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High technology entrepreneurship in transitional economies: The Russian experience
HIGH TECHNOLOGY ENTREPRENEURSHIP IN T~NSITIONAL ECONOMIES: THE RUSSIAN EXPERIENCE
GARRY D. BRUTON AND YURI RUBANIK University of Tulsa, and Moscow Federal Institute of Electronic Technology
Prior to the break up of the Soviet Union many world class technologies were present in the various nations of the Soviet block. Numerous entrepreneurial endeavors have developed based on these technologies as each of the various countries has moved to a market economy. However to date, high technology startups in Russia and many of the other transitional economies is yet to significantly occur. Utilizing an in-depth case analysis of a high technology startup in Russia this manuscript fills part of this void by developing seven testable propositions. These propositions will help direct future investigations of high technology startups in transitional economies.
To date, the investigation of high technology entrepreneurship has focused on the activity in the United States, or other nations with similar stable economic environments such as Canada. In part, this interest in high technology startups in these nations is produced by the critical role that high technoIogy plays in a nation’s economic vitality and resilience (Kirchoff & Phillips, 1987). As industries mature and begin to decline, it is high technology startups which provide the next generation of firms necessary for a stable economy’s growth. There is no reason to expect that high technology startups would be less important in transitional economies. In fact, there is anecdotal evidence of the importance of such
Direct all conrespondence to: Garry D. Bruton, Department of Management. College of Business, University of Tulsa, Tulsa, Oklahoma 74104; Fax: (918) 63 1-2142; E-Mail: [email protected]; Yuri Rubanik, Director Quality Laboratory, Moscow Federal Institute of Electronic Technology, Moscow, Russia. The Journal of High Technology Management Research, Volume 8, Number 2, pages 213-223 Copyright@ 1997 by JAI PIWS, Inc. All rights of reproduction in any form reserved. ISSN: 1047-8310.
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firms in widely divergent environments such as software startups in the Czech Republic and biotechnology firms in Cuba. However to date, there has not been wide spread investigation of high technology startups such nations. Russia has been moving slowly away from a state planned economy since 1989. The transition to a market economy that has occurred in Russia has resulted in a dramatic increase in small entrepreneurial firms (Ageev, Gratchev, & Hisrich, 1995). Additionally, Russia has historically been a producer of world class technological products in many industries (Machlis, 1994). This technological base combined with the opportunity provided by the transition to a market economy has resulted in the founding of many high technology startups. Before a large scale systematic investigation of high technology entrepreneurial startups can occur, the theoretical base for such an examination must be established. This manuscript will fill the existing void on high technology startups in a transitional economy by first examining the existing literature on the characteristics of successful versus unsuccessful high technology startups. The use of in-depth case studies for theory development has previously been recognized (Dyer & Wilkins, 1991). Thus, the manuscript will next examine a Russian high technology startup to develop seven testable propositions. While Russia is the focus of the examination offered here, the propositions developed can also provide guidance for research in other transitional economies. The paper then concludes with a discussion of future research on this critical topic.
LITERATURE
REVIEW
The literature on the characteristics of successful high technology startups can, in stable economic environments, be categorized into three broad subject areas: 1.
2. 3.
Founder characteristics; Firm characteristics; and Startup strategy (Doutriaux, 1992).
Each of these areas will briefly be examined
in turn to establish the domain of concern.
Founder Characteristics There have been a variety of characteristics among founders which have been shown to be associated with high technology startup success. First among these is most successful startups are founded by a team of individuals (Cooper & Bruno, 1977). For example, it has been shown that over 80% of successful high technology firms are founded by two or more people (Cooper & Bruno, 1977). The greater success of such teams is due to the larger set of skills and resources which multiple individuals can bring to a startup. However, multiple member teams can grow to be too large (Kamm, Shuman, Seegar, & Nurick, 1989). If the management styles become too diverse from the presence of too many individuals making decisions, the reaching of a consensus in a timely manner can become problematic. Thus, an associated characteristic is that there is a high dissolution rate among those founding team members (Cooper & Bmno, 1977). The founders of successful businesses, whether they be individuals or members of a team, also have differentiable characteristics. For example, the age of the principal
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founders of high technology startups has been shown to range between 34.9 years (Doutriaux, 1992) and 39.7 years (Bruno & Tyebjee, 1985). However, a significant negative relationship between age of the founder and firm performance has also been indicated (Doutriaux, 1992); the younger the founder the more successful the firm. Additionally, the prior work experience of the founders is important to the ultimate success of a high technology startup. The entrepreneur obtains knowledge about the market served as well as other general business knowledge about the product while employed. The new venture founder can take and apply that knowledge more easily to a new venture which is similar to that of his/her former employer. Thus, the closer the product produced by the startup is to the product produced and sold by the founder’s former employer, the greater is the opportunity for success by the new venture (Feeser & Willard, 1989; Goslin, 1987). While working for that employer if the entrepreneur can develop expertise in a particular functional area it can also aid success in a startup. For example, if the entrepreneur can develop an expertise in marketing or finance they are more likely to experience success (Doutriaux, 1992). Finally, prior experience in a startup business can also impact the success of the entrepreneur in certain situations. For example, prior startup business experience can be particularly beneficial in multi-member founding teams where the other members of the team come from large organizations and have no startup business experience (Feeser & Willard, 1989). In summary, the characteristics of the founders of successful high technology startups include the following issues: 1. 2. 3. 4. 5.
Multiple member teams (although the teams should not grow too large); Younger principle founder; Principal founder’s previous employer’s product and market served are similar to that of startup business; and Prior expertise in marketing and finance by the principal founding entrepreneur. In some instances prior startup business experience.
