GROWTH AND EARLY RETURNS

IN TECHNOLOGY-BASED
MANUFACTURING VENTURES

KENNETH E. MARINO AND ALEX F. DE NOBLE

San Diego State University

This study examines the variance in sales growth and discounted cash flows of 28 firms
that entered into the manufacture of technology-based industrial goods via a public
offering of securities. Explanatory variables include characteristics of industry strnc-
ture, market strategy, and the experience of the management team. Results indicate that
elements of market strategy (segmentation, sales extensions, and product performance
advantages) have the greatest influence on NPV. Annual sales growth, while influenced
by industry structure, is best explained by a combination of industry structure (concen-
tration and number of direct competitors) and strategy variables. Almost 40% of the
variance in each criterion can be explained.

INTRODUCTION

Factors which influence the success of new firms have been identified in a variety of stud-
ies in recent years. These efforts have involved sets of independent variables that capture
the background and traits of the founders, the product/market strategy, the uniqueness of
the product offering, and characteristics of the industry structure. Criterion variables have
included sales growth, growth in employment, time to market with the first products,
“survival,” and a host of financial performance measures. In their extensive review of the
new venture performance literature, Cooper and Gimeno-Gascon (1992) conclude that the
interpertation and generalization of previous results is confounded by four factors:

1. The lack well-developed causal relationships to guide the selection of variables;

2. Wide variation in the age and types of iinns studied;

Direct all correspondence to: Kenneth E. Ma&o, Department of Management, College of Business Administra-
tion, San Diego State University, 5500 Campanile Drive, San Diego, CA 92182-8238; Alex F. De Noble, Depar-
ment of Management, College of Business Administration, San Diego State University.

The Journal of High Technology Management Research, Volume 8, Number 2, pages 225242
Copyright0 1997 by JAI Press, Inc.
All rights of reproduction in any form reserved.
ISSN: 1047-8310.
226 THE JOURNAL OF HIGH TECHNOLOGY MANAGEMENT RESEARCH VOL. g/NO. 2/ 1997

3. The use of a diverse array of performance measures; and

4. The use of univariate analytical methods.

In this study we sought to avoid these confounding factors. Specifically, we examine

the sales growth and discounted cash flows for a three year period following the initial
public offering of securities. The 28 subject firms are homogeneous in terms of a technol-
ogy-based manufacturing orientation, industrial customer focus, age, and stage of devel-
opment. Explanatory variables include structural characteristics (industry concentration,
number of competitors, buyer concentration), market strategy characteristics (segmenta-
tion, distribution control, number of related product lines, use of sales extensions, control
of patents, relative performance advantage), and experience of the management team
(years of related industry experience, prior start-up experience).

THEORETICAL BACKGROUND AND HYPOTHESES

A Framework for Evaluating new Venture Performance

Our focus on structure, strategy, and management team characteristics was informed by
a diverse literature. We have organized our review around four different perspectives
regarding venture performance in an effort to explicate our motivations in variable selec-
tion and hypotheses. A first perspective in this literature is directed at description of the
conditions under which firms grow and survive. Models of venture creation (Gartner,
1985) and new venture performance (Sandberg, 1986) are illustrative of this perspective.
Sandberg’s model identifies entrepreneurial experience, strategy, and industry structure as
the principal determinants of performance. Gartner’s four sets of variables: characteristics
of the individuals, the environment, the organization, and the entrepreneurial process, are
quite similar. Industry studies of minicomputers (Romanelli, 1987), semiconductors
(Eisenhardt & Schoonhoven, 1990), and fruit juice distribution (Duchesneau & Gartner,
1990) have identified industry conditions, strategy decisions, and management team char-
acteristics as factors related to venture performance. A second perspective evident in this
literature is that of the venture capitalist. Because their a priori judgements concerning the
prospects of new ventures are based on extensive experience, a number of studies have
sought to understand their decision processes. Studies by Tyebjee and Bruno (1984),
Macmillan, Siegal and SubbaNarashima (1985), and Macmillan, Zemann and Subba-
Narasimha (1987) developed factor structure solutions to the criteria used by VCs in the
evaluation of proposed ventures. These factors have been labeled management capabili-
ties, market attractiveness, competitive exposure, environmental threat resistance, and so
on. Hall and Hofer (1993) sought to extend this line of inquiry to separate stages of the VC
investment decision, with similar results. Roure and Keeley (1990) analyze the returns
earned by two venture capital funds. They were able to explain almost 60% of the variance
in returns by examining buyer concentration, competition, product superiority, quality of
the technical plan, and the completness of the management team.
Managers of business incubators offer a third perspective in the new venture literature.
These individuals are actively engaged in screening new venture proposals for selection
as members of their incubator facilities (Smilor & Gill, 1984). Presuming the success of
an incubator is contingent on the success of its members, Lumpkin and Ireland (1988)
developed a list of “critical success factors” grouped under three headings: financial
Technology-Based Manufactuting Ventures 227

