Barriers to Growth in

Entrepreneurial Ecosystems
 Introduction
High-tech firms have enormous, previously unseen potential to scale
(e.g. Facebook, Dropbox, WhatsApp, …)

Problem: most firms do not grow persistently

Persistent growth: over 20% growth per year in employees or revenue

for the period of at least four years.

One assumption why this happens: there are internal and external
factors that are preventing growth of companies.

Focused on small and medium sized high-tech companies, particularly

startups.
 Theoretical background
Barriers to growth are usually viewed as internal or external factors
that constrain the growth potential in firms that wish to grow (Storey,
1994:154).

Internal barriers are under the influence of firms’ entrepreneurs and

managers, while external barriers are the domain of policymakers and
other ecosystem actors.

Problem: aside for internal/external there is no standard

categorization of barrier types.

Very little effort has been spent researching barriers to growth in high-
tech firms.
 Theoretical background
A large amount of the barriers to growth research is
geographically focused on Central and Eastern European
transitional countries. Barriers to growth have been researched
in Lithuania (Aidis, 2005), Albania (Hashi, 2001; Xheneti &
Bartlett, 2012), Kosovo (Hoxha & Capelleras, 2010), Slovenia
(Bartlett & Bukvič, 2001), Russia (Doern, 2009), and Bulgaria
(Pissarides et al., 2003).

Another focus has been on developing countries like India and

Ghana (Coad & Tamvada, 2012; Das & Das, 2014; Robson &
Obeng, 2008) or specific contexts in developed countries like the
UK and Canada (Gill & Biger, 2012; Lee & Cowling, 2013).
 Theoretical background
The most thorough and comprehensive critique of barriers to growth
literature was made by Doern (2009).
- Research on barriers to growth often does not distinguish actual and
perceived barriers to growth.
- The same concept is labelled differently in different studies (e.g.,
barriers, obstacles, constraints)
- No specific definition has been broadly recognized.
- Often no standardized and pre-tested measures of barriers are used.
- Most studies employ a cross-sectional design.
- No focus on a particular industry.
- The literature does not seem to converge on a stable set of findings.
 Entrepreneurial ecosystems
The entrepreneurial ecosystem is a set of interdependent actors and factors
coordinated in such a way that they enable productive entrepreneurship (Stam,
2015).

Main point: context matters.

Developed entrepreneurial ecosystems can help entrepreneurs grow their

companies by drawing on supportive culture, mentorships, investment capital and
other resources.

The concept offers a new perspective on firm growth that emphasizes the role of
the external environment (Mason & Brown, 2014).

Spigel, 2015: Three types of attributes of entreprenurial ecosystem (cultural, social

and material)
 Methodological approach
Literature review revealed that authors do not rigorously define what they
mean by ‘barriers’.

Rigorous concept development is often neglected, but having a good concept

definition is vital before the process of developing a measure can begin.

Four-step process of creating a concept definition recommended by Podsakoff

and colleagues (2016):
(1) identify the potential attributes of the concept and collect a representative
set of definitions;
(2) organize the potential attributes by theme and identify any necessary and
sufficient ones;
(3) develop a preliminary definition; and
(4) refine the conceptual definition.
 Data collection
Alltogether 32 in-depth interviews was conducted.

I spent three months following a batch of startups in venture

accelerator.

I used the MAXQDA software for coding and analysis.

I constantly compared the responses with our observations and

findings of past studies.

Finally I discussed the definition with colleagues and practitioners,

including three interviewees.
 Necessary conditions analysis (NCA)
Necessary conditions are determinants that allow a certain outcome to exist, but are
not sufficient to attain that outcome (Dul, 2016).

Without the necessary condition, the outcome will not exist. Failure is guaranteed
and cannot be compensated with by other determinants of the outcome. (example:
passenger airplane).

Traditional approaches (e.g. multiple regression) are based on sufficiency logic. They
often also use the additive rule where the effects of each cause add up to the
outcome, meaning that the lack of one sufficient cause can be compensated by
others.

Hypotheses containing statements about necessary conditions should be tested with

NCA, not traditional regression-based analyses.
 Barriers to growth
Barriers to growth are firm-level factors that are necessary conditions for
persistent growth.

There are five barriers to growth:

- finance,
- human capital,
- growth ambition,
- growth management knowledge and
- product-market fit.

Necessary conditions logic demands that all five conditions must be fulfilled if firm
is to grow sustainably. But they are not enough!

Barriers vs. drivers of growth

Barriers to growth
 Barriers to growth
Two main ways to achieve temporary growth:
• finance push,
• market pull.

Eliminating a powerful barrier like finance or achieving product-

market fit can put the company on a trajectory of temporary growth.

This buys time so leadership can eliminate other barriers.

But if other barriers are not dealt with, the growth will be eventually
brought to a halt.
 Barriers: Finance
“These things can be expensive. We had an app three
years ago which exploded, nobody expected an
explosion like that. First week we had 6,000, second
week 40,000 and the third week 200,000 users. But
then we had to shut it down, because we got the
invoice from Google for 12,000 US dollars per week. We
had no structure, so it was over.”

- Entrepreneur
 Barriers: Finance
Finance barriers mean the ability of a firm to finance its growth.

