Which Factors Determine the Success or Failure of Startup Companies? A Startup Ecosystem Analysis of Hungary, Germany and the US

Diplomica Verlag
  • 1. Auflage
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  • erschienen im September 2017
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  • 202 Seiten
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978-3-96067-675-1 (ISBN)
As more and more startup companies are founded every year worldwide, building up one's own business does not get easier. Since 9 out of 10 startups fail, future entrepreneurs are well advised to take a look at potential reasons for failure and success. Learning from others' mistakes and studying success stories can improve their own performance and help to avoid critical errors.
The academic paper at hand will provide valuable insights for entrepreneurs. It not only states the most important terms concerning startups but also lists the most important factors for a startup company's success, according to literature review. Delineating both internal and external factors, this thesis not only delivers a synoptic view of potential challenges inside a startup as well as in its ecosystem, but also juxtaposes these influences in opposition.
The second part of this paper analyzes a series of interviews with twelve startup founders from three different regions (the province of North-Rhine Westphalia in Germany, Budapest in Hungary and the state of California in the US). Their views and experiences will be summarized and put into the context of their respective startup ecosystem.
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978-3-96067-675-1 (9783960676751)
3960676751 (3960676751)
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Text Sample:

Chapter 7: Typical Factors of Failure and Success:

The following chapter will provide an overview of the most typical factors leading to a startup's failure or success, according to literature review. Each factor will be outlined along with its impact on startup companies.
7.1. Internal Factors:

Contrary to external factors (chapter 7.2), entrepreneurs have almost complete control over the internal factors for startup success (Geibel/Manickam 2015: 64). It is on them to shape their knowledge, put together the right team and choose the best possible time to realize their business idea.
7.1.1. Personality of the Founders:

The character of a founder is important in many ways. On one hand it is decisive how he is as a person, how he handles his employees, how he negotiates with other companies; and on the other hand, because of the founder's influential position, his interpretations of subjective elements lead the way. He is the one who, in the end, makes a strategic decision based on his sense of reality (Kisfalvi 2002: 514).
"Nearly every mistake I've made has been in picking the wrong people, not the wrong idea" (Arthur Rock, venture capitalist and founder of Intel; source: Sahlman 1999: 351).
The founder's traits, attitudes, his professional experience as well as his practical skillset all play a part in the company's growth potential. Being proactive (Cui et al. 2016: 175), motivated (Barba-Sánchez/Atienza-Sahuquillo 2017: 16), open to innovation and taking risks (Bortoluzzi et al. 2014: 134) are considered to be key assets of an entrepreneur's personality.
Among 4,000 successful entrepreneurs, the study of Butler (2017) detected "the ability to thrive in uncertainty, a passionate desire to author and own projects, and unique skill at persuasion" as the most distinct character traits. Although these particular characteristics might fit to a 20-year old, the ideal age of a startup founder (for otherwise lacking experience) is between 30 and 50 (Kon et al. 2014: 22). Challenging working conditions and the pressure of critical decision-making are both part of the rather stressful job of an entrepreneur (Semerci 2016: 41 f.), which may one day affect his mental or physical health. Therefore, founders with a high tolerance for stress have a valuable asset.
In contrast to common belief, after closely watching over 100 startup companies in the past two decades, Furr/Ahlstrom (2011: 5) discovered that attributes such as passion, vision and determination more often lead to failure than to success. When entrepreneurs invest countless work hours, money and reputation into their project, passion and determination can easily become dogmatism. Falling in love with one's product and ignoring honest customer feedback is the reason why most startups fail (Furr/Ahlstrom 2011: 5). Essentially, there should be a beneficial balance between being confident about what you know while at the same time distrusting your knowledge enough to stay eager to learn more (Kelley 2008).
Ge et al. (2005: 19) state that it would be beneficial, especially for complex technology-driven startups, to have a team of founders rather than one single founder. It allows the company to move faster, be more agile to enter a market and more responsive to a change in market conditions. A team also enables opportunities for accelerated and specialized decision making (Eisenhardt/Schoonhoven 1990: 510), as well as a faster pace for innovations (Eisenhardt/Tabrizi 1995: 104).
An important aspect of a successful team of founders is the relationship among them. Beyond their functional role in the company, entrepreneurs often do not realize how the interplay of personalities affects their performances and the overall success of the venture (May 2016: 112). Therefore, choosing co-founders or hiring employees for a small team should ideally focus on both work skills and personal traits.
The ideal team of co-founders consists of members with experience in the industry and in leadership, although these attributes do not need to apply to everyone. In terms of education, a heterogeneous team with different backgrounds would be preferred over a team of members with the same education (Franke et al. 2008: 477 f.). Education itself is regarded as prerequisite for being a successful entrepreneur (Ferrante 2005: 170); industry experience has a positive impact as well (Walter et al. 2013: 121).
Especially valuable is an entrepreneurial experience in the past, since serial founders often develop a specific mindset, which, according to Politis (2005: 403), lets them pursue great opportunities with remarkable discipline. Even though some studies suggest the positive correlation between prior startup experience of the founder and better business performance to be true, an empirical research by the University of Sussex indicates otherwise (Coad et al. 2014: 544). The team analyzed a dataset of over 6,000 startup companies and concluded that prior experience is not necessarily associated with a higher success rate.
7.1.2. Timing of Realization:

