Financial aspects facing start-ups during the go-to-market phase

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Financial aspects facing start-ups during the go-to-market phase

Case studies of Swedish start-ups

Daniel Smirat

Business and Economics, master's level 2018

Luleå University of Technology

Department of Business Administration, Technology and Social Sciences

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Financial aspects facing start-ups during the go- to-market phase:

Case studies of Swedish start-ups

FIRST NAME: DANIEL LAST NAME: SMIRAT

PROGRAM: BUSINESS AND ECONOMICS MASTER: ACCOUNTING AND CONTROL CLASS: SPRING SEMESTER, 2018

SUPERVISOR: OSSI PESÄMAA

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Abstract

Swedish start-ups seem to efficiently develop new products and services but less successful when it comes to taking them to the market and launching them globally. This research aims to address this gap through investigating Swedish start-ups. In light of this problem, the author argues that there is a need for increasing knowledge regarding the financial success factors and challenges facing Swedish start-ups in the go-to-market phase. The research question is thus: What are the significant challenges and success factors affecting the financing of Swedish start-ups during the go-to-market phase?

Four major challenges facing start-ups during the go-to-market phase are identified.

These are lack of sufficient capital, lack of support from the banking sector, lack of support from the regional public level and, finally, regulations and legal issues. On the other hand, four success factors have been identified, which are support from private investors, shared financial private/public risk, efficient internal operations and non- traditional financing methods.

In order to facilitate the go-to-market financing, it is recommended that start-ups be established in a business incubator environment in order to have access to investor networks and other financial support. Besides, having investors with financial experience in the start-up boards increases the chances of success in the go-to-market phase. The banking sector in Sweden should also play a bigger role in the strategic issues in order to accelerate the start-up’s growth.

For further studies, more knowledge regarding the underlying motivations of private capitalists, public funders and loan lenders is desirable. Furthermore, the business incubator’s role in facilitating the financing of start-ups and understanding how start-ups in different sectors should act to increase the rate of success are two important areas for future studies.

Keywords: start-ups, go-to-market, financing, growth, early growth, success factors

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Acknowledgements

What you are about to read is the result of a master’s thesis course at Luleå University of Technology. First and foremost, I would like to express my sincere thanks to my supervisor Ossi Pesämaa, who has been an enormous source of inspiration and who, with the help of his knowledge and commitment, has contributed his enriching views during the course of work. Furthermore, I also want to thank my opponents who contributed with constructive and valuable feedback. Also, I would like to thank the teachers at Luleå University of Technology who provided me with necessary knowledge during my years of education, making this thesis possible. Last but definitely not least, I would like to thank my family members and friends who have been supportive and driving forces during the course of my work.

This thesis has been accomplished as the final stage of the master’s Programme in Business and Economics within the Accounting and Control specialization.

Luleå, June 2018 Daniel Smirat

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1. Introduction

Start-ups involve developing and marketing unique products or services based on skills, entrepreneurial ideas and proprietary technology (Heirman & Clarysse, 2007; Kuestera, Konya-Baumbach, & Schuhmacher, 2018). A crucial phase for start-ups is when the service or product is launched in the market (Kuestera et al., 2018). Success or failure of entry into the market at large determines the survival of the start-up (Avlonitis, Papastathopoulou, & Gounaris, 2001; Lee, Lin, Wong, & Calantone, 2011). Swedish start-ups have been globally successful when it comes to providing innovative solutions for the market. In comparison with the other Nordic countries, Sweden stands out as a magnet for start-ups (Riminton, 2017). For instance, the world’s leading music streaming company, Spotify, launched in Sweden in 2008, has raised over $1.5 billion in capital, and the company is currently valued at over $8 billion (Uncubed, 2017; Davidson, 2015).

Another example of a successful Swedish start-up is the social games development company King, with a market capitalisation in 2015 of $4.9 billion. In part, the go-to- market phase, which is the phase were the products and services reach the market, depends on ownership and ability to pursue entrepreneurial ideas independently. Despite the the go-to-market success among Swedish start-ups, it seems obvious in many cases that ownership of the Swedish start-ups shifts and changes into foreign ownership (Pesämaa & Svensson, 2018).

Previous research within the start-up field maps several crucial factors affecting market entrance. For instance, start-ups purchase venture capital and hand over some of their ownership in the company to finance market entrance and growth (Smolarski & Kut, 2011). The market entrance and growth can also be accelerated through utilizing key- competencies and human capital (Paul, Whittam, & Wyper, 2007). Having strategic partners, such as strong networks, banks and other finincial institutions, increases the rate of success among enterprises (Arena, Bengo, Calderini, & Chiodo, 2018). Previous research also emphasises that critical skills and resoruces, product development and launch strategies, unqiue sets of offerings to the market in terms of costs, performance and quality affect market entrance (Zhao, Libaers, & Song, 2015). In addition, finding key competencies and ensuring intellectual property, along with well-coordinated resource allocation and optimal launching time, increase the chances of success of market entrance (Zhao et al., 2015). New firms with key marketing resources such as markerting research, sales force and advertising/promotion tend to be competitive when launching their first products or services (Song, Benedetto, & Song, 2010; Zhao et al., 2015).

Equally imporant are the resources and skills for research and development, engineering, prototype and market validiation (Zhao et al., 2015). For start-ups, the team members are expected to perfom several tasks due to the lack of resources. Thus, having team members with previous experience from launching products and/or marketing activities and sales increases the likelihood of reseaching the market. Yet, more knowledge regarding the financial aspects needs to be generated.

