Technological Forecasting & Social Change 157 (2020) 120090

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Technological Forecasting & Social Change

journal homepage: www.elsevier.com/locate/techfore

The role of costs in business model design for early-stage technology startups T
Raffi Gabriel Chammassian, Valerie Sabatier
⁎

Grenoble Ecole de Management, 12 rue Pierre Sémard, 38000 Grenoble Cedex 1, France

ARTICLE INFO ABSTRACT

Keywords: Beginning in their early stages, technology start-ups (TSUs) develop several business models. Costs are often
Business model perceived as a constraint to business model innovation. Challenging this assumption, we question the role that
Costs costs play in business model design. We analyzed twelve TSU case studies from Switzerland, France, and the
Technology startups USA. The results indicate that TSUs develop three types of business models that are technology-driven, market-
Strategic management controls
driven, and exit-driven. Costs act as enablers, moderators, and mediators. With a portfolio of business models,
Business model portfolio
Business model design
costs play a mediating role. Finally, the role costs play in the business model design phase changes firm value
capture mechanisms, potentially enhancing the firm's value. This research makes the following contributions: (1)
Technology-, market-, and exit-driven business model portfolios appear to be heterogeneous among TSUs. (2)
Costs play enabler and mediator roles in addition to the traditional moderator role. We add to the literature by
focusing on the new economy (rather than Porter's cost leadership strategies) through an optimistic and in-
vestment-driven approach.

1. Introduction has been overlooked in strategy research. Literature on business models

addresses costs in general or superficial ways, such as in estimating new
Technology startups (TSUs) have been a bulwark of business model product or service cost structures (i.e., goods or services sold) and de-
innovation, the commercialization of innovation, employment creation, termining profitability (Chesbrough, 2010; Johnson et al., 2008;
and economic growth. However, rather than technology, intellectual Zott and Amit, 2010).
property (IP) or public policy, TSU survival and success is based on the Costs have been addressed by Anthony (1952, 1965), the founding
mindset of TSU entrepreneurs, who translate technological concepts or principal of modern management accounting, as controllable input in
ideas into narratives that researchers often refer to as business models industrial research organizations. With the dominance of US-based
(Furnari, 2015). As a cognitive device (Baden-Fuller and Morgan, 2010; corporations and the drive for cost efficiency and profitability, the focus
Mikhalkina and Cabantous, 2015), business models have played a role had been to cut costs, save, reduce, and optimize (Chesbrough, 2010).
in defining and positioning TSUs’ plight as part of their evolving nar- Porter (1980, 1985) introduced the concept of cost leadership as a
rative to accelerate value creation and value capture by converting strategic advantage. In this article, costs are defined as “a value we
intellectual capital into economic value (i.e., monetization). In early- assign or the amount we (are willing to) pay to acquire, produce, or
stage TSUs, variations of business models emerge. Some entrepreneurs maintain an asset (whether intangible or tangible), or to purchase a
manage dual (Markides and Charitou, 2004), parallel (Gruber, 2010), product or service for a perceived return” (Chammassian, 2016). A cost
or portfolios of business models (Sabatier et al., 2010; Aversa et al., is a value that may be either real (i.e., stated or paid for) or perceived
2015; Snihur and Tarzijan, 2018) to balance risks with promises made, (i.e., opportunity cost) to acquire an asset, product, or service. Pur-
explore technology-related possibilities, and establish or improve their chased assets, for instance, are recorded in the balance sheet on a “cost
strategic legitimacy (Aldrich and Fiol, 1994; Shepherd and basis.” An expense is an “incurred cost” that must be captured on the
Zacharakis, 2003; Tornikoski and Newbert, 2007; Zimmerman and income statement, commonly known as the profit and loss (P&L)
Zeitz, 2002). Having a portfolio of business models helps not only to statement.
alleviate risk, as in contingency planning, but also to identify new op- There appears to be a misconception about costs vs. expenses and
portunities for expansion or scaling (Rong et al., 2018), along with their application. In strategy, management of technology, and the ac-
increasing firm value. Although there has been extensive research on counting research, scholars refer to costs as more of an expense that is
business model components, the issue of costs in business model design captured on income statements, such as cost of goods sold, transaction

⁎
Corresponding author.
E-mail addresses: [email protected] (R.G. Chammassian), [email protected] (V. Sabatier).

https://doi.org/10.1016/j.techfore.2020.120090
Received 24 January 2018; Received in revised form 28 February 2020; Accepted 23 April 2020
0040-1625/ © 2020 Published by Elsevier Inc.
R.G. Chammassian and V. Sabatier Technological Forecasting & Social Change 157 (2020) 120090

costs, or marketing costs (i.e., the Porterian cost leadership model). In costs from the management accounting literature. Section 3 details the
management of technology (MoT) literature, reducing costs (such as research design and methodology. Section 4 presents the results of our
transaction costs, cost of information technology, and manufacturing contribution to research on business models, which lies in its identifi-
costs) have been viewed as a value extraction or an output of innova- cation of the different cost roles in business model design, and our
tion (Kleis et al., 2012; Le and Suh, 2018). The business model litera- contribution to the costs literature.
ture alludes to cost assumptions as value propositions that must be low
enough for the startup to survive, for customers to accept the value at 2. Theoretical foundations
lower cost to them, and for revenue to exceed expenses for improved
margin and profitability (Ehrenhard et al., 2017; Le and Suh, 2018; 2.1. Business models
Schuelke-Leech, 2018). From an accounting perspective, this categor-
ization usually applies to income statements. The business model lit- Business models have been the core narrative in defining and po-
erature lacks strategic implications for how cost investments as an input sitioning TSUs in their effort to accelerate the value-creation process
to business models’ value-creation process can affect desired outcome (Amit and Zott, 2012; Doganova and Eyquem-Renault, 2009;
through value capture for various stakeholders, such as founders, in- Magretta, 2002; Teece, 2010, 2018). The process of developing business
vestors, customers, and potential TSU acquirers. The importance of model narratives evolves in the business model design phase, as do the
costs as an input to value creation is even more amplified with early- differing variations of emerging business models (Chesbrough, 2010;
stage TSUs for which sometimes products and services do not exist or Doganova and Eyquem-Renault, 2009; Snihur et al., 2018; Zott and
have not yet been identified by the firm. This means that the firm Amit, 2010). A business model as a model and cognitive device focuses
cannot capture these investments on a financial statement. Even so, the on firm value creation and value capture processes (Baden-Fuller and
captured value may not correspond to intended value. Nonfinancial Morgan, 2010; Teece, 2010). It addresses fundamental questions such
information, such as intangible assets or intellectual capital, is much as the following: “Who is the customer?”, “What value is created for
higher with early-stage TSUs, although it decreases as TSUs mature that customer in his or her interaction with the firm?”, and “How is this
(Brinckmann et al., 2010; Hand, 2005; Smith and Cordina, 2014). value monetized?” (Baden-Fuller and Haefliger, 2013; Baden-Fuller and
The literature on costs has attempted to address costs’ importance Mangematin, 2013; Baden-Fuller and Morgan, 2010; Matzler et al.,
through strategic management accounting and strategic cost manage- 2013). These questions could lead to opportunities in which a single
ment with forward-looking financial statements (Bromwich, 1990; business model may not be enough (Bojovic et al., 2018), and several
Shank, 1996; Shank and Govindarajan, 1993). However, these studies business models may emerge to simultaneously address various stra-
have been limited to mature industrialized companies and new product tegies or market opportunities or to be used as a contingency
development, where, their perceived approach has had limited impact (Gruber, 2010; Markides and Charitou, 2004; Snihur and
on results (Aluko et al., 2010; Taipaleenmäki, 2014). Therefore, the Tarzijan, 2018).
literature on costs does not address costs’ strategic role in new company Within early-stage TSUs, business models play an important role in
development with varying and alternative business models. The fol- determining the rationale of TSU entrepreneurs’ thought processes in
lowing research question then emerges: What role do costs play in the positioning and the directional approach the TSU is taking. This is
business model design in early-stage TSUs? usually the pre-revenue, experimental, market engagement, or new
To investigate this research question, we performed qualitative re- company development stage, in which TSUs are engaged in business
search consisting of multiple case studies of technology start-ups in model experimentation (Wrigley et al., 2016). This is also a period in
Switzerland, France and the United States of America. We identified which the TSU entrepreneurs’ narrative must be convincing enough to
three main types of business models—technology-driven, market- attract investors to finance their projects (i.e., seed capital). This con-
driven, and exit-driven—and characterized the business model portfolio vincing process usually involves both firm value creation through
for each start-up. We then analyzed the role costs play in designing this technologies and innovation capabilities and the firm's value capture
business model portfolio. through exit as a preferred method over growing independently
As theoretical contributions, first we argue that costs play different (Signori and Vismara, 2017) to create wealth from returns on invest-
roles depending on the type and configuration of business model ment. After all, exits are one of the most important and essential parts
(technology-driven, market-driven, or exit driven; single business of the entrepreneurial process (DeTienne, 2010). When it comes to
model or a portfolio of business models): costs as enablers of tech- venture capital (VC) investments, exits are the most important criteria
nology-driven business models, moderators for market-driven business to reap returns on investments (Mahto et al., 2018). However, firms
models, and mediators for exit-driven business models. In case of a make investments in costs with the majority developing intellectual
business model portfolio, costs play the role of a mediator. The enabler capital, such as human capital, organizational capital, and relational
and mediator roles represent a departure from Porter's notion of cost capital (Beattie and Smith, 2013; Hormiga et al., 2011).
leadership (i.e., the moderator for margin and profitability) and creates
a more investment-oriented value for firm value capture. The differ- 2.1.1. Business models and costs
entiating enabler, moderator, and mediator roles of costs have not been Within the business model literature, the reference to costs is em-
adequately studied in the literature. Second, from a costs perspective, bedded, albeit limited to economic logic and within a value chain
we argue that costs can be recognized on the balance sheet as invest- context (Chesbrough and Rosenbloom, 2002; Magretta, 2002). There
ments in intangible assets that are amortizable as long-term assets using appears to be a general assumption that manufacturing and transaction
the fair value principle, since the intent is eventual exit through trade costs must be low enough or cost savings adequate enough for custo-
sales. mers’ acceptance (Ehrenhard et al., 2017; Howell et al., 2018; Le and
In terms of managerial contributions, entrepreneurs, managers, and Suh, 2018; Schuelke-Leech, 2018) to make a sufficient margin to be
educators should also focus on costs as enablers and mediators in the profitable (Amit and Zott, 2012; DaSilva and Trkman, 2014; Zott and
value-creation process, with future-oriented returns on cost investments Amit, 2010). Firms review costs within the production process and sell
in mind as value capture. This research also suggests that a mediating a product or service to achieve improved margins and profitability
role would enhance the firm's potential value and ultimately, the future (Johnson et al., 2008). These are market and profit and loss (P&L)
value capture for high-technology start-ups. driven. The business model literature lacks a focus on costs from a
This paper is organized as follows. Section 2 presents the theoretical strategic investment perspective, especially for businesses that require
foundations related to business models and costs and the inclusion of longer-term incubation and development. Since value creation with
costs in both the business model literature and strategic perspectives on many early-stage TSUs may not be associated with marketable

