup studio relies on its platform rather than the aggregated value of its startup portfolio. It enables the studio to keep on building better and better companies.” (Elziere,

2015).

During this study, the researcher got more and more interested in the concept of a startup studio (i.e. venture builder, company builder, startup foundry or factory), investigated different ones around the world and recorded as many that could be found until this date (December 2016) in one list. When there will be more time allocated to look into this list, it can probably be greatly extended already. And since the amount of startup studios is rising seriously, chances are that the list will be doubled next year. This list can be found in Appendix 7. It can

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As mentioned in the introduction of this study, this novel organizational form is defined as a startup factory, a venture builder/company builder, or a foundry. There are only minor differences between each of the definitions.

Table 6 – Common ways to define novel organizational form

Nevertheless, these differences in definitions are little enough to allow the researcher to continue using the term “startup studio”. Idealab, founded in 1996, was the first to kick off the startup studio model and has created over 75 companies. The idea behind Idealab was to test many ideas at once and turn the best ideas into startups while also attracting the human and financial resources necessary to commercialize them13_{. Now, more and more startup studios have emerged, with}

successful (serial) entrepreneurs, investors, or corporates as their founders. There are even startup studios founded by universities, to monetize academic research.14_{The most well-known startup}

studios include eFounders in Brussels, Rocket Internet in Berlin, Betaworks in New York and Science-Inc. in Santa-Monica. In general, the intended result of startup studios is a more efficient manner of creating startups.

13_{http://www.idealab.com/}

14_{For instance:}_{http://hbsstartupstudio.org/}_,_{http://www.city.ac.uk/cityventures/start/startup-studio}_,

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PART II – THE CONTEXT OF STARTUP STUDIOS

To be able to answer the SRQ 3 – When considering the context of a start-up studio, what personal

characteristics should be emphasised on, and what personal characteristics can be left aside or need to be added? – it is critical to obtain a clear view of the context of a startup studio. This is therefore

what this part of the section is focused on. The organizational context of a startup studio refers to conditions within and outside the startup studio that give rise to situational opportunaties, and constraints that affect; 1) cause and effect relationships in the organizational form, that in turn, influence 2) the occurrence and meaning of behaviour by the startup studio team and co-founders for each startup (based on Johns, 2006). In this regard, it is shaped by the beliefs that a startup studio team holds in common, and the systems, processes and procedures that determine how work is done (Johns, 2006). To create a clear overview, the core components of a startup studio’s context are provided in table 7 below, in comparison with a representation of an incubator’s or accelerator’s context.

This part of the theoretical section also elaborates further on some other components of the startup studio model, which are not shown in table 7: 1) the founders of the startup studio; 2) ways to fund a startup studio; 3) origins of startup studio ideas; 4) the startup studio team; and 5) startup studio phases. This is used as a mean to better illustrate the startup studio model and its context.

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Table 7 – Three organizational forms and their context Source: “What do accelerators do? Insights from incubators and angels” by Cohen, S. (2013), BCG Analysis (“Incubators, Accelerators, Venturing, and More”, www.bcgperspectives.com). Bergfeld, A. (2015) Accelerator vs Incubator vs Company Builder.

https://alexanderbergfeld.wordpress.com/2015/03/26/accelerator-vs-incubator-vs-company-builder/

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2.4. Founders of a startup studio

To be perfectly clear that one does not get confused with the before-mentioned ‘co-founder’, an explanation of what is meant in this paragraph is given: “Individuals who start new organizations to

pursue opportunities” (Wasserman, 2012). Thus, with ‘founders’ is indicated the individuals who

create, execute and invest in ideas to turn them into startups (Nouyrigat & Nager, 2009), whereas co-founders in this study represent the individuals who run one of the startups built by the startup studio – in the beginning together with the startup studio, at a later stage independently. With regard to startup studios, the founders are mostly the ones to decide on business ideas, on spin-off or go/no-go moments, on the strategy of the startup studio and so on. They are the foundation of the startup studio team (see section 2.6).

