Critical success factors it-start-up companies

Table of contents

1 Introduction
1.1 Purpose and target audience of Critical Success Factor research
1.2 Definitions
1.3 Problems

2 Hypothesis

3 Approaches
3.1 Sources in existing Literature
3.2 Expert interview(s)
3.3 Founder interviews and questionnaires

4 Existing Literature
4.1 Definition of Success in various Sources
4.2 Books
4.3 Periodicals
4.4 Other sources

5 Classification of Success Factors
5.1 Hard Factors vs. Soft Factors
5.2 Endogenous Factors vs. Exogenous Factors
5.3 Generic vs. Specific Factors
5.4 Functional Categorization
5.5 Critical Success Factors in general companies
5.6 Success Factors especially for IT start-up companies

6 Empirical Part
6.1 Overview
6.2 Goals
6.3 Questionnaire design
6.4 Questionnaire ‘distribution’ and feedback rate
6.5 Problems
6.6 Expected results
6.7 Results
6.8 Result summary

7 Planning a Project Management System for an IT Start up company
7.1 Introduction
7.2 Definitions
7.3 Case Company: a game publishing company
7.4 Requirements on the Project Management System
7.5 Procedure
7.6 Components of the Project Management System
7.7 Methods
7.8 Planning the „Project Management System” project
7.9 Summary

8 End
8.1 Conclusion
8.2 Findings on the 7 Hypothesis
8.3 Ranking the Success Factors
8.4 Outlook

Appendix

Tables

Pictures

Glossary

Abbreviations

Interviews

Statistische Daten

Kritische Erfolgsfaktoren

Projektmanagement

Acknowledgements

Bibliography

1 Introduction

The biggest group of start-up companies in this decade is IT start-ups, says Christian Wodon⁶, Head of the start-up services in the Vienna economic chamber. The specific topology makes creating an IT-company easier then any other company, low investment cost providing a high profit margin, very low legal and bureaucratic requirements and a large number of specialists growing into IT, often working at a company and then being outsourced leads to a huge number of freelancers. Werner (2000) states that young technology based companies are driving economy.

As the last 2 decades showed, the IT sector allows a virtually infinite number of innovations. Innovations equal huge chances to the innovative companies, which are able to create their own market or own niches where they can generate monopolist revenues.⁷ Werner concludes that those revenues will eventually attract further companies, pushing the economy as a whole and providing a large number of jobs. The companies pushing into the markets will prompt the innovative companies to further innovations, creating an engine of market entries and market exits.

1.1 Purpose and target audience of Critical Success Factor research

Christian Wodon further states that a large number of IT-professional do have expert technical skills, however lack other important business skills altogether or being unaware of those requirements. This makes Success Factor research extremely valuable for founders and investors alike.

Any company has a number of stakeholders who benefit from the existence of the company. Sabisch (1999, p. 23) names a number of stakeholders in the early start-up phase of a company: consultants, investors, organisations, insurance companies, fiscal authorities, communities, potential cooperation partners.

Founders and investors expect revenues and a growth of company value, employee want a secure job with growth potential, customers want a stable supply of high quality goods and contractor a potential income source. For all of them the odds of survival of the company is very interesting.

The Critical Success Factor research holds various benefits for those stakeholders: The Founder himself can estimate the chances and risks involved in the investment of the company. Potential Investors can better estimate the true value of the company in such aspects as potential profits and survival odds measured upon soft facts rather then just key data.

Employees can evaluate the potential of their job if they know if the company will survive and grow. Contractors can evaluate the risk in working with the start-up and offer specific terms of payments. Customers can evaluate the risk of becoming dependent of that deliverer.

The macro-economy as a whole benefits from jobs from surviving companies and the government can make a number of political decisions based upon Critical Success Factors research. The government has always had some influence in the founding of companies in providing laws and requirements for setting up the business in the first place or granting government aid to specific companies. For example, if it is certain that a business plan is an essential tool for company survival, the government could rule to dish out government aid only to companies with a reasonable business plan. Bankruptcies disturb the social security of a country and cost the government a lot of money. The government is interested in new companies, but only in such with realistic chances of survival.

