An investigation into the influence of promotional instruments and framework conditions on the founding and success of start-ups

An investigation into the influence of promotional instruments and framework conditions on the founding and success of start-ups

Author | Source

Severin Renold

Federal reports

Postulate / Motion National Council

Canton Zug

Topic

Startups Switzerland | Zug

The thematic focus of this research work is directed at the framework conditions and funding instruments of a location, which can have an influence on the founding and success of start-ups. The aim is to find out which of these factors have a positive influence on the choice of location and to be able to distinguish them from the influence on success in a differentiated approach.

 

To this end, a literature search is conducted at the outset and sources on entrepreneurship, the development process of a firm and the underlying conditions for a desirable realisation of the business idea are consulted. By delving deeper into the research context, it becomes apparent that a deeper level of abstraction will be necessary for further work in order to be able to make clear and valid statements later in the project. Works such as “Start-up and survival chances of family businesses” (Albach and Pinkwart 2002, pp. 21-54) speak of the required agility in a business and the ability to react quickly to external market influences. This goes hand in hand with the initial choice of a location that can guarantee political as well as legal security on a long-term basis. While other sources such as the book “Strategic E-Business” (Keuper 2001, p. 37-72) discuss competitiveness in the information age, the dilution of national borders and distribution channels and the increasing relevance of making processes digital and automated. Just as the positioning in a niche market, due to the increasing change in consumer behaviour from a seller’s to a buyer’s market. Whereby it is increasingly determined by the consumer what is to be offered and, conversely, due to new possibilities in the e-commerce sector, there is a flood of information and offers. For companies, this means focusing on the access to talent and new employees who can offer a connection to change and guarantee future consistency and innovative strength. However, when looking at other aspects such as the culture and risk appetite in a country, tax comparisons, training opportunities and the characteristics of the investor landscape, it becomes apparent that the scope of the study must be narrowed down, as the statements on the conducive framework conditions vary or are generalised depending on the interpretation and region. Accordingly, the author decides to focus future research purely on funding for start-ups. For this purpose, these are defined by their science- and technology-based approach, their focus on innovation, a scalable business model, return-oriented investors and a maximum duration of five years since foundation, based on the description of a startup by the “Swiss Startup Radar” (Baldegger et al. 2020, p. 9).

 

Startup Beschreibung

 

Furthermore, the research work is narrowed down geographically, using Switzerland as the basis for the international comparison and specifically the canton of Zug in the national comparison. Zug was chosen on the grounds that the canton has had an extraordinary media presence in recent years and has an above-average start-up rate. This can thus be used as a reference example in comparison with theoretical statements at government level and a standardised research methodology that follows later.

 

In a next step, research is conducted at the federal level to find out more about Switzerland’s positioning and measures with regard to its start-up ecosystem. Here, a postulate by former National Councillor Fathi Derder with an appeal to the Federal Council regarding better development of innovative start-ups in Switzerland stands out (Derder 2013). In his appeal, the National Council states that both the founding and success rates of Swiss start-ups could be optimised and therefore a sound analysis and immediate measures should be implemented. The Federal Council approved the proposal and presented its opinion in its report on fast-growing start-ups published in 2017. Drawing on sources from the Global Entrepreneurship Monitor (Baldegger et al. 2020), the Swiss Startup Radar (Kyora et al. 2018) and in collaboration with the Department of Economic Affairs (SECO) (ECOPLAN et al. 2016), the Executive presents its assessments of the Swiss framework conditions and position in an international comparison. The conclusion states that Switzerland and its framework conditions range from good to very good. With a distinctive network of high-quality universities and colleges, it provides a widely diversified start-up hub across a large number of cantons. The analyses show both a healthy growth in the number of spin-offs, a broad range of future-oriented training opportunities, initiatives for government support programmes and administrative relief for start-ups, as well as attractive basic tax conditions. The Federal Council refrains from introducing and defining the official term ‘start-up’, as well as from establishing state venture capital funds to directly support start-ups. Rather, the Confederation is trying to better connect to European financing offers and ensure the regulatory framework conditions. Finally, in the dispatch on location promotion 2016-2019 (Sommaruga and Casanova 2015, p. 1), the Federal Council submits a motion to approve various federal resolutions. The reasons given for why Switzerland has comparatively fewer start-ups are the high per capita income, the labour force participation and the associated unattractive opportunity-risk distribution.

 

Based on these reports, reference can be made to a source that serves to interpret the framework conditions and presents a grid of a total of twelve condensed support instruments from the Global Entrepreneurship Monitor, called the National Entrepreneurship Context Index (NECI) (Baldegger et al. 2020, pp. 9-10). This will be used as a reference point in the later course of the work, supplemented and also used for the next step of the investigation. Some points from this index are the internal market dynamics of a place, the cultural and social norms, the research and development transfer or the commercial infrastructure.

 

National Entrpeneurship Index

 

With this knowledge, the next step is to take a closer look at the Canton of Zug. From sources such as the presentation on the business location from the Department of Economic Affairs (Department of Economic Affairs and Wirtschaftsförderung Zug 2020), the location analysis of the Swiss Brand Experts (swissbrandexperts 2010) and, derived from this, the government’s strategy for the legislative periods 2010 to 2018, the essential success factors are analysed according to the information provided by the stakeholders mentioned (Hegglin et al. 2010). In addition, interviews with start-up founders and government members are taken up to supplement the information obtained (Handelszeitung 04.01.2019). In addition to the overlap of some points from the report of the Confederation as well as from the NECI on the offer of public infrastructures and attractive tax conditions, this research finds some further aspects and soft factors that provide indications of possible research gaps and give rise to hypotheses. This concerns factors such as mobility and the centrality of the location as well as the slogan “The Spirit of Zug” (von Euw 2021), which is supposed to describe the entrepreneurial approach and the customer-centred, solution-oriented appearance of the public authorities. This includes the way of interacting with companies and thus also with start-ups, the stable policy and the innovation-driven mindset. It can be concluded that Zug places special emphasis on communication and marketing, which leads to the hypothesis of including these points separately in a future grid on enabling frameworks. In addition, the theory is established on the basis of the success example of Zug that existing promotional instruments are better used and thus the development of a location progresses all the more the more attention is given to customer-oriented communication. A final hypothesis is formed with regard to local venture capital agencies. After aggregating all sources and despite the partial neglect of the topic at the federal level, the theory is put forward that better access to venture capital in the canton will enable more start-ups to achieve long-term success.