ratios, personal characteristics of the management team, and market factors. Once they
were assessed by a group of incubator managers, a multiple discriminant solution
revealed evaluative dimensions similar to the VC research. A fourth perspective found in
the new venture literature is that of the normative strategy researcher. Studies that
embrace the structure+onduct-performance paradigm have permitted several conclu-
sions regarding new venture performance to be drawn. Structural characteristics including
customer concentration, product heterogeneity, and the growth stage of industry evolu-
tion have all been associated with superior new venture performance (Biggadike, 1979;
Hobson & Morrison, 1983; Sandberg, 1986). Venture strategies which emphasized differ-
entiation based on superior quality and service were also related to venture success
(Hobson & Morrison, 1983; Sandberg, 1986; Robinson, 1990). A final category of vari-
ables involves the skills of the entrepreneur, including the ability to accurately perceive
the environment and the ability to select and motivate the best people for particular jobs
(Hofer & Sandberg, 1987).
While each of these perspectives employ some idiosyncratic characteristics, common
sets of variables are apparent. Our purpose here is to evaluate the explanatory power of
three sets of variables which constitute the industry structure, the product/market strategy
of the firm, and the management team. Because growth and profitability are desirable but
not always simultaneously obtainable, we employ both forms of criterion variables.
Differential expectations, where justified, are pointed out below.

Industry Structure Characteristics

Three aspects of industry structure were examined in this research: industry concentra-
tion, buyer concentration, and the number of direct competitors faced by the firm.

Industry Concentration. The extent to which sales are concentrated among industry
members has been associated with increased profitability in a number of empirical
settings. Capon, Farley & Wind (1990) in their meta-analysis found over 1100 tests in
over 100 articles, the preponderance of which indicated a positive relationship. Industry
concentration and new firm growth is less clear. Eisenhardt and Schoonhoven (1990)
argue that concentrated industries have large competitors with entrenched positions which
are difficult for the newer firms to dislodge. This expectation of a negative relationship
between concentration and new firm growth was not supported in their study of the semi-
conductor industry. In a recent study of new German manufacturing firms, Wagner (1994)
also hypothesized that in concentrated industries new firms would find it more difficult to
grow, and therefore have higher failure rates. His study involved a broad range of firms
from the manufacturing sector, but he could find no support for the hypothesis. An alter-
native expectation might be formulated on the premise that customers in a concentrated
industry may welcome a new vendor as a means of moderating the pricing discretion of
the industry leaders. Additionally, the new firm may well focus its resources on a single
segment ignored by the incumbents of a concentrated industry, thereby promoting its
initial growth. This explanation may be even more persuasive in technology-based envi-
ronments where new entrants may enjoy certain competitive advantages due to technolog-
ical achievements. This would force industry imcumbents to defend their position from
technologically savy new entrants. Due to this conflicting logic and absence of empirical
evidence, we offer no specific expectation regarding growth and concentration.
228 THE JOURNAL OF HIGH TECHNOLOGY MANAGEMENT RESEARCH VOL. S/NO. 211997

Buyer Concentration. Concentration of sales among a few customers is generally

associated with a loss of bargaining power leading to pressure on profit margins in
competitive strategy scenarios. However, in the new venture situation, close links with a
few large customers will minimize selling expenses, establish legitimacy in the industry,
and reduce the performance ambiguity that other potential customers may experience.
Indeed, one conclusion of the venture capital research is that demonstrated market
acceptance is crucial to new venture performance (Macmillan et al., 1987). Empirically,
Duchesneau and Gartner (1990) found that the successful juice distributors in their study
were more likely to serve concentrated customers. Roure and Maidique (1986) also report
that higher buyer concentration was associated with better performance in their study of
electronics firms. In general, in emerging technology-based industries, strong linkages
between new firms and large, prominent buyers serve to increase the prospects that the new
firm’s products will be adopted as industry standards.
Roure and Keeley (1990) report a u-shaped relationship between buyer concentration
and returns. The relationship is positive through lower levels of concentration, but
becomes negative at higher levels of concentration (i.e., less than 30 customers). We
expect buyer concentration to be associated with both growth and profits in the newer
fillIlS.
Direct Competition. The number of direct competitors is a reflection of the level of
competitive rivalry expected within the industry. The greater the number of direct compet-
itors the more likely a competitive response. Several studies have reported a negative rela-
tionship between expected competition and new venture performance (MacMillan et al.,
1987; McDougall & Robinson, 1988; Sandberg & Hofer, 1987; Roure & Keeley, 1990).
While at least two studies found no relationship between number of competitiors and
performance (Eisenhardt & Schoonhoven, 1990; Woo, Cooper, Dunkelberg, Daellenbach
& Dennis, 1989), we expect the number of existing competitors to exhibit a negative rela-
tionship with both growth and returns. This expectation would hold in both emerging
industries with multiple technical solutions vying for acceptance, and in tecnology indus-
tries in which the industry standards have been defined.