Recent studies thus point out that there is still a need for generating more knowledge in the development phases of start-ups (Pugliese, Bortoluzzi, & Zupic, 2016; Santisteban &

Mauricio, 2017). However, the fact that many Swedish start-ups are unable to expand globally without being acquired suggests there are financial issues that have not been adressed fully. The literarture has studied this phenomema among Swedish enterprises.

While countries such as Germany and Japan have many companies that have strong global expansion, the Swedish companies are more investor-laden and less bank-oriented (Pesämaa & Svensson, 2018). This leads to the conlustion that Swedish start-ups in the

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go-to-market phase are in particular interesting to investigate. Swedish start-ups are able to deliver revolutionary products and services but are not able to expand globally in the go-to-market phase without being accquired by multinational enterprises. Few studies have investigated the lack of ability to expand and compete globally while retaining ownership. By losing the power and influence of successful Swedish start-ups, there is a risk that production, jobs and capital will move to other countires. In addition, start-ups and enterprises generally gain more financial support from the financial sectors in other countries, which hypothetically partly explains why Swedish start-ups face challenges to expanding globally (Johnson, Schnatterly, Johnson, & Chiu, 2010; Pesämaa & Svensson, 2018).

Although some of the previous studies tried to identify the different stages in the development of start-ups, authors within the start-up area recognize that there is a lack of knowledge when it comes to understanding the stages of development of the start-ups (Santisteban & Mauricio, 2017; Pugliese et al., 2016). As formerly mentioned, the go-to- market phase is considered an important phase of the start-ups’ timeline because strategies and decisions taken in this phase affect the whole future of the start-up (Avlonitis et al., 2001; Langerak, Hultink, & Robben, 2004; Lee et al., 2011; Kuestera et al., 2018). Based on this, it is obvious that there is a gap in the literature regarding understanding the conditions of start-ups in the go-to-market phase that increase the chances of success and later on survival in the market. There are other gaps in the literature besides the limited studies regarding the financial challenges and success factors for Swedish start-ups. There is limited research on the dynamics in Swedish start-ups and how Sweden has come to be recognized as one of the most outstanding countries when it comes to investments and profitability in start-ups (Riminton, 2017; AtomicoVentures, 2015). Swedish start-ups seem to be good at developing new products and services but less successful when it comes to taking them to the market and launching them globally.

This research aims to address this gap through investigating Swedish start-ups. In light of this problem, the author argues that there is a need for increasing knowledge regarding the financial success factors and challenges facing Swedish start-ups in the go-to-market phase and how start-ups should act in order to survive in this crucial phase. Knowledge within the field will be obtained through reviewing several Swedish start-ups in the go- to-market phase to analyse their progress in reaching the market with new products and services. New knowledge within the research field will contribute to filling the identified gap in the literature. The research question (RQ) is thus: What are the significant challenges and success factors affecting the financing of Swedish start-ups during the go- to-market phase?

1.1 Research purpose

The purpose of this research is to increase the rate of success of new start-ups in the go- to-market phase. Based on the identified gap in the literature regarding financial challenges and success factors during the go-to-market phase, interesting insights could be discovered to provide new knowledge for academic discussion. The research purpose will be fulfilled through investigating Swedish start-ups. Moreover, the result of this study will simultaneously help start-ups in the go-to-market phase wishing to overcome financial challenges and exploit success factors. In this research, challenges will be assumed to be factors that create obstacles for a start-up to go-to-market. On the contrary, success factors will be assumed to be factors that potentially facilitate the go-to-market process.

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2. Literature review

This chapter introduces the literature in the areas of growth in start-ups and the go-to- market phase. This enables the reader to establish an overview of the theoretical foundation within the research area.

2.1 Definition and drivers of start-ups

According to the Silicon Valley serial-entrepreneur and academician Steve Blank, there are a number of different features that distinguish start-ups from other new, small companies. First, while a start-up aims to disrupt the market with a scalable and powerful business model, a small business is satisfied to secure a place in the local market (Pope, 2014). From the beginning, start-ups want to dominate the industry with their new ideas, or even create a new market for their products or services (Kuestera et al., 2018; Pope, 2014). Second, start-ups by their nature are temporary. This means that start-ups must provide new products, build a hypothetical business model and quickly validate the business model by observing the market reaction. Once the business model has been proven, start-ups usually have to shift their agile approach to a more traditional structure (Pope, 2014). Lastly, according to Blank, start-ups and small businesses are funded differently. Both start-ups and small businesses are initially funded by the owner and private bank loans. However, once successful, start-ups are dependent on investors, venture capital and even public finds (Pope, 2014). This results in changes in the ownership of the start-up and the owner shares the risk and success with others (Bolumole, Calantone, Di Benedetto, & Melnyk, 2015).

Start-ups could further be confused with the life cycles of new companies. In this case, start-up is the early, “up-starting” phase of a new company where the business idea is presented to the market in order to receive venture capital (Arena et al., 2018). However, this study refers only to the phenomena of new, emerging, fast-growing companies based on unique business models containing new ideas and innovations.

There are several reasons for the increased attention to investing in and launching start- ups. Among other reasons, the ongoing digitalization process is considered a crucial factor for the rapid growth of a new start-up as the process creates market opportunities for new ideas and innovations (Kuestera et al., 2018). Second, start-up companies and new businesses provide the economy with many new jobs (Santisteban & Mauricio, 2017;

Peña, 2002). Seventy to eighty percent of new jobs are created in this part of the economy, which also constitutes an important part of both sales and exports in the developing countries (Peña, 2002). Third, start-ups have been recognized as forces for social and economic growth because they have the potential to expand the economies of the developing countries (Santisteban & Mauricio, 2017).