1.2 Definitions

1.2.1 Success

According to Woywode (2004)⁸, there is discordance amongst researchers in how Success is measured. He names a number of different measure factors:

- Profit development
- Turnover development
- Market share
- Return on Investment (ROI)
- Shareholder Value
- Profit margin
- Return on Equity (ROE)
- And more

Woywode (2004) further states that (from Almus 2000, Vanderwerf/Mahon 1997) these differences as well as the different methods to measure this key data lead to inconsistent results in Success Factor Research.

In Decision Theory Model for Entrepreneurial Acts (Müller, 2003 from Campbell, 1992) the Goal of the entrepreneur is the economical aspect of a company foundation. Campbell calls this Goal Net Present Value of Entrepreneurship, and defines it as expected profit of a Startup compared to wage as an employee.

According to March (1990, p. 384ff, from Woywode, 2004) multiple empirical studies proved that key data of balancing and cost accounting are insufficient to reflect the economical situation of a company.

Success, not strictly economical speaking, is the grade of achievement of a Goal, and thus the degree of success depends on the Goal the management has set for that company.⁹ These Goals can be individual from company to company and change within the lifecycle of a company.

Steinle/Schuhmann (2003) state that, in general Success can be defined as reaching a (subjective) positive result. That desired result is however not clearly defined but changes constantly with the company’s goals.

For example, a software developer’s goal might be producing the best available software in a specific field.

Forcing one of the above listed successes key data upon every company would therefore be wrong in most cases. Instead I will leave the term success to a more general definition:¹⁰

1. Success = Achievement of the companies objectives/goals

Despite the fact that the above definition is suitable to any company, there are 2 problems. Problem 1: The amount of Success will be lower for companies with ambitious goals Therefore, the degree of Achievement of the Company’s Goals should be set into relation to the level of ambition in those Goals. Empiric research trough interviewing managers and experts would allow those to counter that bias by measuring the amount a goal is achieved accordingly. Therefore the question “How well did you achieve your goals?” could yield different results then the question “How successful have you been?”

Problem 2: A company who reaches all its goals can still go into bankruptcy. I will add the following basic assumption: Every company has the goal to survive. This adds to my basic definition:

2. Success = the opposite of failure

Success could be measured by a number of indicators (see below); often key data is used as such indicators. A managers being interviewed will, depending on his education and background, think of those factors when being asked about the Success of his company. This adds to the comparability of interview data, not every company can be measured using the same key data, but it also could bias the results if the respondents have very different economical education and background. Therefore it is important to ask about such background data, key data and Indicators in interviews.

1.2.2 Success Factors

Basic assumption: “(…) the notion, that despite multi dimensionality and multi causality of a company’s success, a few influence factors can decide over success or failure.”¹¹

A factor is a determinant influencing another determinant, in our case the other determinant would be success.

A Success Factor is a determinant influencing a companies Success.

These Success Factors could be as wide as Marketing or just be a smaller aspect thereof, for example advertisement activities. Since Advertisement Activities can be perceived as part of Marketing, and in fact most Factors can be put into a bigger category, I formed the hypothesis that Success Factors are in fact a hierarchy.

Opposed to the Success Factors are indicators for Success, who do not influence Success but rather are influenced themselves. These Indicators would correlate with the companies Success like the Success Factors, however are either unchangeable or changing them will have no effect on the Success of the company (and the other indicators).

1.2.3 Critical (in aspect of Success Factors)

Critical is anything that could per definition single-handedly decide over life or death.

Critical, in aspect of Success Factors, is a determinant that could alone, without altering the other determinants, decide over Success or Failure of a company.

For example, most companies without any kind of marketing is certain to fail, no matter how ingenious its products are. On the other hand, a company can survive without smaller aspects of marketing, for example advertisement or marketing research.

Roberts (1992) states “the performance of an enterprise is the culmination of intricate interactions of a large number of factors”. Therefore, removal of individual Critical Factors would highly impair the performance and cause failure.