H-1A: Industry concentration will be positively related to returns.

H-1B: Buyer concentration will be positively related to firm growth and

returns.

H-1C: The number of direct competitors will be negatively related to firm

growth and returns.

Product/Market Strategy

The product/market strategy captures the decisions made by the management team
regarding their competitive positioning. The objective of these decisions is, of course, to
establish a sustainable competitive advantage. A number of studies have evaluated the
effects of various characteristics of a firm’s product and approach to the market on
subsequent performance of established firms (Dess & Davis, 1984; White, 1986; Miller,
1988; Robinson & Pearce, 1988; Calingo, 1989; Nayyar, 1993). Motives for the vari-
ables studied can be traced back to Porter’s discussions of the dimensions of competi-
tive strategy and the generic strategies of cost leadership, differentiation, and focus
(1980). Here we considered the use of segmentation, the use of sales extensions, control
Technology-Based Manufacturing Ventures 229

in the distribution channel, breadth of related product lines, control of patents, and rela-
tive product advantage.

Use of Segmentation. The design and delivery of products to different customer

segments is reflected in the depth of product lines and the number of distribution channels
employed. Such decisions are expected to enhance customer acceptance by more closely
meeting the product attributes of purchase behaviors of several different segments. Deep
product lines may also serve to deter entry by establishing the firm in many segments
(Schmalensee, 1978; Brander & Eaton, 1984; Raubitschek, 1987). Consequently, we
expect segmentation to be associated with increased growth. However, the segmentation
decision exposes the firm to increased production, inventory, and distribution costs which
we expect to adversely affect profitability. Similar arguments and expectations can be
made for the use of sales extensions, and the control of distribution.

Use of Sales Extensions. Sales extensions such as financing, consulting, staff train-
ing, repair and other forms of after-sale support represent price adjustments and the reduc-
tion of switching costs to the customer, thereby reducing resistance among first time
buyers and increasing growth (Davis, Hills, & LaPorge, 1985). These extensions are a
particularly valuable competitve tool in technology-based industries where customer
education and support activities are critical. However, due to their direct influence on
profit margins, the use of service extensions is expected to reduce profitability.

Control of Distribution. The control of distribution channels represents an integra-

tion decision. Low control in distribution involves the use of agents and manufacturer’s
representatives while high control involves a corporate sales force. The ability to control
the presentation of competitive products and the information content at the point of sale
are the advantages of distribution control. Increasing control by supporting a network of
distributors or hiring a corporate sales force signals commitment to the line and its contin-
ued development. Hills and LaPorge (1992) have hypothesized that such control is related
to new venture success. While increasing costs, control is expected to enhance the ability
to reach target customers and to communicate product attributes.

H-2A: The use of segmentation will be positively related to growth and

negatively related to returns.

H-2B: The use of sales extensions will be positively related to growth and
negatively related to returns.

H-2C: Control of distribution will be positively related to growth and nega-

tively related to returns.

Related product lines, patent protection, and superior product performance are manage-
ment decisions which are expected to enhance both performance criteria.

Number of related product lines. Multiple product lines offer additional revenue
streams and considered advantageous in that they may lead to cost economies through
resource sharing and tecnology leveraging (Panzar & Willig, 1981; Teece, 1980).
Resource sharing usually occurs only across product lines related by technological simi-
230 THE JOURNAL OF HIGH TECHNOLOGY MANAGEMENT RESEARCH VOL. S/NO. 2/ 1997

larities (e.g., raw materials, production capacity, and internal product design features) or
related by marketing similarities (e.g., channels, marketing programs).

