Impact of external investment on resource availability and competitive advantage in high potential start-ups (HPSUs)

ABSTRACTThe importance of the start-up/early stage business sector to the Irish economy is highlighted in the 2016 Action Plan for Jobs (APJ), where the Irish Government states its objective of creating 50,000 new jobs... [ view full abstract ]

ABSTRACT

The importance of the start-up/early stage business sector to the Irish economy is highlighted in the 2016 Action Plan for Jobs (APJ), where the Irish Government states its objective of creating 50,000 new jobs annually from 2016 to 2018. Importantly, eight percent of new jobs created are expected to emanate from start-up and early stage businesses (APJ, 2016). The importance of small businesses is not unique to the Irish economy as Storey (1994) noted that small businesses account for the majority of enterprises in all world economies. Wiklund and Shepherd (2005) state that “small businesses are important to most economies; therefore, investigation of their performance is a worthwhile scholarly endeavour”. This study is focused on a particular type of small business: the High Potential Start-Up (HPSU), and specifically, the impact of external investment on the availability of resources that contribute to the development of competitive advantage within the business. Mason and Harrison (2004) claim that during the start-up phase, most businesses experience persistent financial constraints, as they are funded by limited, informal sources of finance or bank debt. Yet, only a minority of firms require equity-based finance from providers such as Venture Capital firms (VCs), angel investors, other private and trade investors or state agencies. Typically, they are high potential businesses exploiting some form of innovation or engaging in R&D who require external investment in order to pursue their business goals  (Mason and Harrison, 2004; Barry et al., 2012). While there is disagreement amongst researchers that external investment leads to superior performance in early stage businesses, the role of external investment in the survival of young firms seems to be less contested.

Following a review of the pertinent literature, the author developed a conceptual framework as shown in Figure 1. The framework draws upon Resource Based View (RBV) theory to explain the motivations of the business promoter in seeking external investment, and explores the impact of this investment on resource availability in the HPSU. RBV theory is concerned with how strategically valuable internal resources within an organisation are coordinated to develop key capabilities that evolve into competitive advantages for the enterprise (Wernerfelt, 1984; Barney, 1991). Although, RBV is typically applied to large organisations, there is an opportunity to extend the theory to apply to HPSUs. A unique aspect of the proposed study is a focus on the perspective of the recipient of the funds; the HPSU. The HPSU owner strives to acquire specific resources that, once embedded in the firm, may enable the business to develop certain capabilities in order to build competitive advantage. Therefore, the formal research objective of this study is to “explore the impact that external investors have on resource availability within HPSUs in Ireland that may contribute to the development of internal sources of competitive advantage”. To address the research objective, three research questions were developed:

RQ1:  Why do HPSUs engage external investors to increase resource availability in the business?

RQ2:  What impact do external investors have on resource availability within HPSUs?

RQ3: How does increased resource availability within HPSUs contribute to the development of internal sources of competitive advantage?

Figure 1. Conceptual framework: resource impact of external investors on HPSUs

An exploratory interpretive multiple case methodology was adopted for this study in order to investigate resource availability in its natural context. As previously stated, the unit of analysis is at (HPSU) company level. In order to construct a description of the phenomena under study, the research uses in-depth interviews with CEOs/founders, and group interviews with employees and co-founders. Case candidates were identified through an analysis of Enterprise Ireland’s (EI) directory of HPSU businesses (Enterprise Ireland, 2016), all of which EI supported during the period of 2013-2016. Seven companies in receipt of EI and private sector investment agreed to participate in the study. Ethical approval from the researcher’s host University was granted, and data collection commenced with a pilot study in June 2017.

The pilot study provided the researcher with insights from a number of perspectives within the HPSU. Perspectives were captured from the company CEO and from co-founders on what happened in the HPSU before and after securing external investment. The initial findings indicate that the research methods used are appropriate to achieve the research objectives. Specifically, the three RQs have been addressed, notwithstanding the acknowledged lack of data saturation possible in a single case. The key themes emerging from the pilot study are: 1) goal setting and opportunity recognition, 2) resource constraints and resource acquisition and 3) developing sources of competitive advantage. The findings from the completed study will be available in Q2 of 2018.

This study extends existing theory and research on investment in early stage businesses (Rosenstein et al., 1993; Jain and Kini, 1995; Manigart and Van Hyfte, 1999; Bottazzi and Da Rin, 2002), which generally focused on firm performance and survival, by exploring what happened, following receipt of investment, from the investee perspective. Prior studies (Cooper et al., 1994; Carpenter and Petersen, 2002; Wiklund and Shepherd, 2005)  have mostly looked at firm resources as either a predictor of future growth, or they have analysed enterprise performance and survival retrospectively. Such studies have not explored the impact of external investors on the availability of resources that may become sources of competitive advantage for the early stage business. This study extends the application of RBV theory to explain the motivation of the HPSU owner to engage with external investors, and how securing investment might impact the availability of firm resources. These include physical resources and other non-financial resources such as human and social capital, reputation in the market and technical knowledge which ultimately contribute to the development of internal sources of competitive advantage.

From a practitioner perspective, insights gained from this research will benefit early stage businesses in Ireland. It provides an understanding of strategic entrepreneurial practices such as engaging with external investors, tailoring investment proposals to specific investor types, and understanding how resources such as finance, technology and social capital are acquired. These in turn contribute to the development of competitive advantage within early stage businesses and positions them well in responding to dynamic changes in the business landscape. This research will also benefit state, semi-state and private advisers to early stage businesses seeking external investment to fund resource acquisition.

Key Words:  Early stage business; entrepreneurial finance; resource based view; small business management; competitive advantage; case study

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