Can we help?the impact on entrepreneurial

performance of publicly funded business advisory services.

Eileen FischerSchulich School of Business

York University

All countries want to foster “entrepreneurship”

• But what do we mean by that?– Decreasingly: small business support– Increasingly: entrepreneurial performance– Entrepreneurial performance arises from “enterprising human action in pursuit of the

generation of value, through the creation or expansion of economic activity, by identifying and exploiting new products, processes or markets” (OECD, 2007)

Entrepreneurial performance arises when opportunities

to create something new are created/identified and exploited

The problem is that entrepreneurial performance can vary considerably…so public policies and investments are

made to attempt to “support” entrepreneurial activities

The question considered here is whether publicly-funded interventions

(specifically advisory services) can increase the likelihood that entrepreneurial

opportunities are realized in manner that leads to sustainable, profitable growth at the firm level

and thereby to regional or national benefits at the economy level

Advisory services• Also known as consulting, coaching, guiding…• Offered at different stages

– Pre-founding; early stage; critical growth points, …

• Varied in terms of – Customization– Amount– Delivery timing (continuous, episodic)– Type, degree of qualifications of service providers

What have others found?Documented impact of advisory service

Was judged as satisfactory by recipients of services

Had a direct impact on entrepreneurial performance (growth in sales or employment)

positive Chrisman and Katrishen (1994)

mixed positive and null results

Smallbone (1993). Chrisman, McMullen, Hall (2005) (curvilinear relationship) Hart, Roper and Saal (2008) (intensive advising more effective than occasional)

Null results Labrecht and Pirnay (2005) Roper and Hart (2003);Roper and Hart (2005)

What’s the problem?

• Advisee characteristics?– Growth intentions – Growth potential

• Advising characteristics– Amount– Timing– Expertise

Can advising be done (cost) effectively? A local case study

• Unique dataset from Investment Network– Affiliated with Innovation Synergy Center, Markham (ISCM)– Thanks to Catarina von Maydell (detailed records)– Paper available: Douglas Cumming and Eileen Fischer (2010)

• Examine the impact of advisory hours on entrepreneurial outcomes– Sales– Patents– Financing– Alliances

• Control for endogeneity and selection effects

The clientele• Focus on companies that:

– Are generating revenue or will generate revenue within 12 months

– Have the capacity to generate a minimum of $2M in revenue within 3 to 4 years

– Have a sustainable competitive/technical advantage– Have a current company valuation of less than $2M– Will be looking for up to $500,000 in financing within 24 months

• Appropriate program to assess impact of advisory services on entrepreneurial outcomes among firms with growth and innovation intentions and potential

The advising

• A mix of classes and customized advising• Offered over a period of several months• Delivered by people who have successfully

obtained funding for multiple ventures themselves

Data obtained• 101 entered the Investment Network Program, 2006-Q4 to 2009-Q2

• Types of Variables (over 100 variables in dataset)– (1) dependent variables

• sales, patents, financing, alliances– (2) factors that influence whether or not the firm is part of the Investment

Network• Referral sources, market conditions

– (3) value added provided by advisors• Hours spent, number of mentors, number of companies advised / mentor

– (4) entrepreneurial firm characteristics• Industry, incorporation date, business acumen, coachability, etc

– (5) top management team characteristics• Age, race, experience, etc.

– (6) market conditions• Public market returns over investment horizon, year effects, etc.

Comparison Tests

This table presents comparison of means and medians tests for high (>20) versus (<20) number of hours that the advisor(s) spent with the firm. Percentage changes for sales are for the subset of firms (48 in total) that had sales in 2008.

Variable

Advisors >20 hours Advisors <20 hours Comparison of

Proportions

Comparison of Means

Comparison

of Media

ns

Number of Observatio

nsMean Median

Number of Observations

MeanMedia

n

Sales 08/09 28106.67

472.321 20

360.915

35.417-

104.282***

P<=0.000***

Financing 53 0.755 1 48 0.583 1 1.834*

Patents 53 0.887 1 48 0.542 13.870***

Strategic Alliances 53 0.472 0 48 0.375 0 0.981

Key findings from econometric tests

• Additional advising hours greater sales– Regardless of controls

• Move 10-11 hours increases sales by 13.3% • Move 20-21 hours increases sales by 6.8%

• Additional advising hours higher probability of financing– Regardless of controls for endogeneity

• Accounting for the possible endogeneity of hours spent:– Hours spent do not statistically increase the probability of

patents or alliances

Take-aways specific to the case study

• This program could be considered cost effective means of influencing SOME entrepreneurial outcomes:– firms had raised $6,545,000 in financing– The program costs were totaled at $662,360– Ratio of financing raised per dollar of cost is $0.10

• What's working here?– Selecting firms with high potential– Intensive advising rather than minimal advising

But are public investments in advising widely warranted?

Advisory Services

? ??

Conclusions

• Ideally, we need more research with larger panels and equal attention to data collection

• Record keeping (and likely advice) differs across advisors / programs

• Need to be willing to target selective firms; can't expect advising to pay off equally for all types of firms

• Need to recognize that minimal advising is likely to have minimal payoffs;

• UP TO A POINT, more is better