Firm/Industry
Characteristics
The characteristics of the firm and the industry in which it competes have also been shown to be important to the ultimate success of the new venture. One of the most critical decisions that a new venture can make is knowing in what industry to compete (Vesper, 1980). Different industries offer different opportunities and threats. Thus, picking the industry which best exploits the firm’s abilities and while minimizing its weaknesses is a crucial choice for a startup organization. A similar issue that impacts the success of the new venture is the stage of development of the technology possessed by the firm’s products (Doutriaux, 1992). Those firms utilizing a technology which is unique due to a technological breakthrough tend to be supply driven and thus offer a greater opportunity for success (Doutriaux, 1992). However, once the technology is wide spread the market becomes much more demand driven and above par profits become more difficult to obtain. Thus, those firms whose products represent technological breakthroughs will more likely be successful. The individual characteristics of the firm also impact the success of the company. For example, those firms with greater assets are more likely to be successful (Fredriksen,
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Klofsten, Olofsson, & Wahlbin, 1989). Part of the reason for such success is that firms with larger assets have the luxury of greater organizational slack. The presence of such slack allows the firm greater flexibility in dealing with unexpected occurrences in its environment. Similarly, those firms who have greater external funding have a greater chance of success (Slevin & Covin, 1987). Such funding also provides greater ability for the startup firm to adjust to unexpected occurrences in its environment. Additionally, it has been shown that when external funding comes from sources such as a venture capitalist they can provide advice and networking which can aid the success of the new venture (Bygrave, 1987). Finally, those firms which have a business plan in place are more likely to be successful (Rinholm & Boag, 1987). In summary, the evidence concerning the characteristics of the firm and its industry associated with high technology startup firm success include the following issues: 1. 2. 3. 4. 5.
Selection of an industry that matches the firm’s strengths and weaknesses; Stage of development of the technology produced represents a technological High level of titm assets; High level of external funding; and A business plan in place.
Firm Competitive
break through;
Strategy
Finally, there are a variety of strategic issues that a firm must address which will also impact its ultimate success. It has been shown that entrepreneurial startups which choose to pursue an international strategy from their initiation are structured differently than entrepreneurial firms which pursue an international strategy later or choose not to pursue an international strategy (Oviatt & McDougall, 1994). There are multiple reasons why high technology firms pursuing an international strategy will accrue certain benefits. For example, high technology firms frequently need a critical market mass in order to recoup their initial R&D investment. Alternatively, for high technology firms whose products can be easily copied a large market is needed to insure that they quickly recoup their investment before duplication occurs. These factors help lead to greater success by high technology firms that pursue an international strategy from their startup in certain situations (McDougall & Oviatt, 1996). The firm must also determine which competitive strategy to pursue. While there are a number of competitive strategies that are available, the new entrepreneurial firm must insure that the strategy pursued is consistent with the industrial structure present in the startup firm’s industry (Covin & Slevin, 1988). In summary, the strategic characteristics associated with successful high technology startups include two issues: 1. 2.
Presence of an international startup strategy; and Strategic posture consistent with industry and technological
GLARUS
status of product.
CORPORATION
The use of in-depth case analysis to develop theory has been recognized (Dyer & Wilkins, 1991). Each of the characteristics of successful high technology startups previously
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discussed will now be examined in relation to Russia utilizing Glarus as a case example. Testable propositions will be developed to help direct future research utilizing a large data base of high technology startup firms. The environment in Russia is more turbulent than that associated with the United States, or similarly developed economies such as Canada. The nation’s transition to a market economy has resulted in rapid declines in the governmental spending to support various state businesses and other governmental functions such as research laboratories. Ad~tionally, the nation has suffered a significant decline in its industrial output since beginning to attempt to move to a free market. As the large state businesses and institutions have declined there has been a reduction in employment by those firms. These former employees have developed new entrepreneurial ventures (Ageev, et al., 1995). This growth of entrepreneurial firms has occurred throughout the Russian economy including the high technology sector. Prior to economic liberalization Russia’s work force contained a very high percentage of scientist. As these researchers left their research laboratories and universities they began to establish high technology entrepreneurial firms. One such firm is Glarus. This firm was established in 1991 by three researchers who left one of the large governmental research laboratory which focused on micro-electronics. The firm was founded in the city of Zelenograd which is located near Moscow. In the Soviet Union’s demand economy Zelenograd was the center of the nation’s computer technology and production. The city has frequently been referred to as the Russian equivalent of the United State’s Silicon Valley. As the large high technology firms in the city have faced increasing financial problems they have had to layoff employees. The result has been that a large number of these individuals have founded new entrepreneurial ventures. Thus, since the movement towards a free market system in Russia began, the revenues of the small en~epreneu~al firms in Zelenograd have gone from zero in 1990 to 140 billion rubles in 1994 (Zelenograd Council of Directors, 1995). At the same time the large high technology firms saw their revenues drop from 670 billion roubles in 1990 to 100 million in 1994 (Zelenograd Council of Directors, 1995). Founder Characteristics Previously, it was cited that most high technology startups begin as a team effort. The same appears to be true in Russia. Glarus was founded by three individuals who left one of the large government research laboratories in Zelenograd in 1991. They left the laboratory due to declines in governmental funding which resulted in large numbers of layoffs. Two of the three individuals possess the Russian equivalent of a Ph.D. while the other holds a master’s degree. All three were actively involved in research prior to the founding of the new venture. Discussions with the principal founder of the firm, Mr. Vladimir A. Bespalov, indicated that most other high technology firms in Russia have been founded in a similar manner. The rationale is similar to that in the United States, that multiple founders can each bring special skills and resources to the new business which help it to succeed. The need for resources may even play a greater role in Russia since the sources of external funding for such startup businesses are much fewer than in the United States. For example to date, there are no widely available venture capital funds or seed capital efforts funded by the government. Even the banking system itself remains in a rudimentary and chaotic state. Therefore, the first testable proposition is:
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High technology startups founded by multiple member teams outperform those startups founded by single individuals in a transitional economy.