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R.G. Chammassian and V. Sabatier Technological Forecasting & Social Change 157 (2020) 120090

products, services or revenue, costs by default should have a different complexity described above, there are higher levels of uncertainty and
meaning. ambiguity where predicting growth is very difficult in the absence of
Overall, we take costs for granted in the business model literature historical precedence (Coad et al., 2016). Hence, TSUs use diverse ways
and cover it with a broad brush in the value-creation process. Zott’s of developing their innovative capabilities through exploration and
et al. (2011) review of business model papers published since 1995 exploitation (Bojovic et al., 2018; Jensen and Clausen, 2017). For ex-
examined “the concept through multiple subject-matter lens” (p. 2); the ample, university spinoff TSUs by new graduates and academic en-
word cost is mentioned 18 times (over 1177 research articles). The role trepreneurs attempt to align value creation of technological innovation
of costs is mainly addressed as cost structure in relation to revenue and with markets as well as investors while developing managerial com-
profitability (i.e., revenue stream/cost structure) and as in Porterian cost petencies (Lehoux et al., 2014, 2017; Miozzo and DiVito, 2016). Such
leadership (see below for further discussion). Although the authors spinoffs are usually based on patented technological discoveries seeking
conclude that many scholars from different fields address business new markets as well as the potential to be acquired by a bigger market
models to explain different phenomena, the only collective reference to player. Making the spinoff exit-worthy not only is designed to satisfy
costs made by the authors is that of the “‘business model as cost/rev- investors’ needs, but also becomes an active strategy for growth by
enue architecture’ (for technology management and innovation scho- utilizing the expanded resources of the acquiring company instead of
lars interested in explaining the economic mechanisms that allow a firm growing organically (Henkel et al., 2015; Lehoux et al., 2014). This is
to commercialize technological innovations)” (p. 22). particularly true when TSUs have complementary technologies and
marketable product potential that require larger sums for investment,
2.1.2. Business models and management of technology advanced manufacturing capabilities and marketing skills to grow, and
There is a vast array of literature addressing management of tech- would be a good fit for the acquiring company (Andersson and
nology (MoT) (Ratinho et al., 2015). We specifically review MoT from Xiao, 2016). However, literature is scant about linking such deliberate
the new economy startup perspective. (albeit unpredictable) MoT approaches to costs and business models
In order to address value creation and value capture for customers which incorporate technologies, markets and exits. In most cases, re-
and investors alike, it is imperative to link technological innovation to ferences to costs are about decreasing (cost of IT), minimizing (manu-
business models (Baden-Fuller and Morgan, 2010; Chesbrough and facturing costs), and reducing (transaction costs) to extract higher eco-
Rosenbloom, 2002; Sabatier et al., 2012; Teece, 2010). Business models nomic value.
mediate between value creation and technological development to
reach reasonable value propositions through an iterative process of
business model dynamics and formulation (Rong et al., 2018). Whereas 2.1.3. TSUs and portfolio business models
speed of development and growth depends on the paths TSUs take, the Many TSUs begin their existence through either a university-based
assistance they receive, and the ecosystems they operate in Miozzo and technology or innovation or IP such as a patent, a technological con-
DiVito (2016). cept, or potential market application. This is a strategic stage of posi-
The advent of the sharing economy has had an immense impact on tioning the TSU in which the firm continues to determine its direction
MoT, leading to diverse business models with heavy reliance on mul- through experimentation, R&D, and exploration (Bojovic et al., 2018).
tiple technological inputs, peer-to-peer interactions, and varying plat- Systematic thinking about business model design is crucial to gen-
forms for collaboration (Muñoz and Cohen, 2017). Such platforms have erating viable business models for new technologies (Snihur et al.,
also evolved from granting access to suppliers to develop com- 2018). At times, there may be an identified product or service for which
plementary components, to completely giving up control of the plat- there may be a market and monetization opportunity. Therefore, stra-
forms to component suppliers to be more innovative (Boudreau, 2010). tegically, early-stage TSUs could either have technology-driven busi-
In parallel, future potential customers, users, and intermediaries ness models, market-driven business models or both (Habtay, 2012;
have provided further indirect inputs or drivers to MoT. These include Zott and Amit, 2010). As TSUs adapt their discoveries and experi-
acceptance of the technology, social acceptance, demand for privacy, mentation to identify value creation and value capture opportunities
safety and security features, and the trust factor of these platforms through their technology landscapes (Tierney et al., 2013), they may
(Le and Suh, 2018). They have not only impacted firm strategies and also identify contingency-based business models either as a plan B to
market behavior, but also changed the way people think, expect, and alleviate risks for failure management or competing separate parallel
interact through social networks (Schuelke-Leech, 2018). Consumers of models that are discovery-driven for opportunity management
technology expect improved experiences and additional services rather (Gruber, 2010; Markides and Charitou, 2004; Van de Ven et al., 2013).
than pure product consumption – a move towards specific and targeted Such dual or parallel business models may lead to higher innovative-
benefits-only services, what Frank et al. (2019) call servitization of ness (i.e., firm value creation) especially when commercializing uni-
product-driven industries. Hence, a modularized technology-service con- versity-driven research (Clausen and Rasmussen, 2013) and improved
version have become more effective than the traditional manufacturing- performance benefits (i.e., firm value capture) by identifying various
oriented MoT focusing on technology fusion (Kodama, 2014). Such market opportunities even before market entry (Gruber et al., 2008,
drivers have also led to the requirement of multiple technologies as 2013).
inputs in order to generate desired innovation outputs. This has up- Sabatier et al. (2010, p. 432) define a portfolio of business models as
ended the traditional single technology platform as baseline inputs for different ways a firm delivers value to its customers to ensure both its
product innovation, having a fundamental effect on MoT processes and medium-term viability and its future development. Also referred to by
outputs, such as technology road mapping. This paradigm shift has researchers as business model configurations (e.g., Aversa et al., 2015),
forced companies to use technology differently with new business business model portfolios may build on synergies between business
models and approaches, such as using a broader technology landscaping models (Sabatier et al., 2010) or allow the exploration of new oppor-
approach instead of road mapping (Tierney et al., 2013). tunities while maintaining an established business model (Øiestad and
The use of information technology combined with R&D has con- Bugge, 2014). The complexity of managing a business model portfolio
tributed to knowledge production and innovation outputs that are during design (Snihur and Tarzijan, 2018) may call for a different
mostly intangible (Kleis et al., 2012). It has introduced new ways to perspective on costs. The strategic role that costs play when there is
ideas generation and selection, balancing creativity and standardiza- only one business model could be different when there are two or more
tion, and organizational learning in MoT (Argote and Hora, 2017; business models.
Kornish and Hutchison-Krupat, 2017; Shalley and Gilson, 2017).
When it comes to early stage TSUs, in addition to the technological