Control ofParents. Patents protecting either processes or design characteristics are

likely to yield pricing flexibility through cost containment or product differentiation. In
either case, we would expect patent control to enhance profitability. This is especially
true in situations where the firm has been successful in getting its technical designs
accepted as industry standards. Competitors must now invest heavily to design around
proprietary aspects of the product. Because cost advantage or differentiation can be used
to attract customers, we would expect this aspect of the product/market strategy to also
contribute to growth.

Relative Product Pegormance Advantage. Having a performance advantage over

the existing product offerings should provide a firm basis for differentiation. This, in turn,
should offer performance effects similar to the control of patents. These expectations are
consistent with the results of Roure & Keeley (1990) who report positive effects of prod-
uct superiority on returns. Robinson (1990) offers similar evidence of a performance
advantage having a positive influence on market share in start-up situations. Eisenhardt &
Schoonhoven (1990) hypothesize that the degree of technical innovation in the product
should be related to growth. While evidence of a sustained effect could not be found in
their semiconductor industry study, we feel the logic remains persuasive.

H-2D: The number of related product lines will be positvely related to

growth and returns.

H-2E: Control of patents will be positively related to growth and returns.

H-2F: A relative product performance advantage will be positively related

to growth and returns.

Management Team

Implementation of a venture strategy, whether an independent startup or an internal

corporate venture, requires that a number of decisions be made under conditions of uncer-
tainty. The experiences of the new venture management team are presumed to reflect their
ability to make such decisions in a way that enhances performance.

Related Industry Experience. The greater the number of years of experience in

related technical industries, the more likely the management team will be able to antici-
pate and react to changing business conditions. This experience should also enhance the
ability of the management team to plan and to control costs and adapt rapidly to dynamic
industry change brought on by a continuous stream of technical improvements. We
might, therefore anticipate that experience will improve both growth and profits. Von
Hipple (1977) found that the venture team’s prior experience was related to growth in
corporate ventures. Box, White and Barr (1993) report that years of industry experience is
related to empolyment growth. Brush and Hisrich (1988) and Neiswander and Drollinger
(1986) offer similar evidence regarding growth in new firms. In addition, Hoad and
Rosko (1964) found that experience was related to profitability. However, several studies
found no relationship between performance and industry experience (Macmillan,
Technology-Based Manufacturing Ventures 231

Zemann, & SubbaNarasimha, 1987; Van de Ven, Hudson & Schroeder, 1984; Mayer &
Glodstein, 1961). Although the empirical history is mixed (Cooper & Gimeno-Gascon,
1992) we expect prior technology-based industry experience to be positively related to
growth and profits in new ventures.

Prior New Venture Experience. In addition to related industry experience, it can be

expected that if management team members had worked in previous startup situations, the
chances for success might be increased. Such prior experience would help them anticipate
problems encountered in new firms and make decisions accordingly. Stuart and Abetti
(1987) and Chambers, Hart and Denison (1988) offer support for this expectation. Box,
White and Barr (1993) report a positive correlation between prior startups and employ-
ment growth in their survey of new manufacturing firms. Doutriaux and Simyar (1987)
however, found no relationship between prior entrepreneurial experience and sales growth
in their study, and Reynolds and Miller (1989) found no relationship with firm “survival.”
These studies employ diverse criteria and, are therefore difficult to interpert. We feel that
prior startup experience prepares managers for operating in a resource constrained setting
with broadly defined tasks which should help prioritize demands and achieve more rapid
growth and better profitability.

H-3A: Average number of years of related experience among the manage-

ment team will be positively related to growth and returns.

H-3B: The proportion of the management team with prior new venture
experience will be positively related to growth.

METHODS

Subject Firms and Data Sources

Subject firms are engaged in the manufacture of technology based products for indus-
trial customers. They manufacture surgical, medical, and dental instruments (SIC 384;
50% of sample), navigation and guidance systems and instruments (SIC 381; 21%)
laboratory apparatus and controlling instruments (SIC 382; 18%), photographic equip-
ment and supplies (SIC 386; 7%), and ophthalmic goods (SIC 385; 4%). Each of the
subject tirrns went public during the years 1981 to 1983. The firms produce a wide
range of products offered to a broad range of customers. Products include DNA synthe-
sis instruments, computerized testing systems for cardiopulmonary functioning, pace-
makers and other implantables, strip chart recorders, infrared sensing devices, and a
variety of laser applications.
The decision to focus on the initial public offering (IPO) of a firm as an appropriate
time to evaluate a new firm was made for two reasons. First, at the time of the IPO a firm
is usually beyond the development stage and in operation on at least a limited scale. We
sought firms that were poised to fully implement their venture strategy with the infusion
of funding. Firms that were using the IPO as an exit strategy for initial shareholders were
eliminated. Each subject firm retained at least 80% of the IPO proceeds in the firm as
opposed to compensating selling shareholders. In fact, all but four of the subject firms
retained 100% of the IPO proceeds. The subject firms ranged in age from 1 to 16 years;
232 THE JOURNAL OF HIGH TECHNOLOGY MANAGEMENT RESEARCH VOL. S/NO. 2/ 1997

