4 When Start Ups Shift Network: Notes on Start Up Journey
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Start-ups are often born in some kind of ‘hosting’ environment such as business and university incubators or science technology parks. For decades, this has been considered an important measure of enhancing academic entrepreneurship (Grimaldi, Kenney, Siegel, & Wright, 2011) and the beginning of a start-up’s journey towards becoming a full-grown business. In this chapter, we aim to examine the challenges that start-ups meet when they begin to acquire the shape of a business venture and attempt to develop commercially viable business relationships with customers and suppliers.
KeywordsInnovation Process Business Partner Business Network Business Relationship Business Context
Start ups are often born in some kind of ‘hosting’ environment such as business and university incubators or science technology parks. For decades, this has been considered an important measure of enhancing academic entrepreneurship (Grimaldi, Kenney, Siegel, & Wright, 2011) and the beginning of a start up’s journey towards becoming a full-grown business. In this chapter, we aim to examine the challenges that start ups meet when they begin to acquire the shape of a business venture and attempt to develop commercially viable business relationships with customers and suppliers.
While some attention has been paid to the early stage of development of start ups in the Industrial Marketing and Purchasing (IMP) research (Aaboen, Dubois, & Lind, 2011; 2013; Ciabuschi, Perna, & Snehota, 2012; La Rocca & Snehota, 2014) as well as in entrepreneurship research (Elfring & Hulsink, 2003; Fernández-Alles, Camelo-Ordaz, & Franco-Leal, 2015; Perez & Sánchez, 2003), the process of shifting from the early university/incubator/science park environments to a network of business relationships with customers and suppliers has received limited attention. Indeed, early literature on entrepreneurship has been criticized for inadequately dealing with the dynamics of new venturing and for being mostly concerned with identifying the stages of development (Kaulio, 2003). Additionally, Ambos and Birkinshaw (2010) found that literature offers “little insight into the detailed process—the dynamics of constituent elements and the sequences of events—through which new ventures evolve” (p. 1125).
In their first steps in becoming business ventures, start ups meet several obstacles related to ‘liability of newness’ (Stinchcombe, 1965) or ‘liability of smallness’ (Freeman, Carroll, & Hannan, 1983). Early on, lack of management skills and access to venture capital have been found a typical difficulty of the new and small businesses (Allen & Rahman, 1985). Other barriers have been identified in the absence of administrative support and operational costs, such as rents and fees for services needed (Bøllingtoft & Ulhøi, 2005), which led to providing public support in these areas through various forms of incubators and the like. Etzkowitz and Leydesdorff (2000) referred to science parks, incubators, and technology transfer offices as ‘hybrid organizations’, arguing that they can have a more important role in innovation and new business development compared to more ‘static’ industrial and public laboratories.
Regarding newness, start ups obviously lack visibility and connections to a network of resources; therefore, the inclusion in such institutionalized supportive environments is in itself a benefit, as it enhances credibility of the start up to have potential to become economically sustainable. Unlike older and larger firms, most start ups do not possess a base level of legitimacy, defined as “a social judgment of acceptance, appropriateness, and desirability” that “enables organizations to access other resources needed to survive and grow” (Zimmerman & Zeitz, 2002, p. 114).
In hosting environments, start ups will eventually come to a point where they face the shift from a friendly, often supportive research-intensive environment to a (less friendly) network of business relationships among companies as customers and suppliers in the industry of reference. Thus, they will have to establish business relationships in the new context. Yet, it has recently been observed that “the development of relationships over time and coordination and management of relationships has not been systematically addressed in the university–industry relations literature” (Thune & Gulbrandsen, 2014, p. 978).
In this chapter, we focus on the shift from a phase of a start up to that of a business venture and explore how start ups try to develop new relationships in an attempt to become viable businesses. We will examine the shifting of two technology start ups from the environment in which they are born (universities or like that we will call developing settings) to the network of supplier and customer relationships (to which we refer also as producing and using settings). In doing so, we aim to broaden the debate on technology entrepreneurship, including some particular challenges of the shift from the developing setting to the producing and using settings. These challenges concern the need for focused learning with business partners, letting go of the logic of the developing setting, and coping with the effects of the business network on the fate of the new venture. Our conclusions will be in line with and expanding current entrepreneurship debates regarding opportunity creation, improvisation, effectuation, and networking. Before empirically exploring the shifting process of two start ups born in a Swedish university context, we examine findings of earlier research on the contexts in which a start up has to navigate to become commercially operative.
4.2 Start up and Innovation Journey
Even though research on entrepreneurship and new business venturing is rapidly expanding, the phenomenon of starting up business is still in need of a more systematic theory elaboration. Much of the research refers to technology-based start ups, the phenomenon that we also have in mind in this chapter. Two ideas underlie much of the current research: one is that new business venturing is entwined with innovation, the second is that start ups go through a journey that gradually brings a start up (an idea of business) to become an economically viable (and successful) business organization.