Patzak / Rattay (1998, p. 99) define Critical Success Factors as those parameters which are most likely to lead a project to failure.

1.2.4 IT Company

IT Companies are technology based companies working within the young and dynamic branch of Information Technology. Technology based companies are more Export oriented then other areas of business. So they will have a smaller reprisal effect on existing companies in the same country (Werner 2000, p. 6). Christian Wodon, head of start-up services Vienna, stated in an interview that IT-Start-ups are basically borderless in a matter that they can work for anyone from anywhere and offer services to a geographically unlimited market.

1.2.5 Start-up

Not every foundation is a Start-up; it is important to differentiate real Start-ups from other types of foundations in order to create a true scope for the Research. The Success Factors of Start-ups are not necessarily comparable to other types of Foundations due to structural differences.

A Company Foundation can be categorized as follows:

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Table 1: Foundation forms

(Translated from Werner, 2000, p. 13)

According to the above table by Werner, the Start-up companies which will be in focus of this thesis will be of the following categories:

1. Independent Foundation

The Foundation is done by an independent founder to secure his own existence.

2. Original Foundation

Entirely new structures are being formed.

Both derivate foundations and dependent foundations will have different properties, size and managerial structure and therefore different Critical Success Factors.

According to Werner (2000) Start-up Foundations have newer products, methods or innovative services as compared to other types of foundations and have a higher level of innovation.

To tell when Start-up companies mature (or harden) into regular companies other researchers usually assumes 3 to 5 years. From my findings a certain amount of Start-up culture determines a Start-up company more then the time elapsed since funding. Examples for this kind of culture could be flat hierarchy, a certain amount of urgency, flexibility and informal ways of doing business.

1.3 Problems

Reviewing a number of reports about Success Factors in literature I have found a number of possible biases. The description of Success throughout the literature varies widely. The term Success is defined either quantitative or qualitative, using a number of different indicators for Success (see below in the Literature part). This makes the individual studies incomparable.

Furthermore, a lot of books state results as inconclusive or contradictive (Werner, 2000). The Success Factors across companies and across branches often differ, however most experts point out that within a company and within a branch such Success Factors do indeed exist and can be identified, even though there might always be exceptions.

Post-mortem interviews based on interviews yield a number of biases. Respondents might not be willing to admit their own mistakes and tend to blame their house bank or other external factors.

Founders with more successful companies will be more likely to provide data on their company then their failed counterparts, which leads to a shift of means towards the more successful companies. Amongst those founders responding to my own questionnaire I expect founders (and employees) to give an above-average positive view of their Success and an above-average emphasis on their area of expertise or work in the company.

Customers, who would have a more neutral stance towards the company, have less insight and less motivation to provide data about companies Success. Investors and banks could be a good third tier for collecting data, if they provided large funds they usually do have some insight about the key data on the Start-up, and view it with some criticism. However, since they already gave their money to the company, any respondent Investor will have evaluated the Start-up positively. A broad empirical study about all the IT-Start-ups which were candidates for funding could yield the best results (like the book of the KfW Bankengruppe, 2004, below in the Literature part)¹².

2 Hypothesis

1. IT Start-up companies have common Critical Success Factors.

IT Start-up companies have common traits, some of them have been named by an expert, Christian Wodon, in an interview (9.1.2007): low investment, technology focus, technical skills available and a boundary-less environment. Common traits might be a hint towards common Critical Success Factors. Critical Success Factors have been researched in other, broader areas.

The Hypothesis an be proved by interviewing experts and managers, same results would indicate that there are indeed common Critical Success Factors. I will also examine literature about existing Critical Success Factors research.

2. Those success factors can be put in a hierarchy.

The Success Factors influence a certain area of the company or can be classified otherwise, and can therefore be put in a hierarchy.

3. Importance of Success Factors change over time.

There are different phases of company’s foundations, in which different Success Factors have an increased or decreased importance and are hence critical or uncritical. I will try to find out what these phases are and what their influence on the Critical Success Factors is.