2.2 Growth modes

Generally, the literature discusses two different modes of growth in enterprises: internal and external growth. The first form (internal growth) is described as organic growth which occurs through exploiting new opportunities in old and/or new markets with old and/or new products and services (Achtenhagen, Brunninge, & Melin, 2017; Delmar, Davidsson, & Gartner, 2003; Demir, Wennberg, & McKelvie, 2017). The second form (external growth) is growth by acquisition and thereby taking the ownership of another firm (Delmar et al., 2003; Demir et al., 2017). In addition to these two growth modes,

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there is a hybrid mode through integrating different components from each mode and forming alliances or specific contracts (Demir et al., 2017).

Growth in small enterprises, including start-ups, are characterized by elements of organic growth because these kinds of enterprises aim to grow through reaching the market with new products and services (Delmar et al., 2003). In addition to growing with increased sales and new products and services, the organic growth is also driven by keeping existing customers and making them buy even more products and services. Organic growth depends on the internal development of the firm, such as an increase in total employment and sales (Delmar et al., 2003). Moreover, organic growth happens through expansion of the firm’s operations and sales internally (Achtenhagen et al., 2017). Research highlights several factors that affect organic growth, such as the role of the entrepreneur/entrepreneurial team, availability of resources, the flexibility to learn and the ability to adapt to the market’s demands (Achtenhagen et al., 2017). Other crucial factors for organic growth are careful planning, allocating resources for expansion and internal knowledge (Achtenhagen et al., 2017). Usually, organic growth has to be self- financed because enterprises need to ensure that they have the required resources and liquidity to grow (Achtenhagen et al., 2017).

Furthermore, growth by acquisition, also known as “external growth”, is related more to established and mature enterprises (Delmar et al., 2003; Achtenhagen et al., 2017).

External growth is favoured to reduce costs, risks entering new markets and technical difficulties (Achtenhagen et al., 2017). Other reasons for external growth are accessing new customers, increasing financial credibility, increasing the value of underestimated firms, reducing competition, and reducing the threat of competitors taking over the firms (Trautwein, 1990; Angwin, 2007; Achtenhagen et al., 2017). Even though external growth is related more to larger enterprises, it affects start-ups in several ways. It is often start-ups and small and medium enterprises (SMEs) that are acquired because external growth is restricted by the enterprises’ resources, and thereby the ability for start-ups and SMEs to acquire other organizations is limited (Achtenhagen et al., 2017). At least one expectation for start-ups and SMEs growing externally is when it comes to intellectual property, such as patents and trademarks. Research shows that enterprises active in intellectual property are more involved in mergers and acquisitions processes (Achtenhagen et al., 2017).

2.3 Go-to-market financing

Launching the first product is an important milestone for firms because it is a step toward further growth and financial independence (Islam, Fremeth, & Marcus, 2018; Zhao et al., 2015). Previous research emphasises that success at the go-to-market phase is determined by financing several acitivites of the start-ups. Activities such as finding key competencies and ensuring intellectual property, along with optimal launching time, increase the chances of success of the go-to-market phase (Achtenhagen et al., 2017; Zhao et al., 2015). Other key activites in the go-to-market phase requiring financial resources are markerting research, sales force and advertising/promotion. Start-ups tend to be competitive when launching their first products or services (Song et al., 2010; Zhao, et al., 2015). Equally imporant are financing research and development, engineering, prototype and market validiation (Zhao et al., 2015). Introducing new products and services to the market is a process associated with huge economic risks. Since start-ups have limited financial resources prior to market entry, they are dependent on economic resources from traditional funding sources such as banks and venture capital investments,

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which at the same time are often denied and restrictive in their support (Bolumole et al., 2015). This is due to the high risks connected with start-ups and the low-margin expectations (Bolumole et al., 2015). Thus, the start-up owners usually take a big portion of the financial risk until it is proven to the banks and venture capitalists that the start-up is worth investing in (Bolumole et al., 2015).

Financing the go-to-market phase is critical from several perspectives. Start-ups struggle to demonstrate the legitimacy they seek to transform from the conceptual to the commercial stage (Zhao et al., 2015; Islam et al., 2018). Start-ups must constantly show the quality of their performance in order to receive required financial resources from investors and other capital funds. During each step of the development of start-ups, different financial providers increase their demands. However, if start-ups succeed in meeting the expectations of the financial providers earlier in their development, the likelihood of getting financial support for the market entrance is higher (Islam et al., 2018). Thus, successful go-to-market financing and long-term growth are a chameleonlike process which heavliy depends on how well the start-ups perform during the different developmental stages.

The-go-to-market phase is usually divided into two life-cycle stages, namely, the early growth and the growth stages (Arena et al., 2018). In these two stages, start-ups finally reach the market with their first product or service and start to generate sales. Figure 1 below visualizes the stages of a start-up, including the go-to-market stage.

2.3.1 Early growth financing

The first part of the go-to-market phase, as it appears in Figure 1 above, is early growth.

During the early growth phase, start-ups launch their products and services in the market.

Parallel to the market introduction, start-ups invest in marketing and other advertising activities (Arena et al., 2018). Product production, launching and marketing are associated with uncertainties and big risks because it is doubtful whether the start-ups’

innovations are profitable or not (Arena et al., 2018). This leads to the need for additional investments and financing, and the start-ups must decide if the early growth and go-to- market phase should be organically or externally financed (Trautwein, 1990; Angwin, 2007; Achtenhagen et al., 2017). However, compared to the seed and starting up stages of a start-up’s life cycle, investors and loan lenders obtain better knowledge regarding the

Seed Starting

up

Early

Growth Growth

Go-to-market

Figure 1: Stages of start-up life cycle. Adopted from Arena et al., (2018)

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potential of the start-ups, and thus the willingness to inject funds is considerably higher (Arena et al., 2018).