Studies on innovation in the business network context highlight that innovations, both as a process and outcome, build on the pre-existing network structure and show that numerous practical hurdles and hindrances must be overcome and unpredicted and unpredictable technical, commercial and institutional issues must be solved to put innovation in use (Håkansson & Waluszewski, 2007; Hoholm & Olsen, 2012; Van de Ven, Polley, Garud, & Venkataraman, 1999). Several studies of innovation processes have also shown that much technical development and innovation in general takes place between rather than within companies (e.g., Chesbrough, 2003; Håkansson, 1989; Lechner & Dowling, 2003; von Hippel, 1988). Various accounts of the development of solutions in the business network context have shown that new solutions often arise concurrently with problem and solution identification during interactions and confrontations between the producer and user (Baraldi, 2008; Harrison & Finch, 2009; Johnsen & Ford, 2007). The innovation process in business context does not appear to be linear; rather, it appears to be a recurrent process of trial and error from which workable and satisfying solutions may arise (Ingemansson & Waluszewski, 2009; Tuli, Kohli, & Bharadwaj, 2007). These studies also suggest that innovation is an outcome of joint action, regardless of whether it is intended (Dhanaraj & Parkhe, 2006).
Business relationships are important milieus of innovation because they connect the user and producer, and the new solutions emerge through customer supplier relationships. Novel solutions entail building on and using resources, activities, and actors that exist in the context. Assembling the resources and configuring the activities required for a new solution (product or service) entails selectively connecting actors in their capacity of resource and activity providers. Grafting the innovation into the pre-existing context may take place within existing customer supplier relationships, but later, it involves change in the content and form of such relationships. Innovation entails a substantial re-combining of resources, activities, and actors across pre-existing business network relationships and therefore typically involves development of new user/producer relationships (Araujo, Dubois, & Gadde, 2003). This need to recombine resources, activities, and actors opens opportunities for new businesses that will organize the new combinations.
Development of business relationships and of new businesses in general is entwined with the innovation process because innovations will only take place when a novel solution is being put into use, which involves establishing and developing business relationships between the producer and the user. The economy of innovation projects and processes is entwined with that of business relationships, and it becomes a critical factor in outcomes of the innovation process (La Rocca & Snehota, 2014). Studies of innovation processes have highlighted particularly three features of the innovation process that have clear bearing on our topic of start ups. They have shown that innovation processes involve multiple actors, that the process of innovation unfolds in a non-linear way, and that innovation artefacts (solutions) tend to become transformed along the process (Hoholm, 2011; Van de Ven et al., 1999). Indeed, some contiguities exist between the innovation journey, that is how innovations travel through existing systems, and the start up journey to become a viable business organization.
When dealing with the development of new business ventures, literature on entrepreneurship generally assumes that (technology-based) businesses follow the path of innovations. Innovations and start ups are assumed to originate in (scientific) research carried out in a certain kind of context (developing setting), to eventually turn into a solution that is produced in another setting (producing setting) in line with the application(s) that emerge in the using setting (Håkansson & Waluszewski, 2007). Studies of the innovation journey have shown that because of the multiple interests involved and the need to ‘recombine’ different innovation elements that are spread in the relevant network, the innovation process is non-linear and often regressive. The term ‘journey’ reflects the (often tortuous) path of innovations to be put into actual use. Indeed, if the innovation is to be accomplished, new solutions of start ups that often originate in the developing setting (typically including actors such as universities, incubators, R&D labs or science and technology parks) need to be embedded in two complementary settings—the producing and using settings (Håkansson & Waluszewski, 2007; Ingemansson, 2010). While all shifts across networks have their peculiarities, statistics on the rate of failure of start ups suggest that the shift from the developing setting to producing and using settings is particularly demanding and difficult to master.
The developing setting is assumed to be the context where the knowledge on which the innovation and the start up can build is developed. The developing setting is particularly relevant when the innovation builds on new scientific knowledge or scientific discovery. The logic of the developing setting is the one of research—relative openness, long-term orientation, and limited use of economic criteria. This logic is related to the dynamics of the development setting, specifically the aims, performance criteria, and resource conditions, among others. Scientific discovery in itself does not necessarily lead to economic revenues, and university research has indeed been exposed to growing pressures to make academic research more “accountable and to demonstrate more clearly its potential practical usefulness” (Pavitt, 2004, p. 119). However, Jensen and Thursby (2001) observed that “most university inventions are at such an early stage of development that no one knows if they will eventually result in a commercially successful innovation or not” (p. 240). The embryonic state of the inventions facilitates further development required for any chance of commercialization (ibid.), and this development is supposed to move forward through research–industry collaborations (George, Zahra, & Wood, 2002) as well as by early involvement of customers in solutions development (Da Mota Pedrosa, 2012; Fang, 2008; Laage-Hellman, Lind, & Perna, 2014).
From our perspective, we would like to add two common features of development settings, contributing to the troublesome shifting to producing and using settings. First, the development setting is often characterized by its unrelatedness to industrial networks (Håkansson & Waluszewski, 2007), as academic environments are driven and governed by different logics and powers compared to industry. Second, developing settings typically consist of what has been called ‘epistemic cultures’ or knowledge cultures (Knorr Cetina, 1999), meaning that developing settings are driven by curiosity, academic recognition, and scientific methods, as opposed to the common drivers of mutual adaptation and value creation in industrial networks. Such epistemic cultures are passionate about exploring their epistemic objects (research objects), more often leading to divergence, expansion, and multiplication of problems and alternative solution pathways rather than to the kind of convergence and diminishing uncertainty needed for commercialization (Hoholm, 2011; Knorr Cetina, 2001).