4. Success Factors differ by company size (and other factors)

For example, the importance of the founder himself decreases with the growing size of the company, while the importance of HR increases. Another factor could be the area of business (Software, Data Centre, Information Provider, or Telecommunication Provider).

5. Managers will name critical success factors most often in their own area of work and expertise

I will call this effect the “perceptual bias”. Following this hypothesis I will have to ask about area of work and area of expertise during interviews and correlate it with what Success Factors are named by the respondent.

6. Critical Success Factors vary from company to company

Companies have a certain focus and work in their specific environment. If this hypothesis is true, it would be an additional explanation to the partially observed incomparability of Success Factors in different companies. This Hypothesis is partially a contradiction of Hypothesis one, I will look for supportive evidence for either in the Literature, especially in Case Studies.

7. Failed companies will name different Critical Success Factors then successful ones

This hypothesis is based on the assumption that failed companies have focussed their attention elsewhere rather then the most important aspects of the company. Furthermore founders will likely not want to admit their own mistakes and blame other points instead, financial Factors or customers. This point could be proven empirically.

3 Approaches

During my research I have found that there is little data available on the specific subject: Critical Success Factors of IT-Start-ups. Most literature I have found suitable dealt with CSFs of Start-ups in general, then there was some literature available on CSFs of Technologyoriented companies or Start-ups and some more limited literature dealt with the more specific field of Software-companies.

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Pic. 1: Classification of this thesis

The studies were all rather in-comparative, using different scopes and basic definitions, especially for the term Success. Further problems have been described above in 1.3 Problems. In order to avoid above mentioned biases, I used 3 different sources:

3.1 Sources in existing Literature

Since there is not much literature on CSF in IT-Start-ups available, I will have to use arbitrary literature in the adjacent areas of general Start-ups, technology Start-ups and high-growth Start-ups. Each source of data is counted once, even if there are multiple different sources in one book. I will give 1 to 10 points for mentioning, emphasis and ranking (10 points down to 1 point). Furthermore I will weight the sources by a factor of 0.5 to 1.5 according to the suitability of the scope.

3.2 Expert interview(s)

In order to get more recent and more fitting primary data I will try to interview experts on IT Start-up companies and ask them to name and rank Critical Success Factors. Due to the overview such an expert should have I will score each expert interview as an individual source. The questions will be very open to allow in-depth insight in the Start-up process of IT companies. Possible respondents are consultants and the people at the start-up services of public institutions such as the chamber of commerce.

3.3 Founder interviews and questionnaires

Using the above data as a question basis I interviewed a founder who was involved in a number of IT-foundations in the past hoping to get a more detailed insight into founder’s thoughts. The full interview with Anton Schmidbauer, founder of 3 IT-companies, can be found in the appendix.

To support or oppose the Hypothesis and to further validate the findings, I will use data collected to create a questionnaire with mainly closed-type multiple choice questions. Possible respondents for these questionnaires are founders and employees of IT Start-up companies, either still in the Start-up phase, already running some time or post-mortem. I will try to reach people from different areas of the companies as well as different types of IT- companies companies.

I will use an Online-Questionnaire, using balanced closed type questions with no neutral points. The Respondents will be asked to evaluate Critical Success Factors for their company using a list of Success Factors derived from literature research and expert interviews. More details on the Interview Design can be found in the empirical part of this paper.

4 Existing Literature

There is a number of business books available where the author suggests individual factors as most critical, often solemnly based on the authors opinion. Only in rare cases I’ve found a list of Success Factors and a proper evaluation of their relevance.

Included in this list are the sources which yield enough relevance: a scope that matches IT Start-up companies (either IT or start-up will suffice to extract data) and holds empirical data about (Critical) Success Factors, usually mathematical multi-variant correlation analysis or expert opinions.

4.1 Definition of Success in various Sources

Henning (2000) measures success as a combination of the 3 independent indicators Survival, Revenue Increase and Employee Increase.

