1042-2587-96-204$1 .

50
Copyright 1996 by
BaylorUniversity

A Synthesis of Six
Exploratory, European Case
Studies of Successfully
Exited, Venture Capital-
Financed, New Technology-
Based Firms
Gordon Murray
This research presents the summary findings on sixcase studies of successful, venture capital
Investments in new technology-based firms In four European countries. In all cases, the enter-
prises had been financed by specialist, early-stage, and technology-focused venture funds
which had exited the Investments at a significant economic return. Theexceptional competence
and track records of the founder managers, and their defensible product position In growing
markets, each appeared to be a common feature across the Individual case studies. The paper
also questions the unitary nature of the entrepreneurial process, argUing for entrepreneurial
resources to be seen as an eclectically sourced stock.

T here is a prevailing view within the European investment community that investments in
new technology-based firms (NTBFs) are characterized by their complexity and high risk rather
than their ability to provide investors with attractive returns (Murray, 1991; Bygrave & Timmons,
1992; Murray & Lott, 1995). As a probable consequence of these opinions, the proportion of ven-
ture capital investment that is allocated to technology-based ventures in Europe has diminished
over the last decade. European Venture Capital Association figures for 1993 show technology-
based investments represented 17 percent by value of total investments that year, a 20 percent
decline relative to 1988 (European Venture Capital Association [EVCAl, 1994). In the UK, the
largest venture capital industry in Europe, the proportion of funds allocated to technology-based
enterprises has more than halved in the seven years to 1992 when only 9 percent of the value of
all investments made were in technology-based sectors (British Capital Association [BVCAl,
1994). These European figures are in stark contrast to U.S. venture capital activity, where over
recent years approximately 80 percent of venture capital investments has been directed to tech-
nology-based enterprises (see Fig. 1). This limited financial support for new technology entre-
preneurs has important industrial policy implications for both the European Union and its indi-
vidual member states.
Accordingly, the means by which the genesis and growth of NTBFs can be encouraged has
become an important focus of government policy in both Europe and North America. This inter-
est has evolved from a wider reappraisal since the late 1970s of the contribution of small and
medium-sized enterprises (SMEs) to the overall economic vitality of a modem economy (Birch
,1979, Gallaher & Steward, 1986, Storey, Watson, & Wynarczyk, 1989). NTBFs are especially
seen as offering a significant potential contribution in four cardinal areas of economic activity:
innovation, new employment creation, export sales growth, and regional development (Rothwell
& Zegveld, 1982; Freeman, 1983; OECD, 1986; Oakey, Rothwell, & Cooper, 1988; Keeble,

Summer, 1996 41
Figure 1
'Adjusted' Percentage Value of Technology Investments
(Excluding MBOs/MBIs in the UK and Europe and LBOs/
Acquisitions in the US) by Venture Capital Industries, 1984-93

1989; Rothwell, 1989; Roberts, 1991a; Smith, Tether, Thwaites, Townsend, & Wynarczyk, 1993;
Coopers & Lybrand, 1994).
Financing difficulties are particularly acute for NTBFs on formation and at their earliest
stages of development (Roberts, 1991a; Moore, 1993; Murray, 1994a). Limited tangible assets
reduces the opportunity for collateral-based lending from banks. In consequence, owner-man-
agers of NTBFs are, per force, very heavily dependent on their own personal and family finances
for initial capitalization (Roberts, 1991b; Moore, 1993) in addition to relying on trade credit and
government grants (Utterback, Meyer, Roberts, & Reitberger, 1988; Moore & Garnsey, 1991).
The ability of new entrepreneurs from a technology/scientific background to attract external equi-
ty finance is also prejudiced by their frequent lack of commercial experience and an established
track record of successful enterprise (Tyebjee & Bruno, 1984; MacMillan, Siegal, & Narishima,
1985; Goslin & Barge, 1986).
It is within the context of NTBFs seeking early-stage finance with the potential promise of
substantial returns but at a concomitant high level of risk that the potential of venture capital as
a source of entrepreneurial support appears most relevant. Yet, Bygrave and Timmons (1992)
have evidenced the increasing unwillingness of the U.S. venture capital industry to continue to
engage in what these authors term as "classic venture capital." This antipathy to new venture
financing has reached its apogee in the UK, where the majority (over 90 percent) of annual dis-
bursements by BVCA members is now allocated to later-stage investments.

THE STUDY
In the Summer of 1994, the Early Stage Advisory Group (ESAG) of the European Venture
Capital Association. agreed to the author's request to undertake a series of case studies of suc-
cessful, venture-financed investments in technology-based enterprises. ESAG is a specialist

42 ENTREPRENEURSHIP THEORY and PRACTICE

group within EVCA composed of venture capital firms with an exclusive or predominant inter-
est in early-stage technology investments.
The case studies were designed to investigate in detail the circumstances under which each
of the individual enterprises was created and developed, including the role(s) played by both the
lead venture capital firm supporting the investment and the founding management team. From
these data, the researchers wished to ascertain whether or not the chosen, successful investments
shared any common characteristics. Given the dearth of contemporary case studies on European
NTBFs, the exercise was believed to have an importance in its own right. However, in addition,
the research was also conceived as a means of gaining insights and tentative research hypotheses
for a planned and larger, survey-based study of NTBFs. (It was at this subsequent survey stage
that the findings from the case studies would be statistically tested across a wider sample includ-
ing both successful and less successful/failed enterprises.)
From the perspective of the ESAG members, there was a general concern that the wider
investment community held the erroneous belief that successful technology-based investments
were not being made in European enterprises. In the absence of concrete information for
investors or government policy makers, they believed that these prevailing and negative opinions
would continue to discourage future investment.

ACase Study Approach

The value of focused pilot studies as an antecedent to more extensive survey activity is well
reported within the research methodology literature (Zikmund, 1991, pp. 75-83). Accordingly, the
purpose of this exploratory study was to identify an agenda of material issues regarding the gen-
esis, development, performance, and economic impact of European NTBFs. Given the research
resources available (of approximately twelve man-months), it was decided that six case studies
would be undertaken in the Summer of 1994.
In arguing the relevance of a case study approach, Yin (1989, p. 13) observes:

In general, case studies are the preferred strategy when how or why questions are being
posed, when the investigator has little control over events, and when the focus is on a
contemporary phenomenon within some real life context.