The more the developing setting is distant from the producing and using settings, the more difficult it is to “think of what interfaces with what facility systems, represented by what suppliers, and what product systems, represented by what users, the new solution has to interface with in order to gain widespread commercial use” (Baraldi & Waluszewski, 2011, p. 175). This is certainly one of the reasons why university–industry collaborations are anything but smooth. It has been observed that “incompatibility between cultures, such as secrecy vs. free dissemination of knowledge,” can be a “stumbling block to university-industry alliances” (George et al., 2002, p. 582).
This suggests that the challenges of ‘shifting’ from developing setting to the producing and using settings can be related to different underlying logics, networks, and dynamics of the different settings. In producing and using settings, the logic of business appears to prevail. The logic of business is based on economic criteria and related to achieving results within a relatively limited time frame and exploiting proprietary knowledge. In addition, the networks of the developing setting and of the producing and using settings are different. Therefore, the shift from the initial knowledge-based developing setting to the producing and using settings and related business networks is likely to be challenging.
It is likely that for an undefined period, the new venture continues to be embedded in the developing setting while attempting to develop (new) business relationships in the producing and using settings. It means that when the start up is becoming a new business venture, it is likely to be engaged in different types of relationships that follow different logics and need to be handled differently. Accordingly, this chapter focuses on the following questions: why is the shift from developing setting to the business context of the producing and using settings challenging? How do start ups cope with the shift? Through the two cases reported and discussed in the following sections, we aim to explore the shifting process of start ups from the developing setting in which they are born to producing and using settings in which start ups have to build relationships in order to survive and eventually become a viable business. The cases illustrate the interplay between network dynamics and start ups evolution (progressive and regressive) and the entwinement of start ups journey and innovation journey.
The empirical part of this chapter is based on case study research (Welch, Piekkari, Plakoyiannaki, & Paavilainen-Mäntymäki, 2011). Two cases were selected from a previous data collection focused on ownership changes and network development (cf. Öberg, 2012). The two cases were purposefully selected because the two start ups have their origins in a science park and because of their attempts to develop business relationships with customers and suppliers. Furthermore, the two cases vary in the way in which the two start ups developed, as one mainly follows a progressive path while the other shows a progressive–regressive path. The two cases thus potentially offer different insights on how a research-based start up may move from its original (developing) setting towards business settings.
The data were collected from 16 interviews complemented with secondary data. The data collection started in 2003 for the first case and in 2008 for the second case. Most interviews were conducted between 2008 and 2010, with a follow-up interview in 2013 for the first case. Interviewees included representatives of the start ups, venture companies supporting their development, and early business connections. Questions, which were informal and open ended (McCracken, 1988), aimed to capture the development of the start up from early days onwards and various parties’ roles related to the start up. Based on the size of the start ups and limitations in their connections to others, the total number of interviews amounted to the mentioned 16, which included repeated interviews with the same interviewees over several years. The author conducting the data collection was also employed (between 2002 and 2010) at the same university in which the start ups originated, and she worked between 2011 and 2012 for the university incubator hosting the start ups object of the two case studies in this chapter. This all provides a contextual understanding (Lincoln & Guba, 1985) for the start ups and their development while not having an effect on research results, as the researcher did not act as a consultant for the two studied start ups. To analyse the data, interview transcripts and notes were used to create timelines of events and draft early case descriptions. These have also been compared with previous case descriptions of the data collected. Comparisons between the cases are reported in the discussion section but since this was not the primary reason for including two cases, we have instead focused on tracing the dynamics that have influenced their development.
4.4 Case Studies
4.4.1 Case I: ImageTech; Starting and Re-starting a Research-Initiated Business
The first case reports on a university start up from a Swedish technological university founded in 1984 by a group of researchers interested in imaging technology. The main feature of this technology, based on sensor solutions, was ‘reading’ electronically pictures and other materials. Once developed, it would allow for the detection of variance in the material that was read and, when used for reading pictures, it would permit the interpretation of photographed objects. The researchers’ key interest from start was to develop the technology, while the practical application of the idea was yet to be defined when the start up was founded.
As the emphasis was on developing the technology, the first step of the start up’s development consisted of ad hoc investigations of the various application areas for the technology that they were committed to develop. At that time, the start up moved from the university premises and became part of a newly established science park. The science park, which functioned as an early version of the incubator, provided office space. Additionally, as the science park started to grow, other services were provided through a university-owned organization to help companies in their early phase develop their commercial side. The incubator of which ImageTech was a part was supportive in terms of R&D activities (improving functionality of technologies) but did not provide any specific support for creating contacts and connections with the business context. In practice, it functioned as a provider of office spaces where various ideas from the university could meet.
Looking for possible applications of the technology, ImageTech decided early to hire an external CEO. While the arrival of the CEO in the start up brought more attention to the need to attract paying customers, research continued to be at centre of attention in the company since complete functionality of the technology was still to be figured out. Since researchers focused mostly on the technology features, their main relationships/interactions continued to be with other researchers and more generally with the university.