Furthermore, start-ups in the early growth stage have a wide range of financial alternatives, such as large corporate partners, banks and other financial actors (Ou &

Haynes, 2006; Arena et al., 2018). Forming financial alliances with large corporate partners decreases the control of the owners on the start-ups but simultaneously increases the chances of success of the market entrance. On the other hand, increasing the debt instead of abandoning a part of the ownership of the start-up or owners retaining control of the start-up risks palpable failure during the market introduction (Arena et al., 2018).

Yet, start-ups face several challenges while seeking loans from banks or other financial institutions. First, start-ups usually lack assets to utilize as loan collateral (Sunley &

Pinch, 2012; Arena et al., 2018). Second, the information asymmetry between loan lenders and start-ups is considered a challenge for early growth financing because loan lenders have little knowledge regarding the peculiarities of start-ups (Sunley & Pinch, 2012). Financial institutions are generally sceptical towards start-ups due to lack of credit history and track record, and for that reason they refrain from supporting start-ups or charge a high interest rate (Southern, 2016; Arena et al., 2018). On the contrary, there are several financial actors dedicated to helping start-ups with new innovations despite the lack of previous market experience (Arena et al., 2018).

In addition to financing, the early growth phase involves external partners or loan lenders.

Start-ups typically find opportunities to generate funds from public capital. Start-ups are in many cases favoured by local and national authorities since they contribute new jobs and tax money to the economy (Arena et al., 2018). Financial public support could be expressed in terms of grants, commissioning, subsidies and beneficial contracts.

Beneficial contracts with the public sector have a favourable effect, in addition to financing the production and marketing of the new product: banks and other financial providers feel assured by the involvement of the public sector because it is considered a solid actor from a financial perspective (Southern, 2016; Arena et al., 2018). Generally, start-ups finance the early growth through a mix of loans, public equity, investors and intermediaries. They share the risk and increase the rate of success. After securing financing for the early growth and thereafter entering the market, the start-up faces the next dilemma: the financing of the increased production during the growth stage (Arena et al., 2018).

2.3.2 Growth financing

The second stage of the go-to-market phase is growth (Figure 1). During this stage, the start-ups’ products and services are already known to the market, and the start-ups finally begin to generate revenues and capital through their own sales (Arena et al., 2018). During this stage, it is likely that start-ups grow with increased debt to finance the increase in production and market-linked activities because the rise in sales does not cover all costs.

Another financing strategy, especially for high-tech start-ups with huge demand for capital, is public equity (Ou & Haynes, 2006; Arena et al., 2018). Seeking financing from special venture capital firms is also a possible option because these financial institutions are interested in mature start-ups with distinct potential, which describes start-ups in the growth stage (Arena et al., 2018).

Recent studies within the start-up financing research show that substantially high-tech start-ups prefer to receive angel financing, which are individuals who provide capital in

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exchange for ownership or convertible debts (Croce, Guerini, & Ughetto, 2018).

Furthermore, receiving funds from angels increases the likelihood of market success, especially when the investments are made in the later stages of a start-up’s life cycle (Croce et al., 2018). The reason behind this is that aside from capital injection, the angels play an active role in the start-up. Angels contribute increased knowledge and professionalised management, which start-ups need in the later stages (Croce et al., 2018).

Another instrument for financing growth are commercial debts, the so-called social impact funds (Arena et al., 2018). These social investors aim to guide start-ups to successfully achieve a positive social impact. The social impact funds are characterized by longer repayment times to provide the start-ups the possibility of fulfilling both social impact requirements and at the same time financing the production and marketing of products and services (Arena et al., 2018). Social impact funders demand both financial and social returns on their investments. Many of the organizations providing start-ups with social impact funds are professionally managed and provide diversified funds in order to increase the success of the start-ups’ growth (Arena et al., 2018).

No matter what strategy start-ups utilize to finance the later growth, some of the growth should be financed by the start-up’s own sales and increased profitability. The latter increase the likelihood of access to external capital, given the potential to perform financially well (Islam et al., 2018).

Generally, financing and investing is associated with risk estimation and guarantees (Pesämaa & Svensson, 2018). While private investors and angels are driven by opportunities in terms of ideas, resources and controlling certain resources to gain a first- mover advantage and to hinder other actors from entering the market, banks have other intentions (Yadong & Tung, 2007; Choi, Lee, & Shoham, 2016; Pesämaa & Svensson, 2018). Banks are less risk-averse and are more interested in the tangible guarantees such as bonds and properties. Hence, banks utilize their ownership more passively (Pesämaa

& Svensson, 2018). In countries such as Sweden and the US where the banking sector is playing a significantly passive role, companies are more dependent on foreign private capital to finance the go-to-market phase (Pesämaa & Svensson, 2018). However, in Germany and Japan, the banking sector is more supportive and exhibits a high physical ownership (Pesämaa & Svensson, 2018).

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2.4 Summary of the literature review and theoretical model

The theoretical model was developed based on the key concepts of start-up companies, growth and financing during the go-to-market phase. Figure 2 below visualizes the connection between the different concepts. To summarize: in order to grow, start-ups need to launch products and services in the market. This growth will probably happen through organic growth since it is more common in start-ups. Identifying financing opportunities is significant for start-up companies.