Yin goes on to suggest that such explanatory case studies can also be complemented with
exploratory and descriptive approaches. The objective of the research, particularly its investiga-
tive and descriptive nature, fits closely with the logic for the case study methodology. Within the
typology of case study approaches, the design used may be identified as multi-case, embedded
research. The term embedded here refers to the duality of the units of analysis, namely the ven-
ture capitalist investor and the NTBF entrepreneur investee (see also Pettigrew's 1973 triangula-
tion methodology using multiple respondents). This design is in contrast to the holistic approach,
which does not discriminate or focus on differing units but which analyses the situation or case
per se.
As Mitchell (1983, p. 201) has argued, the dominant influence of quantitative methods has
meant that "... 'representativeness' has come to mean typicality in the sense of a statistically reli-
able random sample from a population. The purpose of the case study approach is, in contrast, to
expand and generalize theories (analytical generalizations) by a process of inference and not to
enumerate frequencies (statistical generalizations)" (Yin, 1989, p. 21). Thus, while the analysis
of the six case studies arrived at a number of propositions, these cannot, on the basis of the
employed research methodology, presently be attributed to the wider population of European,
venture-backed NTBFs.

Definition of Successfully Exited Investments

Because the project sought to view the investment process in part, although not exclusively,
from the perspective of those organizations investing equity funds in the uncertain area of early-

Summer. 1996 43
stage technology enterprises, the meaning of successful investments was critical. After reference
to the research literature and consultation with the four early-stage technology investors who
sponsored the study, five case study selection criteria were imposed in order to determine a tar-
get population of successfully exited investments. These criteria were:

• The investment was related to a new technology-based enterprise

• An internal rate of return (IRR) of greater or equal to 30 percent per annum
was achieved by the third party equity provider (venture capitalist)
• The venture capitalist investor had realized (exited) the investment
• The sum invested was material, i.e. >$500,000 local currency equivalent
• The enterprise was a start-up or at a pre-commercialization stage at the time of the
first venture capital investment

Two other operating constraints were also applied in the selection process:

• Both the fund managers and entrepreneur had to agree to researcher access
• The individual enterprises surveyed had to represent investments in at least four
countries of the European Union

It may well be argued that the threshold of an IRR of 30 percent is too low, given the risks
associated with a technology fund. Barry (1995), in his review of new directions in research on
venture capital, cites the study by Huntsman and Hoban (1980) of 110 investments by three U.S.
venture capital firms over the period 1960-1975. While average returns over the period were 18.9
percent, eliminating the top 10 percent of investments resulted in an average return of -0.28 per-
cent. It is common for the success of a venture capital fund to depend on a few outstanding invest-
ment successes that compensate for the high level of investment failures, including the living
dead.

Research Respondent Selection

With the assistance of the EVCA via a circularized request to its members for information
on investment successes, a short-list of 28, early-stage, European technology-based enterprises
that had received venture capital fmance was drawn up. Seven countries were represented in the
list and the reported IRRs to the investors ranged from 11-1000 percent. This list, which because
of variable member response rates could not be viewed as representative, was expanded by the
researchers' additional efforts to increase the sample numbers in both France and Germany by
direct contact with local venture capital firms. In total, some 35 organizations were identified that
had received venture capital and where these investors had exited with a positive return on invest-
ed capital. No attempt was made to ascertain the total population of European investments meet-
ing the selection criteria.
The six investments chosen were selected to achieve a spread of enterprises in four European
countries. The average, annualized, internal rates of return for the six investments was 76 percent,
standard deviation 25 percent, range 38 percent to 120 percent. Contemporary access to key par-
ties present at the time of the original deal proved to be the most important determinant for the
final selection of research respondents. Accordingly, three of the six case studies were selected
from the investment portfolios of three of the four research sponsors. The six selected companies
(see Appendix 1) were:

Dakota Pharmaceutical, France: A new business providing generic drugs to the French
hospital market and utilizing novel marketing and distribution channels. First venture
capital investment 1987.

Danby Medical, UK: A new business created to exploit a major advance in infusion

44 ENTREPRENEURSHIP THEORY and PRACTICE

 pump design for the international health-care market. First venture capital investment
1988.

Electro Optical Systems, Germany: The first European designer and manufacturer of
advanced, laser-based, rapid prototyping systems for the automotive and engineering
industries. First venture capital investment 1990.

Integrated Circuit Testing, Germany: A spin-off from a major European corporation to

manufacture and supply advanced electronic testing equipment for integrated circuit
manufacturers. First venture capital investment 1984.

Linx Printing Technologies, UK: A new business manufacturing state-of-the-art inkjet

printing systems for the packaging and labeling industries. First venture capital invest-
ment 1987.

PNA Diagnostics, Denmark: A new business based on the discovery of a novel mole-
cule (peptide nucleic acid), which can be used as a diagnostic tool in DNA research work
in the pharmaceutical industry. First venture capital investment 1992.

In all cases, the founder or a leading representative of the original management team, and the
responsible investment executive from the lead venture capitalist investor were each interviewed.
A questionnaire schedule was employed as an "aide memoire" in order to structure the questions
posed, although the interviews were most effectively executed as an extended dialogue between
the respondent and researcher. Subsequent contact also allowed the interviewers to seek elabora-
tion or confirmation of salient facts, where necessary. This data validation was particularly
important regarding the participation of the venture capital executives. All respondents were pro-
vided with a detailed report of their respective case study and the researchers' interpretation of
the data. The accuracy of the data, on which the research findings were based, was confirmed in
a final debriefing session.