Two years after ImageTech was founded, the researchers have got contacts with a manufacturer of wooden doors in Norway. These contacts came about quite unpredictably and without the help of the science park. The contact with the Norwegian company was the result of the researchers’ attempt to apply their technology to imaging of organic materials. The idea was that the technology could be used to sort wood based on its quality. Furthermore, through ‘reading’ the quality structure of the wood and based on certain metrics of the wood, the technology could calculate how to cut the wood to increase its utilization. The relationship between the start up and the door manufacturer meant that the start up could test its technology on the manufacturer’s site and learn to apply it to wood. However, this relationship did not entail any joint development of the technology, nor did the door manufacturer become a customer of ImageTech.
Parallel to the relationship with the Norwegian company, the search for other application areas continued, mainly led by the start up’s CEO. With the help of the science park, the start up found financial support from a venture capital company. Besides the financial support and general business advice, this venture capital company did not provide any support in the development of the technology nor did it provide relevant knowledge related to the industry of reference. However, the start up managed to identify two additional application areas for its technology: a tool to scan and trace documents to be used in offices and an ‘image interpreter’ able to read pictures and find details in them. Established connections were of similar type as the door manufacturer, that is, the start up could test its ideas on the site, but no business deals resulted from these collaborations. Thus, at that point in time, ImageTech, although connected with some actors who could potentially enable its transition to business context, remained fundamentally based in the science park, reliant on research related activities to develop other/better functionalities for its technology. Hesitations to start using the applications were massive among the new business connections, as they were dependent on the existing ways of solving application issues. For instance, they followed certain rules in which documents were currently handled and interpreted manually by specialized personnel.
In the mid-1990s, additional funding was perceived to be needed to create a technological breakthrough. As neither business connections nor venture firms were willing to further support the development financially, financial difficulties were preventing a technological advancement. In that situation, an international industrial company related to the defence industry acquired the start up. This acquisition had important effects on ImageTech. The company relocated from the science park and found itself without the connections that it had previously built, as these decided to suspend their relationships with ImageTech. Hence, the new venture lost partners it had relied on for the testing of ideas and development of application areas, and it also lost the proximity to the continued development of the technology. The start up’s destiny became dependent on the acquirer’s strategies and ways of running business.
The acquirer, whose main business was related to defence solutions, found ImageTech technology potentially useful for interpreting pictures taken in foreign areas to detect defence items of interest. However, as ImageTech became a very small part of the acquirer’s business, it did not attract much interest and contacts between the management of the acquirer and the researchers were rather limited. The new owner offered financial resources to the start up to advance its technological solution, but this was the only thing he did. The acquirer had a strong focus on technological solutions for the defence industry but its knowledge and interest for other areas of commercialization was limited. Since the new owner was interested only in one of the three applications, the development of the other two applications ceased. In addition, the start up’s CEO was absorbed by the management of the acquirer which lead to reduce his engagement in the activities of ImageTech. The start up did not experience the acquisition in a positive way also because these changes were perceived as an obstacle to the technological developments previously achieved through research connections. Over the years that followed, the start up did not generate any sales, did not establish any new business connections, and continued to be seen as a very small part of the acquirer’s R&D.
A few years later, the acquirer ran into financial problems and decided to focus on its core business and to divest the ImageTech unit that was divided into three different companies corresponding to different application areas that were sold separately to different buyers. The office documentation technology was sold to an established IT company. The image interpretation technology was bought out by some managers in the acquirer company. Finally, the part that focused on material analysis of wood (that we will follow here) was bought by a company owned by some researchers at the university in which the start up had had its origin.
As the original start up was taken over by the researchers it had to start anew in many ways. It returned to the university and the science park context where it had been hosted previously. The return to the science park did not imply much beyond ImageTech being located close to the university. As the start up started over again, the new management put considerable efforts on re-establishing connections with previous collaboration partners (those who had previously discussed and tested possible applications of ImageTech’s solution). The new owners considered important to emphasize that the start up started anew so that the (ex) partners would perceive that they could expect something different from what they had experienced during the past years. Initially, these contacts remained hesitant and were only interested in testing of ideas rather than becoming business connections.
The positive aspect that had come out of the previous ownership (in defence industry) was the technological advancement, as the idea moved to a different platform technology. This development made the solutions more reliable and more user-friendly. However, while the company started to be more attentive to attracting customers, the customers they were meeting at fairs and similar occasions showed certain reluctance to adopt the new solution.
In 2001, the struggling start up experienced some change as some ImageTech’s competitors introduced on the market a technology similar to the one developed by ImageTech. Their newly introduced technology solutions were based on the idea of transforming the manual quality judgement of wood into automatized solutions. This in turn was an important breakthrough for the customers. The type of customers was the same as those who had participated in the original development of the application, particularly door manufacturers, although window and floor manufacturers and some saw mills became also interested. ImageTech started then to sell its equipment to these customers and subsequently added support services to the solutions (e.g., programming) to keep a close contact with the customers. Together with researchers at the university, the start up continued to develop the technology to improve its functionality for more high-grained wood materials.
