1. NETWORK SUPPORT AND THE SUCCESS OF
NEWLY FOUNDED BUSINESS
BY JOSEF BRUDERL AND PETER PREISENDORFER

2. FLOW OF PRESENTATION
• Introduction
• Compensation and success theory
• Social capital concept
• Data, variables, and methods.
• Empirical results
• Bivariate results
• conclusion

3. INTRODUCTION
• Network resource, network activity & network support are
heavily used to establish firms.
• Entrepreneurs who have a big broad and diverse network
are more successful.

4. COMPENSATION AND SUCCESS VIA SOCIAL
SUPPORT
• Network approach to entrepreneurship
-Personal network
-Organizational network
• Entrepreneurship is “inherently a networking
activity”

5. • Social relations and social contacts are important
channels for gaining access to information
• Network contacts give access to customers and
suppliers
• Network contacts may open the possibility to
broaden the financial basis of a new firm

6. • Advantage of family network
-unpaid family work
-emotional support
-loyal employees
-control of workers

7. THE SOCIAL CAPITAL CONCEPT
•Strategies to operationalize the network approach to
Entrepreneurship.
•First strategy : The general characteristics of personal networks and
explore the effects of these characteristic on business performance.
•Characteristics
•Network size, network density , network diversity, and network
redundancy.
•Gives us the description of the network structure.
•The level of utilization of the network in terms of opportunity.
Success comes when the entrepreneur makes use of the social
network.

8. •Second strategy: Looks at the activities carried out by
entrepreneurs in the formation stage of their business and the
amount of support received out of their network.
Characteristics
• The number of people the entrepreneurs has talked to about
starting or running his business.
• To which degree he has mobilized strong or weak ties.
• The number of hours he has discussed specific business matters
with friends and acquaintances.
• This is more direct way of testing success hypothesis.

9. FACTORS FOR SECOND
STRATEGY
•
Factor A) Based on opportunity structure an entrepreneur embedded in a broad &
diverse social network will receive more help out of it.
•
Factor B) Entrepreneur embedded in a confined social network or lacking in other
basic resources ( Human capital or financial capital) will try harder to mobilize support
out of its private network.
•
In such conditions the entrepreneur puts in more efforts and succeeds by activating his
private network resources which are his social contacts.
•
Acc to Light & Karageorgis , Highly developed social networks can compensate
shortfalls of the human capital.
•Entrepreneur resorting to social support start business that do not have good prospects
because of critical dimensions. Only after gaining control over these critical dimensions
one should observe the positive influence of social support.

10. SUMMARIZING NETWORK APPROACH TO ENTREPRENEURSHIP
•
1) Based on the compensation hypothesis, entrepreneurs with lower stocks of human
capital should make more use of social support during the start up period of their
businesses.
•
2) Based on compensation hypothesis, entrepreneur initiating business with smaller
amounts of financial start-up capital should receive more social support.
•
3) Based on compensation & success hypothesis simple Bi variate cross tabulations
of social support measures and success indicators should show no or even negative
effects of network support.
•
4) Based on success hypothesis , after controlling for human capital of founders and
start up capital of new business positive influences of network support should show
up.

11. DATA
• The Munich Founder study
• Based on Interviews- 1990
• Sample Size of 1849
• Complex part- The firm were still in existance or not?
• Interview- Broad,Avg time
• First part- characteristics & devlopement
• Second part- Individual & networking

12. STEPS AND OBSERVATION
Address 6000 founders for Sample
Motivate them
1849 – Conducted interview(39 % response
rate)
32% given up untill the date of survey- 1990

13. VARIABLES
• Measuring amount of network support
Support from Strong ties
Support from weak ties
Active help from spouse
Emotional Support from Spouse

14. SUCECESS VARIABLES
• Measures Organizational Success
- Survival (74%)
- Employment Growth
- Sales Growth(if more than 10%)

15. Network Compensation Hypothesis
Ho: The business founders with less favorable human capital profile and with
restricted financial resources try harder to activate their social ties and
receive more support out of other networks.
• Human capital
1. Years of schooling
2. Years of work experience
3. Industry specific experience
4. Self- employment experiencing
5. Management experience
 Start-up capital

16. Including two more variables
• Gender(Female founder)
• Nationality(Non-German founder)
Nationality: not simply on not having German passport but only on the basis of
their language skills
OLS-regression
• Support from strong ties
• Support from weak ties
• Active help from spouse
• Emotional support from spouse

17. Covariates
Means of
covariates
Support from
Strong ties
Support from
weak ties
Active help
from spouse
Emotional
help from
spouse
Female
founder
0.32
0.089
-0.024
0.341*
0.316*
Non-German
founder
0.06
-0.007
-0.158
0.044
0.103
Years of
schooling
13.11
-0.019*
0.012*
-0.085*
-0.027*
Years of work
experience
14.53
-0.009*
-0.010*
0.014*
0.002
Industry
specific
experience
0.56
0.061
0.122*
-0.263*
-0.056
Self
employment
experience
0.29
-0.134*
-0.129*
-0.103
-0.110
Management
Experience
0.52
-0.055
0.053
0.104
-0.014
Start-up
capital
7.08
0.024
0.008
0.071*
0.026

18. • Female founder receive more support from strong ties, more active and
emotional support from spouse/life partner and less support from weak ties
• For Nationality the expected positive effects do not show up. Only positive
effect is Non-German founders receive less support from weak ties.
• Strong ties is only supporting the hypothesis that negative effects of our
human capital makes to mobilize more social support.
• Founders with more years of schooling receive less support from strong ties
and all except having strong support from weak ties.

