Risk governance & control: financial markets & institutions / Volume 7, Issue 1, Winter 2017
INNOVATIVE START-UPS AND YOUNG
ENTREPRENEURS: DEFINITION OF VENTURE
CAPITAL AND FINDINGS FROM SWITZERLAND
Simon Zaby*
* College of Management, Mahidol University, Thailand
Abstract
This paper aims to investigate success factors of innovative start-up firms from the perspective
of young start-up managers. Which key factors did they experience before and since the
foundation of their company? The experience from the quite young Swiss start-up scene pro-
vides important insights to entrepreneurs and policy-makers in emerging countries that cur-
rently face the necessity of building up a start-up environment. One part of the data has been
collected by the author, the other part originates from the Swiss Venture Capital Database (total
sample size: 306). The results show a significant role of venture capital financing for the success
of innovative start-ups. Interestingly, this is to some extent because the start-ups see various
additional benefits from venture capitalists involved in their firm. Thus, the findings shed new
light on a proper definition of venture capital that should not solely focus on the flow of funds.
Keywords:
Entrepreneurship,
Venture
Capital,
Entrepreneurial
Finance,
Switzerland,
Developing
Countries
JEL Classification: L26, G24
DOI: 10.22495/rgcv7i1art10
1. INTRODUCTION
special attention will be given
financing source venture capital.
to
the
start-up’s
Generally, Switzerland is linked with an outstanding
innovation potential, resulting from its universities,
established enterprises (just to mention the global
pharma players), and start-up companies. In the
rankings of the World Intellectual Property
Organization, the World Economic Forum’s Global
Competitiveness Report, and the European
Innovation Scoreboard, Switzerland regularly
appears among the top ranks with regard to patent
applications and innovation performance (World
Intellectual Property Organization, 2015; World
Economic Forum, 2015; European Commission,
As the Swiss start-up scene did not have a very
high momentum for a long time (it emerged after
the millennium), the observations from there are
highly relevant for businesses, the economy, and
politics, especially in quickly developing countries
like in Asia. The experience from Switzerland
provides an effective input to any country that
currently faces the necessity of building up a start-
up scene, and are therefore highly relevant from an
international perspective and from the perspective
of regional development (see also Scheela et al.,
2015).
2016).
In the same context, however, the country faces
2. LITERATURE REVIEW
a tremendous problem: a potential for patents and
innovation is the prerequisite for innovations, but
The significance of venture capital for innovation
not sufficient. Bringing new scientific findings to
and growth has been proved by manifold previous
success requires a transformation to the market.
research (Calderon & Liu, 2003; Hartmann et al.,
Here come the start-ups into play (Leitão, Lasch, &
2007; Mitter, 2010). Hellmann and Puri (2002) show
Thursik, 2011), who are major “innovation dealers”,
a positive influence of the support of start-ups with
because they have a high interest in the conversion
venture capital on the innovative outcome, on the
of existing knowledge into useful and marketable
speed
of
product
placements,
and
on
the
products. Kortum and Lerner (2000) conduct a cross-
professionalism of the management of the start-ups.
comparison and find young firms to come up with a
Young firms that are capitalized with venture capital
higher activity in the field of innovations. Economic
do
receive
valuable
leadership
and
industry
growth and the prosperity of a country are highly
knowledge as well as access to networks. Moreover,
dependent
on
the
innovation
capability
of
start-
Meyer (2008) points out an improvement of the
upsespecially in a resource-scarce and high-wage
transfer of new products to the market by venture
country
like
Switzerland.
The
conditions
and
capital. According to Romain and van Pottelsberghe
problems
the
start-ups
face,
i.e.
their
success
(2004), venture capital fosters productivity growth
factors, are very important for the long-term wealth
of the economy and the transmission of innovations
of a country. It is the purpose of this article to
due to several reasons. On the one hand, young
identify success factors of innovative start-ups from
firms often push forward new research fields that
the entrepreneurs’ perception. Due to the findings,
established firms have not worked on. On the other
75
Risk governance & control: financial markets & institutions / Volume 7, Issue 1, Winter 2017
hand, they boost competitive pressure and therefore
part
originates
from
the
Swiss
Venture
Capital
contribute
to
the
transformation
ability
and
Database (University of Basel, 216 start-ups with
innovativeness
of
economies
(Vetschera
&
relevant feedback between 2007 and 2016). Both the
Gillesberger, 2007). Altogether, a functioning and
database as well as the data hand-collected by the
active
entrepreneurial
venture
capital
sector
has
author
use
the
same
questioning
structure.
The
positive effects on the innovation-driven growth of
entrepreneurs
have
been
asked
the
following
an economy.
questions (cf. Figure 1):
1. Which factors were most significant for the
3. METHODOLOGY AND DATA
success of your company?
2. How important was external financing for
This paper uses empirical data to gain insight into
the start-up scene and its experiences and needs,
followed by a conceptual discussion about venture
capital as a fundamental source of external
financing.
One part of the data has been collected by the
author in 90 interviews, meetings, and encounters
with different entrepreneurs/start-ups between 2007
and 2016, supplemented by several media
your company?
3. What kind of further support did your
company obtain from the investors?
Altogether, in 23 cases previously questioned
start-ups have been surveyed again, however not
earlier than after three years. Due to the additional
experience gained along the entrepreneurial life
cycle in the meantime, answers from both points of
time have been used.
observations (e.g. newspaper interviews). The other
Figure 1. Central Questions
19% of the questioned entrepreneurs/start-ups
shows the distribution of these success factors for
described themselves to be in the early stage, 39% in
Swiss start-ups):
the expansion stage, and 42% in later stages. 38% do
their business in “Information and Communication
Technology”, 29% within the “Engineering” sector,
24% in “Biotechnology”, 8% in “Medical Technology”,
and 1% in the “Greentech” industry.