EX POST CASE ANALYSIS

The very nature of the case study methodology illustrates those details, which are specific
and peculiar to the enterprise under observation, as seen from the perspectives of both the inter-
viewed respondents and the researchers. In order to view the material in a wider context, the case
studies were subsequently reappraised using a common format which appeared to give coherence
to the information collected. This format or template was used to appraise the potential wider
applicability of the findings generated from a small number of detailed observations, or, in Yin's
(1989) terms, to reach analytical generalizations. However, the findings presented below cannot
be seen as a proof, in the conventional sense of statistical inference, of either common behavior
or similar commercial environments shared by the enterprises. Rather, the results document a
number of interpreted themes that each appear to have been consistent and relevant to all or the
majority of the six individual cases.
The common themes derived from an appraisal of the case study material were: Strategic
Focus of the Investee Enterprise; Characteristics of the Markets Selected; Nature and Behavior
of Competitors; Importance of Early Revenue Generation;
Importance of Patent Protection; Contribution of the Venture Capitalist Investors (i.e., con-
trol, hands-on, metrics business plan, reinforcing role, and entrepreneurialism); Competencies of
the Founder Investee Management Teams (i.e., technology/innovation, commercialism, interna-
tionalism, status (peer recognition), serial entrepreneurial activity, and resilience to set-backs).
It is suggested that within this common template the six investments studied illustrated a
remarkable degree of conformity.

Summer, 1996 45
RESEARCH FINDINGS
Strategic Focus
In all cases, considerablethought had been given by the finn founders to the particular mode
of market entry employed. A number of firms had chosen to rapidly internationalize their prod-
ucts in mainstream markets, i.e., within the first two years of sales. Others had defined an appro-
priate niche market which they considered gave sufficient returns while being defensible or of
less interest to major competitors. In the case of Dakota, the sale of generic drugs direct to hos-
pital purchasers was an innovation in the French market to which the enterprise was restricted.
EOS focused directly on a Cad/Cam prototyping system specifically designed to meet the devel-
opment needs of a small number of major, pan-European, engineering corporations. The market
ambitions of Danby Medical, ICT, and Linx were international in scope, and their products and
marketing strategies were designed to meet the direct competitionof incumbentsuppliers in their
respective industries.The uniqueness of the new molecule of PNA gave some protection against
substitute diagnostic tools but was similarly internationalin focus. This reflected the near global
nature of the medical diagnostics markets, and the insufficient size of the domestic market
(Denmark).
In each of the cases, the exact nature ofthe mode of market entry and the new product's posi-
tioning against competitors had been the outcome of a purposeful ex ante, strategic analysis.
Product specification, market segmentation and pricing decisions had been employed to reduce,
at least initially, a potentially damaging, competitive response from powerful established suppli-
ers in their respective industries. The formulation and justification of this strategic intent was a
demand of the venture capitalists prior to confirmation of financial support.

Characteristics of the Markets Selected

Without exception, the markets into which the new products were launched were large and
growing.This remains a key criterion for technologyinvestors.The medical infusion market rep-
resented combined, annual sales of $900 million in the U.S. and Europe and was growing at 10
percent per annum. The medical diagnostic market, although smaller than the pharmaceutical
product market, was closely associated with the former's growth as health care demands increase
universally. The cost and revenue imperatives of rapid product development in complex engi-
neering projects (e.g., a new car model) meant that a successful process innovation, that gave a
clear added-value to customers would be quickly embraced by all manufacturers in the sector.
The growth of integrated circuits as a ubiquitous component of both consumer and industrial
goods is reflected in a parallel need for testing equipment, as silicon etching techniques pass the
one micron barrier and more functions are compressed onto a single chip.
The internationalgrowth in legislationrequiring manufacturers of food, drugs, and other per-
ishable products to adopt date stamping and use by labels, in addition to the introduction of bar
codes as a means of tracking components and product stocks by computerizedinventory systems,
has very significantlyexpanded the demandsfor precise coding and labeling equipment.This was
to the direct advantage of Linx as a start-up company competing against established manufactur-
ers. While the market focus of Dakota was restricted to French hospitals, the move from ethical
branded drugs to generic products has been one of the most significant and material changes to
the organization of pharmaceutical sales in the last decade. The French operation was closely
modeled on a successful U.S. venture started in 1981.The founder of Dakota was fully informed
of this earlier venture and had invited its founder (who declined) to become a co-investor of the
French initiative.

Nature and Behavior of Competitors

Each of the respondents' product/service offerings represented a significant benefit in cost,
functionality or performance over existing producers. Dakota's hospital buyers could purchase

46 ENTREPRENEURSHIP THEORY and PRACTICE

non-patented drugs at a cheaper price than their chemically identical, branded equivalents from
major pharmaceutical companies. Danby Medical's unique infusion pump technology gave both
a price advantage and more accurate metering of the injected product - the latter being a criti-
cal benefit in medical environments. EOS customers could reduce their reliance on a single, dom-
inant U.S. supplier in addition to gaining advantages in both price and product functionality. The
quality of ICT's technology, developed at Siemens laboratories, was sufficient to gain the new
enterprise OEM agreements in Europe, the U.S. and Japan. Their technology had been developed
at a fraction of the cost of the technology of the firm's largest American competitor. In the case
of Linx, their European competitors were reliant on established technologies, some of which
were originally developed by the founders in their previous careers as technical consultants. One
competitor was still using a critical technology in 1986 developed by the founders in 1975. The
new models, which were introduced by Linx, had a specific and important advantage in the area
of precise printing on irregular surfaces.
The Danby Medical, EOS, and Linx cases particularly demonstrated the situation of power-
ful competitors in growing markets that had, arguably, become innovatively complacent. Their
apparent ability to satisfy existing and projected market growth from a current range of products
and technologies had become a weakness. Conversely, for the new entrants, the absence of
aggressive new product development represented an opportunity. Established competitors
appeared to have forgotten the maxim: make your own products obsolescent before your com-
petitors do (Peters, 1990, 1991). Once the new ventures' products were seen by established com-
petitors to offer significantly enhanced price or customer benefits, their market responses became
rapid and highly adversarial. However, given the inevitable lag between this stage of awareness
and their resultant actions, the new enterprises had time to establish a presence in their markets
that could be defended.

