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4
8.5.3
Ecosystem Analysis of Startups in California, US ... 62
8.5.4
General Analysis and Discussion ... 63
8.6
Limitations of the Study ... 65
9
Conclusion ... 65
10
Appendix ... 67
10.1
Interview 1 Brickspaces ... 67
10.1.1
Original Transcript (German) ... 67
10.1.2
Translated Transcript ... 72
10.2
Interview 2 Calumia ... 76
10.2.1
Original Transcript (German) ... 76
10.2.2
Translated Transcript ... 80
10.3
Interview 3 Goedle ... 83
10.3.1
Original Transcript (German) ... 84
10.3.2
Translated Transcript ... 87
10.4
Interview 4 Donatia ... 90
10.4.1
Original Transcript (German) ... 91
10.4.2
Translated Transcript ... 97
10.5
Interview 5 RateMate ... 102
10.6
Interview 6 Barion ... 107
10.7
Interview 7 Bigo ... 117
10.8
Interview 8 YouAte ... 122
10.9
Interview 9 RidePIN ... 127
10.10
Interview 10 Noora Health ... 134
10.11
Interview 11 In Spirit ... 139
10.12
Interview 12 Aero Glass ... 144
10.13
Template of Interview Questions ... 153
10.14
Template of Interview Questions (German) ... 155
10.15
Interview Analysis ... 157
5
10.16
Interview Summary ... 177
11
Acknowledgements ... 184
12
Bibliography ... 185
6
2 Index of Abbreviations
AI
artificial intelligence
API
application programming interface
AR
augmented reality
B2B
business-to-business
B2C
business-to-customer
B2G
business-to-government
ca.
circa
CD
compact disk
CEO
chief executive officer
COI
cluster of innovation
COO
chief operating officer
e.g.
exempli gratia (for example)
et al.
et alii (and others)
etc.
et cetera (and so on)
EU
European Union
Fintech
financial technology
GmbH
Gesellschaft mit beschränkter Haftung
(Limited Liability Company)
7
GPS
global positioning system
IPO
initial public offering
IT
information technology
KYC
know your customer
LED
light-emitting diode
LP
long playing (record)
m.
million
NRW
North Rhine-Westphalia
PCI
payment card identification
PIN
personal identification number
R&D
research and developemnt
SaaS
Software as a Service
SDK
software development kit
SMS
short message service
SQL
structured query language
UK
United Kingdom
8
US
United States
USO
university spin-off
VC
venture capital
9
3 Tables and Figures
Figure 1: Hype Cycles Interpreting Technology Hype ... 22
Figure 2: The Structure of a Cluster of Innovation ... 26
Figure 3: The Kauffman Index of Startup Activity (1997-2016) ... 53
Table 1: Interview Analysis ... 157
Table 2: Interview Summary ... 177
10
4 Introduction
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 (Patel 2015), 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. After delivering
an overview of the most commonly used terms and definitions in the startup scene, chapter 6
will describe the components of a business idea and how experts can assess a company's
value.
Subsequently, the most important factors for a startup company's success, according to
literature review, will be listed and illustrated. Various standpoints of academic research and
studies will be discussed. 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.
This way, the study is able to provide an understanding of the distinctive attributes of these
ecosystems. Furthermore, the interviewees' challenges and advices will be compared to
previously reviewed literature. Therefore, the reader is able to gain insights from an academic
perspective, as well as from real-life examples.
11
5 Definitions
This chapter will provide the definitions necessary for the further research and analyses
conducted throughout this paper. Oftentimes, authors and researchers use similar terms with
different meanings. The following sections will help to clarify these differences, as well as
give an outlook on subsequent chapters.
5.1 Startup Company
"A startup is an organization formed to search for a repeatable and scalable business model."
(Steve Blank, Silicon Valley based serial entrepreneur; source: Blank 2010)
The business model of a company describes the concept of how it is going to make a profit.
However, this concept is by default created under enormous uncertainty and is yet to be
verified. If startups are successful, they often grow extremely fast.
A large company on the contrary, would usually only execute proven concepts. They also
have much smaller potential for additional growth.
In most cases, the founder of a startup writes a business plan, which contains information
about opportunities and risks, as well as the problem that this new venture will solve for its
customers. It usually also includes a long-term forecast for income, cash flow and profits. The
business plan is written prior to creating a product or executing any part of the concept.
Afterwards, the plan can help to foresee unknown difficulties and can also be presented to
potential investors (Blank 2013: 67).
When startup companies are built, they are placed into a pre-existing system of economic
activities, resource constellations and business networks. Their aim is towards establishing
themselves and their idea in the market place. If a startup can do so, they will profit from
other companies resources, activities and initiatives (Oukes/Raesfeld 2016: ).
12
5.2 Startup Ecosystem
The startup ecosystem consists of multiple types of organizations and individuals that interact
witch each other and influence the startup company. These organizations, such as universities,
funding organizations, big companies and others, play different roles depending on the
development stage of the startup. Important people are e.g. angel investors, advisors or other
entrepreneurs, who are all linked to each other through various events, locations and activities.
The dynamics of an ecosystem can change instantly through external factors like market
disruptions or a shift in the financial climate. Since these factors are a result of the startup's
location and environment, entrepreneurs have little control over them (Geibel/Manickam
2015: 64).
Internal factors are interdependent with its ecosystem, e.g. social attributes which determine
worker talent and social networks, or material attributes such as certain government policies
and physical infrastructure (Spigel 2017: 67). The startup founders have, contrary to the
external factors, a high extent of control over internal factors (Geibel/Manickam 2015: 64).
5.3 Innovation
When an idea or invention is transformed into a good or service, which creates a new value
for customers, it can be called innovation. The idea has to be replicable and satisfy a customer
need. Businesses that implement innovations or produce revolutionary products take a greater
risk than their competitors because they create new markets. Imitators stand in contrast to
innovators and take small risk (BusinessDictionary.com).
Billionaire entrepreneur Vinod Khosla believes the acceptance of risk and failure are
inevitable for innovation. Because big companies try to avoid both, great innovations like the
internet or Google came from outsiders, he argues (The Economist 2007).
There is a critical difference between an innovation and an invention. An invention for itself
is not necessarily marketable or useful, whereas an innovation combines the invention with a
customer need. For instance, the invention of a solar panel doesn't bring any value in itself,
although by applying it on the roof of a house it fulfills a market need (Furr/Ahlstrom 2011:
24 f.).
13
The term `innovation' is mostly used referring to new technology. However, innovations do
not necessarily need to involve technology at all. McDonald's fast self-service concept led to
a revolution in the fast-food industry just by running a restaurant in an entirely different way.
