New technology-based firms growing into medium-sized firms

Thesis for the degree of licentiate of engineering

New technology-based firms growinginto medium-sized firms

Rögnvaldur J. Saemundsson

Department of Industrial DynamicsChalmers University of Technology

Göteborg, Sweden1999

New technology-based firms growing into medium-sized firms.Rögnvaldur J. Saemundsson

Department of Industrial DynamicsChalmers University of Technology412 96 GöteborgSweden

Göteborg, Sweden, 1999.

New technology-based firms growing into medium-sized firmsRögnvaldur J. Saemundsson

Department of Industrial Dynamics

Chalmers University of Technology

Abstract

The purpose of this study is to improve the knowledge the growth of new technology-

based firms into medium-sized firms. It is believed that new technology-based firms

are an important source of economic growth, both directly by growing into medium-

sized firms, and indirectly by providing specialized inputs into other industries. This

study is concerned with the former of these mechanisms. More specifically the study

will focus on what has enabled a group of new technology-based firms to grow into

medium-sized firms, while other new technology-based firms, with similar

prerequisites have stayed small.

The empirical analysis of this study is based on a combination of a cross sectional

survey on the population of new technology-based firm in Sweden and a number of

case studies of medium-sized firms belonging to that population. The population

included firms in industry related services as well as in manufacturing, and

independent firms as well as acquired.

Several factors have been identified, some which enable and some which hinder, new

technology-based firms to grow into medium-sized firms. These factors have been

found both within the firm and within the innovation system. While some of the

factors, such as growth acceptance and organizational adaption seem to be common

for all new technology-based firms, other factors, such as the creation of markets,

resource needs and resource access are highly dependent on the innovation context.

Keywords: New technology-based firms, small firm growth, medium-sized firms,

innovation system.

Acknowledgements

This thesis would not have been possible without the help and support I have hadfrom a large number of people.

First of all I would like to thank my supervisor Åsa Lindholm Dahlstrand. She had thecourage of taking me on as a doctoral student, and has patiently guided me throughthe process leading to this thesis. In spite of her busy schedule she has generouslyspent time reading and commenting my work. She has helped me to keep my focusand to build the supporting bricks that are needed for a work like this.

I would also like to thank Staffan Jacobsson who, by the virtue of his personal andintellectual integrity, is an important figure in the research environment at thedepartment. He has also made some valuable comments on this thesis.

I would like to thank Magnus Holmén for being there. His ability to “dadda” has beenvery helpful and his willingness to discuss the subject that is the most interesting,namely technology, makes life more fun.

All my other colleagues at the Department of Industrial Dynamics deserve thanks forproviding a friendly environment where one feels at home.

Special thanks go to the people that have generously provided the data that this studyis based on. This includes the large number of managers that have answered the mailsurvey, as well as the managers in the case study firms that have been interviewed.Many thanks to the people in the CREATE group that have made my life much easierby identifying the population of new technology-based firms and prepared the mailsurvey.

I would like to thank L E Lundbergs stiftelse för forskning och utbildning for theirgenerous financial support, and IMIT for administrative help.

Without being a part of the start-up team at Flaga hf. this study would never had beendone. I would like to thank all the people at Flaga hf. for giving me the opportunity towork on exciting things based on new technology. This has been a very memorableexperience that will continue to inspire me in the future.

Finally, I would like to thank my family for supporting my interests throughout theyears. This large family has always encouraged me to make my own decisions, andrespected and supported those decisions wholeheartedly. Special thanks go to thepersons that are closest to me, namely Birna, Sæmundur and Sölvi, that in additionshow me every day that there are other, more important things in life than writing athesis like this.

Göteborg, September 1999

Rögnvaldur Saemundsson

Table of contents

1 Introduction ...............................................................................................................1

1.1 Background..........................................................................................................11.2 Research problem ................................................................................................21.3 Related concepts ..................................................................................................21.4 Structure of the thesis ..........................................................................................4

2 Frame of reference ....................................................................................................5

2.1 Theoretical perspectives ......................................................................................52.1.1 Theoretical perspectives on the innovation process ......................................52.1.2 Theoretical perspectives on small firm growth .............................................72.1.3 The Dynamic Capitalism typology.................................................................9

2.2 Conceptualization of the growth process...........................................................102.3 Empirical studies ...............................................................................................13

2.3.1 Innovation system ........................................................................................132.3.2 Growth willingness ......................................................................................142.3.3 Creating and expanding markets.................................................................152.3.4 Organizing ...................................................................................................162.3.5 Resources .....................................................................................................18

2.4 The research questions.......................................................................................19

3 Methodology ............................................................................................................24

3.1 The research design ...........................................................................................243.2 Database.............................................................................................................263.3 Case studies .......................................................................................................293.4 Analysis .............................................................................................................303.5 Strengths and limitations of the study................................................................31

4 Description of the firms studied.............................................................................33

4.1 The population of medium-sized technology-based firms ................................334.2 The case studies .................................................................................................37

4.2.1 Helax............................................................................................................374.2.2 IFS................................................................................................................384.2.3 Karobio ........................................................................................................394.2.4 Markpoint ....................................................................................................414.2.5 Mecel............................................................................................................424.2.6 Mydata .........................................................................................................434.2.7 Semcon.........................................................................................................444.2.8 Sintercast .....................................................................................................45

5 The medium-sized technology-based firms: Why have they grown?.................47

5.1 Growth willingness ............................................................................................475.2 Creating and expanding markets........................................................................485.3 Organizing .........................................................................................................525.4 Resources ...........................................................................................................575.5 Conclusions........................................................................................................66

6 The small technology-based firms: Why do they stay small? .............................69

6.1 Identification of the growth constrained small technology-based firms............69

6.2 Industrial classification......................................................................................716.3 Creation and expansion of markets....................................................................716.4 Organizing .........................................................................................................736.5 Resources ...........................................................................................................736.6 Conclusions........................................................................................................77

7 Final conclusions and discussions ..........................................................................79

7.1 The research questions revisited........................................................................797.2 Implications .......................................................................................................82

7.2.1 Managers .....................................................................................................827.2.2 Policy ...........................................................................................................837.2.3 Theory ..........................................................................................................83

7.3 Future research...................................................................................................84

8 References ................................................................................................................86

Appendix A – Interview questions............................................................................92

Appendix B – Breaking the entrepreneurial growth barrier.................................93

1

1 Introduction

1.1 Background

Creating and maintaining diversity in products and technologies is central to the

process of long-term economic growth. This diversity is created in essentially two

ways; by the diversification of existing firms or by the starting-up of new technology-

based firms (NTBF). New technology-based firms can influence economic growth

both directly, by their number and their own growth, or indirectly by providing

specialized input to other firms.

In Sweden considerable attention has been given to the problems of industrial

renewal. Various studies (e.g. Jacobsson and Philipsson 1996) have pointed out that

the strength of Swedish industry is found within traditional industries that have slower

than average growth. Other studies (e.g. Henrekson and Johansson 1997) have

claimed that there is a lack of medium-sized firms, and few new firms grow to

become medium-sized and larger. The combined effect, in the long-term, could be

declining economic growth.

The increasing importance of small firms for employment growth could partly

compensate for the lack of new large firms (Birch 1987, Davidsson et al 1994;1996).

At the same time Davidsson et al (1994;1996) have shown that the growth of small,

established firms in Sweden is more important for employment growth than the

establishment of new firms.

Looking at data from the Swedish Bureau of Statistics, one can see that the number

and share of medium-sized firms is not equally distributed over industries. While

around 2% of the total number of firms are medium-sized, a number of industries that

could be termed knowledge-intensive have an above average share of medium-sized

firms. These industries have also shown a relatively large increase in the number of

medium-sized firms in recent years.

As new technology-based firms in many cases belong to the knowledge-intensive

industries they might be expected to have an above average potential of growing into

medium-sized firms. New technology-based firms could therefore be, at the same

time, both an important source of new medium-sized firms and an important source of

renewal.

Even if the growth of new technology-based firms is one of the important

mechanisms affecting future economic growth, little is known about the phenomenon.

1 Introduction

2

There is no information about how many of these firms grow and become medium-

sized and little understanding of what factors enable, or hinder, them in doing so.

1.2 Research problem

The aim of this study is to improve the knowledge about new technology-based firms

growing into medium-sized firms. It is believed that new technology-based firms are

an important source of economic growth, both directly as they belong to the group of

firms that can be expected to grow into medium-sized firms, and indirectly by

providing specialized inputs into other industries. This study will be concerned with

the former of these mechanisms. More specifically the study will focus on what has

enabled a group of new technology-based firms to grow into medium-sized firms,

while other technology-based firms, with similar prerequisites have stayed small.

Following the development of a frame of reference in Chapter 2, more precise

research questions will be stated.

1.3 Related concepts

A central concept in this study is the concept of new technology-based firms. This

concept has been used widely in various studies, but in a number of different ways. In

some cases the focus may be on the establishment of a new firm in order to exploit a

technical innovation independently of the "newness" of the innovation (Bollinger et al

1983). In other cases all firms operating in "high technology" sectors are included,

that is, industrial sectors having higher than average expenditures on research and

development (R&D) or those which employ proportionally higher number of

engineers and scientists (Storey and Tether 1998). The concept has also been used in a

more narrow meaning considering only newly established firms in the high

technology sectors, or only newly established firms that are developing new

industries. Most studies assume that a new technology-based firm is independent, that

is, not a part or subsidiary of an existing firm.

In this study the concept of new technology-based firms refers to a recently

established firm whose competitive strength comes from the knowledge and skills of

the employees within the fields of the natural sciences, engineering and medicine, and

the subsequent transformation of this knowledge into products and services that can

be sold on a market (Klofsten 1992, Rickne and Jacobsson 1999). It is assumed that

the firm is independent at start-up and operate as a separate business in the case of

ownership change.

The focus of this study is therefore on the knowledge and the skills of the employees

in new firms and the technical innovations that are based on this knowledge, rather

1 Introduction

3

than the newness of the innovations or the R&D expenditures of the firms. For that

reason service firms, as well as manufacturing firms are included in the study.

Another important concept that is central to new technology-based firms is the

concept of innovation. In this study innovation refers to an introduction of new, for

the firm, industrial products or services on a market. A distinction is made between an

invention, innovation and diffusion. While an invention is a discovery of something

new, often a technical discovery, it has to be introduced to the market through an

economic transaction in order to be an innovation. After its introduction to the market

the economic success of an innovation depends on how well it is spread (diffused) to

various customers (Granstrand 1979, s. 8-9). The combined process of invention,

innovation and diffusion can be considered to constitute an innovation process. This

process is not considered to be linear, with the completion of each stage before

entering the next stage, (Kline and Rosenberg 1986) as products and services are

improved after introduction to the market, and the diffusion process is a learning

process that gives rise to further inventions. It is difficult to isolate individual

innovation processes, as they are a part of the larger process of technological change.

There are different types of innovations based on the amount of change brought by the

innovations and/or if the innovations are related to products or processes. Radical

innovations are usually based on different production technologies and need the

creation of a new market for its exploitation (Freeman 1994, Henderson and Clark

1990). This type of innovation can create difficulties for established firms and can

provide the basis for a successful entry of new firms or changes in industry structure.

Minor innovations are on the other hand minor changes to existing products. Several

extensions have been made to this basic dichotomy based on the degree to which the

innovation is based on existing technological competencies or existing knowledge of

market needs (Abernathy and Clark 1985), or the degree to which it changes core

design concepts or the links between components (Henderson and Clark 1990).

Product innovations are related to changes in product features, while process

innovations enable certain products to be produced more effectively.

In this study the growth of a firm is considered a process of change leading to an

increase in the amount of resources internal to the firm. In this study the number of

employees will be used as measure of this increase.

Becoming a medium-sized firm is used in this study as a measure of a firm having

grown beyond being small. The EuropeanUnion’s definition will be used, that is,

medium-sized firms are firms with 50-249 employees (Commission of the European

Communities 1996). Firms with fewer than 50 employees are termed small firms.

1 Introduction

4

A firm is said to have been acquired if another firm owns a majority of its equity

shares, i.e. more than 50%, leading the acquirer to have an ownership control of the

firm (Lindholm 1994, pp. 3-4). In this study an additional requirement is that the

acquired firm is operated as a separate business after the acquisition. This means that

the acquired firm has a separate identity from the parent firm in terms of its products

and services. A firm is said to have sold a minority share if another firm buys less

than 50% of the equity shares of the firm.

1.4 Structure of the thesis

The thesis is structured as follows. In Chapter two the frame of reference and prior

research is presented leading to a pair of research questions guiding the empirical

inquiry. In Chapter three the methodology based on a combination of cross sectional

survey study and case studies is selected and the data collection is explained. In

Chapter four a brief description is made of the population of the medium-sized

technology-based firms and the case study firms. In Chapter five the medium-sized

technology-based firms (MTBF) are analyzed and compared with the small

technology-based firms in order to understand what factors enable small firms to

become medium-sized. In Chapter six a specific group of small technology-based

firms is analyzed and compared to the medium-sized firms in order to understand the

barriers to growth in new technology-based firms. The firms in this group, which is

termed growth constraint, exhibit high growth willingness, they are relatively old, and

yet have experienced little growth. In Chapter seven, the conclusions from the study

are summarized, its implications discussed and suggestions are made for further

research.

In Appendix B the importance of venture capital and acquisitions for the emergence

of medium-sized technology-based firms is discussed. The discussion, which is

presented in the form of an article, addresses a specific issue related to the research

questions analyzed in this thesis. As the discussion has a slightly different, more

specific focus, it was included in an appendix in order not to disrupt the flow of the

main text. The article is built on the same data as the main text and there is some

degree of overlap between them.

5

2 Frame of reference

New technology-based firms operate within the context of technical innovation

processes. It is therefore important for this study to take into account theoretical

perspectives on innovation processes, as well as on small firm growth.

A large number of empirical studies have been made on the subject of innovation and

innovation processes, as well as on the growth of small firms. As these fields are

relatively new the theoretical development is fragmented using a multitude of

approaches, especially in the field of the growth of small firms. There is thus a

number of studies that partly overlap but which are difficult to compare because of the

different assumptions that are made within each approach.

In order to structure the review of previous research, the theoretical assumptions

underlying previous empirical results are presented first. These are combined into a

conceptualization of the early growth process in technology-based firms that is used

as a basis for a selective review of earlier empirical research and as a theoretical basis

for the empirical work in this study. Finally two research questions are formulated for

guiding the empirical inquiry of the study.

2.1 Theoretical perspectives

Current research streams on innovation processes and small firm growth originate

from Schumpeter’s ideas about "new combinations" (innovations), that are carried out

by entrepreneurs (Schumpeter 1912). Innovations have the possibility to eliminate the

old, e.g. products or services, by virtue of their superior performance, thereby creating

new industries while making others obsolete. Nelson and Winter (1982) argue that

this type of competition, which is based more on performance than price, creates

winners and losers. Some firms will be able to take advantage of new technological

opportunities leading to their growth and prosperity while others will fail and suffer

losses and decline. The conclusion is that a new, small, innovative firm can be

established and grow into a large firm, and this is in agreement with empirical

observations.

After summarizing the current research streams on innovation processes and small

firm growth in section 2.1.1 and 2.1.2, they will be combined in section 2.2 into a

conceptualization of the early growth process in new technology-based firms.

2.1.1 Theoretical perspectives on the innovation process

Even if Adam Smith was aware, already in the late 18th century, of the importance of

the creation of new businesses, improvements of production techniques and the


6

creation of new industries, these dynamics were largely absent in the neoclassical

economic theory based on work by, for example, Marshall and Walras in the late 19th

century (Kirchhoff 1994). Innovative entry violated the assumptions of perfectly

competitive markets and the innovation process was considered to be an exogenous

"technology factor". The process itself was a "black box" of no interest to economists

as it could be modeled as a short term disturbance to the market equilibrium brought

about by increases in productivity (Rosenberg 1982). Following the acknowledgement

of the important relation between technological change and economic growth (e.g.

Solow 1957), there has been a revived interest among economists to look into the

"black box" of the innovation process. The inquiry, which has been largely empirical

in nature, has its point of departure from the fundamental idea of Schumpeter (and

Marx) that the capitalist economic system is characterized by "evolutionary turmoil

associated with technical and organizational innovations" (Freeman 1994).

As mentioned in section 1.3 the innovation process consists of three basic elements,

invention, innovation and diffusion that are coupled together by various feedback

loops (Kline and Rosenberg 1986). It is difficult to see where a particular innovation

process starts or stops as they are made in a context of continuous technological

change. Technological change is an interactive, cumulative, path dependent learning

process (Lundvall 1992) where innovations follow relatively ordered patterns along

technological trajectories (Dosi 1988). The learning is dependent on the history of the

actors involved and the surrounding economic structure, as opportunity searches are

based on existing knowledge (Dosi 1988, Teece 1988) and solutions are constrained

by the institutional set-up (Edquist and Johnson 1997)1. Learning is also dependent on

interpersonal relationships as some elements of technical knowledge are tacit, that is,

can not easily be communicated (Polanyi 1962).

Even if the innovation process is constrained by various factors, such as technological

trajectories, it is not determined by these same factors. Many actors are involved who

can change their behaviour in unpredictable ways.

It has become acknowledged that the success of an innovation process is affected by

the many actors in the economy that take part in the interactive learning described

above (Freeman 1994). This has resulted in the development of an innovation system

approach where the system consists of a network of actors that within a specific

1 There has been some confusion related to the concept of institutions. What is meant here is "sets ofcommon habits, routines, established practices or rules which regulate the relations and interactionsbetween individuals and groups" (Edquist and Johnsson 1997, p. 5). There is therefore a distinctionmade between the "rules" that regulate behaviour and the organizations that enforce such behaviour, orare affected by them. Some rules are not enforced by any particular organization but are the results of acollective social process.


7

context are assumed to affect the outcome of the innovation process. The context can

be national/spatial (Lundvall 1992), technological (Carlsson and Stankiewicz 1991) or

sectorial (Breschi and Malerba 1995) depending on the level of analysis. Despite the

contextual emphases the various system approaches share the same view of the nature

of the innovation process and technological change presented above.

Another system approach that has implications for the organization of the innovation

process is the "system solution" argument by Williamsson (1975, pp. 196-207). Small

and large firms have, according to Williamsson, complementary transaction cost

structures2 and could both gain from cooperation with each other. While small firms

can provide the incentives for inventive activity, which makes them effective in the

early innovation phase, they may have difficulty getting access to complementary

resources needed for successful commercialization, such as further research and

development, large scale production, internationalization, customer support and

management. Large firms, on the other hand, have the resources needed, but may lack

the entrepreneurial spirit needed early in the innovation process because of, among

other things, bureaucratic inefficiency.

2.1.2 Theoretical perspectives on small firm growth

Apart from a common foundation, studies on small firm growth usually have different

aims and make different assumptions based on different economic, sociological and

psychological theories. A number of typologies have been made of the perspectives

used (Starbuck 1965, Child et al 1975, Hendrickson 1992, Wiklund 1998, Davidsson

and Wiklund 1999) where the biggest difference between the perspectives is the

degree to which they assume that firm growth is determined by the environment or the

individual.

In order to review the various perspectives a typology developed by Wiklund (1998)

will be used. Wiklund has identified four different perspectives: the resource-based

perspective, the motivation perspective, the strategic adaptation perspective, and the

configuration perspective.

The resource-based perspective

The resource-based perspective focuses on the internal strengths of the firm, its

resources and how they are organized. By combining resources, both physical and

knowledge-based, the firm creates productive services that can be used for exploiting

opportunities in the environment. There are always some opportunities in the

2 The basic idea is that there is a cost associated with each economic transaction, based on the nature ofthe transaction and how it is organized.


8

environment if the firm has the necessary resources for discovering and exploiting

them (Penrose 1959).

For various reasons there are always unused resources within the firm. These unused

resources are at the same time a challenge to innovate, as incentive to expand and a

source of competitive advantage (Penrose 1959, p. 85). In order to exploit new

opportunities and make the firm less sensitive to changes in technology or markets the

firm will expand by spreading its production over a variety of products. This

diversification is made possible either by acquisitions of other firms or by investments

in new resources that are added to the firm. The process of expansion is not automatic

but must be planned and implemented by management. Because existing managers

are the only ones who can provide the services needed for expansion, or train new

managers, the managerial resources limit the growth rate of the firm (Penrose 1959,

pp. 45-47).

The motivation perspective

That firms, or managers, want to maximize some economic variable, such as profit or

growth, is a common assumption made in economic theories. According to the

motivation perspective managers may have other needs, attitudes and goals that affect

their behavior, i.e. they might strive for other things than monetary award (Davidsson

1989, p. 24-25).

In general, the choice of pursuing a certain goal, the energy put into fulfilling that

goal; as well the result is dependent on three factors. Firstly, it is dependent on the

individual motivation for doing the necessary work tasks necessary for obtaining the

goal. Secondly, it is dependent on the ability of the individual to identify and

complete the necessary work tasks, and thirdly, it is dependent on the opportunities

available (Davidsson 1989, pp. 10-12, Wiklund 1998, pp. 40-46).

There are many theories on motivation and they focus on different aspects of the

motivation process (Locke 1991). Some, such as Maslow’s need hiearchy theory

focus on processes that are considered relatively general and stable in individuals.

Others, such as expectancy theory, focus on processes that relate more directly to

actual behavior but may be less general and stable.

The strategic adaptation perspective

The basic idea of the strategic adaptation perspective is that in order to succeed firms

need to adapt their strategy to the environment. Properties of the environment

constrain the number of alternative strategies and in order for firms to succeed in a

certain environment they have to select one of those possible strategies. Managers can


9

choose a strategy, but the number of alternatives leading to success, e.g. survival or

growth, are limited by the environment (Child et al 1975).

Changes in the environment, such as new technology, create both threats and oppor-

tunities for firms. As a consequence firms may need, or choose, to change their

strategy or organizational structure. Firms working in an environment characterized

by continuous change need to make frequent changes to their strategy. Because inertia

is related to structural complexity small firms are generally more flexible and adapt

more quickly (Wiklund 1998, pp. 34-40).

The configuration perspective

The configuration perspective is concerned with how growth affects the structure,

strategy and leadership in small firms. It assumes that there are a number of different

configurations that firms need to adapt to if they are to continue growing (Churchill

and Lewis 1983, Kazanjian and Drazin 1990,Greiner 1972, Hanks and Chandler 1994,

Hofer and Charan 1984). Each configuration is characterized by a certain structure,

strategy and leadership in order to solve dominant problems related to the age and the

size of the firm. As the firm continues to grow the current configuration is inadequate

to handle new types of dominant problems which call for a new configuration. In

order for the firm to continue its growth it has to be able to manage the transition to

the next configuration.

Most of the configuration models have four or five configurations, or phases, where

the firm goes through start-up, commercialization, expansion and consolidation. As

the firm moves through the configurations its organization becomes more formal. The

firm changes from being an entrepreneurial firm, focusing on innovation, into a

professionally managed firm focusing on growth.

2.1.3 The Dynamic Capitalism typology

A useful typology based on Schumpeter’s theory of innovation and his idea of creative

destruction is put forward by Kirchhoff (1994). Kirchhoff argues that new firms bring

with them a varying degree of "creative destruction", that can be described along two

dimensions: business innovation rate and business growth rate (Figure 2.1).


10

Figure 2.1 The dynamic capitalism typology. Adapted from Kirchhoff (1994, p. 69).

Kirchhoff (1994, pp. 70-81) makes a distinction between four groups of firms:

1) Firms belonging to the economic core having low growth rate and low innovation

rate, These firms make up the largest number of small firms. They are firms where

the owners do not intend the firm to grow and where success is measured in the

firms’ ability to survive and provide a satisfactory income for the owner/manager.

2) Ambitious firms having high growth rate but low innovation rate. These are firms

that base their growth on a single or a few innovations. They will eventually

decline as a consequence of their lack of innovations.

3) Firms with constrained growth having high innovation rate but low growth rate.

The growth of these firms can be constrained by the entrepreneur himself, e.g. by

fear of losing control, or by the shortage of resources.

4) Glamorous firms having high innovation rate and high growth rate. These firms

achieve sustainable long-term growth by continuously creating innovations that

spur further growth.

One implication of the dynamic capitalism typology is that high innovation rate does

not guarantee high growth, nor does high growth have to be based on a high rate of

innovation.

2.2 Conceptualization of the growth process

The theoretical perspectives presented above give different views on the growth of

new technology-based firms.