In the mid-2000s, the start up once again found itself struggling financially and new venture capital had to be injected into the start up as the sales revenues were limited. The owners (university researchers) sold then most of their shares to two venture capital companies that came to own 75 per cent of the ImageTech. The CEO and the previous owner owned the rest. In 2013 (end of the data collection), the start up still struggled financially. Subsidiaries that formed in the meantime abroad (in the USA and Germany) have been replaced by distribution deals and agency representation in an attempt to consolidate the business. Research funding has been obtained to develop the technology further. The company remains headquartered in the science park close to the university from which it originated.
4.4.2 Case II: SensorTech; Struggling with the Business Context
The second case refers to a start up that we will call SensorTech, which has its origin in the same university as ImageTech. SensorTech emerged as the result of research on sensor technology. The founders, university researchers, based the start up on a patent obtained for anti-spin software. The researchers, who had previous connections with the automotive industry decided to work with solutions for this specific industry, and they were set to develop the technological functionality of the solution. The anti-spin software was an IT solution to avoid the tyres spinning. While the technology was sensor driven, the application area was set from start and reflected the researchers’ connection to one car manufacturer.
The start up was founded in 2000 and was owned by a venture capital company of the car manufacturer and the researchers. The early focus of the start up was to develop the technology in close collaboration with a research group at the university. The involvement of the car manufacturer (situated in a different city) was quite limited and consisted mainly of providing financial support.
In 2001, the same science park as ImageTech in Case I hosted SensorTech. At that time, the science park focused increasingly on business support. A centre for entrepreneurship had been developed, and some organizations that were expected to support development of start ups became part of the science park. SensorTech benefited mainly from accessing financial support while in terms of commercialization activities in the automotive industry, it was relying on its own efforts. The venture capital company functioned as a representative of the industry but not as a representative of the start up. From early on, the start up worked to establish industry connections also beyond the venture company (and its owner, the car manufacturer) with other car manufacturers and suppliers to the automotive.
At that time, the automotive industry was marked by an outsourcing trend among car manufacturers, which has later led to car manufacturers competing with their suppliers to develop new solutions. The car manufacturers realized that they had outsourced too much and started to reacquire some of their lost competence and influence. SensorTech’s aim was to find customers in an industry characterized by restructuring and some competition between car manufacturers and their suppliers. In this situation, SensorTech was potentially sub-supplier to both car manufacturers and some of their suppliers. Some companies, trusting the technological expertise of SensorTech, started development projects with the SensorTech. However, these companies mostly perceived SensorTech as a partner in developing ideas rather than considering it a potential business partner. The start up, being small and associated more with the university than with any particular company, was not perceived as a competitor; hence, it experienced a freedom and independence in the sector, moving from one company to the next and engaging in different projects. In addition to some research funding and funding from the venture capital company, such projects provided some income but did not actually help develop the idea further. Rather, the idea development continued to take place at the university involving mainly the researchers who were owners of the start up and these also took charge of the project management and development.
Even though the start up managed to create business connections quite early, it still struggled financially and kept struggling to attract customers. Another venture capital company, with less industry connections compared to the first one, also entered the company as a partial owner, providing financial support and some general business expertise, but without any connections to the automotive sector. However, soon thereafter the parent car company divested the venture capital company that initially founded SensorTech, and both the new and the first original venture capital companies exited the venture.
The start up continued to look for options to finance its further development. Talks were held with several representatives of the car industry as well as with suppliers of the automotive sector about taking over the start up. In parallel, the start up continued to introduce its idea to customers. Contacts were created with individuals who enabled the start up’s presentation in an auto fair. However, the solution idea of the start up was met with scepticism, not the least because it would replace mechanical solutions used in the industry. The start up worked to fit its software solution with hardware currently produced by several automotive suppliers but the suppliers showed very limited interest. Thus, while suppliers to the car manufacturing industry were willing to arrange development projects with the start up, they felt that the SensorTech solution was competing with their current solutions.
In 2003, a German car manufacturer that heard about SensorTech at the industry fair decided to acquire SensorTech even if it had no previous contacts. This decision surprised various parties connected to the start up as well as researchers themselves. The car manufacturer acquired the majority of SensorTech’s shares, and the researchers remained as minority owners. The new owner was interested in ensuring the further development of the idea and keeping alive the link to the university. The researchers remained based at the university and continued to pursue research while SensorTech’s management remained situated in the close-by science park.
Following the acquisition, the researchers and management of SensorTech continued to develop the technology. The new owner was very clear about his intention to let the start up continue its path as a separate company, producing new ideas and income from other companies. The acquisition increased the legitimacy of SensorTech as player in the market, but at the same time, it increased the attention by competitors. Car manufacturers started to be less interested in developing projects with SensorTech, and suppliers increasingly perceived SensorTech as a competitor. They were also hesitating about whether the start up would really be able to deliver to other parties rather than its acquirer. Consequently, SensorTech lost much of its external contacts and sources of idea generation, and it became progressively incorporated in the routines of its acquirer that was modifying the nature itself of the start up with its strategic decisions. The link to the researchers also became increasingly administrative, although the technological development of the idea continued. In parallel to the technical development, the start up also focused on developing the service offering. However, several suppliers also started to develop competing solutions.
