Challenges in the early start-up phase

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Theoretical background

In the second chapter we present the theoretical background based on existing literature. First, we discuss start-up survival and factors which increase its likelihood. Then, we elaborate on the role of social capital in start-up survival. And finally, most of this chapter is dedicated to social capital – its dimensions, differences between bridging and bonding, external and internal, and individual and organizational social capital, and we also present the literature on networks as well as the benefits and risks of social capital

Start-up survival

There are many definitions of the term ‘start-up’ that occur in the literature. For example, Luger and Koo (2005, p. 19) define the start-up as an entity ‘which did not exist before during a given time period (new), which starts hiring at least one paid employee during the given time period (active), and which is neither a subsidiary nor a branch of an existing firm (independent).’ Another definition says that start-up is ‘a company or a human institution that is built on different branches and that spontaneously arises the condition of extreme uncertainty, has at its core innovation to create products and services which they wish revolutionize the market’ (Ries, 2011). Yet, most of the definitions meet at the point that start-up is a new venture which brings something new and innovative to the market (Luger & Koo, 2005; Ries 2011; Staszkiewicz & Havlíková, 2016).
In general, the likelihood of the survival of new organizations is limited (Freeman, Carroll, & Hannah, 1983). In fact, many of the new ventures survive only few months or years (Reynolds & Curtin, 2008). Gartner et al. (1999) even claim that the ability of a new venture to survive at least four years is the main indicator of the venture’s success. Similarly, Aspelund et al. (2005) concluded in their study that the average age of survival for the researched new, technology-based firms was 3.8 years. Some entrepreneurs also decide to discontinue their involvement in entrepreneurial activity, in the Czech Republic did so 150,000 people in 2013 (Lukes et al., 2013).
Boeker (1989) and Bamford et al. (2000) suggest that early decisions and founding conditions have an impact on firm’s long-term performance. The internal resources managed by the entrepreneurs at the birth of the new, technology-based firms are important predictors of their survival (Aspelund et al., 2005). Especially important seem to be the resource management decisions as they significantly impact the organization’s future (McDougall, Shane, & Oviatt, 1994) and can remarkably enhance firm’s performance and increase the probability of survival (Bamford et al., 2000; Shephard et al., 2000).
The characteristics of the resources acquired by the entrepreneurs significantly influence the new venture outcome (Dollinger, 1999). To be able to survive in the competing environment, firm’s resources must be valuable, rare, inimitable, and non-substitutable. Unless they have these characteristics, new ventures are very unlikely to survive, because of fierce competition of acquiring customers or market failure (Aspelund et al., 2005).
Aspelund et al. (2005) hypothesized that the more people in the founding team, the higher the likelihood of firm survival – as larger teams should possess more resources. However, the results of their study showed an opposite effect (due to the fact that larger teams have more affective conflicts). A different hypothesis was supported, saying that the probability of survival is higher with the greater degree of heterogeneity in the functional experience of the initial team (Aspelund et al., 2005)

The role of social capital in start-up survival

The difficulties to survive that so many new ventures encounter can be accounted to the concept of ‘liability of newness’ (Aspelund et al., 2005). This phenomenon explains that new organizations have ‘reduced capacity when competing with established players’ due to resource poverty, lack of legitimacy, and weak ties to external actors (Stinchcombe, 1965). In order to survive, new firms need time to establish themselves and develop specific knowledge and contacts with customers (Lukes & Zouhar, 2015).
Social capital enables entrepreneurs to access information and resources from their social network (Maurer & Ebers, 2006), it increases legitimacy (Higgins & Gulati, 2003), and ‘provides information and learning benefits’ (Powell, Koput, & Smith-Doerr, 1996). Therefore, it is very important for firm’s success and survival (Maurer & Ebers, 2006). Furthermore, on the entrepreneur’s personal level social capital is theorized to supplement the effects of education, experience, and financial capital (Coleman, 1990).
Entrepreneurs’ capability to deal with uncertainty and ‘change their behaviors to modify their circumstances into viable opportunities’ is another antecedent of start-ups’ survival (Gartner et al., 1999; Shepherd, 1999). The capability to ‘learn new knowledge and gain abilities during the start-up process’ increases the likelihood of start-up’s success (Gartner et al., 1999). However, the quantum of knowledge or ability (as a static figure) possessed by the entrepreneur has not been proven to have an impact on firm’s survival. The explanation for that might be that the always changing environment is an inherent part of entrepreneurship and therefore the knowledge of yesterday might be useless tomorrow (Gartner et al., 1999).

