This Working Paper is the English version of Entreprendre au Québec, c est capital! Résultats de recherches sur la création d entreprises (Cahier de recherche n o 2005-03). Venture Creation Processes in Quebec Research Findings 2004-2005 Cândido Borges, Germain Simard and Louis Jacques Filion Working Paper # 2005-07 May 2005 ISSN : 0840-853X Copyright 2005 HEC Montréal. All rights reserved in all countries. Translation or reproduction of this document in any form whatsoever is prohibited. The authors of texts published in the Rogers J.A.-Bombardier Chair of Entrepreneurship Working Paper series are solely liable for their contents.
Venture Creation Processes in Quebec Research Findings 2004-2005 ABSTRACT: This research examines the venture creation process in Québec and the problems encountered by venture creators. For the purposes of the study we have divided the venture creation process into four stages, namely (1) initiation, (2) design and preparation, (3) start-up and (4) operations. Québec itself has also been divided into four regions, namely (1) the Montreal region, (2) peripheral regions, (3) central regions and (4) resource regions, as well as three sectors (secondary, services and technology). The process was found to be fairly similar in most of the regions and sectors, the exceptions being the resource region and the technology sector. The venture creation process can be very long. Most firms take an average of 11 months to sell their first product or service, and 21 months to achieve profitability. Marketing and sales are major weaknesses. The research clearly shows that entrepreneurs need training to prepare them for the creation, start-up and management of a small firm. Support at every stage of the venture creation process is vital. Copyright 2005 HEC Montréal. All rights reserved in all countries. Translation or reproduction of this document in any form whatsoever is prohibited. The authors of texts published in the Rogers J.A.-Bombardier Chair of Entrepreneurship Working Paper series are solely liable for their contents.
Venture Creation Processes in Quebec Research Findings 2004-2005 Authors : Cândido Borges, Germain Simard, Louis Jacques Filion Acknowledgements This research was carried out in 2004 and 2005 by the Rogers-J.A. Bombardier Chair of Entrepreneurship at HEC Montreal, and would not have been possible without the financial support of Canada Economic Development (CED) for Québec Regions and Québec s Ministère du Développement économique, de l Innovation et de l Exportation (MDEIE) (known as the Ministère du développement économique, régional et de la recherche - MDERR, when the project began). We would also like to thank the research assistants who collected, coded and analyzed the information presented in this report: Jean-Hugues Labrecque, M.Sc. in Management, HEC Montreal Isabelle Fortin, Student in the Master s program (M.Sc.), HEC Montreal Anne Lavigne, Student in the Master s program (M.Sc.), HEC Montreal Daniel Turner, Student in the Master s program (M.Sc.), HEC Montreal Philippe Cimper, Student in the Ph.D. program, HEC Montreal Sophie Veilleux, Student in the Ph.D. program, HEC Montreal Natasha Cournoyer, Student in the Master s program (M.Sc.), HEC Montreal We are also grateful for the constant support of our office personnel Sylvie Chabot, executive secretary, and her predecessor Nicole Bossard, who revised the original French versions of the documents produced during the research. Our grateful thanks also go to the entrepreneurs who took part in the research for their willingness to contribute their time, a rare commodity in this day and age. They received us and shared their venture creation experiences with us, and we thank them for their availability. We also thank the support agencies throughout Québec that identified the companies for us. To everyone, thank you for your contribution, and for the help you have given to future generations of entrepreneurs. i
Entrepreneurship in Québec: A Capital Business Venture Creation Research Findings Québec 2004-2005 Table of Contents Acknowledgements... i Table of Contents... ii Entrepreneurship in Québec: A Capital Business... iv List of Tables... iv List of Figures... iv List of Appendices...v List of Abbreviations... v Introduction... 1 1. A four-stage model... 2 2. Methodological framework... 3 3. Presentation and analysis of results... 6 3.1 Characteristics of the entrepreneurs and their firms... 6 3.1.1 Characteristics of respondents... 6 3.1.2 Characteristics of the firms... 8 3.1.3 Highlights: Characteristics of entrepreneurs and firms... 9 3.2 Stage 1 Initiation... 10 3.2.1 Reasons for venture creation... 10 3.2.2 Origin of the business idea and reflection on the project... 10 3.2.3 Difficulties and solutions... 12 3.2.4 Highlights Stage 1... 13 3.3 Stage 2 Concept and preparation... 13 3.3.1 Preparation of the business plan... 13 3.3.2 Marshalling of financial resources... 15 3.3.3 The entrepreneurial team... 16 3.3.4 Problems and solutions... 16 3.3.5 Highlights: Stage 2... 17 3.4 Stage 3 Start-up... 18 3.4.1 Legal incorporation of the business and recruitment... 18 3.4.2 Choice of firm s location... 19 3.4.3 Developing the initial product or service... 20 3.4.4 Problems and solutions... 21 3.4.5 Highlights Stage 3... 22 3.5 Stage 4 Operations... 22 3.5.1 Initial sales... 22 3.5.2 Promotional and marketing activities... 23 3.5.3 Achieving profitability... 23 3.5.4 Formal planning... 24 ii
3.5.5 Problems and solutions... 25 3.5.6 Highlights Stage 4... 26 3.6 Training, resources, venture creation support and information sources... 27 3.6.1 Training during the venture creation process... 27 3.6.2 Venture creation resources... 28 3.6.3 Sources of assistance... 29 3.6.4 Sources of information... 31 3.6.5 Highlights: Training, resources, venture creation support and information sources... 33 4. Recommendations... 34 4.1 For support agencies... 34 4.2 For venture creators... 36 4.3 For entrepreneurship research... 37 4.4 For entrepreneurship education... 39 Conclusion... 40 References... 41 iii