In 2008, SensorTech experienced a sharp rise in revenues from customization of solutions and sales to the parent company. What secured a stable income was the introduction of a legal requirement in the USA that made solutions as the one SensorTech developed mandatory in new cars. The owner transformed this new requirement into a standard component in its cars, as the start up’s solution was certified by a European control organization to fulfil the requirements of that market. However, while some external customers showed interest, sales largely remained within the group, and the business of SensorTech mainly supplied its German owner.
ImageTech and SensorTech cases illustrate the challenges associated with shifting from the developing setting to producing and using settings (and backward) and the ways to cope with them. A common thread in the two cases is the effects that business network and its dynamics have on the initial phase of the start up journey when the start up is set to move out of the safe harbour of the development setting where it has stayed for some time.
4.5.1 Diverging Logics
When developing the first business relationships, both start ups start from a ‘solution concept’. In case of SensorTech, it is related to a given application in automotive industry, and in case of ImageTech to a less defined idea of solutions in three different application fields. The new ventures were looking for application domains for the solution concepts, and they strived to identify producers/users that might be able to use these. Both start ups were ready to work on various different application/solutions, being open to pursue quite different paths. This was rather obvious to ImageTech that was working in parallel on solutions to different customer needs as wood structure analysis, document analysis, and picture analysis. SensorTech, to overcome the lack of customers interested in its core idea, has chosen to become a sub-supplier not only to car manufactures but also to some of their suppliers. Both ventures were committed to develop workable solutions and invested quite heavily in doing that. They were ready, in principle, to adapt to the potential customers and even to change the essence of their business, but they struggled to translate it in practice. When starting to operate in the business context, both ventures appeared to maintain the logic of opening (searching for alternative applications and solutions), which is typical of the developing setting. This has not lead to business deals in the initial relationships with potential customers. In the ImageTech case, the door manufacturer, which has paid attention to the new solution, never became a paying customer and remained involved only in joint testing of the idea of the solution. The two start ups appeared loosely committed to the potential customers with whom they were in touch and kept developing the solution for other applications, showing a ‘weak commitment to partnership overtime’ (Thune & Gulbrandsen, 2014, p. 977).
Throughout the entire period during which we followed the evolution of the start ups, the opportunities for the two start ups were not abundant nor were waiting to be ‘recognized’ and exploited (Grégoire, Barr, & Shepherd, 2010). While the application space for the solution concept appears wide from the perspective of the start ups, such space narrows down as the concept is translated into solutions in the existing producing and using settings. This narrowing down solutions with a specific partner seems difficult to accept for the start ups’ entrepreneurs (researchers) who continued to develop the solution concept in different directions. It has been suggested that new companies in a complex business environment can act only on a minor portion of the opportunities (Håkansson & Snehota, 1995), but our two start ups were reluctant to focus, and they appeared to be driven primarily by broadening the opportunity space. This logic to large extent prevails in the development settings, and the two ventures appear to bring such logic with them to the new producing and using settings where it appears inappropriate. The producing and using settings are characterized by the logic of closing on a workable solution that fits with the pre-existing context. The two ventures did not seem to realize that economic outcomes in business reflect the economic consequences of embedding the new solutions in the existing producing/using operations.
In our two cases, we see academic entrepreneurs exploring their knowledge object (i.e., technology) and their potential applicability in various contexts. When meeting barriers or dead ends on the commercial side, they tend to slide back to the logic of research of the developing setting instead of intensifying the commercialization efforts. Ultimately, this appears to hinder the necessary focusing of resources and learning towards (and together with) particular business partners and their networks, which is a necessary condition for economically viable solutions.
Both cases also show limited ability of start ups to confront issues in their emerging relationships and their attitude to conform/adapt to their counterparts (La Rocca, Ford, & Snehota, 2013). This did not favour the two ventures in acquiring a reputation as interesting and dependable business partners. The developing setting and its surrounding relationships represented an asset in our cases; a safe harbour for the two start ups, as both return to the science park until new business relationships and opportunities materialize. At the same time, however, the prolonged period in a hosting environment with its developing logic did not favour the start up’s process of legitimization. In both cases there are signs of the ‘fluidity’ of start ups’ identities (Lounsbury & Glynn, 2001; Rindova & Kotha, 2001) that from the customers’ perspectives on the new venture do not appear to favour the development of business relationships. The identity of start ups in the early phase of the development oscillated between one of ‘inventor/innovator’ and one of a ‘innovative reliable business partner’; the impression is that in both our cases, the inventor identity keeps prevailing while the second is difficult to acquire, which hinders the development of economically viable business relationships.
4.5.2 Network Impact
In spite of all the efforts to develop the initial business relationships, refine the solutions, and construct a certain identity, the actual development is in both cases influenced largely by exogenous factors that come from the actual business networks that the two start ups attempt to enter. The outcomes are thus largely beyond the control of the two ventures’ managements. Examples of the positive and negative effects of exogenous factors on the journey of the start up abound in the two cases.
