Exploring the factors of startup success and growth

Abstract

Most developing economies relies heavily on startups, startups has been identified to be the measure of innovation and development and countries that has more startups have higher economic stability. The aim of this paper is to identify factors that influence the success of startup in this ever changing world. Factors such as turnover, internal Market openness, Market dynamic and Government policies turns to influence capital investors decision and affect the confidence of the entrepreneur. Introduction Entrepreneurship, innovation, and creativity have been the epitome of modern industrialization. World economies are experiencing a massive boost because people are fast adapting to the concept of entrepreneurship and innovation. This in turn puts less pressure on the government in the job creation sector of the economy. In 1949 Economist Joseph Schumpeter's theory of entrepreneurship focused on three main characteristics of the entrepreneur. These are Innovation, Foresight and Creativity A better understanding of the factors that contribute to startup failure represents a critical aspect of entrepreneurship studies. the startup literature has spent disproportionately more attention on success stories and factors rather than on new business failures (Deakins, 1996). From the GEM (2017) report, sixty-two (62) economies around the world were surveyed, more than sixty-seven percent (67%) of the adult population believe that entrepreneurs are well-respected and enjoy high status within their societies. This percentage encourages young and upcomings desire in entrepreneurship, which is positive to the future of their economies. Moderate average scores for media visibility. Around 60% of adults, in all three economic development groups, believe that entrepreneurs garner substantial media attention. On average, sixty-seven (67%) of the adult population in the efficiency-driven economies consider starting a business a good career choice, compared to around 60% in the factor-and innovation-driven economies. Africa is the region reporting the most positive attitudes towards entrepreneurship, with three quarters of working-age adults considering entrepreneurship a good career choice while 77% believe that entrepreneurs are admired in their societies. In contrast, Latin America and the Caribbean reports the lowest proportion of adults believing that entrepreneurs are highly regarded(63%) while Europe has the lowest belief in entrepreneurship as a good career (58%) and the lowest media publicity for this activity (55%). Two factors of success of every startup is it consistency with innovation and continuous flow of funds. But there are a number of factors which affect these two factors, mostly financing due to the high level of risk involved in startups, looking at the statistics, it makes it much more difficult for any investor to trust in any startup. So the focus of this research is to find out factors that influences innovation and makes startup attractive for financing. Many great companies have exited the market because of lack of innovation and foresight of it leaders, there are a number of factors that influences the decision of corporate and startup leaders in their choice to be innovative or not. There has been a

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Exploring the factors of startup success and growth
James Okrah
Alexander Nepp
Ebenezer Agbozo
Ural Federal University, GSEM, Yekaterinburg, Russia
Keywords
Innovation, Startup, Internal Market Openness, Internal Market Dynamics, Government
Policies, Econometrics.
Abstract
Most developing economies relies heavily on startups, startups has been identified to
be the measure of innovation and development and countries that has more startups have higher
economic stability. The aim of this paper is to identify factors that influence the success of startup
in this ever changing world. Factors such as turnover, internal Market openness, Market
dynamic and Government policies turns to influence capital investors decision and affect the
confidence of the entrepreneur.
Introduction
Entrepreneurship, innovation, and creativity have been the epitome of modern
industrialization. World economies are experiencing a massive boost because people are fast
adapting to the concept of entrepreneurship and innovation. This in turn puts less pressure on the
government in the job creation sector of the economy. In 1949 Economist Joseph Schumpeter's theory
of entrepreneurship focused on three main characteristics of the entrepreneur. These are Innovation,
Foresight and Creativity
A better understanding of the factors that contribute to startup failure represents a critical
aspect of entrepreneurship studies. the startup literature has spent disproportionately more attention
on success stories and factors rather than on new business failures (Deakins, 1996). From the GEM
(2017) report, sixty-two (62) economies around the world were surveyed, more than sixty-seven
percent (67%) of the adult population believe that entrepreneurs are well-respected and enjoy high
status within their societies. This percentage encourages young and upcomings desire in
entrepreneurship, which is positive to the future of their economies.
Moderate average scores for media visibility. Around 60% of adults, in all three economic
development groups, believe that entrepreneurs garner substantial media attention. On average,
sixty-seven (67%) of the adult population in the efficiency-driven economies consider starting a
business a good career choice, compared to around 60% in the factor - and innovation-driven
economies. Africa is the region reporting the most positive attitudes towards entrepreneurship, with
three quarters of working-age adults considering entrepreneurship a good career choice while 77%
believe that entrepreneurs are admired in their societies. In contrast, Latin America and the
Caribbean reports the lowest proportion of adults believing that entrepreneurs are highly
regarded(63%) while Europe has the lowest belief in entrepreneurship as a good career (58%) and the
lowest media publicity for this activity (55%).
Two factors of success of every startup is it consistency with innovation and continuous flow
of funds. But there are a number of factors which affect these two factors, mostly financing due to the
high level of risk involved in startups, looking at the statistics, it makes it much more difficult for any
investor to trust in any startup. So the focus of this research is to find out factors that influences
innovation and makes startup attractive for financing. Many great companies have exited the market
because of lack of innovation and foresight of it leaders, there are a number of factors that influences
the decision of corporate and startup leaders in their choice to be innovative or not. There has been a