Almost always successful startup studios were founded by successful (serial) entrepreneurs (e.g. IdeaLab, Betaworks, eFounders, Rocket Internet), by investors (e.g. Andreesen Horowitz15_{), by}

corporates (e.g. AXA - Kamet16, KPMG - startup studio in Slovakia17), or by institutional founders (e.g. InnoHub Mexico18_{, HBS Startup Studio). When analyzing the resume of startup studio founders}

in general, most of them were entrepreneurs that founded great companies and experienced successful exits in the past. Previous entrepreneurial experience and success turns these entrepreneurs into valuable assets for startup studios: they cannot only provide expertise but have starting capital as well. Reasons for them to begin a startup studio are that they wanted to stay entrepreneurs but in a more efficient manner (e.g. Quasar Builders, Szigeti, 2015), that they were not satisfied with the level of influence they could exercise through investment activities in VC or angel roles (e.g. Drukka Startup Studio, Szigeti, 2015), that they were motivated by improving the entrepreneurial process itself and that they strongly believed in serial entrepreneurship (e.g. EFounders, sFBI, Szigeti, 2015). The focus of the studio is often determined by the background of the founders. Their network can be helpful when building startups in a certain sector. For example, the founders of Betaworks, John Borthwick19

and Joshua Auerbach20_{, have a background in the media industry which resulted in extensive domain}

knowledge and many connections. This explains why Betaworks mainly focuses on media startups. Backspace Studio Amsterdam is another example: one of the co-founders, Jons Janssens, describes himself on his website as “an entrepreneur on the business side of technology”21 and holds a MBA in emerging technologies, which has resulted in a focus on tech startups.

2.5. Funding of a startup studio

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in a startup studio as a holding company rather than individual startups. The year 2016 has been a great year for direct investment into the studios themselves. Funding into portfolio companies such as startup studios has been increasing annually with 48% since 2010, now exceeding $7B.

As mentioned in the previous paragraph, most startup studios are founded by entrepreneurs who already had previous success and/or considerable exits (Szigeti, 2016). This makes financing a startup studio relatively easy. Second, some startup studios use part of their resources on doing agency work to generate cash flow that could be used for building startups internally (Szigeti, 2015; 2016). Here, the main challenge is that the startup studio will need to find a way to balance goals on short and longer term. It is difficult to commit to a startup initiative and give up well paying agency contracts (Szigeti, 2016). Third, even though a VC rarely invests into a new startup studio22_{, the startup studio}

might try to raise VC money to back up their model. For example, the startup studio named Quasar Builders23_{showed it is possible: they started their studio with VC money from Emergence Capital}

Partners.24 Former VC investor, Stefano Bernardi, argues that raising money for each startup and the startup studio in parallel is impossible, particularly for the first round (Bernardi, 2016). He states that VCs prefer to invest into the individual startups that are built by the startup studios, instead of in the startup studio itself. Moreover, he mentions that, at early stages, this could also be difficult since VCs will be concerned that co-founders do not have enough shares to give the best they can (Bernardi, 2016). Nevertheless, to stay in the race for VC money he stresses out that it is very important to show VCs how startup studios could keep their incentives aligned and how they will be able to scale (Bernardi, 2016). A fourth way of funding the startup studio is through corporate funding. Meaning, the corporate dedicates funds to a startup studio (Szigeti, 2016) and lets the startup studio create companies that are in line with the corporate’s long term goals. Other ways are for instance family and friends, crowdfunding and angel investors (Szigeti, 2016; Elziere, 2015). Especially angel investors are exploring ways into investing directly into a startup studio as the holding company and not just the individual companies (Szigeti, 2016). Even though VCs rather invest in the latter, it might be an attractive option since it offers the chance for the investor to simply invest in a diversified portfolio of new companies, it offers better equity than traditional angel investment and the startup studio model lowers the risk of failure on a portfolio level (Szigeti, 2016).

2.6. Origins of startup studio ideas

Within the startup studio model, the most common source of innovative ideas for new startups is internal idea generation (Szigeti, 2016). Some even argue that generating ideas internally is a precondition for being a startup studio. Elziere (2015) states: “Even though there can be different

models and philosophies, according to me there are three elements that define a startup studio: 1.

