The Pursuit of Entrepreneurial Opportunities : early-stage investment and initiation of start-ups

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Linköping University

Department of Management and Engineering (IEI)

Degree of Master of Science in Engineering - Design & Product Development Master Thesis 30 hp - Spring Semester 2021

LIU-IEI-TEK-A–21/04168–SE

The Pursuit of Entrepreneurial

Opportunities

– early-stage investment and initiation of start-ups

A case study of the venture capital

start-up Hidden Dreams

Erik Angel & Robin Eriksson

Examiners: Charlotte Norrman & Daniel Kindström Supervisors: Ehab abu Sa’a & Roland Sjöström

Opponent: Olivia Nilsson 2021-06-21

Linköping University 581 83 Linköping

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PREFACE

Entrepreneurship is all about starting somewhere and then evolve. In this case, start on page one, det är väl inte så involverat?

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ACKNOWLEDGEMENTS

As this thesis and thereby a five year educational journey come to an end, the authors would like to gratefully acknowledge:

• All the members of Hidden Dreams, and their portfolio companies, for taking your time to contribute to this thesis. Whether by participating in interviews, sharing documents or inviting to company events - thank you for your support. • Special thanks to Maria Norberg, who gave us the opportunity to pursue this

thesis at Hidden Dreams and helped us along the way.

• Our supervisors for all the guidance and help that you have given us through-out this writing process.

• Friends and family, who have been close by (but no closer than 2 meters) to support us during these times and cheer us on.

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ABSTRACT

The decreasing numbers of investments in early-stage start-ups indicate that fewer start-ups might become scale-ups and later sustainable business, aﬀecting the eco-nomical development. Early-stage investment actors such as venture capital firms (VCs), incubators and business angels select and support investment in diﬀerent ways. The VC and investment research mostly regards later-stage team and idea focused strategies. The thesis investigates what characterises and what is important for the early-stage process and selection of tenants pursued, through the investment process at the VC start-up Hidden Dreams, who combines incubator support with early stage investments.

Organisational documents and previous research, presented in the frame of reference, lay the foundation for the analysis of the thesis. Research about VC selection strategies, investments, incubators, and more, paves the way of modeling a market need focused strategy combined with support. HD’s past pre-transaction processes and its current portfolio companies are analysed by the frame of reference.

A model depicting the early-stage investment and support process is presented as a result, together with other findings in the analysis. The depiction explains the selection and support strategy and process by nine modules, each playing a role in the journeys of the VC and start-up. Insights about how the idea, team and market need aﬀect the outcome of choice from the process are presented. The process becomes iteratively more characterised based on historical lessons. Since early-stage investments are considered risky, a way of minimising that risk can be seen through the combination of VC, incubator and business angel functions. The team and idea play a vital role in the process, especially the entrepreneur or advisor who contribute with market knowledge in the evaluation of market need.

If the market inhibits competition the opportunity needs a hook, otherwise the initia-tors need to know why there is no competition. The team and idea plays important parts in the evaluation of market need. The idea works as initiator of the scope and to define value creation capabilities, whilst the entrepreneurial team, through the potential problem-owner, give each case market anchoring through experience and knowledge.

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LIST OF FIGURES

2.1 Investment Due Diligence Process, following by (Fried & Hisrich, 1994, p.31) . . . 7 2.2 Private Equity Fund Structure, following by (Nyman et al., 2012, p.35) 10 2.3 Selection Strategies, following by (Bergek & Norrman, 2008, p.24) . . 11 2.4 Opportunity Identification, following by (Ardichvili et al., 2003, p.117) 14 2.5 From Market Needs to Successful Company, following by (Ardichvili

et al., 2003, p.112) . . . 15 2.6 Level of Idea’s concretisation and market anchoring, following by

(Klofsten, 2005, p.118) . . . 17 2.7 Commercialisation stages, following by (Klofsten, 2005, p.117) . . . . 19 2.8 Stage Gate for idea initiation, following by (Cooper, 2008, p.215) . . 20 2.9 Analytical model . . . 21

4.1 HD VC Fund Structure (HD CEO (Strat)) . . . 37 4.2 Overview of HD’s 5th Pre-Transaction Process . . . 43

5.1 Opportunity Identification, adapted from (Ardichvili et al., 2003) . . 54 5.2 HD in the Due Diligence Model by, adapted from Fried and Hisrich

(1994) . . . 55 5.3 Idea Identification to Launch, adapted from (Cooper, 2008; Klofsten,

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5.4 Opportunity Identification Portfolio Company Process, adapted from

(Ardichvili et al., 2003) . . . 61

5.5 Selection Strategies, adapted from (Bergek & Norrman, 2008) . . . . 63

5.6 Portfolio Company Idea Development (Market Anchoring), following by (Klofsten, 2005, p.118) . . . 74

5.7 Opportunity Development and Accumulation Matrix . . . 80

5.8 Identification Investment Initiation Trinity (Idea-Team-Need) . . . 82

C.1 The Time-Involvement Process . . . 107

D.1 Explanation Part 1 . . . 108

D.2 Explanation Part 2 . . . 109

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LIST OF TABLES

3.1 Organisational Documents Descriptions . . . 27

3.2 List of Interviewees . . . 29

3.3 Interviews Descriptions . . . 30

3.4 Operationalisation of Categories . . . 30

4.1 Prior Pre-transaction Processes . . . 45

4.2 Organisational Documents Descriptions . . . 48

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ACRONYMS

AI Artifical Intelligence. 41

ARR Annual Recurring Revenue. 41 B2B Business to Business. 3

B2C Business to Consumer. 3 CEO Chief Executive Officer. 35 COO Chief Operating Officer. 35 CTO Chief Technology Officer. 35 HD Hidden Dreams. 2

IC Investment Committee. 36 IPO Initial Public Oﬀering. 2 LOI Letter of Intent. 48

MSEK Million Swedish Crowns. 35

NABC Need, Approach, Benefit and Competition. 12 SaaS Software as a Service. 40

SEK Swedish Crowns. 37

TAM Total Addressable Market. 41 VC Venture Capital (Firm). v, 1

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CHAPTER

1

INTRODUCTION

This chapter focuses on introducing the investment market, venture capital firms (VCs), business angels and incubator support. The characteristics early-stage ac-tors and their co-operation are presented, which together with investment market information lead to the problem identification. Lastly, the purpose, research ques-tions and limitaques-tions of the thesis is presented.

Today in the US, Europe, and Sweden investors are funding start-ups more than ever before (Lavender et al., 2020; Teare, 2020). Around the world there has been a peak in the total invested value during 2020. Though the relative advantage of being small and agile, even the start-up industry was aﬀected by the pandemic that struck the world during the year of 2020 (Bucak, 2020). That resulted in a big loss in the number of deals made. The drop is mostly seen in the early stage investing, as investments in later stages stay more stable. This manifests itself by the fact that several start-ups have attracted investments of over $200 million during the year, such as Klarna and Northvolt who respectively attracted $650 million and $600 million (Lavender et al., 2020). Early-stage investing has seen a decreasing trend for the last year, which might become problematic since the investment pipeline is narrowed early. Fewer start-ups that gain investment at the early stage implies that fewer will make it to become scale-ups and eventually sustainable businesses. This is in essence a manifestation of the dilemma lifted by Schumpeter (1942), who says that it is innovation and entrepreneurship, rather than capital savings, that is the main engine for economic development, and what he further describes as a capitalistic well function for democracy.

