BREAKING THE ENTREPRENEURIAL GROWTH BARRIER: THE ROLE OF VENTURE CAPITAL AND ACQUISITIONS FOR THE EMERGENCE OF MEDIUM-SIZED TECHNOLOGY-INTENSIVE FIRMS
Rögnvaldur J.
Saemundsson
Åsa Lindholm Dahlstrand
ABSTRACT
INTRODUCTION
AIM AND SCOPE
METHOD AND SAMPLE
THE MEDIUM-SIZED
TECHNOLOGY-INTENSIVE FIRMS
FINANCING THE GROWTH OF
MEDIUM-SIZED
SUMMARY AND CONCLUSION
NOTE
TABLE 1
TABLE 2
TABLE 3
TABLE 4
TABLE 5
TABLE 6
TABLE 7
TABLE 8
CONTACT
REFERENCES
Relatively few new firms break the entrepreneurial growth barrier and become medium-sized. In Europe, lack of venture capital has been both a barrier and a reason why small firms sell off their business. In this paper we discuss the financing and acquisition of technology-intensive firms growing to become medium-sized. We found considerable differences between manufacturing and service sector firms, not in their use of venture capital, but primarily in the acquisition pattern. While about half of the manufacturing firms are being acquired, this is so for only a minority of the service firms. Instead these firms have sold off minority shares. No connection between the use of venture capital and acquisitions was found. Swedish venture capitalists are not using the sell off of medium sized technology-intensive ventures as a primary exit strategy.
Exploiting new technological opportunities on existing or new markets is one of the main characteristics of technology-intensive activity. This activity can be used to increase growth in an economy in at least three ways: (1) by diversification of large firms, (2) by the creation of new technology-intensive firms, and (3) by the growth of new or small technology-intensive firms. Among the first modern economists to focus upon the dynamics of economic development and technological change was Schumpeter. In his view, the key development process was the “carrying out of new combinations,” or innovations, which in turn would mean the competitive elimination of the old (Schumpeter 1934, first published in 1912). He perceived the entrepreneur to be the one to carry out the new combinations, reaping an entrepreneurial profit, with other producers following him. Further, the entrepreneurial profits depend upon the time duration until competitors are established and the temporary monopoly of the entrepreneur is destroyed. Thus, Schumpeter saw the entrepreneur as an important means of vitalizing an economy. Later Nelson and Winter (1982) stressed that, in an evolutionary theory of economic change, consideration has to be given to the mechanisms operating in Schumpeterian competition. They argued that Schumpeterian competition is a process that tends to produce winners and losers, and that some
firms exploit emerging technological opportunities, experiencing prosperity and growth, while others are less successful, suffering losses and decline. Further, “growth confers advantages that make further success more likely, while decline breeds technological obsolescence and further decline. As these processes operate over time, there is a tendency for concentration to develop even in an industry initially composed of many equal-sized firms” (p. 325).
Penrose (1959) considered external growth through acquisition and internal development, i.e. growth through new investments, as the two methods of growth for the firm. Further that the unused production resources of a firm are the incentive to expand but they are also the challenge to innovate as well as the source of competitive advantage. Since a specialized firm is highly vulnerable in an environment of changing technology and tastes, she argued, the firm can often make more profitable use of its resources over a period of time by spreading production over a variety of products. The expansion is then made through diversification, either by internal development or by acquisitions. In both cases, the managerial resources are serious limitations of the growth (Penrose 1959).