External Financing comprises answers
such as “Seed Capital”, “Successful Financing
Round” or “Business Angel Investment”. Due to the
early stage in the entrepreneurial life cycle and due
to the capital- and time-consuming activities it is
essential to capitalize the company with external
4. ANALYSIS OF SUCCESS
INNOVATIVE START-UPS
FACTORS
FOR
financing means to build up the young firm, to
develop its products and to turn market-ready in the
end. The financing must be sustainable and the
The analysis of critical success factors that influence
success or failure of entrepreneurial activity is
crucial for start-ups as well as for firms further
proceeding in their entrepreneurial life cycle.
Initially, all major success factors for start-ups will
be identified. This will be followed by a specific
analysis of external financing.
company must successfully pass several, well-timed
financing rounds (milestones).
Internal Financing can be relevant for two
main reasons. On the one hand, a start-up’s very
early positioning in the entrepreneurial life cycle
means a far-reaching lack of track record. Therefore,
a financing by the four Fs (Founder, Family, Friends,
Fools) comes into primary consideration. On the
Identification of Success Factors
other hand, somewhat matured firms may have
already gathered some net income and use it for a
Which factors do start-ups consider crucial for their
development? These highly relevant experiences
from the questioned companies may provide
valuable insight for other start-ups or future
entrepreneurs. The answers given to this open
question (multiple answers possible) have been
grouped into the following success factors (Figure 2
first in-house financing.
The Founding Team / Management holds
the responsibility for all business administration
tasks. In addition to the corporate management staff
itself, the team includes personnel with specific
financial and controlling expertise. A motivated,
qualified and experienced management team with
the ability to push all processes from the product
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Risk governance & control: financial markets & institutions / Volume 7, Issue 1, Winter 2017
idea to the profitable end product is indispensable
entrepreneurs must spot or find market niches. A
to bring the innovative entrepreneurial project to
matured market may not be present at all while the
success. An appropriate compensation scheme is the
prerequisite for attracting potential employees and
can set effective incentives for fostering the
entrepreneurial success in the end.
Qualified Scientific Personnela team of
firm’s activities are developing already.
When it comes to the point where the
start-up has a promising product in its pipeline that
is to be launched in a potentially attractive market,
corresponding and effective Marketing measures
highly
specialized,
internationally
cross-linked
need to be undertaken. Acquiring customers and
expertsis essential for scientifically evaluating and
cultivating customer relations are crucial success
executing
a
product
development
plan.
Just
one
factors.
example: in the context of biotechnology, this may
be designated medical scientists, doctors, molecular
biologists, chemists, and pharmacists. With regard
to the compensation scheme the same holds valid as
mentioned for the „Founding Team / Management”
The success factor Technology / Product
The current Economic Situation plays a
major role for the success of start-ups in terms of
their sales and with regard to their efforts in
attracting venture capital. Entrepreneurs report
recessions to be an obstacle in finding the capital
they need and in getting access to sales markets.
refers to the quality of existing products or products
This became obvious during the financial crisis in
to be developed, the composition of the product
2008/2009
and
its
aftermath
(Deakins,
North,
&
portfolio, and the implementation of state-of-the-art
technology. Ultimate evaluation criteria are the
emergence of a marketable product and the
“correct” timing of the market entry.
An attractive and convincing Business Plan
Bensemann, 2015; Harrison & Baldock, 2015).
The selection of a start-up’s Location can
definitely be essential for its success. The proximity
and efficient access to potential investors (i.e. to
financing sources), corporate partners, future
is
mandatory
for
the
structured
initiation
of
customers, and highly qualified personnel can be
innovative entrepreneurial activity. Creating a plan is
vital. In the same context, educational institutions
not
only
in
the
best
interest
for
a
start-up’s
such as universities and other research facilities are
activities, but also one of the very few sources of
to be mentioned. Industry clusters as the industrial
information
for
potential
investors
in
the
early
location
of
a
business
can
also
provide
an
stages of the entrepreneurial life cycle.
Execution of the Business Plan: In addition
to the mere existence of a business plan, it comes to
its execution, which is a holistic process. It is
interesting that especially managers and
entrepreneurs from high-tech industries mentioned
important character traits such as discipline,
endurance, persistence, and passion (see also
Kuratko, 2009; 2011) in that context.
The survey results prove the importance
infrastructural advantagein Switzerland for
example “Bioalps” in Geneva, “Zurich MedNet”, or
“BioValley” in Basel. Entrepreneurs are not least
attracted by capital, i.e. by the presence of venture
capital firms, in global clusters such as Silicon
Valley, the Massachusetts Route 128 around Boston,
and recently Bangalore in India, “Silicon Wadi”
around Tel Aviv in Israel, or the Shenzhen Hi-Tech
Industrial Park in China (see also Pan, Zhao, &
Wójcik, 2016; Falik, Lahti, & Keinonen, 2016).
of
Market
/
Demand
in
a
sense
that
the
Figure 2. Success Factors of Swiss Start-ups
80%
Mentions
72,0%
70%
62,3%
60%
50%
47,2%
40%
30%
20%
10%
25,4%
22,3%
16,3%
14,6%
14,2%
14,0%
9,7%
8,0%
0%
72.0% of the young entrepreneurs pointed out
founding
team/management
(47.2%).
Most
of
the
that funds obtained from outside the firm are a
other success factors had been mentioned in a range
crucial success factor for the development of their
of around 10 to 25%. Some of them may simply be
start-up.
External
financing
has
therefore
been
linked too far into the future: the demand (25.4%)
clearly the most frequent answer. On the second and
will come later for some firms, e.g. in biotechnology
third places appear technology/product (62.3%) and
after
about
12
to
15
years;
as
a
consequence,
77