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2.2. Costs This approach has had several behavioral effects. First, costs have
played a more negative role in business as a key ‘make or break’
The topic of costs has been studied in accounting since the 1960s, moderator of profitability (Cooper and Slagmulder, 1999;
and both academics and practitioners have attempted to determine Gopalakrishnan et al., 2015) that must be constantly controlled and
their importance as a firm's strategic component. Almost all of the de- used for contingency planning (Chenhall, 2003; Simons 1987, 1991).
bates have focused on the context of large, mature industrialized firms Second, the word cost has been used for both the original intent of the
with a predominant focus on new product development from the word as an input (per Anthony's notion) and an accounting expense
management control perspective (i.e., Anthony, 1965, 1989; captured in the P&L (as an output). In other words, costs and P&L ex-
Chenhall, 2003; Jørgensen and Messner, 2010; Simons, 1987, 1990, pense have been used interchangeably, especially in new product de-
1994). velopment (Cooper and Slagmulder, 2003; Gopalakrishnan et al.,
2015). Since we live in a hyper-profitability-centric business environ-
2.2.1. A recent history on costs ment, more people associate costs with the latter than with the former
Anthony (1952, 1965) addressed the notion of costs as having (Richard, 2015).1 Since operating expenses on a P&L statement are an
mainly an input role within various value centers of a firm, which he output, the role of costs became more of a management mantra to re-
called responsibility centers, expense centers, revenue centers, profit centers, duce, control, and save from operations Gopalakrishnan et al., 2015).
and investment centers (1965, p. 26). Each of these centers have unique Therefore, costs’ strategic importance in value creation has been mea-
inputs and outputs “measured in monetary terms for which a center sured mainly through profitability and cash generation lens to improve
manager is responsible” (1965, p. 26). Anthony defined costs as “a a firm's stock price as value capture to appease its shareholders
monetary measure of the amount of resources used by a responsibility (Richard, 2015). Consequently, the general focus on costs in the lit-
center” (1965, p. 195). He concluded that costs can almost always be erature has mainly remained as a problem to address, control, or
used in measuring inputs, but outputs cannot always be measured eliminate its causes in order to extract higher economic value.
monetarily, since other resources are consumed, even though we at- Finally, the vast majority of these studies have been within larger,
tempt to measure outputs in terms of revenue, expense, and cash gen- established, industrialized company settings and with new product
eration (1965, p. 195). Since these centers are managed by people, their development. The Porterian perspective overlapped with the strategic
most important task is to improve efficiency and effectiveness by management accounting debates, which later included the concept of
linking costs to certain standards to determine some kind of measurable strategic cost management as a new addition (Shank, 1996; Shank and
output such as ratio of outputs to inputs (1965, pp. 195–197). This could Govindarajan, 1993). However, because of its complexity, this ap-
be accomplished using specific approaches and tools such as target proach did not gain serious traction, and it could not be adopted as a
costing and activity-based costing (Ansari and Bell, 1997; practical approach relative to the circumstances (Aluko et al., 2010;
Cooper, 2002; Cooper and Kaplan, 1991; Mihm, 2010). Cooper and Taipaleenmäki, 2014). There has been very little discussion in the lit-
Slagmulder (2004) concluded that cost efficiency could apply erature on costs in the new company development environment.
throughout the product life cycle, not just during product design, to
achieve full-cycle cost management.
Since Anthony's initial notion on costs, the debates have continued 2.2.2. Costs in innovative environments
within the context of strategic management accounting, whose original Some studies have addressed management control systems and costs
purpose was to explore competitor analysis. This was a departure from within innovative environments, such as R&D. Anthony (1952) studied
internally focused conventional accounting practices based on histor- costs within industrial research organizations and found that the most
ical data (Simmonds, 1982). Porter (1980) introduced the notion of cost significant cost factors (labor, material, and overhead) are different in
leadership as a strategic competitive advantage to differentiate a firm similar firms. He concluded that people costs are the highest and most-
from its competitors by incurring lower costs; later (1985), the value- reviewed costs in research-oriented firms (p. 81). He determined that
chain model proclaimed that all activities related to a business are a people costs are an input (or an investment) to create improved pro-
chain of events associated with value creation. From the Porterian ducts and hence firm value. However, since these R&D departments
perspective, for a business to have a successful strategy, it must both were experimental, and inputs and outputs often change, outputs are
produce products at the lowest possible costs and control costs con- not controllable. Furthermore, since the “predictability” (a key com-
tinuously at all levels of an organization, including production, mar- ponent of controlling) of desired outputs is set by people, the only thing
keting and non-marketing support functions. From this perspective, that can be controlled is the actions of the people setting outputs (p.
experienced firms must aggressively pursue cost reductions, tighten 47).
cost controls (especially costs associated with overhead or fixed costs), Further studies build the case that as R&D environments are un-
and minimize costs at all levels to become the lowest-cost producer in predictable, input controls (i.e., budgets and plans) are more important
its industry. than process or output controls, for instance, product cost targets
These views of costs became a standard for product development, (Rockness and Shields, 1984). Abernethy and Brownell (1997) noted
efficiency and effectiveness, as well as MoT. The main role that costs that personnel controls are more likely to be effective when there is task
played has been that of a moderator to determine the breakeven point uncertainty, and traditional controls do not work within innovative
through cost-volume-profit (Jaedicke and Robichek, 1964), margin and R&D environments, especially when founding entrepreneurs rely more
profitability (Cooper and Kaplan, 1988, 1991), and competitive ad- on their prior beliefs, personal intuition and controls that form ex-
vantage (Porter, 1980, 1985). Costs need to be reduced, optimized, and pectations than on traditional management control systems
avoided where possible to obtain the highest profitability (Lord, 1996). (Chenhall and Moers, 2015; Parker, 2006). Therefore, subjectivity has a
This view became the modus operandi since the industrial evolution of greater role than objectivity within innovative business environments
the 1980s, with the dominance of large U.S. multinationals and the (Höppe and Moers, 2011). From these studies, we note that costs appear
associated accounting evolution in which the focus has been on growth to play a different role in R&D and innovative environments than in
through accelerated profits reporting and increased short-term divi- traditional industrial companies.2 This role of costs in R&D
dends distribution to appease shareholders (Richard, 2015). Within this
Porterian business model, the view has been all about growing a busi- 1
Richard believes that this has been at the expense or the “exclusion of
ness through top- and bottom-line growth, improving margins and human and natural capital from this systematic conservation of capital” (p. 30).
profitability by reducing, saving, and optimizing costs through a full- 2
Here we use the word industrial companies to refer to manufacturing, pro-
cycle cost management technique (e.g., Cooper and Slagmulder, 2004). duction, sales and marketing.

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R.G. Chammassian and V. Sabatier Technological Forecasting & Social Change 157 (2020) 120090

environments is more of an enabler of value creation (as input and EFRAG et al. (2014) state that business models affect how costs are
investment), than a moderator of profitability. This perspective is treated. In footnote 5, for example, “under one business model, cost is
missing from both the management accounting literature and other used as the measurement basis, and under another model fair value
management disciplines that cover costs in their studies, including accounting is applied with immediate recognition of the gain in profit”
business models. Chenhall and Moers (2015), in their overall analysis of (par. B59). The point being made here is that aside from accounting
management control systems work, suggest that research should di- standards on treatment of costs about whether to expense (P&L) or
versify from a focus on product innovation to innovation research on amortize (balance sheet) and the use of the fair value principle, business
processes and business models (i.e., intangibles) since “innovations model design has an impact on how costs are treated in financial
emerge from the dynamic, adaptive processes of organizations, often in statements under the current rules.6 Therefore, there is an inter-
unpredictable ways” (p. 9). dependency between business model design and the role that costs play
In retrospect, there have been very few studies on costs related to in financial reporting.
new company development within TSUs. The management accounting Financial reporting relies on historical information and manage-
literature has not addressed the notion of costs within the non-product ment accounting is focused more on present and forward-looking
innovation, highly ambiguous and uncertain3 environments statements. Value applies not only to the past (as in financial reporting)
(Weick, 2015) of early-stage TSUs in which there is a constant need to but also to the present (operations management) and to the future (in-
explore, experiment, and recalibrate (especially their business models) vestment appraisal), and it should be distinguished between short-term
when historical precedents do not exist. Technology requires long dis- and long-term7 importance in value creation (Tagoe, 2016). Since there
covery and incubation periods and large sums of investment capital is a lack of historical financial information about early-stage TSUs, both
with no immediate revenue streams, profitability, or returns on in- founding entrepreneurs and investors rely on soft information about a
vestment in sight. None of the studies in management accounting and firm's value creation and value capture potential. Indeed, they utilize
management control systems address costs in business model design as more fair value accounting methods for future valuation and decision-
innovative cognitive devices aside from their role as a moderator in the making purposes (especially to attract financing) than traditional cost
revenue stream/cost structure (Zott et al., 2011). accounting. Hence, they “plant the seeds for the convergence between
management accounting and financial accounting (Taipaleenmäki and
Ikäheimo, 2013, p. 342) where strategic plans and forecasts sets the
2.2.3. Costs, business models, and developments in accounting precedence to future financial reporting – “an ongoing process of
In the past few decades, there has been increased attention paid to managerialization of financial reporting” (Zambon, 2011, p. 9). Busi-
the role that business models play in financial reporting, which is a ness models as intangibles play a mediating role in setting the tone for
function of financial accounting. In 2009, the International Accounting how a TSU intends to create and capture value, which in return es-
Standards Board (IASB, 2019) released the initial draft of International tablishes a financial reporting prerequisite or precedent as to how costs
Financial Reporting Standards (IFRS) 9, which states that all business will be treated: a measurement basis versus fair value accounting or
entities must disclose their business models to determine how to classify both. However, these definitions and cost classification have lagged
their financial assets. Since IFRS 9 did not actually define what is meant behind with firms in the new economy, especially TSUs. Applying tra-
by business models, in 2013, a conceptual framework bulletin was ditional accounting methods to determine financial value undercuts the
developed on this topic by major European actors in the field of fi- value creation and capture potential of disruptive TSUs in the new
nancial reporting (European Financial Reporting Advisory Group economy.
EFRAG, the French Autorité des Normes Comptable ANC, the
Accounting Standards Committee of Germany ASCG, the Organismo
Italiano di Contabilità OIC and the UK Financial Reporting Coucil FRC, 2.2.4. Costs in the new economy
2013)4.EFRAG et al. attempted to define a business model as “the value- With the onset of the new economy, we are in a new phase of post-
creation process of an entity, i.e., how the entity generates cash flows. industrialization with intangible- or knowledge-intensive businesses
In case of non-financial institutions, it represents the end-to-end value- that have disruptive business models focused on innovation and in-
creation process or processes of an entity within the business and tellectual capital that operate a different value creation and value
geographical markets it operates” (par.12). This bulletin was followed capture paradigm (Ciftci et al., 2014; Lev and Zarowin, 1999). This new
by research papers (EFRAG et al., 2014; Tokuga et al., 2013) and economic phase is also marked by highly technology-oriented business
consequently a feedback statement by EFRAG et al. (2014). Although models and the ascendance of non-US-based companies and startups
the development of business models in financial reporting is ongoing, with pop-up startup concepts for which all that is needed is an Internet
costs in financial reporting simply depend on how a company is connection and a credit card (Davis, 2016). These new entrants are
structured as a result of its business model.5 In its research paper, more human-capital intensive and much less physical-capital driven,

