Improving new venture performance: The role of strategy, industry structure, and the entrepreneur

Abstract This article examines the determinants of new venture performance. Specifically, it rejects the traditional academic model of new venture performance, which argues that success is based solely on the characteristics of the entrepreneur, i.e., NVP = f ( E ); and supports instead the broader model of venture capitalists, which claims that success depends not only on the characteristics of the entrepreneur, but also on the structure of the industry entered and the strategy of the venture involved, i.e., NVP = f ( E,IS,S ). To test this revised model, we developed 19 propositions about possible determinants of new venture performance. These propositions were built around four key questions: 1) What characteristics of the entrepreneur influence new venture performance? 2) What characteristics of industry structure influence new venture performance? 3) What venture business strategies influence new venture performance? 4) What interactive effects among these variables influence new venture performance? The data used for these tests came from a sample of 17 ventures (both successful and unsuccessful) drawn from the files of five different venture capitalists. Overall, we found strong support for the new, broader model. Put simply, new venture performance is influenced by both industry structure and venture strategy, as well as by the characteristics of the entrepreneur. Among our more important individual findings were the following: The interactive effects of industry structure, strategy, and the entrepreneur had a far greater impact on new venture performance than any of these variables in isolation. The essence of this finding is that the new venture game is a complex one, which is one reason it is so risky. It also means that success can be enhanced by specialization on any one of the three basic variables (industry structure, strategy, or entrepreneur), as this will both substantially reduce the complexities involved and enable the venture capitalist to develop greater expertise in managing them. The limited success of previous academic models of new venture performance is also explained, as these models generally did not specialize by industry, by venture strategy, or by type of entrepreneur and did not look for interactive effects. In essence, the lack of specialization of these studies allowed the averaging process produced by interactive effects to mask many potential insights. The clear implication is that future studies of new venture performance must either more carefully limit their domains or be built on contingency models of performance. Disregarding interactive effects, industry structure had a greater impact on new venture performance than either strategy or the characteristics of the entrepreneur. This finding strongly supports the practice of many venture capitalists to specialize by industry, It also emphasizes, albeit indirectly, the tremendous importance of timing to new venture success. The point is simple. Since industry structure has a major impact on new venture performance and since structure can change quickly in the early stages of market development, timing is particularly critical to new venture success. Academically, this finding suggests that specialization by industry may produce more effective research into the influences of both strategy and the entrepreneur on new venture performance with smaller sample sizes, than have the more universal approaches used heretofore. The conditional impact of strategy on new venture performance was far greater than its nonconditional impact. Our key nonconditional strategy finding was that differentiated strategies outperformed focused strategies. This supports venture capitalists' belief that every successful new venture must have some type of unique selling proposition other than price that is not easily duplicated by competitors. Beyond this, however, the key strategy message of our study was that “it all depends on circumstances.” It also indicates that strategy insights may be venture capitalists' key “value added” contribution (other than money) to a new venture. To the extent this is true, it further suggests that entrepreneurs should screen venture capitalists, much as venture capitalists screen entrepreneurs, seeking those with the best knowledge of their industry and the strategies appropriate for it. The biographical characteristics of the entrepreneur had little impact on new venture performance. This was somewhat surprising given the great importance attributed to the role of the entrepreneur in new venture performance by both academics and venture capitalists. In retrospect, though, it probably shouldn't have been so unexpected. After all, our findings do not mean that entrepreneurs are unimportant to new venture success, but rather that their biographical profiles are not the key to such success. Four possibilities remain: 1) that the entrepreneur's psychological profiles affect venture success; 2) that the entrepreneur's behavioral traits affect venture success; 3) that both factors affect venture success; and 4) that the entrepreneur has no impact on venture success. Given venture capitalists' strong belief in the importance of the entrepreneur and their track record of success, we feel that the fourth possibility is very unlikely. However, the lack of success of previous academic research also leads us to discount the first (and, therefore, also the third) possibility as adequate predictors of venture performance—although we would concede that an individual's psychological profile might influence his or her propensity to become an entrepreneur in the first place. What remains is the probability that the key characteristics of entrepreneurs that may affect new venture performance are their individual behavior patterns. Venture capitalists have, in general, been right in disregarding traditional academic research in entrepreneurship. Although this issue was not directly explored by our study, our findings have supported the wisdom of venture capitalists in every instance in which their practices disagreed with the new venture performance model that has dominated academic research. This suggests the need for academics to move beyond studies of entrepreneurial personality and psychology by including in their research the behavioral characteristics sought by experienced venture capitalists.