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lot of research which identified financing of startup as the main hindrance to innovation in startup.
There is a strong relationship between financing and innovation.
Financial and innovation
Innovation is a strong pillar to the success of every startup known in the world, Business that
are not able to invest in research and development dies in the striving market. the capital cycle has
become the main feature of the innovative market, as indicated by (Gompers and Lerner 2004),
(Kaplan and Schoar, 2005), (Gompers, Kovner, Lerner and Scharfstein 2008). (Rhodes-Kropf, M.
2015) indicated that the market plays a vital role in the financing and financing also has a strong
linkage with innovation. Financing hinders innovation in small scale enterprises in Europe (Ghisetti
Et al, 2017). (Nanda, R., Rhodes-Kropf, M. 2017) and (Ou, C. 2011) indicated that strong financial
support for startups can trade off high-level risks. Many business failures are mostly attributed to
lack of financing, internal market dynamics and lack of innovations. there is a concern over declining
innovation in small and medium-sized enterprises, most particularly in the case of family
businesses(Schäfer, D., Stephan, A., Mosquera, J.S. 2017). the research indicated the inefficient
realization of innovative practice by families businesses due to funding in R&D. which means that if
enough financing allocated to such business it will increase their survival and innovativeness. The
gap between innovation and financing seems too difficult to close as noted by (Czarnitzki and
Hottenrott, 2011; Mohnen et al. 2008; Canepa and Stoneman 2008; Freel 2007). Source of funding of
innovative activity becomes the other of the day since there would not be innovation without
research.
From the literature, we come up with these set of Hypothesis.
H1: Innovation is influenced to a certain level by Internal market Openness:
A theoretical model describing the dependence of innovation activity of enterprises on the
degree of competition in the market can also be found in Aghion, Bloom, Blundell, Griffith and
Howitt, 2002. (Berger, 2010) in his work he established an empirically positive relationship between
competition in the market and innovation. Significant is also the effect of economies of scale and
greater ability to raise funds for innovative research. openness bring competition and ensures the
quality of product and services,
H1: Turnover influence the decision of a corporation to be innovative.
Innovation has a major effect on the turnover and general growth of companies (Capasso, M.,
Treibich, T., Verspagen, B. 2015 ). We want to find out if turnover also influences the decision of
corporation to invest much in R&D.
Financing and startups
Financing of startups is the most changing thing for entrepreneurs. most investors are afraid
of the high risk involved in investing in startups and companies that do not have sustainable returns.
This is due to the credit crisis of 2008 and 2009 which has made it more difficult for entrepreneurs to
secure financing as banks have become risk-averse in lending money to new startups (Nutting, 2009).
with the reduced access to financing from banks, it has increased drastically the competition for
venture capitalist funding. Recently governments in most developing countries are trying to finance
startups in other to create employment for its citizenry, but that also has a high competition in
securing funds.As indicated by (Dilger, R.J., Gonzales, O.R. 2011) the USA H.R. 5297, the Small
Business Lending Fund Act of 2010, which would authorize the Secretary of the Treasury to create a
$30 billion Small Business Lending Fund to encourage community banks to provide small business
loans, a $2 billion State Small Business Credit Initiative to provide funding to participating states
with small business capital access programs, and a $1 billion Small Business Early-Stage Investment
Program to provide venture capital funding for startup companies. This is to ensure job creation and