A lot of innovation happens rather in services and processes than in technology (The
Economist 2007).
A third kind of innovation can be illustrated by the example of Levi's and how the company
changed the public's perception towards wearing jeans. Originally being used as pants only
for workers due to its extraordinary durability, through innovative product positioning in the
market, the jeans evolved into a fashionable item for the masses (Kaudela-Baum et al. 2014:
25).
6 Valuation of a Business Idea
The valuation of a business is usually a mere financial calculation. Investors use one of the
many mathematical models and, based on the company's annual revenue, profits, future
projections etc., they conclude an overall valuation.
Most importantly however is customer validation and feedback. Founders who develop a
product without ever leaving their office and conducting field trips might be able to build
something that is perfect in their own eyes; but whether or not the product would appeal to
customers is completely unknown, so it often turns out to be a huge waste of time and
resources (Blank/Dorf 2012: 8 f.).
An increasing number of entrepreneurs in modern times started to focus more on customers
and the company's mission instead of purely going after profit (Reichheld/Markey 2011: 21).
While the involvement of potential customers is an advantageous approach for long-term
success (van de Ven et al. 1984: 104), it is not easy to measure in numbers.
Unequivocally, to value a venture prior to its launch is rather difficult because of numerous
unknown risks and an unproven business model. In fact, venture capitalists admit that valuing
a startup company has a lot to do with emotion and is "often a guess" (Simmons/May 2001:
129). So why is valuation so important after all?
First, knowing the value of a startup company is a helpful measurement not only for
shareholders, but also for every stakeholder that has a long-term interest. Second, companies
14
focused on value are typically more competitive and employ their resources more efficiently
(Koller et al. 2010: 3).
The value of a business idea can mainly be measured by three criteria:
· The level of innovativeness and originality of the product or service that the startup
will offer,
· to what extent the business model is scalable (locally, regionally or globally),
· and how financially feasible the concept is (e.g. how high the profit margins are).
The following chapter will describe these criteria in detail and give a non-mathematical
toolset for a business idea valuation.
6.1 Innovativeness and Originality
For a new business venture to be successful, it is important to create something new and
proprietary. Surely, a business can survive and make profit by being a 1:1 copy of another
business and it might even have reason to think that doing anything other than exactly that is
risky or foolish (Aldrich/Fiol 1994: 645). If someone plans to open another bakery in town, he
might be able to make a living for himself and maybe even support his family with it, too.
However, he will most likely have a hard time finding investors or landing a big hit that
makes him a millionaire.
The kind of business that is investable should be disruptive, better revolutionary. This way,
the company has the chance to grow big, become more and more valuable, and in the end
make stockholders richer.
"Innovation distinguishes between a leader and a follower."
This famous quote by Steve Jobs applies more than ever to the highly competitive market of
technology (Woo 2013), where innovation is an important driver of new value and in the long
run provides a sustainable advantage for any company (Furr/Ahlstrom 2011: 22). In the end,
specific innovations are the reason for extraordinary success of fast-growing startups. As soon
as more competition enters the market, the fast-growing startups will also most likely become
the market leaders (Rok 2011: 19).
15
The pure definition as well as the goal of innovation is to commercialize an idea (Binder 2014:
9). However, it is not enough to just have a better product than competitors. Customers are
likely to remain within their old patterns of behavior and routines unless they are shaken out
of it by something that not only offers a few minor changes, but shows dramatic and
revolutionary improvements (Gourville 2006). The company's innovation has to offer its
customers unique advantages (Groenewegen/Langen 2012: 166).
If executed right, a startup has the ability to alter an entire market. After some time of flying
below the radar, a startup company can be unstoppable once it reaches a critical mass.
Famous examples are SpaceX (creating a new ecosystem for space travel) or Uber (disrupting
the taxi industry) (Böhme 2017: 715 f.).
Furthermore, not only existing market rules are being bent by startup ventures and their
innovative ideas. The fulfillment of latent customer needs often even leads to creating new
markets. New technology plays a decisive role creating the requirements for innovative
business models, products and services (Böhme 2017: 716).
According to Schumpeter (1950: 83), creative destruction is part of a natural development
process within the economy and essential for the capitalist structure. Innovations have to be
put into practice, otherwise they are "economically irrelevant" (Schumpeter et al. 1983: 88).
Thus, the burden of economic progress lies upon the shoulders of entrepreneurs.
One example of creative destruction is rule breaking. During the times when customers took
excellent service and delivery of large and heavy goods, such as furniture, for granted, IKEA
implemented their cold concept of self-service and self-assembly. Many years later, this very
same procedure of taking bulky items home and assembling them, has become an almost
enjoyable part of shopping for furniture (Zimmermann 2013: 76 f.). Eventually, the concept
not only broke the rules of the industry at the time, but scientists also discovered later on, in a
series of experiments, that someone who builds a product himself perceives it as more
valuable than somebody else would (Norton et al. 2012: 10 f.). This ramification became
known as the `IKEA effect' (Norton et al. 2012: 2).
Whereas big companies only react to market changes, try to adapt and to improve, the
innovator is the one who really makes these changes. Once an innovation promises success
and establishes on the market, most of the big firms will either copy the innovator or buy his
business. The difficulty here lies within the right timing, because acting too early means risk
16
for the established company, acting too late is a disadvantage towards competitors (Weis 2013:
12 f.). The importance of the right timing will be discussed further in chapter 7.1.2.
6.2 Scalability
Despite being innovative, which characteristic is important for a new business venture to
become a multi-million dollar company like Facebook, Groupon or Uber? The most crucial
factor for growth potential, along with the ability to increase revenue quickly, is scalability.
Startups that grow fast and respond well to change will most likely outperform big companies,
which is why investors are very keen on infinitely scalable businesses (Stampfl et al. 2013:
228 f.).
One of many famous examples for fast-scaling startup companies is Airbnb. Founded in 2008
with its headquarters in San Francisco, California, it created an online platform for people to
rent or rent out real estate. Airbnb works as a community and a marketplace, bringing tenants
and property owners together while handling the booking process (this is where Airbnb earns
a 10% commission of the booking price). Among other factors, scalability was probably the
most decisive asset for the company's growth. More transactions cost the business nothing but
additional server capacity, which ultimately allowed Airbnb to expand their listings into 170
countries worldwide, while reaching growth rates along the way of up to 800% in 2010
(Stampfl et al. 2013: 229).
The analysis of expert interviews conducted by Stampfl et al. (2013: 229 f.) suggests that the
right use of technology determines a company's scalability to a high extent. One of the
interviewees believes the scalability of a business model to be one of the key criteria for
investment decisions. Technology is often considered a good investment because it has the
ability to enable scalability.