Steinle and Schumann do not define Success as one static variable, but rather a number of indicators which change over time:

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Pic. 2 Success indicators changes over Time

(Translated from Steinle/Schuhmann, 2003, page 21)

Kulicke (1993) uses a much more complex approach on the term Success: Instead of just measuring the degree of success, the respondents were also asked, if they were able to reach the desired goal with the planned amount of input, or if they had to invest more time, money and/or effort. Though not explicitly mentioned, the expressed data shows that the authors researched Success with regards to Goals with the aspects of content, time, money and effort.

Furthermore, the complex Success is determined by the amount of Aggregation (Productversus Company Success, taking external Factors into account), the time horizon (short-term or long-term Success, comparison of different time slices), dynamic observation (static or dynamic, static growth or abrupt chances) and point of view (Person or Institution who observe Success, subjective versus objective measures).

Objective Success criteria’s could be:

- Turn-over and employee numbers
- Profits and annual results, Cash Flow
- Return on Equity, Net Profit Ratio
- Market share
- Growth rates and stability of above values
- Product innovation rates
- Survival for a set period of time

Subjective Success Criteria’s could be based on:

- Estimation of reached technology level, importance of self-developed, innovative products, procedures or services for sales
- Comparison of reached comparative independence in comparison to the goals set during company founding
- Degree of achievement of self-set Goals for the development of the company (Turnover and Headcount development, development of specific company areas)

The authors further reason that the term failure has to be observed critically, and believe that a companies bankruptcy after 7 years doesn’t necessitate the foundations failure, since the original goal of the company foundation is often to develop a specific product or ensure economical independence of the founders. Those goals can both be considered reached after 7 years.

Frank/Korunka/Lueger (1999) defined a number of objective and subjective criteria which define a successful model company: the company does currently exist, is a full-time foundation, original foundation, no negative change in headcount since the company foundation, subjective neutral size-development or expansion, subjective estimation of one’s own company as successful or very successful. This narrows down 153 companies out of the original 1080 respondents as successful.

Roberts (1992)¹³ chose a definition of success measures that “correspond somewhat to how the public might judge the success of a young high-technology company” using three considerations: “(1) average sales growth over the life of the enterprise; (2) modified to account for the number of years that the company has been in business; and (3) incorporating profitability or non-profitability”.

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Pic. 3: Roberts Performance Rating Chart

(Roberts, 1992 in Interfaces 22, page 7)

In Roberts empirical studies, only 15% fail within the first few years, but only 6 % reach the highest performance ratings. (n=142; Mean Rating 9.77; Median Rating 11.0 where 1 means Highest Performance and 15 means Lowest Performance).

Umesh/Huynh/Jessup (2005)¹⁴ explain that the need for Revenue is obvious and that the best indicator for Success is rapidly growing Revenue.

Vockerodt (2002) defines Success as Level of Achievement of Objectives, and states that interdependent Success Determinants are uncertain.

Umesh, U.N.; Huynh, Minh Q.; Jessup, Len: Creating successful entrepreneurial ventures in IT in: Communications of the ACM, June 2005/Vol. 48, No. 6

4.2 Books

Henning, Werner: Junge Technologieunternehmen. Entwicklungsverl ä ufe und Erfolgsfaktoren. Gabler Verlag, 2000

Scope: Young Technology Companies

Success: Survival, Revenue Increase, Employee Increase Success Factors:

Founder Personality:

Critical: Open towards Associates, Growth Orientation, Motivation,

Uncritical: Formal Qualification, Relevant Professional Experience, Leadership Experience, Experience in the Trade, Age

Product and Services Spectrum:

Critical: Complexity of Innovation

Uncritical: New Area of Application, Broadness of Product and Services Spectrum, R&D protected by Patents

Company characteristics: None Critical

Uncritical: Form of Enterprise, Team Foundation or Single Persons Foundation, number of external involved persons, Start-up size

Micro-Environment (Branch)

Uncritical: Internationality of market, broad or niche market segment Strategic Decisions during the Lifecycles

Critical: Intensity of Customer proximity during R&D, (latency of sales activities)