the average age of the firms at the time of their IPO was 5.8 years. This is consistent with
the new venture definition espoused by Biggadike (1979) and others (Miller & Camp,
1985; McDougall & Robinson, 1990) of an eight year cutoff for a “new” venture.
The second reason we choose to focus on the IPO time period is the availability of
secondary data. By seeking equity funds in public markets, each firm was obligated to
abide by reporting requirements which constitute our data sources.
Two data sources were employed here. The first source was the prospectus filed by the
company prior to SEC approval of the securities offering. The documents were obtained
through a variety of sources including direct contact with the company, research depart-
ments of brokerage houses, and a commercial data storage and retrieval firm (Disclosure
Inc.). The prospectus contains a detailed description of the companies current product
lines, sales efforts and overall business strategy. Due to SEC scrunity and potential liabil-
ity for inaccurate disclosure, these documents can be viewed as reliable (Marino, Castaldi,
& Dollinger, 1989). The second source of data was the 10K report filed annually by each
publicly traded firm. Performance data indicating growth and returns were drawn from
these reports.
Approximately 72 firms participating in the subject SIC codes went public during the
study period. Of those firms, 37 remained independent and survived for three years
following their successful IPO. Nine of the surviving firms failed to meet the 80% proceed
retention criteria we applied. The final sample is, therefore, composed of 28 firms that
remained operating and independent during the three year performance period following
their IPO and which met the proceeds retention standard.

Variables

Independent Variables. All independent variables with the exception of industry

concentration were drawn form the firm’s offering prospectus. The operational definitions
and descriptive statistics are presented in Table 1.

Dependent Variables. As Cooper and Gimeno-Gascon (1992) note, the variety of

performance measures employeed in the new venture literature complicates the compari-
son of results across studies. Here we chose objective performance measures which are
easily calculated to facilitate comparability. In order to recognize both the magnitude and
timing of returns, we computed the net present value of the public shareholders investment
following the three years of operations. Cash flows were discounted at a constant 25% rate
with the IPO proceeds treated as a negative cash flow. In this sample, the average NPV
was negative $9.1 million, with a standard deviation of $29.4 million.
Growth in sales is the most commonly used measure of firm growth in entrepreneurship
research (Hoy, McDougall, & Dsouza, 1992). In this study we evaluated growth as the
average annual growth in sales over the three year post-IPO period. This was computed by
averaging the year-to-year growth rates. The average firm in this sample enjoyed annual
growth in sales revenue of 86%, with a standard deviation of 150%.

RESULTS

Table 2 presents the intercorrelation matrix among the variables. Within each set of inde-
pendent variables, there is little evidence of multicollinearity. There are no significant
Technology-Based Manufacturing Ventures 233

TABLE 1
Variable Definitions And Descriptive Statistics
Variable Definition Mean S.d.
Industry Concentration Herfindahl-Hirschman Index of 50 largest firms 624 517
(ICONj
Buyer Concentration Types of customers served: .28 .46
(BUYCON) Numerous small customers = 0
Limited large customers = 1
Number of Direct Competitors Actual number as reported in the prospectus 7.0 5.7
(DIRCOMP)
Use of Segmentation Based on the depth of the deepest product line 2.5 1.1
(SEGMT) and the number of distribution channels in use:
One item/ one channel = 1
2-5 items/ one channel or
One item/ two channels = 2
>5 items/ one channel = 3
>5 items/ two or more = 4
Number of Related Product Lines Actual number as reported in the prospectus 1.9 1.0
(PLINES)
Use of Sales Extensions Extent to which the firm offers after-sales 0.2 0.3
(SEXT) support services:
None (except routine warranty service) = 0
One or more services offered = 1
Control of Patents Does the firm have control of patents protecting 0.5 0.5
(PATENT) product or process technology?
No=0
Yes= 1
Relative Performance Advantage Management opinion of the performance attributes 0.3 0.4
(PERFAD) of their product offering:
Parallel performance to existing products = 0
New product or improved over existing products = 1
Control of Distribution Extent to which the firm can control the principal 2.3 0.7
(DCONT) distribution channel:
Manufacturer’s Reps = 1
Distributors = 2
Direct sales force = 3
Management Team Experience Sum of the years of related industry experience for 6.7 3.4
(AVGEXP) each management team member, divided by team size.
Prior New Venture Experience Percentage of the management team members 14.2 22.3
(PRIORSU) who had worked in a previous new venture.