Actors who usually tend to invest and support in the early stages are venture capital firms (VC), business angels and incubators (Mason & Stark, 2004). VCs invest in start-ups that are both in the early and later stages. Business angels are charac-terised as investing in the earlier stages than the VC, in start-ups that usually do not even have a prototype of their product (Nyman et al., 2012). Incubators provide support to start-ups at diﬀerent stages of their journey (Phillips, 2002). Their com-mon investment stage, the early stage investments, was analysed by Harrison and

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Mason (2000), who described possible operations between the actors, namely co-investing, deal referral, fund financing and sequential investing. The most common method for the business angels was co-investing with venture capitalist in compa-nies, even though the motivations to invest might diﬀer between the two (Harrison & Mason, 2000). Aernoudt (2004) describes the lack of early-stage financing and business angel networks as barriers for the development of entrepreneurship in Eu-rope, and concludes that incubators and business angel networks can help raise the entrepreneurship. Moreover, Aernoudt (2004) suggests that connections with busi-ness angels, and therefore financing, initial public oﬀering (IPO) assistance and later stage financing should be integrated in the incubator practices.

Incubators often give early support and develop their start-ups as by the market need oriented NABC-model (Nair & Blomquist, 2019). Similarly Carter et al. (1996) found that successful companies start building by validating a market need. In later stages investors evaluate potential investments after the team, as suggested by MacMillan et al. (1985) or the idea, as stated by Kaplan et al. (2009). Blank (2006) means that the team’s ability to adhere to rapid changes in the market is what brings success to businesses.

A VC firm called Hidden Dreams (HD) describes themselves as oﬀering both in-vestment in early stages and support by initiating start-ups from crowd-sourced problems. Their process of initiating and investing in problems is interesting to investigate in order to describe characteristics of a company combining the VC, business angel and incubator ways-of-working. The level of entrepreneurship could benefit from an increased development of incubators, business angel networks, and the combination of them (Aernoudt, 2004).

1.1 Problem Identification

The decreasing number of investments in the early stages of the investment tunnel may affect the number of successful start-ups in the long run, thereby affecting economic development. Different characteristics of the early-stage actors, regarding investment process and selection, could be integrated to find more approaches to adopt in the early-stage of investing. The selection focus of this kind of company could be investigated, to learn if the idea, team or market need is the most important selection criteria. It could then be a potential contribution on how to battle the decreasing numbers of investments in early stages of the investment tunnel. The case would also contribute to research on how a combination of VC, business angels and incubators characteristics could operate, both in process and selection. The early-stage investing and support process, together with the market need focus, can therefore be investigated through theories regarding VC, incubator, investments processes, selection strategies, idea-, team- and market need focus.

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1.3. Limitations 3

1.2 Purpose

The purpose of this thesis is to investigate a process of early-stage investing com-bined with incubator support for start-ups. By looking at this the thesis aims to explore what is important and what could indicatively be done diﬀerently. Research questions and analytical model will be given after the frame of reference.

1.3 Limitations

The work focuses on the initiation stage of start-up and therefore rejects other sci-entifically established concepts such as its growth and future company development. Since HD is focused towards B2B (Business to Business) services, an early limitation is to not look at B2C (Business to Consumer) and for the work to mainly focus on digital solutions of the kind that the case company work with.

The thesis analyses the company HD, limiting it to a single case study and their strategy. The focus is therefore not on other VCs and incubators as well as their selection strategies in relation to the case company.

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CHAPTER

2

FRAME OF REFERENCE

This chapter presents insights from previous research on the dynamics of VCs in relation to their selection strategies and daily operations. Idea, team and need based approaches that assemble entrepreneurial opportunities are investigated. The oppor-tunity is sought by initiators, as entrepreneurs and teams. The chapter also presents market focus that can be seen as analogous to need focus by VCs and incubators and elaborates how to initiate start-ups and ideas. The chapter then outlines some views on innovation processes and the development and unfolding of strategies, implied to relate to both start-up businesses and VCs in general. Lastly the presented theories are synthesis to an analytical model, described in the final section.

2.1 The Investment Scene – How and What

Invested capital are categorised as investments where the investor has the possibil-ity of becoming shareholder of stocks (Nyman et al., 2012). Investment capital are frequently divided into public and private equity. Public equity are the companies that have stocks vended in the public market. Private equity are the type of invest-ments that more often are aimed towards companies unlisted in the public market. Private equity is, according to Nyman et al. (2012), divided into the sub-categories angel investments, venture capital and buyouts. Angel investments are often made at an, in comparison to VC’s, earlier stage by serial entrepreneurs willing to invest parts of their wealth in a company. Angel investors, or business angels, are often private individuals and very little is known about the size of investments and how many are done (Prowse, 1998). Venture capital are made at a later stage, with a focus on start-ups (Nyman et al., 2012). Venture capital are often featured by an active role of the fund, in the invested start-ups. Lastly, buyout investments are later investments where the investor gets the majority part of the stocks. All of the three private equity investment types share that they invest at a relatively early phase, where the public equity focus on companies enough established to be listed on the stock market.

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VCs and incubators both invest and can give support to their tenants (Phillips, 2002). Start-ups need different things from supporting incubators and investors at different stages of their developmental process (Clarysse & Bruneel, 2007). After the dotcom bubble a consensus of balancing support with investments was established, where money had prior been the emphasised supportive mechanism. The supportive mechanism can be conceptualised as what Sjögren and Zackrisson (2005) explain as competent capital, where the investment comes with experience, support and insights. The intensity and needs for investments and support change during time and the level of it needs to be affected. Networking and coaching also became central, where the quality of the work done by VCs and incubators during the different time intervals affect the start-up development (Clarysse & Bruneel, 2007).

2.2 VC Selection - Process and Strategy

VCs diﬀer in their stage of interest, assistance provided, scope of size and geographic regional focus (Elango et al., 1995). A VC firm provides capital for new or estab-lished companies to earn on the company shares at profit. Overall, VCs are more focused on capital and they also support with experience and knowledge, while the incubator on the contrary focuses on the support and development, and sometimes also by providing economical means (Phillips, 2002).