The age of the principal founder has also been shown to be significantly associated with the success of the new ventures. The average age of the founders of high technology firms being between 34.9 years (Doutriaux, 1992) and 39.7 years (Bruno & Tybejee, 1985). The age of Russian entrepreneurs would appear to be approximately the same. The age of Mr. Bespalov, the principal founder of the firm, was 36 at the company’s establishment. It is not determinable with a single case if an age difference is present in successful versus unsuccessful new startups. However, it appears to be an area ripe for investigation based on the case example. It may even be a stronger relationship in Russia. It is the young who are most easily adapting to the new economic realities in Russia and world competitive demands. Therefore, the second testable proposition is: P-2:
Greater success is associated with younger neurs in a transitional economy.
high technology
entrepre-
The remaining areas of founder’s characteristics identified as important in established economies are more problematic. In a demand economy, a central authority decides issues such as production and procurement. Thus, it is very unlikely that the founders of high technology firms learned any substantial skills other than technological which they can transfer from their prior work at the state research facilities or universities to the new market economy. Similarly, the ability to develop marketing, or finance skills would likely be very minimal in a demand economy. The time in which a market economy in Russia has been in place is very short; substantial reforms beginning in 1991. Thus, it is also unlikely that any of the founders have any significant prior startup business experience. For example, the founders of Glarus had not had an opportunity to any gain such experiences in their work endeavors for the state laboratory. Therefore, these issues would not likely be substantive issues for investigation in Russia. Firm/Industry
Characteristics
The selection of the industry in which to compete has also been shown to be critical to the success of the new venture in a stable environment. Therefore, it is commonly argued that firms should match the firm’s strength and weaknesses to the opportunities and threats in the industry (Covin & Slevin, 1988). It could be expected that similar activities would also normally be expected in Russia. However, a special dimension of a turbulent environment, such as Russia’s, is that rapid change becomes the norm. The concept of hyper-competition, as introduced by D’Aveni (1994), argues that past concern in matching the environment with the nature of the firm should no longer be the principal focus of the firm. Rather, the nature of competition is changing to where it is whether the firm can rapidly change and adapt to its new environment, or actually change that environment, which determines firm success. The economic environment in Russia would appear to offer a prime opportunity to contrast and study these two views of firm success, industry matching versus ability to adapt and drive change. The behaviors by Glarus support the emphasis on the ability of the firm to adapt as a key to the firm’s success. The nature of the rapid changes in the Russian economy such as the rapid changes in currency valuation (the exchange rate of the rouble
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has gone from 35 per dollar in 1991 to approximately 5,000 per dollar over the period of economic li~rali~tion~ and frequent changes in the nation’s laws has forced the firm to make rapid and continual adjustments. The experience of Glarus plus the recent emphasis by the strategic management literature on the ability to adapt and change, even in a stable economic environment, leads to the expectation in Russia that: P-3:
Rather than which high technology industry a firm competes, it is the firm’s ability to adapt to, or change, its envi~nment which is the most critical aspect of firm success in a transitional economy.
The stage of the development of the technology of the product produced by the high technology firm has also been shown to be important to firm success. A unique aspect of high technology firms in Russia is that frequently these frms’ products were developed originally by the large laboratories from which the high technology entrepreneurs came. The chaotic state of the Russian economy which followed the elimination of the Soviet Union, and the introduction of a market economy reforms, resulted in many researchers simply taking technology from the laboratory where they worked. If a project involved numerous individuals, it was not uncommon for there to be competing teams of individuals establishing firms with similar products at the same time. Additionally, due to the time it took individuals unfamiliar with business principles to establish a new venture, the products were frequently no longer the latest technology in the market place relative to international competitors when they actually began production. However, Russian startup firms typically have no resources for further research and development spending and can not update the technology further. This scenario accurately describes the situation faced by Glarus. The three individuals who founded the firm left their employer with the technology used to m~ufacture the high resolution microscope which became their principal product. However, several other teams also left the same or other related laboratories to establish competing firms. By the time the founders of Glarus were able to produce the microscope European firms had entered the market with a product more advanced. The evidence from the literature on high technology firms in the United States is that being a technological follower does not produce the greatest firm success. Therefore, the testable proposition comparing those firms with break through technology and those without would be: P-4:
High technology firms with breakthrough technology will be more successful than those with demand driven technology in a transitional economy.
The resource poor nature of startup firms in Russia makes the examination of the asset levels of startup firms not very insightful. Additionally, examining the levels of external funding would also not provide much insight since it will be very uncommon for startup firms to have such funding in Russia. The last area of firm characteristics which impacts startup success, and that provides the potential for insight, is the presence of a business plan. The business plan itself indicates several things for the Russian firm. For example, as in the United States the plan symbolizes that the entrepreneur has spent time considering the various aspects of the new business and has committed the time to put those items on paper. It may also denote that the entrepreneur has contacts with business people from outside Russia. Russians would
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not normally be expected to know or understand how to construct a business plan. The individuals who encourage the Russian firms planning activities may be friends of the entrepreneur or may be members of the various business aid programs made available to Russian citizens through the European Union or the United States. In either case such people represent a source of information and aid which the entrepreneur may have that many other Russian firms do not. Glarus did not have a business plan in place when it was begun. The testable proposition is: P-5:
The presence of a business plan leads to greater high technology tup firm success in a transitional economy.
star-
Strategic Characteristics Previously it was discussed that startup firms with an international strategy have a different structure and in some cases have higher performance. Glarus sought to pursue an international strategy when it was formed by selling its product in Scandinavian countries. However, difficulty in servicing the equipment lead them to withdraw from that market. Mr. Bespalov indicated that with the deep financial crisis in Russia that this firm, and by implication of other high technology firms, had to pursue intemational efforts. The government, nor its people, have the resources to purchase many high technology items in Russia. Tberefore, it appears that to pursue the investigation of an international strategy utilization by high technology startup firms in Russia would be insightful. P-6:
High technology startup firms that pursue an international strategy from their initiation experience greater success in a transitional economy.
It was previously discussed m&t firms which match their strategy to their industry and status of their product outperform those that do not. One unique aspect of a transitional economy is that many activities which are commonly assumed to exist in a developed economy are yet to be fuily evolved. Thus, in matching themselves to their environment high technology firms in Russia may devote most of their energies to their high technology product. However, that product may not be the most profitable activity the firm pursues. The international contacts that many high technology firms develop allow such firms to import and then wholesale various products. Inefficiencies in the distribution system make such “trade” activities very profitable. Therefore, it is not uncommon for Russian high technology firm to diversify into various activities to help ensure their survival. Glarus has followed such a pattern of behavior. The firm continues to principally build and sell microscopes. However, the profitability of the firm is now driven by other endeavors. The firm has diversified into calculator assembly, night vision products, and importing and wholesaling of consumer electronics. High technology startups in a stable environment, such as the United States, would not typically pursue such a range of activities. Ad~tion~ly, the evidence from the United States is that firms that do pursue such unrelated activities experience lower profitability (Rumelt, 1982). Therefore, the testabte proposition is that: P-7:
Higher levels of unrelated diversification by high technology startup firms in a transitional economy leads to lower levels of profitability.
