Otago Uni tries to find key to successful start-ups
University research into New Zealand start-up businesses has emphasised the importance for entrepreneurs of developing and retaining intangible assets such as brands, patents and business-execution skills.
The researchers found alliances with partners were particularly important for the start-ups in the study, and that successful start-ups used their intangible assets to attract partners.
The study, by researchers from Otago University, looked at 12 New Zealand start-ups in various industries. They were less than 12 years old and all had received awards for innovation, either from the government or from businesses such as large consulting firms.
Key people from each firm - such as founders, chief executives, or venture capitalists - were interviewed. A report of the study was published in the journal Technovation.
The knowledge involved in developing intangible assets was "cryptic and unobservable" and "often the result of years of experience, and so it is usually difficult to imitate and reproduce," the study authors said.
It was largely the intangible assets - which, among other advantages, also acted as barriers to new entrants - that tended to motivate established firms to cooperate with start-ups.
The study found the capability to execute a business opportunity effectively was more important than other assets. For examples, start-ups dealing with light bulbs, cosmetics and online booking owned only three main assets - brands, other forms of intellectual property and superior business-execution skills.
Yet their performances were vastly superior, as those assets enabled them to become more virtual, reducing risk and capital requirements.
Most of the alliances made by the start-ups in the study were with other New Zealand-based firms, and start-ups that made use of such local alliances were more successful at commercialising their innovations.
Firms which failed to commercialise were those that needed foreign-owned assets but failed to forge international alliances.
Alliances appeared to be easier to build in industry sectors that were relatively generic, such as cosmetics and energy, and that were well established in this country, such as agriculture and tourism, the study said.
"This finding is of particular relevance to firms in small economies (such as New Zealand) as it implies that the commercialisation of innovation in such economies should be aligned with the country's resources and scope of industrial development."
Most of the start-ups developed some inhouse manufacturing resources and outsourced to meet other manufacturing needs, always to local firms.
"Lack of international suppliers increased production costs and put pressure on profit margins," the study said. "On the other hand, relying on local suppliers made communication easier, faster and cheaper, thereby speeding up the commercialisation process."
Some firms appeared to be almost virtual, with multiple alliances that more or less took care of all their business functions. The cosmetics firm in the study, for example, outsourced all its business operations except marketing.
The cosmetics firm had specific organisational routines for launching and promoting new products, successfully launching 42 products in 16 international markets in just eight years.
Of the 12 firms studied, five were financed from personal savings or loans from friends and family. The other seven raised venture capital through external sources such as institutional investors and stock markets by leveraging assets such as brands and patents.
Start-ups dealing with probiotics, computer games, biological-threat detection and a fungicide attracted investment without any proof of concept or marketable product. Patents owned by three of those firms were enough for investors to support them with millions of dollars in venture capital.
"Also, intangible assets are highly valued by firms searching for strategic acquisitions," the study said. The cosmetics and online booking start-ups were bought for large purchase prices.
During the study three of the start-ups - dealing with online discount vouchers, computer games and the fungicide - ceased operating and were placed in receivership. The discount voucher firm achieved commercial success but failed later on because of a dispute between founders.
Altogether, eight of the start-ups successfully commercialised their innovations, and another two may succeed in future.