june 6, 2009 perspectives on economic conditions, entrepreneurship, first-product development, and...
TRANSCRIPT
June 6, 2009
Perspectives on Economic Conditions, Entrepreneurship, First-Product
Development, and New Venture Success
Michael SongLisa Song
Mark E. Parry
Entrepreneurship and Economic Activity
• SBA: 600,000+ U.S. start-ups per year.• Our survey of 11,259 U.S. entrepreneurs: each
entrepreneur creates 512 jobs in his or her lifetime. • But—high failure rates for new ventures:
Song et al. (2008) found that the five-year survival rate for companies with more than five full-time employees was only 21.9 percent.
Source: http://blogs.harvardbusiness.org/gergen-vanourek/2008/08/why-entrepreneurs-love-a-downt.html
“Why Entrepreneurs Love a Downturn”
• Contract manufacturers are “hungrier for business.”
• “More investor attention” because “competing start-ups were scared off by the economy”
• Recessions force companies to focus and “live lean.”
Source: www.HarvardBusiness.org, August 26, 2008
Christopher Gergen and Gregg
Vanourek
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“The downturn has advantages as well as drawbacks”• “Talented staff are easier to find and office space is
cheaper to rent.”• “Harder times will eliminate the also-rans and, in the long
run, could make it easier for the survivors to grow.”• “The information age is making it ever easier for
ordinary people to start businesses and harder for incumbents to defend their territory.”
• Increasing importance of industries where innovation is critical and service firms with low barriers to entry.
Source: Economist, March 12, 2009.
November Opinion Survey of Entrepreneurs from Eight Emerging Markets• 85% said they had already felt the impact of the crisis • 88% thought that worse was yet to come• Expected business and workforce growth of 31% and
12%• Half of them thought they would be able to hire better
people • 39% said there would be less competition.
Source: Economist, March 12, 2009.
• “The deepening recession is speeding up the shakeout in Silicon Valley, forcing droves of start-ups to shut down or sell themselves at fire-sale prices.”
• “Start-ups are failing faster and you’re going to see a major shakeout.”
“More Tech Start-Ups Perish --- As Funding Dries Up, Fledgling Firms Close; Fears of a Chill on Innovation
Source: WSJ, February 12, 2009.
—Startup Wind-Down Martin Pichinson
• “With the economy in a recession, venture capitalists, angel investors and banks are less inclined today to back small businesses without a track record than they were just a few years ago....”
• “You’ve got to assume you’re not getting funded for a year.”
“A Toe in the Water: If you're thinking about starting a business, you might not want to give up your day job just yet”
Source: WSJ, February 23, 2009.
—Entrepreneur and former VC Divya Gugnani
The Recession’s Effect on Entrepreneurship
• From 2007-2008, “U.S. entrepreneurship rates declined for the highest-income-potential businesses last year — the creation of a new physician’s center, say.”
• “At the same time, entrepreneurship rates for lowest-income-potential and middle-income potential businesses — such as a babysitting service, for instance — increased.
• “In other words, high-value businesses aren’t the bulk of the new ventures that are being created.”
Source: The Wall Street Journal , April 30, 2009
Research Questions
• Do ventures started during a recession have a higher or lower probability of failing?
• What is the relationship between new venture success and new product success? How strong is this relationship?
• What factors contribute to the performance of successful first products?
The VENTSURV Database• Our multi-year study of new venture survival. • Tracks success or failure of the new ventures in the
database since 1998. • Data for this study: 539 new ventures that were launched
during 1998-2001 and 539 first product development projects of the ventures.
• Industry representation: telephone/wireless communication equipment (49), consumer electronics (169), games & toys (110), computer & software products (107), and household-related products (104).
Percentages of New Ventures Failing During Their First Two Years
Venture Founding Year
Number Of ventures
Failed First 2 Years
Survived More Than 2
Years
1998-1999 321 41.43% 58.57%
2000-2001 202 52.97% 47.03%
Total 523 54.11% 45.89%
Research Questions Revisited
• Do ventures started during a recession have a higher or lower probability of failing? Answer: higher probability of failure
• What is the relationship between new venture success and new product success? How strong is this relationship?
• What factors contribute to the performance of successful first products?
IEI
Success Measures• First Product Success (a dummy variable): the
performance of the product had exceeded the new venture’s predefined goals and objectives (such as profitability, sales, etc.) as stated in the business plan after two years of product commercialization.
• New Venture Success (a dummy variable): the venture had (1) provided acceptable returns on investment to the founders and investors and (2) met predefined goals and objectives (such as profitability, sales, etc.) as stated in the business plan.
IEI
Performance Measures• First Product Performance• New Venture Success
Ratings from 0 to 10:• a 10 indicated that that the venture’s or first-product’s
performance far exceeded the minimum acceptable performance standard (MAPS) stated in the business plan;
• a 5 indicated that the venture or first product had barely met its MAPS; and
• a 0 signified that the venture’s or first-product’s performance fell far below its minimum MAPS.