ConstrainedGrowth

Glamorous

Economiccore

Ambitious

High

Low

Low High

BusinessInnovation

Rate

Selfconstrained

Resourceconstrained

Business Growth Rate


11

The innovation systems literature focuses on the context of technological change and

the interaction between different actors leading to successful innovation. They

contribute to the understanding of growth in new technology-based firms, as their

growth is based on successful innovation.

The theories on small firm growth are more concerned about the internal aspects of

the firm and in some cases how these are related to the environment. While the

resource-based perspective emphasizes how internal resources create incentives and

opportunities for growth, the strategic adaptation perspective emphasizes that growth

is dependent on the firm selecting the appropriate strategy and structure related to its

environment. At the same time it is important to acknowledge that firms will not grow

if its owners or managers (often the same person in new firms) do not want the firm

to grow. In that case they will not plan for growth, nor select the appropriate growth

strategy. The reason could be that they are not willing to accept the necessary

configuration, e.g. increased formalization.

The dynamic capitalism typology combines innovations with small firm growth. It

predicts that the small firm population consists of different group of small firms,

which differ in their willingness and ability to grow.

But are the different theoretical perspectives compatible with each other, and if they

are, how can they be combined? The fact that the different perspectives have been

used as a foundation for studies of closely linked phenomena, that is, innovation and

entrepreneurship, suggests that it should be possible to combine them.

An innovation is an introduction of a new product or service on the market. In order

for the innovation to be successful it has to be diffused on the market, that is be

accepted by buyers. Creating and expanding markets is therefore a central element in

a successful innovation process.

In order to be able to identify the opportunity to exploit and carry out the innovation

and the subsequent diffusion resources are needed, e.g. knowledge and machines.

Some of the resources are internal to the firm, but others are a part of its environment,

i.e. the innovation system. The innovation system might also constrain the possibilities

of exploiting a certain opportunity, as the firm might not be able to access the

necessary resources.

In order to respond to demand, to use its internal resources effectively and to get

access to important resources in the innovation system the firm needs to organize its

activities, both internally and externally. For this the firms needs resources in the form

of an ability to carry out this organizing. These meta-resources might be termed

management competence.


12

Growth will happen if a successful innovation leads to the accumulation of resources

within the firm. That will not happen without growth willingness on the part of the

managers of the firm. Even if growth willingness is an individual decision, it is also

influenced by institutions in the innovation system, such as culture and legislation.

As the innovation process is a cumulative, interactive learning process firms will have

to improve their products and services even after they have diffused them on the

market. They will produce a stream of innovations, differing in type depending on the

state of the industry and their own products and services.

The conceptualization of the growth process described above includes five

fundamental elements: Growth willingness, creating and expanding markets,

organizing, resources and the innovation system (Figure 2.2)

Figure 2.2 Conceptualization of the growth process in new technology-based firms(NTBF).

All the elements described above are interconnected. Four of them, growth

willingness, creating and expanding markets, organizing and resources, take place

within the firm, where they are embedded in an innovation system. Even if it might be

difficult in some cases to make a distinction between the firm and its environment,

this separation into internal and external factors emphasizes the role of individual

decisions taken within the context of the firm. While the innovation system affects all

the elements that are placed within the firm, the individuals within the firm have

choices to make. They also have different motivation profiles that affect the choices

they make.

Organizing

Creating and expanding markets

Resources Growth willingness

NTBF

Innovation system


13

While Figure 2.2 is supposed to conceptualize growth, growth is not included as a

separate element. The reason for this is that growth is understood to be a result of

processes included in the figure, namely creating and expanding markets and

organizing, which leads to accumulation of resources within the firm. Growth can be

seen as a property of the system described in Figure 2.2, a sort of a performance

measure.

It is important to note that the innovation system is considered to include, at the same

time, a regional/national, technological and sectorial context. For example, in the

Swedish case all new technology-based firms belong to the same national system of

innovation, but might belong to different technological and sectorial systems.

2.3 Empirical studies

A number of empirical studies are concerned with innovation processes and small

firm growth. The following section will selectively review these studies and put them

into the context of the fundamental elements of the conceptualization, that is,

innovation system, growth willingness, creating and expanding markets, organizing

and resources.

2.3.1 Innovation system

In his review of studies related to the economics of technological change Freeman

(1994) refers to many empirical studies that have shown the importance of

relationships and interaction with external actors for successful innovation in firms.

While user/buyers, suppliers, universities and science organizations are of major

importance, other possible actors include government, consultants and others. The

studies have, according to Freeman, demonstrated that "the nature, depth and

frequency of this interaction" is dependent on the industry, the nature of the

innovation and the local economic structure and culture, leading to a large variety of

possible constellations. There is also a great variety in the methods of interactions

between these actors. Relationships can be informal or through various forms of

formal collaboration, such as joint ventures or licensing agreements. Learning can

also take place by recruiting people, through acquisitions, reverse engineering etc.

Institutions, i.e. formal and informal "rules" of behaviour, are found to influence how

different actors interact, thereby affecting successful innovation. These can be in the

form of legislation or government policy (e.g. Carlson and Jacobsson 1997b) or

cultural issues (e.g. Saxenian 1994). Differences in economic policies have even been

related to different attitudes towards firm growth (Davis and Henrekson 1999).


14

Radical innovations are clustered in certain industries and some industries make no

radical innovations at all. Empirical studies have also shown that industries fall into

distinct categories in terms of R&D intensity independent of geographical location,

where the fastest growing industries were those with the highest R&D intensity

(Freeman 1994). Many low and medium R&D intensive industries have, on the other

hand, higher levels of employment and output, leading to a larger overall impact on

economic growth (Smith 1999). Even if these industries conduct little R&D

themselves they are affected by radical innovations made in other industries, such as

information technologies. In some industries, notably some service industries, firms

might be involved in in-house software development (not classified as R&D!) and

make heavier investments in information and communication technology than firms in

manufacturing (Freeman 1994).

Acs and Audretsch (1990) found that the amount of growth in small manufacturing

firms varies between industries. Small firm growth was positively correlated with the

amount of innovativity in the industry and the size of the industry, but negatively

correlated with capital intensity. No relationship was found between industry growth

rate and small firm growth. This is also related to shakeout and consolidation in an

industry after the emergence of a dominant design and an increasing focus on process

improvements (Utterback 1994).

It is often difficult to empirically separate the firm from the environment. In the

following sections that describe the factors considered to be internal to the firm,

references will be made to factors that might be considered external to the firm, such

as customers, financiers and acquirers.

2.3.2 Growth willingness

Davidsson et al. (1994; 1996) have shown that, in Sweden, the growth of established

small firms are more important for employment growth than the establishment of new

firms. There are nevertheless only a few established small firms that grow while most

of the small firms stay small their whole life. The reason for this could be that many

firms lack the necessary prerequisites for growth while owners/managers of others

simply are not interested in their firms expanding.

According to Davidsson (1989) only a small number of owners/managers in small

firms are innovative, change oriented and seeking new business opportunities.

Davidsson concluded that there is a link between growth willingness and future

growth, but could not analyze that link directly because of limitations in his data.

Hughes (1998) who analyzed two groups of firms, one with growing firms and

another with non-growers, found no direct link between growth willingness and future


15

growth. Wiklund (1998, pp. 115-126) found that while rapidly-growing firms had

higher expectations about future growth than slow-growing firms, there was no

difference between the groups regarding their attitudes toward growth. A possible

explanation, pointed out by Wiklund, is that managers in rapidly-growing firms look

at growth as a mean of fulfilling other goals. This is partly supported by his finding

that managers in rapidly-growing firms had more positive attitudes towards the

consequences of growth, i.e. they are more likely to accept growth as a means of

obtaining other goals.

Growth willingness could be related to the motives of the founders when founding the

firm, and the resulting company culture. Two of most important motives for founding

a new firm in Sweden are the need to be independent and the wish to develop one’s

owns ideas and visions (e.g. Lindholm Dahlstrand 1997). Wiklund (1998, p. 118-

119) found that rapid growers were more likely to have plans to start additional firms

leading him to conclude that the opportunity to develop new products was the main

motive for the founding of the rapidly-growing firms.

2.3.3 Creating and expanding markets

Even if many studies emphasize the importance of market orientation in new firms

(e.g. Roberts 1991) few studies analyze how new firms create and expand their

markets.

Most new technology-based firms sell industrial products to relatively few customers

(Utterback and Reitberger 1982, Autio and Yli-Renko 1998). For those firms that

grow it is important to find a growing market niche (e.g. Wiklund 1998, p. 238) and

compete with quality and performance instead of price (Utterback and Reitberger

1982).

Autio and Yli-Renko (1998) found that Finnish new technology-based firms serve a

variety of industrial markets, including "low tech" industries such as forestry. A

majority of the firms focused on improving the productivity of their customers, while

less than half were involved in end-user products. A little less than half of the firms

contributed to the research and development of their customers.

A number of studies have shown that internationalization is important for the early

growth of technology-based firms, especially in countries with small domestic

markets (e.g. Burgel and Murray 1998 and Utterback and Reitberger 1982). Utterback

and Reitberger (1982) came to the conclusion that control over foreign distribution,

e.g. by establishing foreign subsidiaries is important for the growth of new

technology-based firms. Firms that only used agents for distribution showed lower


16

growth than those who used foreign subsidiaries or a mixture of foreign subsidiaries

and agents did. Another strategy would be to gain access to foreign markets through

an industrial acquirer. In her study, Lindholm (1994) found that the use of the

international contacts of an industrial acquirer had positive effects on post-acquisition

growth in acquired small technology-based firms.

Lindqvist (1997) also points to the importance of large firms for the inter-

nationalization of small, Swedish, technology-based firms. Firms that had alliances

with large international firms started their internationalization earlier than those who

didn’t. Contacts from previous employment, academic or industrial, were also

important for early internationalization. The same study also found that finding

suitable foreign distributors as the single largest problem related to inter-

nationalization in new technology-based firms, while financing of international

activities was less important. It seems that finding a suitable distributor was not a

problem that could be solved by financial means.

New products are more important for the growth of small technology-based firms than

other types of firms (Davidsson 1989, p. 198). Meyer and Roberts (1986) and Roberts

(1991) stress, however, that if the newness of the products is too large for the firm,

both in terms of the market and in terms of the technology used it will negatively

affect growth. The most successful new technology-based firms seem to be more

conservative in changing the market they serve than the technology used. That means

that they primarily provide their existing customers with new, improved products

based on new technology.

2.3.4 Organizing

Growth is a dynamic process that creates, and is created by, changes in the firm.

Management has to deal with different problems as the organization of the firm takes

on new forms. Terpstra and Olson (1993) have studied dominant problems facing

management in a number of fast growing firms in the start-up and growth phase. Even

if certain problems, like marketing and sales, are problems that management has to

deal with all the time there are certain differences between the problems in these two

phases. Problems related to securing external financing are much more common in the

start-up phase while problems related to human relations are more important in the

growth phase. Few of the managers in the study mentioned the economic situation in

the environment as a dominant problem. Kazanjian (1988), who studied a group of

manufacturing technology-based firms came to the same conclusion regarding

marketing, sales and external financing, but additionally he found that in his sample

problems related to technology and human relations were important all the time.


17

The willingness to adjust the organization in order to solve the problems created by

growth seems to be crucial for continued growth (Hughes 1998, Kazanjian and Drazin

1990). This willingness could be compared to entrepreneurial orientation, i.e. the

willingness to make changes and exploit opportunity, which, according to Wiklund

(1998) is one of the most important prerequisites for growth in small firms.

If the firms are not able to make the necessary adjustments to the organization a

number of problems can occur. In a new technology-based firm these problems can

include more difficult communication as the number of intra-firm relations increases,

difficulty to maintain "team spirit", breakdown of decision making and resource

shortage (Slatter 1992, pp. 138-141). These problems can lead to stress and burnout of

the personnel leading to key employees leaving the firm, conflicts between various

groups within the firm and a focus on short-term operative problems.

Parts of the above mentioned problems could be related to the characteristics of the

technical employees that are usually a large portion of the employees in new

technology-based firms. These people are, in most cases, relatively young, highly

educated and can easily change jobs. They want demanding work-tasks, good pay,

and recognition for their contribution. As the founder is usually such a person and

technology is of great importance for the firm, these firms can develop a technology-

focused culture at an early stage. This culture, which can be of enormous value early

in the life of the firm, can become its greatest barrier to growth when other issues than

technology become important for future growth (Slatter 1992, pp. 11-12).

Even if a technology-focused culture can become a barrier to growth in a technology-

based firm the solution is not just to focus on marketing activities. Feldman and

Klofsten (1998) found in their single case study of a Swedish medium-sized firm that

the reason for the decline of the firm was that management focused too narrowly on

short-term marketing activities. Because of the lack of resources and management for

research and development the company was not able to renew its products and meet

customer expectations.

Several studies have found positive correlations between growth and distributed

ownership (e.g. Davidsson 1989 and Wiklund 1998). One explanation for this

correlation could be that the founders/managers of rapidly growing firms are more

entrepreneurial in their expansion which is also expressed by establishing more

subsidiaries and making more acquisitions (Wiklund 1998, p. 120). Davidsson (1989)

found that owner/managers of technology-based firms are more likely to accept

external ownership than other owner/managers of other firms.


18

In her study of technology-based acquisitions and spin-offs, Lindholm (1994) found

that, with time, about 50% of the population of Swedish small technology-based firms

were acquired, primarily by large Swedish firms. The small firms were acquired

because they had developed technologies with future potential and could be expected

to have high growth potential. The acquired firms had as many as four times as many

patents as the independent firms did before they had been acquired, and they

continued to generate more patents after the acquisition. The acquired firms also had

higher growth rate before and after the acquisition. It is therefore possible that a

number of Swedish new technology-based firms that have the potential to grow into a

medium-sized firm will not do so as an independent firm, but are more likely to do so

as a subsidiary of a larger organization. As Wiklund (1998, p. 119) did not find any

differences between growth in independent and acquired firms it is possible that the

situation is different for small technology-based firms than for firms in general.

2.3.5 Resources

At start-up the knowledge and contacts of the founders are in many cases the only

resources available to the firm. In spite of that, researchers have not found a clear

relationship between growth and the experience of the founder (Reuber and Fischer

1994). The reason for this could be that the expertise of the founders is more

important than their experience. Davidsson (1989) and Wiklund (1998) even find

negative correlation between the age of the founder/manager and growth, which could

be explained by a decline of growth willingness with age. Earlier employment is

nevertheless important (Utterback and Reitberger 1982) as the first products in new

technology-based firms are in many cases based on experience from earlier

employment as well as with contacts with early customers. This is in line with

Roberts (1991) who found that the success of his group of university spin-offs were

related to the degree of technology transfer from their earlier research institutions.

Technology is an important resource for technology-based firms. In most cases it is

the main resource that the founder brings to the firm. It is further developed within the

firms by adding new employees and interacting with the environment. The founder

continues to have an important role, which may not be apparent until he or she

declines to take part in future development, often following dissatisfaction with the

consequences of growth (Slatter 1992). Autio and Yli-Renko (1998) found that

buyer/seller relationships with customers and suppliers and relations with an industrial

owner were the most important sources of technology interaction in Finnish new

technology-based firms. The interaction was mainly through informal channels and

only to a small extent through the mobility of personnel.


19

Utterback and Reitberger (1982) found in their study that new, Swedish, technology-

based firms had their greatest need of capital at two critical points in their

development: at start-up and six to ten years later when facing a major expansion

decision. They conclude that even if many firms took financial risks during

expansion, they could find no evidence supporting the view that lack of capital

prevented new technology-based firms in Sweden from growing. Other Swedish

studies have come to the same conclusion, i.e. that lack of capital is not a general

barrier to growth for Swedish firms (Davidsson 1989, p. 189, Wiklund 1998, p. 129).

As the traditional venture capital market in Sweden has, until recently, been

undeveloped and lacking the competence for successfully supporting new technology-

based firms (Karaömerlioglu and Jacobsson 1999) it seems that large firms have

played a similar role by providing capital for new ventures (Utterback and Reitberger

1982). This is supported by Lindholm (1994) who found that the most important

motive for the owners of small technology-based firms to sell out to larger firms was

to gain access to capital for expansion.

A number of European studies, mostly British, have found that the lack of capital is

the most important barrier to growth in new firms (e.g. Garnsey 1995 and Storey and

Tether 1998), especially in technology-based manufacturing firms (Westhead and

Storey 1997). This discrepency might reflect the difference between the innovation

systems faced by firms in Sweden and in other countries in Europe.

Hughes (1998) is an important exception among the British studies. He found that it

was not the lacke of capital that prevented growth, but rather the failure to develop

internal business and management competencies. Because of this failure the firms

were not able to exploit opportunities in the environment. Other studies have also

pointed to the importance of management and business competencies that influence

the effective use of other resources. Utterback and Reitberger (1982) found that the

management depth of the founders was positively correlated with growth. Storey and

Tether (1998) also refer to a number of studies that came to the conclusion that lack of

management competence leads to lack of credibility and difficulties in accessing and

combining the needed resources.

2.4 The research questions

In section 2.3 a selected review of the empirical literature has been made in order to

give a picture of the current knowledge on innovation and small firm growth that is

relevant for the conceptualization presented in Section 2.2. In this section the

implications of the results for this study will be discussed, leading to a set of research

questions guiding the empirical enquiry.


20

The previous studies on innovation systems have emphasized the importance of

external actors for successful innovation processes within firms. It has also stressed

the influences of institutions, industry characteristics and the type of innovation on the

process, creating a specific context for the firms.

The innovation systems literature is focused on the success of innovations at the

system level, not at the firm level. The results do, nevertheless, have implications for

growth in new technology-based firms as the elements of the innovation system affect

the firms’ ability to innovate.

Many of the aspects of an innovation system, particularly the effects of institutions are

difficult to measure empirically. It is also in many cases difficult to draw, empirically,

the boundaries between the firm and actors in the system as the firms are so deeply

rooted in their context.

Factor- Innovation system Implications for this study

• Relationships with other actors(Freeman 1994)

• Institutions (Carlson and Jacobsson1997b, Saxenian 1994, Davis andHenrekson 1999)

• Characteristics of industry andinnovations (Freeman 1994, Acs andAudretsch 1990, Utterback 1994)

• Have not focused on the growth offirms.

• Mainly concerned with factorsexternal to the firm.

• System affects all internal factors.

• Difficult to measure someimportant aspects of the system,such as institutions.

• Difficult to draw boundariesbetween the firm and the system.

Table 2.1 Implications of empirical studies on innovation systems for this study.

Previous research has not found clear relations between growth willingness and actual

growth. It is nevertheless clear that many founders/managers do not want to grow, and

that this lack of growth willingness might be a result of system specific factors.

None of the studies has studied growth willingness in medium-sized firms, as the

focus has been on small firms alone. While Lindholm Dahlstrand (1997) analyzed

technology-based firms, the other studies have only included technology-based firms

as a sub-sample.


21

Factor –Growth willingness Implications for this study

• Effects on growth (Davidsson 1989,Hughes 1998)

• Motive of founders (Davidsson 1989,Wiklund 1998, Lindholm Dahlstrand1997)

• Attitudes towards growth (Davidsson1989, Wiklund 1998)

• Many founders do not want togrow but growth willingness isnot sufficient for growth.

• System context, such asinstitutions could affect growthwillingness via motive offounders and their attitudestowards growth.

• No analysis of medium-sizedfirms.

Table 2.2 Implications of empirical studies on growth willingness for this study.

Previous empirical studies have gathered some fragmented knowledge about how

markets are created and expanded in new technology-based firms. Many of the studies

have looked at the issue in isolation from other issues, e.g. only the process of

internationalization, without explicit reference to time or the system context. As this is

a process it has to be investigated over time.

While many of the studies have studied new technology-based firms, they have

mainly been focused on manufacturing firms (e.g. Roberts 1991, Utterback and

Reitberger 1982 and Lindqvist 1997). There have been no references to medium-sized

firms.

Factor -Create and expand markets Implications for this study

• Market orientation (Roberts 1991)

• Markets served (Utterback andReitberger 1982)

• Market entry (Wiklund 1998)

• Means of competition (Utterback andReitberger 1982)

• Internationalization (Utterback andReitberger 1982, Lindqvist 1997,Burgel and Murray 1998)

• Innovativity (Davidsson 1989, Meyerand Roberts 1986, Roberts 1991)

• A process affected by severalfactors, both internal andexternal.

• Time perspective is necessary.

• Have not been systematicallylooked at in different systemcontexts.

• Connections with systemcontext expected.

• Few studies of service firms.

• No explicit references tomedium-sized firms.

Table 2.3 Implications of empirical studies on the creation and expansion of marketsfor this study.

Previous studies on organizing emphasize the need for organizational adjustments as a

firm gets larger and is faced by new dominant problems. Studies have also shown that

adding new owners is positively correlated with growth. Acquisitions of technology-

based firms are common in Sweden and can have positive effects on their growth.

As organizing is a process a time perspective is necessary. While some of the studies

relate to changes in the size of the firm no specific references are made to medium-

sized firms. Many of the studies are concerned with technology-based firms and


22

specific organizational problems within them (e.g. Kazanjan 1988, Slatter 1992 and

Linholm 1994), but only with manufacturing firms.

It is difficult empirically to separate organizing from resources. Much of organizing is

related to obtaining resources, e.g. adding new owners or being acquired.

Factor-Organizing Implications for this study

• Dominant problems facing managers (Terpstraand Olson 1993, Kazanjan 1988, Slatter 1992)

• Organizational adjustments (Hughes 1998,Kazanjian and Drazin 1998, Feldman andKlofsten 1998, Slatter 1992)

• New owners (Davidsson 1989, Wiklund 1998)

• Acquisitions (Lindholm 1994, Wiklund 1998)

• A process. Need for a timeperspective.

• Modes of organizing, e.g.acquisitions, are dependent onthe system context.

• Difficult to separate organizingand resources empirically.

• Few studies of service firms.

• No explicit reference tomedium-sized firms.

Table 2.4 Implications of empirical studies on organizing for this study.

Previous research on resources has emphasized the importance of founder skills and

contacts, technology, capital and managerial resources. There have been conflicting

results regarding the relative importance of each factor, indicating contingencies

based on the system context.

Many of the studies are concerned with new technology-based firms, but as before

few of them address service firms. As was mentioned above there are difficulties in

separating the process of organizing from resources, as relationships with external

actors are important for getting access to resources. No explicit references are made to

medium-sized firms.

Factor-Resources Implications for this study

• Founder skills and contacts (Reuber Fischer 1994,Davidsson 1989, Wiklund 1998, Utterback andReitberger 1982, Roberts 1991, Slatter 1992)

• Technology (Håkansson 1995, Autio and Yli-Renko1998)

• Capital (Utterback and Reitberger 1982, Davidsson1989, Wiklund 1998, Lindholm 1994, Hughes 1998,Garnsey 1995, Storey 1998, Westhead and Storey1997)

• Managerial (Hughes 1998, Utterback and Reitberger1982, Storey 1998, Westhead and Storey 1996)

• Connection with systemcontext expected.

• Difficult to separateorganizing and resourcesempirically.

• No explicit references tomedium-sized firms.

• Few studies of servicefirms.

Table 2.5 Implications of empirical studies on resources for this study.

There is a large number of studies on factors affecting successful innovation, but most

of them focus on factors that are external to the firm. At the same time many studies

have looked for factors affecting small firm growth, but these studies have


23

concentrated on factors internal to the firms. Very few studies have combined these

two fields of research and focused on the early growth of new technology-based

firms. Those that have done so have in most cases only analyzed small firms in

manufacturing industries. The understanding of the factors that enable, or hinder, new

technology-based firms to become medium-sized is therefore limited, especially of

the firms within the service sectors.

In order to increase understanding of this complex phenomenon, involving factors

both internal and external to the firm, the following two research questions will be

addressed in this thesis:

1) What factors have enabled a group of new, Swedish, technology-based firms to

grow into medium-sized firms?

2) What factors inhibit other new, Swedish, technology-based firms, with similar

prerequisites, to grow into medium-sized firms?

The inquiry will be guided by the conceptualization of the growth process as

presented in Section 2.2. Of interest is the relative importance of each factor/element

and how they are related in enabling, or hindering, new technology-based firms to

become medium-sized.

