Risk Factors in Start-Ups: An Evaluation

Year 2023, , 241 - 258, 30.04.2023

Mustafa Halid Karaarslan , Neilan Soylu

https://doi.org/10.29249/selcuksbmyd.1132338

Cited By: 1

Abstract

Start-ups are considered as the way to ensure high added value and competitiveness in economies around the world. While investments in start-ups and government incentives tend to increase, evaluation of start-ups risks is an important issue not only for increasing the return on the investment but also for the efficient use of resources. This study examines the specific risks of 23 start-ups operating in various sectors in Türkiye. Employing multiple case method, the start-ups’ risk factors have been analyzed under four major dimensions (organization and human capital; technology and product; financials; marketing and implementation). Factors affecting the risk of start-ups have been assessed in depth according to their expected impact on funders’ decisions. Findings reveal that issues like key personnel dependence and process efficiency must be carefully assessed as they have a critical role in the survival of start-ups. Due to lack of financial resources and the length of time needed to reach a positive cash flow, the start-ups’ focus can be frequently shifted from their core operations to temporary income generating activities, which also increases the risk. Start-ups are set up subsequently to successfully completed R&D projects, therefore their founders mostly have an engineering background. However, although high R&D potential can be considered as having a risk decreasing effect, it is still their ability to efficiently manage financial resources and to adopt an appropriate marketing strategy to commercialize their products in order to generate cash flows and to attain a stable growth that actually determines their risk levels.

Keywords

Risk Factors, Start-Ups, Valuation, Multiple Case Analysis, Venture Capital

Yeni Kurulan Girişimlerin Risk Faktörleri: Bir Değerlendirme

Abstract

Yeni kurulan girişimler, dünya ekonomilerde yüksek katma değer ve rekabet gücü sağlamanın yolu olarak görülmektedir. Yeni kurulan girişimlere yapılan yatırımlar ve devlet teşvikleri artma eğilimindeyken, yeni kurulan girişimlerin risklerinin değerlendirilmesi, sadece yatırımın geri dönüşünü artırmak için değil, kaynakların verimli kullanılması açısından da önemli bir konudur. Bu çalışmada, Türkiye’de çeşitli sektörlerde faaliyet gösteren 23 yeni kurulan girişimin spesifik riskleri incelenmektedir. Çoklu vaka analizi yöntemi kullanılarak, yeni kurulan girişimlerin risk faktörleri dört ana boyutta (organizasyon ve insan sermayesi; teknoloji ve ürün; finansal; pazarlama ve uygulama) ele alınmıştır. Yeni kurulan girişimlerin riskini etkileyen faktörler, fon sağlayıcıların kararları üzerinde beklenen etkilerine göre derinlemesine değerlendirilmiştir. Bulgular, kilit personel bağımlılığı ve süreç verimliliği gibi konuların, yeni kurulan girişimlerin hayatta kalmasında kritik bir role sahip oldukları için dikkatli bir şekilde değerlendirilmesi gerektiğini ortaya koymaktadır. Finansal kaynak yetersizliği ve pozitif bir nakit akışına ulaşmak için gereken sürenin uzunluğu nedeniyle, yeni kurulan girişimlerin sıklıkla ana faaliyetlerinden uzaklaşıp geçici gelir getirici faaliyetlere odaklanmaları sonucu risk artabilmektedir. Yeni kurulan girişimlerin başarılı bir şekilde tamamlanmış Ar-Ge projeleri sonucunda kurulmakta, bu nedenle kurucuları çoğunlukla mühendislik geçmişine sahiptir. Yüksek Ar-Ge potansiyelinin risk azaltıcı bir etkisi bulunmaktadır. Bununla birlikte, nakit akışı yaratmak ve istikrarlı bir büyüme elde etmek için finansal kaynakları etkin bir şekilde yönetme ve ürünlerini ticarileştirmek için uygun bir pazarlama stratejisi benimseme becerisi riski etkileyen en önemli faktörler olarak ortaya çıkmaktadır.

