http://www.smallbusinessinstitute.biz A B S T R A C T Keywords: Journal of Small Business Strategy 2020, Vol. 30, No. 02, 59-71 ISSN: 1081-8510 (Print) 2380-1751 (Online) ©Copyright 2020 Small Business Institute® w w w. j s b s . o rg Introduction 1HHL Leipzig Graduate School of Management, Jahnallee 59, 04109 Leipzig, Germany, frieda.rosin@hhl.de 2HHL Leipzig Graduate School of Management, Jahnallee 59, 04109 Leipzig, Germany, dorian.proksch@hhl.de 3HHL Leipzig Graduate School of Management, Jahnallee 59, 04109 Leipzig, Germany, stephan.stubner@hhl.de 4HHL Leipzig Graduate School of Management, Jahnallee 59, 04109 Leipzig, Germany, pinkwart@hhl.de Digital new ventures: Assessing the benefits of digitalization in entrepreneurship Digitalization, Entrepreneurship, New ventures, Resource savings, Operational efficiency, Flexibility APA Citation Information: Rosin, A., F., Proksch, D., Stubner, S., & Pinkwart, A. (2020). Digital new ventures: Assessing the benefits of digitalization in entrepreneurship. Journal of Small Business Strategy, 30(2), 59-71. New ventures typically suffer from the liabilities of newness and smallness (Djupdal & Westhead, 2015; George, 2005; Stinchcombe, 1965; Symeonidou, 2013). A variety of challenges accompany these liabilities, such as limited resources, which restrict new ventures in the number of actions they can employ (Djupdal & Westhead, 2015; Ko & Liu, 2017). To survive despite limited resourc- es, entrepreneurial organizations must rigorously manage resources and concentrate on actions that enhance efficien- cy (George, 2005). Digitalization might help to overcome those limitations. Information technologies encompass digital solutions for all elements of the value chain. Researchers have as- signed a variety of benefits to the application of digital technologies, such as resource savings, greater operational efficiency and more flexibility (Bleicher & Stanley, 2018; Henriette et al., 2015; Ladeira et al., 2019; Nambisan, 2017; Parviainen et al., 2017). Integrating digital technologies in new ventures early in their life cycle therefore seems to be beneficial to overcome the limited amount of resources in entrepreneurial firms. In line with the resource-based view (RBV), new ventures might be able to generate competitive advantage by focusing on exploiting the benefits of apply- ing digital technologies (Barney, 1991; Ladeira et al., 2019; Muhos et al., 2019). Although previous research has identified a generally positive influence of digitalization, this effect has not been empirically tested in an entrepreneurial environment (Devos et al., 2012; Obwegeser et al., 2016; Riemenschneider et al., 2003). Current research has just begun to understand the causalities between digital technologies and entrepreneur- ship, a research stream known as digital entrepreneurship (Ladeira et al., 2019; Muhos et al., 2019; Nambisan, 2017; Ziyae et al., 2014). However, this research stream is still in its infancy and is limited in scope in explaining the benefits of applying digital technologies in the area of entrepreneur- ship (Ferreira et al., 2016; Ladeira et al., 2019; Nambisan, 2017; Zhao & Collier, 2016). As a result, researchers have called for future studies analyzing how digital technologies can shape the complex entrepreneurial environment (Berger & Kuckertz, 2016; Ladeira et al., 2019; Nambisan, 2017). Our study fills existing research gaps in this context. New ventures must rigorously manage their resources because they suffer from the liabilities of newness and smallness. Digitaliza- tion, traditionally associated with resource savings, higher operational efficiency and more flexibility, implies great benefits for new ventures; however, this effect has not been empirically proven. Implementing the resource-based view, this article uses a survey with 102 new ventures to investigate how new ventures benefit from digitalization. We clustered the new ventures in three groups according to their degree of digitalization (low, medium or high) and conducted an analysis of variance to compare the benefits of digitalization among these groups. Our results show that a higher degree of digitalization in new ventures does not result in direct resource savings such as decreased human capital or office space needed; rather, it results in indirect savings through increased operational efficiency. It also leads to considerably greater market flexibility. Our findings assist founder and founder support initiatives in evaluating