Uncritical: Intensity of Inception Planning, Usage of equity capital financing, R&D Cooperation, Sales Cooperation, Production Cooperation

Sabisch, Helmut (Publisher): Management technologieorientierter

Unternehmensgründungen. Schäffer-Poeschel Verlag, 1999

Scope: Technology oriented Start-up companies

From the book Deutsche Ausgleichsbank/BMWi 1997, p. 9/10, Sabisch quotes the most common reasons for bankruptcy of Start-up companies are:

1. Financial shortcomings 69%
2. Information shortcomings (especially lack of Market Expertise) 61%
3. Qualification Deficiency (especially economical and entrepreneurial) 48%
4. Planning Deficiency 30%
5. Family Problems 30%
6. Overestimation of operational effectiveness 21%
7. External Influences 15%

Table 2: Reasons for the failure of start-up companies (in percent, multiple selections possible). Source: Sabisch, Helmut 1999, p. 24, originally from Deutsche Ausgleichsbank BMWi 1997, p. 9/10

From another study about a modelling theory of technology oriented company foundations of the former BRD in the same book:

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Table 3: Reasons for failure in a modelling theory of technology oriented Start-up companies (in percent, multiple selections possible).

Source: Sabisch, Helmut 1999, p. 24, originally from Kulicke 1993, p. 166

The book further quotes Kleinschmidt/Cooper, Cooper/Trommersdorff and Tabak/Barr in a summary of ranked Success Factors. A table on p. 31 name and rank the following Critical Success Factors:

Table 4: Success Factors for (Product-) Innovations (numbers indicate order of nomination) Source: Sabisch, Helmut 1999, p. 24, originally from Kulicke 1993, p. 166

Sabisch concludes Marketing and Finance as the most important aspects and concentrates on that Success Factor in particular. Further important Factors in his book are: Conception, Legal Form, System Specifications, Project management and Controlling, Technology transfer and Patent law.

Unterkofler, Günther: Innovative Unternehmensgründungen. Verlag Peter Lang GmbH, 1985

Scope: Innovative Companies Foundations Success Factors:

1. Endogenous

1.1. Founder Personality

Prior experience, seeks professional help in anticipation of problems, knows where to seek what advice, knows own weakness, has key skills, business and profits oriented instead of operations oriented

1.2. Valuation of foundation idea

1.2.1. Market acceptance

1.2.2. Profitability

1.3. Components of Foundation management Foundation support activities of the modules “planning”, “marketing” and “controlling”

1.4. Computer support of the Foundation process

2. Exogenous

2.1. Environment Politics & Law, Technology, Market, Public Opinion

2.2. Infrastructural Conception

2.2.1. Locale Cooperation (Technology centres, etc.)

2.2.2. Educational and consulting institutions

2.3. Financial Conception

2.3.1. Sources for Equity

2.3.1.1.Own Capital

2.3.1.2.Venture Capital

2.3.2. Source for Loan Capital

Unterkofler doesn’t rank these Success Factors, which makes a statistical analysis difficult.

Mulzer, Dirk: Critical Success Factors of High-Growth Ventures. Difo-Druck OHG, 1999

Scope: 8 High-Growth Ventures, 2 of them are IT companies (Intershop and Qualix Group) and further 4 are technology oriented. The remaining 2 are cloth companies and irrelevant for my purposes.

Success Factors:

Mulzer states 3 levels of CSFs: Environment, Industry and Firm. He further breaks down the Critical Success Factors for all of the 8 Case Studies he examined in his book, of which I will only use the data about the 2 IT companies Intershop (building standardized Web shop software) and the Qualix Group (which develops system management software for Unix and Windows networks).

For these two, Mulzer identified the following Critical Success Factors for both companies:

- Customer Satisfaction
- Market growth (both companies)
- Strategic alliances (both companies)
- The foundation team

Additionally, the analysis of Intershop led to the following Critical Success Factors:

- Organizational culture
- Vision to create a new market
- Manager and Employee Skill

Whereas in the case of the Qualix Group the following Critical Success Factors apply:

- Market shift
- Key personnel: technical and senior manager staff
- Sales and Marketing

Mulzers findings support the Hypothesis that the Success Factors vary on a company basis, but also that there are common Success Factors within an area of business.