Social Capital

Social capital is a whole field of research that has during the last two decades matured from a concept covering various phenomena such as social networks, interfirm networks, social resources or social exchange and others (Adler & Kwon, 2002; Kwon & Adler, 2014). It is defined as ‘the sum of the actual and potential resources embedded within, available through, and derived from the network of relationships possessed by an individual or social unit’ (Nahapiet & Ghoshal, 1998, p. 243). Thus, social capital is viewed as a unique resource and Coleman (1990) framed social capital as a valuable asset that stems from access to resources made available through social relationships.
‘Stemming from the theory’s collective and shared character, social capital likely has a strong influence on the flow of information and collective action of groups’ (Pearson et al., 2008, p. 954). As such, Adler and Kwon (2002, p. 23) sum up: ‘Social capital is the goodwill available to individuals or groups. Its source lies in the structure and content of the actor’s social relations. Its effects flow from the information, influence, and solidarity it makes available to the actor.’

Social capital dimensions

Nahapiet and Ghoshal (1998) and Tsai and Ghoshal (1998) identified structural, relational and cognitive dimensions of social capital all of which are crucial to access and leverage the resources inherent in social relationships (Villena Rvilla, & Choi, 2011). Although these dimensions are analytically separated, their features are in many cases interrelated (Nahapiet & Ghoshal, 1998).
The structural dimension can be translated into the pattern and extent to which members are interconnected. This dimension includes the network ties, network configuration and appropriable organization (Nahapiet & Ghoshal, 1998; Pearson et al., 2008). Relational dimension represents the quality of the connections of the structural dimension (Sanchez-Famoso et al., 2015). Thus, relational dimension is constituted by trust, norms, obligations, and identification (Nahapiet & Ghoshal, 1998). Last but not least, cognitive dimension represents the extent to which group members share a common perspective or understanding – mutually beneficial common goals, including the shared purpose, vision, and language and codes (Nahapiet & Ghoshal, 1998; Pearson et. al., 2008; Sanchez-Famoso et al., 2015).
All of these dimensions of social capital are important because their simultaneous presence and strength lead to organizational processes or capabilities that are advantageous for superior firm performance (Pearson et al., 2008).

Bridging and bonding = weak ties and strong ties

Social capital can be a useful resource both by enhancing internal organizational trust, reciprocity, norms, and identification as a member of the group through the bonding of actors, as well as by bridging external networks in order to provide resources (Adler & Kwon, 2002; Putnam, 2000; Sanchez-Famoso et al., 2015).
Bridging social capital or loose network relationships with other individuals predominantly functions as an interface for the exchange of otherwise unavailable or costly to locate information and scarce resources (Davidsson & Honig, 2003; Debrulle, Maes, & Sels, 2014). Examples of bridging social capital based on weak ties may include membership in organizations, contacts with community agencies, business networks, the development of friendships with other businesspersons or embeddedness in an industrial district (Davidsson & Honig, 2003; Inkpen & Tsang, 2005).
On the other hand, bonding social capital or associations with family and close friends (strong ties) is rooted in interpersonal trust and can equip an owner with consistent access to a limited amount of specific resources (Davidsson & Honig, 2003; Granovetter, 1983).
The importance of the configurations of weak and strong ties in relation with the start-up survival differs in different stages of the business (Davidsson & Honig, 2003; Maurer & Ebers, 2016; Pirolo & Presutti, 2010). Strong ties stemming from having parents and/or friends who run their own business and their encouragement are associated with the increased probability and speed of start-up creation (Davidsson & Honig, 2003). Whereas both strong and weak ties have mostly positive effects on start-up survival and economic performance, it seems that weak ties connecting to specific knowledge that the entrepreneur does not have become increasingly important as the start-up progresses (Davidsson & Honig, 2003; Pirolo & Presutti, 2010). Maurer and Ebers (2016) and Pirolo and Presutti (2010) even claim that cohesive social capital and the same strong ties that contribute to the start-up creation and emergence, can hinder performance and innovative capabilities needed for new venture adaptation and survival in subsequent business development phase.

External and internal social capital

Many researches divide social capital into its external and internal part (Adler & Kwon 2002; Barroso-Castro, Villegas-Periñan, & Casillas-Bueno, 2015). Indeed, social capital can be a useful resource both by enhancing internal organizational trust, reciprocity, norms, and identification as a member of the group through the bonding of actors (internal social capital), as well as by bridging external networks in order to provide resources (external social capital) (Adler & Kwon, 2002; Putnam, 2000; Sanchez-Famoso et al., 2015). What is more, there is an interplay between the internal and external part of social capital (Adler & Kwon, 2002). As such, Woolcock (1998) argues that if both parts do not reach certain balance, the organization might turn into its dysfunctional form. For example, a high presence of internal social capital with a low presence of external social capital might lead to isolation of the organization.
Internal social capital and linkages among individuals within the collective include features that contribute to cohesiveness and foster collective action and the pursuit of collective goals (Adler & Kwon, 2002; Pearson et al., 2008). On the other hand, external capital represents the relations that the actors maintain with other actors outside the organization and thus it has the features of networks (Adler & Kwon, 2002).
But yet, despite these research tendencies to differentiate between external and internal social capital (Barroso-Castro et al., 2015), Adler and Kwon (2002) call for overcoming these tendencies. As such, they acknowledge the existence of both internal and external components but at the same time they believe that social capital is a dynamic concept and it changes throughout company’s life. Weak ties might become strong ties at certain stage and vice versa, strong ties might turn into weak ties (Adler & Kwon, 2002).