The importance of the right timing for market entry is most commonly discussed in the technology industry. Gross (2015) stated that, for the 200 companies he analyzed, the factor time accounted for either success or failure in 42% of the cases. He supports his findings by giving examples, such as the company Z.com, which he founded himself together with a team of entrepreneurs. Despite securing large investments and even being able to get a Hollywood talent to join the online entertainment company, the concept did not succeed and went out of business in 2003. Two years later, costs of storage technology decreased and customers felt more comfortable to upload and share videos on social networking sites (Furr/Ahlstrom 2011: 197). Additionally, the rapid development of broadband access and the market entry of Adobe Flash Player (Gross 2015), which makes video content far easier to watch online, came exactly at the right time for the founders of a very similar startup called YouTube.
The case of Facebook shows that the issue of timing is relevant even for established enterprises: Due to laws and regulations, the company is still not allowed to enter the Chinese market. Despite various efforts and meetings with government officials, Facebook remains inaccessible by China's online community. Today however, because of Chinese competitors such as WeChat and Weibo, Google's former president for Chinese operations thinks a market entry of Facebook "at this stage and time [.] is hopeless" (Abkowitz et al. 2017).
Thus, startups have to analyze the current market situation, competition and statistical trends before launching their business (Oechsle 2014).
Nevertheless, other studies show that in order to evaluate a startup company's performance properly, it is not enough to only consider the time of entry. The implementation of the appropriate strategies after entering the industry has a much greater impact (Bayus/Agarwal 2007: 1898 f.).
Being the 'first mover' can give entrepreneurs a decisive advantage. On the other hand, it is risky and not always favorable to be early in a new market niche (Grant/Sandberg 2016: 26). There is no value in being the first when someone else is a stronger competitor. Sometimes it is even more profitable to be the 'last mover', learning from others' mistakes and making the latest great development in one particular market (Thiel/Masters 2014: 45).
Lieberman/Montgomery (1998: 1113) summarize that companies with a strong skillset of new product development can be advised to pioneer a new market, whereas entering later might be desirable for a firm with relative strengths in manufacturing and marketing.
The timing of entry also has an impact on future expansion potential (Chung et al. 2007: 390). Startups, which operate in the same niche market, have to compete for finite resources in order to grow. While early entrants still have the opportunity to choose their preferred niche, latecomers may need to leave the already overcrowded market and seek new possibilities elsewhere (Shamsie et al. 2004: 80 f.). [.].
When new technologies are being introduced to the market, the same pattern can be observed repeatedly. The Hype Cycle shows the progress of a technology from first entering the market to gaining public attention and in the end plateauing, which equals a certain readiness for the market. By analyzing this cycle, experts were able to predict the end of the dot-com boom in November 1999 to be within the next half year (Weis 2013: 24).
The typical cycle starts with a Technology Trigger. At this time, usually no products exist yet, but early proof-of-concept stories reach the media and are published.
After a while, many success stories, along with stories of failure, lead to the Peak of Inflated Expectations.
When experiments and a number of implementations are unable to deliver expectations, products need to be improved for early adopters. Many producers fail during the phase of Through of Disillusionment.
As soon as customers and enterprises understand the technology better and start to benefit from it, the Slope of Enlightenment takes place. Technology providers issue second- and third-generation products.
Reaching the Plateau of Productivity, the technology is adopted by the mainstream and now creates a relevant demand on a broad market. At this point, even conservative companies are interested and willing to invest.
The value of understanding how this cycle works, is to sharpen the consciousness regarding the right timing. It is also vital to know, that certain technologies could make a sudden comeback after a phase of low public attention.
7.2. External Factors and the Startup Ecosystem:

Observing startup companies in different regions of the world, research clearly finds entrepreneurship to be a local phenomenon (Feldman 2003: 93; Hart 2003: 95). Growing and replicating companies creates a local cluster, which gradually, enhanced by institutional factors, emerges into a favorable business environment (Miller/Côté 1985: 115). To determine how well a certain geographic location provides a suitable environment for startups, it is important to gain sufficient knowledge about the elements that make up a startup's ecosystem (Motoyama/Knowlton 2017: 2).
Silicon Valley became known as the ideal startup ecosystem and "innovation capital of the world" (Piscione 2014: 45). Although some of its characteristics have been reproduced elsewhere, it remains unique. Researchers argue that Silicon Valley's success is largely due to its culture, which was formed in the early 20th century by pioneering firms (Lerner 2009: 33). While no differences in terms of general structure between Silicon Valley and Boston could be detected, Fleming/Frenken (2007: 69) hold dynamic networking and recruitment strategies of important firms from the region responsible for Silicon Valley's success.
However, even the ideal startup ecosystem has one disadvantage: fast-growing, prosperous business environments lead to a highly competitive market. The majority of startup ventures will eventually fail, thus dealing with a lot of competition and pressure does not makes it easier for founders or innovators (Slaper/Walton 2016: 6). In addition, despite Silicon Valley being the most popular and most successful startup hotspot, it has to be pointed out that each hotspot has its own strengths and weaknesses. Both support the creation of different types of startup companies (Safar 2016: 53).
The following chapter will provide an overview of the most important elements in a startup ecosystem. Entrepreneurs should keep in mind that these elements are external factors, which are provided by the environment and cannot be altered or changed; they can however develop by themselves over time. The selection of a startup location and with it the choice of an ecosystem will have an impact on the business for as long as it exists.

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