Furthermore his findings regarding Success Factors of immediate and then subsequence importance¹⁵ identifies the following Critical Success Factors in the early stages of the company:

- Window of opportunity
- (Sub-)market growth
- Marketing and sales
- Advanced technology
- Experienced foundation team
- Culture of urgency
- Customer satisfaction

Müller, Thile Andreas: Kunden- und Wettbewerbsorientierung neugegründeter Softwareunternehmen. Eine empirische Untersuchung von Teamgründungen. Deutscher Universitätsverlag, 2003

Scope: Start-up Software Companies

Critical Success Factors: Customer Orientation, Orientation on Competition Arbitrary influencing factors: Market Dynamics, Intensity of Competition

The book is primarily concerned with the two factors Customer Orientation and Orientation on Competition and their influence on the Companies Success. The book states that the correlation is not a linear one, but rather a U-shaped curve. This means that Customer and Competition Orientation do have a very positive effect only if performed to a very high extend.

Müller (2003, p.27-33) further states empiric research revealed the positive effect of teamwork.

KfW Bankengruppe (Publisher)¹⁶: Was erfolgreiche Unternehmen ausmacht. Physica- Verlag 2004

Scope: Success Factor Research of general companies and companies

Data Basis: 2000 German companies, either still operating Ausgleichsbank”

Success Factors:Significant:

- Full Liability
- Customer Loyalty
- Quality Management
- Realistic financial planning
- Information flow
- Receiving government business promotion
- Size of the company
- Founding in times of economical boom

Failure Factors:

- Company Conception
- Finances
- Management Ability

In a part of the book about the Reasons for failure of technology oriented companies by Pleschak, Franz; Ossenkopf, Birgit; Wolf, Björn, there is a table about the reasons of failure from the investors point of view (page 148), which states the following (excerpt of the most important points):

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Table 5: Reasons for failure in Technology companies, n=31

(Pleschak; Ossenkopf; Björn, 2004)

Steinle, Claus; Schumann, Katja: Gründung von Technologieunternehmen; Merkmale - Erfolge - empirische Ergebnisse, 1st Edition. Gabler Verlag, 2003

Scope: Technology oriented Start-ups

Success:

Steinle/Schuhmann found that the basic Orientation of technology oriented Start-ups is towards innovation (pg. 22) and that Cooperation’s are highly success elevating in these companies strives for innovation. The book emphasises the significance of public research institutions. In a table the branch IT- and Communication Technology has a relatively low tendency towards cooperation (26.1% compared to an average 31.4%).

From an empirical study Steinle/Schuhmann found that the employee growth as a Success indicator is significantly (on a 1% level, n=284) influenced by whether or not the founder has a University Degree. More specifically, a doctorate founder would do better then someone with a lower degree from a University, followed by someone who graduated at a University of Applied Sciences, followed by a Master craftsman.

Of their previous activities and knowledge only the following had a significantly higher level of Goal achievement of objectives and profitability (own estimation): people with industry knowledge, Project Managers and HRM managers.

Other significant Success Factors are Quality and adherence to delivery dates, the amount and choice of planning, high costs, lack of financial sourcing, high risk, Manager Qualification, and Marketing.

Kulicke, Marianne: Chancen und Risiken junger Technologieunternehmen; Ergebnisse des Modellversuchs „ F ö rderung technologieorientierter Unternehmensgründungen). Physica-Verlag, 1993

This book provides the reader with detailed empirical data of 57 German Technology oriented companies in 1987-1990. Furthermore the data has been analyzed and extended by experts.

Success: Instead of just measuring the degree of success, the respondents were also asked, if they were able to reach the desired goal with the planned amount of input, or if they had to invest more time, money and/or effort. Though not explicitly mentioned, the expressed data shows that the authors researched Success with regards to Goals with the aspects of content, time, money and effort.