19. • Self-employment is consistently connected with all negative effects.
• Remaining 3 variables the pattern is mixed.
• Out of 11 significant human coefficients 8 have the expected negative
signs, so there might be some truth in Ho.
• Financial resource coefficient contradicts the hypothesis since it is +ve for
all variables.
• So, Ho is true only for human resources but not for financial resources.

20. Network Success Hypothesis
Bivariate Results
Success or failure of a new firm can be extracted with:-
1. Individual characteristics of the founding person
2. Characteristics of the new firm itself
3. Characteristics of the environment of the firm.

21. • Characteristics of the founding person-gender, nationality and
five human capital variables such as years of schooling, years of
work experience, industry specific experience, self employment
experience
• Characteristics of new firm-liability of newness(young firms are
prone to failure) and liability of smallness(small firms have
more chances of failure)
• Smallness and start up size-number of employees in the first
year, sales volume in first year

22. BASELINE MODEL FOR THE SUCCESS OF NEW
BUSINESS
Covariates
Female Founder
Non German
Founder
Years of
schooling
Years of work
experience
Industry specific
experience
Self employment
experience
Management
experience
Follower
Business
Start up
capital(natural
log)
No. of
employees in
Means of
covariates
0.32
0.06
Survival
Sales Growth
0.025 (0.98)
-0.044(0.85)
Employment
Growth
-0.152(3.70)
-0.050(0.58)
13.11
0.017(3.97)
0.001(0.12)
-0.015(2.31)
14.53
0.004(3.42)
-0.006(3.34)
-0.007(3.61)
0.56
0.104(4.36)
0.092(1.92)
0.125(2.49)
0.29
-0.033(1.24)
-0.007(0.19)
-0.027(0.69)
0.52
0.011(0.46)
-0.053(1.55)
-0.005(0.13)
0.24
0.053(1.82)
-0.109(2.8)
-0.173(4.16)
7.08
0.007(2.51)
0.011(2.53)
0.016(3.07)
0.24
0.046(3.08)
0.031(1.63)
0.018(0.83)
-0.129(3.08)
0.055(0.63)

23. Covariates
Means of
covariates
Survival
Employment
Growth
Sales Growth
Sales volume in first
year(natural log)
11.17
-
-
-0.047(6.47)
Registered in
commercial register
0.20
0.185(5.38)
0.108(2.07)
0.053(0.99)
Industry:
manufacturing
0.04
0.234(5.69)
0.068(1.19)
-0.010(0.17)
Industry: construction
0.01
0.210(3.29)
-0.061(0.72)
0.004(0.04)
Industry: wholesale
trade
0.11
0.008(0.20)
0.009(0.17)
0.058(0.96)

24. Covariates
Means of
covariates
Survival
Employment
Growth
Sales Growth
Industry: sales
intermediaries
Industry:
transportation
Industry:
insurance
Industry:
restaurant
Industry:
education/publi
shing
Industry:
consultation
Industry: other
services
0.05
-0.013(0.23)
0.064(0.76)
0.023(0.25)
0.09
-0.076(1.61)
-0.047(0.58)
-0.066(0.85)
0.07
-0.018(0.36)
-0.137(1.35)
-0.140(1.07)
0.08
-0.061(1.28)
-0.116(1.15)
-0.162(1.56)
0.03
0.089(1.27)
-0.102(1.00)
0.026(0.25)
0.18
0.035(0.91)
0.093(1.64)
0.065(1.01)
0.09
0.020(0.41)
-0.078(1.08)
-0.117(1.59)

25. MULTIVARIATE ANALYSIS
• It is based on the statistical principle, which involves observation
and analysis of more than one statistical variable at a time
• Indicates that high network support increases the probability of
survival and growth
• Support from strong ties shows more convincing effects than
from weak ties measure.
• Support from family network increases success than compared to
outside network

26. Network support
varibles
survival
Employement growth
Sales growth
Support from strong ties
(Medium)
0.056*(1.97)
0.037(0.88)
0.033(0.71)
(High)
0.093*(3.04)
0.068(1.46)
0.178*(3.21)
Support from weak ties
(Medium)
0.005(0.19)
0.019(0.53)
0.075(1.92)
(High)
0.058(1.69)
0.046(1.00)
0.138*(3.63)
Active help from spouse
(Medium)
0.105*(3.57)
0.068(1.57)
0.091(1.88)
(High)
0.093*(3.43)
0.018(0.45)
0.095*(2.23)
Emotional support form
spouse (Medium)
0.017(0.58)
0.074(1.78)
0.045(0.99)
(High)
0.075*(2.77)
0.065(1.51)
0.078(1.65)

27. CONCLUSION
• Network approach to entrepreneurship
• Support from personal network improves survival and growth of
newly founded business
• Support from strong ties is important
• No confirmation that entrepreneurs compensate shortfalls of
human and capital by resorting to network but partial
confirmation with respect to human capital

28. LIMITATIONS ON THE RESEARCH
• Did not look at the organizational network
• No information about the network founding
• Data is confined to German region
• Measurement of networking variables