Successful commercialization of an innovation requires several complementary assets (Teece 1986), typically resources for continued R&D, large-scale production, international marketing, after-sales support, and overall management. To acquire these resources on separate markets and integrate them takes time and effort on the part of the small firm, and can then to some extent be considered as growth barriers for the small technology-intensive firms. Besides, any hampering imperfection on the capital market, commonly encountered by small innovation companies, may jeopardize the whole venture. In other words, the transaction costs involved in acquiring complementary assets are likely to be high for the small firm. The alternative of having the whole innovation process internalized in a large firm with a more complete set of resources available from the outset will economize on transaction costs but is likely to give relative disadvantages, such as dulled entrepreneurial spirits, bureaucracy, internal procurement bias, and various innovation barriers (Williamson 1975, Granstrand 1982). Under these circumstances the large and the smaller firms might gain from co-operation. Venture capital, nurturing and joint ventures are, together with the technology-related acquisitions, important because they all make this co-operation possible. Even though Penrose paid no attention to these respective advantages of small and large firms, she suggested that the selling of small firms is suitable under certain circumstances. As the small firm grows, Penrose argued, it will reach a point where a change in its managerial structure must take place because of the necessity of subdividing the managerial task. In addition to the management problem, the small firm has problems of raising capital. Thus, the small firm may find substantial advantages in selling to a large firm. There is still a transaction cost involved in the acquisition, but to the extent that there is a resource fit between the large and the small firm, everything else being equal, the transaction cost will be lowered.
Many studies have reported about difficulties in the early growth phases of new firms. These difficulties can be related to the entrepreneur himself, for example the opportunities that he perceives, his ability and his need for growth (Davidsson 1989, 1991). In other cases the difficulties could be related to the organizational structure, that is, the need for making the necessary transition in organizational structure and management as the firms grows (Greiner 1998, Kazanjian and Drazin 1990, Roberts 1986, Hanks and Chandler 1994, Hofer and Charan 1984, Garnsey 1998). Many researchers have found that financial constraints can prevent the firm from expanding its operations, especially so in high technology firms (e.g. Moore 1994, Mason and Harrison 1994, Garnsey 1995, Westhead and Storey 1997, Murray 1998). This could be of special importance in small countries with small domestic markets, where firms need to internationalize early. Small firms are often faced with some sort of an entrepreneurial growth barrier when moving from early sales to a reinforced “Penrosian” growth where “internal pressures are exerted for further growth” (Garnsey 1998). Thus, the entrepreneurial growth barrier can be considered as the critical step from being a relatively small founder managed firm into being a professionally managed and growth focused firm. In turn, this often comes hand in hand with the organizational structure being transformed from an informal design, focusing on innovation and internal cooperation, into a considerably more formalized and functional one.
In Sweden, access to finance has improved since the late 1970s, but the lack of capital might still be a problem for highly innovative firms, employing new technology (Davidsson 1989, Karaömerlioglu and Jacobsson 1999). Olofsson and Wahlbin (1988) found that the creation of a Swedish OTC market in 1982 drastically changed the situation for the financing of small and medium-sized firms, but also that after 1985 there was first a shake-out in terms of the number of active venture capital firms. In an earlier Swedish study (Utterback and Reitberger 1982) it was found that the firms’ need of capital usually appeared at two critical times in their development: at start-up and when taking a major expansion decision approximately six to ten years after start-up. It could be at this time that many of the founders decide to sell off the business (Lindholm 1994). Also Landström (1987) found that small innovative firms were usually acquired after an expansion had begun, when the need for capital and market resources increased. In small firms, most often the owners and the founders are the same persons. Moreover, the owners and the managers are also often the same. This relation might cause the manager to feel that the firm is his own property and that he is free to increase the risk-taking of the firm. If the risk is increased, the difficulties of obtaining new capital will increase, as financial institutions tend not to get involved in high-risk firms (Landström 1987). In the 1990s, Karaömerlioglu and Jacobsson (1999) report a boom in the broader Swedish risk capital market. However many of the Venture Capitalists are still quite new firms with a relatively limited number of investments.
Even if acquisitions are attractive, Yip (1982) argued that because of the U.S. antitrust policy, American companies tend to use internal development to enter new markets, instead of acquiring other firms. In Sweden, for example, the antitrust policy is less strict than in the U.S., and it is not likely that this policy will limit the attractiveness or frequency of technology-related acquisitions. Thus, it is quite possible that this type of acquisitions, and the financing they bring to a small or medium-sized technology-based firm, might be more usual in Sweden or Europe. On the other hand, it also seems likely that the use of venture capital has been more usual, and perhaps more successful, in the US. Sometimes, however, when an acquiring firm has gained special knowledge on how to nurture acquired technology-related ventures (Lindholm Dahlstrand 1999), such acquisitions can be designed to come arbitrarily close to traditional venture capital financing. The most important difference then lies in that the former aims for a majority share of the venture and the latter limits its ownership to a minority share.