22_{At least, at this moment of time. It may be that this changes when the concept is more well-known.} 23

https://www.quasarbuilders.com/#/investor/investors

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Internal Ideation – ideas should be generated internally; startup studios are not early stage investors but actual co-founders. The studio should originally own 100% of the project idea (…)”. The

triggering of finding good business ideas internally is not just a result of random and spontaneous brainstorming but can come from a wide range of directions (Tidd & Bessant, 2009). For example, startup studios could find opportunities by accident, by watching others, as a result of changing regulation or shocks to the system, by knowledge pushes or need pulls, by inspiration, or by uncovering and amplifying latent needs (Tidd & Bessant, 2009, p.230). However, startup studios have to acknowledge the challenges involved in the internal search for new ideas. Birkinshaw, Bouquet and Barsoux (2011) have identified the following issues as typical challenges with regard to internal idea generation: 1) Capacity, time and motivation; 2) Detachment between management priorities and the efforts of the ones focusing on finding new ideas; and 3) Lack of follow-through in idea generation programs that from the beginning have good intentions.

Even though some might argue internal idea generation to be a precondition for startup studios, some startup studios prefer external idea generation. Although startup studios may have considerable internal knowledge, this pales in comparison to related knowledge outside the startup studio. Consumers, consultants, corporates, suppliers, universities, and even competitors may all be sources of essential knowledge that will allow the startup studio to develop new ideas (e.g., Von Hippel, 1988; Dahlander & Frederiksen, 2012). Accordingly, many “traditional” organizational forms are promoting initiatives to make appropriate use of external idea generation, a development that could be understood as an increasing trend toward an open model of innovation (Chesbrough, 2003; Dahlander & Gann, 2010).

In his study of national research laboratories, Radosevich (1995) introduced the concept of surrogate entrepreneurship which strangely enough has received little attention in later entrepreneurship literature. Originally, a surrogate entrepreneur is defined as an entrepreneur from outside the originating organization that takes on a leading role to seize an opportunity and establish a business based on research findings and knowledge created at universities (Radosevich, 1995; Franklin, Wright & Lockett, 2001). However, this study argues that surrogate entrepreneurship can be viewed broader - “An entrepreneur from outside the originating organization that takes on a leading

role to seize an opportunity and establish a business based on a business idea invented by another organization or person” – and is suggested to be the central academic theory behind the external idea

generation in the context of startup studios.

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entrepreneurial experience and accumulated business knowledge including professional networks, easier access to risk capital, and strategic alliances are advantages of the surrogate entrepreneur model. More generally, an argument for engaging surrogate entrepreneurs has been to help ventures transcend the Valley of Death (Radosevich, 1995, Vohora et al., 2004, Lockett, Wright & Franklin, 2003; Lockett & Wright, 2005; Rothaermel & Thursby, 2005).

It could be that startup studios focusing on external idea generation and thus investing greater effort in drawing in ideas from outside will be better able to generate useful ideas for their organization than those relying only on internal idea search, because a broader range of knowledge sources obtain greater inspiration and inputs for the generation of novel ideas (Maggitti, Smith & Katila, 2013). Moreover, as external sources of knowledge incorporate more variety than internal sources, external idea generation enlarges the scope for startup studios to explore interesting opportunities (e.g. Maggitti et al., 2013). Mainly for these reasons, some startup studios accept external entrepreneurs or teams with ideas at a very early, pre-seed stage, and join them as hands-on co-founders (Szigeti, 2016). Others replicate the VC model: they generate a dense flow of projects from external parties, assess people and concepts, and focus on the projects where criteria are best met (Szigeti, 2016).

2.7. Startup studio team

It is demonstrated that single entrepreneurs, on average, take 3.6 times longer to scale when compared to teams (Startup Genome Report25). Additionally, teams are more likely to attract investors26. Forming the right team is an essential step to building a strong and scalable company, which of course accounts for startup studios as well. Moreover, building a core startup studio team is even a bigger challenge than building a (founding) team of a conventional startup (Szigeti, 2016). In the latter situation, the team needs to focus on one product, one company. In the case of a startup studio, the team aims at building more companies simultaneously. There are chances that lines get blurred between several initiatives. There might be a need to prioritize and it might result in resource issues. A strong core team will be able to conquer these professional and cultural challenges (Szigeti, 2016).