Importance of Early Revenue Generation

Several venture capitalists observed to the researchers that a danger with new technological-
ly sophisticated products is that their inventors never stop improving them. They are always near-
ly ready but never quite actually ready for market launch. This is often described as the entre-
preneurs being in love with the elegance and novelty of the technology itself rather than its abil-
ity to make money. Yet, corporations that have used venture capital firms as part of a technolo-
gy-search strategy reported that satisfactory commercial performance is the best operating yard-
stick of future technology performance (Hurry, Miller, & Bowmanl, 1992).
All enterprises had to meet demanding revenue and cash flow targets imposed by the ven-
ture capitalist investor (Roberts 1991b). A stick and carrot system is frequently employed through
the use of financial instruments such as performance related incentives (ratchets) for the investee
management team. As a result, poor performance against agreed business plans can materially
reduce the founders financial reward from the jointly funded enterprise. Venture capitalists struc-
ture their investment to provide the entrepreneurs with a very clear message as to the conse-
quences of both success and failure.
With the exception of Danby Medical and PNA, the other four enterprises showed early and
significant sales revenues. Because new medical applications have to be exhaustively tested prior
to use and must conform to stringent regulatory protocols, long development cycles are a reality
of the medical and pharmaceutical markets. The consequence of this was that early revenues
throughout the development cycle were trivial or non-existent for the former two companies.
However, the patent rights to PNA's molecule for non-diagnostic uses had already been sold, giv-
ing an indication as to its potential value.
Dakota's first products were bought-in rather than produced in-house in order to generate
revenue. EOS acted as a distributor for another German firm involved in laser technology in order
to generate early revenue. EOS was also successful in attracting significant R&D grants from
both the Bavarian state and the Brite-Euram program of the European Union. It was also award-
ed funds via the Federal German government's BJTU scheme, which underwrote equity invest-

Summer, 1996 47
ments in NTBFs. ICT similarly attracted two Esprit grants from the European Union, in addition
to marketing a prototype early in its development stage. Linx had also successfully applied for an
Esprit grant. However, by the time the grant was awarded the offer price of the company's shares
had changed. The principals of Linx were then of the opinion that the considerable time demands
required for ensuring the success of their grant application were not cost effective and they
allowed their application to lapse. (This illustrates a significant problem of restrictive government
grant eligibility requirements and their often inappropriateness for rapidly growing and meta-
morphosing, young companies in emerging technologies.)

Importance of Patent Protection

The securing of intellectual property rights on all major international markets, while an
expensive exercise, was seen by the venture capital investors as a necessary protection of the key
intellectual assets of the new technology enterprises. For each of the six companies, patents were
an important part in the success of the new enterprise. In the case of Dakota, it was the very
absence of existing patent protection in France for incumbent hospital drug suppliers that became
the key market opportunity identified by the entrepreneur.
The innovations in pump technology developed by Danby Medical resulted in seven patents
applied for and granted. The founder, Hal Danby, regarded only three of these patents as impor-
tant, with one patent assuming a critical contribution to the success of the venture. An unclear
patent cover in Europe by EOS's main US competitor allowed the company to establish a pres-
ence in the market. This was subsequently strongly challenged by the holder of the US patent
rights which attempted (unsuccessfully) to claim substantial damages after having lost 50 percent
of its European sales to the new company. That this challenge could be fought off was in large
part due to the early and rigorous investigation of the European patent market by an employee
recruited by EOS from another European competitor.
ICT similarly had collected over 20 patents in the development of its E beam, circuit-testing
technology. Use of these patents, largely developed while the founders were at Siemens, became
part of the negotiated deal of this spin-off from a corporate research laboratory. The two founders
saw this patent protection as fundamental to their success. Linx inkjet also produced a range of
patents during the development process. Where possible, innovations were patented internation-
ally at the insistence of their venture capitalist investor. Four patents were of material importance
and, like Danby Medical, one patent became pivotal to Linx's technological advantage.
At PNA, the pharmaceutical and reagent opportunities of the engineered molecule were
licensed to other parties, thus leaving the company opportunities only in the diagnostic market.
The development work and associated patents were addressed to this single purpose. Given the
nature of commercially oriented medical research, patents were an indispensable element of the
value of this new enterprise.

Contribution of the Venture Capitalist Investors

With the exception of PNA, the appropriate and timely interventions of the venture capital-
ist investors as partners in the new enterprises was perceived by the founder managers as a criti-
cal element of their successes. The venture capitalists allowed the new enterprises and their man-
agement teams to move quickly down the learning curve based on the investors' greater experi-
ence with new firm formation and growth. Warne (1988) has characterized venture capital activ-
ity as a combination of capital and consulting . The nature and extent of the venture capitalists'
contribution was based on the needs of the new venture, including gaps in managerial compe-
tencies, the appropriate skills available from the investors, and the relevance of specific advice
and support (including additional finance) at particular stages in the development of the new busi-
ness.
The nature of the venture capitalists' advice and intervention was rarely associated with tech-
nical details of the specific innovation (Murray, 1994b). While a number of investor executives
had a technical background in the appropriate discipline, at best this facilitated the level of com-