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employment in the country, but this type of financing can not be accessed by all, so the focus of this
research is to find out the factors that influence startup financing.
Based on this, we formulated this hypothesis.
H3: Government policies places a high constraint on the financing decision of investors.
some policies of the government either make investing in startups attractive or not attractive.
some policies scare investors off certain locations, due to unattractive of government policies.
Data structure
The data is a panel data consisting of developed countries and this selection was done
assessing the GDP of the various countries. The 13 countries are include: Belgium, Canada, France,
Germany, Italy, Japan, Netherlands, United kingdom, United States, Switzerland, Sweden, Russia,
and China. The years selected for the analysis were selected because of the availability of data; data
was selected from the year 2006-2015. Missing data are replaced with the mean.The GDP per capita is
not presented in percentage but in raw figures to know the actual value in dollars.
The data below describes the factors considered in the data structure and what each factor
represent. The GDP per capita is not presented in percentage but in raw figures to know the actual
value in dollars.
Factors
Representation
Turnover
Measures the percentage of Return on Investment over
the course of the year
Financing
The availability of financial resources as equity and
debt for small and medium enterprises (SMEs)
(including grants and subsidies)
governmental_support_and_policies
The extent to which public policies support
entrepreneurship - entrepreneurship as a relevant
economic issue
taxes
The extent to which public policies support
entrepreneurship - taxes or regulations are either size-
neutral or encourage new and SMEs
Basic_education
The extent to which training in creating or managing
SMEs is incorporated within the education and training
system at primary and secondary levels
post_education
The extent to which training in creating or managing
SMEs is incorporated within the education and training
system in higher education such as vocational, college,
business schools, etc.
r&d
The extent to which national research and development
will lead to new commercial opportunities and is
available to SMEs
internal_market_dynamics
The level of change in markets from year to year
internal_market_openness
The extent to which new firms are free to enter existing
markets
cultural_and_social_norms
The extent to which social and cultural norms

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encourage or allow actions leading to new business
methods or activities that can potentially increase
personal wealth and income
GDP_per_capital
GDP per person in the economy
Employment
This discuss the percentage of people who are
employed out of the total population from various
countries.
Correlation Coefficient
1
2
3
4
5
6
7
8
9
10
11
12
1
1.00
2
0.12
1.00
3
0.07
0.60
1.00
4
0.01
0.50
0.63
1.00
5
-0.03
0.43
0.25
0.59
1.00
6
-0.02
0.56
0.50
0.55
0.48
1.00
7
0.01
0.67
0.59
0.63
0.42
0.61
1.00
8
0.10
-0.42
-0.21
-0.38
-0.38
-0.52
-0.42
1.00
9
-0.03
0.60
0.43
0.53
0.71
0.43
0.60
-0.44
1.00
10
-0.06
0.32
0.12
0.42
0.58
0.31
0.24
-0.12
0.39
1.00
11
0.11
0.44
0.28
0.51
0.49
0.39
0.52
-0.29
0.43
0.58
1.00
12
0.10
0.31
0.34
0.64
0.48
0.22
0.39
-0.14
0.40
0.58
0.57
1.00
Data analysis structure
First created a simple linear regression using the lm command of the R-Studio, Setting R&D
as the dependent variable for the first model, I then checked for heteroskedasticity using the plot
command and two other mathematical models, namely the Breusch Pagan Test and the NCV Test.
All the test showed the presence of heteroskedasticity. The Box-Cox Transformation for correcting
heteroskedasticity. We primarily focus on the dependent variable , after the transformation, it was
tested again for heteroskedasticity.
After eliminating heteroskedastic from the data, the data was then analysed using the Fixed
effect model with dummies of Years and country and the second model was with dummies,
Innovation
Log r.d
Oneway (individual) effect
Random Effect Model
With dummies of Year and Country
Oneway (individual) effect Random
Effect Model
Without Dummies
Turnover
-4.1264e-03.
-4.9285e-04