 

With this foundation and prior knowledge, a standardised research methodology is finally arranged. For this purpose, a population of people is defined who are either already in the startup founding role, could found a startup in the future or have been active in a startup in a leading position in the past. The people must be able to establish a direct link to the canton of Zug if possible and are to be surveyed for just under a month by means of an electronic questionnaire. The chosen approach attempts to obtain the opinion of the directly affected target group in the startup question and to compare answers with the previously established and obtained theories. In preparation for the survey, the grid was further broken down and supplemented via the framework conditions and funding instruments NECI. It consists of about 26 items at the time of going live. Further parts of the survey arrangement deal with the location comparisons, the differentiation between the start-up and success factors, the topics of communication and risk capital, as well as with the Canton of Zug as an example of success. To ensure a subsequently valid answer to the research question and hypotheses, the survey must register at least 50 fully completed questionnaires by the final deadline. If the target is not met, Plan B will be implemented with at least 10 qualitatively guided expert interviews.

 

From 18 April 2021 to 9 May 2021, the questionnaire will be shared on social media, LinkedIn and via email and will also be conducted live with some participants. The analysis records 112 records at the end of the survey period, of which around 29 were submitted incomplete. The 83 complete responses can be used for the following discussion, with 47% (53 participants) being self-employed in terms of the total number and around 46% (52 participants) being involved in a start-up. The implementation of Plan B is therefore not necessary. Finally, the answers are compared in weighted form with the NECI of the Global Entrepreneurship Monitor, the federal resolutions and the strategy and analysis of the Canton of Zug. In order to answer the research question, a ranking of the ten most decisive factors for start-up founding and success in each case is created, consisting of the points with the highest agreement from the theoretical basis and the highest rating from the survey. The result shows that for both approaches the following points are of highest relevance:

Supply of and access to public infrastructure
On-site education and access to employees and talent
Local venture capitalists and access to public funding

 

Other congruent aspects with different prioritisation mentioned are fiscal framework, policy stability, legal framework, communication and interaction of authorities, quality of public transport and local business maintenance costs. The only difference in differentiation is item 10, where the number of industry-relevant associations and support programmes is mentioned for start-ups, while for start-up success it is the internal market dynamics that made it to the top ranking. Accordingly, these findings can be further used in the analysis and evaluation of supportive measures and will be discussed in more detail in the detailed research paper.

 

Kantonale Startup Gründungen

 

The hypotheses that have been put forward will also be addressed, starting with the theory that the more customer-oriented communication between the canton and the start-up is prioritised, the better the effect of the other support instruments and infrastructures will be. The question on the impact of customer-oriented communication on the participants shows that 65% of the respondents would make more use of existing funding instruments. Over 50 % would use more funding than before and would be more likely to found their startup in this location. Only 22 % of the votes declare an impact on the success of the start-up and less than 5 % of the respondents each explicitly affirm that customer-oriented communication has no impact on the points mentioned. Over two-thirds affirm the positive effect of speed of response on their decisions and success. Thus, the hypothesis cannot be falsified and remains valid until it is invalidated by a study with a more comprehensive population. As a further thesis, it is suggested that the point of communication must necessarily be taken up as a separate category in the grid of conducive framework conditions and instruments of authorities and governments. The results from the survey show a different picture here. While 92% agree on the relevance of communication and interaction during the start-up phase, only 26% acknowledge its importance for the further success of the company. The thesis is thus partially falsified and the recommendation is only for the inclusion of the communication aspect in the grid of conducive start-up factors. The last hypothesis states that better access to venture capital in a canton will enable more start-ups to achieve long-term success and retain their location. In the entire survey, this is where the clearest evidence emerges to verify the statement. Easy access to venture capital is rated as a decisive factor for success by 95% of the participants, 91% confirm the centrality via the number of regionally represented institutions with a need for investment, and for 88% the average investment volume also plays a significant role. The hypothesis cannot be falsified and remains valid for the time being.

 

Kanton Zug

 

From these findings, it can be concluded that the general framework conditions and funding for start-ups in Switzerland are basically positive, but that there is room for expansion and optimisation of various actions. These include the development of a new specification of the grid of funding instruments separated according to the start-up and success factors. As well as the establishment of standards in quality management and on the process of communication and interaction between authorities and start-ups. As well as the investigation of more attractive framework conditions that lead to the attraction of more venture capitalists and make access and administrative matters as simple as possible. The consideration must take place after a cost-benefit comparison, followed by a feasibility study and the subsequent definition of the scope. In further research, it is recommended to extend the survey period and the budget to incentivise participants in order to record a more comprehensive population and improve the participation rate. Furthermore, there are options to complement the previous research methods with qualitative interviews in order to gain further theories that have not been considered so far and to include them in the validation. In addition, new locations and startup hubs with similar success histories as the Canton of Zug (for example, Berlin) can be consulted for the direct comparison of findings in order to identify circumstantial evidence and to match research gaps such as communication in a different context.