Startup Firms' Growth, Management Control Systems Adoption and Performance

Abstract

Startup firms face a significant managerial challenge when they grow beyond the boundaries of informal interactions. This transition point has often been identified with a significant crisis in the growth path of these firms. An important aspect of this transition is the adoption of management control systems that leverage top management attention and provide the infrastructure to scale up the business model. Using a multi-method, multi-case field research design in a sample of 78 startup firms, we examine the relevance of the adoption of financial systems compared to other management control systems. We find that financial planning -including cash budget, operating budget and sales projections- is the first set of systems to be adopted. We also look at the association between the adoption of management control systems and startup firm growth. We model this association using a simultaneous equation specification to capture the theoretical arguments that posit the endogeneity of these variables. We find a positive and significant association in both equations among these variables. We further examine whether the often argued CEO replacement at this transition point is associated with the level of adoption of management control systems. We find that CEOs that have adopted fewer systems have shorter tenures. Taking advantage of the intimate knowledge that venture capital investors have about the management processes (and management systems, in particular) of the firms they invest in, we examine the association between company valuation and the adoption of management control systems. We find evidence consistent with this association. Finally, we examine the association between the adoption of financial planning systems and the adoption of strategic and human resource planning systems.

Keywords: management control systems, formal systems, professionalization, CEO tenure, startups