KfW/ZEW Start-Up Panel – New Instrument for Analysing Firm Foundations

The Centre for European Economic Studies (ZEW) in cooporation with the KfW Bankengruppe (KfW banking group) and the Business Information Service Creditreform presented a new panel of business start-ups. Up to now, the long-term development of firm foundations has only been studied peripherally. The scientific knowledge about the dynamics of high-tech start-ups was especially underdeveloped. In order to set frameworks for company founders up, it is essential to focus on an empirically established, extended, and continually updated state of knowledge.

The KfW/ZEW Start-up panel is the first instrument to meet these conditions. It examines the development of newly founded firms over a period of several years and provides a wide variety of company- and staff-specific information. The annual study includes 6,000 firms and is based on the so-called economically active start-ups*. For the first time it is possible to conduct industry-specific analysis for the small but economically highly important group of technology-intensive start-ups by relying on the specific structure of the study. The KfW/ZEW Start-up panel, which will be conducted, analysed, and published annually, is supposed to provide a platform of information for start-up promotion policy, spurring the research into business start-ups in Germany.

When the start-up panel was introduced the first results of the study were presented by Dr. Norbert Irsch, chief economist of KfW Bankengruppe, Prof. Dr. Helmut Rödl, vice-chairman of the supervisory board at the Creditreform AG and Prof. Dr. Dr. h.c. mult. Wolfgang Franz, ZEW president and member of the German Council of Economic Experts. The first evaluation was realised from May to August 2008 taking company foundations from the period of 2005 to 2007 into account.

At the time of foundation, young firms provided on average 2.4 full time occupations. Projected on the total number of 240,000 economically active firms this equals about 600,000 full time occupations per foundation period (average of the years 2005 to 2007). It further revealed that start-ups entering the market with innovative and technically novel products and services do so with more staff and that they were faster-growing than other start-ups. Furthermore, the founders’ human capital in the form of qualification and entrepreneurial experience takes a positive impact on both the size of the start-up and the increase in staff.

In order to stand out from competitors and to find a gap in the market, almost 70 per cent of the start-ups intend to offer high-quality products and strongly respond to their customers'demands. Many of the young firms combine those two strategies to form a quality-oriented niche strategy. Only 34 per cent consider lower product prices to be a competitive advantage. Especially start-ups continually conducting R&D tend to work on a product differentiation or niche strategy rather than a price strategy. "Start-ups are not very likely to win a cost competition with established firms – the long-established competitors clearly gain the advantage. Young firms are therefore recommended to establish themselves with customised products and services. They can then step by step build up an extended customer base working on the basis of such niche markets", says Prof. Franz.

95 per cent of the firms founded in 2007 need financial resources to start business operations, with the majority (56 per cent) additionally using existing material resources, such as a private car. However, in many cases only few material and financial resources were required. About two-thirds (62 per cent) of all start-ups contribute their own sources (savings, reserves). Especially high-tech start-ups in the manufacturing sector use their own resources to a high degree (71 per cent). "Overall the willingness of founders to self financing and financial commitment is surprisingly high and therefore a positive sign. Considering the current economic forecasts, the ability of founders to make their business idea work with their own financial resources is gaining more and more importance", Prof. Rödl pointed out. Only around 35 per cent of all economically active start-ups also rely on external financial resources, with the volume of funds reaching an average of around 32,000 euros. The lion's share of external funding was made up by long-term loans from banks and savings banks.

Use and volume of the different financial resources differ considerably within the sectors. For instance, high-tech start-ups using external financial funds very often chose the option of private equity capital (3 per cent of all high-tech start-ups vs. 1.5 per cent of all non-technology-intensive start-ups). "This shows", says Dr. Norbert Irsch, "that even among high-tech start-ups only a small minority takes the option of private equity capital. However, a 19 per cent of the total need of external funding in the high-tech sector is made up of equity capital and is especially important to bigger start-ups with a high focus on R&D."

"Already in the first year the KfW/ ZEW Start-up panel, with a degree of detail and wide variety of sectors, provided diverse and interesting information", Irsch continued. "Updating the database annually will enable us to focus our promotional policy to a higher degree on the developments in the field of business formations."

*Economically active start-ups: new firms gathered by Creditreform. Those firms are either registered in the German Commercial Register, or fell back on borrowed capital, business loans, or similar external financial funds or are in another way actively involved in the economic process.

For further information please contact

Dr. Michaela Niefert, Phone: +49/621/1235-171, E-mail: niefert@zew.de