May 8, 2018

How Start-Ups Succeed


The OECD has published a technical study of start-ups around the world (“A portrait of innovative start-ups across countries” by Breschi, S., J. Lassébie and C. Menon (2018)).

The study reviews previous literature and a database of start-ups to draw a number of conclusions. These are summarized below.

Creating the right conditions for innovative start-ups to experiment and thrive is a policy priority across all OECD countries. New and young firms contribute disproportionately to job creation. Start-ups may also be more effective in exploiting new technologies and introducing radical innovations e.g., climate change, aging society.

The Secret of Success:

What is the secret for jump starting an entire economy? A key factor is venture capital (VC) funds.
According to the OECD, venture capital and related risk-finance instruments play a critical role in fostering the scaling-up of the tiny proportion of start-ups that prove to be successful. For instance, some estimates show that, while VC funds invest in only around 0.2% of new U.S. businesses, 43% of U.S. public companies founded between 1979 and 2013 were VC-backed, and they accounted for 82% of the total research and development (R&D) expenditure of public companies founded in the same period.

The amount of employment generated by VC-backed firms accounts for nearly 10% of employment in the US in the late 1990s and early 2000s, steadily rising from about 5% in the 1980s. The emergence of industries such as semiconductors, biotechnology, and the Internet, as well as the introduction of several innovations across a spectrum of sectors, has been driven in large part by VC investments.

However, across OECD economies there are striking differences in the relative size of the venture capital market, with economies like Israel and the United States having a VC-to-GDP ratio ten time as large as the average European country.

Beyond financial backing to entrepreneurs, there is also evidence that VC investors help recruit talented managers, formulate new strategies, and use their networks to garner resources for the company.

Furthermore, the backing of venture capitalist firms act as a signal of the quality of a new venture. After closing a VC deal, start-ups typically experience sales growth, initial public offerings, and acquisitions. VC backed companies aim at more radical innovations, are significantly faster in introducing their products to the market, and pursue more aggressive market strategies than other start-ups.

Government Role:

Governments are among the main VC investors in several OECD countries. For instance, up to 50% of VC-backed start-ups receive some forms of government VC funding in e.g. Korea and Canada, according to some estimates. Investments in government VC may be motivated by supporting start-ups with high social returns. Government VC might also act as a substitute for private VC if the private VC market is not “mature” yet


The prominence of the VCs affiliated with the new venture, the number of VCs investing in the company, as well as the timing, duration, and magnitude of their investments in the new ventures all positively affect the probability of an exit – initial public offering (IPO) or acquisition.
There is evidence that VC funding is associated with higher takeover premiums when companies become acquisition targets.


Patenting activity also appears to be positively correlated with successful exit. Japan, France, and Netherlands are the economies characterized by the highest number of patents per USD billion of VC.


As for entrepreneurs' characteristics, there is evidence that human capital (personnel ) is associated with a successful exit, but there is other evidence that the amount of effort exerted by the founder(s) is more important.
The size of the founders’ team, their age, and their personal history as patent inventors are also good predictors of the amount of funding received, as well as of the probability that the start-up is eventually acquired.
The OECD study shows that there is considerable cross-economy and cross-sector variation in the educational and professional background of start-ups’ founders.
For instance, the share of founders with previous experience in academia and PhD education is significantly higher in countries such as Switzerland and Finland, and in the biotechnology sector.
While the median age of founders is similar across countries (approximately 28 to 33 year old), a few countries (UK, US, Canada, Brazil, and India) and sectors stand out in the share of individuals founding start-ups during their undergraduate or graduate education.
The OECD says that 20%-30% of founders have one or more previous entrepreneurial
experiences, i.e., are “serial entrepreneurs”, with Sweden, Netherlands, Israel, and United States being the economies with the highest shares.

Female Discrimination?

According to the OECD study, female founders appear to be significantly less likely to receive funding and, when they do, the amount they receive is substantially lower; the probability of acquisition is also lower for start-ups having at least one woman among the founders.


VC funds have contributed to the international economy as they provide a clear focus on getting things done and achieving results. Anything is possible when you have a vision and milestones.

Leon Harris
The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd, INAA Israel Member

As always, consult experienced advisors in each country at an early stage in specific cases.

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