In this paper we will examine the characteristics of these firms who have actually grown into medium-sized firms, that is, who have broken an important entrepreneurial growth barrier. Several studies have shown that for many reasons, such as the need for independence, many small technology-intensive firms deliberately choose to stay small (OECD 1998). Besides the will to grow, there are many other barriers to growth. In many countries, including Sweden, the lack of seed and venture capital has often been considered a barrier for growth. In turn, this lack of financing capabilities has sometimes caused owners of small growing technology-based firms to sell of their ventures to large acquiring companies. In an earlier Swedish study, Lindholm found that the majority of the founders who sold their small technology-based firms did so because they experienced a need of additional capital. In some cases the founders wanted to free capital for their own consumption, but more often the additional capital was needed in order to expand the business and to internationalize the operations of the firm (Lindholm 1996). It was also demonstrated, in the same study, that the growth in the acquired firms was significantly higher than in the non-acquired technology-based firms. The acquired firms also had higher growth before as well as after acquisition, and further, the firms’ growth was increased after acquisition.
In this paper the authors have chosen to focus on the medium-sized technology-intensive firms. By studying such medium-sized technology-intensive firms, we would like to learn more about the characteristics and growth of such firms, and to analyze the importance of different types of financing. Especially we want to analyze: (a) what role venture capital has for the emergence of medium-sized technology-intensive firms, (b) what role acquisitions have for the emergence of medium-sized technology-intensive firms, and (c) the relation between venture capital and acquisitions. For example we want to know whether the use of venture capital has helped medium-sized firms to mange their expansion without being acquired. Or if perhaps venture capital instead has contributed to a higher share of firms being acquired, maybe as part of the venture capitalist’s exit strategy.
In this paper a somewhat narrow definition of a technology-based firm will be used. The empirical sample consist of a group of technology intensive new firms, included in a larger Swedish sample of ‘New Technology-Based Firms’ (NTBFs), earlier described and analysed by Rickne and Jacobsson (1999) and Saemundsson et al. (1997). The definition of a technology-intensive firm, used here, is a ‘firm whose strength and competitive edge derives from the know-how within natural science, engineering or medicine, of the people who are integral to the firm, and upon the subsequent transformation of this know-how into products and services for a market.’ Thus, this does not only refer to firms developing or using ‘high’ technology but to all firms where natural science, medical or engineering skills are central to achieving a competitive edge. These include, of course, not only manufacturing firms but also firms in industry-related services (Rickne and Jacobsson 1999, Saemundsson et al., 1997). In the following text, the phrase ‘technology intensive firms’ will sometimes be used in order to distinguish these firms from the more generally used terms of high-tech or technology-based firm. Moreover, we use the EU definition of the size of medium-sized firms, i.e. 50–249 employees (Commission of the European Communities 1996), not applying the restrictions on turnover or independence. We consider that having over 50 employees is enough for a firm to have taken the step from the informal innovation focusing organization into the more formalized growth oriented firm, that is, to have broken the entrepreneurial growth barrier and reached the stage of reinforced growth.
The identification of firms to be included in the Swedish sample, and, thus, in the sample of medium-sized firms, were based on data from the Swedish Bureau of Statistics (SCB). The firms in the sample are classified in a selected set of industries and industry-related services.1 Included here are those industries which employ the bulk of the engineers and natural scientists, excluding public sector activities such as education and health. Second, only those firms with at least one employee (two in the service sector) with an academic degree in any of these fields were included. This means that we excluded ‘high tech’ firms that had no employees with an academic degree. Third, the firm should have been established after 1975, and have at least three employees, which means that a high number of very small firms were excluded. Finally, companies which were the result of a reorganisation of existing businesses, and therefore all foreign direct investments and all divisionalisations or diversifications by established firms were excluded. The firms were traced over the period 1975–1993, and in 1993 the national population of ‘surviving’ firms amounted to 1,352 (Rickne and Jacobsson 1999).