3
Weick (2015) defines ambiguous as environments with multiple meaning, (footnote continued)
interpretations, doubts and uncertainties; and uncertainty, as a lack of pre- restated to the market value following the fair value principle, which is $120.
dictability or assured results and outcomes (p. 118). The extra $20 would be recorded in the P&L as a gain or profit. The point being
4
European Financial Reporting Advisory Group EFRAG, the French Autorité made here is that “the nature of an entity's business may affect the measure-
des Normes Comptable ANC, the Accounting Standards Committee of Germany ment of assets, the reporting of profit and presentation” European Financial
ASCG, the Organismo Italiano di Contabilità OIC and the UK Financial Reporting Advisory Group EFRAG, the French Autorité des Normes Comptable
Reporting Coucil FRC, 2013. ANC, the Accounting Standards Committee of Germany ASCG, the Organismo
5
European Financial Reporting Advisory Group EFRAG, the French Autorité Italiano di Contabilità OIC and the UK Financial Reporting Coucil FRC, 2013).
6
des Normes Comptable ANC, the Accounting Standards Committee of Germany Since this paper is not about accounting standards, we will only use this
ASCG, the Organismo Italiano di Contabilità OIC and the UK Financial financial reporting topic to illustrate the convergence of financial (accounting)
Reporting Coucil FRC, 2013 present the simple example of cotton. Two com- reporting and managerial accounting point.
7
panies buy cotton for $100. Company A is a garment manufacturer and Com- In accounting, short-term is considered as less than one year; whereas long-
pany B is a commodities trader. Both entities record the purchased cotton at the term is considered as more than one year. Short-term value creation is im-
price they bought for $100 (i.e., the cost basis). In a month's time, the market portant for survival and for long-term prospects, but not to the detriment of
value of the same cotton increases to $120. For company A, nothing changes in long-term value capture. The role costs play in the value-creation process is
terms of the value of the purchased cotton as inventory on its balance sheet. For very much dependent on the defined value capture and the development of
company B, since it is a commodities trader, the value of the cotton must be capabilities and relationships.

5
R.G. Chammassian and V. Sabatier Technological Forecasting & Social Change 157 (2020) 120090

and invest much more on intangibles than on tangibles (Haskel and creation as it should be a part of business model design. Similar to
Westlake, 2018). They create an atmosphere of learning, training by business model research, the literature on costs does not address stra-
doing, and experimenting, which in return leads to employee commit- tegic references to business models beyond fringe topics, such as
ment and improved financial performance (Mahto et al., 2018). bootstrapping (Mac an Bhaird and Lynn, 2015; Vanacker et al., 2011).
These firms initially rely more on private financing options than on Thus, this paper attempts to answer the following research question:
the desire to trade publicly. For more financial capital-intensive TSU, what role do costs play in business model design in early-stage tech-
such as medtechs and life sciences, this reliance is extended to private nology startups?
VC firms which eventually seek superior financial returns through in-
itial public offerings (IPOs). However, this has come at a higher cost to 3. Methodology
the TSU since they have traded ownership with VC firms at higher
discounted rates in exchange for VC name recognition, networks, and To address the research question of what role costs play in business
expertise for relational capital. Nonetheless, these higher costs are no model design in early-stage technology start-ups, we chose a qualitative
longer justifiable in the new economy due to the hypercompetitive VC approach. In the absence of data and historical financial information on
environment where high VC reputation may not be associated with costs with early-stage TSUs, we found it is best to comprehend TSU
superior post-IPO performance (Mahto et al., 2018). entrepreneurs’ narratives through their perceptions on a case-by-case
In early stages, TSU valuations are based more on their intangibles, basis. The multiple-case approach allowed us to extract meaning and
mainly intellectual capital (i.e., human, organizational, and socio-re- sensemaking from varying perceptions of entrepreneurs operating in a
lational) than reliance on traditional profitability models. They create real world of experimentation (Eisenhardt, 1989; Eisenhardt and
value with their human, social and relational capital through open in- Graebner, 2007; Yin, 2014). These perceptions could only be revealed
novation collaboration to add value through improved partner firm through open-ended, semi-structured questions about TSU evolution
performance (Greco et al., 2016), licensing agreements (Arora et al., from conception to startup and to a certain moment of its existence.
2013), and focused strategic alliances (Hagedoorn and Sadowski, 1999) This allowed us to explore how firms formulate cost strategies within a
with the hope that one day they will be acquired by a larger firm in- business model design, what role costs play within business models (if
terested in knowledge sourcing (Aghasi et al., 2017). any), and the similarities and differences from drawn inferences. These
With TSUs, costs are omnipresent throughout their lifecycle. They cases represented different perceptions of the same topic within the
begin at the onset of the entrepreneur's ideas or antenarratives dynamic of multiple instances that are rich in empirical descriptions of
(Boje, 2001) and carry on throughout the development, the evolution of perceived realities, whether objective or subjective (Eisenhardt, 1989;
business model narratives, and the TSU lifecycle. Whether they are real, Yin, 1994).
perceived, direct, indirect, sunk, fixed or variable, costs are ever-pre- From the collected data, we analyzed the perceptions of 15 TSU
sent. For TSUs, the output of intellectual capital (IC) development costs entrepreneurs from 12 TSUs from various technology domains (see
may be intangible, but the input is cash payments into costs (mainly in Appendix A: Founder and Startup Characteristics for the list of TSUs)
people) and investment in time (Chammassian and Blum, 2018). Tra- and ecosystems in Switzerland (EPFL Innovation Park ecosystem),
ditional costing models, such as target costing (Cooper and France (Rhone valley), and the USA (Silicon Valley) that had survived
Slagmulder, 1999; Mihm, 2010), eventually become irrelevant for such for three years or more. The selection process was conducted randomly
startups, since their costs are mostly driven by human capital through professional networks and company lists after fulfilling the
(Granlund and Taipaleenmäki, 2005). Intangible value will have more criteria mentioned below. Switzerland-based startups, the main group,
relevance to market value or fair value methods than traditional book were randomly selected from the EPFL Innovation Park (EIP) website8
values (Tagoe, 2016). from a list of companies totaling 200 TSUs at the time of the interviews,
There are many factors that influence the decisions and costs asso- with the help of the EIP Director. At least two of these TSUs had a
ciated with TSUs at their early stages, in addition to the ones related to significant presence in the USA. France- and USA-based TSUs as a
MoT in the new economy (Le and Suh, 2018; Schuelke-Leech, 2018). control sample were randomly selected through professional networks
For instance, time and timing play a major role. Conventional logic and congresses. None of the TSUs were known to the authors prior to
shows that whenever there is a transaction or an activity, there is an engagement; nor did the authors have any professional or personal
associated cost (Hope and Hope, 1997). The longer a TSU takes to in- relationships with the selected TSUs and interviewees prior, during or
cubate, develop, and transform technologies into innovative products to after the research. All these TSUs operated in nascent markets in an
market and gain market share, the more transactions it will incur and unstructured world full of ambiguity and uncertainty, where every
thus the higher the costs. These costs are more related to developmental experience counts and contributes to the discovery process, with little
transaction volume over time than the unit transaction costs (that need assurance or ability to predict (Davis et al., 2009; Santos and
to be reduced) covered in MoT literature (i.e., Kleis et al., 2012; Le and Eisenhardt, 2009; Weick, 2015).
Suh, 2018). This may also apply to opportunity costs in terms of risks The reasons for selecting these start-ups as case studies are as fol-
and failure, the emergence of competitive technologies, and returns on lows. First, the start-ups were technology-based in general and did not
investment. For instance, Arora and Nandkumar (2011) consider this as represent any specific sector or domain of technology. We use Coad and
“costly actions,” which are “investments that increase the hazard of a Reid's (2012) broad definition of technology “to capture not only the
cash-out” as well as “the hazard of failure” (p. 1844). Partners and equipment, software or instruments used to produce a good or service
customers may not accept long and costly trials with unpredictable but also the (tacit) knowledge, techniques, organizational methods, etc.
product performance, especially with disruptive technologies used to design, develop and market the products and services by busi-
(DeKinder and Kohli, 2008). Another example is the reference to ex- nesses (and the public and not for profit sector), in cooperation with
perienced entrepreneurs. The literature emphasizes the importance of other actors in the innovation system” (p. 1). The selected TSU tech-
experience as a catalyst for TSU development, advancement and suc- nology sectors ranged from specialized web-based services (such as
cessful exit (Butler and Ghosh, 2015). However, experience comes at a social networking, pharmaceutical company customer relationship
price: experienced people simply cost more, as they are in high demand. management systems, content curation, and K-12 online education) to
Although the general expectation is that investment in such people will more complex technologies, either university-transfer technology IP or
bring better and faster results, there is no guarantee that they will be the expansion of existing technologies into innovations. The latter
successful. However, what is generally a reality is their (higher) costs,
whether or not the TSU succeeds. Therefore, understanding costs is as
much of a fundamental part of comprehending TSU evolution and value 8
https://www.epfl-innovationpark.ch/community/companies/

