Exploring Entrepreneurial Action Theories in Technology-based Nascent Ventures Francesc Miralles* La Salle – Ramon Llull University, C/Llucanes 41, Barcelona 08022, Spain. E-mail:
[email protected]
Ferran Giones La Salle – Ramon Llull University, C/Llucanes 41, Barcelona 08022, Spain. E-mail:
[email protected] * Corresponding author Abstract: Scholars are worried about how technology-based nascent ventures can generate value. When both technology and market potential are highly uncertainty, entrepreneurs seem to face additional difficulties to define their value proposition. There is an academic debate on entrepreneurial action theories receiving contributions to advance on the understanding of entrepreneurship in current uncertain settings. This research uses an inductive field study with semi-structured interviews to 21 nascent venture’s entrepreneurs to explore which elements condition the entrepreneurs’ value proposition definition. The results expose the unexpected influence of entrepreneurs' experience, opportunity nature, funding access and technological resources to shed some light on experienced difficulties. The implications of the research are relevant for those directly or indirectly involved in technologybased entrepreneurial endeavours. Keywords: Value Proposition, Entrepreneurial Action, Technology-based ventures, Entrepreneurship.
1Introduction A review of current research on entrepreneurship shows that academics are worried about how new ventures based on new technologies can generate value. When both technology and market potential are highly uncertain, entrepreneurs face additional difficulties to define their value proposition; furthermore, the dynamic changes in the competitive environment pose additional hurdles to the development of the entrepreneurial venture. "Industrial era" approaches to navigate through the early stages of a new venture creation, such as engaging in defining formal business plans, are seen to have limited suitability in environments dominated by the "information age" paradigm. The debate on how entrepreneurs' define their value proposition under uncertainty has motivated scholars to further investigate on the description of the nature of opportunities
and the perceptions of the entrepreneurs. Academic discussion has given shape to different perspectives on the central constructs of the entrepreneurship process. The traditionally dominant perspective describes opportunities as the result of a discovery process in a predictable environment; alternative perspectives describe them as something “created” through the judgment and interpretation of the entrepreneur in an uncertain environment. These two perspectives offer different explanations of the entrepreneurs’ action and depict different entrepreneurial decision-making logics. This research sheds light on the current understanding of why is it more difficult to define the value proposition in uncertain environments. Using the literature background of the entrepreneurship action theories as a support, the authors conducted a theorybuilding inductive field study on the phenomena to explore the influencing factors. The outcomes of this research point out that unexpectedly previous entrepreneurs' experience, opportunity nature, funding access, and technological resources make the value proposition definition difficult to technology-based entrepreneurs. Such findings are of interest to both, institutions involved in promoting entrepreneurship support programs and entrepreneurs aiming to exploit new business opportunities in uncertain environments.
2 Literature Review Introduction A review on current entrepreneurship research shows that academics are worried about how new technologies can generate business value (Teece 2010; Osterwalder & Pigneur 2010; Chesbrough 2010). Recent research works claim that it is not uncommon to see new technology products and services missing expectations when taken to market (Teece 2010); providing evidence that a new technology by itself has no objective value unless it is taken to market as part of a value proposition (Chesbrough 2010; Morris et al. 2005). Taking into consideration the new competitive environment derived from the "information age", Teece (2010) exposes that entrepreneurs that aim to define the value proposition for their nascent venture face an environment that greatly differs from the "industrial era". The emergence of internet and the growth of the knowledge economy made it more difficult to fix the value proposition and to capture value from products and services delivered (Osterwalder et al. 2005; Teece 2010). In the same vein, the reduction of coordination and transaction costs has facilitated the exploration of alternative assumptions on the structure of revenues and costs altering the traditional mechanisms to capture value (Shy 2001; Shapiro & Varian 1999; Teece 2010). In conclusion, entrepreneurs are seen to perceive additional levels of uncertainty as they aim to build ventures that perform activities to serve markets that often do not yet exist (Teece 2010); relying only on the guidance of the entrepreneur’s own vision of the future (Morris et al. 2005). The revision of literature starts with a description of the concept of the value proposition and its role in the development of the nascent venture; following with a description of the theoretical framework provided by current entrepreneurial action theories.