Entrepreneurship in Québec: A Capital Business Venture Creation Research Findings Québec 2004-2005 List of Tables Table 1 Stages and activities in the venture creation process... 3 Table 2 Distribution of sample businesses, by region and by sector... 4 Table 3 Years of experience and training in management areas... 7 Table 4 Turnover and R&D investments by sector... 9 Table 5 - Classification and origin of business idea, by sector... 11 Table 6 Level of difficulty of Stage 1 By region and by sector... 12 Table 7 - Business plan preparation problems, by region and by sector... 14 Table 8 Total seed money by sector... 15 Table 9 Number of partner shareholders, by sector... 16 Table 10 Levels of difficulty in Stage 2 by region and by sector... 17 Table 11 - Importance of factors when selecting a location by region and by sector... 19 Table 12 Level of difficulty at Stage 3 by region and by sector... 21 Table 13 Formal planning rates by region and by sector (%)... 25 Table 14 Levels of difficulty at Stage 4 by region and by sector... 26 Table 15 - Importance of resources, by stage... 29 Table 16 Level of satisfaction (A) and usage rate (B) for sources of assistance... 30 Table 17 Level of importance of information sources, by stage... 32 List of Figures Figure 1 Classification of regions... 5 Figure 2 Age and educational attainment of entrepreneurs... 6 Figure 3 Enterprise functions (% of time)... 7 Figure 4 Number of days taken to prepare the business plan... 14 Figure 5 Number of employees at start-up, by sector... 18 Figure 6 Time taken to sell the first product or service (in months)... 23 Figure 7 Time taken to achieve profitability (in months), by sector... 24 Figure 8 Percentage of entrepreneurs undergoing training... 28 iv
List of Appendices Labrecque, J.-H., Borges, C., Simard, G., Filion, L.J. (2005a) Recherche sur la création d entreprises Données Partie A. Working Paper 2005-04, Rogers-J.-A.- Bombardier Chair of Entrepreneurship, HEC Montreal. Labrecque, J.-H., Borges, C., Simard, G., Filion, L.J. (2005b) Recherche sur la création d entreprises Données Partie B. Working Paper 2005-05, Rogers-J.-A.- Bombardier Chair of Entrepreneurship, HEC Montreal. List of Abbreviations BDC CDEC CLD CED Business Development Bank of Canada Economic and community development corporation Local development centre Canada Economic Development for Québec Regions MDERR Ministère du Développement économique, régional et de la Recherche MDIE CFDC Ministère du Développement économique, de l Innovation et de l Exportation Community Futures Development Corporation v
Entrepreneurship in Québec: A Capital Business Venture Creation Research Findings Québec 2004-2005 Authors: Cândido Borges Germain Simard Louis Jacques Filion Rogers-J.A. Bombardier Chair of Entrepreneurship HEC Montreal April 2005 Introduction In their quest to support economic and social development, government and various other stakeholders in society are increasingly trying to refine their programs and assistance policies for venture creation. This is the case in Québec, where studies have shown that the venture creation rate is lower than the Canadian, and indeed the world, average (Filion, 1999; Riverin, Filion et al., 2003). To help future entrepreneurs prepare to create their businesses and to tailor support services to their needs, governments must have a sound understanding of the venture creation process and the problems likely to be encountered by entrepreneurs. In 2004-2005, after noting the lack of data on the venture creation process in Québec and the shortage of in-depth studies to back up the data, the Rogers-J.A. Bombardier Chair of Entrepreneurship at HEC Montreal, with economic assistance from Canada Economic Development for Québec Regions (CED) and the Ministère du Développement économique, de l Innovation et de l Exportation (MDIE), carried out a survey of 200 entrepreneurs in Québec. The objective of the research was to analyze the activities of a number of entrepreneurs who have created their own business in Québec. This included: finding out what kind of difficulties the entrepreneurs had encountered in their venture creation process; discovering which support measures the entrepreneurs had used, and how useful they had found them; understanding the factors that facilitated the venture creation process; 1
identifying actions and measures that could help support venture creation, or could help businesses survive. This report presents the principal findings of the research 1. It has four sections, besides the introduction and conclusion. The first sets out the model used to structure the research, while the second describes the methodology. The third section presents and analyzes the results, and the fourth contains suggestions and recommendations for entrepreneurs and support organizations to facilitate the creation and start-up of new businesses. Given the scope of the research, we will not comment individually on the elements presented in the tables. Readers may obtain more detailed information from Working Papers 2005-04 and 2005-05, which set out all the data collected during the research project. 1. A four-stage model For the purposes of this research, we have considered the venture creation process to be the set of all the activities performed by entrepreneurs to design, establish and launch a business. As a first step in our research, we reviewed the main literature on venture creation 2, to gain an understanding of the current state of research in the field, and to identify the main variables to be taken into account in our own research. This review also allowed us to design a model that breaks the venture creation process down into four stages (see Table 1), and the model was used both to prepare the questionnaires used in the survey and to present the results. In this model, the venture creation process has three stages prior to the operation stage, at which point the business is considered to be up and running. The first stage is initiation, which includes the identification and development of the business opportunity and the decision to launch a business. The second stage, design and preparation, includes activities such as the drafting of the business plan, the creation of an entrepreneurial team, and the marshalling of resources. The next stage is start-up, which is when the entrepreneur generally incorporates the business, develops the first product or services, hires the first employees and makes the first sale. It is important to stress that that venture creation is a dynamic process that is unique in each case (Reynolds and Miller, 1992; Bruyat and Julien, 2001; Delmar and Shane, 2002). As a result, the stages and activities do not always occur in the order indicated, or may overlap. The division of the process into stages and activities is mainly intended to make it easier to understand and study. 1 The data appear in Workign Papers 2005-04 and 2005-05 produced by the Rogers-J.A. Bombardier Chair of Entrepreneurship, which constitute the appendices to this report. They may be consulted online at: www.hec.ca/chaire.entrepreneuriat 2 This critical review led to another Working Paper (in French only) entitled Création d entreprises Examen de la documentation, (Working Paper 2005-02). 2