Furthermore, the complex Success is determined by the amount of Aggregation (Productversus Company Success, taking external Factors into account), the time horizon (short-term or long-term Success, comparison of different time slices), dynamic observation (static or dynamic, static growth or abrupt chances) and point of view (Person or Institution who observe Success, subjective versus objective measures).

Objective Success criteria’s could be:

- Turn-over and employee numbers
- Profits and annual results, Cash Flow
- Return on Equity, Net Profit Ratio
- Market share
- Growth rates and stability of above values
- Product innovation rates
- Survival for a set period of time

Subjective Success Criteria’s could be based on:

- Estimation of reached technology level, importance of self-developed, innovative products, procedures or services for sales
- Comparison of reached comparative independence in comparison to the goals set during company founding
- Degree of achievement of self-set Goals for the development of the company (Turnover and Headcount development, development of specific company areas)

The authors further reason that the term failure has to be observed critically, and believe that a companies bankruptcy after 7 years doesn’t necessitate the foundations failure, since the original goal of the company foundation is often to develop a specific product or ensure economical independence of the founders. Those goals can both be considered reached after 7 years.

Success Factors: Kulicke (p.25) groups Success Factors into the 2 main categories “Company-dependent Factors” and “External Factors” and puts the Factors into the following hierarchy:

1. Company-dependent Factors
1.1. Goals-System of the Founder
1.1.1. Growth Orientation
1.1.2. Measurement of Success
1.1.3. Relation of Capital Holding
1.1.4. Integration of Cooperation Partners
1.1.5. Complementary goals (Multiple Founders)
1.2. Area of business and products
1.2.1. Type of Company activities/area of business
1.2.2. Characteristics of products
1.2.3. Type of business (broad or narrow spectrum)
1.2.4. Product range (Components or Systems)
1.3. Financial Resources of Company
1.3.1. Equity
1.3.2. Venture Capital
1.3.3. Bonds
1.3.4. Loan Capital
1.3.5. Supplier Credit
1.3.6. Customer down payment
1.4. Non-financial Resources of Company
1.4.1. Know-how in R&D, Marketing, Sales and Production
1.4.2. Management abilities
1.4.3. Ability to create efficient Company Structures
1.4.4. Contact network with customers, suppliers, investors, etc.
1.4.5. Ability to sense and rapidly adopt to shifts in the market

2. External Factors
2.1. Coverage of required capital
2.1.1. Availability and conditions for acquiring risk capital
2.1.2. Availability and conditions for acquiring bonded capital
2.1.3. Availability of government aids
2.2. Extension of non-financial resources
2.2.1. Consulting available for R&D Questions, Questions of company management, sales and marketing questions
2.2.2. Availability and conditions for out-sourced Development

[...]

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¹ Interview conducted January 9, 2007

² Roberts (1992)

³ Migration … Moving from one System to Another

⁴ ERP … Enterprise Resource Planning, Software to manage all areas of a company

⁵ E-Sports … competitive playing of PC and Videogames

Andreas Benedikt II

⁶ Christian Wodon, Head of the Start-up services in the Vienna economic chamber has been interviewed by the author on 9.1.2007. The full interview can be found in the appendix.

⁷ Henning, 2000

⁸ In: “Was erfolgreiche Unternehmen ausmacht” (en: „What constitutes successful companies“), 2004, p. 22

⁹ Roberts (1992)

¹⁰ Kulicke (1993)

¹¹ Vockerodt (2002), p. 2 quoting Hoffmann (1986), p. 832.

¹² Woywode (2004) and Pleschak/Ossenkopf/Wolf (2004)

¹³ Roberts, Edward B.: The Success of High-Technology Firms: Early Technological and Marketing Influences, in: Interfaces 22, 4 July-August 1992, pages 3-12

¹⁵ Mulzer, 1999, Chapter 4: A conceptual framework of CSFs

¹⁶ Woywode (2004) and Pleschak/Ossenkopf/Wolf (2004)