Start-up

Go-to-market Financing

Success factors

Challenges

Figure 2: Theoretical model

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3. Method

This section presents the research method used in the research in order to answer the research question and therefore fulfil the research purpose. The research method includes research purpose, approach, strategy, data collection, as well as the quality of the research.

Table 1 below summarizes the methodology in this research.

Table 1 – Summary of method approaches

Section Method approach Research

purpose

Explorative purpose to increase understanding of critical aspects in start-ups in the go- to-market phase.

Research approach

Qualitative and inductive research approach.

Research strategy

Case studies of five Swedish start-ups.

Sample selection

Non-probability purposive sampling.

Data collection

Five interviews with CEOs, board of directors and founders.

Data analysis Thematic data analysis with six phases to produce relevant codes, themes and dimensions for fulfilling the research purpose.

3.1 Research approach

Exploratory research was preferred since this methodology contributed to gaining new insights and facts regarding start-ups in the go-to-market phase (Saunders, Lewis, &

Thornhill, 2016). The report’s exploratory research is supported by the fact that there is limited data on this paper’s topic, and exploratory research will provide new insights and facts (Saunders et al., 2016). Moreover, because the data in this research will be partly based upon respondents’ opinions and reviews through both explorative and in-depth interviews, the research consequently adopted a qualitative approach (Saunders et al., 2016).

This research resulted in theoretical conclusions and managerial proposals regarding start-ups in the go-to-market phase. Current literature does not provide sufficient inputs in the research area. Thus, this research has been conducted as inductive case studies.

Furthermore, case studies were used to provide in-depth inquiries into the research field (Yin, 2014) In addition, case studies contributed to generating insights and empirical descriptions which were crucial to developing theoretical implications (Yin 2014;

Saunders et al., 2016). The findings from this research are restricted to the explored start- ups and therefore cannot be generalized to all possible enterprises (Dierckx de Casterlé, Gastmans, Bryon, & Denier, 2012).

3.2 Literature search

In order to obtain insights within the theoretical field, the researcher searched for scientific articles published in established journals. The primary search for literature was conducted on Scopus and Google Scholar. Furthermore, the references in several relevant articles were reviewed in order to facilitate the search for additional articles. The keywords for this search were start-ups, go-to-market, challenges and success factors, and these words formed the basis of the literature search. However, words such as market

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introduction, product launch, first product launch, new companies, growth, organic growth and new innovations were searched for to widen the literature foundation. The prioritization of the search results followed a few steps. First, in order to immerse in the latest articles within the research field, the articles were sorted by the year of publication, from the newest to the oldest. Articles from the last three years were considered particularly significant since they contain more relevant knowledge. Second, while searching on Scopus and Google Scholar, only source types other than journals were excluded to ensure a higher quality of the literature. Third, highly cited articles received more attention, even if they were older publications.

3.3 Case and sample selection

During the last few years, several start-ups were established in Sweden. To gain insights and collect sufficient data to answer the research question, a sample of cases was examined. It was impractical to survey the entire population (a census) of cases because of time constraints and also due to the difficulties of finding each one. This was not considered an issue as the researcher debated whether using sampling techniques would possibly achieve higher overall accuracy compared to a census, considering that more care and thought is spent on each individual case (Barnett, 2002).

It was assumed that collecting data from a sample that represents the entire population would be difficult because of the uniqueness of each start-up. Hence, the sample selection followed a few steps. First, after searching for start-ups, a list of start-ups was generated.

Second, an explorative environmental scanning was performed to find specific start-ups with experience from the go-to-market phase. Third, a few cases from step two were chosen for the case studies, based on their relevance to the research. The researcher intentionally searched for start-ups in several sectors in order to obtain a broad perspective. It has not been easy to find relevant start-ups for this research. The reason behind this difficulty is that many start-ups lack website and other public information. In addition, this research, as early explained, aimed for investigating start-up with experience from the go-to-market phase, which make the amount of potential cases even fewer since many start-ups are not sufficiently mature for the market.

Based on this, several start-ups have been identified and subsequently included in the data collection. All these start-ups are Swedish and have financial experience from go-to- market phase. The identified cases are illustrated in Table 2 below.

Table 2 – The examined start-ups from which data was collected through semi-structured interviews

No. Start-up Industry

1 Legal advice in the aviation industry Legal advice 2 Consultation within electronics and

product construction

System development 3 Verifying the nature and identity of

gemstones

Gemstone

4 Oil-free and biodegradable lubricant Forestry and mining

5 Grid surveillance Powerline

3.4 Data collection

To ensure the fulfilment of the research purpose, this research mainly investigated start- ups that have been or are in the go-to-market phase. Interviews are one of the most common data collection methods in qualitative research, which was the main reason why

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they were conducted (Onwuegbuzie & Leech, 2007). Both semi-structured and unstructured questions were asked because the research had a qualitative approach (Saunders et al., 2016). The respondents had key roles in the start-ups and their titles in the organizations are described in Table 3. The common denominator between the respondents is their key roles in the start-ups, such as founders, CEOs and owners. Despite the fact that only five interviews were conducted, relevant and enriching data was generated. Thus, the data collection is considered sufficient in relation to the RQ.

The research had the ambition to conduct substantial face-to-face interviews. However, since some of the investigated start-ups are placed in different parts of Sweden, the interviews with the respondents were Skype interviews. No matter how the interviewer conducted the interviews, all interviews were recorded and transcribed. The time range for the interviews was from 35 to 59 minutes and in total, the data collection consisted of five interviews for a total duration of 232 minutes.

