Characteristics of Start-Ups - Entrepreneurship in Germany - Term Paper Example

Team Composition and Characteristics of Start-Ups: Based on Omnis Mundi AG Table of Contents 1. Introduction 1.1 Background 1 1.2 Problem statement – TMT in start-ups 1 2. Theoretical foundation 2.1 Types of diversity 1 2.2 Upper echelon theory 2 2.3 Functional diversity 2 2.4 Background affiliation 3 2.5 Tenure and age 3 2.6 Level of education 4 2.7 Diversity and conflicts 4 3. Entrepreneurs and team characteristics 3.1 Entrepreneurship in Germany 4 3.2 Start-ups and heterogeneity of experience 5 3.3 Ownership concentration 5 4. Diversity at Omnis Mundi AG 6 4.1 Team members 6 5. Findings and Discussion – organizational outcome 8 6. Conclusion 10 References 11 1. Introduction 1.1 Background Entrepreneurs face challenges transforming a business idea into a viable firm. Prior experience of the founders definitely helps in meeting these challenges, but an entrepreneurial team must have certain characteristics to successfully launch a firm. Managerial decisions are strongly influenced by the behavioral aspects and characteristics of the firm upper echelons and this is the reason that organizations become a reflection of their top managers (Tacheva, 2007). Organizations are becoming diverse in tenure, educational background and functional diversity (Carson, Mosley & Boyar, 2004). Diversity in teams is considered to be a positive force leading to effective functioning of the team (Knight et al. 1999). The Top Management Team (TMT) comprises of individuals with power and authority to make strategic decisions (Camelo-Ordaz, Herna´ndez-Lara, & Valle-Cabrera) and thus, diversity in TMT can impact the organizational outcome. 1.2 Problem statement – TMT in start-ups Top Management Team (TMT) has been defined as the “the relatively small group of most influential executives at the apex of an organization…the top three to ten executives” (Finkelstein & Hambrick, 1996: 8, cited by Tacheva, 2007). An entrepreneurial team consists of two or more members who jointly invest in a business in which they have an equal financial interest (Cooney, 2009). They have shared commitment, shared accountability and shared independent tasks and outcomes for these tasks. In this report, the TMT team includes a team of four experienced entrepreneurial CEOs at Omnis Mundi AG, who have pooled in their talent and expertise to foster the creation of new businesses in Europe. This report would hence evaluate the TMT characteristics in startups. 2. Theoretical foundation 2.1 Types of diversity Diversity in TMT is desirable in different fields but this report would focus on functional or task related diversity, background affiliation, tenure/turnover and demographic heterogeneity. Diversity and heterogeneity are synonymous and hence interchangeably used throughout the report. Diversity can be observable (demographic) or non-observable (cognitive) diversity attributes (Tacheva, 2007). The observable characteristics include age, tenure, functional and educational background, and these account for managerial psychological behavior. These are also known as relations-oriented attributes. Knowledge, skills and expertise or functional background are observable task-related attributes. Non-observable attributes are difficult to assess and hence the TMT is selected based on their observable attributes. 2.2 Upper echelon theory According to the upper echelon theory, the TMT behavior influences firm performance (Carson, Mosley & Boyar, 2004). Performance is measured in terms of improvement in decision-making, in devising strategy, in creativity and in more innovation. It also results in increased morale, higher satisfaction, intent to remain, and greater commitment. Diversity in the backgrounds of the TMT can create unique value. The demographic characteristics affect strategic choices and decisions and therefore it has tangible effect on firm outcomes. TMT diversity enhances the organization’s ability to acquire critical resources. Upper echelons theory is based on the premise that executives influence organizational performance through the decisions they make (Knight et al. 1999). As their decisions are consistent with their cognitive base, demographic diversity among the TMT can influence group processes in diverse directions. 2.3 Functional diversity Functional diversity relates to the different functional experiences, different levels of knowledge, expertise and skills, which influences perspectives (Camelo-Ordaz, Herna´ndez-Lara, & Valle-Cabrera, 2005). Diversity in team member characteristics, in knowledge, skills and expertise, in functional or task related diversity, is desirable as it can enhance creativity, innovativeness and quality of decision-making. Functional diversity stimulates group discussion and leads to debates which can end up in higher quality solutions. It also stimulates the opportunity to learn. Without functional diversity, startup teams face hurdles as in the case of a semiconductor startup that lacked management expertise. While they had the necessary investment and technology experts, they lacked broad expertise in communications. Jeremy Milne, of Quester, bought a stake in an executive search firm in order to identify potential candidates for the startup (Manners, 2005). Jeremy was looking for a serial entrepreneur who can have the right marketing strategy. This implies that experience, knowledge and skill are essential in the TMT. Top Management Team (TMT) dominant functional diversity is positively associated with firm performance if the team members are collocated but negatively associated with firm performance if they are geographically distributed teams (Cannella, Park & Lee, 2008). This is because TMT interactions are critical to TMT functioning. 