24

3 Methodology

The empirical analysis of this study is based on a combination of a cross sectional

survey on the population of new technology-based firm in Sweden and a number of

case studies of new technology-based firms. In this chapter the research design will be

described and motivated, the data collection and the methods of analysis will be

explained, both for the survey (database) and the case studies. Finally the strengths

and limitations of the research design and the data is discussed.

3.1 The research design

Selection of a research problem, and the appropriate methodology to study that

problem, is based on the researcher’s basic view of the world. The researcher’s basic

view of the world consist of, often unconscious, assumptions about how reality is

constructed, the type of knowledge that can be created and the role of the researcher

in the research process (Arbnor and Bjerke 1994). Below an attempt will be made to

describe the author's basic view of the world and how it leads to a research design for

answering the research questions posed in Section 2.4.

One of the author’s basic assumptions is that the world is constructed of components

that in many cases are dependent on each other and cannot be analyzed separately. In

other words the whole is different than the sum of its parts. It is possible to demarcate

a phenomenon, or a system, but that phenomenon will always be a part of a larger

whole. In order to understand the phenomenon, it is important to understand the parts

it consists of, how they are related to each other and how they are related to the

whole.

Another basic assumption, related to the first, is that the relationships between

components do not have to be causal, in the sense that one component determines the

other. Components affect each other, as they are interdependent, but they can do so in

various ways. Many components can have the same effect on another and one

component can affect others in different ways. The way in which the components

interact with each other can be dependent on the system structure, a system goal or the

behaviour of the individuals in the system.

In light of the above the role of the researcher is to demarcate the phenomenon under

study, identify the components/elements and try to understand their relations, both to

one another and to the whole, and how they affect the phenomenon and its outcome.

Even if the basic worldview of the author has not been mentioned before in this thesis

it has obviously affected the selection of the research problem and the frame of

3 Methodology

25

reference. In a selected literature review a frame of reference has been established

which consists of five elements within a firm and its surrounding system context. It

has been acknowledged that these elements are interconnected and make a whole that

affects the phenomenon under study, namely the growth of new technology-based

firms into medium-sized firms. Two main research questions have been stated that

emphasize the objective of understanding how the different components and their

relations affect the outcome of the phenomenon. The next question is what methods

should be used for answering the stated research questions.

Davidsson and Wiklund (1999) argue that as growth is a process it has to be followed

in time. Cross sectional studies only give a picture at a certain point in time, which

makes it impossible to see e.g. how relations evolve through time and how current

attitudes affect future outcomes. In order to solve that longitudinal studies of small

firm growth are needed.

There are problems associated with longitudinal studies. Firstly they take long time to

complete, which is beyond the normal time frame of doctoral studies. Secondly they

need large resources as a large number of firms need to be included in the study. This

is because it is impossible to determine the future outcome of a firm and there is a

need for a multitude of outcomes. A longitudinal study is therefore not a viable option

for this study.

Because the knowledge about early growth in technology-based firms is fragmented

and incomplete, especially for firms in the service industries, an exploratory approach

has been selected for this study. Consequently the research questions posed in Section

2.4 are "what" questions of exploratory character (Yin 1994, p. 5). They ask for the

identification of factors/components and how they affect growth, both "success" and

"failure", in the whole population of new Swedish technology-based firms.

According to the framework (and the basic worldview), there are relations between

the components, both within and outside the firm. Some of the elements are processes,

i.e. the sequence of events is important. Earlier research has identified a number of

elements/factors/components both within and outside the firm that are believed to

affect growth. While some of them relate to firms in general, others relate specifically

to new technology-based firms. The studies usually look at these factors in isolation,

meaning that there could be relationships and interactions between them that are

missing.

For an exploratory study a number of different research strategies can be used, each

having their strengths and weaknesses in a particular situation (Yin 1994, p. 5-6).

Surveys can be helpful in obtaining information about a population. The number of

3 Methodology

26

variables that can be investigated is limited and they have to be decided on

beforehand. Case studies, on the other hand, are helpful in studying a "contemporary

phenomenon within its real-life context, especially when the boundaries between

phenomenon and context are not clearly evident" (Yin 1994, p.13). As the case study

strategy addresses more complex relationships including a large number of variables

they normally, for practical reasons, only include a few cases. The results are not

valid for the populations, from where the cases come from, but replication logic3 can

be used to make contribution to theory (Yin 1994, pp. 45-50, Eisenhardt 1989).

Surveys and case studies can also be combined in order to obtain "converging lines of

inquiry" based on multiple sources of evidence (Yin 1994, p. 92).

In this study a combination of a survey study and multiple case studies was selected.

A survey study was selected in order to give information about the population of new

technology-based firms. This was made possible by access to a database of the whole

population of Swedish new technology-based firms (see Section 3.2). A case study

approach was selected in order to capture the dynamics of the growth process, i.e.

development over time. The case studies were mainly based on semi-structured

interviews with managers which gave the possibility of both replicating some results

predicted by previous studies and the possibility of identifying elements or

relationships not mentioned by the literature. Combining these two methods of inquiry

makes it possible to combine quantitative information about the characteristic of the

population with more qualitative information about the development of the growth

process.

3.2 Database

The survey study is based on a database of new, Swedish, technology-based firms that

has been developed within the CREATE group at the Department of Industrial

Dynamics at Chalmers University of Technology.

The database includes all Swedish firms that fulfill certain criteria of size, year of

foundation, independence at start and industry (Rickne and Jacobsson 1999):

• The firms should be founded between 1975 and 1993.

• In 1993 the firms should have at least three employees, at least one should have a

university degree in engineering, one of the natural sciences or medicine.

3 Replication logic is similar to logic used in multiple experiments. Multiple cases are selected in such away that they either predict similar results between cases or that they produce contrasting results but forpredictable reasons (Yin 1994, p. 46)

3 Methodology

27

• The firms should not have been established as a foreign direct investment or as a

diversification from a larger firm.

• The firms should belong to industries, both manufacturing and industry-related

services, that could be termed knowledge-intensive4.

Around 1,350 firms were identified as fulfilling this criteria in 1993. Of these 1,190

were still registered in 1996. A survey was sent to these firms in January 1998,

containing questions on background, turnover and employment, internationalization,

financing, cooperation, acquisitions and spin-offs. Additional information on e.g.

technical orientation, educational data and localization is also included in the

database.

After a single reminder in April 1998, 400 firms had responded to the survey, of

which 344 had returned a completed questionnaire that could be used for analysis. As

the response rate was less than 40%, half of the non-responding firms (randomly

selected) were interviewed by telephone in June 1998. The objective of the telephone

interviews was to get information about the reason for not responding, and to get

answers to the questionnaire that could be used for analyzing the non-respondents.

Of the firms that had not responded to the survey about an eighth were wrongly

classified, could not be localized or had no activity. About one third said that they did

not have time to answer the questionnaire and one sixth claimed that there was

nobody within the firm who had the knowledge needed to answer the questionnaire.

Additional 20 completed questionnaires were returned after the telephone interviews

and were used for analysis of the non-respondents. As no significant difference was

found between respondents and non-respondents, the 20 answers were added to the

344 answers, resulting in 364 completed answers available for analysis.

Among the 364 answers were answers from 44 medium-sized firms. In order to

increase the response rate for the medium-sized firms, a group of 73 medium-sized,

non-responding, firms in the population were identified. These firms were contacted

for telephone interviews using the original mail survey. The telephone interviews

resulted in 40 responses, of which 17 were valid answers. The 23 responses that could

not be used came from firms that did not fulfill the criteria for a new technology-

based firm described above. Most of these firms had been reregistered, possibly after

merging with a firm not belonging to the population. It is unlikely that these firms

were wrongly classified when included in the database, instead they had taken on the

4 These industries were ISIC 341, 35, 37, 38, 6112, 72002, 8323, 83249, 83292, 83299 and 932.Special rules were applied in ISIC 61120 and in ISIC 83292 and ISIC 83299 for selecting the relevantfirms. See Rickne and Jacobsson (1999) for further details.

3 Methodology

28

identity of a firm not belonging to the population e.g. after a merger or an acquisition.

Of the 73 firms identified, 33 firms either did not want to answer the questionnaire or

could not be reached.

By excluding firms that have merged with firms not belonging to our population there

is a risk that the number of firms that have grown into medium-sized firms has been

underestimated. It is possible that these firms have become medium-sized before the

merger, but that after the merger they cannot be separated from the firm(s) they have

merged. They have lost their separate identity and the managers in the firm might not

be familiar with the history of the acquired firm. The degree of underestimation is

difficult to predict.

Table 3.1 gives an overview of the response rate for the whole population of NTBF

and for the medium-sized technology-based firms (MTBF). In total there are 364

completed mail questionnaires, whereof 44 come from medium-sized firms.

Additionally there are 17 completed questionnaires on MTBF that can be used for

analysis of the MTBF group. The response rate for the NTBF group is 35%, while the

response rate for the MTBF group is estimated as 48%5.

NTBF

Number of questionnaires sent (sample base) 1,194

Terminated or not belonging to population 147

Adjusted sample base 1,047

Responses 420 (40%)

Completed questionnaire 364 (35%)

MTBF

Completed questionnaires from mail survey 44

Telephone interviews, responses 40

Telephone interviews, completed questionnaires 17

Total completed questionnaire 61

Table 3.1 Overview of the response rate for the NTBF and MTBF populations.

5 The size of the MTBF population is in principle unknown, as we do not know the size of thefirms that have not responded to the survey. If it is assumed that the response rate in the mailsurvey is the same for all size groups then the 44 answers from MTBF represent 35% of theMTBF population. The MTBF population is therefore estimated to consist of 126 firms, and 61firms represent 48% of that population.

3 Methodology

29

3.3 Case studies

The objective of the case studies was to get an overall understanding of the qualitative

aspects of the early growth process in new technology-based firms, which could

complement the statistical analysis of the population.

The case study firms were selected from the NTBF population, described in Section

3.2. Even if earlier studies (see Section 2.3.1) predict that factors affecting successful

innovation are dependent on the technology used by the firm and its industrial

orientation, there are no clear indications as to how they differ. In order to explore the

effects of different technologies and industries the case firms came from different

industries, were based on different technologies and offered different types of

products and services. Industrial classification of the firms (found in the NTBF

database) as well as information from the Internet was used for selection.

Nine cases were selected. Eight of those had become medium-sized, while one was

still a small firm. The small firm case was selected in order to understand factors

hindering growth. One case study was not completed because of sudden changes in

the firm6.

Selecting an appropriate number of cases is a balance between effort and results. It

was decided to start out with nine cases and see if there would be a need for adding

more cases later on for exploring certain aspects in more detail. After completing

eight case studies it was judged that the information was sufficient in order to give the

qualitative understanding needed for this study.

Individuals in eight firms, in all but one case including the Managing Director, were

interviewed at the company premises on the background and the development of the

firm. In total 11 people were interviewed, each for 2-4 hours. The questions, which

were open-ended, concerned organizational changes, products, markets, technology,

financing and acquisitions7. The interviews were complemented by secondary

information, such as the firm’s web pages, written material from the firm (financial

statements and product descriptions) and articles from the business press.

Table 3.2 gives an overview of the firms interviewed.

6 Information was gathered on the software development firm Softlab, but unfortunately the interviewwas canceled. The person to be interviewed left the firm and declined to answer any questionsregarding the firm. At that time other individuals, e.g. the founder, had left the firm following anacquisition by a large US firm.7 The interview questions are to be found in Appendix A.

3 Methodology

30

Name Business description

Helax Information system for radiotherapy

IFS Enterprise Resource Planning System (software)

Karobio Development of pharmaceuticals

Markpoint Industrial printers

Mecel Development of automotive electronics

Mydata Pick and place machines for printed circuit boards

Semcon Technical consulting

Sintercast* Production process for compact graphite iron

*Is not yet medium-sized.

Table 3.2 The case study firms.

3.4 Analysis

As has been mentioned earlier, this study uses a combination of a survey study and a

number of case studies, leading to the availability of both quantitative and qualitative

analysis. In addition, the survey data makes it possible to draw conclusions about the

population of firms, while the case studies give a more detailed picture of the

dynamics of the growth process.

When possible the analysis consists of triangulation8 between the survey data and the

case data, where the two studies are compared with one another to support the validity

of an argument.

Cross tabulations, Chi-square tests, t-tests and simple correlations have been used to

used to test correlations and relationships between the cross sectional variables. All

tests for significance are double sided, using 95% significance level.

The data has been analyzed in relation to the factors included in the conceptualization

of the growth process presented in Section 2.2. Because the system context affects all

other factors, and because it is difficult in many cases to separate internal and external

factors empirically, the external factors are analyzed in relation to each internal factor,

and not separately.

When analyzing the factors that have enabled small firms to growth into medium-

sized firms, the small firm group has been compared with the medium-sized group9.

In that way factors that are specific to the medium-sized firms can be identified as 8 Triangulation is the process of combining multiple sources of evidence for developing a converginglines of inquiry aimed at corroborating the same fact or phenomenon (Yin 1994, p. 92)9 All firms that are medium-sized of larger are included in the medium-sized group, as the analysisaims at understanding factors that enable firms to grow into medium-sized. All the firms that are largerthan medium-sized have clearly grown into medium-sized firms as well.

3 Methodology

31

possibly enabling growth. These factors are compared with the results of the case

studies and with previous research.

In order to analyze the factors hindering growth in small firms the following

hypothetical classification of firms is used, based on the dynamic capitalism typology

presented in Section 2.1.3.

Figure 3.1 Hypothetical classification of firms for analyzing hinders for growth insmall technology-based firms (STBF).

The small firms in the sample can not be classified according to the classification in

Figure 3.1, as it is based on future events that are unknown. By using clustering

techniques a group of small firms were identified, which are willing to grow, but have

not done so. These firms have been compared to the MTBF group for identifying

growth constraints other than the lack of growth willingness.

3.5 Strengths and limitations of the study

The strength of the approach used in the study is the holistic picture of internal and

external factors affecting growth. Both acquired and independent firms are included,

which is unusual, but makes it possible to compare the effect of acquisitions on the

whole population. The inclusion of both service firms and manufacturing firms is also

unusual. Technology-based service firms have not been much studied, nor compared

to manufacturing firms.

Another strength is the multiple sources of evidence that are used. Using multiple

sources of evidence increases construct validity, i.e. it is more likely that right

operational measures are used for the concepts being studied (Yin 1994, p. 92).

The main weakness of the approach used in the study may be a lack of detail or

precision as a result of the holistic view taken. This lack of precision is common in

exploratory studies, and further studies may specify different system boundaries, or

concentrate on different sub-systems, in order to increase the precision.

Another weakness is the lack of longitudinal observations. While some of the

dynamics are captured in the case studies, they are retrospective. The questions from

Is notwilling to

grow

Is willingto grow,

but cannot

Is willingto grow,and will

MTBF

STBF

3 Methodology

32

the survey that include the time dimension are difficult to use fully since there is no

knowledge about when the medium-size firms became medium-size.

The reliability of the study is limited by the uniqueness of the time period studied, the

specific situation of the firms etc. The changing nature of the socio-economic

environment decreases the possibility of reproducing the same results, even when

following the same procedures. The fact that the population investigated in this study

is well defined, and because a survey has been used, comparative investigations can

be made on the same population or other populations in the future.

The results from the survey study can be generalized for the whole population of new

technology-based firms in Sweden as defined in the study.

33

4 Description of the firms studied

In this chapter a short description of the medium-sized firms in the database and the

case firms will be presented. The objective is to give background information for the

analysis performed in the next chapters.

4.1 The population of medium-sized technology-based firms

In the following sections some basic, descriptive statistics of the sample of medium-

sized firms will be provided, such as age, size, industry classification and growth, in

order to set the stage for further analysis.

One could suspect that age is an important variable explaining firm size, that is, older

firms are expected to be larger than younger firms. Table 4.1 gives an overview of the

sample of medium-sized technology-based firms in terms of age and size. Size has

been measured in terms of number of employees and sales. Moreover, a comparison

between manufacturing and service firms has been included in the table. As can be

seen in Table 4.1, the distributions are skewed and there is a large variance indicating

an uneven large range of values. This is primarily due to eight firms that have grown

beyond the limit of 250 employees.

Age

(years)

Number of

employees

Sales

(MSEK)

Growth

(empl./year)

Total Mean 12,7 140,3 143,5 13,5

(N=61) Median 12,0 95,0 100,0 8,6

Std. Dev. 4,17 140,0 134,1 12,9

Manufacturing Mean 13,2 110,8 145,6 10,2

(N=40) Median 15,0 90,0 100,0 7,9

Std. Dev. 4,6 96,6 146,7 8,9

Services Mean 12,4 155,7 142,5 15,2

(N=40) Median 12,0 100,0 100,0 10,3

Std. Dev. 4,0 151,4 129,0 14,4

Table 4.1 Age and size of Swedish medium-sized technology-based firms establishedbetween 1975 and 1993.

As can be seen in Table 4.1, the average number of employees is around 140, and the

annual sales are on average 143,5 MSEK. For the total sample of 61 firms, the

average age is slightly over 12 years. That means that the firms are still quite young,

but they would in general have experienced the first rounds of financing and

acquisition related to expansion (Utterback and Reitberger 1982; Lindholm 1994).


34

Two thirds of the medium-sized technology-based firms are found within the service

sectors of the industry. Since these firms are both somewhat younger and larger in the

terms of personnel, they have also experienced a more rapid growth than the

manufacturing firms. However, the service firms have lower turnover per employee

(T-test, p<0.05).

Compared to the NTBF population as a whole the medium-sized firms are slightly

older. There is a positive, significant correlation between age and size in the NTBF

sample (Spearmans rho=0,10, p<0,05) and a significant difference between the

average age in the small firms group and the medium-sized group (11,2 vs. 12,7,

p<0,01, T-test). There are on the other hand great variations in age in the different size

groups. While over 50% of the small firms are older than 10 years, 26% of the

medium-sized firms are younger than 10 years. Even if age is not the only explanation

of growth, it has an effect on the aggregate level.

In Section 1.1 it was argued, based on data from the Swedish Bureau of Statistics, that

new technology-based firms are an important source of medium-sized firms. These

firms belong in many cases to industries that have an above average share of medium-

sized firms as well as an above average increase in the number of medium-sized firms

in recent years10.

In the NTBF sample 88% of the firms are small, that is, have less than 50 employees.

The remaining 12%11 have become medium-sized. This is a relatively large share of

firms becoming medium-sized, compared to the average share of 2% for the industry

as a whole. This difference might, to a some degree, be explained by the fact that the

NTBF group only includes firms with three or more employees while the data on the

industry as a whole includes firms with one or more employees. The firms in the

NTBF sample are on the other hand much younger, as all the firms were established

after 1975. Because of the young age of the population one would suspect that the

share of medium-sized in the sample will increase in the future.

To shed some further light upon the growth differences in different sectors, Table 4.2

shows the distribution of medium-sized firms over different industries, as well the

distribution of the whole NTBF population. The majority of the firms in the NTBF

sample (72%) belong to the service industry while only 28% are manufacturing firms.

This is interesting in the light of the fact that most studies on NTBF only look at

manufacturing firms. The reason for that is that most studies base their sample on 10 There are always risks associated with using this type of aggregated data. Firstly, the data includesboth private and public firms, and secondly, there is no distinction made between new firms growinginto medium-sized firms and medium-sized firms created by breaking up existing large firms.11 When only looking att independent firms in the sample the share of medium-sized firms is 11%. Theshare of independent medium-sized firms in the whole NTBF sample is 7%.


35

certain industries that spend a relatively high share of their turnover on R&D, the so

called "high-tech" industries. When using educational data as criteria for NTBF (see

Section 3.2) it is natural to include the industry-related services, which also is justified

by the high share of service firms in the sample.

Industriesa)

NTBF b)

(Frequency)

MTBF

(Frequency)

Fastest growing MTBFc)

(Frequency)

Manufacturing, total: 97 (28%) 21 (34%) 3 (20%)

Chemistry 10 (3%) 3 (5%) 0 (0%)

Metal products 15 (4%) 2 (3%) 0 (0%)

Machinery 31 (9%) 7 (12%) 1 (7%)

Electric equipment 18 (5%) 4 (7%) 2 (13%)

Automotive 5 (1%) 3 (5%) 0 (0%)

Instruments 18 (5%) 2 (3%) 0 (0%)

Service, total: 256 (72%) 40 (66%) 12 (80%)

Retail businesses 37 (10%) 6 (10%) 2 (13%)

Computer related 98 (28%) 19 (31%) 7 (47%)

Tech. consulting 103 (29%) 13 (21%) 3 (20%)

R&D 18 (5%) 2 (3%) 0 (0%)

Total 355 (100%) 61 (100%) 15 (100%)

a) Industry classification according to ISIC: Chemistry: 35, Metal products: 371 and 381,Machinery: 382, Electronic equipment: 383, Automotive: 384, Instruments: 385, Retailbusinesses: 6112,Computer related services: 8323, Technical consulting: 8324 and 8329,R&D: 9310 and 9320.b) Only 44 MTBF are used when describing the whole population. as nswers from telephoneinterviews are not included. The total number of MTBF in the table can therefore not becompared to the total number of NTBF for calculating the share of MTBF.c) 25% of the MTBF that have the highest growth.

Table 4.2 Industrial classifcation and growth of the medium-sized technnology-based

firms.

Looking at the sample of medium-sized firms there are small differences in the

distribution among industries compared to the whole NTBF sample. Service firms

account for almost two thirds of the medium-sized firms, and an overwhelming

majority of the fastest growing firms are found in the service sector. In the quartile of

firms having the highest annual growth, 80 per cent are firms in the service sector.

Moreover, almost half of all the fast growing firms - 7 of the 15 firms - are found in

the computer related service sector.

Together, the computer related service firms and the technology consultants represent

80 per cent of the medium-sized firms in the service sector. In the manufacturing

sector, the firms are somewhat more evenly distributed among industries. Here the

machinery industry dominates with seven firms (12%). While almost a third of the

firms in the service sector are in the fastest growing quartile of firms, less than 15 per

cent of the manufacturing firms are fast growing.


36

Over half of the firms in the sample of medium-sized technology-based firms are

firms providing technical consulting and computer-related services. Additionally two

thirds of the fastest growing medium-sized firms belong to this sector. Looking at the

industry as a whole, the professional service sector and the computer related services

sector has had a large increase in the number of medium-sized firms, even if the share

of medium-sized firms is average (i.e. around 2%). The professional service sector

additionally has a relatively large number of medium-sized firms, as 8% of all

medium-sized firms in the industry belong to that sector.

While 80% of the NTBF are small firms, their slow growth make them only account

for 34% of the employment. The medium-sized firms therefore have a considerable

direct effect on employment, compared to the small firms.

When looking at the relative change in the number of employees between 1993 and

1998 there is also a clear difference between the growth of the small and medium-

sized firms (Table 4.3).

Changes in the number of employees 93-98 STBF MTBF

Declined 63 (20,5%) 3 (4,9%)

Unchanged 29 (9,4%) 0 (0,0%)

Slow growth 148 (48,2%) 3 (4,9%)

Fast growth 67 (21,8%) 55 (90,2%)

Total 307 (100%) 61 (100%)

Slow growth: The firm has increased number of employees, but has not doubled in size in five years.Fast growth: The firm has more than the doubled the number of employees in five years.

Table 4.3 Relative growth in the number of employees between 1993 and 1998.

Almost all firms that had become medium-size in 1998 (90,2%) had grown fast

between 1993 and 1998, as compared with only 22% of the small firms. Most of the

small firms have grown slowly and 30% have either declined or shown no growth.

This is an interesting result as small firms show high relative growth when adding

only a few new employees.

To summarize:

• The medium-sized technology-based firms are on average 12,7 years old, but

26% of the firms are younger than 10 years old.

• New technology-based firms are an important source of medium-sized firms.

12% of the population of new technology-based firms have grown into

medium-sized firms, compared to 2% for the whole industry.


37

• Two thirds of the medium-sized technology-based firms are found in the

service sector, as well as the 80% of the fastest growing firms.

• The medium-sized service firms are on average somewhat younger and have

higher growth rate than the manufacturing firms.

• 90% of the medium-sized technology-based firms have more than doubled

their number of employees between 1993 and 1998.

4.2 The case studies

In the following sections a brief description will be given of the development in eight

new technology-based firms. Of these, seven have become medium-sized. The

objective of the descriptions is to give a holistic view of the development in each firm

before comparing the cases in the following chapters.