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DISCUSSION The propositions developed here will help direct researchers as they begin large scale investigations of high technology firms in transitional economies such as Russia. However, specific consideration should be given to several unique aspects of ~~ndu~~ng such research. One of the unique characteristics of business in Russia is that typically they have a much higher degree of secrecy than occurs in the United States. This secrecy can be traced to several causes. Among them are the excessive tax laws of the nation. It is estimated that taxes for business can be as high as 50 percent. It is the very high level of taxes that recently lead to the abandonment of a manufacturing effort by IBM in Russia (Banerjee, 1996). This despite the fact the facility was cited by IBM as its top facility in Europe the prior year. High level of taxes leads many firms to seek to hide portions of their income. Addition~ly, the high level of mafia activity in the country discourages a firm from appearing too profitable to the external world. Such profitability can draw attention to the firm from the mafia. Therefore, obtaining financial information from startup businesses in Russia is not likely to occur. Thus, alternative qualitative measures of performance will need to be utilized. Additionally, the method for gathering data for such research will need to be adapted to the Russian environment. As noted previously, secrecy is very prevalent in the Russian business. In addition, traditional information gathering methods such as mail and telephone surveys have not historically been used in Russia and are not likely to generate significant response rates. Even when such methods do generate responses the reliability of the data would be questionable. Therefore, the method which is likely to be the most successful is structured interviews. But the individual conducting those interviews will likely still need some association with a group or individual who can assure that the firm to be contacted will trust them enough to provide the confidential data. Finally, identifying firms for those interviews will need to be considered. The nature of the planned economy concentrated certain industries and related research facilities in a given area. Those areas which contained a large concentration of high technology industries and research facilities will be the greatest sources of high technology entrepreneurs. It is the employees of those facilities that are the most likely to begin new high technology firms. The former planned economy of Russia aid this process since the nation tried to concentrate firms from high technology industries in one city. For example, one area of concentration of such high technology businesses is Zelenograd, Glarus’ home and center of the nation’s micro-electronic industry. Other similar cities include: Chemolgolovka which concentrated on laser technology; Rushkino which concentrated on biology related areas; Monina which concentrated on aviation, and Mitechi which concentrated on space related areas. Each of these cities were closed cities prior to 1991 but now are open to western researchers. Additionally, each of these cities are cIose to Moscow which should facilitate the research in these cities. The initial research effort should seek to answer the propositions discussed here. In the future researchers should expand their research efforts beyond these preliminary topics. The propositions developed here are based on the findings in a stable environment. However, in the future greater international research which utilized multi-national samples needs to be developed. For example, those topics whose underst~ding continues to expand rapidly such as: the role and the impact of strategy implementation; the role of
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and the impact of differing capital structure need
CONCLUSION
The discussion provided here has provided seven propositions which can aid researchers in developing an agenda of research on high technology startup firms in Russia. The Russian economy continues to go through rapid changes. However, it is important that greater insight be pursued into the operation of high technology firms if that nation is to be able to begin to proposer and to develop new firms and industries which will be internationally competitive. Additionally, it is important for researchers to begin to understand how high technology startup firms prosper in environments other than in the stable environment of the United States or similar economies. The propositions and discussion here will help to begin that investigation. After examining high technology startups in Russia, the research should ultimately be expanded to compare and contrast the results with startups through out the former communist countries.
ACKNOWLEDGMENT
Presented to the Southern Management
Association,
November,
1996 New Orleans.
NOTES 1.
Psychological factors such as the propensity of the founder to take risks has frequently been discussed in relation to new venture success. However, there is some degree of disagreement about the impact of such psychological factors on the success of new ventures (Lorrain & Dussault, 1988; Stuart & Abetti, 1988). This disagreement and the substantially different nature of such psychological investigations lead the researchers to not include them in this study.
REFERENCES
Ageev, A., Gratchev, M.V., & Hisrich, R.D. (1995). Entrepreneurship in the Soviet Union and postsocialist Russia. Small Business Economics, forthcoming. Banerjee, N. (1996). IBM to close two year old venture in Russia, citing onerous taxes for step. Wall Street Journal, AlO, (Feb. 29). Bruno, A.V., & Tyebjee, T.T. (1985). The entrepreneurs search for capital. Journal of Business Venturing, 1,61-74. Bygrave, W.D. (1987). Syndicated investment by venture capital firms: A networking perspective Journal of Business Venturing 37, 972-989. Cooper, A.C., & Bruno, A. (1977). Success among high technology firms. Business Horizons, 20(2), 16-22. Covin, J.G., & Slevin, D.P. (1988). New venture competitive strategy: An industry life cycle analysis. In B. Kirchoff et al. (Eds.), Frontiers of entrepreneurship research. pp. 446-460. Wellesely Massachusetts: Babson College.