Definition of the value proposition in nascent ventures In the last decades, the development of information technologies has transformed the traditional economic structures to deliver and capture value (Teece 2010; Pateli & Giaglis 2004). The definition of value, using a strategic management perspective, is the positive difference between the perceived benefits or willingness to pay and the economic costs (Peteraf & Barney 2003). Thus, the increased number of existing choices and options offered by new technologies has indeed increased the complexity of the configuration, definition and implementation of a value proposition (Pateli & Giaglis 2004). In this new competitive environment, nascent entrepreneurs aiming to sustain their value proposition turned to the business model frameworks (Doganova & EyquemRenault 2009; Osterwalder et al. 2005) to support their valuation appraisals. Despite the consistency concerns on their incipient value propositions (Porter 2001), entrepreneurs have used business models to tangibilize incipient ideas through multiple designs and activity configuration options (Osterwalder et al. 2005; Pateli & Giaglis 2004; Morris et al. 2005).
Entrepreneurial action in nascent ventures Nascent ventures entrepreneur’s business models designs are of obligatory prospective nature, embedded in planning efforts such as writing a business plan (Doganova & Eyquem-Renault 2009) as part of the efforts to gain legitimacy and access to resources in the early stages (Bruton et al. 2010). It has in fact become a standard requirement by external funding providers (Kirsch et al. 2009) to receive a formalized version of the business model through a business plan document (Honig & Karlsson 2004). The justification for the introduction of business plans is supported by research (see Table 1) that posits that they are an influencing factor on the new venture future outcomes and success (Delmar & Shane 2003; Castrogiovanni 1996; Kraus & Schwarz 2007; Liao & Gartner 2006). Table 1: Research on nascent ventures performance and business plans usage Source Delmar and Shane (2003)
Kraus & Schwarz (2007)
Liao & (2006)
Gartner
Findings Business planning reduces the likelihood of venture disbanding and accelerates product development and venture organizing activity. Pre-start-up planning is beneficial. There is a positive relation between business plan and company success.
Nature of data Examined 223 new ventures from a random sample of firm founders.
Nascent entrepreneurs who completed a business plan were more likely to persist in the process of business emergence.
Survey on 361 cases of nascent entrepreneurs, from a panel survey data.
Longitudinal survey of 468 new SME businesses in Austria.
Albeit, traditional planning tools have been institutionalized, research done in the last years has uncovered relevant shortcomings and limitations on the usefulness of business plans. In this line, findings suggest that there is a limited use of business plans beyond beyond the self-representation to an external actors’ audience (Karlsson & Honig 2007;
Karlsson & Honig 2009), even having a limited impact on the actual funding decision (Kirsch et al. 2009). Thus, research outputs jeopardize the expected benefits of the preliminar planning activities (see Table 2). Table 2: Research on limitations of predictive planning activities Source Lange et al. (2007)
Findings No performance difference among ventures launched with or without Business Plans, they are only useful to raise substantial startup capital from institutional investors or business angels. New organizations write business plans mostly because of institutional pressures, or mimetic forces.
Nature of data Study of 116 new ventures.
Karlsson & Honig (2009)
Entrepreneurs who wrote business plans never updated or rarely referred to their plans after writing them.
Research on 6 companies over five years.
Kirsch et al. (2009)
Venture Capital funding decisions are weakly associated with documents and information contained in Business Plans.
Analyzed sample of 722 funding requests to a VC firm.
Bhidé (2000)
Entrepreneurs “bootstrap” with limited resources, using opportunistic adaptation and personal abilities. Business planning spoils venture scarce resources.
Interviewed 100 founders of fast-growth companies.
(Honig & Karlsson 2004)
Study of 396 nascent entrepreneurs in a two year period.
The absence of convergent results regarding the impact and value of early-planning activities direct the attention to other elements such as the influence of the envionment dynamism in the exploration of the value proposition.