However, if a business wants to scale quickly, it can easily fall into the trap of `premature
scaling', which Nathan Furr
1
believes to be the most common cause for a startup to fail.
`Premature scaling' is a phenomenon among startup businesses that, at first glance, do
everything right. They have a promising idea, hire talented people, constantly optimize their
product, do marketing campaigns, etc. Even though this is exactly what big established
1
Nathan Furr is an assistant professor of strategy at the Insead Business School in France and co-author of the
book "Nail It Then Scale It: The Entrepreneur's Guide to Creating and Managing Breakthrough Innovation".
17
companies would do, these startups fail because unlike their big competitors, they are moving
in unknown territory. They are expanding their business long before they know what the
customers want and how they can be reached (Furr 2011).
Working on assumptions and purely with the aim of growing fast, these small ventures do not
have the resources to keep up and inevitably run out of capital. After spending vast amounts
of money on a certain market approach, the organizational and often mental attachment of
founders towards their project, creates another problem. It becomes harder to change big parts
of the business model and to ignore increasing sunk costs, which in the end eliminates the
startup company (Furr 2011).
6.3 Feasibility
With the goal of a fast scalable business in mind, it is important to reach a high profit margin.
2
Due to the high competitiveness among big established brands for existing products and
everyday items, it is necessary for a startup company to be innovative. Supplying a new
product secures higher margins and increases the attention of customers (Fisher 1997: 110).
Nevertheless, market size and industry have a huge impact on required resources. Entering a
market filled with global enterprises requires an enormous amount of capital. Due to
economies of scale, it is in most cases impossible to produce cheaper or even to secure shelf
space in any of the retail stores.
In addition, established companies already have a wide base of customers loyal to their
products, whereas a new startup is entirely unknown (Kotsch 2015: 24).
As it is evident now, this chapter's three criteria for a high valuation of a business idea are to
some extent interdependent: innovative and unique products lead to higher margins, which are
critical for feasibility and decisive for the ability to scale.
2
According to Zwilling (2013), the margin should be at least 50%.
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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).
3
"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
3
It is therefore a useful exercise for entrepreneurs to test their own judgement occasionally by comparing their
practices with other business owners (Kisfalvi 2002: 514).
19
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).
20
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.
4
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
5
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).
4
Instead, prior entrepreneurial experience is linked to an increase in startup size of ca. 48% (Coad et al. 2014:
544).
5
Around $10 m., according to Florian (2001).
21
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.).
Big companies as well as small startup ventures often invest large amounts of money and
resources into promising new technologies. When deciding whether an emerging technology
is groundbreaking or simply cannot live up to its promises, it is worth taking a look at the
following so-called Hype Cycle:
22
Figure 1: Hype Cycles Interpreting Technology Hype
Source: Gartner Group (2011)
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.
23
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 20
th
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).
24
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.
7.2.1 Presence and Availability of Talents
Most recent startup companies focus on technology and at the same time neglect the
importance of human talent (Deshmukh 2016: 61). To which extent human capital is a big
issue for growing businesses shows the case of technology startups in the Philippines. For
scaling quickly and sustainably, tech companies are in need of a talented workforce. Many
American ventures look for young, English-speaking, well-educated employees and find them
in the previously colonized and still highly US-influenced Philippines (Segovia 2015: 3).
The demand and competition for talented workers in many regions is at such a high point that
talent attraction and retention initiatives, such as Make it. MSP. for the Minneapolis Saint
Paul region in the US, is backed by numerous investors and companies (Frosch 2016: 30).
But why has finding and hiring talent become such a challenge for aspiring startup companies?
Among other reasons, the overall condition of the present economy seems to influence
people's mindsets. The theoretical model of Friebel/Giannetti (2009: 1368) indicates that in
an economy where consumer credit is not easily available, talented individuals value the
financial risk of working for a small company higher and are therefore less likely to choose
working for a startup than for an enterprise.
Furthermore, certain areas benefit from nearby educational institutions, as for instance Silicon
Valley profited from Stanford University (Adams 2009: 368). In fact, Stanford University
brings out the highest number of unicorn
6
founders by far
7
(Adams 2017), which is probably
the reason why
"Silicon Valley not only surrounds the campus
but has become entwined with it" (McMurtrie 2015).
6
A unicorn is a startup company with a value of at least $1 billion.
7
To this day, Stanford University has brought forth 51 unicorn founders. Harvard University is ranked second
with a total of 37 unicorn founders (Adams 2017).
25
However, hiring talented employees is also possible in common or even underdeveloped
regions. As a study for IT firms in Bangalore, India, found out, HR managers and their
knowledge of the local, regional, national as well as international labor market is a crucial
element in the acquisition process for talented workforce. They need to be aware of
expectations and demands of prospective employees, who have many options to obtain a job
elsewhere, including abroad (van Riemsdijk 2013: 486).
In recent years, recruitment has changed: it is not necessarily applicants who have to impress
their employer anymore, but rather companies competing over the waning pool of talents.
Due to this unfamiliar transition, many companies lag behind and need to find their way to a
faster, more creative approach to talent acquisition (Trost 2014: 151).
7.2.2 Entrepreneurial Community
The value of every community is derived from its inherent rules and culture, an important part
of which is the communication between new and existing members. For instance, by telling a
new entrepreneur about history and peculiarities of the ecosystem, existing entrepreneurs
deliver value while at the same time clarify expectations and values to newcomers (Roundy
2016: 238 f.).
While entrepreneurial communities are distinctively complex constructions, narratives of past
successes or future projections can help new members to identify the ecosystem's boundaries
as well as its unique characteristics and identity (Roundy 2016: 239).
How entrepreneurs interact within their own community, support and learn from each other is
substantially influenced by supporting organizations and the way they structure and offer their
support (Motoyama/Knowlton 2017: 27).
Given the knowledge that the creation of entrepreneurial communities leads to an increased
number of founders and individuals engaging in startup companies, universities and other
educational institutions organize mentor programs, where real-life entrepreneurs engage as
role models and provide helpful insights to students. Martin (2015: 649) states that through an
authentic mentoring experience, along with practice-based learning, students acquire more
tacit knowledge and improve their skills in business.
26
As the benefits of a community are clear, characteristics and social patterns vary among
different regions. So-called "clusters of innovation" (COI), such as Silicon Valley, are
exceptional in terms of collective capital, talent and expertise, with numerous businesses and
experts that support and accelerate innovative development (Engel 2015: 37). This kind of
resourceful and success-driven ecosystem consists of many components, which act
interdependently and create a prosperous startup landscape when combined. Figure 2
illustrates how these components are connected to one another in an idealistic scenario.