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Managing the dynamics of strategic maneuvering. Free press, New York. Doutriaux, J. (1992). Emerging high technology firms: How durable are their comparative start-up advantages? Journal ofBusiness Venturing, 7, 303-322. Dyer, W. & Wilkins, A. (1991). Better stories, not better constructs to generate better theory: A rejoiner to Eisenhardt. Academy of Management Review, 16(3), 613-619. Feeser, H.R., & Willard, G.E. (1989). Incubators and performance: A comparison of high- and lowgrowth high technology Iirms. Journal of Business Venturing, 4, 429&2. Fredriksen, O., Klofsten, M., Olofsson, C., & W~lbin, K. (1989). Growth, performance and financial structure of new technology based firms: A preliminary analysis. In R.H. Brockhaus et al. (Eds.), Frontiers of entrepreneurship research. pp. 189-199. Wellesely, Massachusetts: Babson College. Goslin, L.N. (1987). Characteristics of successful high-tech start-up firms. In N. Churchhill et al. (Eds.), Frontiers of entrepreneurship research. pp. 452-463. Wellesely, Massachusetts: Babson College. Interview with ~adim~r Bespalov, principle founder and owner Glarns (1995). October, Zelenograd, Russia. Kamm, J.B., Shuman, J.C., Seegar, J.A., & Nurick, A.J. (1989). Are well balanced entrepreneurial teams more successful? In R. Brockbaus, et al. (Eds.), Frontiers of entrepreneurship research. pp. 428-429. Wellesley, Massachusetts: Babson College. Kirchoff, B.A., & Phillips, B.D. (1987). Examining entrepreneurship’s role in economic growth. In N. Churchi et al. (Eds.), Frontier’s of enfrepreneurs~i~ research. pp. 57-71. Wellesley, Massachusetts: Babson College. Lorrain, J., & Dussault, L. (1988). Relation between psychological characteristics, administrative behaviors and success of founder- entrepreneurs at the start-up stage. In B. Kirchoff et al. (Eds.), Frontier’s of entrepreneurship research. pp. 150-164. Wellesley, Massachusetts: Babson College. Ma&is, S. (1994). The best high tech from Europes’s new players R&D, 36, 20-25. McDougall, P.P., & Oviatt, B.M. (1996). New venture internationalization, strategic change, and performance: A follow-up study. Journal of Business Venturing. Oviatt, B., & McDougall, P. (1994). Toward a theory of international new ventures. JournaE of International Business Studies, 25, 45-64. Rinholm, B., & Boag, D.A. (1987). Controlling new product development in the small technologybased firm. American Journal of Small Business, 12, 37-49. Rumelt, R.P. (1982). Diversification strategy and provability. Strategic Management Journai, 3, 359-369. Slevin, D.P., & Covin, J.G. (1987). The competitive tactics of entrepreneurial llrms in high- and low-technology industries.In NC. Churchill et al. (Eds.), Frontiers of entrepreneurship research. pp. 87-101. Wellesley, Massachusetts: Babson College. Stuart, R.W., & Abetti, P.A. (1988). Field studies of technical ventures - Part 111: The impact of ent~preneu~al and management experience on early ~~o~ance.In B.A. Kirchoff et al. (Eds.), Frontiers of entrepreneurship research. pp. 177-193. Wellesley, Massachusetts: Babson College. Vesper, K.H. (1980). New venture creation. Englewood Cliffs, N.J.: Prentice-Hall. Zelenogrud Council of Directors (1995). Report of local authorities delivered at meeting with Council of Directors.
GARRY D. BRUTON AND YURI RUBANIK University of Tulsa, and Moscow Federal Institute of Electronic Technology
Prior to the break up of the Soviet Union many world class technologies were present in the various nations of the Soviet block. Numerous entrepreneurial endeavors have developed based on these technologies as each of the various countries has moved to a market economy. However to date, high technology startups in Russia and many of the other transitional economies is yet to significantly occur. Utilizing an in-depth case analysis of a high technology startup in Russia this manuscript fills part of this void by developing seven testable propositions. These propositions will help direct future investigations of high technology startups in transitional economies.
To date, the investigation of high technology entrepreneurship has focused on the activity in the United States, or other nations with similar stable economic environments such as Canada. In part, this interest in high technology startups in these nations is produced by the critical role that high technoIogy plays in a nation’s economic vitality and resilience (Kirchoff & Phillips, 1987). As industries mature and begin to decline, it is high technology startups which provide the next generation of firms necessary for a stable economy’s growth. There is no reason to expect that high technology startups would be less important in transitional economies. In fact, there is anecdotal evidence of the importance of such
Direct all conrespondence to: Garry D. Bruton, Department of Management. College of Business, University of Tulsa, Tulsa, Oklahoma 74104; Fax: (918) 63 1-2142; E-Mail: [email protected]; Yuri Rubanik, Director Quality Laboratory, Moscow Federal Institute of Electronic Technology, Moscow, Russia. The Journal of High Technology Management Research, Volume 8, Number 2, pages 213-223 Copyright@ 1997 by JAI PIWS, Inc. All rights of reproduction in any form reserved. ISSN: 1047-8310.
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firms in widely divergent environments such as software startups in the Czech Republic and biotechnology firms in Cuba. However to date, there has not been wide spread investigation of high technology startups such nations. Russia has been moving slowly away from a state planned economy since 1989. The transition to a market economy that has occurred in Russia has resulted in a dramatic increase in small entrepreneurial firms (Ageev, Gratchev, & Hisrich, 1995). Additionally, Russia has historically been a producer of world class technological products in many industries (Machlis, 1994). This technological base combined with the opportunity provided by the transition to a market economy has resulted in the founding of many high technology startups. Before a large scale systematic investigation of high technology entrepreneurial startups can occur, the theoretical base for such an examination must be established. This manuscript will fill the existing void on high technology startups in a transitional economy by first examining the existing literature on the characteristics of successful versus unsuccessful high technology startups. The use of in-depth case studies for theory development has previously been recognized (Dyer & Wilkins, 1991). Thus, the manuscript will next examine a Russian high technology startup to develop seven testable propositions. While Russia is the focus of the examination offered here, the propositions developed can also provide guidance for research in other transitional economies. The paper then concludes with a discussion of future research on this critical topic.
LITERATURE
REVIEW
The literature on the characteristics of successful high technology startups can, in stable economic environments, be categorized into three broad subject areas: 1.
2. 3.
Founder characteristics; Firm characteristics; and Startup strategy (Doutriaux, 1992).
Each of these areas will briefly be examined
in turn to establish the domain of concern.