In 1998, a postal questionnaire was sent to all surviving firms (1113 firms) in the Swedish NTBF sample. The questionnaire included questions about, for example, the background of the founders, the financing of the firm, the customers, different links and interaction with other organizations, and acquisitions and spin-offs. Of the 1113 firms 344 responded with a completed questionnaire. In total, 44 medium-sized firms answered the questionnaire. To increase the sample size, an additional 17 firms have been interviewed by telephone. These firms were selected from a total number of 73 firms, who we already knew had been at least medium-sized in 1996. Thus, our empirical sample consists of 61 technology-intensive firms who have grown beyond the threshold of 50 employees. Eight of these firms have continued to expand and could be considered as large firms, now having more than 250 employees.
THE MEDIUM-SIZED TECHNOLOGY-INTENSIVE FIRMS
Before turning to the financing of the firms and analyzing the role of venture capital and acquisitions for breaking an entrepreneurial growth barrier, we want to find out more about the characteristics of the medium-sized firms. In this section we will first present data on the age and size distribution of the firms in our sample. Since we suspect that manufacturing and service firms might behave differently, especially in terms of the complementary resources needed to break an entrepreneurial growth barrier, we like to know whether the firms in our sample are found in any particular industry sectors, and if so, whether this will have any influence on their financing and growth.
First, Table 1 gives an overview of the sample in terms of age, size and growth. Size has been measured in terms of number of employees and sales, while the annual increase in the number of employees has been used to illustrate growth. Moreover, a comparison between manufacturing and service firms has been included in the table. As can be seen in Table 1, the distributions are skewed and there is a large variance indicating an uneven large range of values. This is primarily due to eight firms that have grown beyond the limit of 250 employees, that is, these eight firms have definitely managed several growth barriers and grown into larger firms.
As can be seen in Table 1, the average number of employees is around 140, and the annual sales is approximately the same in terms of MSEK, that is, on average MSEK 143,5. For the total sample of 61 firms, the average age is a bit over 12 years. That means that they are still quite young firms, and it is possible that a number of them are likely to be acquired in the future. However, at this age they would in general have experienced the first rounds of financing and acquisition (Utterback and Reitberger 1982, Lindholm 1994).
The growth rate has been a little more than 13 new employees each year. Two thirds of the medium-sized technology-intensive firms are found within the service sectors of the industry. Since these firms are both somewhat younger and larger in the terms of personnel, they have also experienced a more rapid growth than the manufacturing firms have. However, the service firms have lower turnover per employee (p<0.05). This is also reflected by the slightly higher employment growth of service firms.
To shed some further light upon the growth differences in different sectors, Table 2 gives the distribution of firms over different industries. Many of the earlier studies of new technology-based firms, have focused on manufacturing firms, and, thus, often disregarded firms in the service sector. This might be unfortunate, since, as illustrated above, a majority of medium-sized firms—at least in our sample—belong to the service sector. Moreover, in Table 2, it is clear that an overwhelming majority of the fastest growing firms are found in the service sector. In the quartile of firms having the highest annual growth, 80 per cent are firms in the service sector. Moreover, almost half of all the fast growing firms—7 of the 15 firms—are found in the computer related service sector.
Over half of the firms in the sample firms providing technical consulting and computer-related services (see Table 2), In some cases computer-related services firm might be involved in the development of software products, i.e. they are not pure service firms. Together the computer related service firms and the technology consultants represent 80 per cent of the medium sized firms in the service sector. In the manufacturing sector, the distribution of firms over different industries is somewhat more evenly distributed. Here the machinery industry is dominating with seven firms. While almost a third of the firms in the service sector are in the fastest growing quartile of firms, less than 15 per cent of the manufacturing firms are fast growing. Interesting, however, is to observe that the firms belonging to the electronic equipment industry (i.e. one of the high-tech industries according to the OECD classification) seem to be represented by a high growth. Unfortunately, the number of observation is too low to allow any statistical significance.
One of the characteristics of firms having passed the entrepreneurial growth barrier is their self-induced growth or growth reinforcement as they have build up sufficient resources and are committed to growth. Table 3 shows the expectation of the firms in our sample about future growth in employment.