Keywords

Risk faktörleri, Yeni Kurulan Girişimler, Değerleme, Çoklu Vaka Analizi, Girişim Sermayesi

References

• Armstrong, C., Davila, A., & Foster, G. (2006) “Venture-backed private equity valuation and financial statement information”, Review of Accounting Studies, 11(1), 119-154.
• Audretsch, D.B., Bönte, W., & Mahagaonkar, P. (2012) “Financial signaling by innovative nascent ventures: the relevance of patents and prototypes”, Research Policy, 41(8), 1407–1421.
• Bamford, C. E., & Douthett, E. B. Jr. (2013) “Venture capital and risk management: evidence from initial public offerings”, Journal of Managerial Issues, 25(3), 220-240.
• Barney, J. B., Busenitz, L., Fiet, J. O., & Moesel, D. (1989) “The structure of venture capital governance: an organizational economic analysis of relations between venture capital firms and new ventures”, In Academy of Management Proceedings, Briarcliff Manor, NY 10510: Academy of Management, 64-68.
• Berk, J. B., Green, R. C., & Naik, V. (2004) “Valuation and return dynamics of new ventures”, The Review of Financial Studies, 17(1), 1-35.
• Bernstein, S., Korteweg, A., & Laws, K. (2017) “Attracting early‐stage investors: evidence from a randomized field experiment”, The Journal of Finance, 72(2), 509-538.
• Bhagat, S. (2014) “Why do venture capitalists use such high discount rates?”, The Journal of Risk Finance, 15(1), 94–98.
• Block, J., Fisch, C., Vismara, S., & Andres, R. (2019) “Private equity investment criteria: an experimental conjoint analysis of venture capital, business angels, and family offices”, Journal of Corporate Finance 58, 329-352.
• Cao, J., & Hsu, P. H. (2011) ‘The informational role of patents in venture capital financing’, Available at SSRN: http://ssrn.com/abstract=1678809 (Accessed April 15, 2021).
• Cochrane, J. H. (2005) “The risk and return of venture capital”, Journal of Financial Economics 75(1), 3-52.
• Collewaert, V., & Manigart, S. (2016) “Valuation of angel‐backed companies: the role of investor human capital”, Journal of Small Business Management, 54(1), 356-372.
• Colombo, M. G., & Grilli, L. (2005) “Founders’ human capital and the growth of new technology-based firms: a competence-based view”, Research Policy, 34(6), 795-816.
• Cooper, A., Gimeno-Gascón, F. J., & Woo, C. Y. (1997) “Initial human and financial capital as predictors of new venture performance”, The Journal of Private Equity, 1(2), 13-30.
• Corelli, A. (2018) Analytical Corporate Finance, 2nd ed. Switzerland: Springer Nature Switzerland AG.
• Cumming, D., Fleming, G., & Schwienbacher, A. (2005) “Liquidity risk and venture capital finance”, Financial Management, 34(4), 77-105.
• Damodaran, A. (2009) “Valuing young, start-up and growth companies: estimation issues and valuation challenges”, Available at SSRN: https://ssrn.com/abstract=1418687 (Accessed September 15, 2020).
• Das, S. R., Jagannathan, M., & Sarin, A. (2003) “Private equity returns: an empirical examination of the exit of venture-backed companies”, Journal of Investment Management, 1(1), 1-26.
• Duchesneau, D. A., & Gartner, W. B. (1990) “A profile of new venture success and failure in an emerging industry”, Journal of Business Venturing, 5(5), 297-312.
• EBAN (2019) European Business Angels Network Statistics Compendium 2019 [Online] https://www.eban.org/wp-content/uploads/2020/12/EBAN-Statistics-Compendium-2019.pdf (Accessed February 10, 2021).
• Festel, G., Wuermseher, M., & Cattaneo, G. (2013) “Valuation of early stage high-tech start-up companies”, International Journal of Business, 18(3), 216-231. Fiet, J. O. (1995) “Risk avoidance strategies in venture capital markets”, Journal of Management Studies, 32(4), 551-574.