4.2.1 Helax

Helax was founded in 1986 by three people working at the university computer centre

in Uppsala. The founders had degrees in physics, mathematics and computer science,

and had worked on the use of computers in medicine, particularly in radiotherapy.

The computer centre was highly regarded in this area and cooperated with e.g. the

University hospital in Uppsala and Siemens. In the early eighties the computer centre

took part in a Nordic project (the CART project) for specifying a computerized

system for radiotherapy of cancer patients. The system specifications included all

stages of the therapy, from diagnosis to the completion of the treatment, and provided

health care professionals with the information needed in each stage. The results from

the project showed that a better management of information in the process could

greatly improve the quality of the treatment.

The founders were interested in commercializing the results from the project. None of

established firms in the industry was interested in doing so, as many believed that

radiotherapy did not have a future in the treatment of cancer and would be substituted

by other methods. The fact that large actors, such as General Electric and Siemens

dominated the industry made the prospects for a new firm very bleak. The founder

nevertheless managed to assemble money from Landstingsfonden, Industrifonden

(government funds) and a private investment company. The new firm was wholly

owned by the private investment company and the start-up capital was supposed to

keep the firm alive for three years.

The first products were installed for clinical testing in 1988 at university hospitals in

Uppsala and Malmö. By 1989 the firm had not yet managed to get any revenues and


38

the investment company became impatient. Management consultants were brought in

to help the firm to generate revenue. Cultural conflicts between the business minded

owners and the more technology minded employees at Helax resulted in a

management buyout in 1989. At that time the firm was in deep financial crisis.

The important purchase came in 1990 by Radiohemmet at the Karolinska hospital and

it was followed by a number of purchases to customers within the Nordic countries

that knew or had taken part in the CART project. This increased the credibility of the

firm and made relations with its bank much easier.

The first international order, i.e. outside the Nordic countries, came in 1992 when

Helax for the first came competed directly with the giants in the industry. The real

breakthrough came in 1994 when Helax made a strategic partnership with Siemens in

which Siemens took care of distribution and support in selected foreign markets.

Today Helax has similar partnership agreements with other large actors.

The growth of the firm has made it possible to extend its product line and come closer

to the vision of the CART project. The development has been internal and by the

acquisition of a small Norwegian firm. Today, with over 90 employees, the firm is

broadening its strategy to include methods other than radiotherapy for the treatment of

cancer. At the same time there is a need for changes in management and the

organization. There is a need for a more professional management and more stable

finances.

From the start Helax has had a strong academic profile. The firm has conducted world

class research on the treatment of cancer by radiology which has been published in

scientific journals. The researchers have had intensive cooperation with the academic

world and supervised both industrial and academic doctoral students. At start-up the

firm was also working at the research edge in computer science. Today, the firm has

not been able, or seen the need, to stay at that frontline. That has brought certain

problems, e.g. more difficulties in recruiting software engineers, as engineers and

researchers need a stimulating work environment. This is especially evident today

when there is a high demand for technical people.

4.2.2 IFS

IFS was founded in 1983 by five electrical and computer engineering graduates from

Linköping Technical University. The founders did not want to work for a large

corporation, but did not have any clear business idea. They did several consulting

projects, and one important project was to develop maintenance software for the

nuclear power industry. At the same time they became aware, through personal


39

contacts at SAAB, of the development of relational databases and of new tools for

developing such databases simultaneously for a number of different platforms. IFS

decided to develop maintenance software based on this new technology and

introduced it to the Swedish market in 1986. At that time the firm employed 30

people. New functions were subsequently added to the software, dealing with

finances, production, human resources, distribution, product development etc. In 1990

the system had grown into a complete ERP system called IFS Applications. At that

time, with around 100 employees, the firm embarked on an aggressive expansion

strategy on a global market. The expansion, both by internal development and

acquisitions, started in the Nordic countries and spread all over the world. In 1996 the

firms was listed on the SBI stock market, and in 1998 on the O-list. Today the firm

has more than 1500 employees.

Before entering the stock market the firm was mostly self financed. The bank was

helpful and the firm received a loan from Industrifonden in 1992 to continue its

development in difficult times. The firm was owned by the founders, employees and

other individuals, but without any institutional owner.

There have been large changes in the organization, new levels of management have

been added as the firm has grown. The management style has nevertheless kept its

entrepreneurial spirit and all the founders have leading positions within the firm. The

firm has all the time recruited young people, but has put more emphasis on their

experience during the years.

To select the right technology is very important in the fast moving computer industry.

Cooperation with technology suppliers is therefore very important in order to gain fast

access to new solutions.

4.2.3 Karobio

Karobio was founded in 1987 by two biotechnology researchers, one Swedish and one

from the US, whose main research area was nuclear receptors in cells. The researchers

felt that biotechnology was a future trend and that it would be possible to use their

scientific results for the development of pharmaceuticals. The researcher from the US

had already been involved in a similar firm in the US (Scios).

The founders contacted a group of Swedish investment firms that together with Scios

provided 220 million SEK in start-up capital, where the Swedish group owned the

majority of the shares. Management personnel were hired and the founders

concentrated on research.


40

At an early state it became apparent the there were three groups within the firm which

had different interests and different views of the world. Firstly there were the

scientists, represented by the founders, that were interested in research projects

relevant for their research career. Secondly there was management, represented by an

experienced industrial manager, that did not have any experience from either the

pharmaceutical industry or of biotechnology. Thirdly there were the owners that had a

strong financial base and were patient but did not have any experience of research

intensive industries. There were also conflicts of interests between Scios and Karobio

as Karobio was licensing some technology from Scios. As a result Karobio had an

unfocused strategy and was involved in diverse activities, e.g. diagnostics. Licences

were bought and a firm was acquired. After two years of operations it was evident that

the firm had large problems. It had 100 employees, two subsidiaries, unclear strategy,

little money and no revenues. The general manager resigned and an experienced

manager from Pharmacia was recruited. The strategy was changed, now focusing only

on the development of pharmaceuticals based on nuclear receptors. This development

was supposed to be done in cooperation with large firms in the pharmaceutical

industry with the capacity to take care of clinical trials, production, marketing and

sales.

The firm was trimmed down to 30 employees. After providing money for the needed

restructuring the Swedish investors had lost their patience and wanted to get out. That

resulted in a management buyout in 1993 where management and personnel bought

their shares. In 1993 the firm signed its first contract with a large pharmaceutical firm

for a three-year research programme. More financing was though needed and several

institutional owners were added. In 1997 the firm signed two additional contracts with

large, international firms. One year later the firm was introduced on the stock

exchange (O-list) and today it has around 60 employees, over 50 of whom are

engaged in research and development.

In spite of having signed important contracts the firm still does not generate enough

revenues to cover costs. This is mainly for two reasons. Firstly the firm requires large

investments in research and development in order to retain the scientific position it

needs to be an attractive research partner. Secondly the long development time for

pharmaceuticals creates a long lead-time between the invention of an important

substance and before it will bring any revenues in terms of milestone payments and

royalties.

The strength of Karobio is based on its discoveries about the structures of nuclear

receptors, that can be patented, and the development of cell systems for testing the

effects of chemical substances. Links to the academic world are very important, as


41

new discoveries are made continuously and in order to exploit new opportunities

Karobio must be at the knowledge frontier. Good relations with the founders are

important as they provide key knowledge in the area, and links to a large network of

researchers. These relations are nevertheless not always easy to manage because of

conflicting interests.

4.2.4 Markpoint

Markpoint was founded in 1986 by four employees who worked together in a firm

manufacturing industrial printers. Within that firm the founders had different

positions, working with sales, customer support and technical development. The

founders were not content with their work situation following a merger with two other

Swedish firms in the industrial printer industry, and started Markpoint. From the

beginning Markpoint was a competitor to the previous employer of the founders and

the founders had contacts with their former customers.

After having developed its first product the firm grew rapidly. A French distributor

became very important for the firm, at one point providing about 60% of the revenues.

The distributor, who had bought a minority share of Markpoint, wanted to acquire

Markpoint but the founders did not want to sell. The distributor cancelled all

payments, which lead to a financial crisis for Markpoint. With the help of its bank,

Markpoint was able to survive the crisis and cut off all contacts with the distributor.

After this experience, and in order to better coordinate its market activities and build

up its brand name, Markpoint founded its own distribution subsidiaries abroad.

Markpoint was in the beginning financed by the French distributor and a Swedish

bank. Later they obtained development loans from STU/NUTEK. The ownership has

also been fairly stable. One of the founders died and one left the firm for personal

reasons. Two new owners were added who brought with them knowledge and skills in

thermal printing, which was subsequently used in new products.

Markpoint has a very conscious management style based on life-cycle thinking. The

firm has established new subsidiaries for the development and marketing of new

products. In this way each subsidiary can adjust their organization to their position in

the life cycle. The corporation provides administrative services and the basic

management philosophy. In 1998 the corporation, and subsidiaries, had 125

employees, with 40% working abroad.

Markpoint cooperated with Chalmers University of Technology on the development

of a new type of ink. The project, which was partly financed by NUTEK, was closed


42

down after several years having only resulted in a number of patents. In the future the

firm will concentrate on the application of known technologies in its products.

4.2.5 Mecel

Mecel was founded in 1982 by two engineers for developing a new type of ignition

system for car engines. The founders had done some work related to the ignition

system at their former employment, but the basic idea came from the undergraduate

studies of one of the founders, nine years earlier. Before Mecel was founded the

technology was not considered ripe for implementing the idea.

Early on Mecel made a one-year development contract with SAAB, with which the

founders had contacts from previous employment, for developing a prototype of the

system. SAAB continued to support the development and in 1985 they decided to put

the system into production. In order to control the technology SAAB bought a

majority share of Mecel (60%). Delco Electronics, a firm owned by General Motors,

bought the rest of the shares when General Motors acquired SAAB Automobile.

After a period of growth between 1985 and the early nineties, when the firm

established subsidiaries in Jönköping and Gothenburg, further growth was constrained

by the double ownership of SAAB and Delco. The main reason for this was that

SAAB was not interested in offering the technologies developed by Mecel to other

manufacturers. In 1994 it was decided that Mecel should be an independent profit-

centre owned by Delco. Less than 30% of the revenues were to come from GM owned

firms, technology development should be synchronized with Delco/GM and Mecel

would have access to the technology resources at Delco/GM. The objective was to

combine the fast, flexible small firm with the global resources of a large corporation.

Since 1994 Mecel has been growing steadily and has plans for continued growth. In

1998 the firm had around 100 employees, of which 90% were engineers.

As the firm has grown there has been an increased need for formalization, especially

regarding communication. In the beginning, information spread around but when the

firm had more than 50-60 employees there was a need for systematic communication.

At the same time it was important not to lose the entrepreneurial spirit. When the

firms had almost 100 employees, changes were made in the organization structure and

a layer of middle management was added.

Mecel has moved from focusing entirely on the ignition system into other applications

of automotive electronics. The field of automotive electronics has become very

complex, which has meant that Mecel has had to add new technologies to its

knowledge base and increase its knowledge within each technology. Mecel has


43

accomplished this with the help of the GM network and cooperation with Swedish

universities (competence centres). The GM network gives access to a large pool of

technology resources over the whole world, through interesting development projects.

As well as being a source of technology transfer through projects, cooperation with

universities is also an important source of recruitment.

Even if the technology resources of GM are very important for Mecel, it is important

that Mecel is not affected by the bureaucratic inefficiency of the large corporation,

which would diminish its entrepreneurial ability. Mecel has to bypass several layers

of management at GM. This bypassing is based on personal contacts within GM and

on the understanding that in this way Mecel can make a greater contribution.

4.2.6 Mydata

Mydata was founded in 1984 by two engineers for developing an automatic pick-and-

placement machine for surface mount technology (SMT) electronic components. The

founders had earlier developed, and sold, a manual machine for the placement of

electronic components (not SMT) based on their undergraduate studies. The new

machine was intended for small-scale production that needed flexibility and short

setup times.

During the first two years the firm focused on the development of the product, and

was financed by Industrifonden and NUTEK (loans). A prototype was ready by late

1984 and the first installation at a customer site was in 1986. The product still had

technical problems, and the firm was running out of money. After trying hard to

obtain financing without losing control of the firm the founders decided in 1986 to

sell the firm to an investment company. At the same time one of the founders left the

firm, primarily because of the technical problems. The other founder, that still owned

a small minority share, was not allowed to continue as a managing director but stayed

as a technical director in order to solve the remaining technical problems.

Shortly afterwards a conflict arose between the remaining founder and the owners

about the ownership of certain inventions (patents) made by the founder while

working as a technical director. The owners also had problems with the recruitment of

a new managing director. Two managing directors worked in the firm until 1988

when the current one was recruited.

In 1989 the remaining founder attempted to buy the firm back but failed. Mydata was

sold to three individuals, one of whom had been working with Mydata at the

investment firm. The conflict about the rights to the founder’s inventions was solved,

the founder solved the remaining technical problems and thereafter left the firm. He is


44

still a minority owner and sits on the board. After the founder left the firm it was

difficult to recruit a new technical director who was acceptable to the engineers in the

firm.

Before working for Mydata, the current managing director had worked for a

distributor of the old manual machine developed by the founders of Mydata. Starting

at Mydata he focused on building support functions such as production, sales and

support in order to effectively produce and deliver the product to the customers with

good quality. As the market was almost entirely abroad, a network of foreign

subsidiaries and distributors was established. The owners took care of the necessary

financing.

As the original product idea has been very successful the firm has focused on a single

market segment from the start. It has developed a product family offering the

machines in different capacities and the basic technology has not changed very much.

As a result of worsening market conditions the firm has put more energy in recent

years on development. A special group has been established for developing a new line

of products. These product ideas are not new, but were found within the firm already

in the 80s. In 1998 Mydata had 240 employees, of which 170 were working in

Sweden.

4.2.7 Semcon

Semcon was founded in 1980 by four consultants who had been working in two

medium-sized consulting firms (Viking and Knigh), and had mainly done work within

the process industry. The idea was to create a firm that had different values than other

consulting firms at that time. The difference was related to how to treat individuals in

an organization.

Early on another owner, with a business background was added. In 1989 Semcon was

sold to Viak. The reasons were mainly personal because two of the founders wanted

to leave the firm to do something else. In 1990 a large consulting firm, VBB, bought

Viak. The motives of VBB were financial, i.e. to have a larger turnover. At that time

Semcon had over 300 employees. The corporate culture of VBB did not suit Semcon.

VBB was based on old traditions and had a traditional management style. Finally

there was a management buyout in 1996, followed by an introduction to the stock

market (O-list) in 1997 with 600 employees. Much energy was spent on the issues of

ownership and the introduction to the stock market. Before entering the stock market

the firm had not needed any external financing (apart from the management buyout).


45

In 1991 the third of the founders left the firm. He had been the visionary of the firm

and played an important role in motivating the employees. Before leaving he felt that

he could not contribute much more to the organization and that he would have

negative effects on its further growth.

Even if the structure of the organization has changed during the years it has contained

the same basic workgroup structure. Each workgroup has fewer than 25 employees

that is lead by a managing director and three technical directors. Each workgroup is

very much autonomous, as it is responsible for finding work and the people to do it.

When the workgroup has more than 25 employees it is split into two groups.

With time Semcon has moved into new technology fields, the organization has spread

throughout Sweden and each work group has becomed more specialized with the

increasing number of work groups. Until now very few assignments have come from

abroad and the firm has not actively moved into international markets. In 1998 the

firm had around 1000 employees in 54 workgroups.

4.2.8 Sintercast

Sintercast was founded in 1984 by two persons with a background in metallurgy. One

had done some research while the other had some starting-up experience. The

researcher had patented a method for monitoring and controlling the size of graphite

crystals in cast iron. The resulting compact graphite iron (CGI) is lighter than normal

iron, cheaper to produce, can be used at higher temperatures and is more

environmental friendly. The method can be used for the mass production of CGI,

which was not economically viable previously.

At the beginning it was not clear what applications the firm should focus on. In the

first pilot production, compontents used for brakes in trains were produced. But since

the late 80s, the firm has focused on the production of automotive engine blocks. The

first contract for test production in the automotive industry came in 1991. Since then

over 100 000 test blocks have been created in about 50 firms without any contracts for

mass production. The explanation has been the inertia to change within the

automotive industry as well as technical problems. The most important technical

problems have been related to the post-processing of the iron, e.g. cylinder bores.

In 1991 the firm had 20-30 employees and offices in the US, Sweden, Germany and

Ireland. In 1992 a new managing director was recruited, a person that had been

general manager in a large industrial firm with experience of marketing and finances.

The first task of the new director was to sort out the organizational and financial

situation of the firm. Shortly thereafter the founders left the firm. The researcher


46

thinks that the firm is focusing too much on marketing without giving sufficient

attention to further research and dvelopment while the other founder is considered

incompetent. In 1998 the firm had 30-40 employees, main office in London,

development site in Katrineholm and offices in Detroit, Frankfurt and Tokyo.

At start-up the founders as well as other related individuals financed the firm. In 1991

80% of the firm was owned by a group of international investors. In the late 80s there

had been great expectations about the potential of the firm and shares had been sold at

high prices. In 1993 the firm was introduced to the stock market (OTC-list). After the

owners added capital in 1995 the firm has enough capital to survive until year 2001

without any revenues.

When it was decided to take the firm to the stock market it was expected that the firm

would soon be selling its product. As it has not done so, being on the stock market has

been problematic in certain ways. The owners are anonymous and have not

contributed with anything else besides the financing. It is also difficult to inform the

owners as required because the firm is still concentrating on development. Being a

listed firm has also lead to attention from the media which has put a lot of pressure on

the management team and employees.

The firm has been very careful in its recruitment of new personnel. It has been

difficult to recruit appropriate people, above all software engineers. Software

engineers have been recruited in England and in some cases they have moved to

Sweden. The morale is high among the employees, in spite of the difficulties. The

knowledge on the technology increases and it is felt that the goal is getting closer. It

has nevertheless been more difficult to keep up morale as time goes by.

The competition within the manufacturing of CGI has increased as diesel motors are

becoming more important. One of the competing firms is a Swedish firm called

Novacast. The researcher that founded Sintercast is currently working for Novacast.

He has developed, and patented, a new method for manufacturing CGI and methods

for post-processing the iron. According to the researcher his new method is better than

the Sintercast method, but Sintercast believes that it has a technical edge and is well

protected by its patents.

47

5 The medium-sized technology-based firms: Why have theygrown?

The first research question concerns the factors that enable new technology-based

firms to grow into medium-sized firms: What factors have enabled a group of new,

Swedish, technology-based firms to grow into medium-sized firms? In this chapter we

will try to answer this question by analyzing our empirical data. The analysis will be

guided by the conceptualization of the growth process presented in Section 2.2. In

order to identify factors specific to medium-sized firms we will compare the medium-

sized firms with the small firms, and add insights from the case studies. Some of the

results will be useful when we analyze the factors that hinder new technology-based

firms from growing into medium-sized firms (Chapter 6).

5.1 Growth willingness

If management is not interested in creating new demand and hiring new employees to

respond to that demand, growth is not likely to happen. According to previous studies

(see Section 2.3.2) few owner/managers of small firms want their firms to grow. One

would therefore expect growth willingness to be a major growth barrier for new

technology-based firms.

Even if there is a significant difference between the growth willingness in small and

medium-sized firms, few firms indicate that they do not want to grow (Table 5.1).

Number of firms (Share of firms)

STBF MTBF

Do not want to grow 56 (18%) 3 (5%)

Want slow growth 180 (58%) 23 (39%)

Want fast growth 73 (24%) 33 (56%)

Total 309 (100%) 59 (100%)

Chi-square test gives a significant difference between the two groups at the95% level (p<0,001).

Table 5.1 Willingness to future growth in terms of the number of employees in small(STBF) and medium-sized technology-based firms (MTBF).

Does this indicate that there is a link between willingness to grow and actual growth

and that in order to grow management in new technology-based firms need to have

high growth willingness? This does not necessarily need to be so. It is important to

notice that the growth willingness of the medium-sized firms does not give us any

information on their growth willingness prior to becoming medium-sized.

Looking at the small firm group, more than half of the firms want slow growth while

only 24% are striving for fast growth. It is difficult to interpret the attitudes towards

5 The medium-sized technology-based firms: Why have they grown?

48

growth of the owners/managers belonging to the group that want slow future growth.

It is possible that this group represents those owner/managers that want to grow a

little without losing control of the firm. It is also possible that this group represents

managers who focus on other goals and who would accept growth if it would serve as

a means to obtain their goals. In the former case the firm are less likely to grow. It is

most likely both types of attitudes are represented in the group.

In six of the eight case firms the managers/founders had low growth ambitions from

the start, even if all the firms strive for continued growth today. In most cases the

founders/managers of the firms wanted their ideas to succeed on the market and it

seems that they have accepted growth as a means for obtaining that goal. No one has

been against growth even if they have been aware of the fact that growth is

problematical. Growth willingness does not seem to be a sufficient prerequisite to

grow as one of the case firms that wanted to grow from the start has not, after 15

years, been able to grow into a medium-sized firm.

It can be said that once the firms become medium-sized they become growth oriented,

i.e. they aim for future growth. This is in line with Garnsey’s (1998) model which

predicts that after an initial period where the company is preoccupied with mobilizing

resources and gaining legitimacy on the market, the firm becomes more growth

oriented as it has created its own ability and incentives for growth ("Penrosian

growth"). That not all medium-sized firms are interested in further growth might be

because theey find growth problematic or that they are experiencing a growth reversal

(Garnsey 1998).

To summarize the results of this section:

• STBF have lower growth willingness than MTBF, even if few STBF indicate

that they do not want any growth.

• High growth willingness from the start is not a prerequisite for growing into a

MTBF. Accepting growth is important.

• Once becoming medium-sized, the NTBF tend to become growth oriented, i.e.

interested in future growth.

5.2 Creating and expanding markets

A key issue for growing firms is to create and expand the markets for their products.

In some cases the firms need to create a completely new market, but in most cases the

market exists and can be identified. Even if firms may have accumulated sufficient

resources to expand into medium-sized firms without generating any revenues, it will,


49

sooner or later, have to start doing so, unless the firm is developed in order for it to be

acquired by another industrial firm.

Earlier studies have shown that, in small countries, internationalization is an

important mean for getting access to sufficiently large markets which can in turn lead

to growth (see Section 2.3.2). This is confirmed in Table 5.2 which shows that the

medium-sized firms are more internationalized than the small firms.

STBF

N=311

MTBF

N=61

Difference

p-value

Turnover from export (%) 18 27 <0,05 a)

Share of exporting firms (%) 54 72 <0,01 b)

Share of employees abroad (%) 1,6 9,9 <0,05 a)

a) T-test, b) Chi-square test

Table 5.2 Internationalization in small and medium-sized technology-based firms.

The importance of internationalization in medium-sized firms is apparent in all of the

measured dimensions. The variation in the share of employees abroad is significantly

higher within the MTBF group indicating that the medium-size firms use different

types of distribution channels. This is also confirmed by the case firms as only one

firm exclusively uses agents for distribution, while the others use a mixture of own

subsidiaries and agents, only own subsidiaries, or sell directly to foreign customers.

While firms that sell directly to foreign customers have no employees abroad, firms

that have their own subsidiaries in many countries may have a high share of their

employees working abroad.

It seems that export is more important for manufacturing firms than for the service

firms. Of the 17 medium-sized firms that do not have any revenues from export, 13

are service firms. Around 80% of medium-sized manufacturing firms have more than

10% of their revenues coming from exports, compared to 43% of the service firms

(p<0,01, Chi-square test). This does not have to mean that the manufacturing firms do

not have any domestic market, but indicates that manufacturing technology-based

firms will not be able to grow into medium-sized firms without significant sales on

foreign markets. The situation may be different in the service firms, as they are more

likely to be able to grow into medium-sized firms by serving their domestic markets.

This difference between manufacturing firms and service firms is also evident in the

case study firms.

But how do medium-sized firms create and expand their markets, including the

international markets? Unfortunately, there is little information in the database about

that but certain patterns can be identified in the case studies. Three factors seem to


50

have been important for the medium-sized firms: 1) Contacts with customers from

earlier employment, 2) industry specific demand, and 3) cooperation with large

industrial firms within the same industry. Even if all factors have influenced most of

the case study firms their relative importance differs between firms.

In the case firms where contacts from earlier employment were important these

contacts created legitimacy for the firm and a possibility for cooperation with

demanding customers during product development. In some cases the customers even

bought the products early, before they were fully developed. As the contacts have

even been international they have served as a base for internationalization.