Table 1 Stages and activities in the venture creation process Stage Activities Initiation 1. Identification of business opportunity 2. Reflection and development of business idea 3. Decision to create a business Design and preparation 1. Drafting of business plan 2. Completion of market survey 3. Marshalling of resources 4. Creation of entrepreneurial team (partners) 5. Registration of trademark and/or patent Start-up 1. Legal incorporation of business 2. Full-time commitment to the project 3. Organization of facilities and equipment 4. Development of first product or service 5. Hiring of employees 6. First sales Operation (following business launch) 1. Completion of promotion or marketing activities 2. Sales 3. Achievement of break-even 4. Formal planning 5. Management Sources: Vesper (1990); Reynolds and Miller (1992); Carter, Gartner and Reynolds (1996); Kadji-Youaleu and Filion (1996); Reynolds and White (1997); Reynolds (2000); Delmar and Shane (2002); Gasse, Diochon and Menzies (2002a, 2002b, 2003, 2004); Gelderen, Bosma and Thurik (2001); Shook, Priem and McGee (2003). 2. Methodological framework For the research project, 210 businesses were surveyed, all created between January 1, 1999 and September 30, 2004 and having at least four employees. Previous research and the review of the literature used to build our questionnaire (Borges, Simard, Filion, 2005) showed that it is preferable to focus on entrepreneurs who have completed all the stages in the venture creation process, since they have more perspective on the experience of setting up a business. However, we still wanted the experience to be fresh in their minds, which is why we chose entrepreneurs who had set up their businesses less than five years ago. We also made a deliberate choice to restrict the sample to businesses with at least four employees, in other words businesses that were not engaged in the same activities as self-employed workers or micro-enterprises. In the sample businesses, a range of management activities were present, and in addition they had been operating for long enough to have gone through the difficulties associated with creation and startup. We built a questionnaire in two parts, as shown in the two appendices to this document (Labrecque, Borges, Simard, Filion, 2005 a et b). We carried out a number of pre-tests in two stages, each time making adjustments as needed to the questionnaire. First, the questionnaire was presented to five field workers with venture creation support agencies, and was then adjusted. Following this, three members of the team, including the lead researcher, tested the questionnaire in the field. After each trial, the team met to discuss the application and to make corrections as required. 3
The questionnaire was designed to obtain as much information as possible from the entrepreneurs. The first part (questionnaire A) organized the information with regard to business size, region, turnover, training and sources of financing. The second part (questionnaire B) dealt with the four stages of the venture creation process, as outlined above. In building the sample, we received assistance from our partners and local organizations that deal with entrepreneurs on a day-to-day basis. The regional offices of partner government departments, venture creation advisors at local development centres, CFDCs and business incubators together referred a total of 641 businesses. Before establishing our target sample of 200 businesses, we contacted 466 businesses and invited them to take part in the project; 95 refused, and 170 did not meet the criteria set out above. In the end, 201 businesses took part in the survey. After a detailed examination of the questionnaires, five cases were rejected, and so the results are based on a sample of 196 businesses. When setting up the sample, we tried to make sure the businesses selected reflected, as far as possible, the current geographic distribution of small and medium-sized enterprises (SMEs) in Québec, based on a division of Québec into four principal regions (see Table 2). This gave each region a large enough number of businesses for statistically significant analysis. The division is derived from the geographic regions used by government agencies, and we also used their names for the regions. Table 2 Distribution of sample businesses, by region and by sector Region N % 1. Montreal Region: Montreal and Laval 53 27.0 2. Peripheral Regions: Montérégie, Laurentides and Lanaudière 44 22.4 3. Central Regions: Outaouais, Mauricie, Cœur du Québec, 68 34.7 Estrie, Québec and Chaudières-Appalaches 4. Resource Regions: Bas-Saint-Laurent-Gaspésie, Saguenay-Lac- 31 15.8 St-Jean, Côte-Nord, Abitibi-Témiscamingue Breakdown by Sector 1. Primary 3 1.5 2. Secondary 95 48.5 3. Service 72 36.7 4. Technology 26 13.3 Total Number of Businesses 196 4