One of the biggest mistakes in assembling a team is not thinking through the need for particular skills but instead settling for who is around (Blank, 2013). The founders of the startup studio will need to assemble a core team to cover the needed competencies such as development, design, sales, legal, admin and marketing (Szigeti, 2016). In the beginning, this might be limited by how many employees a startup studio can keep on payroll. The advantage, in comparison with a conventional startup, is that the size of the core startup studio can lower the payroll cost for every individual company (Szigeti, 2015; 2016). But again, no startup studio team is the same as no startup studio

25_{https://s3.amazonaws.com/startupcompass-public/StartupGenomeReport1_Why_Startups_Succeed_v2.pdf}

26_{Investors view individual foundership as if no one else believes in the idea. Even if the entrepreneur is a superman who can do it all alone,}

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model is identical. However, three main strategic choices regarding the startup studio team are summarized in table 8 below.

Table 8 – Startup studio team strategies

Elziere (2014) states that it is important to keep focusing on the development of the startup studio team but that it is easily forgettable: “After a while, it became obvious that we, also, are a startup, just

like any of the startups we are building. It sounds silly, but while focusing all our efforts and resources to each of our startups, we just forgot that we also had similar issues. We’ve learned that we should apply to ourselves the structure and the rigor we impose to our companies in order to scale properly. (…) This awareness directly came from our projects that blamed us for not being structured, helpful and demanding enough. When we started eFounders, there was only Quentin Nickmans, my co-founder, and Didier Forest, our Creative Partner. The number of projects was increasing, therefore, we had to hire more people and get more organized; exactly like any startup would do.” Moreover, he

argues that there is no reason for most startup studios to have a huge core team as they are (on average) not involved in the startup projects after two or three years and mostly do not build more than a few companies a year (Elziere, 2014).

2.8. Startup studio phases

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Figure 2. Startup Studio Phases.

2.8.1. Theme selection

Almost all successful startup studios focus on one industry or one customer segment. For instance, Rocket Internet creates mostly e-commerce companies. The German startup studio is excellent at this since e-commerce27_{and on-demand}28_{businesses are very similar and require the same sets of}

resources and skills. Other businesses they created are not as successful.29 This means that startup studios should keep building startups in their circle of competence. Therefore, Betaworks focuses on media and EFounders on Software as a Service (SaaS).

Others put emphasize on specific themes, not specific industries: “We don’t have a specific

industry focus but we like to concentrate our efforts on a few themes that capture our attention.”30 A

startup studio’s focus is often an industry, a segment or a theme where the founders have experience and their network. However, when a startup is still in the early days and if they can afford it, it could be interesting to play around with different ideas in different markets (Szigeti, 2016). Still, it is wise to settle for a main direction eventually. Below, Elziere (2015) explains how EFounders determined its focus: “We wanted to narrow our focus on the SaaS industry, at least for the first couple of years. For

three main reasons. First, because we really believe in the Fortune 5 Million SaaS market which is in a very good position between the volume of B2C and the clear business models (subscription,

27_{Lamoda, Lazada, Home24}

28_{Zipjet, Eat first}

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prepaid…) of B2B. Second, because we had experience in B2B (Fotolia has more than 3M pro customers), a big network, and we already knew what businesses needed in terms of great software because we ourselves were our first customers! Third, in our opinion the SaaS industry is just a fantastic industry to pool resources in, and we could greatly benefit from sharing design, marketing, distribution, sales, HR, PR… resources across all of our projects.” Moreover, the startup studio theme

could also be defined by trends. Midealab states on its website: “We are a venture studio. We discover

ideas based on megatrends.”31_{This way, Midealab aims to disrupt emerging markets and go big. It}

argues that the key to finding the right business ideas is identifying trends that will experience organic growth during the next years, and that this growth and disruption opens up great possibilities for startups to introduce new solutions and build category leading businesses (Nilert, Porkka & Oranen, 2016). Also, they state that it is even more interesting to explore the opportunities that appear when two or more megatrends collide (Nilert et al., 2016).