2.4 Background affiliation Background affiliation suggests that a person’s social identity is determined by the groups to which he belongs and the values shared by those groups. People tend to be attracted to those who are similar to them and they tend to view the in-group members positively while they view the out-group members negatively. Hence, diversity in TMT can lead to lower levels of interpersonal attraction, thereby negatively influencing the group effectiveness (Tacheva, 2007). At the same time, diversity can lead to broader range in perspectives which positively influences group decision-making. 2.5 Tenure and age Diversity in tenure suggests that experiences, perspectives, attitudes and values converge to produce enriched view points (Camelo-Ordaz, Herna´ndez-Lara, & Valle-Cabrera, 2005). Tenure is another factor that influences firm performance. Firm performance is positively impacted by the level of team tenure heterogeneity within the TMT. If all the members have been working as a team for long, they do not want to go against each other and prefer to remain committed (Carson, Mosley & Boyar, 2004). Age of the team members also influences decision-making as the older members may be resistant to change. 2.6 Level of education Higher level of education in the team will lead to a greater awareness of the need to change and innovate. It also enhances the capacity to analyze complex solutions and a greater understanding of the situation, according to Camelo-Ordaz, Herna´ndez-Lara, and Valle-Cabrera (2005) but Carson, Mosley, and Boyar (2004) contend that diversity in educational backgrounds of the team can negatively impact firm performance. 2.7 Diversity and conflicts However, diversity in TMT can lead to internal conflicts which can be either constructive or destructive (Carson, Mosley & Boyar, 2004). Constructive conflict is a cognitive conflict and lead to improved decision-making leading to enhanced organizational performance. Destructive conflict is an affective conflict which leads to personal attacks and animosity. Without cohesion, the team can face hardships in developing interpersonal relationships. 3. Entrepreneurs and team characteristics 3.1 Entrepreneurship in Germany Entrepreneurship in Germany is low because of the lack of ambition among the youth and entrepreneurship is not a part of the historic culture in Germany (Cornwall, 2009). The high tax rates in Germany have also stifled entrepreneurial activity. The motivation for entrepreneurial ventures in Germany is mostly under compulsion rather than Opportunity Recognition, one of the characteristics of an entrepreneur. The German society is grounded in rules, order and process which have not encouraged entrepreneurship to fuel the economy. Startups must have the innovative strength and the ability to succeed in the marketplace. The government in Germany has taken the initiative “Gründerland Deutschland” to increase the number of business startups (Finfacts, 2010). However, the initiatives are not enough because for startups to grow and survive, the economy has to be competitive and dynamic. Successful startups would become the role models and encourage more entrepreneurs to take the initiative. Entrepreneurial firms can be found in Germany but one in twelve entrepreneurs is foreign born and one in ten foreigners start a company (Trade Links, 2010). Germany has the ninth highest corporate bankruptcies and entrepreneurship in Germany is very low. 3.2 Start-ups and heterogeneity of experience In the case of an entrepreneurial startup, heterogeneity of experience, prior shared experience on the team, and the combined industry experience of the founding members can influence the success of the firm (Leary & DeVaughn, 2009). Prior founding experience can help them raise capital and accelerate the transition into a viable firm. Heterogeneous team can perform better than homogeneous firm members as the firm benefits through diverse pool of knowledge, talent and skills. Such characteristics help the members to better generate the demand and resources for the launch of the new venture. Interpersonal relations among the members influence the outcome of such firms and hence if the members have prior shared experience, they do not lose time in understanding and working together. 3.3 Ownership concentration An entrepreneurial firm must have ownership concentration because only when the founders have larger equity stakes they have the tendency to be more involved and take a long-term view of the firm’s success. However, if one owner has a relatively large equity share, he would also tend to hold disproportionate amount of power in his hands. This can lead to conflict with other members in a start-up. Hence, dispersed ownership should be preferred in start-ups as it limits the power and opportunity to any single owner to impose his or her own will. All the members will have an equal interest in the growth of the firm but there is a possibility that all their strategies have a short-term perspective. It is believed that short-term focus may be beneficial for start-ups during the founding period (Leary & DeVaughn, 2009). Leary and DeVaughn (2009) found that members must have less rather than more industry