The data were collected in two different stages. First, the entrepreneur replied to a questionnaire (questionnaire A) sent by e-mail, surface mail or fax. Next, a member of the research team set up an interview with the entrepreneur that lasted an average of 90 minutes, during which the researcher verified various aspects of the first questionnaire and asked questions to complete the second questionnaire. The second questionnaire mainly contained closed questions on various aspects of the venture creation process, but also included open questions to allow entrepreneurs to express themselves more freely on their experiences, difficulties and assessment of the assistance received. The interviews took place between June 2004 and late January 2005, and the data were processed and analysed using SPSS software, including the answers to the open questions once they had been encoded. The compiled answers from both questionnaires are presented in two documents (available in French only), each corresponding to a part of the questionnaire. The first document is entitled Recherche sur la création d entreprises Partie A - Données (Labrecque, Borges et al., 2005a), and the second Recherche sur la création d entreprises Partie B - Données (Labrecque, Borges et al., 2005b). The following sections of this report analyse data from the tables in both documents. To begin with, though, we need to clarify certain elements. First, as indicated above, the businesses were grouped by region and by sector, and this grouping will be used throughout the report. The regions are sometimes referred to by name, and sometimes by number (see Figure 1 for example, Region 1 or Montreal region). With regard to the sectors, the analysis is based only on the secondary, service and technology sectors, because the number of primary-sector businesses in the sample was too small. The classification by sector was carried out by the entrepreneurs themselves, from a list of sectors provided by us. Figure 1 Classification of regions Region 4 (Resource Regions) Region 3 (Central Regions) Region 1 (Montreal Region) Region 2 (Peripheral Regions) 5
Last, on a purely statistical note, in most cases the median and sometimes the mean are used to present results. This is because the median has the advantage of creating a more accurate image of the real-life situation, since the extreme cases that often distort statistical data can be eliminated. 3. Presentation and analysis of results The first findings presented concern the characteristics of the entrepreneurs and businesses in the sample, and the results for each of the four stages in the venture creation process. The last part of this section is devoted to training, the resources needed to launch a business, and the use of support and assistance services. 3.1 Characteristics of the entrepreneurs and their firms 3.1.1 Characteristics of respondents Age, education and sex The average age of the entrepreneurs in the sample when they created their businesses was 36 (median of 35). As Figure 2 shows, 67% were aged between 25 and 44 (85% in the service sector). In addition, 86% of respondents were men, and 14% women. Women were more present in the service sector (24%), and in peripheral regions (25%). With regard to educational attainment, as in society in general, the entrepreneurs tended to be better educated: almost 80% had a college diploma or higher, including 13% with a Master s degree and 1% with a doctorate. In the technology sector, 95% of respondents had at least a college diploma, 23% had a Master s degree and 4% a doctorate. The field of specialization was business administration (36%), technical trades (21%), engineering (17%), science (14%) and other (13%). Figure 2 Age and educational attainment of entrepreneurs Age 45 to 54 20,7% Age 55 to 64 2,1% Age 65+ 0,5% Age 18 to 24 9,6% Master s degree 13,3% Doctoral degree 1,1% Elementary education 1,1% Secondary education 20,2% Age 35 to 44 29,3% Age 25 to 34 37,8% Bachelor s degree 36,2% College education 28,2% 6
Our findings concerning the age and educational attainment of the entrepreneurs in the sample are similar to those of researchers in Canada and abroad (Gasse, Diochon and Menzies, 2004; Riverin, Filion et al., 2003; Reynolds, Carter et al., 2004). However, our findings concerning gender are significantly different. Research in Canada as a whole has shown that approximately one-third of entrepreneurs are women (Riverin, Filion et al., 2003), a figure close to the world average (Reynolds, Bygrave and Autio, 2004). Our hypothesis concerning the difference between our data and other research is that women entrepreneurs tend to create firms that remain small. Thus, our criterion of at least four employees probably reduced the number of female-managed firms that qualified for our sample. Second, women are generally less present in business networks, and our sample was identified through entrepreneurship support agencies. Experience and training Before launching their businesses, our sample entrepreneurs already had considerable experience in their activity sector (ten years on average), on the labour market (17 years on average) and in management positions (eight years on average, with a median of four years). However, a significant group 23% of the entrepreneurs interviewed had launched businesses in a sector in which they had no experience whatsoever. Also, many entrepreneurs went into business with incomplete training and limited experience of business management. As Table 3 shows, most of them had no training in marketing, operations management, human resources management or technology management (including R&D and innovation), and 45% had no financial management training when they launched their businesses. Table 3 Years of experience and training in management areas Years of experience in the area Entrepreneurs with no training in the area Mean Median Freq. % Marketing or sales 6.0 1.3 102 56.0% Accounting or financial management 5.3 1.0 83 45.1% Production or operations management 7.3 4.0 110 60.8% Human resources management 7.4 4.0 107 58.8% R-D, technology management, innovation 4.1 0 138 78.4% These data showing the low level of training in certain management fields are of particular importance if we consider the time spent by the sample entrepreneurs on the various enterprise functions (see Figure 3). For example, they spent almost half their time on financial management and administration (25% on average), and marketing (21% on average). In reality, all the enterprise functions required at least some of their time, and some prior knowledge of these functions would therefore have been extremely useful. Figure 3 Enterprise functions (% of time) 7