Figure 2: The Structure of a Cluster of Innovation
Source: Engel (2014: 11)
An ideal COI consists of Entrepreneurs who seek opportunities and aim to grow businesses
into major corporations. After being successful once, entrepreneurs often sell their company
or gain large sums of capital by an IPO
8
in order to move on to the next opportunity and their
next startup venture. Contrary to the traditional approach of building one company for a
lifetime, this type of serial entrepreneurship usually generates more innovation and value in a
shorter time (Engel 2015: 40).
As mentioned in chapter 7.1.2, Major Corporations are generally not disruptive and rather
exploit pre-existing technology than innovating themselves. In COIs however, these
enterprises often partner with young startups or invest in them. Overcoming the challenges of
8
An IPO (initial public offering) indicates the first time a company publically sells its shares to investors.
27
working together with entrepreneurs in a process of open innovation, making it a beneficial
deal for both parties, constitutes the distinctiveness of an ideal COI.
Universities efficiently build a connection between entrepreneurs and corporations through
the commercialization of research (Engel 2014: 12). One of the leading examples is Stanford
Research Park, in which more than 150 companies settled down, including Hewlett-Packard,
Ford and Tesla (Stanford University 2017).
A key component for an ideal COI is easy access to capital. Therefore, the support of Venture
Capital firms and investors is a necessity, especially for innovative startups in need for early
stage investments. Sometimes financial institutions and Government initiatives or policies can
also help to improve the situation.
The more startup companies come to life, the more will employees inside the COI adapt to
specific demands. Professions such as accountants, lawyers or investment bankers will
provide their services and in many cases even offer flexible payments, e.g. a small stake in the
company instead of a salary. This in turn increases the involvement of experienced
professionals with startups and creates the common goal of the venture's success (Engel 2014:
13).
As startup companies with high growth potential often become too big and diverse for the
founding entrepreneurs to manage, a more experienced and skilled team of managers is
needed. By offering equity shares to the new Management, professionals are motivated to not
only work for a lower salary, but also towards the common goal of success (Engel 2014: 13).
7.2.3 Ways of Funding
Most startup founders do not own the capital that their business requires, so securing
financing is one of the most crucial obstacles of startup growth (Ughetto 2016: 852). In order
to raise enough money to bring their idea to life, develop it further, manufacture a product or
scale an already growing company, there are many ways to acquire additional capital during
any stage of the venture.
28
7.2.3.1 Bank Loans
As this may be one of the more obvious ways to obtain capital, depending on the region and
the bank itself, it can be difficult and strenuous to acquire a bank loan. Since banks rather
provide money to someone who will securely pay it back in time and with interest, instead of
granting loans to those who "really need them" (Prasad 2009: 91), startup companies may
only be able to receive capital under tough requirements or with high interest rates.
Especially high-tech startups, which can provide little collateral value, may have difficulties
to convince banks of their creditworthiness (Colombo/Grilli 2007: 28). Despite these
difficulties, bank credit and loans are still the dominant capital source for startups (Poposka et
al. 2016: 59).
7.2.3.2 Family and Friends
Raising money from personal resources, often in the form of a gift or loan, is sometimes the
easiest and most natural way. Nevertheless, family members or friends will usually make the
investment decision purely based on their assessment of the entrepreneur they know as a
person (Liu 2015: 8). Thus this source of money is often called "family, friends and fools"
(Fazekas/Becsky-Nagy 2015: 825).
As Perry et al. (2015: 259) pointed out, an investor's decision whether or not to fund a family
member's startup company is influenced by his cultural characteristics. In cultures with a
collectivistic attitude and a preference to avoid uncertainty, investors are more likely to
support a family member's new venture.
However, having a personal relationship with an investor can lead to additional challenges
and conflicts; accepting capital from family and friends is generally not recommended.
29
7.2.3.3 Crowdfunding
A new and interesting way to do acquire capital is crowdfunding. Through one of the ca.
2,000 online platforms (Ferriss 2016: 295), such as Kickstarter or Indiegogo, crowdfunding is
an effective alternative to traditional investment sources.
It can be a suitable way to raise money for someone with a product that a large number of
people show interest in and are willing to pay for in advance. For more complex or highly
technological products, crowdfunding might not be as successful (Mitra/Euchner 2016: 13).
Apart from the monetary benefits, crowdfunding is also an excellent way for the startup to
evaluate its business idea at virtually no risk. Through direct customer feedback, companies
receive valuable information about necessary product improvements, price points, market
validation and marketing efficacy (Paschen 2017: 181 f.).
7.2.3.4 Government Funding
The most common reason for an entrepreneur to not put his plan into action and launch a
business is financial risk (KfW Bankengruppe 2013: 6). Initiatives of non-profit organizations
and governments often provide grants, loans or other financing plans that support the startup
landscape in a given region.
As supported by studies, government funding programs can have great effects on small
businesses (Blattman et al. 2014: 747; Mel et al. 2008: 1369 f.). By helping entrepreneurs to
overcome barrier of entries to the market, generally the number of new ventures will increase,
more firms will survive the first critical years and more jobs will be created in the long term
(Butler et al. 2016: 308).
7.2.3.5 Business Angels
Business Angels are private investors who invest their own money. They normally receive a
percentage of equity in return and hope to make a financial profit by selling their shares at the
right time in the future (Mason et al. 2016: 322). By necessity, most investors have a wide
30
knowledge in management, law, finance or other relevant fields; some of them have even
been entrepreneurs themselves (Liu 2015: 3). While others have neither much experience nor
a large capacity for investments, the risk for business angels is considerably high
(Avdeitchikova et al. 2008: 375).
In order to reduce this risk, angel investors often get involved in the business venture to a high
extent. In some cases this will happen through leadership, mentoring or coaching. Other times
it might be through doing operational tasks, changing the organizational structure of the
company, or intensive monitoring (Fili/Grünberg 2016: 105 f.).
Analyzing more than 2,000 business angel investors in the US, Maier et al. (2016: 128) found
that their own professional background correlates with the industry sector they invest in. A
majority of business angels also invests only within the geographical area they reside in,
which underlines the importance of the startup ecosystem.
7.2.3.6 Venture Capital
In case traditional funding sources are too risk averse to invest in a startup, entrepreneurs
often turn to venture capital firms (Gompers/Lerner 2001: 145). These firms, depending on
the sum of investment, will have a high involvement in the company and therefore be more
likely to provide capital even if the venture seems risky (Fazekas/Becsky-Nagy 2015: 829).