Networks in relation with start-ups

‘Networks provide firms with access to knowledge, resources, markets, or technologies. (…) Through membership in a network and the resulting repeated and enduring exchange relationships, the potential for knowledge acquisition by the network members is created.’ (Inkpen & Tsang, 2005, p. 146). Particularly, in relation with new venture survival, Davidsson and Honig (2003) stress the importance ‘of actively maintaining, pursing, and developing social relations.’
Whereas Inkpen and Tsang (2005) distinguish three common network types: intracorporate networks, strategic alliances, and industrial district, we perceive the last one, the industrial district, as often occurring and the relevant one for influencing the start-up survival. As such, industrial district is ‘a network comprising independent firms operating in the same or related market segment and a shared geographic locality, benefiting from external economies of scale and scope from agglomeration’ (Brown & Hendry, 1998, p. 133). Being embedded in an industrial district brings various opportunities to tap into a larger knowledge resource base (MacKinnon, Cumbers, Chapman, 2002). However, as Uzzi (1997) argues, the same embeddedness might lead to inhibition of knowledge flow into the network. Thus, companies participating in the network might overlook the strategies and capabilities of competitors outside the district, resulting in a blind spot situation (Pouder & St. John, 1996

Individual vs. organizational social capital

‘Individual social capital originating from an individual’s network of relationships can be distinguished from organizational social capital derived from an organization’s network of relationships’ (Inkpen & Tsang, 2005, p. 151). As per organizational social capital, members of an organization can tap into the resources derived from the organization’s network of relationships without necessarily having participated in the development of those relationships (Kostova & Roth, 2003; Inkpen & Tsang, 2005). However, as Debrulle et al. (2014) argue, it is mainly entrepreneurs’ network of weak ties that acts as the interface between their firm and its external environment. Consequently, it enables the entrepreneurs to gain external information and introduce it into the start-up, to gain the resources needed for the assimilation of external information, and to point out where the application of market knowledge might be most profitable.

Benefits of social capital

Social capital enables to access wider sources of information and ‘improves information quality, relevance, and timeliness’ (Adler & Kwon, 2002, p. 29). It also facilitates reciprocal exchange of information resulting in the entire network benefiting from it (Burt, 1997). For example, network ties help access information about innovations (Burt, 1987), help forecast customer preferences (Uzzi, 1997) and acquire novel skills and knowledge (Podolny & Page, 1998). As such, social capital is a source of competitive advantage (Paunescu & Badea, 2014). Furthermore, according to Adler and Kwon (2002), other direct benefits of social capital are influence, control, power, and solidarity.
Social capital (measured through its structural, relational, and cognitive dimensions) helps recognize new business opportunities (Ramos-Rodriguez et al., 2011) and thus leads to the long-term success of the new firm (Ozgen & Baron, 2007).

Risks of social capital (negative aspects of social capital)

The investment in social capital may not be cost efficient under certain circumstances as it requires considerable efforts in the establishment and maintenance of relationships (Adler & Kwon, 2002). Unbalanced investment in social capital may then turn into a constraint and a liability (Gargiulo & Bernassi, 1999).
Gained knowledge and abilities can also become a liability if the competitive dynamics change and the changes are not recognized by the actors (Starr & Bygrave, 1992). Furthermore, information benefits gained through contacts who have many other contacts can transform into liability as the dependency of the actor’s direct contacts on the actor decreases (Ahuja, 1998).
Going through the literature we have identified that social capital is indeed a resource contributing to start-up survival (e.g. Paunescu & Badea, 2014). Yet, it is unequally important in different stages of the business (Maurer & Ebers, 2006; Pirolo & Presutti, 2010). The founders are the most accountable for benefits of social capital because they are the interface between their firm and its external environment (Debrulle et al., 2014). This will help us address our research question which asks how founders’ social capital contributes to the survival of tech start-ups

1. Introduction
1.1 Background
1.2 Problem discussion
1.3 Purpose and research question
1.4 Definitions and terms we use
2. Theoretical background
2.1 Start-up survival
2.2 Social Capital
3 Methodology
3.1 Research philosophy
3.2. Research approach
3.3 Research strategy and design
3.4 Data collection
3.5 Data analysis
3.6 Research quality and ethics
4. Findings 
4.1 The importance of contacts
4.2 Challenges in the early start-up phase
4.3 Challenges in the business development phase
5. Discussion and Analysis
5.1 Theoretical contributions
5.2 Practical contributions
6. Conclusions, limitations and further research
6.1 Conclusions
6.2 Limitations and Further research
Reference list
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