The case study firms that depend on earlier contacts with customers are, with one

exception, manufacturing firms. One could ask if this was more important for

manufacturing firms (or product-based firms) than for service firms. If one assumes

that contacts with customers from earlier employment exist if the new firm is a

competitor to the earlier employer of the founders, or has the employer as a customer,

then these contacts are important for the manufacturing firms in the database. About

75% of the medium-sized manufacturing firms have contacts with customers from

earlier employment, which is a significantly higher share than for the small firms

(43%, p<0,05, Chi-square test). These contacts may not be as important in service

firms as fewer firms have these contacts and there is no significant difference between

the shares of small and medium-sized firms (51% and 57%, p=0,52, Chi-square test).

Another factor affecting the creation and expansion of markets for the case study

firms, especially two of them, is the demand in the industry. Technical consulting and

Computer related services, which partially overlap, have been growth industries for a

number of years, especially in the 90s. The case firms that operate within these

industries have been the only case firms that have been able to grow into medium-

sized firms without any foreign sales. They have not based their business on contacts

from earlier employment because they have changed the direction of their activities

and the markets they serve. This is not to say that leading customers were not

important for those firms, only that the leading customers that had importance for

their growth were not based on contacts from previous employment. Industry

characteristics can also have negative effects on growth as in the case study firm that

has not been able to grow into a medium-sized firm. In that case, the customers are

dependent on large-scale production and have not accepted a new, untested

technology in their production processes even though the benefits could be

substantial.


51

Cooperation with large firms in the industry is the third factor that has been important

for the creation and expansion of markets in a number of case study firms. The large

firm can be an industrial firm that has acquired the small firm, a customer or a firm

offering complementary products. The small firm gains access to the distribution

network of the large firm as well as legitimacy on the market. This legitimacy is

particularly important for entering markets that are important because of large size,

but have a great geographical distance, e.g. the U.S. market. The importance of large

firms for internationalization is also apparent in the database. Acquired firms have a

significantkt higher share of their revenues coming from exports than independent

firms (32% vs. 17%, p<0,01, T-test), both manufacturing and service firms.

Earlier studies have found that the introduction of new products, or innovativity, is

important for expanding markets in the case of technology-based firms (see Section

2.3.2). According to Table 5.3 the results are mixed regarding the difference between

innovativity in small and medium sized technology-based firms.

STBF

Min N=238

MTBF

Min N=48

Difference

p-value

Number 6,6 12,8 0,13a)

Share of turnover 58% 44% <0,05a)

Market newnessc) 3,7 3,4 0,093b)

Originality for the firmd) 3.4 3.2 0,74b)

a) T-test. b) Mann-Whitney U test. c) Market newness is measured on a scale 1-5,where 1 is very low and 5 very high. d) Originality for the firm is measured on ascale 1-5, were 1 means a little change for the activities of the firm and 5 means avery large change.

Table 5.3 New products and services introduced to the market in the last five years andtheir market newness and originality for the firm.

The medium-sized firms seem to have a larger number of new products, but the

variance is significant larger than for the small firms (p<0,001). A possible

explanation is that high innovativity is not a requirement for becoming a medium-

sized technology-based firm, even if many of them are. This is in line with Kirchhoff’s

typology where innovativity and growth are two dimensions that do not need to be

related, especially in the short term (Kirchhoff 1994). The number of new products is

though a problematical indicator for cross industrial comparison as there are great

variations between industries in what can be called a new product and the amount of

different products in a firm’s product line (Penrose 1959).

The small firms have a significantly higher share of turnover from new products. This

result could be biased in favour of the small firms because the small firms could be

younger and still depend on their first products or services. When controlling for age


52

by only analyzing firms older than 10 years old, similar results are obtained. The

small firms continue to innovate, even if they are not growing.

The large variance in the number of new products in the medium-sized firms and

continued innovativity of the small firms indicate that there is no clear evidence of a

relationship between innovativity and growing into a medium-sized firm. But even if

small and medium-sized firms are similar, in terms of innovativity, the products of the

small firms do not get diffusion enough for growth to take place.

One possible explanation for the lack of diffusion of the products of the small firms

could be their slightly higher market newness (see Table 5.3). It is difficult to see if

high newness is an indication of that the market has not yet started to appreciate their

products or services, but will do so in the future, or if it is an indication that these

firms are offering something that the market does not demand. In the former case the

problem could be that the small firms are creating new markets. In that case they

might need to "educate" the customers before the products are accepted or that

compliementary innovations are needed. For this time and large resources will be

necessary. In the other case the firms might be overestimating the impact of its

innovation, as it may only be interesting for a very small market.

There is no difference between small and medium sized firms regarding the

originality of the new products for the firm. There is therefore no support found for

the hypothesis put forward by Meyer and Roberts (1986) and Roberts (1991) that

relative amounts of product changes affect the growth in new technology based firms.


• MTBF are more internationalized than STBF

• Internationalization is more important for manufacturing firms than for service

firms.

• Three factors have been identified as being important for creating and

expanding markets: 1) Contacts with customers from earlier employment,

particularly in manufacturing firms, 2) Demand in the industry, and 3)

Collaboration with large firms.

• Mixed results were found in the difference in innovativity in STBF and MTBF.

There was no clear relation between innovativity and growth.

5.3 Organizing

As a small firm grows its organizational structures are transformed. The number of

employees increases, new tasks emerge, capacity increases, and different activities


53

must be coordinated. In order to cope with these changes management has to be added

and structures formalized. At the same time the firm needs to organize its

relationships with the environment in order to get access to important resources such

as, finance, technology and market knowledge.

But how does the organizational structure change as the firm grows? There is no

detailed information about this in the database, but from the case study firms one can

see a clear pattern of the increased use of formal structures as the firm grows. These

formal structures nevertheless take on a different form in the case study firms. Some,

typically the manufacturing firms, have divided work in a traditional way into

production, development, sales etc. Others develop small units, largely autonomous,

based on a certain product or some specialization. The third group has developed a

project based matrix organization where project managers rely on a number of

supporting functions.

The development of supporting functions and the rationalization of operations has

been important for the case study firms. When demand has increased more control

and coordination is needed for delivering products to the customer with the

appropriate quality. At the same time all the managers of the case study firms mention

that there are conflicts between the technology culture of the development people and

the business culture of the people working with day-to-day operations. A stimulating

environment is thought to be important for technical employees, but this is not always

compatible with the formal structures needed for rationalizing the daily operations.

There is a need to "protect" the technical employees from the structural effects of the

rationalization for two reasons. Technical development is important for the growth of

the firm and as there is a high demand for technical employees on the market, they

can easily change jobs if they are dissatisfied

The common picture of an entrepreneur is of a person who owns a single firm which

grows due to its own strength. In reality the pictures is more complex. Firms can

change forms by creating subsidiaries, e.g. through spin-offs or the acquisition of

another firms. Firms can also merge with other firms, change name, change owners

etc. According to Wiklund (1998, p. 120) there is a difference in the behaviour of

rapid-growing and slow-growing firms in terms of how the firm is organized. Rapid-

growing firms were found to be more entrepreneurial in the sense that they establish

more subsidiaries and make more acquisitions.

Table 5.4 shows that over 40% of the medium-sized firms in the sample have

acquired other firms, compared to 14% of the small firms, which is a significant

difference. There is on the other hand no significant difference between the small and


54

the medium-sized firms regarding related spin-offs, were about 10% of the firms have

spun-off related firms.

STBF MTBF Difference

Own acquisitions 14,3% 45,9% <0,001a)

Related spin-offs 9,6% 11,5% 0,66 b)

a) Chi-square test. b) Fishers exact test

Table 5.4 Own acquisitions and related spin-offs in small and medium-sized firms.

It is difficult to compare the numbers in Table 5.4 with the results obtained by

Wiklund (1998). It seems that own acquisitions are more common in this study than

in his study. This can hardly be related to the inclusion of service firms in this study

as there is no significant difference between own acquisitions in manufacturing and

service firms (23% vs. 16%, p=0,11, Chi-square test). On the contrary, the

manufacturing firms are more likely to have acquired other firms. It is possible that

the acquisitions are a way for the firms to grow (Penrose 1959), enter new markets or

get access to new technology or other important knowledge. Acquisitions could also

be a result of having reached a certain size along with a more professional

management. There is a positive correlation between size and the having made own

acquisitions (Spearman rho=0,32, p<0,01) which gives a partial support for that

hypothesis. The results from the case study firms, where only one firm had made an

acquisition before becoming medium-sized, also indicates that acquiring other firms

may be done more readily once the firm has become medium-sized rather than small

firms using acquisitions as a means of becoming medium-sized. Considering related

spin-offs in Table 5.4, there is no evidence that growth in new technology-based firms

"disappears" through the establishment of new firms, i.e. that small firms with growth

potential grow through the establishment of new firms.

Another sign of a more entrepreneurial expansion strategy characterizing rapid-

growers is, according to Wiklund (1998), adding new owners. This can be a

prerequisite for obtaining external financing and might in some cases bring other

resources that can affect growth. Certain owners, e.g. industrial firms or venture

capitalists, could give access to knowledge, contacts and other resources necessary for

growth. Table 5.5 indicates a relationship between adding new owners and becoming

medium-sized.


55

Share of firmsc) Difference

STBF MTBF p-value

Have added new owners (either minority of majority of shares) 47,2% 70,7% <0,01a)

Have both sold minority shares and been acquired 5,8% 11,9% 0,15b)

Have sold minority shares 33,8% 50,0% <0,05a)

To Swedish buyers 32,5% 48,2% <0,05a)

To foreign buyers 4,2% 8,9% 0,17b)

Have been acquired 18,1% 32,8% <0,01a)

By Swedish buyers 13,8% 16,7% 0,33a)

By foreign buyers 4,2% 13,3% <0,05b)

a)Chi-square test. b) Fishers exact test. c) Percentages are related to the number of answers to each question.

Table 5.5 Ownership changes in small and medium sized new technology-based firms.

While roughly 70% of the medium-sized firms have added new owners, either by

selling minority shares or being acquired, this has happened in 47% of the small

firms. About 50% of the medium sized firms have sold minority shares while almost

33% have been acquired. Of the medium-sized firms, 12% have both sold minority

shares and been acquired. A significantly lower share of the small firms have sold

minority shares (34%), or been acquired (18%).

When looking at the effects of the acquisitions on growth, 67% of the acquired

medium-size firms (12 of 18) report substantially increased growth as a result of the

acquisition. This can be compared to 29% of the acquired small firms that report the

same effect (p<0,01, Chi-square test)12.

About half of the acquired medium-sized firms were acquired by foreign firms. It

indicates that it is not only Swedish firms that have gained the necessary competence

to successfully acquire technology-based firms. It was more common for medium-

sized firms to be acquired by foreign firms than small firms. It is possible that foreign

owners give easier access to foreign markets and access to other innovation systems

that positively affects growth.

As the wish to stay independent is an important motive for the establishment of new

technology-based firms in Sweden (e.g. Lindholm 1994) one would expect that the

willingness to grow is related to changes in ownership. Table 5.6 shows that the firms

12 Even if no correlation was found between the size of they buyer and post-acquisition effects ongrowth (Spearman rho=0,169, p=0,23), only 2 of 12 medium-sized firms providing information abouttheir buyer had been acquired by a firm with less than 250 employees. In comparison large firms hadacquired 52% of the acquired small firms. As pointed out by Lindholm (1994), other factors than sizeare important for the success of the acquisition, as she that found the fulfillment of the buyers’ andsellers’ motives along with realization of technological synergies among the most important factors forpost-acquisition growth in technology-based acquisitions.


56

which have added new owners are significantly more willing to grow compared to

those which have not added new owners.

No new owners

N=144

New owners

N=146

Do not want to grow 18% 9,0%

Want to grow slowly 67% 47%

Want to grow fast 15% 45%

Chi-squre test gives a significant difference at the 95% level (p<0,001)between the willingness to grow in those firms that have added new ownerscompared to those that have not.

Table 5.6 The relationship between growth willingness and ownership changes (soldminority shares or being acquired).

It is possible that if owners/managers strive for the growth of their firms, they are

prepared to accept new owners who could give access to the necessary resources.

Another possible interpretation is that the owners/managers do not strive for growth

because they know that they can not do so without adding new owners, which would

counteract their motives for founding the firm. In the case studies, external financiers,

such as investment firms, demanded a majority share of the firm in order to make an

investment in the firm. If this is usual, it might mean that the institutional environment

affects the growth willingness of entrepreneurs in a negative way by constraining

financing possibilities for those founders who are not prepared to sacrifice the control

of the firm.

The case studies give an additional view of the relationship between founders,

managers and owners. In five of the case study firms, one of the founders is still the

managing director of the firm, while three firms have added new top managers. In two

of the cases when new management has been added it has been because of, or led to,

disputes with a technically oriented founder that left the firm shortly thereafter. In the

third case the founders had no interest in managing the company and continued to

focus on research. All the managers in the firms that are not led by the founders

mentioned that the founders play a very important role for the development of the

firm, but that they are not easily managed. It can be difficult to replace the founder

when he leaves the firm, finding a person that has similar knowledge as the founder

and one who can be accepted by the technical employees. In one case study firm, the

leaving founder has established a new, competing firm.

All of the case study firms added new owners before they became medium-sized even

if the type of owners and their contributions have been different. Half of the case

study firms, being to a large extent self-financed, were primarily owned by the

founders and a few related private persons (not belonging to the group of so-called


57

business angels). In two case study firms the founders did not own any or only a small

part of the firm from the beginning. In both cases the investors lost their patience and

sold the firm to the management team, including the founders, before it started to

grow. One case study firm sold a majority share to a large firm at an early stage while

another, which has not grown into a medium-sized firm, has had many institutional

owners and was introduced to the stock market before having selling any products. In

one of the case studies the founder tried to finance the firm without giving up a

majority share, but failed, and a majority share was sold to an investment firm in

order to get the necessary finances for survival.

There is a clear link in the case studies between getting access to finance and adding

new owners. Only in one case did the case study firms get any other resources than

money and financial competence from its owners. That firm had been acquired by a

large multinational firm, which gave access to enormous technology resources.


• It is important to make adjustments to the organization as the firm grows

larger. Rationalizations in operations are important, especially in

manufacturing firms, but it is also important for growth to provide a

stimulating environment for the technical employees.

• MTBF have added new owners to a significantly higher degree than STBF.

There was a significant difference between the MTBF and STBF both

regarding the selling of minority shares and regarding to acquisitions.

• Adding new owners can be related to getting access to finance. New owners

were not found to contribute with much more than capital.

• Acquisitions were found to have a positive effect on growth in the medium-

sized firms. The effect was significantly less frequent in the small firm group.

• There is a positive correlation between growth willingness and adding new

owners.

5.4 Resources

Without resources the firm is not able to develop, produce and deliver products and

services to its customers. At the same time resources in themselves are not sufficient,

as someone has to be willing to combine them into products and services. In many

cases there are no other resources available to a new firm than those that reside within

the founding individuals, i.e. their knowledge and social networks. The firm needs to

use these resources in order to get access to more and other kinds of resources, e.g.


58

capital for investing in machines and hiring people, and overcoming the "liability of

newness" (Stinchcombe 1965) facing new firms. Even if earlier studies have shown

mixed results about the extent to which the experience of the founders affects early

growth (see Section 2.3.4) the case studies show that the founders are very important.

In six of the case studies the founders had important market contacts and technical

knowledge from the start. In the firms that are spin-offs from universities the most

important resources the founders bring with them are technical knowledge and

contacts within the research world. In the firms with their origins in industry the

founders have both marketing contacts and technical knowledge. In five of the case

study firms the founders are still the managers of the firms even if they did not have

any experience of management prior to starting the firm. In the two case studies

where the founder has left the firm due to disputes with management or owners, it has

led to large problems, especially technical problems.

As the firm grows larger certain resources are developed in-house while others, that

are more standardized, are obtained from a market. Most resource exchanges are

nevertheless characterized by long-term relationships with a number of economic

actors, e.g. customers and suppliers. This is especially so for resource exchange

related to technical development (Håkansson 1994).

Table 5.7 shows that relationships with universities, customers and suppliers are the

most important relationships for small and medium-sized technology-based firms. Of

these three the customers are the most frequently mentioned.

Start (≤5 years old) Early (6-10 years old) Late (≥10 years old)

STBF MTBF STBF MTBF STBF MTBF

Universities 22% 28% 21% 34% 24% 28%

Customers 62% 83% 59% 76% 54% 69%

Suppliers 31% 21% 29% 31% 24% 34%

Competitors 6% 3% 8% 3% 9% 10%

Consultants 12% 7% 12% 14% 8% 10%

Research institute 11% 7% 8% 7% 9% 11%

Other 7% 7% 9% 10% 6% 10%

Only firms older than 10 years are included. STBF: N=140, MTBF: N=29. The percentage shows the share offirms that mentions the particular relationship as being very important for knowledge development and resourceexchange.

Table 5.7 Important relationships for knowledge development and resource exchangeat different age of the firm.

The importance of the customers is largest in the start-up phase, but declines through

the years, while being still the single most important relationship. There is a

significantly larger share of medium-sized firms that mention customer relationships

as being very important in the first five years compared to the share of small firms


59

(83% vs. 62%, p<0,05, Chi-square test). The difference becomes smaller with

increasing age and when the firms are older than 10 years the difference is not

significant at the 95% level. The difference between medium-sized and small firms

indicates that early customer relationships are important for growth. These results are

in line with earlier results about the importance of market contacts from earlier

employment (see Section 5.2) and earlier studies that have described the importance

of customers for successful product development (e.g. von Hippel 1980).

It is difficult to judge if the changes over time in the share of firms that mention

relationship with suppliers as important are real trends. While the importance of

relationships with suppliers decline with age for the small firms, it increases for the

medium-sized firms. Even so, the difference between small and medium-sized is

never significant at the 95% level.13

No clear changes are evident in the importance of the relationships with universities,

nor are there any significant differences between small and medium-sized firms. A

possible interpretation is that relationships with universities depend on the

characteristics of the technology that the firm is based on and that the relationships are

stable. Firms that have important relationships with universities from the start, e.g.

because their technology is science-based, are likely to continue to have those

relationships, while those who have no important relationship with universities from

the start are not likely to take up such relationships later. The information from the

case study firms supports this hypothesis.

Regarding other relationships in Table 5.7 it is very hard to draw any conclusions. No

differences are significant at the 95% level nor are there any that are nearly so14.

13 A possible explanation for the increased importance of supplier relationships for medium-sized firmscould be that the firms are increasingly dependent on their suppliers for the quality and possibleimprovements of their products and services. The products or services may be dependent on a certaintechnological solution, coming from a particular supplier, e.g. a development tool, a component or asub-system. As the need for improvement increases, e.g. related to large-scale manufacturing or newcustomer requirements, it may be difficult to switch technology. The design cost might be high or thenew products or services might become incompatible with earlier versions. In any case there would bea need for a good relationship with the supplier in order to induce the supplier to make necessarychanges to its products or services. Small firms may not be as dependent on their earlier selection of atechnological solution as they have a smaller customer base which could make it easier for them tochange technologies in their products.14 The low importance of relationships with competitors, especially for medium-sized firms might bean indication that it is important for growth to operate in markets were there is little competition (e.g.Wiklund 1998, p. 238). The increased share of medium-sized firms that mention relationships withconsultants as important in early phase might be related to the need for solving organizational problemsrelated to growth. This observation is not though supported by the case studies, as none of the casestudy firms mentioned relationships with consultants as important for solving organizational problems.Findings on the importance of research institutes are also indecisive, but when added to the importanceof universities they might underline the need for science-based knowledge.


60

One might expect that international relationships are important for development and

growth of new technology-based firms. As has been shown earlier, many new

technology-based firms are dependent on international customers and new technology

that in many cases is developed abroad. Table 5.8 shows that even if relationships

with Swedish actors are the most important relationships for both groups, it seems that

a larger share of the medium-sized firms mention international relationships as being

important. This difference is not though significant at the 95% level.

STBF

N=204

MTBF

N=26

Differencea)

p-value

Local 43% 46% 0,77

Within Sweden 76% 73% 0,75

Foreign 43% 58% 0,15

a)Chi-square test.The percentage shows the share of firms that have mentionedrelationships with an actor in a particular geographical location as veryimportant for knowledge development and resource exchange.

Table 5.8 Location of actors having important relationships with small and medium-sized technology-based firms regarding knowledge development and resourceexchange.

When looking at the localization of the three most important actors, i.e. customers,

suppliers and universities, small firms are more likely to have relationships with

foreign suppliers and universities, even if the difference is not significant. On the

other hand, a significantly larger share of the medium-sized firms mention

relationships with foreign customers as very important (50% vs. 23% for small firms,

p<0,01, Chi-square test). This further underlines the importance of

internationalization for the growth of new technology-based firms, not only for

getting access to larger markets but also for knowledge development and resource

exchange.

When looking at what the important relationships have resulted in, in terms of

knowledge development and resource exchange, results related to product

development and marketing activities are the most common for both small and

medium-sized firms. Recruitment and improved image are also common (see Table

5.9).


61

STBF

N=258

MTBF

N=41

Differencea)

p-value

Capital 13,6% 14,6% 0,85

New technology 46,5% 61,0% 0,085

New products 51,9% 53,7% 0,84

New organizational solutions 8,9% 17,1% 0,11

Employees 33,3% 29,3% 0,61

Expert competence 56,6% 53,7% 0,73

Market knowledge 45,0% 48,8% 0,65

Complementary product/service 28,3% 31,7% 0,66

Spreading of risk 6,6% 9,8% 0,46

Improved image 20,5% 26,8% 0,36

Other 4,3% 4,9% 0,86

a) Chi-square test.The percentage shows the share of firms that have mentioned particular results of a relationshipthat has been very important for knowledge development and resource exchange.

Table 5.9 Results of important relationships in small and medium-sized technology-based firms.

Even if there are no significant differences between small and medium-sized firms at

a 95% significance level a number of trends might be interesting.

A larger share of the medium-sized firms mentions access to new technology as a

result of their important relationships (61%, compared to 47% of the small firms). If

we look at the differences between manufacturing firms and service firms, 63% of the

manufacturing firms mention technology as an important result of external

relationships, compared to 44% of the service firms (p<0,01, Chi-square test). A

possible explanation could be that the medium-sized firms, especially manufacturing

firms, are more dependent on their suppliers for technology sourcing, as has been

mentioned earlier15.

Even if there are some differences between small and medium-sized firms regarding

access to different resources through relationships with other actors, there is no

evidence that access to certain resources enables some firms to grow into medium-

sized firms. All the firms are technology-based which accounts for the importance of

universities, especially for the recruitment of personnel. Customers and suppliers are

15 The medium-sized firms also seem to get access to new organizational solutions through theirrelationships in greater extent than small firms do. As with the relationship with consultants, thisindicates that the firms need to change their organization as the firm grows. A larger share of themanufacturing firms than service firms get new organizational solutions from their relationships. Evenif service firms do need to change their organization as they grow, the need for changes may be largerin manufacturing firms. This is supported by the findings from the case studies, where themanufacturing firms need various new support functions as the firm grows, such as production anddistribution.


62

important for all firms and it is likely that most managers acknowledge their

contribution. What might differ between growing firms and other non-growers is the

quality of the relationships, which was not studied here.

One explanation for the small differences between small and medium-sized firms

could be that the orientation of the firms and their environment has more influence on

the type of relationships they develop and the resource exchange they engage in, than

the general importance of certain relationships and resources. This is in line with both

the innovation system approach and the strategic adaptation approach (see Section

2.1.5) where it is assumed that managers need to adapt to the environment. An

important prerequisite for growth is then that managers are able to identify the

resources they need and how the resources can be accessed in a particular innovation

system.

One example of this situation dependence is the difference between those case study

firms that develop their own technology and those who do not. The firms that develop

their own technology consider their relationships with universities and scientists to be

very important for their development. These relationships are not only important for

their knowledge development but also for the recruitment of key employees. The

firms are involved in the supervision of doctoral students, who contribute with new

knowledge during their studies and in many cases are hired by the firm after

completion. The firms which do not develop their own technology, but use

technologies available on the market, might not have any relationships with a

university but might instead rate its relationships with its suppliers as very important,

as it is their most important source of technology.