48 ENTREPRENEURSHIP THEORY and PRACTICE

munication between the two parties. At Dakota, the entrepreneur saw the venture capitalist as
equivalent to a board of directors to which he reported every month. This was highly appropri-
ate to the experience and preference of the founder, who had spent his former career as a senior
executive in large and formally structured corporations. Once the reporting details were agreed,
the venture capitalist played little active role in the management of the new enterprise up until
the stage at which exit discussions were introduced. More direct interventions were not neces-
sary, given the competence of the founders and the balance of commercial and technical experi-
ence of their management team.
The intervention of the two venture capital partners at Danby Medical was more incisive and
critical. The lead investor had considerable experience in the medical instrumentation market and
was able to contribute significantly to strategic and marketing decisions. It was the lead venture
capital firm's executive who persuaded the founder to form a manufacturing company rather than
to take the less profitable but safer course of licensing his innovation. This decision proved piv-
otal to the subsequent scale of success of the venture. The venture capitalists also provided the
critical commercial skills, which were of less interest to the technically oriented founder. The
lead venture capital partner was informed by the founder that he wished for a managing director
to be recruited to assume responsibility for running the company. However, the responsibility for
identification of a potential buyer for the enterprise was retained by Hal Danby whose familiar-
ity with the market allowed a clear opinion as to his desired future purchaser from very early in
the project's development.
The managers of EOS selected their venture capital partner, from a choice of three potential
investors, based on the latter's technical expertise and experience in the target product/market.
The founder and the investment executive from the chosen venture capitalist were known to each
other from previous industry contact. Despite the investor's technical familiarity, this relationship
was largely based on financial controls, in addition to the provision of advice and shared experi-
ence of the relevant markets. In leT, the investor chosen by the entrepreneurs was already linked
to the business because Siemens was a limited partner in the selected venture capitalist s fund.
However, the venture capital firm was, according to the founders, relatively hands-off and did not
become closely involved in tactical operational or commercial issues.
The investors in Linx were all technically trained and industry experienced. Because both
the investment executive and the founder of Linx were engineers, communications were believed
to have been made more easy. The investor immediately introduced very rigorous financial con-
trols and imposed demanding staged targets on the new enterprise. The investor was also influ-
ential in identifying additional management resources as the company grew. Assistance with
additional recruitment to the key management team is a common role for venture capital
investors (MacMillan, Siegal, & Narishma, 1985; Mac Millan, Kulow, & Khoylian, 1989;
Sapienza, 1992). The original decision of the founders to recruit professional management was a
direct consequence of their earlier and unsuccessful attempts to raise venture capital finance. In
the opinion of the entrepreneurs, these declining investors all believed that the original founders
lacked sufficient management experience to ensure the success of the proposed venture.
The investors in Linx were typical in being very hands-on in the process. They spent, on
average, two man-days per week with the new venture. This intensive relationship is the norm
for early-stage investments (Gorman & Sahlman, 1989; Murray, 1994b). The entrepreneur con-
ceded that the tight financial controls they quickly imposed on the venture proved to be very
helpful to the management team and were instrumental in the subsequent success of the compa-
ny. Again, given the technical competence of the founding managers, the investor did not signif-
icantly influence the nature of the technical development process, to which it could not materi-
ally contribute.
The case of PNA is the least typical of the six case studies regarding the role played by the
investor's management team. PNA raises the fundamental question of which parties contributing
to a new venture can sensibly be viewed as the entrepreneurs. The innovative research work on
the new molecule was unquestionably the responsibility of the Danish university research team.

Summer, 1996 49
However, these academics were primarily interested in the scientific and technical challenges
represented by the new molecule. Accordingly, although the research leader was interested in
exploring the commercial possibilities of the new molecule (and had some previous technology
patent and licence experience), he and his three-man research team did not envisage or wish to
develop personally a commercial company to exploit the technology's potential. They saw their
role as proving the theoretical principles and taking the technology up to but not beyond the com-
mercial border .
Commercializing the technology became the exclusive responsibility of the Danish venture
capital investor. The investment executive who championed this project was familiar with the
pharmaceutical industry and knew of the research professor by reputation. This executive was
mandated by his venture capital firm to create the management team, including R&D and admin-
istrative infrastructures, by which the new molecule could be developed to a stage of commercial
readiness. The organization of an enterprise to develop the commercial possibilities of the mole-
cule proved demanding. The senior professional management group that was recruited to the
original team was changed twice during a two-year period in which substantial, unplanned costs
were incurred.
As the enterprise grew, the original technical founders played an increasingly minor role in
the enterprise. Development work involved more prosaic organic chemistry skills. The founders
were less interested in this necessary activity, preferring to remain academics focused on more
exciting fundamental research questions. The responsibility and impetus for commercialization
of the diagnostic product technology became almost totally that of the investor and the recruited
professional and technical management team under its control. It was exclusively the investor's
decision to sell the enterprise to a German company. This decision was strongly influenced by the
considerable operating costs continuing to be incurred by PNA, and the substantial additional
funds that the investor would be required to contribute in order to take the product to final mar-
ket launch. The timing and decision to realize the investment by a trade sale was not universally
welcomed by the enterprise's operating managers or the academics. However, at this stage, the
increase in project capitalization had resulted in the investor virtually assuming full control and
ownership over the future of the enterprise.

Competencies of the Founder Investee Management Teams

The creation and subsequent commercial success of a new technology-based firm demands
an extraordinary range of skills and experience from within the entrepreneurial team. Ideas and
innovations have to be formulated, tested and made to work in commercial conditions and scale.
The users of a new technology are invariably highly informed purchasers and are well able to
appraise the technology against existing and competing offerings (Popper & Buskirk, 1992). At
the same time, the founders have to manage effectively the uniquely demanding tasks of creating
and developing a new enterprise. A high level of technical skills are necessarily required.
However, these are rarely sufficient for the successful creation of an attractive and viable busi-
ness in a technology marketplace characterized by its sophistication and international scope.
Considerable managerial skill is also required. By any definition, the creators of a successful
NTBF have to be exceptionally competent. Serendipity, while always welcome, is rarely suffi-
cient.
The founder of Dakota was a professional manager with both management training (an
American MBA) and substantial international experience in large corporations in the same indus-
try as his new enterprise. He had had direct experience of the proposed venture through his close
association with a U.S., venture-backed entrepreneur working in generic drugs marketing to hos-
pitals in America. As noted, his project was a direct copy of this earlier venture as the entrepre-
neur recognized its unexplored applicability in a European market (France). He was also famil-
iar with the role of venture capital and already knew the venture capital firm that fmally backed
his proposal. The investor commented that the entrepreneur presented the most professional busi-
ness plan that his firm had ever received. The strength of the team was sufficient to overcome a

50 ENTREPRENEURSHIP THEORY and PRACTICE

Table 1
Comparison of Founder Characteristics

Founder Characteristics: Dakota Danby EOS ICT Linx PNA

High Level of Commercial

Experience ? x ? x

History of Innovation:
Technology x .I ? .I .I .I
Commercial .I .I .I x .I ?

