Luck is important for new businesses

A new company that is lucky and manages to secure a larger contract can often experience major positive long-term effects.

Many years later, such companies have on average 20 per cent higher turnover than similar entrepreneurial companies that only just lost out on contracts.

The ‘lucky’ companies also have an average of 20 per cent more employees.

Researchers at the Department of Economics at the University of Bergen have looked at the winners of tender offers by the Norwegian Public Roads Administration.

Winning such competitions is largely down to offering the lowest price. Since others’ offers are kept secret, luck is important to reach the desired price offer.

A great opportunity to learn from the start

“Companies that are lucky in these tenders early in the company's life experienced positive consequences of this more than five years later,” Professor Hans K. Hvide tells sciencenorway.no.

But what is it that really creates such long-term effects?

“Young companies that get to start with slightly larger projects simply become more efficient,” Hvide says. “They can use this increased efficiency to secure growth in several contexts, both in terms of improving existing products and in terms of developing new products.”

Completely random who bids 7.5 or 8 million

Hvide emphasises that the findings are not driven by companies that have first been awarded one contract by the Norwegian Public Roads Administration, receiving even more.

“It's quite coincidental who offers NOK 7.5 million and who offers NOK 8 million to secure a contract with the Norwegian Public Roads Administration,” he says.

Whoever hits the right price, gets the contract.

And this is where Hvide and his colleagues believe that it is largely a matter of luck.

The story of Microsoft

Economics researchers are concerned with what makes some young companies do well - while others do not.

The story of the company Microsoft is a classic in this context. It began with Paul Allen proposing to Bill Gates in 1975 that the two create a computer program.

Surprisingly, they made it work. And they managed to sell it, an event that many consider to have been pivotal for Microsoft’s later growth at record speed.

More profitable

“Here in Norway, we see that the entrepreneurial companies that emerged victorious from tender offers by the Norwegian Public Roads Administration, several years after the contract work was completed, are far more profitable than entrepreneurial companies that came second in similar competitions.

“We therefore believe that this is largely about learning-by-doing,” says Hvide.

“Companies that are lucky in the beginning gain more experience and become more productive. They get the opportunity to hire better-qualified employees, participate in more demanding tenders in the private market, and they get the opportunity to grow even more.”

Interestingly, the researchers in Bergen see no similar effect if more mature companies win the same kinds of tender offers by the Norwegian Public Roads Administration.

Control

Many companies that are owned and run by an entrepreneur get into trouble if the person in question is unable to let go of their control, according to research from the Norwegian School of Economics (NHH) (link in Norwegian).

“It can often be wise to give up control and bring in people with better, and other experiences. Entrepreneurs are often creative, engaged and know the field, but may not be as good at running the company,” says researcher Jarle Bastesen.

Gender equality has not reached the entrepreneurs

Only 20 per cent of those who start joint-stock companies are women and only 4 per cent of new technology companies are owned by women, a report on Norwegian entrepreneurs n 2019 showed. Sciencenorway.no wrote about this in the article Equality hasn’t reached entrepreneurs.

“The numbers are alarming. Having worked on this over time, I was even surprised at how great the imbalance is. We risk losing a huge amount of innovative expertise, because women entrepreneurs are so poorly represented,” communications adviser Vidar Korsberg Dalsbø at the bank DNB said in 2019.

“We believe that we have to think long term to get more female entrepreneurs, and that we need to start with how we raise our children. Already from early school age on, boys are encouraged to take chances, while girls are encouraged to make safe choices,” he said.

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Translated by Alette Bjordal Gjellesvik.

Read the Norwegian version of this article on forskning.no

Reference:

Hans K. Hvide and Tom G. Meling Do Temporary Demand Shocks Have Long-Term Effects for Startups? SSRN, 2020.