Relations with partners 9% Promotion, sales 21% Human resources mgmt 9% Other 6% Financial Management and administration 29% Operations mgmt 15% Research & Development 11% The entrepreneur s circle and prior entrepreneurial experience Most of the respondents (63%) had people among their family or close friends who had already launched a business. The people in question were mostly immediate family members (47%), followed by members of the extended family (32%) and close friends (26%). Almost half the respondents had previously been (or were still, at the time of the research) owners of other firms. This figure was even higher for entrepreneurs in the Montreal region (55%) and in the resource regions (58%), and in the secondary (53%) and technology (58 %) sectors. 3.1.2 Characteristics of the firms The firms had an average of eleven full-time employees (median of seven), four part-time employees (median of two) and two contractual employees (median of one). An average of ten employees (median of six) worked in production, three (median of two) in R&D and three (median of two) in administration. Six firms out of ten (64%) had at least one university graduate on the payroll (employee or entrepreneur). Table 4 sets out the sample firms turnover in 2003. In all, 52% had a turnover equal to or below $500,000. In 24% of cases they spent less than 1% of their turnover on R&D, although 25% spent over 20%. It is not surprising to find that R&D investments were higher in the technology sector, where 60% of the firms spent 30% or more of their turnover on R&D. On the other hand, 16% of technology sector firms spent less than 10% of their turnover on R&D, which is not much when one considers the importance of research and development activities in this sector. The share of turnover devoted to R&D activities tended to be lower in the central, peripheral and resource regions, where between 50% and 60% of firms spent less than 5% of their turnover for this purpose, than in the Montreal region, where only 32% of firms spent less than 5% on R&D. 8
Table 4 Turnover and R&D investments by sector Turnover in 2003 Secondary Services Technology Overall Less than $100,000 8.4 % 12.7 % 28.0 % 12.9 % $100,001 to $250,000 13.7 % 15.5 % 4.0 % 12.9 % $250,001 to $500,000 22.1 % 28.2 % 36.0 % 25.8 % $500,001 to $1 M 22.1 % 32.4 % 16.0 % 25.8 % $1,000,001 to $2,5 M 23.2 % 9.9 % 12.0 % 16.5 % $2,500,001 to $10 M 8.4 % 1.4 % 4.0 % 5.2 % More than $10 M 2.1 % 0 % 0 % 1.0 % % of turnover set aside for R&D Secondary Services Technology Overall Less than 1 % 25.5 % 28.6 % 4.0 % 24.0 % 1 % - 5 % 31.9 % 20.0 % 8.0 % 25.0 % 6 % - 10 % 13.8 % 10.0 % 4.0 % 10.9 % 11 % - 20 % 13.8 % 17.1 % 16.0 % 15.1 % 21 % - 30 % 7.4 % 7.1 % 8.0 % 7.3 % 31 % - 40 % 0 % 1.4 % 12.0 % 2.1 % 41 % - 50 % 4.3 % 7.1 % 12.0 % 6.3 % More than 50 % 3.2 % 8.6 % 36.0 % 9.4 % With regard to products and services, 16% of the sample firms offered only one product or service, 41% offered between two and five, and 43% offered more than five. Most of the firms customers were located in Québec. An average of 75% of all sales (median of 95%) took place in Québec, 9% in Canada and 10% in the United States. The technology firms tended to export more (55% of their sales on average were to customers outside Québec), but for the sample as a whole, sales outside Québec were fairly low. Another noteworthy fact is that a significant number of firms were dependent on only one customer. In 41% of cases, the principal client accounted for 31% or more of the firm s turnover, and in 17% of cases for more than 50% of turnover. The firms suppliers were also located in Québec for the most part (mean of 70%, median of 90%). 3.1.3 Highlights: Characteristics of entrepreneurs and firms The following points are worthy of note: Generally speaking, the entrepreneurs had considerable experience of their sector and the labour market before launching their businesses, but were poorly trained and had insufficient experience in certain management-related areas such as marketing and operations. An entrepreneur s time is spent on a range of activities related to business management, hence the need to be versatile, as already pointed out by Kadji-Youaleu and Filion (1996). A considerable number of the sample entrepreneurs (nearly 50%) were engaged in their second entrepreneurial venture at the time of the interview. Their past experience may have had an impact on their approach to venture creation in general, and their decision on whether or not to use support services in particular. 9
Most of the firms sales were in Québec, and in 40% of cases the firm had only one customer. There is therefore a significant need to diversify the customer base, in terms of both geographical location and volume. 3.2 Stage 1 Initiation. The first stage of the venture creation process involves identifying a business opportunity, reflecting on the business project and deciding whether or not to proceed. Before addressing these three elements, however, it is interesting to examine the reasons why entrepreneurs decide to launch a business. 3.2.1 Reasons for venture creation Entrepreneurship research normally separates entrepreneurs into two groups, namely those who choose to launch a business and those who do so out of necessity (Reynolds, Bygrave and Autio, 2004) or, to use another term, voluntary and involuntary entrepreneurs (Filion, 2000). Of the 196 entrepreneurs in our sample, 53% had launched their businesses to take advantage of a business opportunity, 9% because they did not have good job prospects, and 38% for other reasons. Of this latter group, most cited non-economic reasons, such as having a family business, taking up a challenge, achieving a personal goal, doing what I like, working for myself and helping the younger generation. The percentage of respondents who did not have good job prospects in other words, the involuntary entrepreneurs or entrepreneurs by necessity was slightly lower in our findings than in the results of other surveys such as GEM (Riverin, Filion et al., 2003; Reynolds, Bygrave and Autio, 2004), which usually report between 10% and 20% of involuntary entrepreneurs. By including an other category in our questionnaire, we were able to add a further refinement to our findings concerning venture creation intentions, one that is not normally covered by most venture creation research questionnaires. In addition, our questionnaire was completed by a research assistant, who took the time to question subjects on their responses. Most of the entrepreneurs in our other category would in fact have been classified as voluntary entrepreneurs or business opportunity entrepreneurs in other surveys. It is interesting to note that (1) most of these entrepreneurs are located in the regions, not in Montreal; (2) they usually launch their businesses alone; (3) they take longer than other venture creators to complete all the stages in the venture creation process; and (4) the initial capital comes mainly from their own savings, rather than other sources. We believe we can also deduce that, for many respondents, there may have been a desire in their family environment to make a social contribution. This aspect would need to be examined carefully and in more depth in future research. 3.2.2 Origin of the business idea and reflection on the project In all, 37 % of the sample entrepreneurs said their business idea was original, 58% said it was an adaptation of another firm and 6% said it was an adaptation of someone else s idea. In the 10