One type of resource that is of general interest to new firms is capital. Capital is a

generic resource, and even though not all resources can be bought on a market, capital

is needed in order to be able to pursue internal development or cooperate with other

actors. Many studies judge lack of capital as the greatest barrier to growth in new

firms, especially new technology-based firms. Lack of capital for expansion has also

been found to be the most important reason for Swedish new technology-based firms

to sell out to larger firms (see Section 2.3.4).

Looking at the difficulty in getting access to financing at different stages of

development there is no significant difference between small and medium-sized firms

(Table 5.10).


63

Stages of development STBF MTBF Differencea)

p-value

Start ( ≤5 years old)b) 2,3 2,7 0,068

Early (6-10 years old)c) 2,4 2,4 0,81

Late (>10 years old)d) 2,5 2,2 0,43

a) T-test b) STBF: N = 263, MTBF: N=43. c) STBF: N=200, MTBF: N=34.d) STBF: N=123, MTBF=N=24. Difficulty is measured on a scale 1-5, were 1 is very easy and 5 very difficult.

Table 5.10 Difficulty in getting access to finances at different ages of the firm..

The firms rate it, on average, neither very easy nor very difficult to get financing from

the sources they have tried to access. The medium-sized firms seem to have

experienced more difficulties in getting access to financing than the small firms in the

start-up phase, but less so as they grew older. The explanation could be that the

medium-sized firms have greater ambitions from the start and need more capital.

When they grow larger they might have more credibility than small firms because of

their size making it easier for them to get access to financing. This effect is strengthen

by the fact that the Swedish capital market has, until recently, focused more on late

stage financing than seed/start-up financing (e.g. Karaömerlioglu and Jacobsson 1999

and Klofsten et al 1999).

One could suspect that even if the medium-sized firms, on average, do not have easier

access to finance, they might have access to more competent sources of finance.

Competent sources of capital, such as venture capitalists, could contribute with other

resources apart from capital, especially knowledge resources such as business

competence and contacts with important actors, which would positively affect growth.

In Table 5.11 no significant difference was found between small and medium-sized

firms in the difficulty they have in accessing various sources of finance16. There is

therefore little evidence supporting the idea that the medium-sized firms have had

easier access to more competent sources of capital.

16 That medium-sized firms report more difficulty in getting financing through prepayment or loansfrom customers is a bit surprising considering the importance of customers for the medium-sized firms.A possible explanation could be that these firms expect more support from their customers as theywork closely together. According to one of the founders of the case study firms, the customers believedin their product idea and would gladly assist in developing and testing the idea, but they were not at allinterested in giving financial help to the firm.


64

Sources Difficultya)b)

STBF MTBF

Own capital 2,14 2,22

Other private persons 3,19 3,89

Prepayment or loan from customers 2,53 3,36

Government grants or loans 3,14 2,98

Bank loans 2,56 2,79

Venture capital 3,41 3,32

Other 2,38 2,50

a) Difficulty is measured on a scale 1-5, were 1 is very easy and 5 is verydifficult. b) T-test gave no significant difference between STBF and MTBFfor any source.

Table 5.11 Difficulty in accessing financing from different sources.

It is hard to see in Table 5.11 that any sources of financing are particularly more

difficult to access than others, except, maybe, other private persons (“business

angels”) and venture capital. These are important sources of competent capital, and

the difficulty of accessing them might be related to the immaturity of the Swedish

venture capital market in the 80s and the early 90s (Karaömerlioglu and Jacobsson

1999).

When looking at the sources of financing, and how important the firms rate each

source, the differences between small and medium-sized firms are small (Table 5.12).

Share of firmsa) Importanceb)c)

STBF MTBF STBF MTBF

N=293 N=60

Own capital 87,7% 88,3% 4,15 4,33

Other private persons 9,2% 5,0% 3,24 3,00

Prepayment or loan from customers 21,2% 16,7% 3,63 3,85

Government grants or loans 27,6% 33,3% 2,99 3,38

Bank loans 57,0% 55,0% 3,66 4,11

Venture capital 22,9% 26,7% 3,83 4,31

Other 17,1% 16,7% 4,19 3,55

a) Chi-square test gave no significant difference between STBF and MTBF for any source. No p-value waslower than 0,25.b) T-test gave no significant differences between STBF and MTBF for any source. No p-value was lowerthan 0,3.c) Importance is measured on a scale 1 to 5, where 1 is very little importance and 5 is very high importance.

Table 5.12 Financial sources in small and medium-sized technology-based firms.

Self-financing and bank loans are the sources that most of the firms have used and

they are sources of relatively high importance. About one fourth of the firms have

received financing from the government, customers and venture capital. Of these


65

sources venture capital is considered to be the most important and government the

least important. Relatively few firms have received financing from private persons.

This is in contradiction with Wiklund’s (1998) study which found that business

angels, i.e. private persons, often with industrial experience, who invest in new firms,

were more important than venture capital firms.

It is difficult to say anything about the differences between small and medium-sized

firms in Table 5.12. It is tempting to draw the conclusion that a larger share of the

medium-sized firms has received venture capital. If one assumes that a number of

firms in the small firm group do not seek venture capital, as they are not interested in

growth, the difference is very small. Additionally, 67 of the 80 firms that have

received venture capital are still small, which indicates that access to venture capital is

not a secure recipe for growing into medium-sized firm. This does mean that venture

capital is not important for those firms who get it, which is also apparent in Table

5.12, where medium-sized firms rate venture capital as very important. Nevertheless

there is no obvious relationship from the data between access to venture capital and

growing into medium-sized firm for the whole population.

Information from the case studies does not give any indication of a link between

growth and a certain source of financing. The case study firms have had very different

types of financing. About half of the firms have been self-financed, i.e. they have

generated their growth from their own revenues, while others have been externally

financed. Some of the externally financed firms have only had external financing in

the start-up phase when developing its products, while others have been externally

financed for their whole life. Those firms that have been externally financed all their

life are developing new, untested technologies in an established industry. Getting

access to external finances has not been the largest problem in these firms.

In the case study firms external financiers have contributed with very little apart from

capital and financial competence. In some of the firms an investor has increased the

credibility of the firm and it has been easier to get continued financing. In the case

study firm that has been acquired the parent company has contributed with technology

resources.


• Contacts, both related to markets and technology, are important for firm

growth, especially at start-up.

• Relationships with customers, especially foreign customers, important for

resource exchange and knowledge development, were more frequently

mentioned by MTBF, especially at start-up.


66

• External technology sourcing is more frequent in MTBF and STBF, especially

for manufacturing firms.

• In general little differences were found between STBF and MTBF in the type

of relationships that were important for resource exchange and knowledge

development and the results of these relationships. The general conclusion is

that these issues are dependent on the innovation context, e.g. technology and

industry.

• Little evidence was found supporting the hypothesis that difficulties in getting

access to financing or difficulties in getting access to sources of competent

financing prevents new technology-based firms from growing into medium-

sized firms.

5.5 Conclusions

The basic question of this chapter is the first research question presented in Section

2.4:

What factors have enabled a group of new, Swedish, technology-

based firms to grow into medium-sized firms?

All of the elements included in the conceptualization of growth, presented in Section

2.2, have been found to affect growth in one way or another. On several occasions the

elements have been linked. The main conclusions related to each element are the

following:

• Growth willingness/Organizing. One of the most important factors has been

for the owner/managers of the medium-sized firms to accept growth and be

able to solve the emerging managerial problems related to growth. At the same

time growth willingness is not a sufficent condition for growth.

• Creating and expanding markets/Resources. Early contacts with customers

have been very important. Not only have they been helpful in creating and

expanding markets for the products and services of the firm, but they are also

important sources of resources related to product development and marketing.

In many cases, especially in manufacturing firms, these contacts come from

earlier employment.

• Creating and expanding markets. Early internationalization has been

important, especially for manufacturing firms. Relationships with large firms

and contacts from earlier employment have been particulary important for

internationalization. For some firms, especially service firms, demand from


67

domestic markets has enabled the firms to grow into medium sized firms

without any foreign sales. These firms are typically found in fast growing

industries.

• Organizing. It has been important for the medium-sized firms to make

adjustments to the organization, as they have grown larger. Rationalization of

operations is important, especially in manufacturing firms, but it is nevertheless

important to keep a stimulating environment for the technical people concerned

with development. One of the most important growth problems that needs to be

solved is the negative effect on the motivation of the technical staff, as the

organization becomes larger and more formal.

• Organizing/Resources. To add new owners, either by selling minority or

majority shares, was seen to be important for the medium-sized firms, as it is

related to getting access to finance. Financiers, apart from an industrial aquirer,

did not seem to contribute with other resources than capital and financial

competence. Industrial acquirers had a direct and positive effect on the growth

of the aquired firms, possibly because they have contributed not only with

capital, but also with other types resources of resources needed for growth, e.g.

international contacts. Growth willingness is positively correlated with having

added new owners.

• Resources. Good relations with founders were considered to be important for

the medium-sized firms. Or, in other words, when the relations with the

founders were not working well it affected the firm severely, especially

technical development within the firm.

• Resources/Organizing. In general little differences were found in the type of

relationship important for resource exchane and knowledge development and

the results of these relationships. The general conclusion is that these issues are

dependent on the innovation context, such as technology, industry and the

surrounding economic structure. The ability to identify the necessary resources

for growth in the particular innovation context facing the firm and to find out

how these resources can be accessed has been important for the medium-sized

firms.

The factors that have been identified in this study are both general and specific. The

general factors relate to how the firms react to growth, i.e. how they accept its

consequences and adapt the organization to take on problems introduced by growth.

The specific factors relate to how the firms make use of the available resource

environment by diverse relationships that differ in importance in different innovation


68

contexts. This study has acknowledged the existence of such factors but further work

is needed to identify the different contexts and how they can be characterized.

69

6 The small technology-based firms: Why do they staysmall?

The second research question presented in Section 2.4 concerned the factors that

hinder new technology-based firms from growing into medium-sized firms. In this

chapter an attempt will be made to answer that question by analyzing the empirical

data. It has already been found, in Section 5.1, that the lack of willingness to grow is a

major hinder for growth in small technology-based firms. The analysis in this chapter

will be focused on what other factors might exist, by looking at the firms which are

willing to grow. The analysis will be based on the classification presented in Figure

3.1. First the sub-group within the small firms’ group that has constrained growth will

be identified. The constrained group will be compared with the medium-sized group

in order to identify differences that might explain the constraints of the constraint

group. Finally conclusions will be drawn in order to answer the research question.

6.1 Identification of the growth constrained small technology-basedfirms

Figure 6.1 shows a classification of the population of new technology-based firms.

Figure 6.1 Classification of the NTBF population

So far in the analysis the population has been divided into small firms and medium-

sized firms. It is reasonable to assume that the small firm population can be further

divided into three classes.

I. Non-growers. These are firms that do not accept growth and belong to the

economic core according to the Dynamic Capitalism typology. Success is

not measured by growth, but by survival and that they provide their owners

with a reasonable income.

II. Constrained growers. These are firms that accept growth but will not be

able to grow. They belong to the growth-constrained firms in the Dynamic

Capitalism typology. They are supposed to be innovative, but are

constrained either by the founder himself or some external conditions, such

as not having access to important resources.

INon-

growers

IIConstrained

growers

IIIFuture

growersMTBF

STBF

6 The small technology-based firms: Why do they stay small?

70

III. Future growers. These are firms that accept growth, and will grow into

medium-sized firms in the future. Even if growing into a medium-sized

firm hardly can be termed glamorous these firms belong to the glamorous

group in our interpretation of the Dynamic Capitalism typology.

In Table 5.1 it was shown that 18% of the small firms did not want to grow, 58%

wanted to grow slowly, and 24% wanted to grow fast. The firms that do not want to

grow belong to the ‘non-growers’and are not of interest for our analysis of other

growth constrains. At first sight it seems that the group of firms that want slow growth

are the ‘constrained growers’ and the group of firms that want fast growth are the

‘future growers’. Closer inspection reveals that many of the firms that want fast

growth are actually small and have been small for a long time. Many of the firms that

want slow growth might, later on, accept faster growth and become medium-sized.

One would expect that relatively old firms that want fast growth but have grown

slowly, either in absolute or relative terms are the most constrained. It could be that

these firms are finally starting to grow after many years without growth but other

studies (e.g. Garnsey 1998) have showed that firms that have been small for a long

time tend to continue to be small. It is also predicted by Nelson and Winter (1982)

and Kirchhoff (1994) that not all innovations will be successful, even if innovators

have high growth ambitions. One of the case study firms is an example of that.

The group of firms with the most growth constraints would be most useful group to

analyze for our purposes. By using a k-means clustering, two clusters of small firms

that had high growth willingness were identified based on four variables: age,

absolute growth rate, relative growth rate between 1993 and 1998 and absolute

growth rate between 1993 and 1998 (Table 6.1). These clusters represent the most

constrained group and a group that is likely to obtain future growth. The second

group is called less constrained as it is uncertain whether they will grow in the future.

Variables Most constrained Less constrained

Age (years) 13,90 8,37

Absolute growth from start (employees/year) 0,27 1,21

Relative growth 93-98 1,58 2,20

Absolute growth 93-98 (employees/year) 0,87 1,99

Number of firms 30 43

Table 6.1 Clustering of small firms with high growth ambitions.

The ‘most constrained’ firms are older and have shown much less growth than the

‘less constrained’ group. The difference between the groups is significant in all four

variables at the 95% significance level using T-test, except for absolute growth 93-98


71

(p=0,08). The probability that this difference between the firms is caused by chance it

very low. The mean age is slightly higher for the most constrained group than for the

medium-sized group (13,9 years compared to 12,5 years) but the variance in age for

the medium-sized firms is significantly larger, reflecting that many of the medium-

sized firms have grown very early.

In the following sections the ‘most constrained’ group will be analyzed and compared

with the medium-sized firms.

6.2 Industrial classification

The constrained small firms do not seem to belong to other industries or sectors than

the medium-sized firms (Table 6.2).

Constrained STBF MTBF

Manufacturing 11 (37%) 21 (34%)

Chemistry 1 (3%) 3 (5%)

Metal products 5 (17%) 2 (3%)

Machinery 2 (7%) 7 (12%)

Electric equipment 1 (3%) 4 (7%)

Automotive 0 (0%) 3 (5%)

Instruments 2 (7%) 2 (3%)

Services 19 (63%) 40 (66%)

Business retail 5 (17%) 6 (10%)

Computer related 6 (20%) 19 (31%)

Technical consulting 6 (20% 13 (21%)

R&D 2 (7%) 2 (3%)

Total 30 (100%) 61 (100%)

Table 6.2 Industrial classification of growth constrained small technology-based firmsand medium-sized technology-based firms.

It could be concluded that even if the properties of the industries, such as slow growth

and strong competition, might be constraining some of the firms, there is no

indication of a systematic growth constraint related to industrial orientation.

6.3 Creation and expansion of markets

No significant differences are found regarding the internationalization of constrained

small technology-based firms (CSTBF) and the medium-sized firms (Table 6.3).


72

CSTBF

N=30

MTBF

N=60

Difference

p-value

Turnover from export (%) 23 27 0,62

Share of exporting firms (%) 57 72 0,14

Share of employees abroad (%) 2,2 9,9 0,14

Table 6.3 Internationalization of growth constrained small technology-based firms andmedium-sized technology-based firms.

The constrained manufacturing firms, on the other hand, have less contact with

customers from earlier employment than the manufacturing medium-sized firms.

While almost 75% of the medium-sized manufacturing firms have such contacts, only

25% of the growth constrained firms do. This is a significant difference (p<0,05,

Fisher’s exact test), even with a few number of observations. This share is also low

when compared to the manufacturing small firms in general, where 43% of the firms

had contacts from earlier employment.

Acquisitions have the same positive effect on the internationalization of the

constrained group as it has on the medium-sized group. About one third of the firms

in both groups have been acquired, indicating that the firms in the constrained group

are not less attractive for acquisition.

When looking at the average number of new products in the last five years, there is no

significant difference between the CSTBF group and the MTBF group (12 vs. 13).

The variance is also high indicating large differences in innovativity within the

CSTBF group. The same reservations are made here as in Chapter 5, about the

problems related to comparing the number of new products across industries.

The market newness is slightly higher for the constrained firms compared to the

medium-sized while not being significant. (p<0,09, Mann-Whitney U test).

As the constrained firms have shown little growth they might have problems creating

and expanding their markets. The firms are innovative, and relatively international,

but market acceptance is lacking. One possible explanation could be that the

innovations in the constrained firms are more discontinous than in the medium-sized

firms, that is, they are newer to the market and could be based on new, untested

technology17. The lack of contact with customers from earlier employers can be seen

to support that explanation.

17 As mentioned in Section 5.2, small firms introducing products or services that are new to the marketmight need to “educate” the customer before the products or services are accepted. Compliementaryinnovations might also be needed in order for the original innovation to take off. In some cases thismight take a long time.


73

Looking at the origin of the firms the groups do not differ to the extent that the idea

that they are based on comes from research and most of the firms are corporate spin-

offs, i.e. spin-offs from existing firms. The constrained firms therefore do not seem to

have a more science-based background than the medium-sized group.

6.4 Organizing

One reason for the constrained growth group being less successful in the marketplace

could be that they have been more reluctant to add new owners in order to get the

resources they need. From Table 6.4 it can been seen that this is not the case. The

firms in the constrained group have sold minority shares and been acquired to the

same extent as the medium-sized firms.

Constrained

STBF

MTBF

Have added new owners (%) 72% 71%

Have sold minority shares (%) 48% 50%

Have been acquired (%) 33% 33%

Table 6.4 Ownership changes in growth constrained small technology-based firms andmedium-sized technology-based firms.

It is unlikely that the constrained STBF are self-constrained by the need of the

founders to stay independent or the fear that someone else will “steal” their great idea,

as suggested by Kirchhoff (1994, p. 76-78). As seen in Section 5.3, changes in

ownership could to be related to access to finance, which might suggest that the firms

have not been financially self-sustained and external financing was necessary (see

further below).

6.5 Resources

Kirchhoff (1994) mentions two types of growth constraints for small firms. Firstly,

constraints self-imposed by the founder, such as the fear of losing control, and

secondly the shortage of resources. Financing is the most general resource that is

needed by new firms but shortage of other resources, such as technology or business

competence, could be just as important as the shortage of capital (e.g. Hughes 1998).

As the firms in the growth-constrained group have survived at least 10 years, they

have obtained the resources necessary to survive that long. One would suspect that

many of the small firms which experience real resource shortage would not survive so

long. As this study is only concerned with surviving firms nothing can be said about

those firms that go out of business.


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Looking at the importance of different relationships for the constrained small firms

through the years and comparing them to the medium-sized firms no significant

differences are found (Table 6.5).

Start (≤5 years old) Early (6-10 years old) Late (≥10 years old)

CSTBF MTBF CSTBF MTBF CSTBF MTBF

Universities 31% 28% 34% 34% 45% 28%

Customers 66% 83% 66% 76% 69% 69%

Suppliers 38% 21% 34% 31% 34% 34%

Competitors 3% 3% 14% 3% 21% 10%

Consultants 7% 7% 7% 14% 3% 10%

Research institutes 7% 7% 7% 7% 0% 0%

Other 7% 7% 7% 10% 3% 10%

Constrained STBF: N=29, MTBF: N=29. The table shows the share of firms that mention the particularrelationship as being very important for knowledge development and resource exchange.

Table 6.5 Important relationships for knowledge development and resource exchangein growth constrained small technology-based firms (CSTBF) and medium-sizedtechnology-based firms (MTBF).

Relationships with customers, universities and suppliers are by far the most important

for knowledge development and resource exchange, as was found earlier in Table 5.7.

The constrained group has slightly fewer international relationships, especially with

customers.

As for the whole small firm group, fewer constrained small firms mention

relationships with customers as being important in the start-up phase than in the

medium-sized firms, but now the difference is not significant (p=0,13, Chi-square

test). While fewer medium-sized firms mention relationships with customers to be

important as they get older, the trend is in the opposite direction for the constrained

group. Constrained firms also rate relationships with universities higher than the

medium-sized firms and the difference increases with age as more constrained firms

mention relationships with universities as important. Almost half of the constrained

firms (45%) mention relationships with universities to be important in a late phase,

compared to 28% of the medium-sized firms (p=0,10, Chi-square test). The trend for

suppliers is in the opposite direction. There seems to be a difference in the start-up

phase (38% vs. 21%), that disappears as the firms grow older with fewer constrained

firms and more medium-sized firms rating the relationships with suppliers as

important.

The results regarding the importance of universities and suppliers support the

explanation mentioned before that the constrained small firms were/are constrained

because of technical difficulties.


75

That fewer constrained firms use consultants might support the explanation that

greater use of consultants is related to the need for new organizational solutions as the

firms grow (see Section 5.4). As the constrained firms have grown very little they

have not been in need of such help. On the other hand, the lack of help might have

prevented them from growing.

The results of important relationships are very similar as obtained in Section 5.4. The

most interesting difference might be that there is no difference between the CSTBF

and MTBF regarding technology and very few CSTBF mention spreading of risk

(actually no firms) and improved image as a result of important relationships (Table

6.6).

Constrained STBF

N=26

MTBF

N=41

Capital 15% 15%

New technology 58% 61%

New products 50% 54%

New organizational solutions 12% 17%

Employees 38% 29%

Expert competence 58% 54%

Market knowledge 65% 49%

Complementary product/service 27% 32%

Spreading of risk 0% 10%

Improved image 12% 27%

Other 4% 5%

The table shows the share of firms that have mentioned particular results of arelationship that has been very important for knowledge development and resourceexchange.

Table 6.6 Results of relationships that have been very important for knowledgegeneration and resource exchanges in growth constrained small technology-based firmsand medium-sized technology-based firms.

As in Table 5.9 there are no significant differences between the groups. The

difference in market knowledge (p=0,18, Chi-square test) might mirror the need of the

constrained group of such competence, as they did not seem to have such competence

to the same extent from earlier employment. It is also an indication that they are really

trying hard to gain market acceptance for their products and services. That none of the

constrained firms mentions risk spreading as a result of their relationships is difficult

to explain as well the low share of firms mentioning improved image. One possible

explanation could be that the founders/managers focus primarily on the technical

merits of their products and consider the image of firm less important. In that way it

could be a sign of a technology focused management style, which could hinder

growth (Slatter 1992).


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As mentioned earlier, money is the most general resource and a shortage of money

would precede the shortage of almost all other resources. When looking at the

difficulty of the constrained firms in getting access to financing it is very similar to

the whole small firm group and does not differ significantly from the medium-sized

firms, neither in terms of time periods or the type of source.

When looking at the financing obtained and the importance of different sources the

picture is different from the whole small firm group. The constrained firms mention a

larger number of sources and may have had more need of external financing (Table

6.7).

Share of firms Importance a)

Constrained

STBF

N=27

MTBF

N=60

Constrained

STBF

MTBF

Own capital 85% 88% 4.2 4,3

Other private persons 19% 5% 4.4 3,0

Prepayment or loan from customers 33% 17% 3.8 3,9

Government grants or loans 52% 33% 3.7 3,4

Bank loans 70% 55% 4.0 4,1

Venture capital 52% 27% 3.8 4,3

Other 11% 17% 3.7 3,6

a) Importance is measured on a scale 1 to 5, where 1 is very little importance and 5 is very high importance.

Table 6.7 Financial sources in growth constrained small technology-based firms andmedium-sized technology-based firms.

The largest differences between the two groups are in their access to government

grants and venture capital. While 52% of the constrained group have received grants

or loans from the government, only 30% of medium-sized group have obtained such

funding (p=0,060, Chi-square test). The same numbers also apply for access to

venture capital. A larger share of the constrained group has also got financing from

customers, private investors and banks. The importance has been similar as for the

medium-sized firms, apart from the exception of the greater importance of private

investors and the government in the constrained firms, and the slightly higher

importance of venture capital reported by the MTBF group.

The growth-constrained firms have on the whole been able to gather external

financing from a variety of sources; both sources considered competent, such as

venture capital and private investors, and government financing. Their owners have

been resourceful in keeping the firms going for such a long time but they have had

problems with expansion. As pointed out earlier, the reason for this might be that the

innovation offered by these firms might have more difficulties in being accepted on


77

the market. The reasons for not being accepted on the market might be that the

technology they are based on has not yet matured, i.e. has some inherent technical

problems, or that there might be a need for creating a new market. The large share of

funding from government and venture capitalists indicates that these firms have a

potential that may not be yet have been realized, or may never be realized.