The main ecosystem-level factors that influence companies’ ability to

obtain financial resources are cultural attitudes, networks, investment
capital, and policy and governance.
Cultural attitudes determine what amount of risk and debt is culturally
appropriate for entrepreneurs to take.
Social connections help entrepreneurs obtain access to the right people
(investors, bankers) who are the decision-makers for dispensing finance.
Abundant investment capital in the region makes it easier for all startups
to find equity capital.
Policy and governance initiatives (e.g. guarantees, subsidies) can help
acquire finance for those new ventures that would otherwise be
disadvantaged due to poor credit ratings and unavailable collateral.
 Barrier: Human capital
“There’s one obstacle that is always constraining you!
The team! This determines everything from A to Z.
Team determines if you will get to growth phase,
determines if you can get through growth phase.
Everything else is some exercise to somehow get to
product-market fit and sell things. The team is by far
the most complex thing.”
- Entrepreneur
 Barrier: Human capital
There are three dimensions of the human capital barrier: the human capital of
the founder team, the human capital of the employees, and the firm’s ability to
attract and retain worker talent.
The main ecosystem-level factors that influence the human capital barrier are:
cultural attitudes, histories of entrepreneurship, networks, worker talent, and
universities.
Cultural attitudes are the basis for whether talented experienced people are
prepared to establish or work for small companies.
Histories of entrepreneurship change these attitudes with positive role models.
Expansive social networks help entrepreneurs identify suitable employees and
appropriate co-founders.
Abundant worker talent is necessary to support growing firms’ increasing needs
for workers, while universities are one of the main factors in creating human
capital.
 Barrier: Growth ambition
“There are no role models in this region, that’s a fact.
Role models are mostly craft workshops, which are
known in some niche. But none of them grew into really
large multinational corporation. Individuals can be very
successful, but they keep their firms at 100 people, they
don’t want to grow to 10,000.”
- Investor
 Barrier: Growth ambition
The main ecosystem-level factors that influence the growth ambition barrier are:
cultural attitudes, histories of entrepreneurship, investment capital, mentors and
dealmakers, and open markets.

Cultural attitudes influence how risky the entrepreneur’s actions will be and this will
in turn influence the growth ambition.

Examples of successful entrepreneurs in the region and knowledgeable mentors can

help overcome the adversity to risk inherent in growth.

Investment capital encourages entrepreneurs to have greater ambitions than they

would normally have.

Open markets can help fuel the growth ambition with abundant opportunities for
expansion.
 Barrier: growth management knowledge

“Here in Silicon Valley, there is many more people who

have experience how to grow to a million or hundred
million users. In smaller ecosystems there is are not
many, but they do exist now. In SV you can skip this
learning phase if you get into contact with the right
people. “

- Entrepreneur based in Silicon Valley

 Barrier: growth management knowledge
The main ecosystem-level factors that influence the growth management
knowledge barrier are: networks, investment capital, mentors and dealmakers,
worker talent, and support services and facilities.

Entrepreneurs embedded in expansive networks can more easily identify people

with growth management knowledge if that is insufficiently present in the company.

Investment capital investments often come with experience in handling the growth
process.

Mentors can also advise the founders when growth problems arise.

If there is an abundance of people on the market who have first-hand knowledge of

the growth process, ventures can hire the appropriate worker talent.

Finally, support services and facilities can help growing companies.

 Barrier: product-market fit
“Precondition for growth is product-market fit on a fast-
growing market. If you want to get to that you have to
understand the market better than others. If you want
to understand it, you have to have work experience on
that market”
- Consultant
 Barrier: product-market fit
The main ecosystem-level factors that influence the product-
market fit barrier are: networks, mentors and dealmakers, and
open markets.

Networks and the proximity of customers mean that

entrepreneurs can identify customer needs more easily.

Mentors who have gone through the process of finding a product-

market fit can guide them with their experience and knowledge.

Being in a big market means even niches are big enough to

develop products targeted at specific customers.
 Implications for research
This conceptualization of barriers to growth is thorough and holistic. It
embeds the barriers in the entrepreneurial ecosystem concept in order
to capture contextual factors.

We have conceptualized barriers as necessary, but not sufficient

conditions for growth (Dul, 2016). One consequence of this distinction
is methodological. Traditional regression-based methods with their
rule of linear additivity may be appropriate for empirically examining
drivers of growth, but inadequate for assessing barriers to growth.

Multilevel connections between entrepreneurial ecosystem attributes

are insufficiently researched and can be basis for future research
projects.
 Lessons for entrepreneurs
Entrepreneurs can use barriers to growth
framework as a long-term lens on the
development of their company

All five barriers must be eliminated before

achieving persistent growth.

Decisions about founding team are the most

difficult to correct later.
 Lessons for policy
Policy measures should apply a holistic strategy
towards lowering barriers to growth.

Because every barrier is a necessary condition for

growth it is not enough to focus on just one
barrier.

Policy-makers so far had too much focus on

finance, and should spend additional resources
on eliminating other barriers.
 Describe an entrepreneurial
ecosystem of your choice. What are
its characteristics?

Describe a role model for your

selected entrepreneurial ecosystem.