International Prod/Mkt .I .I .I .I .I ?
Experience

Status (peer recognition) .I .I .I .I

Prior Entrepreneurial
Activity (indep./corporate) .I .I .I x .I x

Commercially Astute .I .I .I .I .I ?

Resilience to Set-backs .I .I .I .I .I na

Exploited Lucky Breaks .I .I .I .I .I na

Previous Contact with the VC .I .I .I .I x ?

number of delays in drug registration approval, in addition to an aggressive price response from
one large competitor in a targeted product market.
Hal Danby was well known as a highly successful inventor within the medical instrumenta-
tion industry. He had already created, with venture capital finance, a successful US company
manufacturing infusion pumps to his design. Prior to this American venture, Danby had also suc-
cessfully developed a range of cardiac electrodes for another medical instrumentation supplier.
Thus, Danby had both very high technical skills and detailed market knowledge, in addition to
highly relevant, commercial awareness at an international level. Like the Dakota founder, he was
able to create a small team with complementary skills. Also in common with all the founders
from the six companies, he wished to see a direct financial payback from his efforts. While being
a highly creative technical designer, he was also commercially astute. This was a characteristic
which he shared with each of the other founder management teams, with the possible exception
ofPNA.
During its four-year existence, Danby Medical suffered a number of potentially serious set-
backs. Initially, it proved difficult to attract a suitable managing director to develop the new busi-
ness. Critically, the Japanese manufacturer of an essential electronic component for the infusion
pump pulled out as a result of its concern with the litigation potential of product failure in a med-
ical device controlling drug administration to patients. This reversal delayed the business by six
months. The acquisition of a small company in an allied field also served as a serious distraction
from completing designs and product launch on time. The need for substantial refinancing of
Danby Medical, before the company was ready for a trade sale, further added to the series of hur-
dles faced by the company.
The founder of EOS also came from the industry in which his proposed enterprise would

Summer, 1996 51
compete. Like the founder of Dakota, he had become frustrated when his employer, a large U.S.
component manufacturer, would not develop his product ideas. He had thus become sensitized to
a possible alternative entrepreneurial future. The founder was scientifically trained with a Ph.D.
in the relevant technical field. This competence was combined with a detailed commercial
knowledge of the related markets and their customers' requirements in both the U.S. and Europe.
Setbacks included the withdrawal of an early government grant when the founder refused to pro-
vide a personal bank guarantee. Subsequent to the product launch, the U.S. competitor mounted
a major challenge on EOS patent rights. The early recruitment of a European patent expert, who
had helped define the European opportunity and, subsequently, assisted EOS in defending its
strategy, was a measure of the professionalism of the founder. His understanding and contacts in
the European customer base enabled the company to secure firm purchase commitments, with
advanced revenues from one potential customer, several months prior to the new product being
available.
The founder of ICT also had a Ph.D. in the relevant technology field and a series of over 20
patents to his name. The proposal to spin-off the technology from Siemens was his idea and he
successfully obtained senior, corporate management support for this unusual (in Germany)
course of action. The founder's technical experience was complemented in the critical marketing
field by his recruitment of a partner with international sales experience. The inclusion of this
manager allowed the founder to address reservations expressed by the venture capital investor on
the original business plan and the balance of the management team. A second application to the
investor some six months later was successful.
During the development of the business, a major U.S. corporation entered their market seg-
ment, threatening to become a very serious competitor. This threat acted as a catalyst for ICT to
seek a strategic partner. The Japanese integrated circuit maker, Advantest, was identified and ICT
was subsequently sold to this company. This resolution enabled the investors to exit from the
company while ensuring ICT's survival with a powerful parent contributing additional financial
resources and core skills in its primary area of technology.
The technical and entrepreneurial talents of the founders of Linx had been directed in assist-
ing other companies in the ink jet field to grow as a result of their contributions as technical con-
sultants. This had created a fruitful tension of the kind: If they can do it, why not us? Their tech-
nical and innovative skills were proven and acknowledged by the industry. Current industry prod-
ucts in the UK and Europe were significantly based on their earlier work. Perceived weaknesses
in commercial and managerial skills were addressed by the founders' recruiting a highly experi-
enced chairman able to convince potential investors as to the merits of the proposal and, partic-
ularly, the investee management team. In addition, a marketing specialist with international expe-
rience in the ink jet product market was also recruited, as was additional financial systems sup-
port.
The single biggest challenge for the original founders of Linx was to convince potential
investors that their unquestionable technical skills could be used to create and develop a compa-
ny that could win substantial sales against entrenched competitors. Once this hurdle had been
overcome and the company launched, existing competitors rapidly recognized the seriousness of
the threat that the new company represented. Initial offers of employment, made to the founders
prior to the establishment of the new company, were replaced by competitors responding with the
introduction of new machines and, in one case, the changing of international marketing channels.
Ironically, these competitor reactions worked directly to the advantage of Linx. In their attempts
to rapidly introduce new model upgrades, at least one competitor experienced unforeseen tech-
nical difficulties. Linx was able to supply products of demonstrable performance superiority. In
addition, the wholesale change in distribution channels by one major competitor created a hiatus
in the product supply of its erstwhile distributors. This gap, created by a competitor's strategic
miscalculation, was rapidly filled by Linx with its new products.
As has already been noted, the primary entrepreneurial function in the case of PNA was
assumed by the investing venture capital firm rather than the academic inventors of the new tech-

52 ENTREPRENEURSHIP THEORY and PRACTICE

nology. The investor, in effect, created a highly entrepreneurial infrastructure around a technolo-
gy developed in a university research department. The innovation, a new molecule with potential
diagnostic capabilities, became the foundation stone on which the enterprise was built by techni-
cally informed but essentially commercial investor-managers.

DISCUSSION OF RESEARCH OBSERVATIONS

The above observations have been based on a sample of six case studies. As noted, it is,
therefore, prudent, to exercise extreme caution in generalizing the research findings to date other
than to construct a set of tentative hypotheses. Alternative interpretations may become more plau-
sible with further survey data, which should necessarily include both successful and failed invest-
ments. Despite this strong caveat, two particular aspects of the six cases were striking to the
author - the exceptional skill and experience sets of the successful entrepreneurs, and the nature
of what is, and who contributes to, the entrepreneurial process. Gartner, Shaver, Gatewood, and
Katz (1994), in addressing the theme "Finding the Entrepreneur in Entrepreneurship," similarly
placed strong emphasis on the centrality of these two strands to future entrepreneurial studies.