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2.4105e-03
1.2053e-03
Government Policies
.0245e-01***
2.8435e-02
9.6744e-02**
2.8527e-02
xinternal_market_openness
1.5338e-01***
3.5389e-02
1.5633e-01***
3.4642e-02
Employment
3.3923e-03
6.3146e-03
2.4362e-03
4.9234e-03
Cultural and social Norms
-1.0568e-02
2.6148e-02
-1.9972e-02
2.5559e-02
xtaxes
4.0454e-02
3.0548e-02
5.6835e-02*
2.7605e-02
xGDP_per_capital
-3.1232e-06
5.9685e-06
-9.4631e-07
1.9265e-06
xinternal_market_dynamics
1.7991e-02
7.3356e-02
1.9939e-02
7.2424e-02
R2
0.56729
0.48925
F statistics
6.32382 on 17 and 82 DF, p-value:
3.6795e-09
10.8962 on 8 and 91 DF, p-value:
1.184e-10
The first hypothesis Innovation is influenced to a certain level by Internal market Openness,
this was seen to be positive with the Fixed effect model in table 2. this confirms another finding by
(Berger, 2010), which stated that openness of the market create competition which intends makes
leaders focus much on innovations. as the market is open, it attracts a lot of participants, which
create the atmosphere for innovation and development. when there is no competition, leaders
becomes reluctant with the creativity. Like the case of Nokia, because there was a high competition
on the smartphone market, those companies that still lived in the past were left behind. Facebook is
still Facebook after a decade because they understand the competition and always tries to kill the
competition, Facebook buying WhatsApp because they realized people were switching their
attention to WhatsApp at the time of purchase. Openness keeps good leaders on their toes, which
wakes their innovative instincts. competition is good for every economy.
It was realized that turnover did not have any influence on the innovation of startups.
The analysis shown a strong impact of Governmental policies on innovation, this takes into
account the sound economic policies, good trade practices, knowledge sharing and good
environment for business
Financing
Log Financing
Oneway (individual) effect
Random Effect Model
With dummies of Year and Country
Oneway (individual) effect Random
Effect Model
Without Dummies
Turnover
5.7657e-03*
2.6098e-03
2.5570e-03.
1.3835e-03
Government Policies
1.0836e-01***
1.1611e-01***

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3.0786e-02
3.2745e-02
xinternal_market_openness
8.8976e-02*
3.8315e-02
1.2841e-01**
3.9764e-02
Employment
9.9723e-03
6.8367e-03
1.4194e-02 *
5.6513e-03
Cultural and social Norms
-1.4463e-03
2.8311e-02
1.0912e-02
2.9337e-02
xtaxes
5.0201e-02
3.3074e-02
1.1988e-02
3.1686e-02
xGDP_per_capital
-8.9482e-06
6.4620e-06
-9.9709e-07
2.2114e-06
xinternal_market_dynamics
-1.7017e-01*
7.9421e-02
-1.7854e-01*
8.3131e-02
R2
0.57577
0.43717
F statistics
6.54653 on 17 and 82 DF, p-value:
1.8182e-09
8.83536 on 8 and 91 DF, p-value:
7.118e-09
Financing has been identified to have a strong correlation with innovation and success in
most startups. it has also been identified to be the best mean to the trade of risk is by high initial
investment in startups. But there are other unknown factors that influenced the behaviour of of
investors.from the results indicated above, it shows that turnover, internal market openness and
Government policies are characteristics that investors looks at before committing their monies to any
venture. The internal dynamics of the market scares investors off due to the higher risk associated
with the market dynamics.
Discussion
Based on our findings, this section discusses the factors which influence startup success. It is
divided into two subsections with discussions on the research question.
Turnover
With respect to the financing factor, our analysis revealed that turnover, internal market
openness and government policies highly influence the financing of startups. The results confirm the
findings of Diamond (2012), Tanrısever et al. (2012) and Cusumano (2012). According to Tanrısever
et al. (2012), profit maximization is key to investment decision which in turn influences the survival
of startups. Facebook's success hinges upon pressure to innovate and aggressively compete against
other technology companies which led to massive turnover that in turn attracted more investors
(Diamond, 2012).
A positive turnover has a positive effect on a firm's performance builds its reputation in the
marketplace and influences the desire for investors to invest in the said firm.
Conversely, Cusumano (2012) reported that, within a week of the social networking giant Facebook's
initial public offering (IPO), their stock market value fell by 25% which affected its first earnings,
thereby disappointing investors. Thus, low capital turnover influences investor confidence.
Government Policies

