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1. Introduction
The “technology bubble
burst” of April 2000 has marked a significant change in the behaviour of world
stock exchanges, causing investors to question the transparency of information
regarding the risks involved and, in particular, the way in which firms are
evaluated when going public. Moreover, the period of analysis and reflection
that began after venture capital investments plummeted has also indicated a
need for revision of traditional financial valuation methods (discounted cash
flow, price to earnings, net present value, etc.). Academics and practitioners
alike have yet to provide new evaluation methods and tools that allow for more
systematic methods of appraising the possible success of new ventures.
The start-up general
valuation model (SGVM) is an attempt to fill this gap. Because the present
business environment is one in which a firm’s competitiveness and capacity to
create value is very much dependent on its ability to deploy and re-create its
intangible knowledge assets in innovative ways (Lev, 2001; Sullivan, 2000),
and because a start-up is so dependent on intangibles (a business formula and
the top management team’s capabilities and personalities), any such new
valuation approach must be based on intellectual capital. Furthermore, the
turbulence and complexity of the environment demands an approach that allows
for a better understanding of the specific dynamics of a given start-up
company. An improved estimation of a company’s value must combine several
theories and approaches, including strategy, entrepreneurship, and psychology.
The SGVM consists of
two parts: (i) the start-up business model benchmark (SBMB); and (ii) the top
management team scoreboard (TMTS). The SBMB builds upon Hedman and Kalling’s
(2001) work and Viedma’s (2000) intellectual capital benchmarking system (ICBS),
and aims to predict a start-up’s competitive capability and value-creating
capacity vis-à-vis the best world-class competitor. The TMTS aims to evaluate
the most decisive factor in the success of any start-up – the top management
team (TMT). The TMTS thus appraises the TMT’s competencies, commitment,
values, and attitudes – not only in terms of the abilities and experience of
the members of the team, but also in terms of their personality
characteristics. In doing this it relies on Cattell’s 16 personality factors –
commonly known as “the 16PF” (Karson et al., 2002). In addition, the work of
Erikson (2002), Mayo (2001), Ulrich (1998), and Herron and Robinson (1993) is
of significance.
The remainder of the
paper is structured as follows. Section 2 is a short review of venture capital
firms’ functions and objectives and common valuation methods. Section 3
briefly outlines the new business environment and the need for more
integrative approaches. Section 4 introduces the SGVM (including its
theoretical framework, components, and general functioning). Section 5 notes
the main limitations of the study and possible future research lines. Section
6 presents the main conclusions.
2. Venture capital value
added and valuation methods
Start-ups’ own
characteristics (lack of history, a promising idea, a bundle of competencies,
among others) make venture capital the natural refuge for new ventures in
search of financial support. This being the case, there are some elements
relating to the functioning, objectives and valuation methods of these firms
that we must understand before aiming to improve the latter and ultimately the
investment cycle and allocation of resources.
According to Triantis
(2001), a venture capitalist or a venture capital firm is a financial
intermediary between investors and start-up firms that are too small and too
volatile, and have insufficient history to be able to secure financial
resources directly from the capital markets. For early stage firms, venture
capital is a source both of financing and of strategic advice. This advice and
the active coaching of the firms in which they invest is probably what
distinguishes venture capital financing from other, more traditional
mechanisms such as capital markets or debt contracting (Gompers and Lerner,
1999). Furthermore, those who invest in start-ups (characterised by extreme
volatility and operations in new or emerging market segments) aim to obtain a
return on their investment around five times the capital initially invested
over a period that averages 5-6 years. Such high returns in turn demand some
special features at start-up including: i) potential to grow rapidly and
generate gross margins of around 40%, ii) the ability to go public or merge in
the mid-term at a high P/E, and iii) a strong leader and a top management team
with entrepreneurial and managerial experience, perseverance, commitment,
imagination, and integrity.