Exceptional Individuals
Gartner et al. (1994, pp. 6-8) argue that past studies have focused on the motivational variable
and tended to ignore the ability variable. Using respondents' self-assessments of competence on a
six-item scale, Chandler and Hanks (1994) illustrate empirically from their study of 155 U.S. man-
ufacturing firms that entrepreneurial competence and the quality of the opportunity are directly
correlated with venture growth, a fmding that would be of little surprise to most venture capital-
ists. (Interestingly, they did not find a significant association between managerial competence and
venture growth.) In attempting to isolate the factors that determine venture creation, Vesper (1990)
argued that technical and business know-how are necessary components. These two factors are
subsumed under the rubric "ability to enterprise" by Gnyawali and Fogel (1994) in their proposed,
integrated framework of the environmental factors influencing new firm creation.
Despite methodological problems with the processual interrelatedness of entrepreneurial
ability or competence to both organizational resources and capabilities (Chandler & Hanks, 1994)
and propensity to enterprise (Gynawali & Fogel), the founders of the six enterprises clearly
demonstrated exceptional abilities. These individuals had both the conceptual skills and industry
experience to recognize the potential technology/market opportunities. They also demonstrated
the technical andsnnovative skills to undertake the necessary pre-market development. Venture
capitalists see a very large number of would-be entrepreneurs. In the U.S., one-third of the ven-
tures they have supported subsequently resulted in a financial loss (Bhide, 1992). Accordingly, a
key part of the venture capitalist's task is to determine those individuals and teams who have a
high probability of creating a commercial, as opposed to a merely technical, success (MacMillan
et al., 1985; MacMillan, Zemann, & Subbanarasimha, 1987; Hall & Hoffer, 1993). Typically,
U.K., continental European, and U.S. venture capital firms will reject approximately 95 out of
every 100 proposals presented to them (Dixon, 1991; Roberts, 1991b; Bannock, 1992). The cen-
trality and difficulty of this selection task illuminates much of the general canon of venture cap-
ital studies by academics.
Yet, even a cursory examination of the entrepreneurs studied in this exercise would indicate
the exceptional nature of their technological and, frequently, commercial track records. This
would have isolated them from the rank and file of their contemporaries. The technical special-
ists had each demonstrated a level of innovative excellence that had made them well known and
respected among their peers, usually at an international level. The professional managers, with-
out exception, had worked for major corporations in several countries and had assumed signifi-
cant managerial and marketing responsibilities. Interestingly, they had also each experienced an
element of frustration that entrepreneurial projects of their suggestion had not been taken up by
their employers.

Summer, 1996 53
 Ex post appraisals run the danger that factors are presented that are only consistentwith the
desired hypotheses or models of the researcher. There is also ample room for the seductive but
fruitless tautology that successful investments are the result of successful managers. Yet, it is dif-
ficult to see how the founder managers and entrepreneurs described could not be categorized as
exhibiting a very high level of professional competencies, irrespective of how their particular
investments had fared. With the peculiar exception of the academic progenitors of PNA, the
founder managers demonstrated their competencies across a range of both technical and com-
mercial skills.
These findings closely mirror the results obtained by Roure and Maidique (1986) in their
(exploratory) comparative study of eight U.S. high-technology start-ups. Their samplecompanies
were split into two matched groups differentiated by the success/failure of the venture. These
authorsfound that the successful firms sales of $65-500million and after-tax profits of about 10
percent were founded by management teams with significantly greater and more relevant expe-
rience than those of the failed or unsuccessful firms. Founder management teams were larger,
more complete and had more extensive experience in the function they performed in the new ven-
ture. Roure and Maidique, (1986, p. 302) observed that their successful firms targeted niche mar-
kets uninhabited by strong competitors or avoided head-on competition.
This was not universally true in the present study. PNA was differentiated from other diag-
nostic offerings through the novelty of its new molecule. Dakota pursued a policy of avoiding
direct competition with the powerfulmanufacturers and distributors of brandedpharmaceuticals.
The unique and patented workings of Danby Medical's infusion pump allowed some protection
from less-effective models supplied by competitors. However, for the other three companies,
their introduction into the market broughtthem per force into direct competition with entrenched
suppliers. As the suppliers of substitute products to existing firms, they could not avoid direct
competition. However, it is true that if successis measured by the size of the investors' IRRs, the
three former firms recorded an average return at 92 percent which was considerably higher than
the average of 60 percent for the three firms exposed to direct competition. However, the small
number of firms involved in the study and the limitations of IRRs as a universal criterionof suc-
cess suggest that this comparison should be made with extremecaution. (This caveat is also nec-
essary in Roure and Maidique's study.)

The Stock ofEntrepreneurial Resources

Gartneret al. (1994)also questioned both the identityand the natureof the entrepreneur, and,
in consequence, the challengeof studying this idiosyncratic phenomenon. They particularly cau-
tion against the assumption that the totality of this activity may be adequately encapsulated and
understood withinthe actionsof one individual, arguing that the entrepreneur in entrepreneurship
is more likely to be plural, rather than singular.
Again, the findings of the six case studies lend further credenceto this observation. The task
of creating and developing a new, technology-based firm is an undertaking of near gargantuan
proportions. In the U.K., 60 percent of new firm starts do not reach their tenth birthday (Storey,
1994). The range and complexity of the skills necessary for survival, let alonefor the level of suc-
cess demanded by a venture capitalist, are profound. To require that these skills are present and
available in the single individual or a small management team can only serve to ensure the very
high rejection rate of all proposals received by equity investors. The key aspect of the proactive
and hands-on approachadopted by the investors in each of the six cases is that they, themselves,
represented a portfolioof complementary skills that could augmentthe existing resources of the
founder manager(s) in order to increase the probability of economic success.
This may be seen in PNAin an extremeform, but is also represented in the majority of other
cases. Danby Medicalwould have gone no furtherthan creatingan attractive technology for sub-
sequent licensing. It was their industry-informed and strategically aware lead investor who sug-
gestedthe creationof a direct competitorto the incumbent players in the infusionappliances mar-
ket. The venture capitalist in the case of EOS had also previously run his own company in the