2.8.2. Research & Identify

Both internal and external idea generation is discussed in section 2.3.3. But when ideas are generated, startup studios need to figure out which ones to prioritize. Szigeti (2015) provides a simple exercise regarding this step: rate all ideas on a scale from 1 to 5 in three categories: 1) How severe is the problem? 2) How big is the market? And 3) What is the level of confidence (based on gut feeling) to belief one can build something that is innovative and has a high growth potential. The highest rating wins. He argues that it is an option to bring a co-founder on board afterwards, to do an ad hoc market research – e.g. Google for news, competitors, trends, user perceptions (Szigeti, 2015). The “Research & Identify” phase might take anywhere between a few days to a few weeks.

2.8.3. Source entrepreneurial talent

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skills complementary to those of the startup studio, who can think in an entrepreneurial way, and who are willing to take risks and to work on something with absolute passion. To illustrate the importance, Elziere (2015) mentions in one of his online blogs: “We are spending almost one third of our time

interviewing excellent entrepreneurs before deciding whether they will be capable of turning a project into a successful company. Formidable founders are key to success, that’s why we are taking as much time as needed to find the best founders because we’ve lost too much time, resources and reputation changing them along the way.”

Since this phase is believed to be very challenging, this study dives deeper into this topic. As mentioned earlier, this research particularly elaborates further on the personal characteristics of co-founders in this context.

2.8.4. Develop & Validate

In the “Development & Validate” phase, startup studios move to develop a minimum viable product for further market validation and fine-tuning the product-market fit (Andreesen, 2007). They delve deeper into business development and marketing to understand how and where the startups they are building could best enter the market. The startups begin to emerge and core competencies need to be identified to enable fast growth. It could be argued that methodologies such as the “Lean Startup” principle (Ries, 2011) are very useful during this stage. The Lean Startup principle is one of the new management methodologies used by startups, as well as by accelerators and incubators (Miller & Bound, 2011). This methodology is inspired by the ideas put forward by Blank (Customer Development Process, 2009)32_{and Osterwalder and Pigneur (Business Model Canvas, 2010)}33_.

The term was first proposed by Eric Ries, an entrepreneur and author who has been blogging, speaking and consulting on what he calls lean startups since 200834. The methodology is about reducing waste in the process of finding a scalable and viable business, and is based on the iterative build-measure-learn loop: turn ideas into products, measure how customers respond, and learn whether to pivot or persevere (Ries, 2011). Here, the first step is figuring out the problem that needs to be solved and then developing a minimum viable product (MVP) to begin the process of learning as soon as possible. A MVP is the most basic product that attempts to solve the customer’s problem and once

32_{The “Customer Development Process” is a systematic approach to ‘getting out of the building’ and testing and validating each of those hypotheses}

to discover a repeatable, scalable business model.

33_{The Business Model Canvas is the starting point and the scorecard which monitors startups’ progress as they turn their hypotheses about what}

customers want into actionable facts – all before a startup or new division has spent all or most of its capital (Blank, 2009)

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it is created, a startup can work on tuning the engine. This includes measurement and learning and must involve actionable metrics that can show cause and effect question (Ries, 2011).

Figure 3. The Build-Measure-Learn Loop. Ries, (2011).

One could say that thorough customer and market evaluation as well as iterative product testing, to summarize the key ideas presented by these authors (e.g. Blank, Ries, Osterwalder & Pigneur), are at the heart of the “Develop & Validate” phase of a startup studio.

2.8.5. Grow (scaling) + raising seed/prepare

Every startup studio wants their individual startups to reach this phase. Mostly, startup studio’s objective is to get the companies they build past the previous explained “Develop & Validate” phase in a relatively short period, with a solid product-market fit and a strong business plan so that they can focus on growth. In this phase, validated products are built into high growth businesses. Besides, masses of consumers are adopting new behaviors and technologies, meaning, there are great opportunities to offer solutions to the market problem. Initially, the startup studio remains deeply involved, providing support on strategy, building independent teams and cultures around the individual ventures, funding and other areas. However, the startup also gets prepared to leave the nest of the startup studio and to become independent – operationally and financially.