The aforementioned
aspects, generally screened through business plans, financial statements,
projected cash flows, and other financial tools (internal rate of return, net
present value, economic value added, etc.) together with other informal
sources (potential clients, suppliers, etc.) and insider information, guide
venture capitalist investment decisions. However thorough this screening is,
there is clearly a lack of systematic analysis of the whole valuation process.
Therefore, if investors and analysts learned anything from the share price
collapse of the year 2000 (especially that of the Nasdaq), it was the
imperative of turning attention to the firm’s true sources of sustainable
competitive advantage and value creation (Koeller, 2001). The development of
“sustainable” competitive advantage is by no means only a matter of
competencies and good strategy formulation (the content of the business plan)
but also one of leadership capability, staying power, commitment, and the
values and attitudes of the people in charge of bringing the business venture
to fruition. A survey of sustainability carried out by the New Economic
Foundation (The å Project, 2001) highlighted in section 3.5 “… shareholders
concerned about risk management will increasingly demand evidence linking the
quality of leadership with the creation of long-term shareholder value. They
will want to know about the purpose, values and strategy of the organisation
in order to form their judgement of the company’s long-term potential (the
so-called ‘success jigsaw/recipe’)” (p.30).
Venture capital (VC)
played an important role in the economic growth, cultural change and financial
“exuberance” experienced by the United States during the last decade
(especially in the period 1997-2000). Although, to a lesser extent, Europe was
also affected by this VC boom (i.e. early-stage investment rose to €6.7
billions in 2000, an amount 15 times greater than that of 1995), the European
Venture Capital Association (EVCA, 1996 and 2001) argues that venture
capital-backed companies stimulate the economy through creation of jobs,
exceptional growth rates, heavy investment, and international expansion. A
recent survey carried out by Hellmann and Puri (2000) across 149 recently
formed companies in the Silicon Valley suggests that VC stimulates innovative
activity. Thus, a start-up financed by venture capital needs less time to
bring a product to market. The report of the EVCA (2001) also shows that
venture-backed companies’ commitment to R&D expands Europe’s technical
expertise and resources, and strengthens its competitive position in world
markets. International competitiveness is also enhanced by significant growth
in export sales.
With this brief
discussion of some VC figures and their impact on innovation and economic
expansion we intended to highlight the importance, not only for start-ups, but
also for a nation’s growth and prosperity, of investment flowing back to
venture capitalists and to new ventures. We believe that improving the way in
which these firms are appraised could contribute to restoring investors’ trust
and increasing the level of financial inflows allocated to these activities.
3. The new business
environment and the need for more integrative approaches
The business
environment at the beginning of the twenty-first century is characterised by
an acceleration of changes already present in the preceding decade – global
markets, shorter innovation cycles, knowledge-driven organisations, the
leading role of end consumers, the importance of new information and
communication technologies in intra-firm and inter-firm relations and so on.
In such a context, the rapidity with which new knowledge must be assimilated
makes it difficult for a firm to generate such knowledge internally, forcing
it to create networks with suppliers, clients, and even competitors (Venkatraman
and Subramaniam, 2002). The external pressures of the environment thus push
organisations towards an increasing internal complexity (Lowendahl and Revang,
1998).
In the Knowledge Age,
when products and firms survive or die depending on their capacity to
effectively and efficiently manage their intangible assets, knowledge and
innovation capability have become the main value drivers of organisations.
However, the increasing importance of knowledge considerations does not simply
mean that a new variable ought to be introduced when developing or analysing
the firm’s value chains and strategies. It also means that market and
competence rules have been substantially modified making us rethink completely
the firm’s whole value chain. In this sense, the capacity of a firm to manage
its knowledge assets has become a key factor in the firm’s potential for
success and survival (Bontis, 1996), as well as its wealth creation capacity,
which is a sign of its people’s knowledge and competencies. While this fact is
particularly relevant for start-ups (because of their intangible nature), from
a venture capital viewpoint, the huge gap between book values and market
values recognises that the market also puts a premium on these capabilities.