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R.G. Chammassian and V. Sabatier Technological Forecasting & Social Change 157 (2020) 120090

group included TSUs in medical devices, life sciences or biotechnology, 4.1. Types of business models observed and configurations
and semiconductors. Second, the TSUs came from different countries
and ecosystems. This was also deliberate, to identify any cultural con- Technology-driven business models were R&D oriented, focusing on
text, biases or similarities in viewpoints. Furthermore, TSUs have a developing an emerging technology. TSUs were formed based on a
global impact through their scalability, as the majority of technologies technology, an IP, a university-created patent transfer, or a concept for
today are borderless. Therefore, country or location is not relevant to which marketable uses or a product or services did not exist. They
TSU characteristics, although an ecosystem or habitat (such as a tech- experimented, explored, and discovered adaptive technology uses.
nology incubator) may encourage or hinder development. We are aware People as human capital were the main drivers of knowledge and the
that culture and certain cultural attributes play a role and filter in know-how generation, which led to creating unique processes, cap-
perceptions of costs. The vast majority of the TSUs, however, had cli- abilities, procedures, databases, software, patents, and similar in-
ents, partners, investors, or legal entities in different countries. Third, tangible assets (i.e., organizational capital). The specific knowledge and
all the TSUs had survived for more than three years and the majority competences related to the technology under development were the
had raised significant amounts of equity financing. At the time of the major source of value for the TSU and its customers. TSUs also created a
interviews, the TSUs either continued to survive or exited through fi- unique value through special relationships they built with partners,
nancial harvest, stewardship, and voluntary cessation (DeTienne et al., future customers, unique suppliers, specialized ecosystems (such as
2015), including merger, trade sale, or closure caused by bankruptcy. It technology incubators), universities, and reputation building (i.e., so-
was necessary to have a survival bias to study the TSUs and their cial and relational capital). The value-capture mechanism of this type of
business models’ evolution. The main reason for this approach was to business model was through accumulated intellectual capital and in-
interpret and determine how perceptions combined with the impact of tangible asset orchestration (i.e., balance-sheet driven) to establish
day-to-day realities, changes in circumstances, and business model and strategic alliances and licensing agreements.
strategy evolution over time. Market-driven business models followed the traditional business
The interviewees were all senior leaders, either original founders or models in which the TSU had either marketable products and services
leaders who joined later. We initially interviewed three and two senior from the beginning or a clear focus on developing these products or
entrepreneurs from each of the first two cases, respectively. After the services to cover unmet market needs. Value was created by selling
initial interviews, we concluded that the narratives of different en- products or services. The value capture was through sales and revenue
trepreneurs of the same TSUs were very similar. We then decided to generation, cost leadership, cost optimization, improved margins, and
interview only one senior entrepreneur per TSU. Furthermore, we profitability. Value capture of purely market-driven business models
decided to stop at the 15th interview (12th TSU), since we also thought was initially through product- and/or services sales revenues, margins,
that we had reached a saturation point in which the majority of the profitability, and market share. Financially, the firms were income-
narratives either revealed similar results or did not reveal anything new statement driven.
or novel (Charmaz, 2014). Exit-driven business models are the third type of business model we
The research employed semi-structured interviews in which we observed, in which TSU entrepreneurs began positioning the TSU for
encouraged the participants to discuss openly what actually happened exit from the very early stages of their startups. Even though the exit
and how it evolved to understand the notion of costs within their TSUs’ narrative evolved over time and there was no guarantee that exits
development. We did not introduce the topic of costs at the onset of the would materialize, the TSUs’ exit business model design process began
interviews; this was done only later through generic questions. We di- in the early stages. The focus of this business model was to develop the
gitally recorded, transcribed and analyzed the interviews through TSUs’ perceived value in which the TSU was the “actual product” itself.
qualitative data analysis methods: sorting and synthesizing, in vivo The “material costs” were mainly people costs (i.e., human capital). The
coding, memo writing, and word frequency. Through interpretivism TSUs’ “future customers” were primarily potential acquirers of the TSUs
and induction, we used different methods to understand how TSU en- or acqui-hirers who were interested in knowledge sourcing. Their other
trepreneurs attach meaning to costs in their strategies. These included customers were their primary stakeholders: investors, who were in-
first-cycle coding methods, such as in vivo, line-by-line, and word-fre- itially business angels and potentially private equity or venture capital
quency coding to allow them to grasp how TSU entrepreneurs’ beliefs firms. The key TSU features as a product were intellectual capital,
over time shaped their evolving narratives and their treatment of costs scalability of technology, proof of concept, possible marketable pro-
within business model design (Charmaz, 2014; Saldaña, 2015). We then ducts and services, market share, and growth potential. In our study,
employed QSR International's NVivo 10 Software (NVivo, 2012) to when TSU entrepreneurs treated their startups as a product for exit sale
conduct verbatim or literal coding to preserve the TSU entrepreneurs’ from the start, they experimented with ways to increase their TSUs’
meaning and actual language used for sensemaking. We identified value through their technologies and eventually wanted to find unique
several codes and subcodes and categorized them thematically. Si- and scalable trade sales markets for their TSUs.
multaneously, we used memo writing to capture thoughts, meaning, Among the twelve case studies, we found four TSUs with a single
and sensemaking. Finally, we conducted word-frequency queries business model, four TSUs with a portfolio of two business models, and
through NVivo to analyze word counts and the relationship of words to four TSUs with a portfolio of the three business model types (see
specific topics. Tables 2 and 3).

4.2. Costs as enablers of technology-driven business models

4. Results
As technology-driven business models are exploratory by default,
Our study indicated that early-stage TSUs have three distinct types research and development (R&D) factors and where to invest become
of business models: technology-driven, market-driven, and exit-driven. key strategic decisions. Costs act as an investment in resources and
We briefly present these three types and then detail the role costs play capabilities development, which contribute to technological value
in these business models. In these business models, TSU entrepreneurs creation. In this respect, costs act as an enabler to create value, since
derived value through the eyes of the value beholder. Table 1 sum- they did not have a specific market or value yet given that the tech-
marizes the three business model types, Table 2 shows which case nologies were under development. The entrepreneurs created the TSUs
corresponds to which business model, and Appendix B provides addi- to explore further and to develop additional IP, capabilities and re-
tional quotes from the case studies. sources, and costs were mainly to enable and advance technological
developments. TSU entrepreneurs were able to experiment and

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R.G. Chammassian and V. Sabatier Technological Forecasting & Social Change 157 (2020) 120090

Table 1
Types of business models observed and configurations (Source: compiled by authors).
Type of business model Value creation Value capture

Technology-driven New and emerging technologies, IP, or technological Licensing agreements, royalties, strategic alliances, big data, potential market-driven
concept. products/services, and firm value capture through intangible asset orchestration.
Development of intellectual capital, partnerships.
Market-driven Technological products/services with commercial value. Market share, profit and loss, free cash flow generation.
Customer acquisition, channels and platforms.
Exit-driven Technologies, concepts, IP, R&D pipeline. Development of Attractiveness to potential buyers; trade sale, IPO, acqui-hiring
IC and IP.

innovate. The focus was not cost affordability, but the type of R&D in Table 3
which to invest. Configurations of business models (Source: authors).