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which cannot. Moreover, letting go could evolve into an emotional process as well. Especially for people dedicated to these projects. Szigeti (2016) describes three key features which enable startup studios to move quickly from poor projects to more successful ones: make fast and transparent decisions, prepare the startup studio team professionally and personally, and strengthen the startup studio’s collective experiences.

2.8.6. Exit

When analyzing startup exits in the startup studio model, some startup studios clearly aim for low-hanging fruits and quick wins. They position their startups in such a way that they will be an ideal acquisition target, and use the money received from their exits for building more startups. Others plan for the long run, build startups with synergies, build unicorns and take over a whole market or industry. It could be argued that most startup studios seem a bit like VCs in this regard: VCs always seek an exit strategy in which the company is merged or acquired, or its equity stake is sold to another party, permitting the investors to recoup many times their initial investments (Lewis et al., 2011). Although the startup studio takes an equity stake in every startup they build, the ownership philosophy is to decrease the intensity of support month-after-month and to exit after approximately two to three years. In every case, it should be clear to the startup studio itself, to its team and to the individual startups what the long-term goal and the exit strategy is. Having exit strategies boost the program performance (Colbert, Adkins, Wolfe & LaPan, 2010) and incubation programs with lax or no exit policies typically grant less-than-optimal performance. (Lewis et al., 2011). Szigeti (2016) states that in underdeveloped innovation ecosystems startup studios should aim for early-stage exits. This, he argues, could be a great manner of building an experienced local CEO pool that took part in all startup phases – from ideation to exit.

2.8.7. Innovation ecosystem, portfolio management and team management

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entrepreneurs and leaders (e.g. in specific sectors) as well as talented individuals (i.e. potential entrepreneurs) around. Also, it is about understanding corporate patrons and finding the intrapreneurs inside these corporates. It is about identifying mentors in the ecosystem, i.e. individuals that have been there and done that, and about importing what it does not possess. It includes becoming fluent in the language of investing and knowing what investor in the ecosystem is interested in what. It involves building bridges with other communities and supporting actors (e.g. incubators, accelerators) and providing an environment for all actors to connect. Besides, every relevant actor within the innovation ecosystem needs to know the startup studio by name and needs to know how they can be valuable to them. It is about being findable, clearly communicating how they can be helpful, clearly communicating what is in it for different parties, expanding its network, sharing its ideas, getting the uninitiated and first-timers on board, and so on.

2.9. Advantages and disadvantages of the startup studio model

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PART III – PERSONAL CHARACTERISTICS OF SUCCESSFUL ENTREPRENEURS IN GENERAL

It is already mentioned a few times before in this study - assessing whether someone will be a potentially successful co-founder35_{who eventually can run the business without (intensive) support}

from the startup studio is a very hard, but crucial task.36_{To investigate the desired personal}

characteristics for co-founders in the context of a startup studio, general entrepreneurship literature is reviewed. The research field of entrepreneurship has evolved from examining innate personality traits approaches to studying the interaction between an entrepreneur’s perception, intention and ability, combined with characteristics of the environment and situation (Driessen & Zwart, 1999; Driessen, 2005; Rauch & Frese, 2007), however, as already clarified in section one, this research focuses on the academic literature regarding personal characteristics that are linked to successful entrepreneurs in general.

2.10. Desired personal characteristics for general entrepreneurs according to Driessen (2005) There are multiple theories and associated scans that one can use to check for an individual’s entrepreneurial ability based on personal characteristics, but this study has chosen to elaborate further on the theory of Driessen (2005) since it is widely acknowledged in the Netherlands. His scan (the E-scan) is extensively used by various companies and institutes, such as the Dutch Chambers of Commerce and the Rabobank (in their assessment of loan granting to starters). Many other researchers in the field of entrepreneurship have mentioned the same or only slightly different personal characteristics. Driessen (2005) presents a detailed description of the various characteristics and qualities an entrepreneur should have, at least to some extent (see also Driessen et al., 2006). A representation of these personal characteristics is provided in table 9 below.

35_{In terms of personal characteristics}

36_{Elziere (2015) emphasizes: “The problem is not so much about finding people, but about finding the right people. It took us some time and}

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Master Thesis, MSc BA Small Business and Entrepreneurship Lieke Fidom January 2017