relationships among the structural measures and the two management team variables are
independent of each other. Among the strategy variables, there is one significant correla-
tion. While strict independence among the independent variables is desirable, it is most
unlikely in the study of strategy content. The observed relationship is quite sensible: the
control of patents is positively related to the existence of a relative product performance
advantage. However, relationships across sets of independent variables do exhibit a poten-
tial for distortion. Distribution control is correlated with two of the three industry structure
measures. The number of direct competitors is positvely related to the number of product
lines, and the average experience of the management team is related to the use of sales
 TABLE 2
Intercorrelations Among Variables
1 2 3 4 5 6 7 8 9 10 II
ICON
2 BUYCON .20
3 DIRCOMP -.09 -.24
4 SEGMT .oo -.28 .14
5 PLINES .07 -.13 .37* .31
6 SEXT -.03 .03 .oo .17 .13
7 PATENT -.30 .02 -.25 -.22 -.ll .13
8 PERFAD .14 .17 -.29 -.26 -.30 .06 .44”
9 DCONT .33* .41* -.19 -.08 -.09 .18 .02 .23
10 AVGEXP .lO -.16 .23 .30 .lO .33 -.17 -.09 -.Ol
I1 PRIORNV -.13 -.04 -.19 -.16 -.16 -.OS .03 -.lO -.28 -.25
12 NPV .12 .ll -.03 -.23 -.16 -.55* -.15 -.30 -.18 .Ol .09
13 ASG .47* .03 .09 .19 -.06 -.03 .I.5 .19 .24 .16 -.25

Note: *p<.o5;**p<.o1
Technology-Based Manufacturing Ventures 235

TABLE 3
Results Of Regression Analysis For NPV Of IPO Proceedsa
Model I Model 2 Model 3 Model 4
INDUSTRY
ICON .I0
BUYCON .lO
DIRCOMP .Ol

STRATEGY
SEGMT -.20 -.29*
PLINES -.15
SEXT -.41** -.51***
DCONT -.04
PATENT .Ol
PERFAD -.36* -.3 1**

MGT TEAM
AVGEXP .03 .25
PRIORNV .lO

? .02 .44 .Ol .48

adj 2 .oo .27 .oo .38

F 0.17 2.63** 0.11 5.00***
Note: a Values shown are standardized regression coeffkients
*p<.10;**p<.05;***p<.01.

TABLE 4
Results Of Regression Analysis Foraverage Annual Sales Growtha
Model 1 Model 2 Model 3 Model 4
INDUSTRY
ICON .49** .66***
BUYCON -.04
DIRCOMP .13 .33*

STRATEGY
SEGMT .32 .33*
PLINES -.06 -.27
SEXT -.15
DCONT .26
PATENT .17 .47**
PERFAD .13

MGT TEAM
AVGEXP .12
PRIORNV -.14

t-2 .23 .18 .04 .49

adj 2 .ll .oo .oo .31
F 2.44* 0.73 0.55 4.00***
Note: a Values shown are standardized regression coefficients.
*p<.10:**p<.05;***p<.01.
236 THE JOURNAL OF HIGH TECHNOLOGY MANAGEMENT RESEARCH VOL. g/NO. 211997

extensions. We proceeded with the analysis, retaining all the original variables, with the
expectation that most results would not be subject to distortions due to multicollinearity.
The hypotheses were tested by regressing net present value of the IPO proceeds follow-
ing three years of operations, and average annual sales growth over the same three year
period, on combinations of the independent variables. Each criterion was regressed on
each set of independent variables (Industry, Strategy, Management Team) in models 1, 2
and 3. Model 4 represents a reduced model which yields the highest adjusted ?. These
results are presented in Table 3 and Table 4.

Results on Industry Structure Hypotheses

Industry concentration is not related to returns, as we expected (HlA). Concentration is

however significantly related to sales growth. While we offered no hypothesis regarding
this relationship, these results support the argument that receptive customers in concen-
trated industries might encourage and purchase from newer entrants.
There is no support for our hypotheses regarding buyer concentration (HlB) or the
number of direct competitors (HlC).
While buyer concentration has no effect, the number of direct competitors works in the
opposite direction of our expectations on sales growth when combined with the strategy
variables (model 4 of Table 4).