In both cases, indeed, the start ups benefited from and took advantage of changes occurring in the network beyond the horizon of their direct business relationships (Holmen & Pedersen, 2003) and the space of their action, even if only temporarily. For instance, developments in the relevant business network of ImageTech, which paradoxically emerged from what competitors did, made it possible to extend the potential customer base from door manufacturers to floor manufactures and sawmills. In the case of SensorTech, a regulatory change in the USA made the solution provided by the new venture mandatory for cars sold in the USA, leading to consistent business. On the other hand, the effects of development on the relevant business network have not been positive. Both ventures actually appear at mercy of decisions and actions taken elsewhere by other actors. ImageTech was acquired and sold for reasons quite unrelated to its activities. After the acquisition by the German car manufacturer, SensorTech’s activity was clearly subordinate to the acquiring company’s strategy, and became confined to the role of ‘internal component supplier’.
The journey of ImageTech and SensorTech towards becoming a business venture appears thus largely marked by decisions the origin and effects of which were difficult, if not impossible, to anticipate. What happens in the business networks, including the various takeovers and acquisitions, can bring in valuable resources and affect businesses positively (Ahuja & Katila, 2001; Capron, Dussauge, & Mitchell, 1998), but it can also block access to resources and destroy existing resources (Santos & Eisenhardt, 2009). ImageTech acquisition by the defence related company has two important consequences for the development of the start up. The new owner imposed developing only one of the three applications. When it is subsequently divested, the other two applications were entirely disconnected from the original start up and followed different paths. When the defence industry company sold ImageTech to the university researchers, it was pushed back to the developing setting. However, this did not imply a re-starting from scratch, as the start up could use the connections established with previous business partners and benefited from the technological developments of the ‘picture interpreting’ solution for a highly sophisticated user. In both cases the original innovative solution concepts continued to be transformed following the two start ups’ encounters during their journey, and the solution that emerged at a certain point with certain partners eventually could become an asset in other situations that the ventures would meet.
The two cases clearly showed that developing actual business relationships and shifting from developing to producing and using settings is anything but linear. Rather it appears to be a painstaking process that is likely to be regressive mainly due the fact that networks have their own life continuously interfering with start ups’ plans, intentions, and actual actions. After 20 years for ImageTech and 15 for the SensorTech, both start ups are still suspended between the developing setting and producing and using settings. Neither of the two is a viable stand-alone businesses, both remaining start ups that are trying to become a full-fledged business venture. ImageTech is back to the start up phase and SensorTech is an R&D and production unit in a larger business organization.
Shifting from the developing setting to producing and using settings (or in other words closing the distance between the former and the latter) is problematic for a start up for several reasons and is therefore often demanding for the management of the venture in becoming. In the following two sections, we draw conclusions on why this shift is challenging and discuss what it takes for the entrepreneurs/management of the new venture to cope with this process.
4.6.1 Challenges of the Process
The shift in the network context, implied by the first steps in the journey from start up to business venture, presents various challenges. The first challenge reflects the need to relate to the new business context by developing business relationships with customers, suppliers, and other stakeholders that follow logics different from those the start up experienced in the developing setting. Developing the first business relationships require commitment to interaction with a limited number of specific partners. In developing these relationships, there is a need to develop a range of cost-effective and economically viable specific solutions for problems of some specific users that find value in the solutions. It requires logic of narrowing down a workable solution and often entails developing elements of the solution that are peripheral to the core technology solution but important for making the new technology solution adapted to the resources and routines in place. Such logic is distant to the logic of developing setting that puts premium on opening the solutions.
The extent to which it is necessary to commit to single opportunities for resource strained start ups, as compared to keeping more opportunities open, is an interesting question; nevertheless, entrepreneurial ventures often need to focus their resources (Leitch, Hill, & Neergaard, 2010). They are then expected to move towards diminishing uncertainty by learning over time, as they test and adjust their ideas often in interaction with counterparts (Van de Ven et al., 1999; Wiltbank, Dew, Read, & Sarasvathy, 2006). However, the nature of epistemic cultures in developing settings and universities in particular may be an underlying reason for this not happening and for entrepreneurs to revert to their ‘safe’ hosting environment. Hoholm (2011), drawing on Knorr Cetina (2001), noticed how experts, when exploring their ‘knowledge objects’ (objects of inquiry, such as innovations and new products), made the objects multiply into a number of new problems and alternative development pathways due to the experts’ passion for knowledge and exploration of interesting problems.
A related (second) challenge is that the new business venture has to engage simultaneously in several business relationships. To develop economically viable solutions in the business context of the producing and using settings requires integrating a number of different elements in a context-specific solution, which in turn requires developing business relationships with several counterparts. To gain paying customers and to generate income sufficient to cover operating costs is conditional on the solution having positive economic consequences in the new business context.
The heterogeneity of relationships matters a great deal. Since technical and commercial knowledge, funding, production capacity, distribution and sales, product combinations, among others, are rarely available within one and the same relationship, the new venture has to engage in ‘heterogeneous engineering’ (Law, 2004). Through this process the entrepreneur (whether scientist, engineer or business manager) seeks to mobilize and relate necessary resources and actors, while also being influenced by the same resources and actors. In this material semiotic (i.e., relational) process, the meaning and value of a resource (such as a technology or a product) are established as a relational effect of the emergent network within which the process takes place. The ‘heterogeneous engineering’ cannot be avoided. It is intrinsic to transforming the general solution concept into a specific solution-in-use for solving a specific problem of a specific business partner. It generates the distinct identity of the start up and the new venture that is the product of their relationships.