Founder Characteristics There have been a variety of characteristics among founders which have been shown to be associated with high technology startup success. First among these is most successful startups are founded by a team of individuals (Cooper & Bruno, 1977). For example, it has been shown that over 80% of successful high technology firms are founded by two or more people (Cooper & Bruno, 1977). The greater success of such teams is due to the larger set of skills and resources which multiple individuals can bring to a startup. However, multiple member teams can grow to be too large (Kamm, Shuman, Seegar, & Nurick, 1989). If the management styles become too diverse from the presence of too many individuals making decisions, the reaching of a consensus in a timely manner can become problematic. Thus, an associated characteristic is that there is a high dissolution rate among those founding team members (Cooper & Bmno, 1977). The founders of successful businesses, whether they be individuals or members of a team, also have differentiable characteristics. For example, the age of the principal
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founders of high technology startups has been shown to range between 34.9 years (Doutriaux, 1992) and 39.7 years (Bruno & Tyebjee, 1985). However, a significant negative relationship between age of the founder and firm performance has also been indicated (Doutriaux, 1992); the younger the founder the more successful the firm. Additionally, the prior work experience of the founders is important to the ultimate success of a high technology startup. The entrepreneur obtains knowledge about the market served as well as other general business knowledge about the product while employed. The new venture founder can take and apply that knowledge more easily to a new venture which is similar to that of his/her former employer. Thus, the closer the product produced by the startup is to the product produced and sold by the founder’s former employer, the greater is the opportunity for success by the new venture (Feeser & Willard, 1989; Goslin, 1987). While working for that employer if the entrepreneur can develop expertise in a particular functional area it can also aid success in a startup. For example, if the entrepreneur can develop an expertise in marketing or finance they are more likely to experience success (Doutriaux, 1992). Finally, prior experience in a startup business can also impact the success of the entrepreneur in certain situations. For example, prior startup business experience can be particularly beneficial in multi-member founding teams where the other members of the team come from large organizations and have no startup business experience (Feeser & Willard, 1989). In summary, the characteristics of the founders of successful high technology startups include the following issues: 1. 2. 3. 4. 5.
Multiple member teams (although the teams should not grow too large); Younger principle founder; Principal founder’s previous employer’s product and market served are similar to that of startup business; and Prior expertise in marketing and finance by the principal founding entrepreneur. In some instances prior startup business experience.
Firm/Industry
Characteristics
The characteristics of the firm and the industry in which it competes have also been shown to be important to the ultimate success of the new venture. One of the most critical decisions that a new venture can make is knowing in what industry to compete (Vesper, 1980). Different industries offer different opportunities and threats. Thus, picking the industry which best exploits the firm’s abilities and while minimizing its weaknesses is a crucial choice for a startup organization. A similar issue that impacts the success of the new venture is the stage of development of the technology possessed by the firm’s products (Doutriaux, 1992). Those firms utilizing a technology which is unique due to a technological breakthrough tend to be supply driven and thus offer a greater opportunity for success (Doutriaux, 1992). However, once the technology is wide spread the market becomes much more demand driven and above par profits become more difficult to obtain. Thus, those firms whose products represent technological breakthroughs will more likely be successful. The individual characteristics of the firm also impact the success of the company. For example, those firms with greater assets are more likely to be successful (Fredriksen,
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Klofsten, Olofsson, & Wahlbin, 1989). Part of the reason for such success is that firms with larger assets have the luxury of greater organizational slack. The presence of such slack allows the firm greater flexibility in dealing with unexpected occurrences in its environment. Similarly, those firms who have greater external funding have a greater chance of success (Slevin & Covin, 1987). Such funding also provides greater ability for the startup firm to adjust to unexpected occurrences in its environment. Additionally, it has been shown that when external funding comes from sources such as a venture capitalist they can provide advice and networking which can aid the success of the new venture (Bygrave, 1987). Finally, those firms which have a business plan in place are more likely to be successful (Rinholm & Boag, 1987). In summary, the evidence concerning the characteristics of the firm and its industry associated with high technology startup firm success include the following issues: 1. 2. 3. 4. 5.
Selection of an industry that matches the firm’s strengths and weaknesses; Stage of development of the technology produced represents a technological High level of titm assets; High level of external funding; and A business plan in place.
Firm Competitive
break through;
Strategy
Finally, there are a variety of strategic issues that a firm must address which will also impact its ultimate success. It has been shown that entrepreneurial startups which choose to pursue an international strategy from their initiation are structured differently than entrepreneurial firms which pursue an international strategy later or choose not to pursue an international strategy (Oviatt & McDougall, 1994). There are multiple reasons why high technology firms pursuing an international strategy will accrue certain benefits. For example, high technology firms frequently need a critical market mass in order to recoup their initial R&D investment. Alternatively, for high technology firms whose products can be easily copied a large market is needed to insure that they quickly recoup their investment before duplication occurs. These factors help lead to greater success by high technology firms that pursue an international strategy from their startup in certain situations (McDougall & Oviatt, 1996). The firm must also determine which competitive strategy to pursue. While there are a number of competitive strategies that are available, the new entrepreneurial firm must insure that the strategy pursued is consistent with the industrial structure present in the startup firm’s industry (Covin & Slevin, 1988). In summary, the strategic characteristics associated with successful high technology startups include two issues: 1. 2.
Presence of an international startup strategy; and Strategic posture consistent with industry and technological
GLARUS
status of product.
CORPORATION
The use of in-depth case analysis to develop theory has been recognized (Dyer & Wilkins, 1991). Each of the characteristics of successful high technology startups previously
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discussed will now be examined in relation to Russia utilizing Glarus as a case example. Testable propositions will be developed to help direct future research utilizing a large data base of high technology startup firms. The environment in Russia is more turbulent than that associated with the United States, or similarly developed economies such as Canada. The nation’s transition to a market economy has resulted in rapid declines in the governmental spending to support various state businesses and other governmental functions such as research laboratories. Ad~tionally, the nation has suffered a significant decline in its industrial output since beginning to attempt to move to a free market. As the large state businesses and institutions have declined there has been a reduction in employment by those firms. These former employees have developed new entrepreneurial ventures (Ageev, et al., 1995). This growth of entrepreneurial firms has occurred throughout the Russian economy including the high technology sector. Prior to economic liberalization Russia’s work force contained a very high percentage of scientist. As these researchers left their research laboratories and universities they began to establish high technology entrepreneurial firms. One such firm is Glarus. This firm was established in 1991 by three researchers who left one of the large governmental research laboratory which focused on micro-electronics. The firm was founded in the city of Zelenograd which is located near Moscow. In the Soviet Union’s demand economy Zelenograd was the center of the nation’s computer technology and production. The city has frequently been referred to as the Russian equivalent of the United State’s Silicon Valley. As the large high technology firms in the city have faced increasing financial problems they have had to layoff employees. The result has been that a large number of these individuals have founded new entrepreneurial ventures. Thus, since the movement towards a free market system in Russia began, the revenues of the small en~epreneu~al firms in Zelenograd have gone from zero in 1990 to 140 billion rubles in 1994 (Zelenograd Council of Directors, 1995). At the same time the large high technology firms saw their revenues drop from 670 billion roubles in 1990 to 100 million in 1994 (Zelenograd Council of Directors, 1995). Founder Characteristics Previously, it was cited that most high technology startups begin as a team effort. The same appears to be true in Russia. Glarus was founded by three individuals who left one of the large government research laboratories in Zelenograd in 1991. They left the laboratory due to declines in governmental funding which resulted in large numbers of layoffs. Two of the three individuals possess the Russian equivalent of a Ph.D. while the other holds a master’s degree. All three were actively involved in research prior to the founding of the new venture. Discussions with the principal founder of the firm, Mr. Vladimir A. Bespalov, indicated that most other high technology firms in Russia have been founded in a similar manner. The rationale is similar to that in the United States, that multiple founders can each bring special skills and resources to the new business which help it to succeed. The need for resources may even play a greater role in Russia since the sources of external funding for such startup businesses are much fewer than in the United States. For example to date, there are no widely available venture capital funds or seed capital efforts funded by the government. Even the banking system itself remains in a rudimentary and chaotic state. Therefore, the first testable proposition is:
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High technology startups founded by multiple member teams outperform those startups founded by single individuals in a transitional economy.