2.2.1 Process

The authors Fried and Hisrich (1994) proposes a due diligence process model showing how investors make decisions for their venture prospects, that is shown in Figure 2.1. It starts with an investment being proposed originating the process followed by a VC-firm specific screen (Fried & Hisrich, 1994). Similarly Stevanović et al. (2016) means that the quality of the ideas selected is ensured through a transparent process, where each idea is ranked and grouped to make sure that it follows the strategic guidelines set by a company. This speciality ensures a not to wide and not to narrow focus, that better predicts success in ideas. The VC’s firm-specific screen is done to limit the scope of the portfolio in a VC, to make sure a speciality is withheld. Which is followed by a generic screen that is more focused on the market prospect (Fried & Hisrich, 1994). To finalise the process, Fried and Hisrich (1994) propose that a first and second phase evaluation is held to decide on the closing of a deal or not. All through the six steps a rejection might be made where the venture can be concluded as not selected.

In a comparison between high, moderate and low experienced VCs, Shepherd et al. (2003) concluded that experience affects the quality of VCs decision making pro-cesses. The highly experienced and the inexperienced VCs were shown to be less effective and reliable in their decision making. On the other hand, the moderate were better at both reliability and effectiveness. The reason for the highly experienced and inexperienced VCs’ lower result was thought to be due to different reasons, conclude the authors. The inexperienced are not familiar with the decision

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struc-2.2. VC Selection - Process and Strategy 7 Origination VC Firm-Specific Screen Generic Screen First-phase evaluation Second-phase evaluation Closing Funded Proposal Investment Proposal Reject Reject Reject Reject Reject

Figure (2.1): Investment Due Diligence Process, following by (Fried & Hisrich, 1994, p.31)

ture that they are currently pursuing, and therefore they are on a more discovering journey. The highly experienced firms instead usually have streamlined and au-tomatised their decision making processes to such extent that it is mostly intuition and observatory heuristics that in actuality drives decision making. This tendency of highly experienced firms tend to make them more susceptible to biases and error (Shepherd et al., 2003). This risk of not being rational and empirically driven is further stressed by Zacharakis and Meyer (1998) who concludes that in most cases VCs do not understand their own decision process. The study by Zacharakis and Meyer (1998) also showed that VC decision makers seem to follow very consistent patterns. A fact that can be seen as intuitively contradicting that they don’t un-derstand their process that good. This is in line with the finding by Shepherd et al. (2003), that highly experienced firms makes decisions more intuitively and therefore can be consistent but not necessarily conscious about their decision making.

2.2.2 Selection Strategies

VCs often invest in many diﬀerent companies that share some sort of specificity requirement (Fried & Hisrich, 1994). Stevenson et al. (1987) concluded five condi-tions, acted upon by VCs, to establish success in their future returns. Stevenson et al. (1987) says that the fund should incrementally evaluate the venture’s perfor-mance before committing to additional funds. In other words, the VC should not just try to save what they first committed to, but actually re-evaluate the venture and the investee. VCs should also clearly distinguish winners from losers by objec-tive evaluation while also having the confidence to commit with additional funds to

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the ones determined as winners. The VC should try to commit to long-term hold-ings in the portfolio, while also thoroughly extract new information gained from previous rounds of investment to continuously improve the objectivity in decision making. Continuously the model proposed by Stevenson et al. (1987) also pointed at four success patterns in the behaviour of VCs. The VC should know the perfor-mance intimately of the portfolio company, have the confidence to cut out losers, have confidence to put more money on the perceived winners and be there for the long run. By being there for the long run, the investor and the investee develops a better and more fruitful relationship that benefit their interests simultaneously, with the addition that there is enough stake in it for both parts (Stevenson et al., 1987). Stevenson et al. (1987) means that diﬀerent rounds of investments comes with diﬀerent kind of opportunities. If the VC takes the opportunity initially, there are more to come, in line with the entrepreneurial opportunity corridor proposed by Ronstadt (1988).

Most investors want to see a clear and structured business plan before investing, but there are also other very different aspects that range from both financial-, market-and the entrepreneur aspects (Mason & Stark, 2004). The different kind of investors indicate that the business model needs to be customised whether the investee wants to seek investment from a bank, VC fund or business angels, according to the study by Mason and Stark (2004). Mason (2005) also means that business angels often takes an active approach as private individuals in their cases. Venture Capital firms have different perspectives internally, in general, on how they want the business plan to look before investing. The most emphasised factors are, according to Mason and Stark (2004), the management team, the product/service, and the market. Miloud et al. (2012) examines how start-ups are valued by VCs and conclude that among the factors, industry attractiveness was the one with significant importance. The industry attractiveness is based on whether the industry shows a potential for the idea to exploit, attaching it to its feasibility both in practical terms, from complexity, and in relation to competition and outsets concerning i.e., growth or other dynamic changes. MacMillan et al. (1985) argues that the traits of the entrepreneur carry the biggest impact on the investor decision, significantly tied to the persons closeness to the market and industry, adaptability to fast changes and leadership capabilities. Market characteristics regard significant growth, limited competition, potential for high returns and a clear exit possibility. According to Fried and Hisrich (1994) and Manigart et al. (1997), the financial short-term estimates in earned returns carry a limited or negligible effect on an investments interest.

Stross (2006) points out that several investors in the Silicon Valley area devote to the so called “20-minute rule”, which says that if a start-up seeking funding is more than 20 minutes away from the investors, they will not receive funding. This can be shown in Silicon Valley, as companies such as YouTube and Google are close to their early investors, for example Kleiner Perkins. In 2006, 43 percent of their investments went to companies located in the San Francisco Bay Area, also known as the valley (Stross, 2006). The reason for this is that the investors get a close contact with the start-ups. Sequoia almost demanded that the start-up was located nearby, as it would make the contact easier.

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2.2. VC Selection - Process and Strategy 9

2.2.3 VC Practises

Venture capital can be received by start-ups as investees for many diﬀerent reasons, such as expansion or to kick-start a start-up (Nyman et al., 2012). Venture capital funds are often structured with a set of investors who together makes investments gathered in the fund. Distinctive for these funds are that the investors, who own the fund, are independent to each other. The number of investors are limited and as a rule of thumb under ten (Nyman et al., 2012). The number of investors are sensitive to the success of a specific company since each investor needs to see their worth in time being paid in something else (Hobohm, 2010). Therefore, a fair stake in coordination with the level of involvement is crucial.

Additional to this structure there is a company that administer and manage the fund, who also often hold shares in the investments, with often a smaller amount of capital (Nyman et al., 2012). The company who manages the fund gets their emolument from the fund itself and the return from the outcome of the start-ups are distributed according to the investment distribution or else if specified. Risk sharing is a central part in private equity investing and it aﬀects how the partnership proceeds and works (Hobohm, 2010). In a similar way, Stevenson et al. (1987) propose that there is a diﬀerence based on the stake of shares the investor have in the investee, as well as to how big that stake is compared to all other stakes the investor have invested in the investors whole fund. It is beneficial to have a strategic approach to how much should be invested, for the investor to feel involved and for the investee to still be encouraged to work hard. By distributing shares to the management company, an incentive is gained for all parts to work hard to reach success in the event of, for example, an exit of the invested portfolio company. A strategy that could be preferably used by the VC to put ownership at the entrepreneur level on the companies in the VC. This practise drives success in private equity funds (Hobohm, 2010). Gompers and Lerner (2000) explains that start-ups’ success was positively correlated with capital supply of investments, indicating that closer relations to investors may be preferable to succeed with the start-up.