Results on Product/ Market Strategy Hypotheses

Several of the strategy variables were expected to stimulate sales growth at the expense
of returns. These data are supportive of most of those expectations. The use of segmenta-
tion (H2A) is positively related to sales growth and significant in the reduced model.
Segmentation exhibits a significant negative relationship with NPV.
The use of sales extensions (H2B) has a strong and significant negative effect on
returns. The positive effect we expected on sales growth cannot be detected from these
data. Although not significant, the coefficient is in the opposite direction. Control of distri-
bution (H2C) works as expected with sales growth, but never reaches significance. There
is no evidence that control of distribution compromised the returns earned by these firms.
The remaining strategy variables were expected to support both sales growth and
returns. With the exception of patent control being associated with rapid sales growth, our
expectations cannot be supported among these firms. Control of patents (H2E) is related to
increased sales growth and exhibits one of the strongest effect in the reduced model on
that criterion. The same variable is largely independent of NPV.
The number of related product lines (H2D) is not significantly related to either crite-
rion. In the reduced model on sales growth, it approaches significance but in the opposite
direction of our expectation. Instead of stimulating sales growth, the number of related
product lines tends to inhibit the rate of sales growth. Perhaps in these newer firms,
spreading scarce selling resources across multiple product lines is not as effective as
concentrating resources in support of fewer lines.
A relative performance advantage over existing products offers no particular stimulus
to sales growth and poses a liability to returns (H2F). The latter result is significant across
models, and quite the opposite of what we expected. This implies that a performance
Technology-Based Manufacturing Ventures 237

advantage may require additional selling expenses and/or an inability to value price during
the early years.

Results on Management Team Hypotheses

Despite the acknowledged importance of the founding managers reflected in the litera-
ture and the empirical results cited earlier, we detected little support for the management
team hypotheses among this group of firms. The average years of related industry experi-
ence enjoyed by the management team (H3A) is independent of the sales growth. On the
NPV criterion, average experience does approach significance in the expected direction.
The proportion of the management team that have prior experience in a new venture
(H3B) is, similarly, unrelated to either criterion. It must be concluded that these forms of
experience are poor predictors of subsequent success in these firms.

DISCUSSION

This research is intended to contribute to and extend the empirical understanding of new
venture performance in several ways. First, we’ve studied a group of firms that are homo-
geneous in their stage of development. These firms have each taken an idea and demon-
strated the commercial potential to the extent that they sought and received outside
investment. Regardless of their age, each firm is at the point in its development that
required them to attract and invest substantial resources to spur further growth. Second,
we sought to evaluate a more robust representation of the strategy decisions new venture
managers make than previous empirical studies. We’ve measured six elements of firm
strategy that are conceptually distinct and, for the most part, empirically independent
among the sample firms. Third, in this study we employed multiple performance criteria.
While it is generally acknowledged that growth and profitability are legitimate objectives
in a new firm, earlier efforts focus on one criterion or the other. Finally, we’ve avoided the
limitations of a single industry study. By restricting our focus to technology-based manu-
facturing firms serving industrial customers, and measuring the aspects of industry struc-
ture deemed theoretically relevant, our sample can cross industry boundaries and make the
results more generalizable.

Predicting Early Returns

Firms in this sample that enjoyed the greatest returns in the three year performance
period choose to compete with little recognition of different customer segments. Their
principal product line tended to have little depth, distributed through a single channel. The
firms eschewed after-sales services, offering familiar products with performance attributes
that parallel those of the existing competitors. This “no frills” profile is consistent with a
cost leadership posture.
Product superiority was positively related to the internal rate of return in the Roure and
Keeley (1990) study of the firms funded by venture capitalists. Of course, product differ-
entiation has a rich history in strategy research in general and new venture research in
particular (Hobson & Morrison, 1983; Sandberg, 1986; Robinson, 1990). These appar-
ently conflicting results may well be the result of our crude dichotomy of the construct.
We reserved the performance-advantage category for those products that represented new
238 THE JOURNAL OF HIGH TECHNOLOGY MANAGEMENT RESEARCH VOL. 8/NO. 211997

products or major product enhancements. While product performance claims were made
in almost all the prospectus we read, we chose to ignore those that offered no compelling
arguments in their support. Among the firms we studied, those that met our strict standard
were penalized in the early returns.