• Franke, N., Gruber, M., Harhoff, D., & Henkel, J. (2008) “Venture capitalists’ evaluations of start–up teams: trade–offs, knock–out criteria, and the impact of VC experience”, Entrepreneurship Theory and Practice, 32(3), 459-483.
• Gompers, P. A. (1995) “Optimal investment, monitoring, and the staging of venture capital”, The Journal of Finance, 50(5), 1461-1489.
• Gompers, P. A., Gornall, W., Kaplan, S. N., & Strebulaev, I. A. (2020) “How do venture capitalists make decisions?”, Journal of Financial Economics, 135(1), 169-190.
• Greenberg, G. (2013) “Small firms, big patents? Estimating patent value using data on Israeli start‐ups’ financing rounds”, European Management Review, 10(4), 183-196.
• Hand, J. R. (2005) “The value relevance of financial statements in the venture capital market”, The Accounting Review, 80(2), 613-648.
• Harrison, R. T., & Mason., C. M. (2017) “Backing the horse or the jockey? Due diligence, agency costs, information and the evaluation of risk by business angel investors”, International Review of Entrepreneurship, 15(3), 269-290.
• Hartmann, G. C., & Lakatos, A. I. (1998) “Assessing technology risk–a case study”, Research-Technology Management, 41(2), 32-38.
• Hoenig, D., & Henkel, J. (2012) “Patents and alliances as venture capital screening criteria—investigating industry differences”, Available at SSRN: https://ssrn.com/abstract=2179878 (Accessed May 05, 2020).
• Hoenig, D., & Henkel, J. (2015) “Quality signals? The role of patents, alliances, and team experience in venture capital financing”, Research Policy, 44(5), 1049-1064.
• Hsu, D. H. (2004) “What do entrepreneurs pay for venture capital affiliation?”, The Journal of Finance, 59(4), 1805-1844.
• Hsu, D. H., & Ziedonis. R. H. (2013) “Resources as dual sources of advantage: implications for valuing entrepreneurial‐firm patents”, Strategic Management Journal, 34(7), 761-781.
• Hsu, D.H. (2007) “Experienced entrepreneurial founders, organizational capital, and venture capital funding”, Research Policy, 36(5), 722-741.
• Jeffrey, S. A., Lévesque, M., & Maxwell, A. L. (2016) “The non-compensatory relationship between risk and return in business angel investment decision making”, Venture Capital, 18(3), 189-209.
• Kaplan, S., & Strömberg, P. (2004) “Contracts, characteristics, and actions: evidence from venture capitalist analyses”, The Journal of Finance, 59(5), 2177-2210.
• Kaplan, S. N., Sensoy, B. A., & Strömberg, P. (2009) “Should investors bet on the jockey or the horse? Evidence from the evolution of firms from early business plans to public companies”, The Journal of Finance, 64(1), 75-115.
• Kooli, M., Kortas, M., & L'her, J. F. (2003) “A new examination of the private company discount: the acquisition approach”, The Journal of Private Equity, 6(3), 48-55.
• Koryak, O., & Smolarski, J. (2008) “Perception of risk by venture capital and private equity firms: a european perspective”, The Journal of Private Equity, 11(2), 30-42.
• MacMillan, I.C., Siegel, R., & Subbanarasimha, P. N. (1985) “Criteria used by venture capitalists to evaluate new venture proposals”, Journal of Business Venturing, 1(1), 119-128.
• Manigart, S., De Waele, K., Wright, M., Robbie, K., Desbrières, P., Sapienza, H., & Beekman, A. (2000) “Venture capitalists, investment appraisal and accounting information: a comparative study of the USA, UK, France, Belgium and Holland”, European Financial Management, 6(3), 389-403.
• Mason, C., & Harrison, R. (2004) “Does investing in technology-based firms involve higher risk? An exploratory study of the performance of technology and non-technology investments by business angels”, Venture Capital, 6(4), 313-332.