All of the service firms and almost all of the manufacturing firms expect to grow in the near future. This indicates that these firms have indeed passed the entrepreneurial growth barrier and are motivated for future growth. The firms that do not expect to grow could be experiencing growth reversal (Garnsey 1998). If the growth ambitions in Table 3 will materialize in the near future, we can thus anticipate to find further differences of growth between the service and manufacturing firms.
To summarize so far, we have demonstrated that our sample of medium-sized technology-intensive firms consist of relatively young firms with a strong growth ambition. The firms are on average 12 years old and are likely to have experienced the first rounds of financing and acquisitions. We have also found that the majority of our medium-sized firms belong to the technology service sector, and that there is a larger number of fast growing service firms than manufacturing firms. Even if almost all the medium-sized firms expect to continue growing in the near future, the service sector firms have an even more pronounced future growth ambition. In the next section we will turn to questions of the financing of the medium-sized firms, among other things to elaborate upon whether the service and manufacturing firms differ in respect to the sources of financing utilized.
FINANCING THE GROWTH OF MEDIUM-SIZED TECHNOLOGY-INTENSIVE FIRMS
In this section we will present data on the financing of the firms in our sample. We will compare the importance of different financing sources and to what extent the firms have sold out either minority shares or the whole company. Finally, we will look at the motives behind and the growth effects of the acquisitions. First, Table 4 illustrates the importance of different financing sources for the medium-sized technology-intensive firms in the sample. The use of various sources of financing has been divided into different stages of development in (a)the start-up phase, (b) the phases of early development, and (c) later stages. We have used data for the first five years to illustrate the start-up phase, data for the following five years to illustrate the early phase of development, and data for the company age of over ten years to illustrate the later phase.
As can be seen in Table 4, an overwhelming majority of the medium-sized firms have themselves financed the development of the firm. This financing is made either through the owners personal savings and loans or through reinvesting profits that could otherwise have been distributed among the owners. The second most common source of financing is through different loans. Bank loans are very frequently used in both the start-up and the early phases of development. While the importance of self financing increases with age, probably because the firms start to generate a profit that can be reinvested, the importance of loans decreases in the later phases of development.
Only three firms have gained any financing from private investors, or so called Business Angels. Moreover, even when this source has been used it is generally evaluated as having a relatively low importance for the development of the firm. This might be related to an often claimed lack of Business Angels within the Swedish economy. Also the use of customers as an important source of financing seems to have been quite rare among the medium-sized firms. However, the importance of having an early customer, and perhaps also having the early phases of the product- or service-development carried out in collaboration with a customer, could be linked to the higher importance of customer-financing in the start-up phase.
In total, a third of the medium-sized technology-intensive firms have gained some government support, either in the form of grants, seed capital or loans that should be reimbursed if and when the firm is successful. Government support has been most frequent in the start-up phase, in later phases the frequency decreases quite drastically. While a third of the firms have gained government support in the start-up phase, only 16 per cent of the firms have benefited any kind of venture capital in this phase. However, while no additional firms seems to be able to attract governmental support in later stages an additional 10 per cent of the firms are receiving venture capital. Looking at the total time period, there are only small differences in the frequency of firms having gained government support or venture capital. However, the evaluated importance of the two sources of financing differs quite considerably. While the importance of venture capital is the second most important single source of financing, governmental support is rated as being only of a moderate importance.
The number of additional firms getting venture capital decreases with age, and there is also an indication that its importance might be somewhat lower in the later stage. At the same time fewer firms name self financing as an important source of financing in the ‘Early phase.’ Even if the empirical data is limited, it might be speculated that in this phase of development, the firms are financially quite weak and that it is at this point in time that additional competence is often needed to handle the problems of expansion (Utterback and Reitberger 1982, Landström 1987).
Above the differences between manufacturing and service firms were pointed at. Because of their differences it seems likely that also their financing and requirements have followed different patterns. It has been argued that service firms have lower capital requirements than production firms (Harrison and Taylor 1996). In Table 5 the frequency and importance of different financing sources are illustrated for both manufacturing and service firms.