technology sector, 54% of respondents said their ideas were original. As Table 5 shows, the business ideas were derived mainly from the entrepreneur s knowledge of the sector (53%), knowledge acquired from the entrepreneur s previous employment (42%), and the entrepreneur s technological knowledge (37%). Knowledge of the sector and the technology concerned appears to be a key element in the creation of technology firms, since these two aspects were mentioned by 69% of the respondents. Table 5 - Classification and origin of business idea, by sector Classification of business idea Secondary Services Technology Overall Original idea 30.5 % 38.9 % 53.8 % 36.7 % Adaptation or imitation of another firm 63.2 % 58.3 % 38.5 % 57.7 % Adaptation of someone else s idea 6.3 % 2.8 % 7.7 % 5.6 % Origin of business idea* Secondary Services Technology Overall A firm for which the entrepreneur used to work 36.8 % 47.2 % 46.2 % 42.3 % Discussions with family or friends 24.2 % 23.6 % 30.8 % 25.5 % Discussions with potential customers 29.5 % 31.9 % 26.9 % 30.1 % Discussions with potential suppliers 15.8 % 8.3 % 3.8 % 11.2 % Discussions with potential investors 16.8 % 8.3 % 7.7 % 12.2 % Entrepreneur s knowledge of the sector 49.5 % 51.4 % 69.2 % 53.1 % Entrepreneur s technical knowledge of the 28.4 % 38.9 % 69.2 % 37.2 % product or service Other 18.9 % 19.4 % 19.2 % 18. 9 % * More than one response accepted On average, the entrepreneurs had thought about their business idea for 266 days (median of 90 days) 3. There were, however, some considerable differences between the regions, especially in the resource region, where the average was 459 days (median of 180 days). The results for the other regions were: Montreal region, average of 194 days, median of 120 days; peripheral region, average of 316 days, median of 110 days; central region, average of 200 days, median of 60 days. If we look at what the firms had become at the time of the survey, we see that there had been very little change from the initial business idea. In 53% of cases, the firm had remained the same, in 28% of cases there had been some change, and in only 20% of cases had there been a considerable change. In a survey carried out in the United States, Hills and Singh (2004) obtained similar results (only 13% of their sample firms had changed significantly). It was in the resource region that the firms appeared to have changed the most (32% had undergone some change and 32% had changed significantly), and in the technology sector where they appeared to have change the least (61% had not changed at all, while 27% had undergone 3 The significant differences between the averages and medians indicate the existence of cases that are a long way from the median. This factor must be considered in all comparisons of averages and medians where significant differences emerge. In this case, for example, a handful of entrepreneurs took much longer than the 90-day period indicated by the majority to think about their ideas. 11
some change). The changes that had occurred were mainly strategic adjustments (e.g. diversification, adjustment to demand, etc.), faster-than-anticipated growth, or changes to and additions of products and services. 3.2.3 Difficulties and solutions As Table 6 shows, most of the respondents said Stage 1 was easy or neither easy nor difficult. The activities that were slightly more difficult included finding good business opportunities, assessing the potential and viability of business projects, finding resource people and identifying sources of funding. Finding resource people was particularly difficult for entrepreneurs in the resource regions. Table 6 Level of difficulty of Stage 1 By region and by sector Region Sector Total I II III IV Second. Serv. Tech. Finding good business opportunities 4 3 3 3 3 3 3 3 Assessing the potential of business projects 3 3 3 3 3 3 3 3 Finding information on a product/ service 4 4 4 4 4 4 4 4 Finding resource people 3 3 3 2 3 3 3 3 Understanding my own entrepreneurial capacities 4 4 3 4 4 4 3 4 Assessing my own ability to develop the business idea 4 4 3 4 4 4 3 4 Obtaining information on the sector 4 4 4 4 4 4 4 4 Understanding the business registration process 4 4 4 4 4 4 4 4 Identifying sources of funding 3 3 3 4 3 3 4 3 Taking risks 4 4 4 4 4 4 4 4 Convincing friends and family of the validity of the business project 4 4 4 4 4 4 4 4 Medians on a scale of 1 to 5, where 1 very difficult; 2 - difficult; 3 neither difficult nor easy; 4 - easy; 5 very easy. The above results were obtained via a closed question. In response to another question, an open one this time, respondents said they had encountered three types of difficulties in Stage 1 (initiation), namely (in order of importance): Difficulties related to decision-making (e.g. the uncertainty of going into business, leaving prior employment, making the decision to go ahead or not): 18 %; Difficulties related to financing (e.g. clarifying financing needs, lack of resources): 12 %; Difficulties related to the market (e.g. deciding on the concept, establishing the vision, testing ideas): 9%. 12