Impact of uncertainty in entrepreneurial action perspectives The environmental context has been analyzed through the influence of the entrepreneurs' uncertainty perception in their decision to engage in preliminary planning efforts; Liao & Gartner (2006) depict uncertainty as the individual’s perceived inability to predict because of a lack of information or an inability to discriminate among available data (Milliken 1987). This approximation focuses on the environment perception as a discriminator between those who decide to engage in entrepreneurship and those who do not (McMullen & Shepherd 2006). A complementary approach to the uncertainty construct, derives from the idea that uncertainty is permanent (Knight 1921), therefore it has a continued influence on the entrepreneurial action, as individuals “willingness to bear uncertainty” (McMullen & Shepherd 2006, p.133) influence their action paths. From this perspective, the influence of uncertainty is not only seen as a potential action deterrent but also as a persistent influence on the development strategies in the early steps of the nascent venture.
The different perspectives on the influence and perception of uncertainty offered a framework to support the development of the opportunity "discovery" and "creation" theories described by Alvarez & Barney (2007). In environments were uncertainty is seen as risk by the actors, “entrepreneur alertness” (Kirzner 1999) and prior knowledge (Shane 2000) are among the factors that help entrepreneurs “discover” opportunities. On the other hand, dynamic environments were uncertainty is persistent (Knight 1921) entrepreneurs' actions to uncover opportunities are explained with an opportunity “creation” perspective that is built upon processes such as “bricolage” (Baker & Nelson 2005), “sense-making” (Weick et al. 2005) or “trial-error” (Teece 2010). Aligned with the opportunity identification theories described by Alvarez & Barney (2007), the entrepreneurial action theories have consolidated in two perspectives: a design-precedes-execution (DPE) view, and an effectuation perspective (Hmieleski & Baron 2008; Dew et al. 2009; Sarasvathy 2001). In the DPE framework, entrepreneurial actions are explained through the perception of a "risk-type" environment that requires initial efforts to collect information and resources that will guide and support the action (Baker et al. 2003). Such approach fits with the institutionalized view of how entrepreneurs aim to define their value proposition, using static business models and formal business plans. In contrast, the improvisational-effectuation approach describes the setting of entrepreneurial action in an environment where outcomes cannot be predicted, with remnant uncertainty entrepreneurs engage in improvisational activities to gain additional information and shape their offering to gain market fit. This last perspective is described in the effectuation theory (Sarasvathy 2001) as a process of transformation using a given set of means to produce the aimed effect, in this research, shaping a sound value proposition. The different set of assumptions that support the entrepreneurial action theories, evidence the difficulties to describe current entrepreneurship settings, stressing the need for futher research on the influencing factors in the initial development stages of technology-based nascent ventures.
Research Questions The definition of the value proposition in technology-based nascent ventures is the linchpin of their future development. Although, entrepreneurial action theories provide hints on the theoretical background to support the research of the phenomena, it is still unclear whether it is more difficult for entrepreneurs to find a sound value proposition? and if so: what elements condition entrepreneurs’ difficulties to define their value proposition?
3. Method and data Method The objectives of this research are of an exploratory nature, the complexity of the constructs under study: the nascent venture entrepreneur and its perceptions; advocate for a qualitative and interpretative method of resesearch doing an inductive theory-building field study (Miles & Huberman 1994).
The use of an exploratory method responds to the interest in “discover the theory that the informants themselves are using to understand their experience” (Wagner et al. 2010, p. 8). However, such methodological approximation generates results with a contingent validity, not supporting generalization ambitions (Easterby-Smith et al. 2008; Wagner et al. 2010).