The interview layout

The interview questions were partly conducted in an exploratory manner in order to obtain general background knowledge regarding the start-ups. Most interview questions were more formal and semi-structured in order to gain essential insights into the research area.

The in-depth research questions are preferred for use in qualitative studies (Saunders et al., 2016). The respondents were chosen by their key role in the start-ups. Moreover, the subjects for the interviews were derived from start-ups and focused on the go-to-market phase, including financial barriers and challenges in that phase. Even though the above- mentioned actions were taken, the researcher is aware that it is not possible to ensure totally favourable conditions for generating all possible data. For instance, the location of the interviews was not always decided by the interviewees, which makes it not always favourable from a reliability perspective. The interviews were conducted in Swedish, which was later translated into English. Table 3 below illustrates the number of interviews in the research.

Table 3 – Description of the interviews

Startup Respondent Date Role in the

start-up

Duration (min) Legal advice in the aviation

industry

R1 2018-03-29 Chairman of the Board, Co- founder

59

Consultation within electronics and product construction

R2 2018-04-09 Co-founder 35

Verifying the nature and identity of gemstones

R3 2018-04-20 Founder, CEO 47 Oil-free and biodegradable

lubricant

R4 2018-04-20 CEO 56

Grid surveillance R5 2018-04-20 Co-Founder,

CEO

35

3.5 Analysis method

Prior to the data collection and data analysis sessions, the researcher acquired a solid knowledge of the research topic and the literature. A solid knowledge contributed to developing the quality of the analysis and strengthening the ability to develop relevant interview and follow-up questions. Along with the data collection from the interviews,

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the gathered data was analysed simultaneously. After each interview, the researcher reviewed the answers from the respondents and compared the recordings with the written data. These mentioned activities were necessary in order to ensure that sufficient time had been invested in grasping the sense of the whole, extracting interesting facts, distinguishing relevant themes and discovering the meanings beyond the facts (Dierckx de Casterlé et al., 2012).

The analysis method had a thematic approach because the researcher aimed for flexibility regarding the determination of common denominators, themes and trends in the concept of start-ups. Themes are described as “general propositions that emerge from diverse and detail-rich experience of participants and provide recurrent and unifying ideas regarding the subject of inquiry” (Bradley, Curry, & Devers, 2007). These themes were derived from both conceptual codes and relationship codes, which is further beneficial when the research investigates and compares several different organizations (Bradley et al., 2007).

In addition, a thematic analysis method enables flexibility in analysing qualitative data, particularly when the qualitative data is rich and complex, as is the case with start-ups that will be examined in this research. Since the interviews were conducted with persons with deep knowledge and rich experience in the start-ups, the researcher is convinced that the theme analysis will be suitable.

Conducting a thematic analysis includes six phases: familiarization with data, generating initial codes, searching for themes, reviewing themes, defining and naming themes and finally producing the report (Braun & Clarke, 2006). These six phases are discussed and developed below. While conducting the theme analysis, the researcher iteratively ensured that the gathered data could contribute to answering the RQ.

Phases 1–4: Data coding and theme formation

The initial coding phase began with scanning of the gathered data to generate a list of ideas of which information would be interesting for addressing the research purpose. In addition, the researcher also strived to identify interesting aspects of the data items which could be repeated across the entire data set. Several codes were highlighted in order to have a solid foundation of codes for the formation of themes. Relevant themes were constructed after detecting the codes. All data extracts were collated into these identified themes. To make sure that the identified themes were pertinent, they were formulated in such a manner that they contributed to answering the RQ. The researcher discussed and compared the themes and aimed to trace relationships between the themes and the codes.

After forming the first set of themes, they were adjusted and merged, and several themes were omitted since they lacked data support or did not contribute to fulfilling the research purpose. Later, the relevant themes were analysed in relation to the entire data set to determine whether the themes were reflecting the key content of the data.

Phase 5: Defining and naming themes

To ensure that the themes fulfilled the research purpose, this phase started with a process of defining and refining the themes based on the RQ and the research purpose. A profound analysis of each theme was written and supported with a description of the relationship to the other themes and how the themes together form the overall context. Before the concluding analysis was started, each theme and sub-theme was named for the last time.

After this phase, eight themes and twenty sub-themes were developed to be included in the final phase.

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Finally, the research report was written in the closing phase. The report included an analysis and description of the gathered data. The report also included the findings from the research and how quality improvements were ensured in order to increase the quality of the research and to validate the results.

3.6 Quality improvement measures

To ensure the improvement of the research quality, the researcher applied the four criteria of Lincoln & Guba (1985), mentioned and discussed by Shenton (2004) and Amis & Silk (2008). These criterias are credibility, transferability, dependability and confirmability (Lincoln & Guba, 1985; Shenton, 2004; Amis & Silk, 2008). Below presents how these four criteria have been integrated into the research.

Credibility

This research’s credibility aspects are traced to Lincoln & Guba’s (1985) three activities in the research process: prolonged engagement, persistent observation and triangulation.

Prolonged engagement was carried out through spending sufficient time on the research, from the middle of January 2018 until the middle of June 2018. It is also reasonable to assume that this research will not cover all interesting aspects of the research area; more start-ups in other sectors and countries should be studied to ensure a higher level of knowledge. Persistent observation was managed in the analysis method-section through reviewing how characteristics and elements were identified and described. During the prior empirical data collection period, the researcher was immersed in the research topic to gather sufficient knowledge. The concept of triangulation, which indicates that at least two methods are used in order to check the results from the study, was considered in this research. The researcher utilized the concept of triangulation through, as earlier mentioned, sampling data regarding start-ups in the go-to-market phase mainly from both empirical interviews and secondary data sources, such as documents and articles from newspapers and industry magazines.