the neces- sity of investing in digitalization given the benefits realized. Anna Frieda Rosin1, Dorian Proksch2, Stephan Stubner3, Andreas Pinkwart4 http://www.smallbusinessinstitute.biz http://www.jsbs.org 60 A. F. Rosin, D. Proksch, S. Stubner, & A. Pinkwart Journal of Small Business Strategy / Vol. 30, No. 2 (2020) / 59-71 In this article, we examine how new ventures benefit from digitalization along the value chain. Our investigation dis- tinguishes between degrees of digitalization to determine whether a higher degree of digitalization leads to greater benefits such as resource savings, greater operational effi- ciency or more flexibility in new ventures. Building on the RBV, we develop and test hypotheses regarding to the bene- fits of digitalization in new ventures. To do so, we collected data from 102 new ventures from various industries using a survey design. We used cluster analysis to group the new ventures according to degree of digitalization (low, medium or high) and conducted an analysis of variance (ANOVA) to test for the benefits of digitalization among these groups. This study contributes to the literature by responding to current calls for more digital entrepreneurship research (Ferreira et al., 2016; Ladeira et al., 2019; Nambisan, 2017; Zhao & Collier, 2016). The article provides researchers with a solid basis for understanding digitalization as a re- source through the lens of the RBV and also highlights its limitations in entrepreneurship. This contribution is import- ant in terms of research development, as there are only a few empirical studies in digital entrepreneurship and cur- rent knowledge on the effects of a higher degree of digi- talization in new ventures has not been driven efficiently. Understanding the causality between digitalization in new ventures and the benefits resulting thereof is also important from a practical perspective. With this article, we contribute to entrepreneurial practice by providing managerial insights that highlight the most important benefits of digitalization for new ventures. This is a key concern for new ventures, as the limited access to tangible resources results in the need to carefully evaluate costs and benefits of their investments (George, 2005; Symeonidou, 2013). Thus, without knowing the payoffs of digitalization, investments (whether by the new venture itself, its investors or other founder supporter) might not bring the expected returns (e.g., resource reduc- tion) but instead result, in the worst case, in a waste of re- sources. Because new ventures are subject to the liabilities of newness and smallness, misallocating resources to dig- itization could ultimately threaten not only new ventures’ competitiveness but even their survival (George, 2005). The remainder of this article is structured as follows. In the next section, we introduce the theoretical framework by providing insights into digitalization in the area of entre- preneurship and developing hypotheses to test the benefits resulting from the usage of digital technologies. Next, we describe the methodology and present and discuss the re- sults of the empirical study. Finally, we highlight the impli- cations as well as the study limitations and future research suggestions. Theoretical Framework Entrepreneurship and Digitalization Entrepreneurship describes the discovery, founding and running of new businesses, allowing the realization of novel ideas or business models and the generation of new opportunities in business (Ferreira et al., 2016; Ladeira et al., 2019; Memon, 2016). Herein, we define the entrepreneurial firm as a new venture, being an organization not older than 10 years and having not more than 50 employees. Research highlights that new ventures are typically confronted with a variety of challenges caused by the liabilities of newness and smallness (Djupdal & Westhead, 2015; George, 2005; Stinchcombe, 1965; Symeonidou, 2013). New ventures need to put a great deal of effort into developing intangible resources (e.g., a broad skill set, the establishment of op- erational routines), which they typically do not have in the initial years due to the liability of newness (Barney, 1991; Fackler et al., 2013; Stinchcombe, 1965). Developing this knowledge and these actions takes time and financial re- sources. However, new ventures typically lack these tangi- ble resources and have difficulty generating scaling effects, because of the liability of smallness (Fackler et al., 2013). According