Data The subjects of study in this research are entrepreneurs in technology-based nascent ventures. In order to capture variability from different settings in the technology-based entrepreneurship (including different sub-industries: electronic devices, software applications, internet services, digital television, optic equipment, telecommunications), a total of 21 entrepreneurs have been interviewed. The selection of entrepreneurs has been driven by the emerging concepts of the first data iterations, aiming to capture more information on novel concepts and categories till a saturation point was reached. The majority of the entrepreneurs are based in the Barcelona (Spain) area and have not been in their current entrepreneurial venture for more than 3 years. Table 3: Description of the entrepreneurs’ sample
Nascent venture name
Industry
P01 - Electonix
Electronics
P02 - Usability
Internet
P03 - HHRR Software
Software
P04 - M edical Coding
IT services
P05 - Innovation Services 1
IT services
P06 - Venturing
IT services
P07- eRecovery
eHealth
P08 - TDTBox
Digital TV
P09 - WaterPower
Renewable Energy
P10 - ChinaTravel
eTravel
P11 - Laserpower
Optic devices
P12 - Contengia
IT services
P13 - Security Systems
IT services
P14 - Creativity
IT services
P15 - UbiquousWifi
Telecom devices
P16 - Outsourcing
IT services
P17 - Innovation Services 2
IT services
P18 - ElectroComputer
Electronics
P19 - Data Secure
Software
P20 - Ebusiness
IT services
P21 - DigitalDevices
IT services
The data has been collected using semi-structured interviews, the interview guideline was fine-tuned in sequential rounds of interviews to introduce questions regarding factors that emerged as relevant. The duration of the interviews varied from 45 to 80 minutes and were taped and compiled into a project standard transcript format by a team of three researchers. The transcribed data has been analyzed identifying “key points” within the perceptions expressed by the interviewees, that were grouped through common codes into more general concepts. At this point, concepts were further grouped into categories that supported the emergence of main factors in an iterative process of contrast with the reviewed literature (Allan 2003). The data coding had a first stage pivoted at interview by interview level, in a second stage, cross-interview categories were grouped together capturing interviews variablity and reinforcing the shared factors.
4. Results analysis The data collection and coding process lead to the identification of four different elements that were perceived to influence the difficulties experienced by the entrepreneurs as they advanced towards the definition of their value proposition. The coding process and sequential iterations with the reviewed literature provided support for the identification and description of the emerging elements: the entrepreneur's experience, the nature of the opportunity, the access to funding and the technological resources.
Entrepreneurs Experience The interviews with the entrepreneurs provided vivid accounts of the initial steps of their nascent venture development, focusing on the perceptions and experiences of the entrepreneur. The first and most dominant element to describe their difficulties in shaping the value proposition was the influence of past learning experiences of the entrepreneur, through both professional activities and educational programs, as expressed by the entrepreneurs: "If I hadn’t had experience in this industry, I wouldn't have (created) this company" (Data Secure), or "What you already know is the support to develop your idea" (Venturing). In the reviewed literature, the identification of past experience and knowledge as a resource is seen to explain the opportunity identification process (see Shane (2000)), in line with the idea that entrepreneurs that possess more information and knowledge would find it easier to exploit their opportunity, mitigating the influence of uncertainty in the development of the nascent venture (Liao & Gartner 2006). Nevertheless, the data shows that entrepreneurs find limited usefulness in their experience and knowledge assets as they attempt to shape their value proposition and gain market fit. In consonance with Chesbrough (2010) and Teece (2010) description on how established firms struggle to sustain market fit. Entrepreneurs’ attempts to bring their product or service value proposition to market are also subject to dynamic change and constant adjustment. Consistent with this idea of dynamic adjustment of the value proposition, experienced and novice entrepreneurs describe the usage of instruments and procedures that would fit with a bricolage or improvisational process (Baker et al. 2003), as Electronix entrepreneur said:"with the available resources you realize that the best way to do money
is another one, if you are in a position to do it, you do it", or in the Security Systems entrepreneur’s words:"From what was available, I said, I am going to do something that solves all this issue". The usage of bricolage like mechanisms by both novice and expert entrepreneurs contrasts with the suggestion by Dew et al. (2009) that this effectuation approach would be mostly seen only with experienced entrepreneurs (see Table 4). Table 4: Description of the entrepreneurs’ nascent-venture attributes
Nascent venture name P01 - Electonix
Industry
Entrepreneur profile
Financing
Mechanism
Electronics
Novice
External
Formal planning
P02 - Usability
Internet
Novice
External
Formal planning
P03 - HHRR Software
Software
Novice
Own
Bricolage
P04 - M edical Coding
IT services
Novice
Own
Bricolage
P05 - Innovation Services 1
IT services
Experienced
Own
Bricolage
P06 - Venturing
IT services
Novice
Own
Bricolage
