An analytical report on the article “Predictors of success in new technology based ventures” by J. B. Roure and R. H. Keeley
The purpose of this paper is to examine the causes of success and failure in new ventures. It considers only high potential, technology based new ventures the companies on which venture capitalists concentrate. This study uses a three-level analysis which considers the management, the venture’s strategy, and its competitive environment.
It would be better having knowledge about the environment of venture capitals and technology companies. Furthermore, before reading this paper, reading of Khan (1987), MacMillan (1987), Tyebjee and Bruno (1984), Stuart and Abetti (1987), Van de Ven (1984), Sandberg and Hofer (1987) are going to be beneficial to understand the base concept of this article.
Journal of Business Venturing is appropriate for this article.
The article is an empirical article.
2. Brief Summary
What is the problem being addressed?
The problem is addressed by the paper is what are the causes of success or failure of new ventures. In the paper it is mentioned that a new, high potential venture enters a market large enough to attract competition from firms in related industries and from other startups. Moreover, the authors said that ventures must establish a position quickly in the face of high uncertainty. Emphasized challenges of ventures including:
· Identifying an attractive market opportunity and developing a plan to obtain a large share of it.
· Obtaining sufficient funds to begin execution of the plan.
· Attracting additional key employees and achieving quick technical progress on the new product.
· Making arrangements with key customers and suppliers.
· Obtaining added funding in order to build manufacturing, marketing, and administrative capabilities.
· Modifying the business strategy in response to changing conditions.
· Broadening the product line, obtaining additional funding, and continuing the organization.
Which solution is being proposed?
Success is a matter of degree. The greater the number of tasks that are accomplished rapidly and efficiently, the larger market share, profitability, and return on investment expected. This implies that the three viewpoints namely, the qualities of the founders, the environment, and the business strategy should explain success or failure to the degree they reflect how rapidly, efficiently, and effectively a firm accomplishes its emphasized challenges. The authors believe that the three areas are “additive” in the sense that strength on one attribute can compensate for weakness on another. This creates an eclectic framework; they can not rely solely on social psychology, industrial economics, or strategic management. In addition to this, the paper considers only high potential, technology based new ventures the companies on which venture capitalists concentrate. It suggests that such firms face unusual time pressures and uncertainty, and that their responses to these forces are major determinants of success or failure. The article proposes 11 easily measured qualities describing management, the firm’s strategy, and its environment which should influence how quickly the venture can act. These should predict a new venture’s performance.
What evidence is put forward to support the solution provided (if article is of empirical type, highlight what kind of empirical study was conducted as part of the evidence)
The authors conduct an empirical test. Having suggested why a set of common influences should exist and what they should be, they turn to empirical testing. Two prominent venture capital firms provided business plans and investment documents on 36 new, technology-based companies, in which they had invested. Only firms that received financing are included in the study. Furthermore, multivariate linear regression was used in the article. Three separate regressions, one each for management, environment, and strategy, are used to examine the relative influence of variables within each point of view. Additionally, a regression combining variables from all points of view examines the extent to which some may dominate others. 11 independent variables are related to management, environment, and strategy that are expected to influence the success of new ventures are examined. These are job experience, high growth experience, team completeness, prior joint experience, quality of the technical development plan, product development time, product superiority, competitor strength, forecast market share in the fifth year, buyer concentration and founders’ equity share.
Relationship Between Managers’ Characteristics and Success
Table 3 provides no support for the importance of individual characteristics on the firm’s success. The measures of high growth experience and similar functional experience have very low t statistics in all equations. In contrast to individual traits the team measures, completeness and prior joint experience are related to success.
Relationship Between the Environment and Success
Competition in the targeted market segment is negatively related to success and projected market share has a positive relationship. Table 4 also shows that the number of potential buyers targeted by the new company has an inverted U-shaped relationship to the success of the venture. The postulated relationship between the share of equity owned by the founders and the new company’s success is apparently not true. None of the coefficients of founders’ equity are significant.
Relationship Between Strategic Choices and Success
Table 5 suggests that of the variables describing the firm-planning of the technology development, projected time of product development, and product superiority-only product superiority is a good predictor of success.
The article reviews further papers which are Khan (1987), MacMillan (1987), Tyebjee and Bruno (1984), Stuart and Abetti (1987), Van de Ven (1984) and finally builds on the work of Roure and Maidique (1986) to modify the analytical framework which is offered by them. This study extends their work in several ways:
· It augments their theoretical framework with concepts from organizational development and from strategic management.
· It develops scales for their qualitative variables and adds a new measure of product strategy-projected product development time.
· It adds 28 companies to the original sample, making a total of 36 high potential, technology based companies. This allows statistical analysis to replace the qualitative comparisons of their exploratory study.
· It incorporates measures of performance that permit the use of multiple regression analysis. This facilitates assessment of the relative importance of each explanatory variable, not just its statistical significance in a bivariate comparison.
Additionally, there are many findings which are:
· A set of four measures representing all three areas explains 57% of the variance. The four-completeness of the founding team, technical superiority of the product, expected time for product development, and buyer concentration-all behave as expected. The first two have a positive effect; the latter two have an inverted U-shaped relationship with an optimum development time of 12 months and an optimum number of customers of approximately 60. Three other measures-prior shared experience of the founders, competitive conditions, and projected market share-show an influence when management, strategy, and environment are examined one area at a time.
· These relatively simple measures predict success well, probably at least as well as any other study has done using more subtle measures.
· The measures used in this study, though they have strong predictive power, apparently did not influence the young capitalists. Otherwise the relationships should have been different when the return to venture capital investors was used in place of the total return; in fact they were the same. This suggests that the venture capital investors did not give sufficient weight to the qualities that we consider and could make better choices by giving greater attention to those measures.
· Prospective entrepreneurs and investors should benefit from using model of this paper as part of their screening processes. Specifically, they might calculate a predicted rate of return. If it is low-say, below 30% per year-they should examine the reason for the low score and consider whether circumstances exist which outweigh or invalidate that apparent weakness.
· An “additive” model seems realistic. That is, one can combine dissimilar qualities (with appropriate weighting for relative importance) to arrive at an overall figure of merit with strong predictive power.
· Although individual qualities of the founders are no doubt important, this remains a difficult matter to demonstrate statistically.
· Firms exist in an ever changing competitive environment. To the extent that these findings are valid beyond this sample, they may have been recognized and incorporated in more recent new ventures. If so this may change the nature of competition, and alter the key determinants of success or failure.
5. General Critique
How selected independent variables effect the success and failure of new ventures is illustrated in a good way. However, the number of independent variables would be increased. Some of sentences are hard to understand because of being too complicated. Moreover, the paper is effected too much from previous papers. Maybe, setting up completely different model instead of improving model of Roure and Maidique (1986) would be better.
6. Personal response to article
The article gives me inside about ventures which is one of the main topics of the course. Because of its topic, I selected it. I interest in how ventures will be successful in unstable environment. I like the paper thanks to its good findings and its being informative state.