This change in
strategic orientation towards knowledge assets requires a recognition that the
creation of a competitive advantage depends on the ability of a firm to
create, use, transfer, and protect its intangible assets – assets that are
scarce, non-tradeable, and difficult to imitate (Grant, 1996, 2002; Barney,
1991). In these changed times, the resource-based view (RBV) of assets emerged
as the natural answer within management theory, and with this view came a
series of models (including Skandia Navigator, Balanced Scorecard, and
Intangibles Assets Monitor) designed to manage this new form of capital.
Venture capital firms
pursued this process with particular intensity. They were the great drivers
and enablers of the innovative thrust of the mid-1990s (Lerner, 2001) and they
produced (generated?) unprecedented growth in stock exchanges worldwide.
However, when the economic “bubble” was dramatically punctured in 2000, these
same firms became the scapegoats. Questions arose as to whether the
information systems and methodologies in use produced realistic evaluations of
the likely success of start-up companies, and this led to a recognition of the
need to create sustainable business models (Aidar et al., 2001).
3.1 The need
for a new strategic approach
The RBV, at least as it
was conceived initially, does not offer a satisfactory answer to the creation
of sustainable competitive advantage, because it is notably static (Eisenhardt
and Sull, 2001; Eisenhardt and Martin, 2000) and/or because of its lack of a
suitable treatment of the firm-industry duality (Foss and Knudsen, 2001). A
more dynamic view therefore began to emerge (Spanos and Lioukas, 2002; Teece
et al., 1997). A similar process was observed in the field of intellectual
capital – giving rise to management and measurement models that were based on
the concept of dynamic capabilities (Teece et al., 1997), which gave greater
relative weight to the competitive business context in its evaluations. These
models approached this either through benchmarking the firm’s essential
competencies against those of the best world-class competitor (Viedma, 2000)
or through the introduction of a competitiveness factor in the valuation
calculus (Andriessen and Tissen, 2000).
However, the extreme
centrality of both the RBV and these early intellectual capital measurement
models in the firm’s resources and capabilities internally harms the concept
of a firm’s success in terms of good strategy formulation and implementation
(Grant, 2002) as it attempts to explain the creation of sustainable
competitive advantage as a cause-and-effect relationship between the “stock”
of these resources and the firm’s ability to generate such resources. To build
a corporate strategy with the RBV as the only theoretical foundation focuses
the firm unilaterally (and dangerously) on ”formulation” when, in fact, what
the market values is the result of the deployment of these unique resources
and capabilities through the firm’s specific actions. This is essentially a
problem of implementation and the activity-based view (ABV) of a firm as a
main theoretical approach. Although the present resources and capabilities of
a firm play a major role in the development of strategies for the creation of
competitive advantage (Spanos and Lioukas, 2002), being able to explain at a
given point in time a firm’s superior performance and greater market value
hardly orients that firm towards sustainability – unless there is an
appropriate consideration of what the company actually does with those
resources. Such an analysis requires other theories and approaches. The
concept of competitiveness, which is inseparable from the concept of
competitive advantage, demands a consideration not only of what assets are
necessary to generate a superior performance, but also of the process required
to carry this out (Man et al., 2002).
Finally, the fact that
firms transcend their own apparent boundaries (and those of their particular
industries) in searching for new opportunities means that the natural unit of
strategic analysis is no longer that of ”the firm”. Rather, it is a more
comprehensive unit that allows new configurations of value-creating factors
and processes. Amit and Zott (2001), for example, have proposed the “business
model” as an alternative unit, and have spoken of a new paradigm anchored in
strategy (value chains, strategic networks, and specific resources and
capabilities) and entrepreneurship.
4. The SGVM: theoretical
framework, main components, and functioning
The start-up general
valuation model (SGVM) is applied to a start-up firm without history, and to
its bundle of intangibles. The SGVM seeks to systematise a process whereby an
estimation of the probable success of such a start-up can be made with greater
confidence.