Transferability

Transferability is described as the ability to show that the findings from the research are applicable in other contexts. The questions in the interviews were constructed to treat the respondents as a collective representing a broader population, which made the gathered data relevant for both specific case studies. In addition, several issues that should be given attention before any attempts at transference are made are considered. These are: the number of organizations taking part in the study, the number of participants involved in the fieldwork, the data collection methods that were employed, the number and length of the data collection sessions and the time period over which data was collected. All these parameters are presented in the method section.

Dependability

Ensuring reliability is crucial to increasing the quality of the research and could be employed to show that repetition of the work in the same context and environment with the same tools and with the same participants would obtain similar outcomes. This technique enables forthcoming researchers to repeat the process of the study to achieve a similar outcome. Shenton (2004) suggests three sections to be included in the research method, which are: the research design and its implementation, the operational detail of

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data gathering and reflective appraisal of the project. The first two sections were included and developed in the method section, where the method of this research was thoroughly described as well as how the analysis and interpretation led to the findings and the conclusions. Regarding the third section, the effectiveness of the research was evaluated through the review of opponents in five different seminars and by a contentious dialogue between the researcher and the supervisor.

Confirmability

In qualitative studies, confirmability is the “investigator’s comparable concern for objectivity”. This thesis utilizes three methods to ensure the confirmability of the research. First, triangulation, which was described earlier, was used to reduce the effect of the researcher’s bias and preconceptions. Second, reflective commentary was applied, pervading the research both internally and externally, through the seminar oppositions and continuous dialogue with the supervisor. Third, a detailed methodological description, which was explained earlier, was included in the research report to enable determination of how far the data is trustworthy and objective.

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4. Findings

This section presents the research findings. The findings are based on the data generated from the interviews. Subsection 4.1 compiles the data regarding the financial challenges and success factors during the go-to-market phase and together, the dimensions contribute to answering the research question. Subsection 4.2 presents a financing model for start-ups in the go-to-market phase.

4.1 Financial challenges and success factors during go to market phase

After reviewing and sorting the generated data from the interview sessions, the following main financial challenges during the go-to-market phase were identified: lack of sufficient capital, lack of support from the banking sector, lack of support from the regional public level and, finally, regulations and legal issues.

On the other hand, based on the interviews, the following financial success factors during the go-to-market phase were developed: support from private investors, shared financial private/public risk, efficient internal operations and non-traditional financing methods.

The most common financial challenges and success factors are summarized in Table 4 below. These factors form the basis of the first-order codes in the data coding structure in Figure 3. The first-order codes form in turn the second-order themes, which are finally categorized under the aggregated dimensions financial challenges during go-to-market and financial success factors during go-to-market.

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Table 4 – Identified financial challenges and success factors of the explored start-ups.

Start-up Key challenges Success factors

Legal advice in the aviation industry

– Lack of financial resources due to fast growth.

– Accurate allocation of resources in the go-to-market phase.

– Applying for regional public funds was both time- and effort- consuming.

– Delays regarding payment of regional public funds.

– Difficulties getting bank loans.

– Lack of trust among banks towards the regional public fund providers.

– Many of the investors are members of the board.

– Slightly easier to obtain

contributions and loans from state- owned institutions.

Consultation within electronics and product construction

– Lack of financial resources to hire more employees.

– Taxes and other financial public regulations.

– Difficulties convincing private investors and public fund providers due to product complexity.

– Low-cost operations.

– Short go-to-market phase.

Verifying the nature and identity of gemstones

– Delays regarding payment of public funds.

– Reductions in payment amount from regional and state-owned funds, despite previous approval.

– Public payment was divided into several pay-outs with long time intervals and strict requirements.

– Difficulties getting bank loans.

– Mix of several private and public funds.

Oil-free and biodegradable lubricant

– Applying for EU funds was both time- and effort- consuming.

– Financing IP and necessary certifications.

– Access to investor networks.

– Winning start-up ventures to be exposed to investors.

– Financing willingness among both public and private sectors.

– Support from business incubator for finding suitable funding.

Grid surveillance

– Lack of resources to avoid involvement in legal processes with established competitors.

– Securing sufficient financial resources for faster growth.

– Support from banks.

– Support from business incubator for finding suitable funding.

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First–order codes Aggregate dimensions Second–order themes

Lack of support from the banking sector

Lack of support from regional public level

Lack of sufficient capital

• Lack of financial resources due to fast growth

• Lack of financial resources to hire more employees

• Accurate allocation of resources in the go-to-market phase

• Difficulties getting bank loans

• Lack of trust among banks towards the regional public fund providers

Dimension A:

Financial challenges during

the go-to-market phase

• Applying for regional public funds was both time- and effort- consuming

• Delays regarding payment of public funds

• Reductions in payment amount from regional and state-owned funds, despite previous approval

Regulations and legal issues

• Lack of resources to avoid involvement in legal processes with established competitors

• Financing IP and necessary certifications

• Taxes and other financial public regulations

Efficient internal operations Shared financial private/public risk

Non-traditional financing methods

• Support from business incubator for finding suitable funding

• Winning start-up ventures to be exposed to investors

• Low-cost operations

• Short go-to-market phase

Dimension B:

Financial success factors during the go-to-market phase

• Slightly easier to obtain contributions and loans from state-owned institutions

• Mix of several private and public funds

Support from private investors

• Many of the investors are members of the board

• Access to investor networks

• Support from banks

First–order codes Second–order themes

Figure 3 – Data coding structure

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4.2 Dimension A: Financial challenges during go-to-market phase

Dimension A is developed to compile the identified themes for financial challenges facing Swedish start-ups during the go-to-market phase. Dimension A is based on four aggregated themes, which in turn are developed from eleven first-order codes. To best facilitate the creation of these themes and first-order codes, several similar challenges and barriers were either disregarded or merged with related ones.

