Entrepreneurs’ networks and the success of start-ups

Abstract

The network success hypothesis assumes a positive relation between the networking activities of founders and their start-up’s success. The rationale behind this hypothesis is the theory of socially embedded ties that allow entrepreneurs to get resources cheaper than they could be obtained on markets and to secure resources that would not be available on markets at all, e.g. reputation, customer contacts, etc.

This paper clarifies how entrepreneurial network activities can be measured and which indicators exist to quantify start-up success. It then reviews empirical studies on the network success hypothesis. The studies have rarely come up with significant results. This surprising evidence can be explained by large differences in the way that the dependent and the independent variables were defined and by effects of unobserved variables such as the networking expertise of the founders and the entrepreneurs’ level of existing know-how in the areas of co-operation and networking (‘absorptive capacity’). The major shortcomings of existing network studies are found to be the neglect of different starting conditions, the focus on individual founders’ networks instead of multiple networks in start-ups with an entrepreneurial team, and the assumption of a linear causal relation between networking and start-up success. Accordingly, the paper develops a new, extended model for the relation between entrepreneurial networks and start-up success. Finally, we make some suggestions for the further development of entrepreneurial network theory.

Keywords:

• networks
• start-up success
• co-operation
• social embeddedness
• costs of networking
• network dynamics

Acknowledgements

In preparing this paper I benefited greatly from comments by Horst Albach, Klaus Brockhoff, and Peter-J. Jost. German Brachtendorf, Verena Rode, and Andreas Schroeter helped in reviewing the existing literature on the subject. Earlier versions of this paper were presented in February 2002 at the Annual Conference of the Commission on Organization Theory of the German Association of University Professors in Management in Lüneburg; in July 2002 as my habilitation lecture at Humboldt-University in Berlin; and in February 2003 at the first Interdisciplinary European Conference on Entrepreneurship Research (IECER) in Regensburg. The author would like to thank two anonymous referees and the editor of this journal for their substantial advice and guidance in revising this paper. All remaining errors and omissions are my own responsibility.

Notes

 McGee, Dowling and Megginson (1995) analyse a sample of 210 stock-listed growth companies based on information given in IPO documents. They measure networking activities of these corporations with a dichotomous variable, the existence (or non-existence) of co-operations ranging from informal agreements to contractually fixed joint ventures in the areas of marketing, R&D, and production. The study chooses the compound growth rate of sales over a 3-year period as the proxy for corporate success.

 Baron and Markman (2000) have also put forward this argument and developed a theory of social skills of entrepreneurs.

 The study of Brüderl and Preisendörfer (1998) is the only existing empirical study of the network success hypothesis that goes beyond measuring networking activities and structural network measures and focuses on the amount of network support entrepreneurs received. Unfortunately, their paper does not make an attempt to compare the amount of support received, i.e. the benefits from the network, with the costs of building, maintaining, and extending it.

 An exception is Johannisson (2000) who investigates the dynamics of serial entrepreneurs and presents the entrepreneurial career as a set of interlocking ventures embedded in the personal network of the entrepreneur (which is assumed to be constant).

 This may be most plausible for the relation between parents and their children. Altruism may also be the dominant motive of some business angels supporting young entrepreneurs, but certainly not for all of them.

 Johansson and Mattsson (1987) have compared the network approach with the transaction cost approach in all details. They show that the network approach in its general form views firms as social units and is closer to social exchange theory than to neoclassical economic theory. The authors also point out that opportunistic behaviour, a central assumption in transaction cost approaches, is replaced by mutual trust and personal relations in network approaches.