Any consideration of a
firm’s performance and its potential to obtain rents and create greater value
must take into account the presence of sustainable competitive advantage and
the concepts of competitiveness and competency. Competitiveness is usually
taken to mean superior performance vis-à-vis competitors, evaluated in the
long term. Competency is usually taken to mean the TMT’s individual and
collective competencies to lever the existing resources and competencies, and
to develop new ones, in a process of continuous learning. Although the term
”competitive advantage” has a relative and external nature, its construction
has mainly an internal focus – either on the firm’s stock of resources and
capabilities and/or on the actions it decides to carry out. In a global
knowledge economy, it is less easy to explain the differences among the
performances of firms only by differences in the possession of resources
(tangible or intangible). It is not only what the firm has (RBV), but what the
firm does (ABV) (Haanes and Fjestaldt, 2000) that will have an impact on the
value perceptions of consumers and other stakeholders, and ultimately on the
firm’s value.
In the case of
start-ups, the high failure rate observed during the early years means that
these considerations acquire an even greater importance. Because a start-up
does not have a history, and because it has not yet developed ties with the
environment, the deployment of resources and capabilities that it effects
today will more than any other factor determine its potential to attain
success. Therefore, any evaluation model used to capture the potential of a
given start-up to generate market opportunities, and to take advantage of
those opportunities, must necessarily involve both an RBV approach and an ABV
approach.
The SGVM takes into
account these different streams of thought and systematically improves the
start-up valuation process by considering its value-creation mechanisms. The
general scheme of the SGVM was developed as follows:
The premise
that a firm’s success results from good strategy formulation and
implementation (Grant, 2002);
For the
purposes of the model, strategy was defined, in its formulation and
implementation aspects, as the ”leading wire” around which resources,
capabilities, and activities are aligned in a dynamic exchange of information
and knowledge with the environment for the attainment of sustainable
competitive advantage that contributes to superior performance (Spanos and
Lioukas, 2002; Amit and Shoemaker, 1993); and
These
elements were deployed in two constructs that represent the SGVM’s basic
instruments of evaluation and analysis: (i) the SBMB, which evaluates the
start-up’s business model vis-à-vis the best world-class competitor (Viedma,
2000; Hedman and Kalling, 2001); and (ii) the TMTS, which aims to determine
the TMT’s potential to make the proposed business formula work effectively and
be correctly implemented, thus taking the start-up to fruition and profitable
growth (Erikson, 2002; Mayo, 2001; Ulrich, 1998; Herron and Robinson, 1993).
In broad terms, SGVM’s
content and objectives do not differ much from those deemed to be significant
by venture capitalists or investment banks. For the latter, the focus in the
due diligence stage is on the firm’s corporate strategy execution, followed by
management quality and credibility, strategy quality, innovation capability,
and finally the firm’s ability to attract and retain a competitive and
talented workforce (Andriessen and Tissen, 2000). All these elements are at
the very core of both SBMB and TMTS. Thus, SGVM’s main contribution is to
identify, deploy, and measure a bundle of intangibles that might account for
the start-up’s possible success, in a way that allows a systematic and
competitive assessment.
Figure 1 illustrates
this scheme.
Why do we value
separately the start-up’s business model and the top management team? After
all, the founding team is a part (albeit an essential one) of the
organisational resources and capabilities and therefore figures among the
SBMB’s objects of analysis. However, there exists a powerful reason that is
directly linked to the role the TMT plays in a start-up. The success of a
start-up is totally dependent on the competencies and commitment of the TMT,
and this capacity conditions the potential value created in the first instance
by the firm’s business formula. The TMT has the capacity to lever or destroy
the possible value embedded in the start-up’s business formula; it does not
matter how good the start-up’s strategy formulation is if the people in charge
of executing this do not have the competencies, personality characteristics,
and values required to bring the firm to fruition.
Both the SBMB and the
TMTS are established by extensive questionnaires that give rise to two
indices: the Start-up’s Business Model Index (SBMI) and the Top Management
Team’s Index (TMTI). These are later combined into a single measure, the
Start-up’s General Index (SGI). The evaluation is thus a two-stage eliminatory
process whereby the non-approval of the start-up’s business formula (as
determined by the SBMB) stops the whole process, thus precluding TMT
evaluation. (See Figure 2.)