Lack of sufficient capital. The first theme regarding the financial challenges during the go-to-market phase is the lack of monetary resources to finance key activities, such as hiring staff with high levels of competence. When an innovation is launched, there is a demand to quickly meet customer needs and requirements, which requires a sufficiently large workforce. This barrier has been considered as an obstacle for growth and is explained by the CEO and Co-founder of “Consultation within electronics and product construction”:

“The biggest financial barrier for us is to deliver in time, have sufficient time to deposit, to keep schedules and so on. The challenge has been to grow at the pace required to fulfil our mission. If we had the capital to bring in some senior competence, it would of course have made it possible to grow faster. But it is at risk of failure to deliver.”

This was confirmed by the CEO and Co-founder of “Grid surveillance”, who also wanted to accommodate the growth with increased staffing:

“Of course, we need to bring in capital and it has taken time, for example, to get the right skills and strengthen up.”

Furthermore, the lack of financial resources forces the start-ups to make hard choices for balancing the budget. In some cases, the growth of the start-up could be affected by the budget constraints and key activities are down-prioritized. This was underlined by the Chairman of the Board and Co-founder of “Legal advice in the aviation industry”:

“We had constant debates about keeping the economy in control; we could not go over budget. Sometimes, we might have been too scrimpy to keep floating in the beginning. However, we employed a case manager at the beginning. We had to cope with the small resources we had, despite the fact that we had a lot of wills when we launched our service.”

Lack of support from the banking sector. The second theme regarding the financial challenges is the difficult experiences with the banking sector. Banks have been considered an important key player for several reasons, including financing large-scale production for the go-to-market stage and having a temporary credit check. Several start- ups were surprised at how difficult it was to receive financial support from banks. This has been mentioned by, among others, the Chairman of the Board and Co-founder of

“Legal advice in the aviation industry”:

“It was finally the bank X that approved our application and could provide us with temporary credit. However, it was difficult to get loan from the banks. It was really difficult, much more difficult than expected.”

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A similar situation was witnessed by the founder and CEO of “Verifying the nature and identity of gemstones”. Even high-tech start-ups with greater equity and economic muscle have been considered to be too risky for the Swedish banks:

“What is happening now is that the main public financier now comes with its second payment and that we have a bank in the form of bank loans. But it's hard and harder than I thought. And it is also being worked on right now. If we get the bank loan, other public financial institutes will make a payment and then we will get a cover, so we can finance everything.”

The difficulties of receiving bank loans were not limited to financial procurement. For instance, it was hard to receive a low-sum credit check from the banks despite having a public partner as collateral for the loan. The lack of trust among banks towards the regional public fund providers decreased the rate of success in the go-to-market phase.

This is further explained by the Chairman of the Board and Co-founder of “Legal advice in the aviation industry”:

“Although the temporary credit was guaranteed from a financial institution that is public, there was no risk at all. But even with the explanations from the public regional institution, the first bank did not want to change its mind.”

Lack of support from the regional public level. The third theme regarding the financial challenges is the non-fruitful cooperation between the start-ups and the regional public funders. This theme is especially interesting since it addresses a perceived problem among the five investigated start-ups in this thesis. The regional public funders required a higher level of formalism and paperwork, according to the founder and CEO of “Verifying the nature and identity of gemstones”:

“Regarding the regional public funds, it was more formalism and much more paperwork, much more work with budget. There was a lot to be mapped and planned. You were a bit bitter and confined after you have been doing it for a while.”

In addition, delayed processing weakened the go-to-market phase. This was discussed by the Chairman of the Board and Co-founder of “Legal advice in the aviation industry”:

“Then, when we started with the regional public funds, it was supposed to take two months; it took just over a year to complete. I mean the application for contributions and they have not been so engaged and barely kept on track, I would say, personally.”

The same situation with problems and hassles is described by the CEO and Co-founder of “Grid surveillance”:

“The regional public funds I would say was straight the opposite. It was difficult to apply at the regional public fund providers and there was a lot of hassle afterwards too. There were to many formalities.... It takes a lot of time to apply for money and to report afterwards as well. I would not seek money from regional public funds. Not worthy.”

Aside from the regional public funders, other types of cooperation problems occurred for the start-ups. Start-ups in the go-to-market phase are generally in desperate need of capital. Delays in receiving different funds can thus negatively affect growth in the go-

Financial aspects facing start-ups during the go-to-market phase

Financial aspects facing start-ups during the go-to-market phase

Case studies of Swedish start-ups

Daniel Smirat

Financial aspects facing start-ups during the go- to-market phase:

Case studies of Swedish start-ups

Abstract

Acknowledgements

Table of contents

1. Introduction

2. Literature review

2.2 Growth modes

2.3 Go-to-market financing

2.3.1 Early growth financing

2.3.2 Growth financing

2.4 Summary of the literature review and theoretical model

Start-up

3. Method

4. Findings

4.1 Financial challenges and success factors during go to market phase

4.2 Dimension A: Financial challenges during go-to-market phase