Nyman et al. (2012) presents a model on how private equity funds often are struc-tured, that can be seen in Figure 2.2. A management company is used to manage the daily operations and strategical pursuits of the fund. Then there are investors in-vested in the fund through capital, and the management company often get shares in the fund as well. This creates an incentive for the management company to perform well through its portfolio companies while the investors want to see their investments in a fund increasing in growth (Hobohm, 2010). Finally, new companies are frequently started and assemble the portfolio of the fund (Nyman et al., 2012). In the selection and evaluation of the process where ideas are turned into reality, Stevenson et al. (1987) stresses that the substantial most-part of investments should be considered successful when it gives back the sought high return. That implies a strategy of thinking that all your investments should be able to become the company that pays for all the interest of other companies. This is to make sure that at least a few of all ventures might become successful, a point of view that is often used in VC’s. Stevenson et al. (1987) concluded that in most portfolios one individual

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General Partner

(Private Equity Firm) Limited Partners(Investors)

Private Equity Fund (Limited Partnership) Manages the fund

New Company (Investment) New Company (Investment) New Company (Investment)

Figure (2.2): Private Equity Fund Structure, following by (Nyman et al., 2012, p.35)

company, often stood for as much as 50% of their total net present value of the portfolio.

2.2.4 Managing Entrepreneur-Investor Relations

When a VC and an entrepreneur come together a B2B relationship is established and diﬀer according to the point of time of coming together (Panda et al., 2020). There are diﬀerent needs before investment between the entrepreneur in relation to VC and incubator, that engage as investment partners (Kaplan & Strömberg, 2001). Three identified factors that VCs and incubators, can apply to maintain relations are financial contracts between the parties, use a pre-investment study and do post-investment counselling and monitoring. This can be used to mitigate the conflicts of interest that can arise between the investor and investment receiver (Kaplan & Strömberg, 2001). According to the empiric studies by Kaplan and Strömberg (2001), these factors are commonly used to mitigate the conflicts of interest by VCs and incubators.

In general, the B2B relationship issues between VC and entrepreneur are mitigated by an early-stage partnership, since the asymmetric distrust between the two then has time to improve during a longer time, according to Panda et al. (2020). Steven-son et al. (1987) also stress that long-term focus is a better predictor for start-up venture- and investment portfolio success. Long term investment focus also estab-lishes better relationships between the start-up and investor, which in turn arises better communication and the possibility to listen, learn and use the knowledge and resources necessary from each other to succeed with the venture Stevenson et al. (1987). Inderst and Muller (2004) means that the relation of investments needs to be strategically balanced between start-up and investors since a good portion of shares as incentive for investors might lead to a decreased incentive for start-ups. In order to do so the entrepreneur and the investors should preferably be on good terms and have insights on each of their incentives.

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2.3. Incubator Selection - Process and Strategy 11

2.3 Incubator Selection - Process and Strategy

Incubators sometimes support small companies economically through investments but are mainly focused on giving support with experiences and development of busi-nesses (Phillips, 2002). Phillips (2002) findings suggest that technology focused incubators should eﬀectively focus on the application of the innovations from tech-nology into business strategies.

2.3.1 Incubator Strategy

Aerts et al. (2005) explains that the selection of start-ups should be separately focused between the factors of team, market, and financials, since it will lead to a higher rate of success. Such selective processes will in turn have a positive impact on the success of the incubator at large. Nair and Blomquist (2019)’s data indicate that the incubators look at the team at first hand and idea second when evaluating tenants. That is so that they have the opportunity to change the idea if the team looks promising.

Incubators have, according to Bergek and Norrman (2008), selection strategies that can be represented as a cross-diagram, as seen in Figure 2.3, where their survival opposes winners on one axis and idea focus opposes entrepreneur focus on the other. The "survival-of-the-fittest" strategy constitutes focusing on selecting many ventures who will fight for survival while "picking-the-winners" imply a more thorough due diligence process that leads to selection. The picking-the-winners strategy results in a highly niched portfolio, focused towards a narrow technological focus. The entrepreneur in such portfolios is meticulously handpicked and carefully evaluated.

Idea-Focused Selection Entrepreneur-Focused Selection Selection Strategies Picking the Winners Survival of the Fittest

Figure (2.3): Selection Strategies, following by (Bergek & Norrman, 2008, p.24) Smith (1956) lay the foundation for market driven ideas by stating that market segmentation diﬀer from product diﬀerentiation. The author regards market seg-mentation as a strategy of adjusting to the market with at least as much dynamism as is present there. Similarly suggested by Nair and Blomquist (2019) the need also carries a lot of importance, especially since incubators pick tenant earlier than VCs, often prior to investments and business formation. Nair and Blomquist (2019)

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ex-plain that incubators should use a model called the NABC (Need, Approach, Benefit and Competition). By that account the need is regarded as the most important fac-tor and a solution or approach comes afterwards. Carlson and Wilmot (2006) means that the NABC is what defines the value proposition. According to the authors the proposition is never perfect at start but evolves iteratively, where the critical factor then becomes to start.

2.3.2 Incubator Practises

Cardon et al. (2011) means that the failure of ventures can have a big impact on the regions and society since it can make it harder for start-ups to receive new venture capital, especially through specific incubators that have high rates of failure. On the other hand Knott and Posen (2005) means that failure also can be good as econom-ical lessons learnt for other regional or otherwise specifeconom-ically niched start-ups and incubators. Bergek and Norrman (2008) proposes a framework of how an incubator succeeds, containing three components in one model. The three components are selection, business support and mediation. That an incubator is successful means that its result is as close to the goal as possible as defined by the authors. The goal and result communicate with each other through the incubator’s model and strat-egy, thus being the causal indicator to the incubator being successful on its results or not.

Support by incubators are explained by the authors Bergek and Norrman (2008) as a continuum between strong intervention and lasseiz faire, where the incubator does not interfere with development of the start-up at all. Mediation depends on the character of the innovation system as technology, regional or cluster focused (Bergek & Norrman, 2008). An incubator with a regional focus specify in a certain geographical place for their start-ups while the technology focus imply a specified technology on a international scale. Cluster formation is an interlink between the two that are present while the empirical data have not obviously showed a focus between technology and regional focus.

2.4 Selection Focus: Team vs. Idea?

Investors selection strategies can be done in many diﬀerent ways, where a team-focused one is mostly used according to research by Kaplan and Strömberg (2001). Bergek and Norrman (2008) uses idea- and entrepreneur-focused selection to dis-tinguish between incubators. In the paper the authors uses the term idea owner, who is the soon to be entrepreneur. Gompers et al. (2020) performed a thorough study of 885 venture capitalists to examine how they decided, by using Kaplan and Strömbergs’ (2001) framework. According to the study there is a somewhat larger focus on the team than other things, such as business-related aspects relating to product and technology. But there is a variation in the relation between these two focus aspects, depending on which industry and the character of the company’s idea (Gompers et al., 2020). The success of the companies that venture capital is

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2.4. Selection Focus: Team vs. Idea? 13

invested in therefore depends on a mix of the team and business-related aspects, with diﬀerent configurations. There was a clear connection that investments in IT businesses had an extra focus on the team to reach success, according to Gompers et al. (2020).

