by Christoph Endenich
, 23.06.23
With ESSEC Knowledge Editor-in-chief
Community is key – in business as in life. This applies to startups as well, as they benefit greatly from being part of an entrepreneurial ecosystem. These ecosystems can provide tangible benefits, like office space and funding, or less tangible aids, like mentorship and community-building. In new research published in Top-5 accounting journal Contemporary Accounting Research, Christoph Endenich (ESSEC Business School) and Sebastian D. Becker (HEC School of Management) explored how entrepreneurial ecosystems influence management control systems (MCS – the tools and processes used for steering companies and supporting decision-making such as Key Performance Indicators, incentive systems or product development milestones) in startups. Their findings show that these ecosystems tend to amplify the Lean Startup philosophy over a more traditional business plan philosophy (1).
The Lean Startup philosophy refers to an approach that “prioritizes experimentation over elaborate planning, customer feedback over intuition, and interactive design over traditional ‘big design up front’” (2) . Ventures employing this philosophy aim to shorten product development time and rapidly figure out if a business model is scalable using a “build-measure-learn” (BML) feedback loop: build a minimal viable product (MVP), see what works (or what doesn’t), learn from your mistakes and successes, and on to the next one. Originating in the Silicon Valley and popularized by Eric Ries, it’s now the dominant entrepreneurial philosophy all over the world.
The researchers studied early-stage startups in the greater Paris region, finding that the Lean Startup philosophy has had a major impact on their management control systems (MCSs). These startups were embedded in an entrepreneurial ecosystem composed of business angels, venture capitalists, business school professors and higher education institutions, incubators, and more. In short, it’s a community that encourages collaboration and sharing experiences.
As Dr. Endenich explains : "This ecosystem acts as a meso-level mediator between macro-level ideas – such as the Lean Startup philosophy from the Silicon Valley – and entrepreneurs on the micro-level, shaping how the latter run their ventures." The Greater Paris ecosystem in particular has extensive public funding and support, making it a fruitful ground for entrepreneurship.
To gain a better understanding of how this ecosystem impacted embedded startups, they conducted several dozen interviews with both key ecosystem players (such as business angels, venture capitalists and higher education figures), Lean Startup thought leaders, and founders and managers of the startups in question. As these startups were typically around two years old, the management control systems being studied were the very first they put in place.
These interviews revealed that incubators had a central role in the ecosystem, connecting startups and, according to interviewees, helping startups become “more efficient” and “scale up very fast.” The incubators also promote the fact that failure should be at minimum accepted and at best, valued – at the time a rather novel phenomenon, as many of the interviewees noted that such views were deemed atypical for the traditional French entrepreneurship environment, and as one noted, these views foster “startups that have trajectories that we didn’t see before.” The majority of the interviewees either directly or indirectly mentioned the Lean Startup philosophy and noted that it was encouraged by the ecosystem. Dr. Becker summarizes: “The Lean Startup is clearly the dominant entrepreneurial philosophy of the ecosystem. It is widely adopted by its startups and internalized by its entrepreneurs.” However, Dr. Becker and Dr. Endenich add, the Lean Startup is not a guarantee for success – most startups will still fail – but that hasn’t impeded its popularity!
How has this happened? The researchers identified three key mechanisms:
● Regulative mechanisms: rules, procedures, incentives and sanctions that enforce certain conditions and practices. In this instance, the incubators adopted the Lean Startup mindset and expected incubated startups to do the same before being admitted (e.g. by asking for minimum viable products and traction metrics). Also incubator managers track startups’ development closely with the expectation that they will achieve certain KPIs. Additionally, many of the incubators offered incentives that coerce startups to adopt management control systems that are in alignment with Lean Startup ideas, such as specific product development software and other tools and resources.
● Normative mechanisms : the values and norms that become social obligations. In this study, this took the form of educational and training curricula that instilled certain values and that were diffused through mentors, coaches, training and events. What’s more, ecosystem actors tended to disparage traditional business planning; as one participant said, “You need to drop any belief in planning systems…it is a wrong concept.” The startup actors responded eagerly, adopting the values of the ecosystem mentors as they wanted to do things differently than their entrepreneurial predecessors. There was also a specific set of lingo filled with Lean Startup buzzwords, like pivot vs. persevere, MVP, and traction, reinforcing the Lean Startup philosophy.
● Cultural-cognitive mechanisms: these are shared understandings, contributing to a distinctive identity shared by the members of the entrepreneurial community. Here, this meant that there was a feeling of solidarity and ongoing peer-to-peer knowledge sharing of best practices.
Together, these mechanisms reinforce startups’ tendency to adopt Lean Startup practices.
Lean Startup and MCSs: a recipe for success… or problems?
The researchers found that all the startups studied not only had MCSs in place but that they considered these essential for developing a scalable business model, since MCSs provide valuable information.
Namely, MCSs provide data on customer KPIs – needed for the “learn” part of the “build-measure-learn” cycle. The Lean Startup practices might, however, mean that detail and nuance are sacrificed in favor of speed, and that startups become more and more similar. Further, as one participant notes, the Lean Startup methodology “is not a guarantee that people are asking themselves the right questions.” Startups might focus on the wrong market or the wrong product, wasting time going through the build-measure-learn process. This can also make startups deviate from their original values and vision and lose sense of their initial goals.
MCSs are also geared towards accelerating the BML loops, particularly in key entrepreneurial areas like product development, sales, and customer relationship management. In other words, they structure and accelerate a flexible learning process – useful when funds and time are limited resources. Even the software available is geared toward this. It’s a fine line, though: startups need to monitor progress and quickly pivot to a new business model, meaning their MCS must be flexible – something that in research is called an ‘enabling’ MCS. In these startups, the MCSs develop gradually given the needs at each startup’s development stage and their scarce resources. MCSs are also characterized by being rather horizontal and less vertical as in more mature companies. Their effects are good and bad, since they can not only facilitate transparency but could also be used to control work progress and result in significant stress for startup employees.
In sum, MCSs help boost accountability, transparency and collaboration, and are shaped according to institutional pressure from surrounding actors in the ecosystem which amplifies certain pressures and processes through the mechanisms described above. While startups might be quite different in terms of their product and the space they operate in, this study suggests that they manage in surprisingly similar ways due to their surrounding entrepreneurial ecosystem.
References
1. Becker, S. D., & Endenich, C. (2023). Entrepreneurial Ecosystems as Amplifiers of the Lean Startup Philosophy: Management Control Practices in Earliest‐Stage Startups. Contemporary Accounting Research, 40(1), 624-667.
2. Blank, S. (2013). Why the Lean Startup changes everything. Harvard Business Review, 91 (5): 63–72.
