Fostering Innovation and Entrepreneurship : Entrepreneurial Ecosystem and Entrepreneurial Fundamentals in the USA and Germany

278 Pages·2016·5.618 MB·English

by  Christian Schwarzkopf (auth.)

Christian Schwarzkopf
Fostering
Innovation and
Entrepreneurship
Entrepreneurial Ecosystem and
Entrepreneurial Fundamentals in
the USA and Germany
Fostering Innovation and Entrepreneurship
Christian Schwarzkopf
Fostering
Innovation and
Entrepreneurship
Entrepreneurial Ecosystem and
Entrepreneurial Fundamentals in
the USA and Germany
Christian Schwarzkopf
Karlsruhe, Germany
Karlsruhe Institute of Technology, Germany, 2015
OnlinePlus material to this book can be available on
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ISBN 978-3-658-13511-9 ISBN 978-3-658-13512-6 (eBook)
DOI 10.1007/978-3-658-13512-6
Library of Congress Control Number: 2016936553
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Acknowledgements
I would like to thank my thesis advisor Professor Rothengatter for having given me the
opportunity to write about this exciting topic, for his continuous and great support, as
well as for his valuable feedback throughout the years of this dissertation.
I would also like to thank my Professors, Orestis Terzidis and Andreas Oberweis, for
their valuable feedback and motivation.
Many thanks go to my family and their support, especially my father Professor
Schwarzkopf for his intense feedback and valuable discussions.
Finally, I would like to thank all the persons who have helped me to master this thesis,
by giving advice and feedback, participating in the surveys, and by providing me with
insights – from an investor’s perspective, from academia as well as from an
entrepreneur’s perspective.
Last but not least, thanks to my business partner Tim, who supported my aspiration to
pursue this doctoral thesis throughout this long period.
Christian Schwarzkopf
Abstract
Entrepreneurship and innovation have been identified in politics and in industry as
crucial elements for economic success. In this context, the importance of a successful
entrepreneurial environment is mentioned, and sometimes the term ecosystem is also
being used. Yet the fairly new term Entrepreneurial Ecosystem has not been sufficiently
defined, analyzed and developed, in order to understand what it actually stands for. The
major goal of this thesis is to develop a holistic concept of an Entrepreneurial Ecosystem
– taking economic, social and personal aspects into account – and identify areas, in
which Germany nowadays can improve and learn from the USA. In the beginning, the
areas of innovation and entrepreneurship have been analyzed, showing that innovation
is all about implementation of new things in a market, and entrepreneurship is about
persons that are part of the innovation process, by starting business with an invention
or a new business aspect that they bring into the economy, according to their own
believes and goals.
Not everyone can become a successful entrepreneur, because the necessary inherent
abilities cannot be learned or taught. However, these qualities alone are not enough to
guarantee success. Success factors of startups and its entrepreneurs have been part of
an analysis and have been supplemented by two surveys the author conducted among
investors and entrepreneurs. The surveys especially revealed that self‐motivation, and
the combination of individual ability and skills of the entrepreneurs were considered by
both groups as the most important success criteria.
A comparison between the United States and Germany showed that today the US indeed
is a more entrepreneurial country and has had, on average over the last years, about 40
times more available venture capital than Germany. Its open culture, its recent 200+
years of immigration history, as well as its investor friendly tax policy and its
entrepreneur friendly bankruptcy laws all together favor the foundation and growth of
new ventures in the US.
As a role model for global entrepreneurship, the US success factors, as well as the
literature research and the surveys have helped to identify the four important areas of
an Entrepreneurial Ecosystem. These areas occur in a circular form creating 4
independent circles, starting from the personal characteristics in the center to the
impersonal business qualities and activities on the outside parameter. Every circle has
its own distinct qualities and characteristics. Among them are abilities and skills in the
“Personal Circle”, family and friends in the “Private Circle”, higher education and
training in the “Educational Circle” and business world and culture in the “Public and
Business Circle”. For the purpose of this study of entrepreneurial phenomena and their
VIII Abstract
success relation, the focus is on Germany and its needs for improvement, which are
necessary to overcome the under‐financing of startups and to induce a more pro‐
entrepreneurial climate. Encouraging the legal person – company or corporation – to
invest parts of their yearly profits into venture capital is one of the potential solutions.