2.4.1 The Team and Entrepreneur - Execution Performed

MacMillan et al. (1985) concluded that the entrepreneurial traits were the most im-portant ones when investors made decisions. The capability of intense and sustained eﬀort was determined highest in significance together with the ability to evaluate and react to risk well. Thereafter, capabilities tied to the personal traits and knowl-edge of ventures followed. The entrepreneur and team might be most important for start-up success and investor decision making, according to Gompers et al. (2020), Kaplan and Strömberg (2001). Whilst the most important trait of the entrepreneur according to MacMillan et al. (1985), may be one of product and idea significance. Kaplan and Strömberg (2001) determined the team as most important due to the rapid changes in the idea itself and therefore concluded it less important. The en-trepreneurial experience was also a good predictor for investors decisions according to MacMillan et al. (1985). Familiarity with industry, demonstrated leadership in the past and a track record relevant to the venture was the strongest sub-factors concluded as most important (MacMillan et al., 1985). The entrepreneur focused approach entails a need to be able to judge personality traits and characteristics tied to the ability of the person as explained by Bergek and Norrman (2008).

2.4.2 The Idea - Solution

Unlike the findings by Gompers et al. (2020) and Kaplan and Strömberg (2001), another study by Kaplan et al. (2009) showed that the team is inferior and of less importance than business characteristic aspects. This is according to Kaplan et al. (2009) due to the team being a more changing factor than the idea itself. This contradicts findings by Kaplan and Strömberg (2001) and Gompers et al. (2020) in summary, but is still in line with Gompers et al. (2020) conclusion that the con-figuration and combination of the team versus idea focus is dependent on context and changes based on industry and company. MacMillan et al. (1985) mention the entrepreneur’s ability through familiarity and experience in the industry and mar-ket as the most important trait for the entrepreneur, which signifies an integrated factor between the idea and team characteristics. To be able to pursue an idea-focused approach the incubator should, according to Bergek and Norrman (2008) have more in-depth knowledge in relevant technologies used in the strategy. With in-depth knowledge and experience of the product/services provided by the com-pany, MacMillan et al. (1985) also means that the possibility of gaining proprietary protection can increase the desirability for investment, which attributes the specific idea.

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2.5 Entrepreneurial Opportunity

Seeing entrepreneurship as a quest to pursue opportunities in potential of ideas becoming start-ups, the journey of innovation can be conceptualised in accordance with Van de Ven (2017) and unfold during time. Van de Ven (2017) explains that the innovation journey can be maneuvered but not controlled. Entrepreneurship is defined by Shane and Venkataraman (2000) as the discovering of whom, what and how are aﬀecting opportunities to create future business potential.

Venkataraman (1997) expresses a view where entrepreneurship is distinguished from other fields by implying the importance of gaining knowledge on how opportuni-ties are created. In the paper, Venkataraman (1997) explores what drives the en-trepreneur, by building on the risks aligned with opportunities. Taking advantage of opportunities often comes with risks, since the nature of opportunities often are connected to unknown territory. Therefore it is also important to stress that the opportunity really is an opportunity by identification through markets such as pro-posed by Venkataraman (1997). Ardichvili et al. (2003) categorises opportunities into a cross diagram of known and unknown ground, as can be seen in Figure 2.4. When the identified value meets defined capability opportunities can be transformed into businesses Ardichvili et al. (2003).

Unidentified “Dreams” 1 Problem Solving2 Technology Transfer 3 Business Formation 4 Undefined Value Sought Value Creation Capability _Defined Identified

Figure (2.4): Opportunity Identification, following by (Ardichvili et al., 2003, p.117)

Ardichvili et al. (2003) suggests that evaluation of opportunities starts with the market need or what they call un- or under employed resources. The opportunity has to go through the step of market needs to pass through, and if that step may in any way have been compromised and not done thoroughly, the other steps may be lacking, resulting in an eventual step back to further identify the first step of oppor-tunities - market needs. Stevenson et al. (1987) similarly means that opporoppor-tunities should be evaluated all through their creation and development, which similarly is shown in Ardichvili et al. (2003)’s Figure 2.5.

Opportunity in a new venture is first identified after a starting point that is be-ing iterated with the market, through customers and users (Bhave, 1994). This is conceptualised as strategic feedback in Bhave’s (1994) model and is simultaneously the first step in opportunity identification as well as the starting of exploiting the opportunity itself. This feedback is both strategic and operational and therefore is a loop that never stops to work. Bhave (1994) means that there is a significance to the first sale in a new venture. This establishes a concrete link between the business concept and the market, which manifests the steps right after opportunity

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identi-2.5. Entrepreneurial Opportunity 15

Successful Enterprises Business Formed

Business Plans Business Concepts

Mar ket N

eeds,

Un-/Under Employe

d R

eso

urc_es

Figure (2.5): From Market Needs to Successful Company, following by (Ardichvili et al., 2003, p.112)

fication. In a similar manner Phillips (2002) means that evaluation of opportunity is done based on previous lessons. That is using a so called summative approach in addition to the formative one. The summative will, according to Phillips (2002) lead to higher probability of success and is more based on being alert to market needs and changes.

Kirzner (1973) addresses the point of view where the opportunity is central in idea development for entrepreneurs. The Kirznerian view from 1973 is that the en-trepreneur’s role depends on the ability of alertness to new opportunities or knowl-edge in the market (Kirzner, 1973). Ardichvili et al. (2003) study the opportunity identification and development process where the entrepreneurial alertness is con-cluded antecedent to personality traits, social networks, prior knowledge, and the opportunity itself. The opportunity is defined as the chance to meet market need by solving a problem with a solution, and the context of the idea and opportunity is af-fecting the process in unique situational ways (Ardichvili et al., 2003). Ardichvili et al. (2003) explains that the entrepreneur should identify business opportunities and deliver value to stakeholders. The opportunities are made, not found, and therefore the entrepreneurial alertness is of highest importance when it comes to developing potential in a business opportunity (Ardichvili et al., 2003). Gartner (1988) sees entrepreneurship as the creation of organisations where new opportunities are taken advantage of. Similarly, Stevenson and Jarillo (1990) stress that entrepreneurship can favourably be presented as a cause to find and act on opportunities. Ronstadt (1988), means that the ongoing process of continuously involving yourself as an en-trepreneur and starting ventures is what creates new opportunities. The multiple serial entrepreneur in that manner pursues what Ronstadt (1988) calls the corri-dor principle. One identified opportunity gives birth to a new one, and so it goes. This is one of the reasons that the entrepreneur in itself is interesting, based on their current record and through the ability to continuously identify and create new opportunities.