P07- eRecovery
eHealth
Novice
Own
Formal planning
P08 - TDTBox
Digital TV
Experienced
External
Formal planning
P09 - WaterPower
Renewable Energy
Novice
External
Bricolage
P10 - ChinaTravel
eTravel
Novice
Own
Bricolage
P11 - Laserpower
Optic devices
Novice
External
Formal planning
P12 - Contengia
IT services
Novice
Own
Formal planning
P13 - Security Systems
IT services
Novice
Own
Bricolage
P14 - Creativity
IT services
Experienced
Own
Bricolage
P15 - UbiquousWifi
Telecom devices
Novice
Own
Bricolage
P16 - Outsourcing
IT services
Novice
Own
Formal planning
P17 - Innovation Services 2
IT services
Novice
Own
Bricolage
P18 - ElectroComputer
Electronics
Experienced
Own
Bricolage
Software
Novice
Own
Bricolage
P20 - Ebusiness
IT services
Experienced
External
Bricolage
P21 - DigitalDevices
IT services
Novice
Own
Bricolage
P19 - Data Secure
Possible explanations to these phenomena are the motivational elements that influence the entrepreneur's decision to engage in the entrepreneurship process. It has been seen for example in Hmieleski & Baron (2009) and Baron (2007), that positive affect would help to explain the behaviour of entrepreneurs and the future success of their nascent venture. In this line, entrepreneurs were often keen to keep looking for alternative conceptualizations of their value propositions, despite having to look in different market or business contexts from their initial opportunity framework, as ChinaTravel founder said:"I had the idea that I wanted to have something I would own". This would help to explain the use of bricolage-like mechanisms regardless of past entrepreneurial experience.
The nature of the opportunity A complementary explanation to such phenomena can be described through the second emerging factor: the nature of the opportunity. The emergence of the "information era" has facilitated the development of multiple models to exploit business opportunities. However, it has also brought an additional layer of complexity in the development of the value proposition, even in cases where there was the perception of having a clear business idea, the use of IT made it more difficult to define the value proposition, in words of the eRecovery founder: "our uncle thought that there was space (for business) in the rehabilitation market"..."we thought about the product, and started describing the specifications" but: "at the same time we are looking for financing, we still need to develop a more commercial version". This entrepreneur described the difficulties they were experiencing as they aimed to bring to a technology-based environment an existent service in the physiotherapy market. This is in line with the general ideas expressed by Teece (2010) and Morris et al. (2005) when describing the difficulties to bring to market new products in current dynamic environments; fitting with the idea expressed by McMullen & Shepherd (2006) of uncertainty as a remnant factor, and described by Laserpower entrepreneur:"you are reaching the end of a phase, so that particular uncertainty disappears, but new ones come in...When you are reaching the horizon, there is a new horizon further ahead". Such difficulties are exacerbated by the early stages focus on the technological development of the product "the technological part was receiving more resources with the aim to finish the product development" (TDTBox founder), or in "(our product) is highly technological, it needs a lot of time to actually become a marketable product" (Electronix founder). Consistent with the observations from Bhide (2000) only in few cases there was a market-oriented development of technology-based opportunities, as described by Data Secure entrepreneur:"When the product was infantile, that's when we engaged the sales person...and we changed our (product) development plans", something that helped to reduce the perceived difficulties in achieving the value proposition market fit.
Access to funding At the same time, the technological nature of the opportunity was also used as a justification to request external funding, often linked to the nascent venture financial needs to cover the full development of the novel technology. The access to external funding sources is related to the utilization of a formal tool to describe the value proposition and the opportunity exploitation plan in a business plan format. The extended usage of business plans as a screening mechanism to discriminate among different entrepreneurial proposals has already been subject to criticism (see Lange et al. (2007) and Honig & Karlsson (2004) among others). But in addition they introduce an additional difficulty to technology-based entrepreneurs as they find it of limited utility in their nascent-venture endeavour, as mentioned by the entrepreneur at Medical Coding:"We did the business plan to get the validation from the (incubator) personnel to get the office space", or in the words of the founder of Creativity:"It is very difficult to put some things in the business plan, for example if the business depends on this or not...the inputs you receive shape a new path too frequently". In fact, most of the entrepreneurs interviewed that could sustain by themselves the start-up of the nascent venture, would rely on more flexible planning formats or
"dashboards" that would be limited to the key elements that frame their "temporal" value proposition: "we described the product, the technology, the market, the pricing, the customers...but it wasn't too detailed" (Data Secure founder). This is in line with the ideas expressed by Sarasvathy (2001) and Baker & Nelson (2005) explaining the exploratory logics of entrepreneurs that build upon the resources at hand to construct their value proposition in uncertain environments.