Note: The “others” in
the circle refers to other elements, apart from the start-up’s potential, that
could be taken into account in the investor’s final decision (i.e. risk
profile, a particular investment portfolio structure, etc.).
4.1 Start-up
business model benchmark (SBMB)
The SBMB aims to
evaluate the business model in terms of its consistency with the firm’s
internal and external strategy. In doing so, it departs from the start-up’s
mission and strategic vision and develops an evaluation process in two stages:
It
identifies the start-up’s potential core competencies from the resources,
capabilities, and activities that the TMT intends to develop; it then
evaluates them against the present core competencies of the best world-class
competitor’s business formula (internal view); and
It
evaluates a series of factors, most of them common to those of the industry
competitive analysis of Porter (1985), with a special emphasis on the networks
that the firm develops (external view).
Identification and
evaluation of the start-up’s potential core competencies thus constitute the
main body of the analysis. This assesses the consistency or ”fit” between the
start-up’s intangible assets and the business model it has proposed; in brief,
identification and evaluation of the start-up’s potential core competencies
give credibility to the proposal. Nevertheless, the unit of analysis and
comparison is the business model. The index that is obtained at the end of the
process of benchmarking refers to this unit of analysis, and the other
components of the system of which the competencies are an essential part, and
has a largely explanatory value.
The SBMB’s main
components are shown in Figure 3. The present discussion considers only those
elements that represent a change from existing models, or those that assume
special relevance in the case of start-ups. For the remaining elements,
readers are referred to the two basic models that served as a source for the
development of certain aspects of the SBMB (Hedman and Kalling, 2002; Viedma,
2000).
The factors that
deserve some special attention are:
Industry.
Of special importance are considerations of the stage of the industry life
cycle and the environment’s relative stability or dynamism.
Location.
This evaluates the proximity to the market, whether the firm belongs to a
cluster, and so on. The social structure of the location’s surroundings plays
a key role in the opportunities perceived by the firm, and in the strategic
actions that it ultimately takes (Gulati, 1999). These matters are even more
significant in the case of start-ups – given given their recent creation.
Complementary business assets (Sullivan, 2000). The embryonic nature of a
start-up, without an established product and with an image under construction,
makes commercialisation an especially delicate process and a matter of great
importance for its future performance.
Networking.
This refers to the framework of relations that the firm weaves with its
environment in determining the scope of its products and in evaluating market
factors. “Network resources” (Gulati, 1999) have the capacity to lever the
total value created by the firm, in addition to being a permanent flow of
knowledge acquisition and source of learning, allowing it to share risks and
thus reach its objectives (Gulati et al., 2000).
Business
model. This has a somewhat different nature from those noted above, in that it
is a derived component. Its value could therefore be different from that which
results from the sum of its components – that is, it can increase as its
configuration becomes more difficult to imitate, to transfer, and to
substitute, (Zott and Amit, 2002). It is a key indicator of the TMT’s
strategic capacity.
4.2 Top
management team scoreboard (TMTS)
When venture
capitalists speculate on a start-up, they are, in fact, speculating on the TMT
and its ability to formulate and execute the business strategy. The TMTS is
therefore an instrument that is intended to contribute to venture capitalists’
investment decisions by providing the information required to determine
whether the TMT has the competencies, values, and attitudes necessary to
succeed in the implementation of the business formula (that has already
”proved” to be effective) – such that the investor stays within his or her
“return for risk” parameters.
Traditionally, the
evaluation of the potential of a start-up’s TMT includes an assessment of such
aspects as: (i) proven antecedents of its experience; (ii) capacity to execute
the business plan; (iii) known background; (iv) areas of expertise; (v)
leadership capability; (vi) industry knowledge and contacts; (vii) integrity;
and (viii) passion and dedication to the job. All of these elements are easily
transferable to the duality of competencies and commitment as reflected in
more structured theoretical approaches – under the concepts of intellectual
capital (Ulrich, 1998), talent (Jericó, 2001), or entrepreneurial capital (Erikson,
2002). Any attempt to evaluate the potential of the TMT to take the start-up
to fruition must incorporate an assessment of two elements: (i) the successful
implementation of the business model; and (ii) the presence of the necessary
vision and enthusiasm for establishing and maintaining the firm’s
competitiveness. In turn, the set of competencies and commitment that the TMT
brings to the start-up depends upon the values and attitudes of each of its
members. This constitutes the third and last component valued by the TMTS.