On average the manufacturing firms in Table 5 depend on a higher number of sources for financing their development. Private investors and customers play a larger role in those firms than in the service firms. What is maybe most striking is the difference in dependence on loans where as many as 81 per cent of the manufacturing firms have used loans for financing the development of the firms. The corresponding figure in the service firms is only 45 per cent. Even if the use of venture capital has been as frequent for both categories of firms, it is worth noting that seven of the 11 service firms that have gained venture capital can be found in the computer related services. As these firms might be involved in some sort of product development they might have capital requirements that are similar to the manufacturing firms. There may, however, still be a difference in capital requirements when a manufacturing firms starts building and expanding production facilities. This capital requirement might in part explain the dependency of manufacturing firms on loans. Another interesting finding is that all manufacturing firms rate venture capital as having a very high importance. Compared to the service firms, the same is true for all but one of the computer related firms. Nevertheless, only one of the additional four service firms with venture capital is considering this source as having had a very large importance.
An often used alternative to seeking external financing is to sell of minority shares to external firms and investors. Such minority investments is also often a first step towards selling of the entire firm to an external acquirer. As can be seen in Table 6, the selling of shares of a technology-intensive firm, either a minority share or the majority of the firm, is quite usual among the medium-sized firms of our sample. However, only a third of the firms have been acquired, a figure that is somewhat lower than has earlier been found in Sweden (Lindholm 1994, 1996). However, this might be explained by the higher proportion of service firms in our sample, or the relatively lower age of these firms. Half of the acquired technology-based firms in Lindholm’s earlier study were acquired after they had reached the age of ten years. In our sample of medium-sized technology-intensive firms the average age is yet only 12 years.
Almost half of the medium-sized firms (46 per cent) have sold minority shares. Among these 28 firms, eight have later been acquired but the majority has stayed independent. Among the firms in the service sector the majority have sold off minority shares, while among the manufacturing firms only a third has sold off any minority shares. Looking at the numbers of acquired firms the relation is reversed, here acquisitions are more usual among the manufacturing firms. The frequency of acquisitions is slightly higher than the 27 per cent of firms receiving venture capital financing. While 43 per cent of the manufacturing firms have been acquired, this is true for only 28 per cent of the service firms. That is, for service firms venture capital and acquisitions have been equally frequent. On the other hand, acquisitions are considerably more frequent among the manufacturing firms. Moreover, while manufacturing firms are usually acquired in the ‘Early-phase’ (i.e. at the age of five to ten years) the acquired service firms have usually been bought in either the start-up or the late phases.
Problems of receiving sufficient financial resources may cause the owners to seek a suitable acquirer of the firm. In the earlier cited Swedish study Lindholm (1994) found that two thirds of the founders who sold their firms did so since they felt a need of additional financial resources. In Table 7, the motives for selling of the medium-sized technology-intensive firms in our sample are presented.
The majority of the manufacturing firms in Table 7 have been motivated to sell off the firms, because of a lack of capital for expansion of the business. This is in line with our previous findings. In the majority of the cases there are also some personal reasons for selling out, such as a too high risk for a private owner. In five firms (3 in manufacturing and 2 in service) the owner mentioned both lack of capital and private reasons as motives for selling out to another firm. It is worth noting that half of the service firms mention other reasons for selling out.
To shed some further light on the links between the financing of the firm’s development and the motivation to sell of a firm, Table 8 summarizes the most important sources of financing in acquired and non-acquired firms.
It seems that the acquired firms in Table 8 have had difficulties in generating revenues that can be used to finance the development of the firm. The non-acquired independent firms have been more successful in financing their own development. There are also fewer acquired firms who report that their own capital has been important for the financing. This is especially notable in the late phase, and it might be in that phase that we are seeing the effects of the acquisition, i.e. firms are now able to generate revenues. In a large majority of the firms the acquisition had positive effects on growth; 75 per cent of the acquired firms claim to have increased their growth because they were acquired. This indicates that the acquisitions have provided the needed resources, both in terms of finance and competence, for the company to expand. Another striking finding in Table 8, is that, despite the low evaluation of its importance, it is the firms who have received government support that seems to be better able to continue as independent businesses. As can also be seen in Table 8, the acquired and the non-acquired firms do not differ much in terms of the frequency and importance of venture capital. Thus, it does not seem like the use of venture capital makes it more likely for the firm to be sold off as part of an exit strategy of the venture capital firm. Only six of the acquired firms had received any venture capital prior to the acquisition. However, as was noticed earlier, our sample of medium-sized firms are still of a relatively limited age, and it is possible that the number of acquisitions will increase in the future. Ten of the non-acquired firms have been financed by venture capitalist firms, and here the use of venture capital has been important and helped these medium-sized firms to mange their expansion without being acquired. However, later when the venture capitalists want to exit these investments, the sell off of the medium sized technology-intensive firm can be one alternative to an IPO.