experience and the CEO must be strongly embedded into the entrepreneurial teams and no team member should hold more than 10% of the firm’s total equity. Less experience is preferred because knowledge depreciates over time, business environment keeps changing and too much of conservative knowledge can hinder progress. According to Jeff Bussgang, an entrepreneur turned venture-capitalist, team chemistry plays a vital role in the success or failure of a start-up (Cameron, 2010). A team that has worked together and made profits is more likely to meet with success. Confidence and trust are essential in the success of the start-ups and an inexperienced team lacks these qualities in the early stage of their start-up. Hence, a start-up should always have an experienced entrepreneur in their team because in a start-up, the individual role is not important. This again suggests functional diversity as a critical factor in the success of the start-ups. 4. Diversity at Omnis Mundi AG Omnis Mundi AG is a team of experienced entrepreneurial CEOs led by Gerald Heydenreich and Alain Falys. The TMT comprises of two partners, Gerald and Alain, Sergejs Barovskis, an associate and Cornelius Boersch, serving as a member of the Advisory Board. 4.1 Team members Alain Falys brings with him the experience of founding OB10 Ltd, a global e-invoicing network (PPT, n.d.). He has sufficient experience in securing funds from venture capitalists and from the industry leaders. He has experience in online retail, card payment processing and in advising start-ups in various fields across Europe. Having started his career in marketing, Alain can devise the right marketing strategy for the start-up – Omnis Mundi. He has also been involved in the business development activities of an IT services joint venture based in Paris. Thus, within a short span of ten years, Alain has gathered diverse functional experience in different business fields. Highly qualified in Business Management, Alain’s educational background keeps him constantly aware of the need to change and innovate. Alain is fluent in four languages (French, English, Spanish and Italian) which enhance the communication ability of the start-up. Gerald Heydenreich is educationally more qualified than Alain as he has an MBA against diploma held by Alain. Gerald became an entrepreneur at the age of 25 after serving MNCs such as Hoechst and IBM in marketing and business development. However, both these leaders have a background of marketing and sales, and both have an entrepreneurial background. Gerald’s exposure has been restricted to Germany while Alain has international exposure. As entrepreneurs, again both were engaged in ventures with internet applications and both started their entrepreneurial ventures with two former colleagues. This suggests that team chemistry, as pointed put by Jeff Bussgang, is more likely to bring success for entrepreneurial ventures. Both Alain and Gerald did successfully launch their first entrepreneurial ventures. Gerald has been voted as one of the top 100 German masterminds in e-business. Unlike Gerald and Alain, Cornelius has founded a global asset management company looking after small- and medium-sized investments. He has been an entrepreneur since 1991 as the founder and CEO of the investment company (Mountain-Partners). He is also the founder of a leading company dealing in smartcard and RFID market. He has a solid financial background as he has been handling IPOs at the Stock Exchange. He is one of the most acknowledged fund investors in Europe. Although Cornelius forms a part of the TMT at Omnis Mundi, he is here only on the Advisory Board with no financial stakes. Sergejs has direct experience in retail business, financial consulting and venture capital. He started his career as a financial analyst with the largest Baltic retail chain. He joined Omnis Mundi as a financial analyst in 2006 and worked with the two partners on issues including financial models, market research and business plans. His educational background is slightly different from others as he has a degree from Higher Institution of Banking Education. 5. Findings and Discussion – organizational outcome Diversity in TMT is considered to be a positive force as it can lead to innovative ideas and creativity. At Omnis Mundi, the two partners have typically the same educational and functional background. While the other two members of the TMT, Cornelius and Serjegs, come from financial background, they do not have any financial stake, which undermines their power and authority in the organization (Leary & DeVaughn, 2009). While the founding partners may consult them on various issues, but when conflicts arise, the final decision would rest with the founding partners. As far as the two partners are concerned, there is no indication of the equity held by each of them. However, it can be presumed that they are equal partners and hence power is proportionately held by them. All the four members of the TMT at Omnis Mundi are located in Germany and have prior experience in the same environment. Hence, it is likely they share the same values and possibly they have been attracted because of the social identity factor. Under the circumstances, their perspectives on issues and problems would tend to be similar which may have a negative influence on firm effectiveness (Tacheva, 2007). Heterogeneity of experience in start-ups is considered essential for the success of start-ups. Both the founders have been founders earlier and have