• Mason, C., & Stark, M. (2004) “What do investors look for in a business plan? A comparison of the investment criteria of bankers, venture capitalists and business angels”, International Small Business Journal, 22(3), 227-248.
• Maxwell, A. L., Jeffrey, S. A., & Lévesque, M. (2011) “Business angel early stage decision making”, Journal of Business Venturing, 26(2), 212-225.
• Miloud, T., Aspelund, A., & Cabrol, M. (2012) “Startup valuation by venture capitalists: an empirical study”, Venture Capital, 14(2), 151-174.
• Paul, S., Whittam, G., & Wyper, J. (2007) “Towards a model of the business angel investment process”, Venture Capital, 9(2), 107-125.
• Presidency of the Republic of Türkiye Investment Office (2020) The State of Turkish Startup Ecosystem An In-Depth Analysis and Evaluation [Online] https://www.invest.gov.tr/tr/library/publications/lists/investpublications/turk-startup-ekosisteminin-gorunumu.pdf (Accessed 12 January 2021).
• Proksch, D., Stranz, W., Pinkwart, A., & Schefczyk, M. (2016) “Risk management in the venture capital industry: managing risk in portfolio companies”, The Journal of Entrepreneurial Finance (JEF), 18(2), 1-33.
• Reid, G. C., & Smith, J. A. (2002) Investor and Investee Conduct in The Risk Appraisal of High Technology New Ventures in the UK. Discussion Paper Series No 0205. University of St. Andrews, Centre for Research into Industry, Enterprise, and the Firm. https://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.200.6950&rep=rep1&type=pdf (Accessed 10 December 2021).
• Ruhnka, J. C., & Young, J. E. (1991) “Some hypotheses about risk in venture capital investing”, Journal of Business Venturing, 68(2), 115-133.
• Ruhnka, J. C., & Young, J. E. (1987) “A venture capital model of the development process for new ventures”, Journal of Business Venturing, 2(2), 167-184.
• Sharma, A. K. (2015) “Venture capitalists’ investment decision criteria for new ventures: a review”, Procedia-Social and Behavioral Sciences 189, 465-470.
• Sievers, S., Mokwa, C. F., & Keienburg, G. (2013) “The relevance of financial versus non-financial information for the valuation of venture capital-backed firms”, European Accounting Review, 22(3), 467-511.
• Smith, J. K., Bliss, R. T., & Smith, R. L. (2011) Entrepreneurial Finance: Strategy, Valuation, and Deal Structure [online] Stanford, Calif: Stanford Economics and Finance. http://search.ebscohost.com/login.aspx?direct=true&db=e000xtr&AN=390616&lang=tr&site=eds-live. (Accessed 10 August 2020).
• Startupcentrum. [online] 2020 Turkey Investment Report. https://startupcentrum.com/reports
• Startups.watch. [online] Annual Report - 2020 Year in Review. https://blog.startups.watch/2020-year-in-review-turkish-startup-ecosystem-7834596297a5. (Accessed 10 February 2021).
• Sudek, R. (2006) “Angel Investment Criteria”, Journal of Small Business Strategy, 17(2), 89-103.
• Teberga, P. M. F., Oliva, F. L., & Kotabe, M. (2018) “Risk analysis in introduction of new technologies by start-ups in the Brazilian market”, Management Decision, 56(1), 64-86.
• Thornhill, S., & Amit, R. (2003) “Learning about failure: bankruptcy, firm age, and the resource-based view”, Organization Science, 14(5), 497-509.
• Tyebjee, T. T., & Bruno, A. V. (1984) “A model of venture capitalist investment activity”, Management Science, 30(9), 1051-1066.
• Vesper, K. H. (1990) New Venture Strategies, 2nd ed. Englewood, NJ: Prentice Hall.
• Wessendorf, C. P., Kegelmann, J., & Terzidis, O. (2019) “Determinants of early-stage technology venture valuation by business angels and venture capitalists”, International Journal of Entrepreneurial Venturing, 11(5), 489-520.