Additionally, established companies such as Google, Microsoft, Dell and Qualcomm all have
venture capital arms. They make strategic investments to gain specific knowledge, obtain
exposure to new technologies and explore future markets (Harroch 2017).
Even though venture capital may include high uncertainty, investors are usually well
informed about the market and aware of risks as well as opportunities. Since they have limited
hard information on the company, they often rely on soft information, including trust towards
the founders (Bottazzi et al. 2016: 2315). By assessing observable characteristics (e.g. social
behavior of the founders), they are able to draw conclusions about unobservable
characteristics (e.g. performance structure of the startup company) and then come to their
investment decision (Hoenig/Henkel 2015: 1050). In contrast to common belief, growth is not
among the criteria based on which investors select a startup for investment (Davila et al. 2003:
706).
31
A VC investor does not only provide funds, he can also be a valuable source of insights and
experiences. Investors with greater involvement in the company achieve higher returns on
their investment (Ragozzino/Blevins 2016: 1010), which ultimately leads to the venture being
more successful. The empirical study of Gompers/Lerner (2001: 165) reveals that venture
capital funding correlates positively with innovation and is on average three to four times
more efficient in generating patents than traditional corporate R&D.
Furthermore, obtaining a VC investor accelerates the accomplishment of various milestones,
such as the implementation of human resource policies, stock option plans, or recruiting a
marketing and sales executive. Startup businesses with venture capital also tend to replace the
company's founder with an external CEO
9
(Hellmann/Puri 2002: 194). Some VCs,
particularly in Silicon Valley (Breznitz/Taylor 2014: 391), often ask the company to relocate
to their area to have more control.
7.2.3.7 Startup Incubators and Accelerators
A startup incubator is an organization, which acquires startup companies and helps to
accelerate their growth. It is doing so by providing services, such as office space, equipment
and business or administrative services. In the US, the number of business incubators
increased from just 75 in 1984 (Plosila/Allen 1985: 729) to over 1,000 by 2012, about 90% of
which are non-profit organizations (NBIA).
For instance, the EvoNexus incubator in Irvine, California, was able to secure a capital
investment of more than $9 million from angel investors, strategic partners and venture
capitalists. They provide valuable resources and mentors to all their startups, which have to go
through an application process prior to joining EvoNexus (Newman 2016: 9).
Since first-time entrepreneurs and early-stage founders in most cases are not aware of their
resource gaps or lack of business knowledge, they will join an incubator most likely because
of financial capital and be hesitant to fully engage in the benefits of the incubation process
(van Weele et al. 2017: 28).
While overall differing from each other, most incubators require equity shares or fees to enter,
while offering support and advice in exchange. Some incubators might also force their
9
Interestingly, the founders commonly remain within the company and acquire a different role (Hellmann/Puri
2002: 194).
32
resources on entrepreneurs and wish to have a high involvement (van Weele et al. 2017: 20),
similar to business angel investors (see chapter 7.2.3.5).
If one of the ventures becomes successful, it is common for one of the incubator's investors or
partners to acquire it. Overall, it can be stated that incubators have a positive impact on
startup growth, likely because of the network and assistance they provide (Stokan et al. 2015:
323 f.).
Startup accelerators work similar to incubators. The main difference is their strict schedule.
After a small seed investment, the startup spends a certain period from a few weeks to a
couple of months in the program. They have access to a network of mentors and will get an
opportunity to pitch investors for additional funds by the end of the accelerator program
(Cohen/Hochberg 2014: 4).
In comparison to an incubator program, accelerators often give startups the opportunity to
redefine their idea and concept. The financial involvement in the early steps of these ventures
is therefore much lower than in mature startup projects (Warmer/Weber 2014: 297).
With the first startup accelerator founded in 2005, the idea is still new. Nevertheless, the
number of programs increases every year, in the US as well as in Europe (Miller/Bound 2011:
7).
7.2.3.8 Personal Funding
Even though self-financing or also called bootstrapping a startup might seem to be a last
resort for founders (Carter/van Auken 2005: 142), it has its advantages. Limited capital
teaches entrepreneurs to be creative and work efficiently and forces them to improvise (Smith
2016: 3). Despite starting a personally funded venture being a greater challenge than raising
money from investors, it might help develop a certain entrepreneurial skillset (Bhide 1992:
110).
When hiring employees or co-founders, the lack of capital will rather attract people who are
willing to take a risk and believe in your vision for the company. At the same time,
bootstrapping means that founders will own the entire business without having to depend on
investors (Smith 2016: 3).
33
"The fact is that the amount of money startups raise in their seed and Series A rounds is
inversely correlated with success." (Fred Wilson, venture capitalist and investor in Twitter,
Tumblr, Foursquare, Kickstarter and more; source: Mullins 2014: xvii)
Considering that the media, including entrepreneurial blogs and networks, are covered with
news about venture capital investments, this seems quite an unbelievable statement. Sramana
Mitra, serial entrepreneur at Silicon Valley and founder of the global accelerator program One
Million by One Million, came to the conclusion that venture capital funding simply is not for
everyone. While businesses with enormous growth rates, huge market opportunities and an
available market size of billions of dollars may profit from VC, the majority of startups will
not
10
(Mitra/Euchner 2016: 12).
The study of Cressy (1996: 1266) confirms this assumption. A large random sample of startup
companies in the UK showed the correlation between success and financial capital to be
"spurious"; human capital on the other hand is the real determinant for the startup's survival.
For a typical innovative startup, the ideal way of funding would be to start on no budget and
solely live on the company's achievements (e.g. customers who pay in advance). As soon as
the business model is proven and supported by high growth rates, the acquisition of capital
will help to scale the venture (Hahn 2014: 21 and 30). Collecting money prior to the
development of a final product may lead to a loss of focus and to a step in the wrong direction
(Stagars 2015: 120).
7.2.4 Educational Institutions
Despite the obvious advantage of a wider talent pool (see chapter 7.2.1), educational
institutions within a startup's ecosystem offer other benefits, too. Universities are able to
provide tremendous networking and can further synergy opportunities, can establish
partnerships to connect science and research with real-life businesses. However, the majority
of universities makes no use of their resource potential; they instead try to educate the
entrepreneurial community by offering business plan competitions or workshops (Stagars
2015: 6-9). A possible reason for this lacking sense of bringing business and research together
might be that universities are too distanced from the market (Miller/Côté 1985: 122).
10
According to (Mitra/Euchner 2016: 12), this is also the reason why 99% of startups get rejected by venture
capital investors.