Furthermore, looking into how the German state can encourage and motivate more
successful entrepreneurs, inventors as well as investors to participate in startup
businesses and companies. Eventually, a more unified and business open‐minded
Europe creates one huge common domestic market, in which startups could grow as
large and as fast as startups can in the USA.
Table of Contents
Abstract ............................................................................................................................................................ VII
List of Tables ................................................................................................................................................... XV
List of Figures .............................................................................................................................................. XVII
Abbreviations ................................................................................................................................................ XIX
1 Introduction ............................................................................................................................................... 1
1.1 A Rationale for Innovation & Entrepreneurship .................................................................................. 1
1.2 Innovation and Entrepreneurial Background ....................................................................................... 3
1.3 German & US Market ....................................................................................................................................... 3
1.4 An Entrepreneurial Ecosystem .................................................................................................................... 4
1.5 Motivation ............................................................................................................................................................ 4
2 Methodology .............................................................................................................................................. 7
2.1 Approach ............................................................................................................................................................... 7
2.2 Hypotheses .......................................................................................................................................................... 8
3 Knowledge Base ........................................................................................................................................ 9
3.1 History of Innovation ....................................................................................................................................... 9
3.2 Three Potential Waves of Innovation Development ......................................................................... 10
3.2.1 First Wave of Innovation ......................................................................................................................... 11
3.2.2 Second Wave of Innovation .................................................................................................................... 11
3.2.3 Third Wave of Innovation ....................................................................................................................... 12
3.3 Further Defining Innovation ....................................................................................................................... 13
3.3.1 Type of Innovation ..................................................................................................................................... 13
3.3.2 Innovation as a Must for Survival ........................................................................................................ 15
3.3.3 Origin of Innovation – From Ideas to Inventions .......................................................................... 16
3.3.4 Numbers and Monetization of Patents and Innovation .............................................................. 16
3.4 Defining Entrepreneurship & Entrepreneur ........................................................................................ 17
3.4.1 Differentiation of Unternehmer, Entrepreneurs and Intrapreneurs .................................... 18
3.4.2 Entrepreneurs vs. Financial Risk ......................................................................................................... 19
3.4.3 Further Definitions of Entrepreneurs ................................................................................................ 20
3.4.4 Social Entrepreneurship .......................................................................................................................... 21
3.5 First Definitions of the Entrepreneurial Ecosystem ......................................................................... 21
3.5.1 Boulder Entrepreneurial Ecosystem .................................................................................................. 23
3.5.2 Developments of Further Entrepreneurial Ecosystems ............................................................. 23
3.5.3 Entrepreneurial Ecosystem by Isenberg .......................................................................................... 24
3.5.4 Two Entrepreneurial Ecosystems by the World Economic Forum,
Stanford University, Ernest Young and Booz & Company ......................................................... 26
3.6 Startup & Spin‐Off ........................................................................................................................................... 29
3.6.1 Founding Process ....................................................................................................................................... 30
X Table of Contents
3.6.2 Company Stages of Startups ................................................................................................................... 31
3.7 Three Areas of Innovation ........................................................................................................................... 34
3.8 Open Innovation .............................................................................................................................................. 36
3.9 Innovation Management .............................................................................................................................. 37
3.10 Financing of Startup Companies ............................................................................................................... 40
3.10.1 Personal Financing..................................................................................................................................... 42
3.10.2 Trade‐Off Theory ........................................................................................................................................ 42
3.10.3 Pecking Order Theory ............................................................................................................................... 43
3.10.4 Debt Security – Real and Personal Property ................................................................................... 45
3.10.5 Equity .............................................................................................................................................................. 46
3.11 Financing with Risk Capital ......................................................................................................................... 46
3.11.1 Business Angels (BA) ................................................................................................................................ 47
3.11.1.1 Facts & Figures about BAs .............................................................................................................................. 47
3.11.1.2 Motivation of Business Angels ...................................................................................................................... 49
3.11.2 Private Investors ......................................................................................................................................... 49
3.11.3 Crowd Funding ............................................................................................................................................ 50
3.11.4 Venture Capital (VC) ................................................................................................................................. 50
3.11.4.1 Organizational Entity ........................................................................................................................................ 51
3.11.4.2 Structure and Investment Focus .................................................................................................................. 52
3.11.4.3 Facts & Figures about VC ................................................................................................................................ 53