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2.5.1 Outsourcing and Crowdsourcing Ideas

The pursuit of outsourcing ideas to experienced personnel may acquire similar bene-fits to the pursuits of developing start-up ideas in collaboration with large companies (Usman & Vanhaverbeke, 2017). In which insights by the larger companies and its resources are combined with the agile ability of the start-up. When ideas are judged by crowdsourced users, Poetz and Schreier (2012) mean that they turned out to be a better predictor of success and showed a higher degree of customer benefit. These kind of successfully crowdsourced procedures indicate that more customer focus is better for idea quality.

According to Poetz and Schreier (2012) crowdsourced user ideas scored higher in their novelty as well as in customer benefit. Which indicates that the possibility of high closeness to- and involvement of market-forces in development aﬀects the raw concrete idea, where a market involvement as early as possible is proven beneficial. In general, the user ideas also scored significantly higher in idea quality index (Poetz & Schreier, 2012). Homfeldt et al. (2019) studied ideas on innovation made by suppliers in comparison with start-ups. The reasoning behind was to see how the closeness to markets, an advantage for the suppliers, stands against the agility that a start-up possess. Start-ups’ ideas had a higher degree of novelty and customer benefit but were less likely to be implemented than those of suppliers. As stated by Gross (1998), it is only small companies that can create the feel of a small company and there is a significant characteristically diﬀerence. This indicates that the actual quality dimension in ideas made by suppliers, naturally close to market, are higher, and that the closeness to market carries significance in early-stage idea valuation (Homfeldt et al., 2019).

2.5.2 Market Focus

Porter (1985) and Day (2014) propose an approach of outside-in where the intel-ligence of market and customers is what drives business development. Similarly Klofsten (2005) means that the development of an idea is more vital than the idea where it stands concretised, and that development should be done in coordination with the potential customers and markets. The concretisation of the idea will de-velop with the market, and how good the idea is should therefore be judged by its current anchoring in the market. This corresponds to diﬀerent levels of high or low idea concretisation and market anchoring of the idea, as shown in Figure 2.6. In the moment the potential corresponds to the predicted success of the development of the idea, in its pursuit of becoming a successful business (Klofsten, 2005). Kornish and Ulrich (2014)’s study showed that market anchored ideas, in approximate, lead to 50% better sales of the final oﬀering. This is because there is a proven want and need for it.

Klofsten’s 2005 definition of a low degree of market anchoring is described as a market pull, which goes in line with Day’s (1994) explanation of an organisation with market focus. Day (1994) argues that organisations who are market-driven and have an outside-in strategy are superior to those who take on an inside-out strategy.

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2.5. Entrepreneurial Opportunity 17

Figure (2.6): Level of Idea’s concretisation and market anchoring, following by (Klofsten, 2005, p.118)

By developing market-sensing and customer linking capabilities, the management can make the organisation become more market oriented.

2.5.3 Market/Industry Timing – First In, First Win?

Market timing is not only a good driver for success in the market, but also a factor that needs to be addressed when taking on investments, in relation to probable market timing (Zider, 1998). In the adolescence stage of start-ups, the probable winners and losers look strikingly similar according to Zider (1998). Due to this fact, a first-in, second-in or later more exploitive industry growing position may be advantageous based on the type of idea related to its industry, in accordance with the suggestions of Hall and Weiss (1967).

Kerin et al. (1992) describe that being the first mover does not directly indicate great advantages in the market. The explanation is that some companies might be more successful in being the first mover whilst other find success in entering later, which resemble Buisson and Silberzahn (2010)’s view on market entering opportunities. Gaining sustainable advantage from being the first mover is only possible if the company has the correct resources and expertise.

To dominate a submarket, a company must change the rules of the market, ac-cording to Buisson and Silberzahn (2010). Drucker (1998) means that innovation leadership is the way towards winning the market. The leadership should be timed with changes in industry, markets and factors such as i.e. demography. Though, Buisson and Silberzahn (2010) believe that a company can dominate a submarket without being the first or second mover by using one or several breakthrough models, namely design, business model, technological and process. Their view on reaching a domination of a submarket is that it is a dangerous game with a lot of involved risk.

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Porter (1980) likewise explains that being a market pioneer can attain great return but involves high risk. Pioneers may enjoy lower entry barriers and better chances of customer loyalty, but the initial costs for competing with other early entries are high before the market has matured. Therefore, being the first mover does not only present the company with opportunities but also provide advantages (Kerin et al., 1992). Kerin et al. (1992) also stresses that there can only be one market pioneer, and therefore many companies often tend to enter later.

2.5.4 Market-, Industry Character and Potential

Zider (1998) stress the importance of being aware of what kind of industry the venture is pursuing, while at the same time understanding how the current stage of the industry eﬀect the coming outsets of possible progress. For VCs the question also is whether the industry already is exploited or not by other VCs (Zider, 1998). With already established and continuously proven stable industries, a VC’s eﬀort may not be as risky (Hall & Weiss, 1967). Although, with smaller industries and business characters, the investment size is often smaller, which lowers the risk of high loss for investors. On the other hand the potential upside of high gain is also lowered with this fact. Industry profitability are positively correlated with market concentration according to Peltzman (1977). Though this often is the case, there are a few exceptions showing the opposite (Peltzman, 1977).

Miloud et al. (2012) suggest having the industry structure in mind during idea’s valuation. Potential industry pursuits are valued based on possible monetary gains by the company during exploitation. The study by Miloud et al. (2012) showed that highly diﬀerentiated industries receive higher evaluations from VCs and the potential industry growth also is a good predictor for evaluation. This is in line with the need for market segmentation rather than product diﬀerentiation, as explained by Smith (1956). Similarly Peltzman (1977) means that a well-aimed focus on market concentration and industry outsets can increase the possibility of increasing profitability. Drucker (1998) suggests always focusing on innovation leadership in a company’s market pursuits, where the agility against unexpected occurrences, market- and industry changes can be exploited to gain market advantages.

2.5.5 Start-up and Idea Initiation

The originality of an idea is, according to Rietzschel et al. (2019), in a paradoxical relationship to feasibility. What is feasible often does not share a high degree of originality which may make it less desirable to pursue. McMullen and Shepherd (2006) means that the evaluation stages in idea assessment by investors should be categorised by feasibility and desirability. Desirability is explained as something that stands out, and make you want to initiate the venture. In a similar way Pouya and Esmaeilzadeh (2008) describes an initiation factor that is needed for the entrepreneur prior launch. In other words it can be seen as if the originality feeds the ideas desirability for initiators. Rietzschel et al. (2019) suggests that the originality

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2.5. Entrepreneurial Opportunity 19

in the idea carries substantial importance on the concretised idea variable.