34
Student entrepreneurship has been recognized as a successful strategy for startups, especially
when students have access to their university's local network and entrepreneurial classes
(Andersson/Berggren 2016: 317). Nevertheless, universities keep focusing more on the
employability of their students than on supporting them in developing business ideas (Gaskell
2016).
A report by the EACEA (2016: 9 f.) shows that even though there's a lack in entrepreneurial
education in countries of the EU, a trend towards broader innovation strategies can be
identified.
One interesting type of partnership between universities and startups is a spin-off, where
university research develops a technological innovation and ultimately sets up a company to
bring their idea to the market. While being a separate entity, the USO connects business and
research resources.
With interest from other business parties or customers, the USO often needs to alter its
technology in order to reach acceptance (Aaboen et al. 2016: 164). Though, by means of
established relationships and networks, companies are able to run their businesses on a more
sustainable model than by internally developed competences (Story et al. 2011: 964).
Although the attention for university spin-offs has recently increased, financial funding for
high-technology business ventures remains an issue (Rodríguez-Gulías et al. 2016: 885 f.).
7.2.5 Complexity of Bureaucracy and Regulations
For many potential startup founders, one of the first barriers of entry to the market is
bureaucracy hurdles. Regulatory factors can either stimulate or obstruct entrepreneurs to start
a new venture (Trifu et al. 2015: 58).
Even though the level of complexity for regulations is solely dependent on laws, which differ
from region to region, there are wide differences in the perception of bureaucracy within the
same region. In South Africa for instance, 89% of entrepreneurs at viable startup businesses
view the level of regulation as positive, while only 26% of non-viable startups in the same
region share this perspective (Worku 2016: 16).
Besides the obvious psychological reasons for different perceptions, another aspect to
consider is that the complexity of regulations may also differ with the industry. An example
35
of certain areas in Romania shows that, despite the existence of great opportunities for the
tourism industry, excessive bureaucracy hinders investors to create businesses there (Francu
2014: 117).
In the case of Romania, founders require a vast amount of time obtaining documents and
information necessary to open a business, which is due to a lack of transparency of
institutions and a high degree of bureaucracy. Small companies pay comparably high taxes
while also having to cope with corruption
11
(Francu 2014: 117 ff.). All these negative effects
of over-regulation and ineffective bureaucracy prevent a startup ecosystem from thriving and
can even have an impact on the region's overall economy.
Different municipalities, local administrations and even the professionals involved all play a
role in business procedures and may affect their overall complexity. Therefore, levels of
efficiency for bureaucratic procedures can differ by large margins, even within the same
country (Bianco/Bripi 2010: 67).
7.2.6 Potential Customers
One of the very first decisions a startup company has to make is about who to sell their
product or service. Prior to narrowing down a specific target group, the company has to
decide to sell to either private customers (B2C), other businesses (B2B), the government
(B2G) or a combination of several of all three.
While the value of customers as a source of revenue is self-evident, customers as a source of
learning to further improve the business are not widely recognized (Perez et al. 2013: 449 f.).
Customers can bring great value to the entrepreneurial process and influence the founder's
ideas and developments (Elias/Chiles 2016: 749).
Customer value propositions have proven themselves to be a useful tool; taking the
customer's perspective can offer great insight (Wouters/Kirchberger 2015: 64). Only by truly
connecting to customers and creating an interdependency, vendors are able to assess customer
problems and needs, which allows them to gain a competitive advantage (Friend/Malshe 2016:
11
Besides the fact that corruption in general has a negative influence on entrepreneurial activity, in an over-
regulated country, it leads in contrast to an increasing number of entrepreneurs (Dreher/Gassebner 2013: 427).
36
186). Recently, companies have started to realize the benefits of customer engagement
12
; as
engaged customers interact with the brand, their friends and other consumers, making them
valuable ambassadors (Maslowska et al. 2016: 493).
Startup companies are advised to not reveal their status as a rather young and small business,
because customers generally tend to choose established companies over startups in order to
reduce uncertainty (Eggers et al. 2016: 439).
Apart from that, it is crucial for startup ventures to possess profound knowledge of their
market. For instance, there is a relatively high number of early adopters in the US, which
makes it easier for innovative companies to sell a new technology. In a country such as
Germany, with most potential customers being risk averse, it is undoubtedly more difficult to
bring new ideas to the market (Geibel/Manickam 2015: 68).
7.2.7 Productive Infrastructure
While the correlation between entrepreneurial activity and physical infrastructure has not been
a topic in many studies (Woolley 2014: 722), an investment in infrastructure improves
people's connectivity and therefore benefits the startup community (Audretsch et al. 2015:
220).
An enhanced connectivity facilitates interaction among entrepreneurs and triggers the flow of
ideas and knowledge (Ghio et al. 2015: 2). Considering people require resources to launch a
startup and knowledge is one of these resources, with a profound infrastructure at hand, an
individual is more likely to become an entrepreneur (Acs et al. 2013: 767).
The rather new but rapidly growing (Muñoz/Cohen 2016: 72) urban entrepreneurship is
highly dependent on a developed infrastructure and a sign for a viable startup community.
Urban entrepreneurs offer solutions for insufficient provision of governmental services or
goods to private citizens or the public. Two of the most famous examples are Uber (providing
taxi services) and Airbnb (providing accommodation), both of which aim to improve civic life
and the sharing of available resources within a city. Interestingly, both companies have
oftentimes been accused of acting against regional or federal law (Stone 2017).
12
Customer engagement is the reaction of a consumer towards a certain brand or company. Companies use a
variety of channels (online and offline) to strengthen their relationship with customers.
37
Due to a wider range of market opportunities, individuals from urban areas tend to take more
risk and become innovative entrepreneurs; when rural workers choose to be self-employed, it
is mostly not entrepreneurial and only for the lack of better options (Faggio/Silva 2014: 81 f.).
7.2.8 Quality of Life
Studies have confirmed that an active entrepreneurial environment improves the region's
overall quality of life (Woodside et al. 2016: 157; Mir/Woodside 2016: 22). Could this effect
also work vice versa?
Tim Boyle, CEO of Columbia Sportswear, is one of many business owners from the state of
Oregon who decided against moving his company because of the "love of place" factor.
Despite the lack of an efficient transportation system among other negative elements in the
business landscape in Portland, Boyle even declined an attractive offer from the mayor of
Dallas to move the company. He explains that he himself as well as his employees simply like
it in Oregon, "and that's a positive" (Cook 2016).