In recent years relatively few new technology-intensive firms in Sweden have broken the entrepreneurial growth barrier and become medium-sized. Several studies have shown that for many reasons, such as the need for independence, small technology-intensive firms often choose to stay small. Moreover, in Sweden the lack of venture capital has often been a barrier for growth, which may be the primary reason for the owners to sell out to a larger firm. In this paper we have analyzed medium-sized technology-intensive firms in both the manufacturing and the service sector. Special attention was paid to the analysis of the role venture capital and acquisitions have for the medium-sized technology-intensive firms. This included analyzing the relation between venture capital and acquisitions, e.g. the use of venture capital within independent as well as acquired medium-sized technology-intensive firms.
First, we can conclude that almost two thirds of the medium-sized Swedish technology-intensive firms can be found in the service related industrial sector. Firms in this sector often have advantages because of relatively limited financial growth barriers. Moreover, an overwhelming majority of the fastest growing firms were found in the computer related and the technology consulting industries. Being in a rapidly growing industry is of course important for the firm’s growth possibilities, and, thus, the possibilities of breaking different growth barriers. However, in order to break an entrepreneurial growth barrier we here suggest that there must also be a will to expand. Among the medium-sized firms of this study, this willingness was strong and almost all firms (in fact all firms in the service sector) were planning for a continued future growth. Besides the willingness to grow, there are many other barriers to growth. In many European countries, researchers have found that there is a lack of seed and venture capital (Mason and Harrison 1994, Moore 1994, Murray 1998, Klofsten et al. 1999), and this has often been considered a barrier for growth. In turn, this lack of financing capabilities has sometimes caused owners of small growing technology-based firms to sell of their ventures to large acquiring companies (Garnsey and Roberts 1992, Lindholm 1994, 1996).
As in many earlier studies (Cooper 1986, Moore 1994) we find that self financing and loans are the two most usual ways of financing the emergence of the technology-intensive firm. Very few of the firms in our sample had received any financing from private investors or Business Angels. Government support in the form grants or loans were found in a third of the firms, and especially so in the firms who managed the development as independent non-acquired firms. Less than a third of the firms did receive any venture capital. But for the firms who did so this was considered as highly important for their development. The frequency of venture capital did not differ between firms in the manufacturing sector and firms in the service sector. Instead we found very different patterns in their selling off of minority and majority shares. Among the Swedish medium-sized technology-intensive firms, being acquired has been more usual than receiving venture capital. Especially this has been an important way for the manufacturing firms to find the financing needed to expand their business. Among the firms in the service sector, it has been relatively more important and common to sell off minority shares. Finally, we could not demonstrate any clear connection between the use of venture capital and the later sell off or acquisition of the firms. It might be that firms receiving venture capital are able to use this financing and the received competence in order to expand the business without being acquired. So far the venture capitalists investing in this sample of technology-intensive firms, have only exited six of their 16 investments through acquisition arrangements. Since the medium-sized firms of our sample are still quite young, it is however possible that this figure will increase in the future.
1. The industries included are ISIC (rev. 2 from 1968) 341, 35, 37, 38, 6112, 72002, 8323, 83249, 83292, 83299 and 932. This is a subset of the manufacturing and service sector.
CONTACT: Rognvaldur J. Saemundsson, Chalmers University of Technology, Industrial Dynamics, S-412 96 Goteborg, Sweden; (T) +46 31 772 5121; (F) +46 31 772 1237; rjs@mot.chalmers.se
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1999 by Babson College. All rights reserved. Last updated March 2000.