“[Our] cost is basically all linked to science and technology and Business models Technology-driven Market-driven Exit-driven
clinical trials. So, it's only in the innovative part, of course, it is
Technology-driven S=3; P=4 P=4
salaries” (Interviewee 4, TSU 2). Market-driven S=1
Exit-driven P=4 P=4 P=4
“Team is core. Team is essential… having a team allowed us to make
sure that we are balanced, in terms of what is important—money, S=Single BM; P= Portfolio of BMs.
market, technology” (Interviewee 5, TSU 2).
Among the TSUs with a technology-driven business model, the sales price and the cost of the product for the patient and the doc-
majority of cost investments were in people (i.e., human capital) whom tors” (Interviewee 1, TSU 1).
the entrepreneurs perceived to be the most valuable intangible asset. Among the 12 case studies, only one TSU had a single market-driven
Investment in people enabled TSUs to develop unique capabilities and business model, but this type of business model was more common in a
organizational capital (i.e., intellectual property), and to forge re- portfolio of business models that included all three business model
lationships (i.e., relational capital) that comprise the TSUs’ intellectual types, such as technology- and exit-driven business models. The only
capital portfolio. single market-driven business model was focused on exploiting a spe-
“I don't think that there is a massive difference between technology cific market niche in the pharmaceutical industry to capture, track, and
and people... People and technology, in a technology start up, are manage the opinions of industry thought leaders, such as doctors, re-
exactly the same” (Interviewee 7, TSU 4). searchers, and pharmacists. As an example, this firm treated costs as a
moderator in creating a high gross margin by outsourcing some of its
“We have extremely high KPI in terms of data processed software developments.
analyzed—KPIs in terms of power of our technology platform.[…]
For me, the main cost is really, in our business, the people […] 4.4. Costs as mediators of exit-driven business models
People is [sic] investment and retention plans is [sic] clearly an
investment for us” (Interviewee 6, TSU 3). In exit-driven business models, costs play the role of mediator to
create and then capture value. In this type of business model, the in-
4.3. Costs as moderators of market-driven business models vestment is in the TSU itself as the “product” for eventual sale, posi-
tioning it to a specific market segment for eventual sale to another
In market-driven business models, costs act as moderators in the player in the marketplace (i.e., acquisition). Cost investments mediate
value-creation process: the firm's focus is on improving product or the process of creating enough enterprise value so that value is captured
service gross margin and thus on profitability or the bottom line. Firms when someone will pay a premium to acquire the TSU.
achieve this through reducing or optimizing manufacturing costs, as well “Set aside moral goals—the will to do good—the real customers are
as improving selling and distribution costs. basically the buyers of the company—Building this company, we'll [be]
“The cost of the product, the cost of production. It's really my focus developing this product so it can interest someone in buying us”
to reduce the costs, because…the cost of the product for the patient (Interviewee 12, TSU 9).
and for the doctors, what they pay and to put a price is not easy... “The amount of acquisition value went to the technology, the plat-
Obviously, if you can reduce the production cost, you can reduce the form infrastructure that we had built, and a certain portion of the

Table 2
Business model type by case study (Source: authors).
Case Technology Technology-driven business model Market-driven business model Exit-driven business model Configurations

1 Medical device ✓ ✓ ✓ Portfolio (3)

2 Biopharmaceutical technology ✓ ✓ Portfolio (2)
3 Web-based content technology and services ✓ ✓ ✓ Portfolio (3)
4 Technologies for unmanned aerial vehicles ✓ Single
5 Technologies for unmanned aerial vehicles ✓ ✓ ✓ Portfolio (3)
6 Software for biopharmaceutical companies ✓ Single
7 Web technologies ✓ ✓ Portfolio (2)
8 Technologies for semiconductors ✓ ✓ Portfolio (2)
9 Microelectronics for health applications ✓ ✓ Portfolio (2)
10 Technologies for biopharmaceuticals ✓ Single
11 Web technologies ✓ Single
12 Web technologies ✓ ✓ ✓ Portfolio (3)

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R.G. Chammassian and V. Sabatier Technological Forecasting & Social Change 157 (2020) 120090

value went to acquire a really amazing team of people that we have follows two notions in the cost literature. First, from a cost account-
assembled.” (Interviewee 10, TSU 7). ability perspective, strategic cost input controls with the technology-
based business model design appeared to be more important than
Among the twelve case studies, none of them had only an exit-
process or output controls (Rockness and Shields, 1984). Second, there
driven business model, but four of them had a portfolio of two business
was a higher reliance on personal intuition and personal controls of TSU
models – technology and exit driven business models; and four had all
entrepreneurs than on traditional management controls (Abernethy and
three types of business models – technology-, market-, and exit-driven.
Brownell, 1997; Anthony, 1965; Chenhall and Moers, 2015). Market-
driven business models follow the traditional cost controls approach
4.5. Costs as mediators in business model portfolios (Porter, 1980, 1985; Simons, 1987, 1990, 1991, 1994). In exit-driven
and business models portfolios, costs play a mediating role in the value
Portfolio business models consisted of technology-driven and exit- creation and capture processes through financial harvest
driven business models (Cases 2, 7, 8, and 9) or included all three (DeTienne et al., 2015) rather than a contingency or a plan B
business model types (Cases 1, 3, 5, and 12). These business models (Gruber, 2010). We found technology-driven, exit-driven, and portfolio
followed the same pattern as technology-driven business models, but business models to be more heterogeneous, with marked differences in
they also had either a dual focus on technology and exit from the be- their typology and approach in value creation and value capture in
ginning, or they may have included a market-driven business model and comparison to traditional market-driven business models. These busi-
a spinoff product or service from the technology to market and sell. ness models follow more intangible- or knowledge-industry trends and
Costs played the mediator role for portfolio business models in this do not follow traditional Porterian (1980, 1985) cost leadership and
value conversion process, and the firms managed them to increase profitability approaches that had been dominant during the second half
value capture in the case of exit. In other words, strategically, costs had of the 20th century. This is our primary contribution to the existing
both a value creation (i.e., input) and a value capture (i.e., process and body of knowledge in business models.
output) element with portfolio business models. In the context of early-stage TSUs, costs play a strategic role, an
“We almost never had revenue by the time we were acquired…. We important common denominator and critical link in the value-creation
always knew what our revenue generation model was, but we never process, from conceptualizing to developing business models to de-
got to the point of having enough traffic to generate any significant termining competitive advantages through investment in intellectual
amount of revenue from any such deal” (Interviewee 10, TSU 7). capital generation. Our study shows that TSU entrepreneurs treat costs
as input, a strategic enabler, and a conduit to create value and even-
The difference between two- and three-portfolio business models tually capture TSU value through exits as an output. Anthony (1952,
was the fact that they had market-driven products and services. 1965) initially highlighted the input orientation of costs that could be
Furthermore, they can spinoff and sell in focused marketplaces parallel measurable. However, his study was within a larger firm, responsibility
to the firm value creation. Such business models continued to focus on center context. While most people refer to investment as the preferred or
intellectual capital value creation when the firms developed additional acceptable terminology, as it evokes a more optimistic perception (for
ideas, technologies, or concepts. Overall, costs play the mediator's role instance, return on investment), TSU entrepreneurs’ implicit sense-
in portfolio business models, as the TSUs’ ultimate goal is value capture making and explicit references treat costs (especially human capital
through exit (see Table 4). costs) as a strategic enabler to create value instead of a burden, or a
cause of value reduction, or a reason for lower profitability. This is a
5. Discussion and conclusion new conceptual and practical dimension of the new economy TSUs that
adopts an investment-oriented cost accountability system towards a
The results of the 12 case studies allow us to distinguish three dif- future value capture or return. It addresses gaps on costs in MoT lit-
ferent roles played by costs in business model design for early tech- erature in ideas generation and selection, creativity vs. standardization,
nology ventures: enabler, moderator, and mediator (see Fig. 1 below). organizational learning, and the higher emphasis of indirect inputs and
Instead of having an approach in which costs constitute either a drivers affecting MoT processes (i.e., technological landscaping vs.
black box or a constraint, here we see the three different roles of costs. roadmapping) and innovation outputs (Argote and Hora, 2017;
In technology-driven business models, the TSU entrepreneurs’ approach

Table 4
The role of costs in the configurations observed (Source: authors).
Business models Technology-driven Market-driven Exit-driven

Technology-driven Enabler NA Mediator

- To create long-term value - Intellectual capital generation
- Investment in IC (>70% HC) - Longevity and scalability focused
- Customers are partners, investors and future TSU buyers - ID potential TSU buyers from onset
- Licensing and royalties agreements
Market-driven NA Moderator NA
- Cost leadership
- Competitive advantage
Exit-driven Mediator NA Mediator
- Intellectual capital generation - Future TSU value oriented
- Longevity and scalability focused - Focus on returns on IC (cost) investments
- ID potential TSU buyers from the outset - Multiple TSU buyer potential
- Licensing and royalties agreements
Technology + market + exit driven Mediator
Focus is creating TSU value through:
- Technology IP (organizational capital)
- People and their dynamic capabilities (human capital)
- Partnerships, licensing and royalty agreements (relational capital)
- Sales and marketing, either to show spinoff products/services work or to show proof of market viability, profitability and growth potential
- Potentially multiple exit options: better fit, highest-bidding TSU buyers

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R.G. Chammassian and V. Sabatier Technological Forecasting & Social Change 157 (2020) 120090

Fig. 1. Role of costs (Source: authors).