The age of the principal founder has also been shown to be significantly associated with the success of the new ventures. The average age of the founders of high technology firms being between 34.9 years (Doutriaux, 1992) and 39.7 years (Bruno & Tybejee, 1985). The age of Russian entrepreneurs would appear to be approximately the same. The age of Mr. Bespalov, the principal founder of the firm, was 36 at the company’s establishment. It is not determinable with a single case if an age difference is present in successful versus unsuccessful new startups. However, it appears to be an area ripe for investigation based on the case example. It may even be a stronger relationship in Russia. It is the young who are most easily adapting to the new economic realities in Russia and world competitive demands. Therefore, the second testable proposition is: P-2:
Greater success is associated with younger neurs in a transitional economy.
high technology
entrepre-
The remaining areas of founder’s characteristics identified as important in established economies are more problematic. In a demand economy, a central authority decides issues such as production and procurement. Thus, it is very unlikely that the founders of high technology firms learned any substantial skills other than technological which they can transfer from their prior work at the state research facilities or universities to the new market economy. Similarly, the ability to develop marketing, or finance skills would likely be very minimal in a demand economy. The time in which a market economy in Russia has been in place is very short; substantial reforms beginning in 1991. Thus, it is also unlikely that any of the founders have any significant prior startup business experience. For example, the founders of Glarus had not had an opportunity to any gain such experiences in their work endeavors for the state laboratory. Therefore, these issues would not likely be substantive issues for investigation in Russia. Firm/Industry
Characteristics
The selection of the industry in which to compete has also been shown to be critical to the success of the new venture in a stable environment. Therefore, it is commonly argued that firms should match the firm’s strength and weaknesses to the opportunities and threats in the industry (Covin & Slevin, 1988). It could be expected that similar activities would also normally be expected in Russia. However, a special dimension of a turbulent environment, such as Russia’s, is that rapid change becomes the norm. The concept of hyper-competition, as introduced by D’Aveni (1994), argues that past concern in matching the environment with the nature of the firm should no longer be the principal focus of the firm. Rather, the nature of competition is changing to where it is whether the firm can rapidly change and adapt to its new environment, or actually change that environment, which determines firm success. The economic environment in Russia would appear to offer a prime opportunity to contrast and study these two views of firm success, industry matching versus ability to adapt and drive change. The behaviors by Glarus support the emphasis on the ability of the firm to adapt as a key to the firm’s success. The nature of the rapid changes in the Russian economy such as the rapid changes in currency valuation (the exchange rate of the rouble
High Technology Entrepreneurship
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has gone from 35 per dollar in 1991 to approximately 5,000 per dollar over the period of economic li~rali~tion~ and frequent changes in the nation’s laws has forced the firm to make rapid and continual adjustments. The experience of Glarus plus the recent emphasis by the strategic management literature on the ability to adapt and change, even in a stable economic environment, leads to the expectation in Russia that: P-3:
Rather than which high technology industry a firm competes, it is the firm’s ability to adapt to, or change, its envi~nment which is the most critical aspect of firm success in a transitional economy.
The stage of the development of the technology of the product produced by the high technology firm has also been shown to be important to firm success. A unique aspect of high technology firms in Russia is that frequently these frms’ products were developed originally by the large laboratories from which the high technology entrepreneurs came. The chaotic state of the Russian economy which followed the elimination of the Soviet Union, and the introduction of a market economy reforms, resulted in many researchers simply taking technology from the laboratory where they worked. If a project involved numerous individuals, it was not uncommon for there to be competing teams of individuals establishing firms with similar products at the same time. Additionally, due to the time it took individuals unfamiliar with business principles to establish a new venture, the products were frequently no longer the latest technology in the market place relative to international competitors when they actually began production. However, Russian startup firms typically have no resources for further research and development spending and can not update the technology further. This scenario accurately describes the situation faced by Glarus. The three individuals who founded the firm left their employer with the technology used to m~ufacture the high resolution microscope which became their principal product. However, several other teams also left the same or other related laboratories to establish competing firms. By the time the founders of Glarus were able to produce the microscope European firms had entered the market with a product more advanced. The evidence from the literature on high technology firms in the United States is that being a technological follower does not produce the greatest firm success. Therefore, the testable proposition comparing those firms with break through technology and those without would be: P-4:
High technology firms with breakthrough technology will be more successful than those with demand driven technology in a transitional economy.