(See Figure 4.).
The TMTS is organised
around the axis of “competencies x commitment” of Ulrich (1998), and the
content of each factor is fundamentally an adaptation of the competency areas
of Man et al. (2002). The main difference from the approach of Man et al.
(2002) is that the TMTS, because it takes Ulrich’s definition of intellectual
capital as a proxy of the TMT’s potential success, considers “commitment” to
be a different factor from that of “competencies”, and analyses it within the
separate factor “commitment”. In relation to the measurement of the influence
of the TMT in the start-up’s performance, we consider Ulrich’s (1998) creation
of a multiplicative function of competencies and commitment to be more
accurate – for example, when compared with that of the sum of both elements as
stated in Mayo’s "Human Capital Monitor" (HCM) (2001). The achievement of a
superior performance requires the simultaneous presence of both elements. The
TMT’s competencies are the starting point of the firm’s success but its
commitment is the component that determines whether those competencies will be
effectively channelled to produce the expected results.
4.2.1 Competencies
and commitment
The great majority of
attempts to measure the influence of the TMT on a firm’s performance fall into
one of two groups: (i) those that are exclusively based on the behaviour of
the TMT’s demographic variables (sex, age, experience, education); and (ii)
those that analyse the characteristics of personality in an attempt to
establish a cause-and-effect relationship between both types of variables
(those relating to demography and personality and those of performance).
However, the lack of conclusive results within both the first group (van Olfen
and Boone, 1997) and the second (Herron and Robinson, 1993) makes it difficult
to justify a model that evaluates the TMT’s probable success only on the basis
of the predictive capacity of these variables considered in isolation.
In contrast, the TMTS
adopts a process approach and defines the competencies as the basic unit of
evaluation – an approach similar to that of Man et al. (2002) who analysed the
influence of the entrepreneur on the competitiveness of small to medium
enterprises (SMEs). This approach means that the model possesses greater
conceptual clarity and explanatory potential in assessing a firm’s potential
because it takes into account the personality characteristics, skills,
knowledge, experience, training, education, and background of individual TMT
members – rather than mere demographics.
Apart from the
conceptual differences noted above, and other minor ones of denomination; the
areas that the TMTS evaluates are essentially those of Man et al. (2002).
However, its contents (abilities, experiences, knowledge, and personality) are
the result of having adapted these components to the start-up’s specific
reality. The TMTS begins by identifying which abilities and personal
characteristics have greater influence on the start-up’s performance, and then
transfers them to five selected competency areas. Finally, the personality
characteristics that sustain that set of abilities are translated to Cattell’s
16PF to allow measurement. Because the model focuses on anticipating the
start-up’s performance, and because the degree to which a certain behaviour
(competency in action) leads to a better performance depends, in part, on
whether the firm’s specific environment demands that type of behaviour (Herron
and Robinson, 1993; Cooper et al., 1994), the TMTS introduces the concept of a
”competency adjustment factor” – a factor that weighs the relative importance
of each competency according to the objectives of the SBM and the start-up’s
environment. In favour of this ”adjustment factor” we could cite Baron and
Markman’s (2003) recent findings on entrepreneurs’ social competency and their
relevance to financial success. Interestingly, the authors conclude not only
that social competency does matter to the entrepreneurs’ financial success but
also that the type of abilities that are significant for that competency
varies according to the industry to which the firm belongs (i.e. social
adaptability was relevant for the cosmetics industry but it was not
significant for high-tech industry).