Frank et al., 2019; Kodama, 2014; Kornish and Hutchison-Krupat, 2017; the formula.9 Examples include investment in people (training and
Shalley and Gilson, 2017; Tierney et al., 2013). It moves away from a development, learning and knowledge acquisition) (Mahto et al., 2018)
management control-centric mentality (i.e., Chenhall, 2003; to develop human capital, and in seeking networks and expertise from
Simons, 1987, 1990, 1991, 1994) and towards an investment-centric the higher cost of seeking VC funding (Mahto et al., 2018) as relational
one to capture value in which firms derive a return on costs from the capital. This is a new typology that neither the business model, nor the
value that TSU entrepreneurs attempt to create for the future. There- management accounting, nor the MoT literature have addressed. These
fore, what has traditionally applied to industrialized companies, MoT, narratives indicate a different mindset on costs, which is a future-or-
and to current business model references does not necessarily apply to iented, accountability-driven, optimistic view rather than the short-
innovative TSUs, particularly in their early stages. This new dimension term, control-oriented, pessimistic approach to which existing practice
arises within new company development of TSUs instead of new pro- and literature have alluded. We find this to be a new opportunity for
duct development. Costs play a strategic role as enabler and mediator in exploration, with the possibility of expanding the current definition of
the firm-value creation and capture processes in business model design. business models in financial reporting to consider technology- and exit-
This role is a departure from the traditional generic moderator role that driven business models for fair value accounting and future valuation
costs have played in MoT (i.e., Kleis et al., 2012; Le and Suh, 2018), and (Taipaleenmäki and Ikäheimo, 2013). Technology- and exit-driven
the revenue stream/cost structure of business models, as highlighted by business models, for instance, are clearly highlighted to be long-term
Porter (1980, 1985) (Zott et al., 2011). This, we believe, is the second investment oriented. They potentially fall under European Financial
contribution of this paper. Reporting Advisory Group EFRAG, the French Autorité des Normes
For early-stage TSU entrepreneurs, costs are and should be considered Comptable ANC, the Accounting Standards Committee of Germany
an investment in technology development and intellectual capital creation ASCG, the Organismo Italiano di Contabilità OIC and the UK Financial
(i.e., intangible assets), not a financial burden to overcome, control, or Reporting Coucil FRC, 2013, European Financial Reporting Advisory
optimize for the purposes of improved margins or profitability. This is a Group EFRAG, the French Autorité des Normes Comptable ANC, the
departure from the cost control concepts that have been the bedrock of Accounting Standards Committee of Germany ASCG, the Organismo
managerial accounting (Simons, 1987, 1990, 1994). The strategic focus of Italiano di Contabilità OIC and the UK Financial Reporting Coucil FRC,
TSU entrepreneurs is investment in intangible asset orchestration (from a 2014) “model [where] fair value accounting is applied with immediate
balance sheet perspective rather than that of an income statement) to recognition of the gain in profit” (par. B59). With these business model
create value, whereas value capture is through successful exits designs, costs are recognized as an investment in intangible assets in the
(DeTienne et al., 2015). This sets a more optimistic tone for costs than the balance sheet that are amortizable as long-term assets using the fair
pessimistic one traditionally perceived by Porter's cost leadership strate- value principle, since the intent is eventual exit through trade sales.
gies, and generally acceptable practices in MoT of reducing transaction In terms of managerial contributions, this study has a different
costs, decreasing cost of IT, and minimizing manufacturing costs. perspective on investment and strategy for TSU entrepreneurs. Because
In all cases, entrepreneurs view costs as value drivers (or inputs) to their focus is on value creation and value capture, practitioners should
create value (as a process) or to eventually capture value through view costs strategically as a value conduit focusing on the best
successful exit (as the ultimate output). From an early stage, en-
trepreneurs emphasize return on costs and return on intellectual capital
investments (i.e., intangible assets) instead of the traditional return on 9
The formula for ROA is Net Profits / Average Total Assets (of 2 periods);
assets (ROA) or return on equity (ROE), in which profitability is part of ROE is Net Profits / Average Owner's Equity (of 2 periods).

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R.G. Chammassian and V. Sabatier Technological Forecasting & Social Change 157 (2020) 120090

perceived return on cost investments in intellectual capital through private equity, and corporate buyers perceive these strategies based on
utilizing business model portfolios and new approaches to MoT. Current their experiences.
business model frameworks have major limitations in high-tech in- This research calls for further studies, including a comparative
dustries (Snihur et al., 2018), and we show that costs can play different analysis of TSUs that embrace portfolio or single business models;
roles in the early years of TSUs. This research also alludes to gaps on longitudinal studies following TSUs from concept to exit; and research
costs in MoT literature associated with early stage TSU development. on exited TSUs and how buyers derived value versus how entrepreneurs
Educators, trainers, and coaches could realign their approaches from and investors created and captured value. Furthermore, we suggest
purely market-driven business models to technology-driven and exit- further research on incorporating technology- and exit-driven business
driven ones. In regard to costs, they can embrace costs more optimis- models into fair value accounting and financial reporting practices.
tically with a focus on investment orientation rather than being control-
driven. These points are scalable to larger, intrapreneurial settings in
which corporations are considering new business models, investments CRediT author statement
in projects, and MoT.
With respect to limitations, this study sheds light on early-stage TSU Raffi Chammassian: Conceptualization, methodology, validation,
strategies and business models and does not address the outcomes formal analysis, investigation, resources, data curation, writing – ori-
about what happens to TSUs at later stages. Additionally, as this study ginal draft, visualization, project administration.
reviews perceptions of TSU entrepreneurs, it does not address how Valerie Sabatier: Conceptualization, validation, writing – review &
various types of investors, such as business angels, venture capitalists, editing.

Appendix A: Founder and start-up characteristics.10

Interviewee Title Technology Funding Interviewee Country

status

Case 1 Co-founder and University Technology Transfer (UTT), a medical device startup that monitors the eye's 3 series Active Switzerland
Int. CTO intraocular pressure
1 CHF 52.1M
Case 1 I- CEO total Left as CEO to Switzerland
nt. 2 join board
Case 1 Co-founder and Active Switzerland
Int. COO
3
Case 2 CEO A research and development biopharmaceutical company specializing in therapies for 4 series Active Switzerland
Int. Alzheimer´s disease
4 CHF 84M
Case 2 CFO total
Int.
5
Case 3 Founder and CEO A web-based content curation publisher startup that allows individuals to create personalized on- 3 series Active Switzerland
Int. line newspapers
6 $5.1M total
Case 4 Founder and CEO An unmanned aerial vehicles (UAV) technology based on multiple technologies that deliver Unknown Active France
Int. specialized information and focuses on measuring and sensing
7
Case 5 Co-founder and R&D, production and sales and marketing firm specializing in miniature UAVs/drones 2 series Active Switzerland
Int. CEO
8 $5.4M total
Case 6 Founder and CEO A software development and sales company specializing in opinion leader management systems Self-funded Departed USA
Int. geared towards life sciences pharmaceutical companies
9
Case 7 CEO A web-based search engine with a marketing-by-advertising base internet search business model 2 series Departed USA
Int. focusing on “natural language search engines”.
10 $22.5M total
Case 8 CEO An R&D company in the semiconductor domain 3 series Departed Switzerland/
Int. USA
11 $47M total
Case 9 CEO A technology company specializing in micro electrical mechanical systems (MEMS) 3 series Active Switzerland
Int.
12 CHF 24M
total
Case 10 Co-founder, A biotechnology R&D company specializing in isolating therapeutic targets from different 1 series Active France
Int. chairman and CEO biological material
13 €1M
Case 11 Founder and CEO A web-based service based on the social media/blog concept allowing members to form and 5 series Active USA
Int. contribute to specialized communities
14 $14M total
Case 12 Co-founder and A web-based learning management application for various education users 2 series Departed Switzerland
Int. CEO
15 Amount un-
disclosed

10
At the time of the interviews.

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R.G. Chammassian and V. Sabatier Technological Forecasting & Social Change 157 (2020) 120090

Appendix B: Quotes associated with various business models

Technology-driven business models – costs as an enabler:

