Gavin C. Reid

What Makes a New Business Start-Up Successful?

This paper seeks a good measure of new business performance, and then explains this measure by various dimensions of business strategy. Three criteria are used to create a one dimensional ordinal ranking of high, medium and low performance for new business starts: employment growth; return on capital employed; and labour productivity. It is shown that statistical cluster analysis provides a convincing separation of a sample of new business starts into high, medium and low performance categories, using a minimum distance criterion for clustering. An ordinal logit model (with selection) is then used to explain this performance ranking. The results indicate that many widely discussed features of small business strategy have little, or even negative, impact on performance. Of the numerous aims that owner managers may adopt (survival, growth etc.), only one appears to have a major impact on performance; the pursuit of the highest rate of return on investment. Many entrepreneurial perceptions of their own capabilities appear false or unimportant, with the exception of organisational features and systems.

Staying in business

Abstract The paper analyses factors which help a small, entrepreneurial firm to stay in business. The time-scale for the analysis is three years (1985–1988). The main issue that the paper is concerned with is the role of market and financial variables. Primary source data are used. An estimated probit model indicates that, for this sample, product range and gearing are the key maket and financial variables, respectively. The greater the product range, and the lower the gearing, ceteris paribus, the better the chances of staying in business.

Early life-cycle behaviour of micro-firms in Scotland

The paper reports on the behaviour of young (less than three years old) micro-firms (less than ten employees) in Scotland, with an emphasis on life-cycle effects. Two main tests were carried out. The first took Gibrats Law (that growth is independent of size) as the null hypothesis, and a life-cycle effects model as the alternative. The Gibrats Law model was rejected in favour of the life-cycle model. Smaller micro-firms grow faster than larger micro-firms. Robust nonlinear variants of the life-cycle model were discussed and shown to display stable equilibrium characteristics which were consistent with the sample evidence. The second took a Classical simultaneous equations model as the null hypothesis, for which growth and profitability were mutually reinforcing. A Managerial model was set up as the alternative for which growth and profitability were in a trade-off relationship. The Classical model was rejected in favour of the Managerial. In the short-run, young micro-firms experience a trade-off between profitability and growth. The Managerial model was shown to imply a stable equilibrium, with characteristics consistent with sample evidence.

Theories of industrial organization

Part 1: General Considerations. Part 2 The Dominant Schools: The Structure, Conduct, Performance Paradigm The Case-Study Approach The Structural Modelling Approach. Part 3 Rival Approaches The Marshallian Tradition The Austrian Revival Workable Competition. Part 4 New Departures: Contestability and Natural Monopoly Analysis The Organisational View of The Firm. Part 5 Conclusion: Theories of Industrial Organisation.

Venture Capital Supply and Accounting Information System Development

One of the most important events in the early life-cycle of any entrepreneurial firm that harbors serious growth ambitions is the Infusion of external capital (Reid, 1996). This event can lead to significant changes in the firms ownership composition. It affects its subsequent rate of growth and, consequently, its size and organizational structure. It is within the context of such changes that the managerial demand for information about the firm is stimulated. This study examines the origins and characteristics of developments in the accounting information systems (AIS) of firms that are going through this stage. It does so by investigating the consequences of venture capital1 intervention for the entrepreneurial firm, particularly as regards the characteristics of its accounting information system.

Fast growing small entrepreneurial firms and their venture capital backers: An applied principal-agent analysis

First the empirical background of the U.K. venture capital industry is developed using a panel of major U.K. venture capital funds over the period 1988–92. Then a framework for applied principal agent analysis is developed, focusing on risk management and information. Under risk management it explores attitude to risk, risk sharing and bearing, and the effects of risk bearing on effort. Under information handling, it explores information systems, information asymmetries between investor (venture capitalist) and investee (entrepreneur), and ways of attenuating them, and information variance and costs. Finally, the contract between investor and investee is seen as a device for “trading” risk and information. The implications of this “trading” for risk bearing, effort and efficiency are explored. The whole analysis is supported by a detailed case study which reflects current practice in the U.K. venture capital industry. The evidence provides striking confirmation of the applicability of the principal-agent model to the venture capital financing of hightech ventures.

Trajectories of Small Business Financial Structure

A dynamic theory of the small firm is expounded, assuming entrepreneurs maximise business value over a finite time horizon. Predicted trajectories for key financial variables are seen to depend on whether debt or equity are cheaper. The predicted trajectories are compared with actual trajectories, using empirical evidence from three years of detailed primary source data on one hundred and fifty new business startups in Scotland. Evidence largely confirms predictions of the model, for the cheap equity case. For this case, as capital and sales rise steadily, debt is retired rapidly, except when interest rates on long-term debt are low. This finding is supported by explicit empirical trajectories of key financial variables.

Financial Structure and the Growing Small Firm: Theoretical Underpinning and Current Evidence

This paper introduces a special issue of small Business Economics on ‘Financing and Small Firm Dynamics’. It establishes a general underpinning for the analysis of small firm financing over time. This appeals to the control theoretic literature, and permits the specification of ‘master trajectories’ of key variables over time like output, debt, dividend and capital. Two trajectories (for cheap debt, and cheap equity, respectively) illustrate this type of analysis, showing how financial structure can vary over time, involving phases of growth, consolidation and stationarity. From this perspective, six papers on small firm dynamics and finance are reviewed. Issues addressed include: credit constraints (funding shortages), wealth as collateral, financial structure, target income modelling of start-up, and bank lending during financial liberalisation.

Risk management in venture capital investor?investee relations

This paper provides an empirical analysis of risk handling arrangements adopted in the relationship between the venture capital investor and his investee. The theoretical framework adopted is principal-agent analysis, which views the investee as a risk averse agent entering into a risk sharing contract with the investor, a risk neutral Fully diversified) principal. The sample analysed is made up of twenty venture capital investors in the UK over the period 1992-93, and (where available) their corresponding investee(s). These investors accounted for about three-quarters of venture capital activity in the UK over this period. The paper reports on evidence gathered by semi-structured interviews with investors and investees, on expected returns, portfolio balance, screening and risk sharing.

Mature micro-firms and their experience of funding shortages

Funding shortages are analysed in the context of a simple neoclassical model of the micro-firm that uses financial capital for its operations. It predicts that a response to funding shortages is to substitute part-time workers for full-time workers, under the assumption that the latter are the more financial capital intensive employees. The experience of funding gaps in finance capital by long-lived micro-firms is investigated using data which were obtained by telephone interviews. The micro-firms examined had an average size of six full-time and two part-time workers, and an average age of fifteen years. Using probit estimators of the probability of experiencing funding shortages it is found that a strong and significant negative association exists between the number of part-time workers and the probability of experiencing funding shortages, refuting the simple neoclassical hypothesis, and suggesting an alternative hypothesis, emphasising the flexibility advantages of part-time embloyees in averting funding shortages. A ten per cent increase in part-time employees is shown to reduce the probability of experiencing funding shortages by two and a half per cent. A regional effect was also discovered, and bivariate probits gave results which were consistent with univariate probits.