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The results confirm the findings of Minniti (2008), Cheah et al. (2016), Colwell & Narayanan
(2010), Patanakul & Pinto (2014) and Dolfsma & Seo (2013) that government policies have an effect
on financing of startups and innovation in startups which lead to growth and success. With respect
to financing, policies implemented by governments are capable of fostering or retarding financing
and investment opportunities in the business and entrepreneurship ecosystem of a country. Similar
to spheres such as agriculture and education where government policies drastically influence the
outcome over a period of time, one can infer that government policies are the fuel of an economy. As
argued by Minniti (2008), the place of government as a body in regulating rules both formal and
informal places constraints on entrepreneurial activities. The author concluded that government
policies are powerful influencers of entrepreneurial activity by structurally setting the tone in the
business world thereby encouraging certain activities which will favour one group of startups which
fall within laid out criteria and disfavour another (leading to loss of investment opportunities).
A classic example of a society where startups flourish is Singapore and the success is
attributed to government policies purposefully aimed at innovation-driven economic growth. Cheah
et al. (2016) pointed out that the government of Singapore established venture-friendly legislation in
areas such as taxation and bankruptcy laws (where the procedure duration drastically was cut down
from 29 months to 10 days) to encourage the formation of innovative startups and investment.
Thus, government policies are capable of changing the entrepreneurial culture of the country by
fostering a climate in which entrepreneurship is viewed by citizens as a means to create value for the
economy (Colwell & Narayanan, 2010) and drawing in investment opportunities.
Next, we discuss the influence of government policies and their impact on innovation in
startups. Government policy framework, according to study is a progress or hindrance to innovation
and the determines the course of the country’s development; within which the startup and
innovation landscape is constituent. In America, the government launched an initiative - Startup
America - aimed at promoting entrepreneurship and accelerating the transfer of research
breakthroughs from universities to businesses, improving the regulatory environment for starting
and growing new businesses, and increasing connections between entrepreneurs and prolific
business mentors (Patanakul & Pinto, 2014). A policy framework of this nature serves as a launching
pad for startups and gives rise to sporadic quality innovation due to the fact that government policy
has made provision for building an ecosystem that promotes startup growth.
A strategic policy by the government of the Netherlands aims at strengthening its position as one of
the world’s top five most competitive economies by increasing spending on research and
development to 2.5% of the gross domestic product (GDP) by 2020. Thus, creating a ripe
environment for more startups to spring up with highly innovative products.
Government policies such as lower corporation taxes, provision of funding opportunities, tax credits,
intellectual property rights as well as antitrust law are examples of policies which exist to protect
small players active in the startup market, hence creating a level playing field to encourage healthy
competition (Dolfsma & Seo, 2013).
Internal Market Openness
Our analysis revealed that internal market openness is essential to startup financing and
innovation, and back the findings of Li et al. (2004) and Zilgalvis (2014). The level of openness of a
country’s internal market is to external investors and trade opportunities is a gateway to drawing in
investment opportunities which will contribute to the economy of the country as well as drive
innovativeness and competitiveness. Foreign investments made possible by market capital openness
as a result of trade openness boosts innovation by local startups which motivates startups to
outperform rivals (Li et al., 2004).
Zilgalvis (2014) described the U.K. withdrawing from the European Union as a move from
openness toward isolation which could damage the talent and investment base of the emerging
startup ecosystem. The author made reference to the need for more accelerators and incubators in the

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UK due to the huge operational costs associated with running a startup in London. Thus, the market
structure here calls for more investment, yet the changing scene from an open to closed system is
potentially threatening to startups gaining financial backing.
The open nature of markets in the United States, Netherlands and Switzerland make them
powerhouses for startup innovation.
On the other hand, observing countries such India and China which were closed until the last
decade and two decades respectively, levels of innovativeness has skyrocketed and the outcome of
startups in these countries are evident all over the world.
Internal Market dynamics
Our analysis revealed a negative significance of market dynamics on financing of startups. A
country or region’s entrepreneurial landscape is dependent on the systems that form the economy
and is filled with uncertainties with various risks associated. Giardino et al. (2014) pointed out that
despite the uncertain nature of certain or all aspects of the market, a good entrepreneur is proactive,
has foresight and is capable of anticipating unforeseen events. This means, new startups are at risk of
failing which poses a threat to financial investment opportunities. Also, the unpredictable nature of
the market puts investors in a position whereby financing startups is done in a cautious and rigorous
manner so as to avoid risks, and it affects the chances of other equally innovative startups being
financed. Hence, the market dynamics of a region highly influence the financing of startups and for
that matter, startup growth.
Conclusion
Two factors were considered for the dependent variable Innovation (R&D) and Financing,
and factors like Government policies, Internal market openness, internal market dynamic, are
considered as independent variables with GDP per capita and employment as controlled variables.
The finding will help policymakers strengthen their policies in the area of trade and
investment. Increasing government support for startup and making the trade environment more
easy. Government has a major rule to play in ensuring growth in the success of startups.
Future work should focus on assessing closed markets at a regional level to establish the
impact of financing, innovation (R&D), government policies, internal market openness, and internal
market dynamics on the success of startups.
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