A third challenge for start ups is the need to interact and act jointly. Relational interdependencies limit the autonomy of the venture and the control it has of its own actions as well as of the outcomes of the own activities. Interaction is the central business process; it is a condition for developing business relationships and related solutions. Any start up and new venture is simultaneously engaged and interacting in several different relationships. Acting jointly with several actors implies that certain activities are carried out between actors rather than within respective actors’ organizations. Every form of interaction and joint action with an external actor brings in uncertainty and entails (potentially) unexpected developments and risks. It also means a certain loss of control and autonomy in defining the technical features of the appropriate solutions in different relationships. Joint action results in interdependencies that limit the opportunities for the emerging business venture. As every actor involved in a relationship has its own ideas of goals, alternative courses of action, and expected outcomes, there is no complete consensus among actors about the variables that produce outcomes of the interaction. The new business needs to constantly reassure its counterparts about the expected outcomes in an attempt to find some consensus.
Overall, we are inclined to frame the journey of a technology start up becoming a business venture as a process of fitting solutions to problems; starting from available solutions and then searching for problems that can be solved by the available solution. It is akin to the garbage-can model of organizational choice (Cohen, March, & Olsen, 1972) in one important aspect: the outcomes of the process are largely dependent on interacting context variables rather than on one-sided action of the new venture. The difficulties in shifting from the developing context to a producing/using context thus appear to be related to the interplay of two factors: the diverging logics of the two settings and the different dynamics of the relational networks in the two settings.
4.6.2 How To Cope with It
Our study indicates that the difficulty for new firms to merge into the pre-existing business context lies in the continuous interferences from those with whom they interact and who hold a different logic. However, no business can be generated without relating to others. The need to relate to others implies that the outcomes of a new business will depend on the intentions, perceptions, actions, and reactions of the interacting actors and only to a certain degree on plans and intended strategies of the new venture management. The major difficulty for new ventures in becoming ongoing businesses is conditional on others’ influence. The continuous interferences from the context make the process of new business formation a collective phenomenon (Ciabuschi et al., 2012). Therefore, the new venture must, in some way, play collectively with the surrounding context to achieve positive economic outcomes. Opportunities do not wait to be discovered and exploited by an alert entrepreneur (McMullen & Shepherd, 2006); rather, according to the creational view on entrepreneurial opportunities, they emerge from joint action and interaction (Mainela, Puhakka, & Servais, 2014).
The management of the new venture has to espouse a new logic, quite different from the one of the developing setting. The instrumental rationality of the scientific context has to be complemented by an economic and organizational rationality (Thompson, 1967), which is to large extent reflexive (and in a broad sense opportunistic). The passion for exploring knowledge (Knorr Cetina, 2001) needs to give way to focused learning processes with specific business counterparts, even if it is likely to lead to compromises and tough pragmatic choices between equally interesting opportunities (Hoholm, 2011). These two logics are mutually exclusive and are not easy to combine. For the start up journey, it means that if the new venture is to become part of the new setting, the logic of the developing setting at some point has to be downplayed and complemented with a logic of the producing and using settings, which entails giving priority to business interaction. This requires converging and focusing resources towards fewer opportunities with fewer counterparts, which entails tough compromising work. From a research logic, this may be experienced as difficult (to kill your darlings) and risky (to temporally give up other opportunities). The logic of the developing setting is likely to become a burden when developing new relationships in the producing and using settings (Håkansson & Snehota, 1998). The shift to the network of the producing and using settings implies taking on a new identity, which is certainly demanding and one may doubt whether the same individuals can achieve it or whether it requires a substantial change in the human resources of the new venture.
The management of the emergent venture will have to learn and adopt the business logic of the new setting that produces dynamics different from the business setting that is much less stable compared to the developing setting. What characterizes the new setting and its network is continuous unexpected events that make it impossible (and risky) to follow a plan developed ex ante. In an ever-changing producing and using settings, a start up needs to acquire ability similar to what has been called ‘improvisation’ defined as, “the degree to which composition and execution converge in time” (Moorman & Miner, 1998, p. 698). Improvisation implies a “shift away from planning, and a reliance on action” (Leybourne & Kennedy, 2015) and resonates well with the ‘effectuation’ logic in entrepreneurship and acting in uncertain contexts (Read, Dew, Sarasvathy, Song, & Wiltbank, 2009; Wiltbank et al., 2006). Recent studies on interaction behaviours in business relationships have suggested that the ability to improvise rests on employing reactive rules, such as readiness ‘to improvise and to react to the unexpected’ to keep interaction in business relationships smooth and accomplish their tasks (Guercini, La Rocca, Runfola, & Snehota, 2015). What makes the shift from the network of the development setting to the network of producing and using settings so difficult is that the logic of action implies relying on heuristics related to acting rather than scientific rationality of systematic knowledge development. While heuristics in interaction have been explored in a context of ongoing established relationships, we assume that these play an even greater role in circumstances where the uncertainty and ambiguity make decisions based on extensive information unlikely. Overall, we also believe that this study, as well as other studies in this volume, evidences the necessity of adopting the business network perspective to the study of new venture creation, to complement the social network perspective (Elfring & Hulsink, 2003).
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