“I tried to redirect the people to different diseases using the same technology because we thought that their technology was outstanding… In
2003, we had absolutely nothing except a dream to make this medication for what was later Alzheimer's disease—a better technology, which I
thought was very powerful… Between July 2003 and July 2006, we created a molecule… to show that the technology works…The American
government has chosen this first-ever molecule for a prevention trial for Alzheimer's.” “We don't have sales yet. What we sell is our licenses, but our
income is higher than the costs … depending on how many clinical trials we run and of course, our profitability, in quotation marks, because
profitability in the finance sense is going away.” “[Our] cost is basically all linked to science and technology and clinical trials. So, it's only in the
innovative part, of course, it is salaries” (Interviewee 4, TSU 2).
“They realized that it's not obvious what to do with that information. That required us to multiply the number of clinical trials to investigate, first
of all, to demonstrate the safety of the device, [and] to demonstrate the efficacy of the device.” “Team is core. Team is essential… having a team
allowed us to make sure that we are balanced in terms of what is important—money, market, technology” (Interviewee 5, TSU 2).
“We have extremely high KPI in terms of data processed analyzed—KPIs in terms of the power of our technology platform; if I mention, for
example, these 200 million different articles per day analyzed semantically.” “For me, the main cost is really, in our business, the people… Our main
cost is and always will be people and team and brains.” “People is [sic] investment” and “retention plans is [sic] clearly an investment for us”
(Interviewee 6, TSU 3).
“I don't think that there is a massive difference between technology and people... People and technology, in a technology start up, are exactly the
same.” “Money, cost, investment, funding, budget, maybe have different shades but can probably be interchanged. That's the point of an [early-stage
technology] start-up, because there is no revenue. Whatever goes in goes into a cost… which is an investment.” “Without money, there is no
investment, there is no research and development, [and] there is no technical innovation.” “In [a] start-up, most of the costs are related to in-
vestment because there is no a clear and regular operation producing income, [and] then the cost is really building assets for the future.” “Costs…
[are] how funds or money affect innovation.” “[Does] money impact innovation? Yes, it does” (Interviewee 7, TSU 4).
“Research in bio-inspired mobile robotics, aerial robotics, flying robots… I helped start the drones in academia… I had to develop a lot of pilots…
that have now become the core of TSU 5 products.” “At the beginning, I think it was the salaries, because we didn't have to buy big machines or
invest in outsourcing or stuff like that. It's still salary—so, people basically.” “We want to make sure that the innovation we create [and] in which we
invest are really good in terms of creating value for our customers… [to] minimize the administrative expenses, and we invest a lot into R&D because
we want to remain number one for a long time… The biggest costs within the R&D are related to salaries.” (Interviewee 8, TSU 5).
“We were not as interested in making sure we would win a lot of money as we were in having a historical impact, if you wish, to change how
surveyors work or change how people look at drones” (Interviewee 8, TSU 5).
“There are two stages in the life of a [TSU] company. The first stage is when you take money and convert it into technology; and the second stage,
which is the one that interests us, is when you take the technology and you convert it back into money.” “The semi-conductor R&D industry requires
large sums and human capital but also has a very high [cash] burn rate… To solve this really difficult problem, you needed some exceptionally good
people.” “There were other costs, but it was primarily salaries… We had pretty high salaries for a start-up… We probably would not have been able
to hire the majority of them without offering those salaries… They directly contributed 70% of the budget.” “The intention was not to make
[products] ourselves, there are enough companies losing money making [products] without adding another one. But instead, we wanted to license
the technology and therefore, I hope for a better chance to have a profitable business model than if we were in the [product] business, which is
renowned as a not very profitable business” (Interviewee 11, TSU 8).
“Cost isn't usually ‘I'm throwing money outside my window.’ It usually means I'm spending something to build a better business.” “[People costs
are] my investment. So, if I go and hire someone (engineers are very expensive here in Silicon Valley), when you first do it, all you do is the cost… It
comes down to people. It's the investment in your teammates” (Interviewee 14, TSU 11).
“When we invested, we wanted to make sure that we get something back. So that was primarily employees or employing more people. This means
that we could develop our products, better products, more secure.” “The biggest assessment… was investing in people.” “It was never, from day one
until we sold the company, cost was never looked upon as a burden, as a factor that reduced our own view of success or not, which meant we never
measured a major issue, even knowing that it was important.” “Seventy to 75% of total costs were salaries” (Interviewee 15, TSU 12).
Market-driven business model – cost as a moderator:
“The cost of the product, the cost of production. It's really my focus to reduce the costs, because… the cost of the product for the patient and for
the doctors, in other words, what they pay and to put a price on it, is not easy... Obviously, if you can reduce the production cost, you can reduce the
sales price and the cost of the product for the patient and the doctors” (Interviewee 1, TSU 1).
“It's a razor blade model, so we open centers and then the centers keep reusing the device, consuming the lenses, which is a single-use contact
lens” (Interviewee 2, TSU 1).
Exit-driven business model – cost as a mediator:
“[Our] exit strategy [was] basically [to] create the company then sell it… We always knew that we wanted to build a sustainable company with
an appreciation value that would not be flipped in a year or a few months, and therefore, we needed to understand and articulate our paths to
liquidity, acquisitions, and potential targets for being acquired.” “[This investment should produce a] return on our costs” (Interviewee 5, TSU 2).
“The acquisition value went to the technology, the platform infrastructure that we had built, and a certain portion of the value went to acquire a
really amazing team of people that we have assembled.” “We almost never had revenue by the time we were acquired… We always knew what our
revenue generation model was, but we never got to the point of having enough traffic to generate any significant amount of revenue from such a
deal” (Interviewee 10, TSU 7).
“Once you take in funding of a major amount of money, which they [original founders] had, you have to deliver on time something that's exit
worthy for the investors; otherwise, it's not going to be a success… It had to make money for the investors. If it solved the problem but didn't make
money, it was going to be a failure. If it made money but didn't solve the problem, it could still be a success” (Interviewee 11, TSU 8).
“Set aside moral goals—the will to do good—the real customers are basically the buyers of the company—Building this company, we'll [be]
developing this product so it can interest someone in buying us” (Interviewee 12, TSU 9).
“When I invest one dollar into this, I essentially get back some combination of money, intrinsic value, and enterprise value… Even though you're
spending and you're increasing monetary risk, you're starting to do what you're supposed to do as a start-up, which is spend money to make money”

12
R.G. Chammassian and V. Sabatier Technological Forecasting & Social Change 157 (2020) 120090

(Interviewee 14, TSU 11).

Portfolio business model – cost as a mediator:
“The semi-conductor R&D industry requires large sums and human capital but also has a very high [cash] burn rate… To solve this really difficult
problem, you needed some exceptionally good people.” “This wasn't going to be solved by a few students. So, we had an average age of 45 on the
engineering team.” “Once you take in funding of a major amount of money, which we did, you have to deliver on time something that's exit worthy
for the investors. Otherwise, it's not going to be a success. They [investors] don't have infinite time.” “We started to approach potential licensees. In
fact, we did a deal with a major manufacturer for embedding the technology on their processor chips. We did a major [license] deal with another
multinational…then we started a joint development with them.” “Technology looked very exciting. It was what I would call a sort of long shot
because if this company succeeded, it would either be a billion-dollar company or nothing at all. There was no in-between.” “It [the patents] was a
good thing. In the end, it turned out to be pretty helpful for getting some exit money” (Interviewee 11, TSU 8).
“Research in bio-inspired mobile robotics, aerial robotics, flying robots… I helped start drones in academia… I had to develop a lot of pilots…
that have now become the core of TSU 5 products.” “Team is core. Team is essential... Having a team allowed us to make sure that we are balanced in
terms of what is important: money, market, technology.” “We want to make sure that the innovation we create, what we invest in, are really good in
terms of creating value for our customers.” “[Product performance is] being able to deliver, to pass R&D effort into product… [and] the main driver
of having a product.” “Since we looked at growth and it was really growing fast, we preferred to sell [the TSU] right away.” “It was helping each
other in terms of ramping up, industrialization and R&D.” (Interviewee 8, TSU 5)
“[Our TSU] became the Windows-like application for education in universities, in primary and secondary schools, and in special schools.” “It was
quite easy to sell the concept because we're talking about upscaling the business quickly, internationally.” “To us, growing the company meant to
increase the revenue, increase the market penetration, and increase the coverage, which meant entering new markets…; [however,] cost is as
important as revenue.” “From day one until we sold the company, cost was never looked upon as a burden, as a factor that reduced our own view of
success, which meant we never measured a major issue, even knowing that it was important” “When we sold, we realized there is a different world in
the corporate sector, where [the focus is on] net profit and how much.” (Interviewee 15, TSU 12).

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Taipaleenmäki, J., Ikäheimo, S., 2013. On the convergence of management accounting finance, strategy, and entrepreneurship spanning across Europe, Middle East, Africa and
and financial accounting – the role of information technology in accounting change. the Americas. Industry experiences include ICT, aerospace, services, and education. In
Int. J. Account. Inf. Syst. 14 (4), 321–348. https://doi.org/10.1016/j.accinf.2013.09. addition to his professional qualification, he earned a Doctorate of Business
003. Administration (DBA) from Grenoble Ecole de Management specializing in costs, in-
Snihur, Y., Thomas, L.D., Burgelman, R.A., 2018. The Performative Power of Words: How tangibles, intellectual capital, and technology startups. He currently mentors and coaches
Business Model Innovators Use Framing for Strategic Advantage. KristianSund sustainability-oriented technology startups, consults SMEs, is an affiliate professor at
Robert, J.J., Stefano Brusoni (Eds.), Cognition and Innovation 3, 13–44. Grenoble Ecole de Management, and an adjunct professor at various Eruopean uni-
Taipaleenmäki, J., 2014. Absence and variant modes of presence of management ac- versities.
counting in new product development – theoretical refinement and some empirical
evidence. Eur. Account. Rev. 23 (2), 291–334. https://doi.org/10.1080/09638180.
Valerie Sabatier is the Director of GEM Doctoral School and associate professor of
2013.811065.
Tagoe, N. (2016). Rethinking the business model [White paper]. Retrieved December 15, strategic management. Her main research interests are in corporate strategy and industry
2017 from Chartered Global Management Accountant (CGMA)https://www.cgma. evolutions. In particular, her research examines the relationships within and between
org/content/dam/cgma/resources/reports/downloadabledocuments/cgma-bus- business models portfolios and strategic disruptions.
model-fullreport-051817.pdf.

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