Predicting Sales Growth

Firms that grew the fastest in terms of sales revenue participated in concentrated indus-
tries with a number of direct competitors. They offered limited product lines that enjoyed
that enjoyed some form of patent protection. These firms did, however, recognize and serve
product segments with product line depth, and customer segments with different channels.
In these industries, the larger competitors either did not seek to block the growth of the
newer entrants, or their attempts were unsuccessful. Whether the newer firm’s attention to
segmentation brought a better match with customer desires, or if customers sought to
promote rivalry among their vendors, is beyond these data. It is clear that two aspects of
industry structure, concentrated and numerous competitors, are associated with rapid sales
growth in the subject industries.

Strategy and the Management Team

In light of earlier research and the long standing belief in the entrepreneurship and new
venture literature that the “people running the show somehow matter,” our results on
management team characteristics are unexpected. Several studies report positive associa-
tions with performance criteria and the breadth of management experience; “team
completeness” in Roure and Keeley (1990) jargon and “marketing and management
specialists on board’ in the Schoonhoven et al. (1990) operational definition. In this
sample there was little variance on the completeness of the team. Each of the subject firms
had assembled a functionally diverse team prior to seeking public funds. There was,
however, variance in the depth of management experience. Eisenhardt and Schoonhoven
(1990) created a composite variable that partially reflected length of experience in related
industries, and Duchesneau and Gartner (1990) also report positive performance effects of
a similar variable. We offer two alternative explanations for the failure of the management
team variables to affect either criterion. First, a threshold effect. Each of our sample firms
had reached a stage of development and success (i.e. going public) that many ventures
never reach. It is possible that each of the management teams had surpassed a manage-
ment experience threshold, above which additional experience has little effect. Indeed, in
this sample there is only one team with less than 10 years of related industry experience.
Total team experience averages 35 years among the sample firms.
Our second explanation rests on the treatment of the strategy variables. Management
experience has always been used as a priori assessment of managerial judgement. Teams
with more experience will be better able to identify and assess relevant environmental
factors, and better understand causal relationships required for control. When the venture
capitalists review a plan, they must rely on the management team to make the right deci-
sions once in operation. In this study, the firms are in operation and a variety of crucial
strategic decisions have been made. By measuring the strategy variables at this stage of
Technology-Based Manufacturing Ventures 239

development, we may well have preempted the promise of experience and moved directly
to the outcomes of that experience.

CONCLUSIONS AND LIMITATIONS

Several conclusions seem justified by these results. First, a simple linear combination of
industry structure variables and strategy decision variables can offer substantial predictive
power on important new venture performance criteria. These variables can explain about
40% of the variance in the sales growth and NPV measures.
A second conclusion concerns the tradeoffs involved in the pursuit of growth versus
profitability. In the early years of these ventures, only management’s approach to segmen-
tation has disparate effects on the two criteria: enhancing sales growth while retarding
NPV. The other variables, while influencing one of the criteria, do not compromise the
pursuit of the other. While it would be prudent to incorporate multiple criteria in future
research, the choice of performance objectives does not appear to be as polarizing a deci-
sion as we might have expected.
Third, incorporating a more robust description of the strategy decisions implemented
by management seems to be worthwhile. The strategy variable set alone can explain
almost one quarter of the variance in the NPV criterion, and offers significant improve-
ment in the estimation of sales growth.
Caution in the interpretation of these results due to sample size and the narrow range of
high technology firms we studied should, of course be exercised. However, there are two addi-
tional limitations to this research that are noteworthy. We have tried to explain performance
among a group of firms that in some respects are “successful.” Each firm progressed to the
point of going public, no small feat in and of itself. Each firm also survived and remained
independent for the three year study period following the IPO. Firms certainly failed prior
to the stage off development we focused on, and attrition due to bankruptcies and acquisitions
occurred during the study period. We have essentially cut off the tails of the performance
distribution. The methods and data sources we employed required this, Nonetheless, those
that failed and those firms that were successful enough to attract suitors could add to our under-
standing of new venture performance.
A further limitation is the result of our focus on early returns and growth. The first three
years following the IPO is a crucial period in the life of an enterprise, but is it long enough
to capture the performance effects of the strategic decisions we studied? For instance,
were the firms that incorporated a significant product enhancement due a major payoff in
the next few years? In future research the performance horizon should be extended. We
choose a three year horizon in part because reasonable stability in the independent vari-
ables could be assumed, thereby permitting a more direct assessment of performance
outcomes. Such an assumption becomes more tenuous as the performance horizon is
extended. The likely changes in the strategy and structure variables that will occur if a
longer performance period is examined will complicate the design and challenge the
causal interpretation of future studies.

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