3.11.4.4 Differences between BAs & VCs ................................................................................................................... 54
3.11.5 Series A, B, C .................................................................................................................................................. 55
3.11.6 Comparison of Different Risk Capital Types ................................................................................... 56
3.11.7 The Right Fund Size ................................................................................................................................... 58
3.11.7.1 Fund Size Calculation ........................................................................................................................................ 58
3.11.7.2 Importance of the Fund Size with the Example of WhatsApp ........................................................ 59
3.11.8 Brief Outlook on the Development of the Venture Capital Market ........................................ 60
3.12 Investment Decisions of Venture Capitalist & Business Angels ................................................... 60
3.12.1 Adverse Selection at the Beginning of the Encounter ................................................................. 60
3.12.2 Investor’s Decision Process .................................................................................................................... 61
3.12.3 Venture Capitalist & Business Angel Cycle ...................................................................................... 63
3.12.3.1 The Deal Origination ......................................................................................................................................... 63
3.12.3.2 The Screening ....................................................................................................................................................... 63
3.12.3.3 The Evaluation ..................................................................................................................................................... 64
3.12.3.4 The Deal Structuring ......................................................................................................................................... 65
3.12.3.5 Post‐Investment Activities ............................................................................................................................. 66
3.12.3.6 Monitoring ............................................................................................................................................................. 66
3.12.3.7 Value Adding ......................................................................................................................................................... 67
3.12.3.8 Exit ............................................................................................................................................................................ 68
3.13 Business Planning ........................................................................................................................................... 70
3.13.1 The Basic Structure of a Business Plan .............................................................................................. 71
Table of Contents XI
3.13.2 Effectiveness of Business Plans ............................................................................................................ 72
3.13.3 Business Plans in a New Context ......................................................................................................... 73
3.14 Business Case .................................................................................................................................................... 74
3.14.1 Business Cases in an Entrepreneurial Environment ................................................................... 74
3.14.2 Scenario Planning ....................................................................................................................................... 75
3.15 Government Support ..................................................................................................................................... 76
3.16 Competitions ..................................................................................................................................................... 76
4 Success Factors ....................................................................................................................................... 79
4.1 Success ................................................................................................................................................................. 79
4.2 Characteristics of Entrepreneurs ............................................................................................................. 80
4.3 Entrepreneurs as Social Creatures ........................................................................................................... 82
4.4 Important Factors for Success of Startups ............................................................................................ 84
4.4.1 Entrepreneurial Team .............................................................................................................................. 85
4.4.2 Product and Service ................................................................................................................................... 86
4.4.3 Market Characteristics ............................................................................................................................. 86
4.5 Expert Panel Survey ....................................................................................................................................... 88
4.6 The Investor’s Perspective .......................................................................................................................... 89
4.6.1 General Aspects on the Investors’ Most Successful Companies .............................................. 89
4.6.2 Product and Service Characteristics ................................................................................................... 90
4.6.3 Market Characteristics ............................................................................................................................. 92
4.6.4 Venture Team Characteristics ............................................................................................................... 92
4.6.5 General Factors ........................................................................................................................................... 95
4.7 Success Factors from the Entrepreneurs’ Perspective .................................................................... 98
4.7.1 Market Characteristics and Strategy .................................................................................................. 98
4.7.2 Product and Service Characteristics ................................................................................................... 99
4.7.3 General Internal and External Factors............................................................................................... 99
4.7.4 Venture Team Characteristics ............................................................................................................ 101
4.7.5 Motivation and Characteristics of the Founders ........................................................................ 103
4.7.6 Deriving Influence on the Startup’s Growth ................................................................................. 106
4.7.7 Most Important Success Areas ........................................................................................................... 107
5 Market Comparison ............................................................................................................................ 109
5.1 Venture and Startup Relevant Figures ................................................................................................ 110
5.2 Market Situation ........................................................................................................................................... 113
5.2.1 Concept of Buyer’s and Seller’s Markets ........................................................................................ 114
5.2.2 Situation in Germany and the US ...................................................................................................... 115
5.2.3 Results of the Different Distribution of Power ............................................................................ 115
5.3 Possible Reasons and Analysis of VC Developments ..................................................................... 117
5.4 History, Geography & Culture ................................................................................................................. 117
5.4.1 Anglo Saxon Tradition ........................................................................................................................... 118