IEI
First-Product and New Venture Success Rates and Performance
First-Product Succeeded
First Product Failed
New Venture Was Successful (N=176)
132 (77.19%) 44 (11.96%)
New Venture Was Unsuccessful (N=363)
39 (22.81%) 324 (88.04%)
First Product Performance
8.33 1.17
Venture Performance 6.53 1.55
IEI
Research Questions Revisited
• Do ventures started during a recession have a higher or lower probability of failing? Answer: higher probability of failure
• What is the relationship between new venture success and new product success? Answer: The success of the first product is critical to venture success.
• What factors contribute to the performance of successful first products?
IEI
Emerging vs.
Established
Market?
Emerging vs.
Established
Technology?
Product
Success
Radical vs.
Incremental?Which is Better for New
Product Success and New
Venture Success?
IEI
Performance Impact of Product Type, Market Characteristics, and Technology Standard
First-Product Performance
Venture Performance
Radical Innovation 4.44* 3.86*
Incremental Innovation 2.81 2.67
Emerging Market 3.68* 3.38*
Established Market 3.18 2.86
Emerging Tech. Standard 2.06* 2.22*
Established Tech. Standard
4.57 3.87
IEI
Product Type by Market Characteristics Cross-Tabulation
First-Product Performance
VenturePerformance
Emerging Market
Established Market
Emerging Market
Established Market
Radical Innovations
5.02 (A)a 3.98 (B) 4.52 (A) 3.33 (B)
Incremental Innovations
3.02 (C) 2.52 (C) 2.81 (B,C) 2.46 (C)
IEI
Product Type by Technology Standard Cross-Tabulation
First-Product Performance Venture Performance
Emerging Technology
Standard
Established Technology
Standard
Emerging Technology
Standard
Established Technology
Standard
Radical Innovations
2.86 (C) 5.42 (A) 2.80 (C) 4.52 (A)
Incremental Innovations
1.66 (D) 3.92 (B) 1.94 (D) 3.37 (B)
IEI
Technology Standard by Market Characteristics Cross-Tabulation
First-Product Performance Venture Performance
Emerging Market
Established Market
Emerging Market
Established Market
Emerging Technology Standard
2.22 (C) 1.82 (C) 2.42 (C) 1.94 (C)
Established Technology Standard
5.20 (A) 4.02 (B) 4.38 (A) 3.42 (B)
IEI
Technology
Development
Other
Sources
Idea
Sources
Market
NeedsWhich Idea Source
Generates the Highest
Levels of New Product
Success and New Venture
Success?
IEI
Effects of Sources of First-Product Ideas on First-Product and New Venture Performance
Source of Product Ideas Number of Observations
First-Product Performance
Venture Performance
Both Technology Development & Analysis of Customer Needs
179 4.42 (A) a 3.87 (A) a
Technology Development 142 3.23 (B) 3.24 (B)
Analysis of Customer Needs
123 3.25 (B) 2.65 (C)
Other Idea Sources 95 2.18 (C) 2.21 (C)
IEI
Conclusions• Only 45.89% of the new ventures in our data survived
more than two years. • Economic downturns lead to higher failure rates for new
ventures.• New venture success is highly correlated with the first
product success. • New ventures based on radical innovations outperform
those based on incremental innovations.• Emerging markets with established industry standards
enhance new venture success.
IEI
Conclusions (cont.)• First-product and venture performance were significantly
higher for products based on ideas that came from the founders.
• The most successful first products were based on ideas that reflected both technology development and an analysis of customer needs.
• Products based on either an analysis of customer needs or technology development (but not both) had statistically indistinguishable performance levels.
• Technology-based products enhanced venture performance, relative to customer-need-based products.
Managerial Implications• A successful first product launch is critical to venture
success.• In screening venture opportunities, entrepreneurs should
focus on ideas that based on both technology development and an analysis of customer needs.
• Entrepreneurs should look for opportunities to develop a first product that incorporates radical innovation, builds on an established industry standard, and targets emerging customer needs.
IEI
Future Research• Why are new venture failure rates higher during
recessions? Difficulties in raising capital? Soft market demand? More startups with underdeveloped business plans (necessity entrepreneurship)?
• How do ventures with unsuccessful first products succeed?
First-Product Succeeded
First Product Failed
New Venture Was Successful (N=176)
132 (77.19%) 44 (11.96%)
New Venture Was Unsuccessful (N=363)
39 (22.81%) 324 (88.04%)
Future Research• Does radical innovation emerge from new venture
founding strategy or from later developments?• Does the opportunity to shape industry standards in
markets where those standards are emerging yield long-term benefits that are not reflected in our data?
• What is the relationship between market conditions and the effectiveness of idea sources?
Emerging Market Established Market
Emerging Technology Standard
Technology Development?
???
Established Technology Standard
???Customer Needs?