Katz (1990) uses three hurdles to model the initial phase of a start-up coming to life, as aspiring, preparing and entering. Rotefoss and Kolvereid (2005) says that the aspiring milestone manifests how the entrepreneur becomes committed to pursue the journey. The preparing milestone represents that the entrepreneur is going to create a business out of it and the entering milestone is a stage where an actual start-up is initiated (Rotefoss & Kolvereid, 2005).

Carter et al. (1996) explored different start-up sequences and related their outcomes as still trying, gave up or started a business. The ones who gave up focused their process on internal activities such as saving money and preparing a plan instead of making an effort to make the business real to others, such as developing in integration with the market. The ones who gave up according to Carter et al. (1996) frequently pivoted their initial too much, since it would not lead to a sustainable business, which made them unmotivated to pursuit by “killing their darlings”. The successful ventures instead directed their focus on aggressively creating a business that would work with the market and customers, no matter what differences it implied compared to the initial idea.

Klofsten (2005) categories idea development processes as pre-commercialisation and commercialisation as seen in Figure 2.7. In pre-commercialisation a launching plat-form is needed, whilst commercialisation needs a business platplat-form.

Figure (2.7): Commercialisation stages, following by (Klofsten, 2005, p.117) The pre-commercialisation platform entails a business opportunity whereas the com-mercialisation platform entails the business idea (Klofsten, 2005). At the launching platform there needs to be an actor ready to invest resources and time in the fu-ture development of the idea. When the launch is over, critical early-stage steps have been managed to be taken by the idea, that now can survive on its own. At this stage new business opportunities will emerge and the entrepreneurial capabil-ities may lead the idea to become something completely diﬀerent from what was intended. Similarly to the launching platform by Klofsten (2005), Cooper (2008) describes a five-step stage-gate model, of the initiation of an idea becoming a busi-ness (Figure 2.8). The model can be seen in Figure 2.8 and it starts with an idea screen and ends with a launch, after the business case, development and validation stages. When the idea enters post-launch review new ideas can occur as a conse-quence which resembles with what happens at Klofsten (2005)’s commercialisation platform.

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Figure (2.8): Stage Gate for idea initiation, following by (Cooper, 2008, p.215) Each step in the stage-gate model cost more than the preceding one and the infor-mation is designated to be able to make decisions on whether to continue or not (Cooper, 2008). For that reason all the steps should be cross-functional to include a broad knowledge for all decisions. The gates leads to decisions that are followed by an action plan and if the final gate is go a new product/service should be launched.

2.6 Research Questions

The research questions specifying the purpose are the following:

1. What characterises the process of early-stage investing combined with sup-port?

2. What is important for the selection of tenants in such process?

3. What attention is payed to the entrepreneurial team and idea in the selection of tenants?

2.7 Analytical Model

To answer the research questions, the analytical model aims to use the empirics with the theories presented above in this chapter. This is done to analyse HD’s selection strategy, what is important for an early-stage need driven selection strategy, and how it is aﬀected by the idea and entrepreneurial team. Ultimately, it helps answer the research questions. The analytical model is illustrated in Figure 2.9 and what kind of theories are used in the analysis tied to each research questions. After the analysis, the research questions are answered in the conclusions chapter.

Diﬀerent selection strategies, VC-, incubator processes and strategy, and initiation lay the foundation for the analysis of HD’s need-driven strategy. Theories

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regard-2.8. Summary FoR 21

ing market focus, selection focus, and entrepreneurial opportunity help analyse the second research question. Lastly the idea and team’s eﬀect on the selection strategy are answered by theories about relationships (entrepreneur and investor), initiation, selection focus, and outsourcing- and crowdsourcing ideas.

Incubator Selection - Process and Strategy

Start-up and Idea Initiation

VC Selection - Process and Strategy

Selection Strategies

RQ1

Relations - Entrepre-neur and Investor

Start-up & Idea Initiation

Outsourcing and Crowdsourcing Ideas

RQ3

RQ2

Market Focus Selection Focus_{(Team, Idea)}

Entrepreneurial Opportunity

Selection Focus (Team, Idea)

Figure (2.9): Analytical model

2.8 Summary FoR

Strategies and complications of the investment scene, VC selection and incubator support practises for picking tenants will be used on the empirical data from the case VC company. The active portfolio company cases will be looked at to later build analysis on what type of selections strategy the company uses and what implications it has on the portfolio companies and vice versa.

This will be done through a lens of market need focus and entrepreneurial opportu-nities to further emphasise and investigate the case companies need driven strategy. This way outsourcing and crowdsourcing comes in, which is one of the strategies used by the case company to utilise market anchoring.

The scope goes from the early-stage VC getting in connection with a potential portfolio company case to its selection, initiation and investment. This process is done in the case companies process called the pre-transaction process. In that regard the scope of the study starts just prior to initiation of new case companies and therefore the Frame of Reference include a final chapter regarding start-up and idea initiation.

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CHAPTER

3

METHOD

This chapter describes the choice, use and view on methodology that is used through-out the qualitative study. Interviews, literature, and data collection are used to lay the foundation for the later empirical chapter. Collected data is analysed qualita-tively through text analysis in the form of coding. The study’s reliability, validity and ethics are also presented.

3.1 Research Approach

First, the pre-study articulates the problem identification and purpose in the thesis by an introduction to the VC market and relevant earlier research. The pre-study is conducted through a literature study and several interviews with key personnel at case company. Then a thorough literature study is done to create a frame of reference and analytic model. As for data collection methods, organisational data and documents from the case company are used together with interviews with key people from the portfolio companies and the pre-transaction process. The interviews are recorded and transcribed to help answer the research questions. The analyti-cal model lays the foundation for the analysis of the transcriptions, organisational documents and other data retrieved from the case company. After the analysis of the empirical data has been conducted, conclusions are presented together with a discussion and the study’s suggestions for further research.

3.2 Scientific View

The authors of this study have a systems view, which according to Arbnor and Bjerke (2008) aims to explain and understand a system. Arbnor and Bjerke (2008) describe the systems view as a mix of the positivistic and hermeneutic view, as it

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uses systems such as analytic models to explain and interpret the study’s material. This study intends to investigate and draw conclusions from texts of earlier pre-transaction processes, and therefore the authors take a hermeneutic approach to the analysis, since its sensitive to the social context in which the texts are produced (Bell et al., 2018). Analysing and interpreting documents in a hermeneutic way puts emphasis on both the author of the text and its historical context. While a positivistic view is when the authors draw conclusions from facts through similarities and diﬀerences (Sjöström, 2018). The system view is present in this study with analytical model and qualitative analysis, in which conclusion are drawn both from facts and interpretation of peoples’ views.

3.3 Case Study

The pre-transaction process is defined by a certain period of time and number of people working, which makes it possible to qualify as a case (Merriam, 2009). Bell et al. (2018) also explains that a case study examines a specific setting with bound-aries and purpose. Which goes in line with Merriam (2009) motivation for using case studies, as wanting to describe and analyse a particular closed system. When eval-uating a program, such as the pre-transaction process, a particularistic case study is preferable (Bell et al., 2018). Since the focus is on HD’s pre-transaction process the study is kept to a single case, and not a multisite case study since it does not analyse processes at several other VCs.

