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June 6, 2009

Perspectives on Economic Conditions, Entrepreneurship, First-Product Development, and New Venture Success . Michael Song Lisa Song Mark E. Parry. June 6, 2009. Entrepreneurship and Economic Activity. SBA: 600,000+ U.S. start-ups per year.

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June 6, 2009

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  1. Perspectives on Economic Conditions, Entrepreneurship, First-Product Development, and New Venture Success Michael Song Lisa Song Mark E. Parry June 6, 2009

  2. 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.

  3. Source: http://blogs.harvardbusiness.org/gergen-vanourek/2008/08/why-entrepreneurs-love-a-downt.html

  4. “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.” Christopher Gergen and Gregg Vanourek Source: www.HarvardBusiness.org, August 26, 2008

  5. http://blogs.bnet.com/harvard/?p=413

  6. http://www.economist.com/specialreports/displaystory.cfm?STORY_ID=13216025http://www.economist.com/specialreports/displaystory.cfm?STORY_ID=13216025

  7. “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.

  8. 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.

  9. “More Tech Start-Ups Perish --- As Funding Dries Up, Fledgling Firms Close; Fears of a Chill on Innovation • “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.” —Startup Wind-Down Martin Pichinson Source: WSJ, February 12, 2009.

  10. “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” • “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.” —Entrepreneur and former VC Divya Gugnani Source: WSJ, February 23, 2009.

  11. 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

  12. 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?

  13. 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).

  14. Economic Performance from 1998-2001: The NASDAQ 100 Stock Index Source: Yahoo

  15. Percentages of New Ventures Failing During Their First Two Years

  16. 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? How strong is this relationship? • What factors contribute to the performance of successful first products?

  17. 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.

  18. 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.

  19. IEI First-Product and New Venture Success Rates and Performance

  20. 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?

  21. IEI Radical vs. Incremental? Which is Better for New Product Success and New Venture Success? Product Success Emerging vs. Established Market? Emerging vs. Established Technology?

  22. IEI Performance Impact of Product Type, Market Characteristics, and Technology Standard

  23. IEI Product Type by Market Characteristics Cross-Tabulation

  24. IEI Product Type by Technology Standard Cross-Tabulation

  25. IEI Technology Standard by Market Characteristics Cross-Tabulation

  26. IEI Market Needs Idea Sources Which Idea Source Generates the Highest Levels of New Product Success and New Venture Success? Technology Development Other Sources

  27. IEI Effects of Sources of First-Product Ideas on First-Product and New Venture Performance

  28. 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.

  29. 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.

  30. IEI 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.

  31. 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?

  32. 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?

  33. Thank You! Questions?

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