Technological resources In the description of the resources available to shape their value proposition, the technological resources appeared as an element that would have an unexpected influence. In the literature the existence of patents or advance technological development would be seen as a resource (Alvarez & Busenitz 2001) that could contribute to the future development of the venture. Nevertheless, technology-based nascent ventures experienced additional difficulties as they tried to capture external funding sources, in words of Electronix founder:"it is very difficult to talk in technical-terms to investors", unless they had already managed to proof the value of their technology in the market "we have overcome this stage and now it is the client who will buy the technology" (UbiquousWifi). In a paradoxical manner, the presence of technology resources would on one hand favour better valuations of the business plan, but attracting external investors would require a specific and clear focus on a fixed value proposition to exploit the technological resources, as the entrepreneur at Usability described:"you cannot justify the use of (financial) resources, unless they are aligned with the main focus of the business", limiting the possibilities to explore the applications of the technology: "we still haven't found it yet, different customers see it in different ways, so we want to spend time in that" (ElectroComputer founder). Therefore, it appears that technological resources in this setting constrain the possibilities of exploration for the value proposition, particularly in the cases when they are used as anchor to subject external funding sources. In conclusion, the research outcomes shed some light on the research question on whether technology-based entrepreneurs experience additional difficulties to define their value proposition; describing that besides the pervasive uncertainties on the entrepreneurship process, they are subject to additional complexities created by the limited help from their past experience, the intrinsic complexity of information technologies, the institutional requirements for business plan formalisms, and the ambidextrous impact of the technology resources in the construction of their value proposition.
5. Conclusions The findings in this research suggest that the definition of the value proposition in technology-based nascent ventures remains a difficult endeavour for entrepreneurs. Entrepreneurship research has focused its attention in the entrepreneur, giving shape to the development of entrepreneurial action theories to better understand the exploration and exploitation of opportunities. In this research, the focus has been on the identification of influencing elements that entrepreneurs related to their difficulties in the value proposition definition. Following a theory-building inductive field study method, a total of 21 entrepreneurs have been interviewed to explore the phenomenon.
This study calls attention on the unexpected influence of entrepreneurs’ resources such as prior knowledge built through past experiences in technology-based ventures. The complex nature of the technological opportunities, force entrepreneurs to carry on their actions under high levels of uncertainty, adopting “bricolage” mechanisms regardless of the market or product knowledge they have accumulated. Traditional business planning approaches do not make it easier for the nascent venture entrepreneurs to find their value proposition, as its prospective nature limits its consistency in a dynamic environment. Thus, its usage is mostly seen as a result of institutional forces, consequence of external pressures that request the entrepreneur to fix an initial value proposition to successfully claim external funding support. This study also calls attention to the ambivalent influence of technological resources, seen as a valuable resource for the nascent venture; they are also an anchor that limits the search of a value proposition.
6. Limitations and Further Research The results of the current research provide relevant insights built upon an inductive method of research, although the results are consistent with the intuitions and ideas expressed in previous studies (Teece 2010; Morris et al. 2005; Baker et al. 2003) their validity is limited to the sample object of study. Therefore subsequent research would need to gather further evidence in order to extend validity claims to other settings or research environments. In a similar manner the use of theoretical sampling has provided a varied and diverse sample that does not aim to depict a representation of the total population of technologybased nascent ventures. This research would benefit from future efforts to explore this phenomenon in different geographic locations and through different business environments. Further research could look to enrich current debate on entrepreneurial action theories in light of the often unexpected influence of the identified factors; studying the evolving influence of the factors through the dynamic growth stages (Levie & Lichtenstein 2010) of the technology-based nascent venture.
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