Growth and Performance in Small Innovative Firms

Ezra Bar

June 13, 2006


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Small businesses, also known as SMEs (Small and Medium-size Enterprises) follow, in general, the following phases of lifecycle:

(1) launch,
(2) initial development and growth,
(3) consolidation and growth, and
(4) maturity or exit.

There are some characteristics that identify SMEs from larger firms, as discussed in other papers; there are, also, many powers and constraints that affect and direct the growth-path of an innovation SME - internal and external ones.

The greatest power/ constraint affecting and shaping an SME’s growth is the financial factor. As confirmed by numerous studies, around three-quarters of technology-bases SMEs (or NTBFs) are launched as a result of the founders’ frustration from their previous position at a large organisation; given this desire for independence, many entrepreneurs avoid the institutional financial aids, which come with binding conditions.

For the first stage of the formation of an SME, the founders can provide the relatively small amount of investment from their own personal sources (between $10k-$50k in the US, as indicated by studies). Nevertheless, for the second phase of the SME’s lifecycle, which involves a significant growth and heavy investments (£200k to £750k in the UK, for instance), there is a need for an institutional financing.

This requires the SME to prepare a business plan, and to be committed to minimum financial performance and ROI. SMEs’ founders that are reluctant to compromise find themselves selling their “baby” to large firms, only to launch a new one, later.

Another characteristic of SMEs that limits their growth and financial performance is their reliance on very few, sometime a single customer in their early stage. Sometimes one of these customers can be a source of financing, by either a direct or indirect investment in its innovation supplier.

A major drawback for such a close relationship with very few customers might be in less incentive to innovation, which results in no-growth or little-growth; this, in turns, results in low ROI and financial performance. Moreover, studies have confirmed that NTBFs are not creating more innovations than large established firms; in contrary to the general belief, when innovations are weighted with all factors, large firms are those who produce more innovations, henceforth, have higher ROI and overall growth of financial performance.

In the early phase, an SME’s growth is related to sales and turn-over, with little attention to the growth of net profit. Other factors that influence growth and profitability of SMEs are owners’ technical qualifications, as well as their attention to product planning and marketing. Two sectors of NTBFs were studied for analysing the factors affecting their success.

Software start-ups identified the following five factors as most critical to their success:

(1) level of R&D expenditure,
(2) how radical new products were,
(3) intensity of product upgrades,
(4) use of external technology, and
(5) management of intellectual property.

Biotechnology start-up identified the following three factors:

(1) proximity to similar firms,
(2) quality of scientific staff, and
(3) commercial experience of the founders.

FOOTNOTES Ezra Bar, MBA, PhD Student, is a Business Consultant and Academic Mentor for MBA and Engineering Students. Find many other Academic and Business Articles at http://Ez-B-Process.Com/Resources.htm
Visit http://Ez-B-Process.Com/PhD.htm for Academic Mentoring.
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