The resource poor nature of startup firms in Russia makes the examination of the asset levels of startup firms not very insightful. Additionally, examining the levels of external funding would also not provide much insight since it will be very uncommon for startup firms to have such funding in Russia. The last area of firm characteristics which impacts startup success, and that provides the potential for insight, is the presence of a business plan. The business plan itself indicates several things for the Russian firm. For example, as in the United States the plan symbolizes that the entrepreneur has spent time considering the various aspects of the new business and has committed the time to put those items on paper. It may also denote that the entrepreneur has contacts with business people from outside Russia. Russians would
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not normally be expected to know or understand how to construct a business plan. The individuals who encourage the Russian firms planning activities may be friends of the entrepreneur or may be members of the various business aid programs made available to Russian citizens through the European Union or the United States. In either case such people represent a source of information and aid which the entrepreneur may have that many other Russian firms do not. Glarus did not have a business plan in place when it was begun. The testable proposition is: P-5:
The presence of a business plan leads to greater high technology tup firm success in a transitional economy.
star-
Strategic Characteristics Previously it was discussed that startup firms with an international strategy have a different structure and in some cases have higher performance. Glarus sought to pursue an international strategy when it was formed by selling its product in Scandinavian countries. However, difficulty in servicing the equipment lead them to withdraw from that market. Mr. Bespalov indicated that with the deep financial crisis in Russia that this firm, and by implication of other high technology firms, had to pursue intemational efforts. The government, nor its people, have the resources to purchase many high technology items in Russia. Tberefore, it appears that to pursue the investigation of an international strategy utilization by high technology startup firms in Russia would be insightful. P-6:
High technology startup firms that pursue an international strategy from their initiation experience greater success in a transitional economy.
It was previously discussed m&t firms which match their strategy to their industry and status of their product outperform those that do not. One unique aspect of a transitional economy is that many activities which are commonly assumed to exist in a developed economy are yet to be fuily evolved. Thus, in matching themselves to their environment high technology firms in Russia may devote most of their energies to their high technology product. However, that product may not be the most profitable activity the firm pursues. The international contacts that many high technology firms develop allow such firms to import and then wholesale various products. Inefficiencies in the distribution system make such “trade” activities very profitable. Therefore, it is not uncommon for Russian high technology firm to diversify into various activities to help ensure their survival. Glarus has followed such a pattern of behavior. The firm continues to principally build and sell microscopes. However, the profitability of the firm is now driven by other endeavors. The firm has diversified into calculator assembly, night vision products, and importing and wholesaling of consumer electronics. High technology startups in a stable environment, such as the United States, would not typically pursue such a range of activities. Ad~tion~ly, the evidence from the United States is that firms that do pursue such unrelated activities experience lower profitability (Rumelt, 1982). Therefore, the testabte proposition is that: P-7:
Higher levels of unrelated diversification by high technology startup firms in a transitional economy leads to lower levels of profitability.
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DISCUSSION The propositions developed here will help direct researchers as they begin large scale investigations of high technology firms in transitional economies such as Russia. However, specific consideration should be given to several unique aspects of ~~ndu~~ng such research. One of the unique characteristics of business in Russia is that typically they have a much higher degree of secrecy than occurs in the United States. This secrecy can be traced to several causes. Among them are the excessive tax laws of the nation. It is estimated that taxes for business can be as high as 50 percent. It is the very high level of taxes that recently lead to the abandonment of a manufacturing effort by IBM in Russia (Banerjee, 1996). This despite the fact the facility was cited by IBM as its top facility in Europe the prior year. High level of taxes leads many firms to seek to hide portions of their income. Addition~ly, the high level of mafia activity in the country discourages a firm from appearing too profitable to the external world. Such profitability can draw attention to the firm from the mafia. Therefore, obtaining financial information from startup businesses in Russia is not likely to occur. Thus, alternative qualitative measures of performance will need to be utilized. Additionally, the method for gathering data for such research will need to be adapted to the Russian environment. As noted previously, secrecy is very prevalent in the Russian business. In addition, traditional information gathering methods such as mail and telephone surveys have not historically been used in Russia and are not likely to generate significant response rates. Even when such methods do generate responses the reliability of the data would be questionable. Therefore, the method which is likely to be the most successful is structured interviews. But the individual conducting those interviews will likely still need some association with a group or individual who can assure that the firm to be contacted will trust them enough to provide the confidential data. Finally, identifying firms for those interviews will need to be considered. The nature of the planned economy concentrated certain industries and related research facilities in a given area. Those areas which contained a large concentration of high technology industries and research facilities will be the greatest sources of high technology entrepreneurs. It is the employees of those facilities that are the most likely to begin new high technology firms. The former planned economy of Russia aid this process since the nation tried to concentrate firms from high technology industries in one city. For example, one area of concentration of such high technology businesses is Zelenograd, Glarus’ home and center of the nation’s micro-electronic industry. Other similar cities include: Chemolgolovka which concentrated on laser technology; Rushkino which concentrated on biology related areas; Monina which concentrated on aviation, and Mitechi which concentrated on space related areas. Each of these cities were closed cities prior to 1991 but now are open to western researchers. Additionally, each of these cities are cIose to Moscow which should facilitate the research in these cities. The initial research effort should seek to answer the propositions discussed here. In the future researchers should expand their research efforts beyond these preliminary topics. The propositions developed here are based on the findings in a stable environment. However, in the future greater international research which utilized multi-national samples needs to be developed. For example, those topics whose underst~ding continues to expand rapidly such as: the role and the impact of strategy implementation; the role of
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and the impact of differing capital structure need
CONCLUSION
The discussion provided here has provided seven propositions which can aid researchers in developing an agenda of research on high technology startup firms in Russia. The Russian economy continues to go through rapid changes. However, it is important that greater insight be pursued into the operation of high technology firms if that nation is to be able to begin to proposer and to develop new firms and industries which will be internationally competitive. Additionally, it is important for researchers to begin to understand how high technology startup firms prosper in environments other than in the stable environment of the United States or similar economies. The propositions and discussion here will help to begin that investigation. After examining high technology startups in Russia, the research should ultimately be expanded to compare and contrast the results with startups through out the former communist countries.
ACKNOWLEDGMENT
Presented to the Southern Management
Association,
November,
1996 New Orleans.
NOTES 1.
Psychological factors such as the propensity of the founder to take risks has frequently been discussed in relation to new venture success. However, there is some degree of disagreement about the impact of such psychological factors on the success of new ventures (Lorrain & Dussault, 1988; Stuart & Abetti, 1988). This disagreement and the substantially different nature of such psychological investigations lead the researchers to not include them in this study.
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