The TMTS reflects the
fact that the TMT, to be successful in translating the business formula to a
business recipe, must show competency in the following areas:
Opportunity. The promptness of the TMT to commit themselves to a new objective
and to take concrete action rapidly whenever a better opportunity emerges
(Brown et al., 2001).
Innovation.
Man et al. (2002) include this within the broad category of “conceptual
competencies”. Innovation evaluates the TMT’s knowledge and abilities with
respect to new products and technologies, and its capacity to create an
appropriate environment for innovation.
Networking.
This evaluates the TMT’s capacity to develop the start-up’s social capital, as
much as its own social capital. The importance of this competency is greater
the higher the level of networking in the start-up industry, which reflectsthe
factors assessed by the SBMB.
Management.
This is similar to the organisational competencies of Man et al. (2002). In
the case of a start-up, the TMT’s competencies in the financial, technical,
market development, and managerial areas are of great importance.
Strategic.
This refers mainly to the capacity of the TMT to establish, evaluate, and
implement the start-up’s strategy, and also its ability to introduce the
necessary strategic changes to maintain success. Its evaluation includes the
final score obtained by the SBMB.
Commitment is the other
key variable in the evaluation of the TMT’s likelihood of success. By analogy
with the SBMB (above) in which it was asserted that resources and
capabilities, in themselves, do not have the capacity to generate sustainable
competitive advantage (but that these result from the application of strategic
activities to the start-up’s core resources and competencies), it can be said
that the TMT’s level of commitment as applied to its set of competencies
determines the potential success of this group of people and, ultimately, of
the start-up.
This second factor of
commitment poses greater difficulties from an evaluation point of view. Ulrich
(1998) did not explore the measurement of this factor in any detail.
Commitment, per se, is not measurable, and it can be assessed only through
behaviour. It is a reflection of the abilities and the personality of an
individual faced with a specific objective or situation. Thus, the TMTS’s
method of approaching this assessment was to identify possible means of
estimating commitment in the theory and to relate these to Cattell’s 16PF to
allow measurement. Two factors are assessed in the model: (i) the professional
and personal strategic priorities of each of the TMT’s members at the moment
of start-up; and (ii) the sustained effort of which each individual is
capable. The first allows a determination of the extent to which the start-up
project is perceived to be capable of satisfying the person’s priorities.
Individual motivation is thus taken to be an approximation of individual
commitment. As Herron and Robinson (1993: 289) observed, “motivations
determine what abilities are exerted, when each one is exerted, and in what
amount it is exerted”. With respect to the second factor, the estimation of
the TMT’s sustained effort provides a measure of the capacity of individuals
to implement the start-up’s business model successfully, even in the face of
adversity.
The evaluation of both
elements gives rise to a commitment index that is later incorporated in the
TMTS final index.
4.2.2 Values and
attitudes
The incorporation of
values and attitudes creates a sort of ”supporting platform” that adds
consistency to the evaluation of competencies and commitment. In this, the
TMTS follows the HCM of Mayo (2001: 90) who stated that “The way in which the
core (personal behaviours, business and professional know-how and networks of
contacts) is demonstrated is then conditioned by the attitudes and values that
the person holds – these these being the most difficult to change.”
The values and
attitudes of the managers of a start-up have a direct influence on the
strategic decisions they make, and hence on the future of the organisation.
The inclusion of these two components (values and attitudes) into the general
scheme allows venture capitalists to determine whether the instrumental values
that underlie the TMT are consistent with the development of an organisational
culture that fits the business formula and the demands of the start-up’s new
competitive environment, and whether the values of the TMT are consistent with
those of the venture capitalist who is contemplating investment. The latter is
not a minor consideration, because an investment decision marks the beginning
of a long relationship – and the key to such a relationship is a shared set of
values to sustain this union. With regard to the TMT members’ personal values,
we gave special attention to “integrity” as it plays an essential role in
shaping the organisation’s proceedings and culture, and contributes to its
smooth functioning and strengthening of stakeholders’ confidence in the
organisation (Shaw, 1997), which is particularly relevant for a start-up,
whose image and reputation are just beginning to develop. On this particular
point, Kaptein’s (2003) “Diamond of managerial integrity”, through its
conceptualisation of ”the manager as a person of integrity”, as someone
authentic, reliable, and constructive, was of great help in the process of
identifying and depicting the “right” personality characteristics that might
contribute to measure this key element.