Many locations like Michigan (Himmelspach 2009: 17) or Danbury in Connecticut (Bosak
2016: 4) might attract startups and small business development for its low living costs. In
addition, factors such as climate (Dickson 2013: 11), an active outdoor lifestyle or clean
sidewalks could also be the reason why entrepreneurs sometimes choose a small town as
opposed to a big city to start a business (Reinhardt 2014: 5).
However, settling down outside of typical startup hotspots usually means missing out on
entrepreneurial community, lifestyle (Baldwin 2014: 5) and opportunities to acquire venture
capital (Himmelspach 2009: 17). In exchange, startups in smaller cities have less competition,
the cost of doing business is low and they might even be able to receive government funding
for the creation of new jobs (Tozzi 2009: 19).
Until today, the impact of quality of life as a factor for startup success has not been the topic
of profound research in academic studies. As for various entrepreneurs who claim this to be of
high importance for their business as well as for themselves, the value of a certain lifestyle or
sentimentality towards a specific region has to be considered subjective and therefore depends
solely on the founder's character and attitude.
38
If the definition of a high quality of life means to live in a small city, it is in most cases not a
good decision to move a startup business there. In the author's opinion, the lack of other
elements of a viable ecosystem, which prevails in a small city, outweighs the benefits of a
high quality of life.
8 Real-Life Examples
The following chapter will provide real-life cases of startup companies, based in three
different regions. The reader will obtain an impression of how the importance ranking of
success factors may shift in different ecosystems. In the final part of this chapter, these
findings will be compared with literature review from previous chapters.
8.1 Research Methodology
It is to be expected that different business environments create certain challenges and
opportunities, which is why this thesis mainly compares samples of startups in three regions:
· The province of North Rhine-Westphalia in Germany,
· Budapest in Hungary
· and the state of California in the United States.
Through interviews with experts in these regions who either failed or succeeded with their
startup company, decisive factors can be pointed out and analyzed within the given ecosystem.
Each of the interviews will contain an identical set of ten questions, plus additional
introductory questions regarding general information, such as the company's founding date
and number of employees (see appendix 10.13 for the interview template). In order to provide
a fair comparison among the regions, there will be four expert interviews for each of the
regions.
Interviews for Hungary and the US will be conducted in English, interviews in Germany will
be held in German and translated afterwards. All interviews will either be conducted via
Skype calls or during a personal meeting.
39
Afterwards, relevant statements will be paraphrased and generalized (see appendix 10.15),
based on the comprehending model of Mayring (2015: 74) for qualitative content analysis. A
summary and generalized comparison, which delivers the basic tools for this chapter's final
analysis and discussion, can be found in appendix 10.16.
8.2 Startups in NRW, Germany
Between the years 2008 and 2011, only 3% of the population in Germany completed plans to
open their own business annually. Out of these individuals, one half de facto launched a
company, whereas the other half discarded their plan (KfW Bankengruppe 2013: 1). In 2012,
Germany had less than 400,000 new company startups, the lowest number since the country's
reunification (Creutzburg 2012).
A study of Fratzscher et al. (2016: 322) confirms that even in the startup hotspot Berlin,
which arose to an internationally recognized center for creative and innovative potential,
many issues remain unresolved. The biggest challenges seem to be high complexity of
bureaucracy (Kritikos 2016: 343) and limited access to risk capital (Fratzscher et al. 2016:
323). The fact that most venture capital funds for German startups still come from foreign
sources implies a general distrust some local VCs have (Winter 2012: 36).
8.2.1 Brickspaces
Brickspaces realized the need for a market place for commercial spaces. Founded in 2014, the
company started as an advertising platform for short-term commercial rentals and pop-up
stores and now functions as an Airbnb for commercial spaces. By taking a share of 15-20% of
the rental fee, Brickspaces was able to grow into a business of five full-time employees plus
an additional five interns. The company is about to be profitable and shows a constant rate of
growth.
In order to discover the factors that led to its success, the author conducted an interview with
Philip Schur, who is the CEO and Founder of Brickspaces.
Schur pointed out that the narrow cost structure, which has been in place right from the
company's early days, created a competitive advantage. While competitors raised millions of
40
investment and spent their money extensively, Brickspaces tried to take a lean approach,
keeping fix costs as well as labor costs down.
It was also crucial to determine exactly where customers come from. While others failed in
contacting big corporations directly, Schur and his colleagues realized that those corporations
usually hire agencies and do not deal with renting commercial spaces themselves. So going
after these agencies turned out to be a much more efficient strategy. Improved Google
rankings and always being able to deliver to customers were another two important factors for
Brickspaces's growth.
While web-based platforms are quite common, the business model was highly innovative for
the commercial real estate industry at the time. During its first one to two years of existence,
the company faced the challenge of educating potential clients on the possibility of short-term
rent. For commercial real estate this was not as common back then as it is now. Knowing this,
timing might have played an important part: Brickspaces took an antiquated industry and
revolutionized it by using modern tools. They realized a certain first-mover advantage. Today,
new competitors would most likely struggle to catch up with their portfolio of around 1,500
spaces in the German-speaking region.
As one of the biggest obstacles during the founding process, Schur remembers a distinct lack
of entrepreneurial knowledge and experience. He criticizes that the expertise to build a
company is taught neither in schools nor in universities or companies. It was especially tough
in the city of Essen, because the entire Ruhr area did not have any networks in place, no
government funding and no investors. For this reason, Brickspaces moved from Essen to
Düsseldorf, which improved the situation considerably. Nevertheless, the difference between
a startup and founding a small business seems to be nonexistent for local organizations. As
Schur recalls, particular events as well as business loans turned out to be tailor-made rather
for opening a barbershop than building an innovative startup.
When asked about what to do differently, Schur responded he would most likely have
founded Brickspaces somewhere else, definitely not in Essen. Berlin might have been his
choice, due to better infrastructure and a more suitable environment.
According to Philip Schur, companies mostly fail not because of one but because of multiple
factors, most importantly a lack of knowledge, expertise or willingness to change. Founders
should be honest with themselves and not too stubborn. Questioning the business model is an
important part of managing a startup company and therefore the success of a business depends
41
a lot on the people involved. Besides a good idea, the passion to go through with it, as well as
the willingness to make sacrifices and to be ready for change, are decisive factors. As for
Brickspaces, there has not been a month where processes or responsibilities have not changed
because they are in a constant process of learning.
8.2.2 Calumia
Based in Essen and founded in March 2016, Calumia manufactures app-controlled LED shirts,
rents them out for a day or long-term to companies, which use them for store openings,
marketing strategies, fairs or guerilla marketing.
The five founders still work together on the project. The interview has been conducted with
Daniel Spengler, who is also the COO of the company.