To overcome these problems, the most commonly cited strategies were: Outside support (e.g. consultants, support agencies, contact networks, family support): 28%; Perseverance and patience: 19%; Use of personal or private financing: 10%; Involvement of associates or partners: 8%. 3.2.4 Highlights Stage 1 The Stage 1 data reveal the following elements: Only 9% of the sample entrepreneurs were involuntary, meaning that they launched their business out of necessity. In addition, 38% of respondents cited non-economic reasons for going into business. Most of the firms (63%) were adaptations or imitations of existing activities. The sample entrepreneurs cited knowledge of the sector (53%) and their former employment (43%) as the two main sources of business ideas. The importance of former employment, in our opinion, suggests that there is an excellent potential for spin-offs. Stage 1 did not appear to present any major difficulties for the sample entrepreneurs. However, they did encounter some problems in identifying people they could talk to in order to improve and test their business ideas, in order to move forward more quickly and with more certainty. 3.3 Stage 2 Concept and preparation In this section, we will examine the business plan, the creation of the entrepreneurial team and the marshalling of resources for the venture creation process. 3.3.1 Preparation of the business plan Almost all the entrepreneurs (93%) had prepared a business plan; in the technology sector and peripheral region, the figure was 100%. However, it is important to remember that these high rates may be due to the nature of our sample, since all the firms were identified by venture creation support agencies, and most financial institutions require applicants to submit business plans. Other researchers have found business plan preparation rates among venture creators ranging from 28% to 73% (Bhidé, 2000; Gelderen, Bosma and Thurik, 2001; Honig and Karlsson, 2001). The business plan was detailed in 77% of cases, brief in 17% of cases and outline only in 6% of cases. However, in the majority of cases only a small part of the business plan was devoted to the market survey. Just 31% of the plans had a complete and detailed market survey, 49% had a summary survey, and 20% had no market survey at all. This is a very important finding that deserves additional consideration. The market survey is really the cornerstone of a business plan, 13
and it is somewhat worrying to observe that venture creators, even those who are closely supervised by venture creation support experts, are neglecting it to such a significant degree. It took an average of 83 days (median of 45 days) for the sample entrepreneurs to prepare their business plans. However, there were some differences between regions and sectors (see Figure 4). In 80% of cases it was the entrepreneur who prepared the business plan, while 7% delegated the task to a consultant and 13% to someone else (e.g. a partner, a local development centre, an accountant, a family member). Some entrepreneurs who prepared their plans themselves, however, did say they requested help (from a consultant, a family member, a government agency or an accountant) in the drafting process. Figure 4 Number of days taken to prepare the business plan Region 4 60 111 Region 3 30 71 Region 2 30 53 Region 1 Technology 68 83 90 109 Average Median Services 48 79 Secondary 30 81 Overall 45 83 0 20 40 60 80 100 120 As Table 7 shows, the main difficulties encountered by the sample entrepreneurs during the preparation of their business plan were the market survey, the time factor, and access to information. For firms in the central region and the secondary sector, finding out how to prepare a business plan was also difficult. Table 7 - Business plan preparation problems, by region and by sector Region Sector Total I II III IV Second. Serv. Tech. Market survey 25.5 26.2 28.1 29.6 25.0 27.7 33.3 27.2 Time 19.1 7.1 18.8 22.2 13.6 21.5 12.5 16.7 Access to information 12.8 11.9 14.1 11.1 10.2 12.3 25.0 12.8 Putting together the financial plan 10.6 11.9 3.1 11.1 9.1 10.8 0 8.3 No problems 8.5 16.7 4.7 11.1 11.4 7.7 8.3 9.4 Knowing how to do it 6.4 11.9 15.6 11.1 14.8 10.8 4.2 11.7 Developing the project 4.3 2.4 4.7 0 3.4 3.1 0 3.3 Cost 2.1 0 6.3 0 3.4 0 8.3 2.8 Vision (long-term vision) 2.1 4.8 3.1 0 2.3 3.1 4.2 2.8 14
For 48% of the entrepreneurs we interviewed, the business plan had been a very important element in start-up success. For 19% it was fairly important, for 17% important and for 11% not very important. Only five percent said it was not important at all. 3.3.2 Marshalling of financial resources The venture creation seed money was less than $100,000 in 51% of the cases studied (see Table 8). It took an average of 98 days (median of 30 days) for the entrepreneurs to obtain the necessary capital, but somewhat longer in the case of the technology entrepreneurs (average of 130 days and median of 90 days). Table 8 Total seed money by sector Secondary Services Technology Overall $O to $25,000 12.6 % 35.2 % 11.5 % 20.5 % $25,001 to $50,000 15.8 % 8.5 % 3.8 % 11.3 % $50,001 to $100,000 17.9 % 19.7 % 23.1 % 19.5 % $100,001 to $250,000 29.5 % 22.5 % 19.2 % 25.6 % $250,001 to $1 M 14.7 % 14.1 % 19.2 % 14.9 % More than $1 M 9.5 % 0 % 23.1 % 8.2 % As far as the source of funding is concerned, the entrepreneurs themselves provided seed money of between $0 and $5,000 in 24% of cases, of between $5,001 and $10,000 in 8% of cases, of between $10,000 and $50,000 in 39% of cases, and of more than $50,000 in 29% of cases. In all, 86% obtained public financing, 82% obtained bank or private financing, and 37% obtained financing from family or friends. The vast majority of the respondents (87%) had one or more financial partners, mostly government agencies (42%), family members (31%), friends (21%), former co-workers (20%), or a venture capital corporation (15%). In the peripheral regions family partners were more common (41%) and other types were less common (34% for government agencies and 5% for venture capital corporations). In the service sector, government agencies were more prevalent (48%), while in the technology sector the entrepreneurs were more likely to use venture capitalists (35%). It is important to note, however, that the high percentage of entrepreneurs obtaining public funding and using government agencies as partners is probably a specific feature of our sample; as we pointed out earlier, all the firms in the sample were identified by entrepreneurship support agencies. Other researchers have found that approximately 80% of the financing obtained by most business creators comes from personal sources their own money in the majority of cases, followed by funds from family members and friends. Public funding and bank funding are less common (Shepherd and Zacharakis, 2001). Nearly half the sample entrepreneurs had been forced to review their capital requirements during the venture creation process. The main reasons for this were the need for additional equipment and greater automation (26%), the length of time taken to achieve profitability (24%), the need for working capital (13%), and growth (11%). 15