This study uses an abductive reasoning strategy, which according to Douven (2011) is in modern times often associated with finding conclusions in the best explana-tion. Abduction refers to puzzling incomplete evidence to shape the explanation, in which diﬀerent facts are combined with common sense to draw any inferences (Aliseda, 2006). Even though there might be several explanations for an observa-tion, abductive reasoning concludes on the best ones, according to prior hypothesises and contextual factors. In this study, abductive reasoning is used to help draw the best inferences from the various organisation documents from HD and transcrip-tions from interviews, to describe their need focused strategy, its characteristics and complications.

3.4 Pre-study

Since the authors do not have experience in neither the investment nor VC industry, a pre-study is carried out to get a better understanding of it. Pre-studies are useful for gathering information about an area, which lays the foundation for the rest of the research (Sjöström, 2018). This is done by obtaining knowledge from earlier research, interviews with experienced professionals or surveys. The results from the pre-study guides the way for the rest of the thesis, but more particularly the frame of reference.

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3.6. Study of Literature 25

The pre-study began with a literature study, by searching for previous research on the incubator-, investment- and VC topic. Simultaneously, interviews are held with the key persons at HD, to get a better understanding of how they work and their investment process. The knowledge attained from both the literature study and interviews are analysed, and later used to find the research used in the analytical model. Since several theories are discussed and compared, a decision is made to further research the idea.

3.5 HD’s Investment Process as Analysis Unit

According to Merriam (2009), an analysis unit is supposed to be chosen as a specific situation in time. This makes it easier for the interviewee to recall a specific event or process when answering questions. Since this thesis is a single case study, it is better if the analysis unit is in a closed system (Merriam, 2009). Therefore, the analysis unit of this thesis is the pre-transaction process, since it captures the process from which an idea is first collected to it, maybe, receiving an investment. This is line with Sjöström’s (2018) recommendation of choosing an analysis unit in which a story can be told. The choice of this analysis unit also makes it possible for the interviewee to openly talk about the process. The pre-transaction process can then be puzzled together using the answers from several interviewees.

3.6 Study of Literature

Both the pre-study and frame of reference chapters involve a thorough study of past literature on relevant subjects in line with the study’s objective. A literature review aims to explore what is already known about a subject, what earlier research say about it and what useful theories can be found in the area. The pre-study involves a literature review regarding the VC-market, research on idea development and investment decisions. Bell et al. (2018) describe the literature review in an early stage of research as a way to build and motivate the basis on which the research questions are designed. It is also a way to find which questions have not yet been answered in the area, or if there are any controversies regarding them. Sjöström (2018) recommends that researchers use literature to create an understanding of the subject, if they do not have any prior experience in the area.

In the pre-study, books and popular scientific literature are used to gather knowl-edge and understanding of the VC-market together with other material relevant to the subject area. More specifically, researched areas are global and national VC-market, start-up investment processes, idea development theory, investment criteria and theories aﬀecting an idea’s market characteristics. The chosen literature also helps guide the researcher towards a problem formulation (Bell et al., 2018). Mer-riam (2009) also stresses the opportunity to find a research topic in past literature. A topic might, for example, be found in the later chapters of an earlier research where suggestions for further research are made.

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Literature is collected through books and electronic databases, such as Google Scholar and Linköping University’s own online library through the authors student access. Relevant articles are chosen according to their number of citations and where they are published. A higher number of citations and a known publisher are the preferable characteristics of an article, for the authors. If an article does not meet these requirements, the authors consider other characteristics such as author, date of publication or how researched the topic is. News reports and similar newspaper material for the pre-study are also retrieved from the internet from various online newspapers, such as The Atlantic.

On the other hand, in the frame of reference only relevant research literature posted on diﬀerent journals are used. As explained by Merriam (2009), reviewing literature is an iterative process in which the researcher goes back and forth, when finding new areas, in the search for relevant literature. The thesis therefore develops in an iterative way, where literature is collected on a topic, which guides toward new areas or key words to search for. The reviewed areas for this thesis are research including market-developing factors, idea development, entrepreneurial opportunity creation, marketing theory, market value drivers, start-up investing team development and market shaping. The use of several theories from diﬀerent areas are used to model the selection strategy that has not been as studied as others.

Keywords are a good way to navigate in large databases and find relevant references (Bell et al., 2018). Long search sentences are not advisable as they can give many re-sults that extends outside the area of interest. Therefore, suitable keywords covering the business area are used to better capture relevant articles. The used keywords in this thesis are outside-in strategy, customer value creation, idea development, ven-ture capital investing, incubator support, incubator selection, idea generation, idea outsourcing, idea originality, idea novelty, feasibility in ideas, venture capital de-cision making, investments, entrepreneurial opportunity, start-up development and entrepreneurship.

3.7 Data Collection Methods

The methods used for data collection in this study are a study of literature, organ-isational documents, and interviews. Collected data is then presented in chapter 4 4, which lays the foundation for the analysis and later conclusions of the work. Research approach and scientific view are also discussed to further strengthen the choice of methods. Interviews are the primary method for data collection in this thesis, while assessing organisational documents are the secondary method. This is because the quality of the organisational documents is not known before, they are retrieved from the case company.

The Pursuit of Entrepreneurial Opportunities : early-stage investment and initiation of start-ups

The Pursuit of Entrepreneurial

Opportunities

– early-stage investment and initiation of start-ups

A case study of the venture capital

start-up Hidden Dreams

PREFACE

ACKNOWLEDGEMENTS

ABSTRACT

CONTENTS

LIST OF FIGURES

LIST OF TABLES

ACRONYMS

CHAPTER

1

INTRODUCTION

1.1 Problem Identification

1.2 Purpose

1.3 Limitations

CHAPTER

2

FRAME OF REFERENCE

2.1 The Investment Scene – How and What

2.2 VC Selection - Process and Strategy

2.2.1 Process

2.2.2 Selection Strategies

2.2.3 VC Practises

2.2.4 Managing Entrepreneur-Investor Relations

2.3 Incubator Selection - Process and Strategy

2.3.1 Incubator Strategy

2.3.2 Incubator Practises

2.4 Selection Focus: Team vs. Idea?

2.4.1 The Team and Entrepreneur - Execution Performed

2.4.2 The Idea - Solution

2.5 Entrepreneurial Opportunity

2.5.1 Outsourcing and Crowdsourcing Ideas

2.5.2 Market Focus

2.5.3 Market/Industry Timing – First In, First Win?

2.5.4 Market-, Industry Character and Potential

2.5.5 Start-up and Idea Initiation

2.6 Research Questions

2.7 Analytical Model

RQ1

RQ3

RQ2

2.8 Summary FoR

CHAPTER

3

METHOD

3.1 Research Approach

3.2 Scientific View

3.3 Case Study

3.4 Pre-study

3.5 HD’s Investment Process as Analysis Unit

3.6 Study of Literature

3.7 Data Collection Methods