achieved success. Their prior experience has helped them raise capital for this new venture, Omnis Mundi. They have been able to successfully support new ventures through seed capital supplied by them. However, as far as functional diversity is concerned, there is no difference in the knowledge, skills and expertise of the founders. They have both been entrepreneurs in the same field, both have exposure in marketing and business development and both have similar educational background. Thus, the future projects that they may undertake, would be oriented and based on their prior experience and field of expertise. Chances of stimulating group discussions are remote and they would tend to agree with whatever is proposed by the other partner. As far as age and tenure is concerned, Gerald has more of work experience. However, before Omnis Mundi, Gerald and Alain have not worked together as a team and hence, chances of remaining committed to each other are remote. All the four members of the TMT have pursued higher education. This is a positive factor for the long-term success of the firm high level of education leads to greater awareness of the need to change and innovate. It enhances the capacity as a team to analyze complex situations. Diversity in educational backgrounds is essential. At Omnis Mundi, while the two founders have similar educational background, the other two members have financial background. This is important for the organization because merely sales and marketing or business development is not sufficient. Expertise in financial investment and planning is equally critical. Since the two founders have similar functional background, chances of conflicts are high. As Carson, Mosley, and Boyar (2004) point out, conflicts can either be constructive or destructive. Consensus decisions are rare and hence task conflicts are likely to take place in the firm. If the TMT have a cognitive understanding of the issues at hand, the task conflict can lead to improved quality decision-making. This can lead to enhanced organizational performance. They would then, as a team, be in a position to provide a better direction to the firm as a whole. Chances of destructive conflicts are low, given the similar educational and functional backgrounds. However, based on social categorization theory, they would tend to group themselves together against the other two and make their decisions. This would stifle innovation and creativity within the organization. According to Leary and DeVaughn (2009) less experience is preferred as knowledge depreciates over time. Both the founders have a good amount of experience and they would end to perceive through the lens of their experience and may not keep track of the ever-changing business environment. While they turn bright ideas into real companies, they have been investing in e-business activities. They not only provide seed financing, management time and expertise, Gerald is also a founder in one such start-up, BuyVIP, which is an exclusive e-commerce community for lifestyle and fashion products. BuyVIP had more than 3.5 million members as of December 2008. The company offers unique products and is a leader in the private sales segment. The two founders are also on the board of CAVI (specializing in music and fashion online), as investors and mentors. In three years of their existence, they have invested in seven start-ups as per their website. All of these firms offer online web services and have been in existence only recently. The future of Omnis Mundi would depend on the success of these firms. It is too early to determine the organizational outcome. 6. Conclusion Entrepreneurship in Germany is very low as the youth lacks ambition. This, perhaps, is the reason that Omnis Mundi takes in the youth as trainees and after six months, they suggest ideas to start a new venture. Through their seed and venture capital, they aim to support and encourage entrepreneurs in Europe in general, and in Germany, in particular. Gerald is supposed to be a master-mind in e-business and Alain too has exposure in IT ventures. They would hence tend to come with business start-ups related to online services. This may lead to stagnancy after some time and create more competition in the same field. There is not much of diversity to be seen in the TMT at Omnis Mundi. They clearly lack functional, educational and background diversity. These are the observable characteristics and have both relations-oriented and task-related attributes. While in the initial stages, their prior experience has paid off, in the long-run, this homogeneity of functional and educational background may become a hindrance to strategic decisions and impact the organizational outcome. References Camelo-Ordaz, C., Herna´ndez-Lara, A.B., & Valle-Cabrera, R. (2005). The relationship between top management teams and innovative capacity in companies. Journal of Management Development. 24 (8), 683-705 Cameron, C. (2010). Does Team Chemistry Trump Experience or Skills for Startup Success? Retrieved August 28, 2010, from http://www.readwriteweb.com/start/2010/08/does-team-chemistry-trump-experience-or-skills-for-startup-success.php Cannella, A.A., Park, J., & Lee, H. (2008). Top Management Team Functional Background Diversity And Firm Performance: Examining The Roles Of Team Member Colocation And Environmental Uncertainty. Academy of Management Journal. 51 (4), 768-784 Carson, C.M., Mosley, D.C., & Boyar, S.L. (2004). 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