6.6 Conclusions

The basic question of this chapter is the second research question presented in Section

1.2, which is a continuation of the first question about the factors that enable firms to

become medium-sized:

What factors inhibit other new, Swedish, technology-based firms, with similar


In Section 5.1 it was found that there was a significant difference in growth

willingness in small and medium-sized firms. At the same time it was acknowledged

that growth willingness is not a necessary prerequisite for growth, as many of the case

study firms had no explicit growth willingness at start. To accept growth was found

more important. It was also found that growth willingness is related to ownership

changes, in the sense that firms with lower growth willingness were less likely to add

new owners. The need for independence therefore might affect the willingness or

acceptance to grow as has been reported in a number of Swedish studies (e.g.

Lindholm 1994). It is not easy to estimate how large a share of the Swedish

population of new technology-based firms is constrained by these factors but it is

probably not an overestimate to say that over half of the population is greatly affected

by these factors.

But not all small firms that stay small are constrained by the lack of willingness to

grow. Some want to grow but can not for some reason. By analyzing a sample of the

NTBF population that had the most serious growth constraints, that is, the firms

reported high willingness, were relatively old and had shown little growth, a picture

has begun to emerge. These firms are innovative, but constrained by technology and

market factors, rather than internal constraints to growth or a lack of financial

resources. For exactly what reasons these firms are constrained is not clear. The lack

of contact with customers and the greater newness of the products, relative to the

medium-sized firms, indicate that the innovations that these firms are based on are

more new to the market. Increasing contact with universities also indicate that there

are technical problems.


78

The lack of contacts with customers from earlier employment could also underline the

importance of the spin-off parent for the growth of the new technology-based firm,

especially manufacturing firms. Most of the constrained firms were spin-offs from

established firms, but very few of them had contacts with customers from the spin-off

parent. The lack of contacts, might make difficult for these firms to get a foot in the

market, especially if the lack is related to a hostile reaction by the spin-off parent

(Lindholm Dahlstrand 1997).

Other possible explanation, considering other studies, e.g. Hughes (1998), is the lack

of managerial competence. There have been some signs that the constrained firms

have less knowledge about their markets and that they are more technology oriented

than the medium-sized firms. They have nevertheless added new owners to the firms,

which indicates that the founders are willing to add the resources that are necessary in

order to succeed. As was evident in two of the case studies, it is not certain that

experienced industrial managers succeed in small firms that are based on new

technology that they may not be familiar with. The management problem might be

related to the use of experienced managers rather than a founder/manager problem.

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7 Final conclusions and discussions

In Chapter 5 and Chapter 6 the empirical data has been analyzed in order to answer

the two research questions put forward in section 2.4. In this chapter the final

conclusions will be made and its implications for managers, policy makers and theory

will be discussed. Finally some suggestions will be made for further research.

7.1 The research questions revisited

The objective of this study was to answer the following research questions:

1) What factors have enabled a group of new, Swedish, technology-based firms to

grow into medium-sized firms?

2) What factors inhibit other new, Swedish, technology-based firms, with similar


A summary of the conclusions in the previous chapters is provided in Table 7.1.

RQ 1: Factors enabling growth RQ 2: Factors inhibiting growth

• To accept growth and be able to solvemanagerial problems related to growth.

• Early contacts with customers. Helpful inexpanding markets and important forknowledge development. Contacts from earlieremployment are especially important inmanufacturing firms.

• Early internationalization, especially formanufacturing firms. In growing industriesthere might not be a need forinternationalization.

• Make adjustment to the organization as thefirm grows. Balance between rationalizingoperations and providing a stimulatingenvironment for technical employees.

• To add new owners. Is related to access tofinancing. New owners were found to addlittle more than capital.

• Good relations with founders.

• Ability to match the particular resource needof the firm with what is offered by theinnovation system.

• Growth willingness is not a sufficient conditionfor actual growth.

• Firms with less growth willingness are lesslikely to add new owners.

• There is little evidence supporting thehypothesis that small firms are constrained by alack of financial resources.

• Lack of early contacts with customersconstrains can constrain growth.

• Market and technology factors can constraingrowth.

Table 7.1 Summary of the conclusions from the previous chapters.

Several factors have been identified, both enabling and hindering, new technology-

based firms to grow into medium-sized firms. The factors that have been identified as

affecting growth can be divided into two groups: generic and specific. Generic factors

affect all new technology-based firms and might be related to new firms in general

even if this has not been investigated in this study. Specific factors are factors that

affect firms differently depending on their environment, i.e. innovation context. The


80

innovation context affects the generic factors, but the distinction is nevertheless

useful. In practice, it might be said that the generic factors could be identified in the

whole population of new technology-based firms, while one needs to further divide up

the population for identifying the specific factors.

The single most important generic factor affecting growth has been found to be the

willingness to accept growth. The willingness to accept growth is distinct from the

willingness to grow in the respect that the founders/managers of small firms may not

have high growth ambitions from the start but their growth willingness might change

with time. The willingness to grow is therefore not a stable ambition of the founders

and can not be used as a predictor of future growth. This is in line with earlier studies

that have not found a relationship between growth willingness and future growth

(Hughes 1998, Wiklund 1998). Related to the willingness to accept growth is the

willingness to manage the consequences of growth. These consequences are among

other things related to increased formalization and difficulties in motivating the

technical personnel. As pointed to by Slatter (1992) new technology-based firms often

develop a technology-focused culture that collides with the new culture brought by

the new people responsible for the rationalization of operations. The founder has an

important role in this transition as he/she usually symbolizes the technology-focused

culture. Even if the founder is dispensable in most cases, the firms which get into

conflict with its founders seem to end up having problems with their technological

development.

Another important aspect of the willingness to accept growth is the willingness to add

new owners. If the founders do not accept new owners it might prevent them from

getting access to a number of important resources that might otherwise not be

available. One could also change the logic of the relationship between the willingness

to accept growth and the willingness to add new owners. If the founders want to stay

independent, as is the case in many small, Swedish firms (e.g. Lindholm 1994), and

they see that they can not get the necessary resources for growth without adding new

owners, it could make them less willing to accept growth. In that case one could argue

that the economic environment is hindering growth in these firms by not providing

access to the necessary resources without demanding ownership in the small firm.

This would be true even if there were actors within the economy, such as large firms

or venture capitalist firms that could provide the resources needed for growth.

This finding can be related to the importance, or rather the lack of importance that

access to specific resources, or relationships, seem to have for growing into a

medium-sized firm. The study found no specific pattern of resource exchange or

providers of resources that could explain growth. There are two possible, related,


81

explanations for this. Firstly resources in themselves do not create value. It is their

combination that is important, and in order to succeed with resource combinations,

meta-resources, such as business- and management competence, are more important.

This is in line with e.g. Wiklund’s (1998) main argument that entrepreneurial

orientation has a moderating effect on how resources and the environment affect the

growth of firms. Secondly, what resources are needed and the possibilities for

accessing them are based on the situation of the small firm, e.g. the competence of the

founders, the technology and the industry. Certain industries might have easier access

to venture capital (Karaömerlioglu and Lindholm Dahlstand 1999), others might have

to cooperate with other industrial actors such as large firms, etc. Because of this

situation dependency there can be no specific patterns in the resource needs and the

patterns of resource access for a whole population of new technology-based firms.

Different sources of resources are also important from an economic perspective as

increased variety will make the economy more flexible and open for the exploitation

of new opportunities that might not be based on previous economic activity. In other

words there would be lower risks of lock-ins in the economy, which in turn are

conducive to long-term economic growth (e.g. Carlsson and Jacobsson 1997a)

For many technology-based firms internationalization is the only way to gain access

to sufficiently large markets as to enable the firms to grow. This is especially true for

a small country like Sweden with limited domestic markets. In line with what has

been said earlier about different patterns of resource access, the medium-sized firms

have internationalized in different ways with the help of different actors. For some of

the medium-sized firms, especially manufacturing firms, contacts with customers

from earlier employment have been particularly important. For others the relationship

with larger industrial actors has been the most important factor, which is reflected by

a higher degree of internationalization in acquired firms compared to independent

firms.

Even if small firms strive for growth, have added new owners and seem to have

access to resources through diverse sources, it is not enough to guarantee growth. In

these firms other factors, related to the market acceptance of products of new

technology might hinder growth. It is difficult to see the source of those problems or

how they could be solved. One view would be that these firms have not been able to

adapt to the environment, i.e. failed to use the right strategy. Another view would be

that it takes a very long time to succeed with certain types of innovation because the

technology or the market is not ready for them. Founders of new technology-based

firms might have limited strategic choices regarding the selection of the technologies

they use in their products. The reason for establishing the firm is often to exploit a


82

certain technology or an opportunity that the founder has specific knowledge about

(Oakey and Cooper 1991). A founder of a biotech firm can not change his/her firm

into a software firm even if it might be difficult to commercialize his/her original

ideas. The selected strategy obviously affects the results but technological uncertainty

and the characteristics of the industry, combined with the inherent focus of the small

firm might be constrains that are not easy to overcome in order to grow into a

medium-sized firm.

7.2 Implications

Even if the objective of this study was not to generate implications for management,

policy or theory some of the results have such implications. In the following sections

these will be discussed.

7.2.1 Managers

The most important managerial implications from this study relate to the managerial

aspect of the growth process. It is important to acknowledge that there are important

aspects related to the technical personnel that need to be addressed as the firms grow.

Technical employees need a stimulating working environment in order to thrive, and

the new technology-based firms need the competence and knowledge of the technical

employees in order to be able to carry out the necessary innovations. As there is great

demand for technical employees, creating a stimulating environment and thereby

retaining key personnel is an important competitive issue18. This is not a problem at

start-up when the focus is on development, but as the firm grows, its increasing size,

the preoccupation with other tasks than development and the resulting formalization

make the environment less stimulating. One of the most important tasks for the

manager of technology-based firms is to solve this problem. This is nevertheless a

double-edged sword because a corporate culture that is too technology focused could

hinder growth (Slatter 1992).

Another important implication that can be drawn is that new technology-based firms

operate in a specific innovation context that affects their choices of business models,

possible sources of financing, key resources etc. This could imply that hiring

experienced professional managers from other industries, might not bring the

competencies needed in order to solve the growth "problems" of the firm. There are

nevertheless important general aspects related to growth, such as the need for

organizational adjustment.

18 This could be a contemporary phenomenon related to a short-term imbalance between the supply anddemand of technical employees. The problems of managing scientists and technical employees, and theissue of appropriate environment, is nevertheless not new (e.g. Pelz and Andrews 1966).


83

A third important implication is the need to get and nurture early contacts with

customers. This has a special implication for those who start a new firm by spinning

off an existing organization. Contacts from previous employment can be crucial in

getting a foot into the market, especially for manufacturing firms working in

industries that show little growth. In new industries which offer high growth it might

be more successful to search for a small niche with a growing demand.

7.2.2 Policy

The study has shown that the lack of growth willingness is related to the willingness

to add new owners, which is related to access to financing. In some of the case studies

investors have not been willing to provide financing without getting a majority share

of the firm. I a variety of sources of financing are available in the economy, it might

increase the probability that different actors get access to resources necessary for

growth, on terms that they can accept. If small firms traditionally are not able to get

access to the resources they need in order to grow, without giving up a majority share,

and if the need for staying independent is high, a number of firms will be hindered

from growing even if they had the capabilities of doing so. If this is the case then the

role of policy could be to create a diversity of sources that could be related to growth

objectives as well as the willingness to add new owners.

As some of the factors that affect the growth of new technology-based firms are

dependent on the innovation context, it is difficult to develop a general scheme that

can help all firms. The way in which government policy can directly contribute to

help firms to solve their context specific problems is unclear. More knowledge is

needed on the classification of innovation contexts and on how new emerging

innovation contexts could be identified.

7.2.3 Theory

One of the most important implications this study has for theory is the apparent need

for combining the different perspectives on new firm growth and the innovation

process. As already pointed out by Davidsson and Wiklund (1999) there is a lack of

systematic knowledge and clear conceptualizations about small firm growth. Different

perspectives provide the different pieces, but it is important to combine the pieces to

complete the puzzle. Even if this thesis can be considered as an attempt to combine

the perspectives much is left to be done. The results indicate important links between

these two streams of research, and that the combinations should be pursued further.

The complexity of both the innovation process and the growth process as well as the

division of factors into generic and specific has some consequences for theory


84

building. While some theories can be generalized to a large population of firms there

seem to be a number of factors where such generalization are not meaningful, except

on a more abstract level. It is also uncertain if mathematical, causal models can be

applied to such a complex phenomena that involves a number interacting social actors

and an abundance of feedback loops. It might be more fruitful to increase the

knowledge about the characteristics of different innovation contexts and identify

elements that might be important in the emergence and evolution of such a context

and how it relates to the individual firms. As articulated by Freeman (1994, p. 491):

"It is very much to be hoped that the neo-Schumpeterians above all do not fall into the

trap of recent generation of economists in sacrificing descriptive realism and richness

of historical evidence to the requirements of formal mathematisation. With this

reservation, they have given a valuable new impulse to the prolonged efforts of the

profession to provide satisfactory formal representation of the complex, untidy and

changing behaviour of the economic system".

7.3 Future research

As usual the study has awakened more questions than it has answered, which points to

the need of further research.

More research is needed for a better understanding of the dynamics of growth

willingness. What factors affect growth willingness and how do they change with

time? In their studies, Davidsson (1989) and Wiklund (1999) only investigated the

expected consequences of growth regarding the changes in work tasks and workloads

of a single founder/manager. This study indicates that there are other factors, and

more people than a single founder, that affect the growth willingness in technology-

based firms and that these factors change with time. The technical employees, who in

a small technology-based firm usually are the majority of the personnel, might feel

that the stimulating, technology-focused environment is threatened by growth.

Successful firms are nevertheless able to continue to provide a stimulating

environment that motivates technical employees at the same time as the firm grows.

Even if there is some literature on the motivation of technical employees (e.g. Pelz

and Andrews 1966 and Schou 1991) little is known about how motivation is affected

by growth. More knowledge about such aspects would increase the knowledge about

the strains between the original technology-focused culture and the more business-

oriented culture associated with growth, and help managers to cope with the

transition. This issue is also related to problems that tend to emerge in growing firms

when they need further technical development to spur future growth.


85

Another important issue that needs further study is the influence of the market-

technology context on the growth of the firm. Various studies have shown the

difficulties in establishing new industries or managing technological discontinuities

but few have linked these factors directly to new firm growth. In order to do so there

might be a need for integrating the innovation systems literature with the literature on

new firm growth. In that way a better understanding could be obtained on how certain

elements of the system affect the internal aspects of the firm and vice versa. Such

studies could provide better information about how different innovation contexts

should be characterized and what types of resources are needed.

86

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Appendix A – Interview questions

Questions about the person interviewed:

ä Founder? ä For how long at the company?ä Work positions at the company ä Education and earlier experience?

Why was this firm established? What is the history behind it?ä Business idea ä Founders (number, background)ä Expectations/strategy ä Relations with a firm/university

Could you describe how the firm has developed, that is, how it has grown into what it is today?ä Founder-Manager-Owner changes ä Changes in the organization structureä Changes in leadership style ä Changes in growth strategy

What events have been critical for the development and success of the firm?ä Spin-offs ä Cooperationä Changed focus ä Relations with customerä Own acquistions

How have your products changed with time? How focused have you been?ä Technology and focus ä Geographical diffusion (Int.nat.)ä Role of university ä Cooperation with firmsä Research ä Product development

How have you got access to the resources you have needed?ä Financing ä Competent personel (tech/man)ä Market contacts/knowledge ä Technologyä Other

Why did you get X type of capital. How has the X type of capital affected the firm? (Follow up fromlast question about resources)

ä Market knowledge ä Productsä Technology ä Management competence

Is the firm being acquired?ä Why? (seller/buyer) ä Influenceä Motives (seller/buyer) ä Effect

Why do you that this firms has grown as it has done?ä Industry ä Internal/External driversä Internationalisering ä Cooperation with a leading customer

What have I forgotten to ask you?

93

Appendix B – Breaking the entrepreneurial growth barrier

Breaking the entrepreneurial growth barrier:The role of venture capital and acquisitions for the emergence of

medium-sized technology-intensive firms

March 1999

Rögnvaldur Saemundsson

Åsa Lindholm Dahlstrand

Industrial DynamicsChalmers University of Technology

S-412 96 Göteborg, SwedenTel: +46 31 772 5121/1206

Fax: +46 31 772 1237Email: [email protected], [email protected]

Accepted for publication in Frontiers of Entrepreneurship 1999.

Appendix B Breaking the entrepreneurial growth barrier

94

Abstract

Relatively few new firms break the entrepreneurial growth barrier and become

medium-sized. In Europe, lack of venture capital has been both a barrier and a reason

why small firms sell off their business. In this paper we discuss the financing and

acquisition of technology-intensive firms growing to become medium-sized. We

found considerable differences between manufacturing and service sector firms, not in

their use of venture capital, but primarily in the acquisition pattern. While about half

of the manufacturing firms are being acquired, this is so for only a minority of the

service firms. Instead these firms have sold off minority shares. No connection

between the use of venture capital and acquisitions was found. Swedish venture

capitalists are not using the sell off of medium sized technology-intensive ventures as

a primary exit strategy.

Introduction

Exploiting new technological opportunities on existing or new markets is one of the

main characteristics of technology-intensive activity. This activity can be used to

increase growth in an economy in at least three ways: (1) by diversification of large

firms, (2) by the creation of new technology-intensive firms, and (3) by the growth of

new or small technology-intensive firms. Among the first modern economists to focus

upon the dynamics of economic development and technological change was

Schumpeter. In his view, the key development process was the "carrying out of new

combinations", or innovations, which in turn would mean the competitive elimination

of the old (Schumpeter 1934, first published in 1912). He perceived the entrepreneur

to be the one to carry out the new combinations, reaping an entrepreneurial profit,

with other producers following him. Further, the entrepreneurial profits depend upon

the time duration until competitors are established and the temporary monopoly of the

entrepreneur is destroyed. Thus, Schumpeter saw the entrepreneur as an important

means of vitalizing an economy. Later Nelson and Winter (1982) stressed that, in an

evolutionary theory of economic change, consideration has to be given to the

mechanisms operating in Schumpeterian competition. They argued that

Schumpeterian competition is a process that tends to produce winners and losers, and

that some firms exploit emerging technological opportunities, experiencing prosperity

and growth, while others are less successful, suffering losses and decline. Further,

"growth confers advantages that make further success more likely, while decline

breeds technological obsolescence and further decline. As these processes operate


95

over time, there is a tendency for concentration to develop even in an industry initially

composed of many equal-sized firms" (p.325).

Penrose (1959) considered external growth through acquisition and internal

development, i.e. growth through new investments, as the two methods of growth for

the firm. Further that the unused production resources of a firm are the incentive to

expand but they are also the challenge to innovate as well as the source of competitive

advantage. Since a specialized firm is highly vulnerable in an environment of

changing technology and tastes, she argued, the firm can often make more profitable

use of its resources over a period of time by spreading production over a variety of

products. The expansion is then made through diversification, either by internal

development or by acquisitions. In both cases, the managerial resources are serious

limitations of the growth (Penrose 1959).

Successful commercialization of an innovation requires several complementary assets

(Teece 1986), typically resources for continued R&D, large-scale production,

international marketing, after-sales support, and overall management. To acquire

these resources on separate markets and integrate them takes time and effort on the

part of the small firm, and can then to some extent be considered as growth barriers

for the small technology-intensive firms. Besides, any hampering imperfection on the

capital market, commonly encountered by small innovation companies, may

jeopardize the whole venture. In other words, the transaction costs involved in

acquiring complementary assets are likely to be high for the small firm. The

alternative of having the whole innovation process internalized in a large firm with a

more complete set of resources available from the outset will economize on

transaction costs but is likely to give relative disadvantages, such as dulled

entrepreneurial spirits, bureaucracy, internal procurement bias, and various innovation

barriers (Williamson 1975, Granstrand 1982). Under these circumstances the large

and the smaller firms might gain from co-operation. Venture capital, nurturing and

joint ventures are, together with the technology-related acquisitions, important

because they all make this co-operation possible. Even though Penrose paid no

attention to these respective advantages of small and large firms, she suggested that

the selling of small firms is suitable under certain circumstances. As the small firm

grows, Penrose argued, it will reach a point where a change in its managerial structure

must take place because of the necessity of subdividing the managerial task. In

addition to the management problem, the small firm has problems of raising capital.

Thus, the small firm may find substantial advantages in selling to a large firm. There

is still a transaction cost involved in the acquisition, but to the extent that there is a


96

resource fit between the large and the small firm, everything else being equal, the

transaction cost will be lowered.

Many studies have reported about difficulties in the early growth phases of new firms.

These difficulties can be related to the entrepreneur himself, for example. the

opportunities that he perceives, his ability and his need for growth (Davidsson 1989,

1991). In other cases the difficulties could be related to the organizational structure,

that the need for making the necessary transition in organizational structure and

management as the firms grows (Greiner 1998, Kazanjian and Drazin 1990, Roberts

1986, Hanks and Chandler 1994, Hofer and Charan 1984, Garnsey 1998). Many

researchers have found that financial constraints can prevent the firm from expanding

its operations, especially so in high technology firms (e.g. Moore 1994, Mason and

Harrison 1994, Garnsey 1995, Westhead and Storey 1997, Murray 1998). This could

be of special importance in small countries with small domestic markets, where firm

need to internationalize early. Small firms are often faced with some sort of an

entrepreneurial growth barrier when moving from early sales to a reinforced

“Penrosian” growth where “internal pressures are exerted for further growth”

(Garnsey 1998). Thus, the entrepreneurial growth barrier can be considered as the

critical step from being a relatively small founder managed firm into being a

professionally managed and growth focused firm. In turn, this often comes hand in

hand with the organizational structure being transformed from an informal design,

focusing on innovation and internal cooperation, into a considerably more formalized

and functional one.

In Sweden, access to finance has improved since the late 1970s, but the lack of capital

might still be a problem for highly innovative firms, employing new technology

(Davidsson 1989, Karaömerlioglu and Jacobsson 1999). Olofsson and Wahlbin

(1988) found that the creation of a Swedish OTC market in 1982 drastically changed

the situation for the financing of small and medium-sized firms, but also that after

1985 there was first a shake-out in terms of the number of active venture capital firms.

In an earlier Swedish study (Utterback and Reitberger 1982) it was found that the

firms' need of capital usually appeared at two critical times in their development: at

start-up and when taking a major expansion decision approximately six to ten years

after start-up. It could be at this time that many of the founders decide to sell off the

business (Lindholm 1994). Also Landström (1987) found that small innovative firms

were usually acquired after an expansion had begun, when the need for capital and

market resources increased. In small firms, most often the owners and the founders

are the same persons. Moreover, the owners and the managers are also often the same.

This relation might cause the manager to feel that the firm is his own property and


97

that he is free to increase the risk-taking of the firm. If the risk is increased, the

difficulties of obtaining new capital will increase, as financial institutions tend not to

get involved in high-risk firms (Landström 1987). In the 1990s, Karaömerlioglu and

Jacobsson (1999) report a boom in the broader Swedish risk capital market. However

many of the Venture Capitalists are still quite new firms with a relatively limited

number of investments..

Even if acquisitions are attractive, Yip (1982) argued that because of the U.S. antitrust

policy, American companies tend to use internal development to enter new markets,

instead of acquiring other firms. In Sweden, for example, the antitrust policy is less

strict than in the U.S., and it is not likely that this policy will limit the attractiveness or

frequency of technology-related acquisitions. Thus, it is quite possible that this type of

acquisitions, and the financing they bring to a small or medium-sized technology-

based firm, might be more usual in Sweden or Europe. On the other hand, it also

seems likely that the use of venture capital has been more usual, and perhaps more

successful, in the US. Sometimes, however, when an acquiring firm has gained

special knowledge on how to nurture acquired technology-related ventures (Lindholm

Dahlstrand 1999), such acquisitions can be designed to come arbitrarily close to

traditional venture capital financing. The most important difference then lies in that

the former aims for a majority share of the venture and the latter limits its ownership

to a minority share.