54 ENTREPRENEURSHIP THEORY and PRACTICE

same industry sector as the proposed investment. He recognized the potential of the technology
and directly augmented the entrepreneurial commitment of the founder manager. The other case
studies similarly illustrate that the investors contributed a range of skills in strategy formulation,
product/market focus, and managerial recruitment, in addition to their traditional core financial
appraisal and monitoring roles. Of no little importance, the external investors did not intervene
in areas where they had no economic contribution to make. The hands-on relationship was exer-
cised on a discriminating and exceptional basis rather than in a universal manner.
It is therefore suggested that a new venture requires a critical stock of relevant skills and
experience. Provided that these skills are readily available, easily communicated, and efficiently
adopted and integrated into the new venture, the original ownership of these key resources
becomes of limited importance to the success of the venture. In the above cases, it is difficult to
de-couple the critical contributions made by both the founder managers and their venture capital
partners. In essence, the new venture accumulated a critical stock or threshold of core technical
and commercial competencies irrespective of their source.
Viewing the conditions for the success of a new venture in this light, the demands for a full
suit of skills to be resident in the entrepreneur or founder management team can be relaxed, pro-
vided they are readily accessible from active partners to the venture. This, in turn, requires the
investor, or any other source of a key information/experience, to be hands-on in operation. A
more remote or arm's-length relationship would increase the transaction or communication costs
beyond the point where the resource could be viewed as part of the accumulated stock of the
enterprise. In all the above cases, the investors were hands-on investors, or close trackers
(MacMillan et al, 1989).
If this model of a critical minimum stock of entrepreneurship skills needed at firm formation
is shown to be robust, it represents a powerful argument for the predominant mode of operation
of specialist, early-stage, and technology-based venture capitalist investors.

Summer, 1996 55
Appendix
Summary Information on the Six Case Studies
Company Name Dakota Pharmaceutical DanbyMedical Electro OpticalSystems
GmbH (EOS)

The lead entrepreneur M. Perrin Mr. HalDanby Dr. Hans Langer

Previous ventures Running divisions of Anatros Corporation None

large corporations

Venture capital funds Apax AltaBerkley European Technologies

involved Holdings N.V/
Technologieholding
VCGmbH
Citicorp Prelude Technology
Investments
Society General Electra Innvotec
Banexi

Date offirst VC investment March 1987 December 1988 December 1990

Period of investment 4 years 3 years 3 years

Meansof exit Trade sale Trade sale Trade sale

Totalequity invested FFI2 million US $20,000,000 DM1.8 million

(£1.4 million) (£13,333,333) (£750,000)

IRR to investors 65% 90% 75%

Initial equity split Undisclosed 60/40% 64/36%

(managIVC)

Equity split at exit Notdisclosed Notdisclosed 75/25%

The technology Generic drugs Infusion pump Laser-based

technology prototyping

Market scope Focus on the French World-wide health European Market

hospital market for care initially
injectable drugs

Employment growth to Ix3 1.5 x 38 I x 30

summer 1994 (period years) (4) (4) (4)

Keyissues to emerge: Market rather than product Critical VCstrategy role High technical expertise
innovation Market driven approach FirstEuropean supplier
Value of entrepreneur's High technical expertise Support from corporate
view ofVC Recruited commercial customers
Recognized patent gap skills Innovative failure by
Early exit allowed High level of market competitors
refinancing knowledge Recognized patent gap
Role of German public
funds

56 ENTREPRENEURSHIP THEORY and PRACTICE

Appendix (continued)

Summary Information on the Six Case Studies

Company name Integrated Circuit Linx Printing PNA Diagnostics
Testing (ICT) Technologies

The lead entrepreneur Dr. Hans-Peter Feuerbau Mr. Mike Keeling Prof. OleBuchardt

Previous ventures None None Licenced earlier research

findings

Venture capital funds Techno Venture Managers MTI Managers Danish Development
involved Banque Paribas Finance Corporation

Date offirst VC investment April, 1984 January, 1987 February, 1992

Periosd of investment 3 years 5 years 2 years

Meansof exit Trade sale Initial public offering Trade sale

Totalequity invested DML5 million £990,000 Dkr16.5 million

(£624,000 million) (£1.7 million)

IRR to investors 38% 68% 120%

Initial equitysplit 51/49% 20/80% 50/50%

(manag/VC)

Equitysplit at exit 24n6% 40/60% <5/95%

The technology Integrated circuit testing Inkjet printing New molecule binding
DNA

Market scope International International product International medical

semi-conductor market labelling market diagnostics applications

Employment Grow~ to 4 x 56 3 x 155 3 x 12

Summer 1994 (period years) (10) (7) (4)

Keyissues to emerge: Fourfounder managers Detailed preplanning Who is entrepreneur

balanced team High technical expertise Total hands on control
'Spin-off' from Industry experience byVC
SIEMENSAG Innovative failure of Role of inventors
High technical expertise competitors Future 'equity gap'
Competitive product in Expanding market due encouraged sale
expanding market to legislative changes
Trade saleto strategic Technical contact with
partner users

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Gordon Murray is a Lecturer in Strategic Management at Warwick Business School, University of Warwick,
United Kingdom.

This study was made possible by the financial support of the following four members of the Early Stage
Advisory Group of the European Venture Capital Association: Atlas Venture Group, Amsterdam, The
Netherlands; Danish Development Finance Corporation, Soborg, Denmark; Prelude Technology Investments
Ltd., Cambridge, UK; and Techno Venture Management GmbH & Co., Munich, Germany.

Field work was carried out by David Cassell, Peter Gerstmann, and Chris Mason while MBA students at
Warwick Business School

60 ENTREPRENEURSHIP THEORY and PRACTICE