3.3.3 The entrepreneurial team In 78% of cases, the firm was created by a team rather than by an entrepreneur working alone (see Table 9). In the technology sector, 96% of all new firms were created by teams. The partners usually worked in the firm; only in 17% of cases were the partners not active. As far as control of the firm was concerned, 12% of respondents held less than 25% of the firm s capital stock, while 40% held between 25% and 50%, and nearly half (47%) held more than 51%. Table 9 Number of partner shareholders, by sector Secondary Services Technology Overall None 23.2 % 29.2 % 3.8 % 22.4 % One 40.0 % 29.2 % 42.3 % 35.7 % Two 18.9 % 22.2 % 11.5 % 19.4 % Three 5.3 % 5.6 % 11.5 % 6.6 % Four 4.2 % 4.2 % 11.5 % 5.1 % Five or more 8.4 % 9.7 % 19.2 % 10.7 % The main reasons for the choice of partners were to acquire expertise (46%), followed by costsharing (18%), family reasons (16%) and risk-sharing (8%). Very little time was required to identify partners and form the entrepreneurial team the average was 90 days and the median, 12 days. 3.3.4 Problems and solutions The main problem encountered during Stage 2 was financing (see Table 10). The respondents also mentioned the time factor (more difficult in the central and resource regions and in the service sector), preparing the marketing and financial plans, identifying financial partners (more difficult in the service sector), preparing the human resources plan, and setting up an accounting system. 16
Table 10 Levels of difficulty in Stage 2 by region and by sector Region Sector Total I II III IV Second. Serv. Tech. Understanding the market 3 4 4 3 4 4 4 4 Defining the product/service 3 4 4 4 4 4 4 4 Preparing the marketing plan 3 3 3 3 3 3 3 3 Preparing the financial plan 3 3 3 3 3 3 3 3 Designing the organizational system 4 4 4 4 4 4 4 4 Preparing the human resources plan 4 4 3 4 3 4 4 3 Maintaining motivation 4 5 5 5 5 5 5 5 Finding the time to do everything 3 3 2 2 3 2 4 3 Talking to people about support 4 4 4 4 4 3 4 4 Negotiating funding 2 3 3 2 3 2 2 2 Setting up an accounting system 3 4 3 4 4 3 4 3 Finding financial partners 2 3 3 4 3 3 3 3 Finding partners to manage the firm 5 4 4 4 4 5 4 4 Medians on a scale of 1 to 5, where 1 very difficult; 2 - difficult; 3 neither easy nor difficult; 4 - easy; 5 very easy. In response to an open question on this subject, the main problems identified by entrepreneurs during Stage 2 were as follows (beginning with the most common): Problems related to the business plan (e.g. finding information, preparing budgets, knowing where to go for help): 23%; Problems related to financing (e.g. establishing financing needs, negotiating funding, finding funding): 16%; Problems related to the market survey (e.g. formalizing the business concept, carrying out the market survey): 14%; Problems related to the time factor (e.g. lack of time, reconciling work and family, managing time): 7 %. The solutions identified by the entrepreneurs were similar to those cited in Stage 1, i.e. use of external support and contact networks (38%), use of funds from personal, family or private sources (13%) and perseverance and patience (10%). The external support and networks mentioned by respondents included support agencies (CLD, CFDC, Emploi Québec, BDC), family support, accountants and mentors. 3.3.5 Highlights: Stage 2 Most of the entrepreneurs (93 %) had prepared a business plan, but only 31% of the plans contained a full market survey. This may be due partly to the fact that the market survey was one of the main problems encountered during plan preparation, and also one of the main problems during Stage 2 of the venture creation process. Approximately 50% of the entrepreneurs had to review their capital needs during the process, mainly as a result of new equipment purchases, additional automation and the need for more working capital. 17
In 78% of cases the sample firms had been created by teams. Entrepreneurs (and support agencies) must therefore consider two elements that have not, as yet, been examined in depth in the venture creation literature, namely the formation of the team (partner selection) and its subsequent operations. The main problems encountered during Stage 2, in addition to preparation of the business plan and the market survey, were negotiating funding and finding the time to do everything that had to be done. As was the case for Stage 1, the solutions used to overcome these problems were external support, perseverance and funds from personal and private sources. 3.4 Stage 3 Start-up. The third stage in the venture creation process is start-up. It includes activities such as legal incorporation of the business, recruitment, and development of the initial product or service. 3.4.1 Legal incorporation of the business and recruitment The entrepreneurs registered their firms an average of five months (median of one month) after deciding to launch a business. In some cases, however, the firm was registered even before the business opportunity had been identified or the decision to proceed made. This can be explained partly by the fact that some entrepreneurs used registrations that they or their partners had already made but not yet activated. Generally speaking, very few of the sample entrepreneurs registered a trademark (22%), patent (13%) or industrial design (2%), although these figures are somewhat higher for technology sector firms (38%, 35% and 12% respectively). Two-thirds of the firms were started with few or no employees (see Figure 5): 28% with no employees, 38% with between one and three employees, 25% with between four and nine employees, and 9% with more than 10 employees. Figure 5 Number of employees at start-up, by sector 18