Emerging high-tech firms: How durable are their comparative start-up advantages?

Abstract

Successful high-tech entrepreneurial firms have been shown to have several common founder characteristics and start-up conditions. This paper presents a study of the duration of the effect of these characteristics and conditions on a firm's early growth: do they have a permanent effect or does the early comparative advantage that they confer to the firm fade away after a few years, successful firms being better able to adapt to changing conditions than the others? The study is based on the longitudinal analysis of the first 8 years of operations of 73 high-tech firms located in various parts of Canada, founded between 1965 and 1980, by one or several entrepreneurs in microelectronics, communications, and related fields. The sample includes only “survivors” and “manufacturers,” all the firms being still active and doing some manufacturing at data collection time. In terms of firm size, start-up capital, and sources of financing, this sample is comparable to other samples of high-tech start-ups described in the literature and can therefore be assumed to be representative of the industry. The importance of the government sector in Canada resulted in a very high “government orientation” of the firms at start-up (an average 32% of first year sales being to the public sector); similar market and firm behaviors may develop in other industrial economies, some having very important government sectors (e.g., France, Italy), or high-tech markets indirectly driven by governments (through major defense and space contractors in the United States). The analysis confirms the positive short- and medium-term impact of such start-up characteristics as initial size; start-up capital; past experience in marketing, finance, and government contracting; founder's age; market structure; and similarity with the market served by a previous employer. However, except for initial size (sales), initial government orientation (percentage sales to the public sector, year I), and previous experience in government contracting, which tend to be excellent predictors of medium-to long-term “success” (measured in terms of sales level), other start-up characteristics show only short-term direct effects: 3 years for past experience in marketing and finance, 1 to 2 years for market structure and similarity of the market served with that of a previous employer. They are, however, indirectly related to success through their effect on initial size and government orientation. Past experience in government contracting is strongly linked with initial government orientation whereas initial size and initial government orientation are independent of each other. Initial size and initial government orientation are therefore two independent start-up traits that show the longest global direct effect on sales level (8 years, the time horizon of this study). When regrouping firms by initial size and government orientation, other “long-term” (at least 8 years) effects appear: for all the firms, size of the previous employer and similarity of technology with that of a previous employer; for smaller start-ups, similarity of their market with that of a previous employer; for government-oriented firms, amount of start-up capital, past government employment, past experience in R&D and in government contracting (positive effects), and level of control retained by the founders and lack of external capital (negative effects); and for non-government-oriented firms, past government employment and past R&D experience. From a practical point of view, these results illustrate the importance of start-up conditions: behaviors and strategies can evolve as a firm matures, but some initial characteristics seem to be clearly associated with sustained comparative advantage, either because they lead to larger initial size or good government contracts, or because they impact on the general orientation and strategy of the firm. Considering these start-up conditions is therefore useful to the entrepreneur when planning a start-up, to the venture capitalist when analyzing a start-up, and to the public sector planner when developing support policies.