Predicting the Survival and Success of Start-ups
At first glance, the theory seems completely counter-intuitive. But when Steven Bradley started to really look at the question, the answer became surprisingly clear. The assistant professor of Management and Entrepreneurship wondered: how do resources help or hurt new businesses? His hunch was that for start-up businesses, too many resources could hinder more than they helped.
The idea came from my experiences as an entrepreneur in the '90s," Bradley said. "I started a small business with very little money during the height of the dot-com bubble."
A friend of Bradley's was working for a publicly traded dot-com business at about the same time.
"His company was burning through money," Bradley said. "He was proud of having one of the most expensive office spaces in Austin and more resources than I could imagine. And I was asking myself how I could very creatively use the little money and resources I had in my business."
When the dot-com bubble busted, Bradley's friend's company went bankrupt, while his survived.
That's when Bradley became interested in the "folding table theory," which suggests that the success or failure of a start-up business could be predicted by visiting the offices. If they have a receptionist and high-priced art on the walls, it predicted failure. But if the business was operating off folding tables, the business would succeed.
Bradley began thinking about those successful "folding table" businesses, like Sysco and eBay.
"I started wondering, could too many resources be a bad thing?" he said. "As it turns out, yes. If you run into problems and you have money, you bring in a consultant. If not, you start working out creative solutions: what can I do to ‘duct tape' this problem using the resources I already have? Instead of buying your way out, you have to be creative with your resources, and that is what brings inventiveness, ingenuity and – ultimately – success to a company."
Bradley's research extended to looking at how these businesses performed during the recent economic downturn. He coauthored two articles published in top journals: "Competition, Resources, and Environmental Change: The Asymmetric Paths of Young Independent and Subsidiary Organizations," Strategic Management Journal (coauthors: Howard Aldrich, Dean Shepherd, Johan Wiklund); and "The Importance of Slack for Organizations Facing Tough Environments," Journal of Management Studies (coauthors: Dean Shepherd, Johan Wiklund).
Bradley's research showed that start-up companies that were subsidiaries were, in some ways, protected by their parent firm, but that during the economic downturn, independent companies had a better chance to survive.
"Many of the bad independents failed, of course," Bradley said, "but the good ones did better than the subsidiaries, in large part because they were able to find creative ways to face challenges. Those companies that have to figure out how to survive, do the best."
The other finding from the study, which was five years in the making, was evidence of progressive learning by companies.
"We know it's occurring, and we can show that time and experience in the use of even limited resources is a factor," Bradley said. "It's an exciting finding because learning is tough to quantify."
Bradley is now expanding his research to, hopefully, find more effective ways to assist businesses in developing countries.
"Conventional thinking is that the poor in developing countries are waiting for money, and as soon as they have money they can become entrepreneurs," Bradley said. "But we are finding loans through micro-financing are having no effect on the poverty level. In fact, people are using loans to off-set lack of income, like a credit card."
The successful microfinance loans, he said, are those to people who have unique ideas.
"I don't think money is ever the bottom line problem," he said, "Whether in the U.S. or Kenya, it's about good ideas and how to find them."
One solution he is now studying is the idea of micro-franchise versus microfinance.
"The idea is to find a number of low-cost businesses, which already have a business model in place, and provide entrepreneurs in developing countries with the name and training," Bradley said. "We want to see what happens if you introduce a business that's not new to the world, but new to that area of the world."Bradley and his team are currently collecting data in Burundi, Kenya, Indonesia and the Dominican Republic.