Aim and scope

In this paper we will examine the characteristics of these firms who have actually

grown into medium-sized firms, that is, who has broken an important entrepreneurial

growth barrier. Several studies have shown that for many reasons, such as the need for

independence, many small technology-intensive firms deliberately choose to stay

small (OECD 1998). Besides the will to grow, there are many other barriers to

growth. In many countries, including Sweden, the lack of seed and venture capital has

often been considered a barrier for growth. In turn, this lack of financing capabilities

has sometimes caused owners of small growing technology-based firms to sell of their

ventures to large acquiring companies. In an earlier Swedish study, Lindholm found

that the majority of the founders who sold their small technology-based firms did so

because they experienced a need of additional capital. In some cases the founders

wanted to free capital for their own consumption, but more often the additional capital

was needed in order to expand the business and to internationalize the operations of

the firm (Lindholm 1996). It was also demonstrated, in the same study, that the


98

growth in the acquired firms was significantly higher than in the non-acquired

technology-based firms. The acquired firms also had higher growth before as well as

after acquisition, and further, the firms’ growth was increased after acquisition.

In this paper the authors have chosen to focus on the medium-sized technology-

intensive firms. By studying such medium-sized technology-intensive firms, we

would like to learn more about the characteristics and growth of such firms, and to

analyze the importance of different types of financing. Especially we want to analyze:

(a) what role venture capital has for the emergence of medium-sized technology-

intensive firms, (b) what role acquisitions have for the emergence of medium-sized

technology-intensive firms, and (c) the relation between venture capital and

acquisitions. For example we want to know whether the use of venture capital has

helped medium-sized firms to mange their expansion without being acquired. Or if

perhaps venture capital instead has contributed to a higher share of firms being

acquired, maybe as part of the venture capitalist’s exit strategy.

Method and sample

In this paper a somewhat narrow definition of a technology-based firm will be used.

The empirical sample consist of a group of technology intensive new firms, included

in a larger Swedish sample of ‘New Technology-Based Firms’ (NTBFs), earlier

described and analysed by Rickne and Jacobsson (1999) and Saemundsson et. al,

(1997). The definition of a technology-intensive firm, used here, is a ‘firm whose

strength and competitive edge derives from the know-how within natural science,

engineering or medicine, of the people who are integral to the firm, and upon the

subsequent transformation of this know-how into products and services for a market’.

Thus, this does not only refer to firms developing or using ‘high’ technology but to all

firms where natural science, medical or engineering skills are central to achieving a

competitive edge. These include, of course, not only manufacturing firms but also

firms in industry-related services (Rickne and Jacobsson 1999; Saemundsson et. al,

1997). In the following text, the phrase ‘technology intensive firms’ will sometimes

be used in order to distinguish these firms from the more generally used terms of

high-tech or technology-based firm. Moreover, we use the EU definition of the size of

medium-sized firms, i.e. 50-249 employees (Commission of the European

Communities 1996), not applying the restrictions on turnover or independence. We

consider that having over 50 employees is enough for a firm to have taken the step

from the informal innovation focusing organization into the more formalized growth


99

oriented firm, that is, to have broken the entrepreneurial growth barrier and reached

the stage of reinforced growth.

The identification of firms to be included in the Swedish sample, and, thus, in the

sample of medium-sized firms, were based on data from the Swedish Bureau of

Statistics (SCB). The firms in the sample are classified in a selected set of industries

and industry-related services19. Included here are those industries which employ the

bulk of the engineers and natural scientists, excluding public sector activities such as

education and health. Second, only those firms with at least one employee (two in the

service sector) with an academic degree in any of these fields were included. This

means that we excluded ‘high tech’ firms that had no employees with an academic

degree. Third, the firm should have been established after 1975, and have at least

three employees, which means that a high number of very small firms were excluded.

Finally, companies which were the result of a reorganisation of existing businesses,

and therefore all foreign direct investments and all divisionalisations or

diversifications by established firms were excluded. The firms were traced over the

period 1975-1993, and in 1993 the national population of ‘surviving’ firms amounted

to 1,352 (Rickne and Jacobsson 1999).

In 1998, a postal questionnaire was sent to all surviving firms (1113 firms) in the

Swedish NTBF sample. The questionnaire included questions about, for example, the

background of the founders, the financing of the firm, the customers, different links

and interaction with other organizations, and acquisitions and spin-offs. Of the 1113

firms 344 responded with a completed questionnaire. In total, 44 medium-sized firms

answered the questionnaire. To increase the sample size, an additional 17 firms have

been interviewed by telephone. These firms were selected from a total number of 73

firms, who we already knew had been at least medium-sized in 1996. Thus, our

empirical sample consists of 61 technology-intensive firms who have grown beyond

the threshold of 50 employees. Eight of these firms have continued to expand and

now have more than 250 employees they could be considered as large firms.

The medium-sized technology-intensive firms

Before turning to the financing of the firms and analyzing the role of venture capital

and acquisitions for braking an entrepreneurial growth barrier, we want to find out

more about the characteristics of the medium-sized firms. In this section we will first

1919 The industries included are ISIC (rev. 2 from 1968) 341, 35,37, 38,6112,72002,8323,83249,83292,83299 and 932. This is a subset of the manufacturing and servicesector.


100

present data on the age and size distribution of the firms in our sample. Since we

suspect that manufacturing and service firms might behave differently, especially in

terms of the complementary resources needed to break an entrepreneurial growth

barrier, we like to know whether the firms in our sample are found in any particular

industry sectors, and if so, whether this will have any influence on their financing and

growth.

First, Table 1 gives an overview of the sample in terms of age, size and growth. Size

has been measured in terms of number of employees and sales, while the annual

increase in the number of employees has been used to illustrate growth. Moreover, a

comparison between manufacturing and service firms has been included in the table.

As can be seen in Table 1, the distributions are skewed and there is a large variance

indicating an uneven large range of values. This is primarily due to eight firms that

have grown beyond the limit of 250 employees, that is, these eight firms have

definitely managed several growth barriers and grown into larger firms.

Table 1: Age, size and growth of manufacturing and service firms.

Age(years)

Number ofemployees

Sales(MSEK)

Growth(empl./year)

Total Mean 12,7 140,3 143,5 13,5(N=61) Median 12,0 95,0 100,0 8,6

Std. Dev. 4,17 140,0 134,1 12,9Manufacturing Mean 13,2 110,8 145,6 10,2(N=40) Median 15,0 90,0 100,0 7,9

Std. Dev. 4,6 96,6 146,7 8,9Services Mean 12,4 155,7 142,5 15,2(N=40) Median 12,0 100,0 100,0 10,3

Std. Dev. 4,0 151,4 129,0 14,4

As can be seen in Table 1, the average number of employees is around 140, and the

annual sales is approximately the same in terms of MSEK, that is, on average MSEK

143,5. For the total sample of 61 firms, the average age is a bit over 12 years. That

means that they are still quite young firms, and it is possible that a number of them are

likely to be acquired in the future. However, at this age they would in general have

experienced the first rounds of financing and acquisition (Utterback and Reitberger

1982; Lindholm 1994).

The growth rate has been a little more than an additional 13 new employees each year.

Two thirds of the medium-sized technology-intensive firms are found within the

service sectors of the industry. Since these firms are both somewhat younger and

larger in the terms of personnel, they have also experienced a more rapid growth than

the manufacturing firms have. However, the service firms have lower turnover per


101

employee (p<0.05). This is also reflected by the slightly higher employment growth of

service firms.

To shed some further light upon the growth differences in different sectors, Table 2

gives the distribution of firms over different industries. Many of the earlier studies of

new technology-based firms, have focused on manufacturing firms, and, thus, often

disregarded firms in the service sector. This might be unfortunate, since, as illustrated

above, a majority of medium-sized firms - at least in our sample - belong to the

service sector. Moreover, in Table 2, it is clear that an overwhelming majority of the

fastest growing firms are found in the service sector. In the quartile of firms having

the highest annual growth, 80 per cent are firms in the service sector. Moreover,

almost half of all the fast growing firms - 7 of the 15 firms - are found in the computer

related service sector.

Table 2: Industry classification and growth

Frequency Fast growingN (%) N

Manufacturing, total: 21 34.4 3Chemistry 3 4.9 0

Metal products 2 3.3 0

Machinery 7 11.5 1

Electric equipment 4 6.6 2

Automotive 3 4.9 0

Instruments 2 3.3 0

Service, total: 40 65.6 12Retail 6 9.8 2

Computer related 19 31.1 7

Tech. consulting 13 21.3 3

R&D 2 3.3 0

Total 61 100.0 15

Over half of the firms in the sampleare firms providing technical consulting and

computer-related services (see Table 2). In some cases computer-related services firm

might be involved in the development of software products, i.e. they are not pure

service firms. Together the computer related service firms and the technology

consultants represent 80 per cent of the medium sized firms in the service sector. In

the manufacturing sector, the distribution of firms over different industries is

somewhat more evenly distributed. Here the machinery industry is dominating with

seven firms. While almost a third of the firms in the service sector are in the fastest

growing quartile of firms, less than 15 per cent of the manufacturing firms are fast

growing. Interesting, however, is to observe that the firms belonging to the electronic

equipment industry (i.e. one of the high-tech industries according to the OECD


102

classification) seem to be represented by a high growth. Unfortunately, the number of

observation is too low to allow any statistical significance.

One of the characteristics of firms having passed the entrepreneurial growth barrier is

their self-induced growth or growth reinforcement as they have build up sufficient

resources and are committed to growth. Table 3 shows the expectation of the firms in

our sample about future growth in employment.

Table 3: Expected growth in number of employees in near future

Increase No change DecreaseTotal 56 2 1(N=59) 95% 3% 2%

Manufacturing 17 2 1(N=20) 85% 10% 5%Service 39 0 0(N=39) 100% 0% 0%

All of the service firms and almost all of the manufacturing firms expect to grow in

the near future. This indicates that these firms have indeed passed the entrepreneurial

growth barrier and are motivated for future growth. The firms that do not expect to

grow could be experiencing growth reversal (Garnsey 1998). If the growth ambitions

in Table 3 will materialize in the near future, we can thus anticipate to find further

differences of growth between the service and manufacturing firms.

To summarize so far, we have demonstrated that our sample of medium sized

technology-intensive firms consist of relatively young firms with a strong growth

ambition. The firms are on average 12 years old and are likely to have experienced the

first rounds of financing and acquisitions. We have also found that the majority of our

medium-sized firms belong to the technology service sector, and that there is a larger

number of fast growing service firms than manufacturing firms. Even if almost all the

medium-sized firms expect to continue growing in the near future, the service sector

firms have an even more pronounced future growth ambition. In the next section we

will turn to questions of the financing of the medium-sized firms, among other things

to elaborate upon whether the service and manufacturing firms differ in respect to the

sources of financing utilized.


103

Financing the growth of medium-sized technology-intensive firms

In this section we will present data on the financing of the firms in our sample. We

will compare the importance of different financing sources and to what extent the

firms have sold out either minority shares or the whole company. Finally, we will

look at the motives behind and the growth effects of the acquisitions. First, Table 4

illustrates the importance of different financing sources for the medium-sized

technology-intensive firms in the sample. The use of various sources of financing has

been divided into different stages of development in (a)the start-up phase, (b) the

phases of early development, and (c) later stages. We have used data for the first five

years to illustrate the start-up phase, data for the following five years to illustrate the

early phase of development, and data for the company age of over ten years to

illustrate the later phase.

Table 4: Frequency and importance of different financing sources in different phases

of development

Start-up(N=61)

Early(N=60)

Late(N=40)

Totalperiod

Source:freq.

%impor-tance

freq.%

impor-tance

freq.%

impor-tance

freq.%

Self financing 74 4.22 58 4.37 78 4.48 87Private investors 5 3.00 2 1.00 2 1.00 5

Customers 10 4.17 8 3.60 8 3.20 14

Governm. support 30 3.50 11 3.57 10 3.67 33

Loans 41 4.26 41 4.16 30 3.78 57

Venture capital 16 4.30 13 4.50 13 4.13 27

Other 11 4.43 5 4.67 8 4.60 18

Note: Importance is measured on a 5-point scale ranging from 1=very low importance to 5=very highimportance.

As can be seen in Table 4, an overwhelming majority of the medium-sized firms have

themselves financed the development of the firm. This financing is made either

through the owners personal savings and loans or through reinvesting profits that

could otherwise have been distributed among the owners. The second most common

source of financing is through different loans. Bank loans are very frequently used in

both the start-up and the early phases of development. While the importance of self

financing increases with age, and possibly then when the firms start to generate a

profit that can be reinvested, the importance of loans instead decreases in the later

phases of development.


104

Only three firms have gained any financing from private investors, or so called

Business Angels. Moreover, even when this source has been used it is generally

evaluated as having a relatively low importance for the development of the firm. This

might be related to an often claimed lack of Business Angels within the Swedish

economy. Also the use of customers as an important source of financing seems to

have been quite rare among the medium-sized firms. However, the importance of

having an early customer, and perhaps also having the early phases of the product- or

service-development carried out in collaboration with a customer, could be linked to

the higher importance of customer-financing in the start-up phase.

In total, a third of the medium-sized technology-intensive firms have gained some

government support, either in the form of grants, seed capital or loans that should be

reimbursed if and when the firm is successful. Government support has been most

frequent in the start-up phase, in later phases the frequency decreases quite drastically.

While a third of the firms have gained government support in the start-up phase, only

16 per cent of the firms have benefited any kind of venture capital in this phase.

However, while no additional firms seems to be able to attract governmental support

in later stages an additional 10 per cent of the firms are receiving venture capital.

Looking at the total time period, there are only small differences in the frequency of

firms having gained government support or venture capital. However, the evaluated

importance of the two sources of financing differs quite considerably. While the

importance of venture capital is the second most important single source of financing,

governmental support is rated as being only of a moderate importance.

The number of additional firms getting venture capital decreases with age, and there is

also an indication that its importance might be somewhat lower in the later stage. At

the same time fewer firms name self financing as an important source of financing in

the ‘Early phase’. Even if the empirical data is limited, it might be speculated that in

this phase of development, the firms are financially quite weak and that it is at this

point in time that additional competence is often needed to handle the problems of

expansion (Utterback and Reitberger 1982, Landström 1987).

Above the differences between manufacturing and service firms were pointed at.

Because of their differences it seems likely that also their financing and requirements

have followed different patterns. It has been argued that service firms have lower

capital requirements than production firms (Harrison and Taylor 1996). In Table 5 the

frequency and importance of different financing sources are illustrated for both

manufacturing and service firms.


105

Table 5: Frequency and importance of different financing sources for manufacturing

and service firms.

Manufacturing(N=21)

Services(N=40)

Source:% Importance % Importance

Self financing 90 4.37 85 4.62Private investors 10 4.00 3 1.00

Customers 24 3.80 8 4.67

Governm. support 38 3.25 30 3.58

Loans 81 4.47 45 4.50

Venture capital 24 5.00 28 4.45

Other 14 4.67 20 4.75

Note: Importance is measured on a 5-point scale ranging from 1=very low importance to 5=very highimportance.

On average the manufacturing firms in Table 5 depend on a higher number of sources

for financing their development. Private investors and customers play a larger role in

those firms than in the service firms. What is maybe most striking is the difference in

dependence on loans where as many as 81 per cent of the manufacturing firms have

used loans for financing the development of the firms. The corresponding figure in the

service firms is only 45 per cent. Even if the use of venture capital has been as

frequent for both categories of firms, it is worth noting that seven of the 11 service

firms that have gained venture capital can be found in the computer related services.

As these firms might be involved in some sort of product development they might

have capital requirements that are similar to the manufacturing firms. There may,

however, still be a difference in capital requirements when a manufacturing firms

starts building and expanding production facilities. This capital requirement might in

part explain the dependency of manufacturing firms on loans. Another interesting

finding is that all manufacturing firms rate venture capital as having a very high

importance. Compared to the service firms, the same is true for all but one of the

computer related firms. Nevertheless, only one of the additional four service firms

with venture capital is considering this source as having had a very large importance.

An often used alternative to seeking external financing is to sell of minority shares to

external firms and investors. Such minority investments is also often a first step

towards selling of the entire firm to an external acquirer. As can be seen in Table 6,

the selling of shares of a technology-intensive firm, either a minority share or the

majority of the firm, is quite usual among the medium-sized firms of our sample.

However, only a third of the firms have been acquired, a figure that is somewhat

lower than has earlier been found in Sweden (Lindholm 1994, 1996). However, this

might be explained by the higher proportion of service firms in our sample, or the


106

relatively lower age of these firms. Half of the acquired technology-based firms in

Lindholm’s earlier study were acquired after they had reached the age of ten years. In

our sample of medium-sized technology-intensive firms the average age is yet only 12

years.

Table 6: Frequency of firms selling minority shares and being acquired.

Share offirms, totally

Start-upfreq/(%)

Earlyfreq/(%)

Latefreq/(%)

Totalperiod

Total (N=61) sold minorityshares

46% 16 (57%) 17 (61%) 10 (36%) 28

acquired 33% 5 (25%) 8 (40%) 7 (35%) 20

Manufac-turing (N=21)

sold minorityshares

33% 4 (57%) 5 (71%) 4 (57%) 7

acquired 43% 1 (11%) 6 (67%) 2 (22%) 9Service (N=40) sold minority

shares53% 12 (57%) 12 (57%) 6 (29%) 21

acquired 28% 4 (37%) 2 (18%) 5 (45%) 11

Almost half of the medium-sized firms (46 per cent) have sold minority shares.

Among these 28 firms, eight have later been acquired but the majority has stayed

independent. Among the firms in the service sector the majority have sold off

minority shares, while among the manufacturing firms only a third has sold off any

minority shares. Looking at the numbers of acquired firms the relation is reversed,

here acquisitions are more usual among the manufacturing firms. The frequency of

acquisitions is slightly higher than the 27 per cent of firms receiving venture capital

financing. While 43 per cent of the manufacturing firms have been acquired, this is

true for only 28 per cent of the service firms. That is, for service firms venture capital

and acquisitions have been equally frequent. On the other hand, acquisitions are

considerably more frequent among the manufacturing firms. Moreover, while

manufacturing firms are usually acquired in the ‘Early-phase’ (i.e. at the age of five to

ten years) the acquired service firms have usually been bought in either the start-up or

the late phases.

Problems of receiving sufficient financial resources may cause the owners to seek a

suitable acquirer of the firm. In the earlier cited Swedish study Lindholm (1994)

found that two thirds of the founder’s who sold their firms did so since they felt a

need of additional financial resources. In Table 7, the motives for selling of the

medium-sized technology-intensive firms of our sample are presented.


107

Table 7: Motives for selling out to another firm

Lack of capital Image Private Other

Total(N=18)

8 (44%) 4 (22%) 11 (61%) 7 (39%)

Manufacturing (N=8) 5 (63%) 2 (25%) 5 (63%) 2 (25%)Service(N=10)

3 (30%) 2 (20%) 6 (60%) 5 (50%)

Note: More than one motive possible.

The majority of the manufacturing firms in Table 7 have been motivated to sell of the

firms because of a lack of capital for expansion of the business. This is in line with

our previous findings. In the majority of the cases there are also some personal

reasons for selling out, such as a too high risk for a private owner. In five firms (3 in

manufacturing and 2 in service) the owner mentioned both lack of capital and private

reasons as motives for selling out to another firm. It is worth noting that half of the

service firms mention other reasons for selling out.

To shed some further light on the links between the financing of the firm’s

development and the motivation to sell of a firm, Table 8 summarizes the most

important sources of financing in acquired and non-acquired firms.

Table 8: Importance of financial sources in acquired and independent firms.

Start-up Early Late% importance % importance % importance

Self financing acquired 50 3.80 45 3.89 73 4.45independent 85 4.34 65 4.54 80 4.50

Governm. support acquired 20 2.25 5 5.00 5 5.00independent 34 3.86 15 3.33 13 3.40

Loans acquired 55 3.82 45 4.44 40 4.00independent 49 4.50 39 4.00 25 3.60

Venture Capital acquired 15 4.33 10 4.00 15 4.33independent 17 4.29 15 4.67 13 4.00

Note 1: Importance is measured on a 5-point scale ranging from very little importance to very large importance

It seems that the acquired firms in Table 8 have had difficulties in generating revenues

that can be used to finance the development of the firm. The non-acquired

independent firms have been more successful in financing their own development.

There are also fewer acquired firms who report that their own capital has been

important for the financing. This is especially notable in the late phase, and it might

be in that phase that we are seeing the effects of the acquisition, i.e. firms are now

able to generate revenues. In a large majority of the firms the acquisition had positive

effects on growth; 75 per cent of the acquired firms claim to have increased their


108

growth because they were acquired. This indicates that the acquisitions have provided

the needed resources, both in terms of finance and competence, for the company to

expand. Another striking finding in Table 8, is that, despite the low evaluation of its

importance, it is the firms who have received government support that seems to be

better able to continue as independent businesses. As can also be seen in Table 8, the

acquired and the non-acquired firms do not differ much in terms of the frequency and

importance of venture capital. Thus, it does not seem like the use of venture capital

makes it more likely for the firm to be sold off as part of an exit strategy of the

venture capital firm. Only six of the acquired firms had received any venture capital

prior to the acquisition. However, as was noticed earlier, our sample of medium-sized

firms are still of a relatively limited age, and it is possible that the number of

acquisitions will increase in the future. Ten of the non-acquired firms have been

financed by venture capitalist firms, and here the use of venture capital has been

important and helped these medium-sized firms to mange their expansion without

being acquired. However, later when the venture capitalists want to exit these

investments, the sell off of the medium sized technology-intensive firm can be one

alternative to an IPO.

Summary and conclusion

In recent years relatively few new technology-intensive firms in Sweden have broken

the entrepreneurial growth barrier and become medium-sized. Several studies have

shown that for many reasons, such as the need for independence, small technology-

intensive firms often choose to stay small. Moreover, in Sweden the lack of venture

capital has often been a barrier for growth, which may be the primary reason for the

owners to sell out to a larger firm. In this paper we have analyzed medium-sized

technology-intensive firms in both the manufacturing and the service sector. Special

attention was paid to the analysis of the role venture capital and acquisitions have for

the medium-sized technology-intensive firms. This included analyzing the relation

between venture capital and acquisitions, e.g. the use of venture capital within

independent as well as acquired medium-sized technology-intensive firms.

First, we can conclude that almost two thirds of the medium-sized Swedish

technology-intensive firms can be found in the service related industrial sector. Firms

in this sector often have advantages because of relatively limited financial growth

barriers. Moreover, an overwhelming majority of the fastest growing firms were

found in the computer related and the technology consulting industries. Being in a

rapidly growing industry is of course important for the firm’s growth possibilities,


109

and, thus, the possibilities of breaking different growth barriers. However, in order to

break an entrepreneurial growth barrier we here suggest that there must also be a will

to expand. Among the medium-sized firms of this study, this willingness was strong

and almost all firms (in fact all firms in the service sector) were planning for a

continued future growth. Besides the willingness to grow, there are many other

barriers to growth. In many European countries, researchers have found that there is a

lack of seed and venture capital (Mason and Harrison 1994, Moore 1994, Murray

1998, Klofsten et al 1999), and this has often been considered a barrier for growth. In

turn, this lack of financing capabilities has sometimes caused owners of small

growing technology-based firms to sell of their ventures to large acquiring companies

(Garnsey and Roberts 1992, Lindholm 1994, 1996).

As in many earlier studies (Cooper 1986, Moore 1994) we find that self financing and

loans are the two most usual ways of financing the emergence of the technology-

intensive firm. Very few of the firms in our sample had received any financing from

private investors or Business Angels. Government support in the form grants or loans

were found in a third of the firms, and especially so in the firms who managed the

development as independent non-acquired firms. Less than a third of the firms did

receive any venture capital. But for the firms who did so this was considered as highly

important for their development. The frequency of venture capital did not differ

between firms in the manufacturing sector and firms in the service sector. Instead we

found very different patterns in their selling off of minority and majority shares.

Among the Swedish medium-sized technology-intensive firms, being acquired has

been more usual than receiving venture capital. Especially this has been an important

way for the manufacturing firms to find the financing needed to expand their business.

Among the firms in the service sector, it has been relatively more important and

common to sell off minority shares. Finally, we could not demonstrate any clear

connection between the use of venture capital and the later sell off or acquisition of

the firms. It might be that firms receiving venture capital are able to use this financing

and the received competence in order to expand the business without being acquired.

So far the venture capitalists investing in this sample of technology-intensive firms,

have only exited six of their 16 investments through acquisition arrangements. Since

the medium-sized firms of our sample are still quite young, it is however possible that

this figure will increase in the future.


110

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New technology-based firms growing into medium-sized firms

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