Coming up with the idea for Calumia while having a beer with his co-founder Nikolaj Meß,
Spengler recalls the first challenge to be of pure technical nature. Both having a background
in business economics, they addressed a friend who is an electrical engineer. From that point
on, the development of the actual product was a long path of trial and error.
Other competitors failed according to Spengler because manufacturing such a shirt is much
more difficult than one might think. One company in India had the exact same business idea
and despite having succeeded in financing its venture via a crowdfunding campaign, they
continuously postpone the release date. Another project in place is a cooperation of a startup
with the whiskey company Ballantine's. They announce a shirt on their website since 2011
and have not delivered up until today.
Interestingly, Calumia also takes a different approach by renting their shirts out to companies
rather than selling it to private consumers. Spengler explains that as of now, the shirt is not
ready for mass production yet and therefore quite pricy. In order to keep the risk low, renting
out gives Calumia the chance to continuously improve the design and comfort of the shirts. In
order to fulfill the German federal regulation of a two-year warranty for consumers, the
company has to forego further long-term testing.
As for the future of LED shirts, Spengler believes that functional textile will become more
relevant, even in daily life. The trend of wearables and smart watches shows enormous
potential; however, Calumia's shirts are still in their early days.
42
The current challenge of the company is to focus on improving the product. Clients often ask
about a higher resolution or longer battery life, which is difficult to implement because higher
resolution firstly means higher demand of battery power.
When Calumia was founded, the small budget did not allow them to make hasty decisions,
which can also be an advantage. Spengler is convinced that the way the company progressed
would not have been possible by doing it differently. Despite many hardships, the founding
team stayed on the project and showed not only perseverance, but also a high frustration
tolerance.
In Spengler's opinion, the team is a highly important factor. Especially when building a
startup together with friends, one has to be able to yell at each other when times are bad.
Furthermore, it is a good choice to bring your product to the market early on, see whether
people like it or not, and then customize it to one's customers' needs.
In Calumia's case, clients approached them right from the early days and without having done
a lot of advertising. By attending startup events and fairs, they were able to receive booking
requests through cold acquisitions. That definitely shows they have found a valuable market
niche.
8.2.3 Goedle
The Köln-based company Goedle started out in 2015, using a financial support program
called "Exist." The program is offered by the German government to students or academic
researchers at universities, who seek to put their innovative and technology-oriented business
idea into practice. The program pays fixed salaries to founders for one year and offers up to
30,000 euros to cover company expenses (Bundesministerium für Wirtschaft und Energie
(BMWi) 2017: ).
Fabian Hadiji, CEO and Co-Founder, has been with the company since the start. Going from
three employees in the very beginning, from six at the peak to now two people, Hadiji sees
the development as typical startup dynamics.
Goedle provides a platform for websites and mobile apps to help automatize their marketing.
It delivers feedback by telling websites for instance which group of users purchase or are
more likely to purchase. For mobile apps, it reports which users might stop using the app soon
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and what measures should be implemented to prevent this. For websites and apps that have
tens of thousands of users, data-driven support is a necessity; Goedle offers this kind of
preprocessing by using machine learning.
Hadiji and his team decided to focus more on the needs of marketers than their competitors do.
Instead of simply processing data and providing descriptive analyses, they detect underlying
rules for user behavior, e.g. how to retain a certain number of regular users, which patterns
they follow, which events they execute. Usually finding these regularities requires a high
amount of effort and manual labor; machine learning however would be able to perform this
process on its own.
Having a team with backgrounds in technology and artificial intelligence, one of the biggest
challenges in the company's early days was to frame things in a way that non-technicians
would understand. At the moment, however, the team is putting their efforts into improving
the technology and making it easier to use. Apart from that, the restructuring of the team is
another challenge as well.
As for the progress of Goedle, Hadiji recalls a series of minor mistakes, which in the end the
company could learn from. "You perceive things in a different way once you experienced
them," he says. For someone interested in building a business around artificial intelligence, he
would suggest to take a realistic approach. The media often communicates a misconception of
the true capabilities of AI. If a problem cannot be solved manually, checking for small parts
of the process to automatize and then going step-by-step would be the best way to find a
potentially good business idea.
When asked why companies might fail, Hadiji is convinced that the main factor is always the
team because "humans are just too complex." Secondly, the wrong development of the
product plays a part as well, even the best team could not produce something successful that
customers do not like. Furthermore, having good knowledge and being able to execute well
on the idea are a definite plus.
8.2.4 Donatia
Dominik Schulz, CEO and Founder of Bochum-based Donatia, first had the idea for his
donation platform in spring 2014. One year later, he founded a corporation and a public
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charity. He works alongside one part-time employee and a second shareholder and CEO. In
order to keep the company viable, both shareholders voluntarily receive no salary.
Donatia is an online platform that allows charities to introduce themselves to generate
donations, starting from one euro. Unique about this platform is the cooperation with
advertising partners, who contribute to donations. This way, a ten-euro donation can turn into
twelve euros going to a charitable project. Donatia, in the form of a corporation, is able to
offer features beyond those commonly offered by a charity. In June 2017, Schulz plans to
realize income generation through advertisement video clicks, which means that users could
effectively donate money to a project of their choice without having to use their own money.
The charity platform on the other hand simply collects donations, administrating and
redirecting 100% of the money to charity projects. Recently, Donatia started to engage in
their own projects, too. Users can choose to donate to a girl named Stella, who suffers a bone
marrow disease and requires regular medical treatment from abroad. Focusing on a small
number of handpicked projects, Schulz and his colleagues aim to avoid an overload of choices
and unnecessary information for users. The company redirects donations via their website or
app in under 20 seconds and without taking any fees from the user.
The biggest challenges to build the platform have been connected to Germany's complex
fiscal law, especially regarding public charities and donations. Secondly, in order to fund
Donatia's platform, Schulz negotiated a deal with a local agency. He sold them equity shares
of the corporation, which in the end worked out in favor of the company's development, but
led to even more challenges regarding law, authorities and administration.
Despite all the beneficial features of the platform, Schulz had to find out that acquiring
charities or foundations is difficult without investing capital himself. To make the company
known and to gain charities' trust remains Donatia's greatest challenge up until today.
Furthermore, charities and foundations work slowly and, due to their level of bureaucracy,
need a long time for decision-making. With regards to this, setting up the company's sales
structure differently might have been more efficient.
To increase Donatia's popularity, they collaborated with advertising agencies from Köln
which market relatively large companies. After being online for a year now, Schulz feels that
the platform is ready for more clients and users. He also managed to engage in a cooperation
with the Ruhr University Bochum, which is interested in making Donatia a class project for
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