The main instruments
used to evaluate these factors are: (i) a questionnaire on values; and (ii) a
composition of personality factors (16PF-based) intended to assess the
presence of a positive attitude in the TMT’s members.
5. Limitations and future
research
One of the main
limitations of this work is the almost total absence of empirical research in
the field of start-ups. This means that many of the variables included in the
present analysis of start-ups (core competencies of TMTs and organisations,
commitment, attitudes) had to be deduced. Further research could therefore be
oriented towards in-depth studies of the development of start-ups from
conception to initial public offering or sale. Empirical evidence from such
studies would enable improvements to be made in the SGVM methodology. Some of
the issues to be addressed include: (i) the relevant competencies of a TMT for
this stage of the firm’s life; (ii) the relative weight to be accorded to
commitment in an estimation of the TMT’s success; (iii) the most appropriate
elements in a TMT’s profile; (iv) the adequacy and predictive capability of
the chosen personality characteristics to deduce TMT’s competencies in each
competency area; and (v) whether the overall approach of the SBMB (especially
the emphasis put on the identification of core potential competencies) is the
most appropriate approach to take for accurate prediction of a start-up’s
likely performance. Moreover, these points should be addressed if possible in
relation to both successes and failures.
More in-depth research
and analysis of the dynamics and specificities of start-ups is necessary if
the goal is to improve venture capitalists’ assessment processes and valuation
methods. The benefits are two-fold:
At a
macro-economic level, it could be said that the relevance of the subject is
established by the research scope itself (venture capital and start-ups).
Venture capital investment (especially at an early stage) is a particularly
dynamic subset of financial markets and of great strategic significance given
its positive impact on a region’s innovation capabilities, economic growth,
employment and quality of life.
At the
micro level of the venture capital firm, we could simply say that improving
knowledge in this area responds to a specific requirement of financial markets
–to be able to rely on better assessment and valuation methods.
6. Conclusion
The huge number of
bankruptcies among high-tech companies in 2000 turned the spotlight on
start-ups and the ways in which venture capitalists were making their
investment decisions. The weaknesses of the evaluation process included the
lack of a systematic approach, absence of rigour in gathering basic
information and excessive use of intuition. The SGVM, through its two
instruments (SBMB and TMTS), is an attempt to address the problem of
evaluation by assessing the same sources that are used in a start-up’s
value-creation process – the business formula and the TMT’s competencies and
commitment. In addition, because one of the main contributions of venture
capitalists to the healthy development of a start-up is the provision of
professional know-how and support to strategic decision making, the systematic
application of the SGVM could be a helpful tool which contributes to a
reduction in the financial risks associated with new ventures.
Special emphasis has
been placed on the TMT as a set of competencies and a source of commitment
that has the power to lever or to destroy the potential value created by the
start-up’s business model. The major improvement of the TMTS compared with
extant models is its incorporation of the measurement of personality factors
within the top management team, in addition to traditional estimation of
members’ skills and abilities.
The rapidity with which
globalisation and new technologies have changed the basis of competition has
confronted organisations with complex problems. The tackling of these problems
demands a combination of different approaches and theories. In such a setting,
a framework that brings together different streams of thought (RBV, AVB,
social capital, entrepreneurship, psychology, and so on) is likely to have a
better chance of correctly predicting the success or failure of a start-up.
The multidisciplinary nature of the SGVM is thus likely to improve the
risk-management capabilities of investors, and, ultimately, to improve the
allocation of economic resources for the well being of the global society in
which we live.
Finally, the collapse
of share prices in the second half of 2000, which still persists, makes us
believe that we could reasonably expect a higher level of commitment and
effort from academics, investors and entrepreneurs in order better to
understand firms’ value creation processes in the Knowledge Economy.
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