to the RBV, entrepreneurs therefore need to se- lect a strategy that can exploit internal resources and capa- bilities in the best possible way relative to the opportunities arising externally (Barney, 1991). The RBV lays the theoretical foundation in our arti- cle to examine how new ventures might be able to generate competitive advantage by focusing on exploiting the bene- fits of digitalization (Barney, 1991; Cai et al., 2014; Martin & Javalgi, 2016). Using the RBV to explain new venture performance issues is common in entrepreneurship research (Cai et al., 2014; Martin & Javalgi, 2016; Sirmon et al., 2007). Developing capabilities in the field of digital tech- nologies might help new ventures efficiently and effectively perform value-adding tasks along the value chain (Martin & Javalgi, 2016). Creating own capabilities, such as digital technology capabilities, is necessary because the external environment is unlikely to provide all resources needed for a new venture to perform well (Cai et al., 2014; Sirmon et al., 2007). Building up a high degree of digitalization in new ventures seems to be a promising strategy for new ven- tures to overcome the liabilities of newness and smallness. “Digitalization” describes the adaption of digital tech- nologies in business, economy and society and provides possibilities to connect objects, individuals and entire or- ganizations (Autio, 2017; Legner et al., 2017). Applying digital technologies in the field of entrepreneurship is sum- marized as “digital entrepreneurship” (Davidson & Vaast, 61 A. F. Rosin, D. Proksch, S. Stubner, & A. Pinkwart Journal of Small Business Strategy / Vol. 30, No. 2 (2020) / 59-71 2010; Nambisan, 2017), defined as new ventures that are linked with digital activities or goods and services and thus pursue opportunities with the help of any digital element (Davidson & Vaast, 2010; Dutot & Van Horne, 2015). Ac- cording to Hull et al. (2007), digital entrepreneurship can be divided into three groups: light, moderate and extreme digital entrepreneurship. Light digital entrepreneurship de- scribes a firm that uses digital technologies only as com- plement to more traditional processes. Moderate digital en- trepreneurship, in contrast, encompasses new ventures that can exist only by concentrating on a digital product/service or other digital components, and extreme digital entrepre- neurship describes firms having a digital product or service as well as digital processes. Berger et al. (2018) note that these digital processes can be of pure technical nature or can include the active involvement of humans (e.g., digital customer interaction, digital internal collaboration). In this article, we define the degree of digitalization similar to Hull et al.’s (2007) conceptualization, distinguishing between low, medium and high degrees of digitalization by means of digital products/services, digital processes, digital customer interaction and digital internal collaboration. The Benefits of Digitalization The application of digital technologies in the context of entrepreneurship and small-and medium sized enter- prises has revolutionized organizations around the globe (Celuch et al., 2014; Ziyae et al., 2014). New ventures that can successfully adopt digital technologies and develop the necessary capabilities to use those resources along the value chain are able to generate a variety of benefits (Ladeira et al., 2019; Voelker et al., 2017; Žebrytė et al., 2019) to over- come the liabilities of newness and smallness. Parviainen et al. (2017), for example, show that the potential effects resulting from digitalization are positive. Organizations that can, for example, digitalize information-intensive process- es are able to replace manual steps, which helps streamline actions (Parviainen et al. 2017). Thus, an integrated digi- talization enables new ventures to track processes in real time so that workflows become more transparent (Arkhi- pova & Bozzoli, 2018; Iivari et al., 2016), which allows for not only faster decision making but also the identification of processes with improvement potential, which might result in cost savings (Hui, 2014; Iivari et al., 2016; Mazhelis et al., 2013). In addition, the transformation from manual to digital processes along the entire value chain enables firms to auto- matically collect and analyze data, which can help new ven- tures increase the quality and comprehensiveness of infor- mation that is transferred from one end to another (Ladeira et al., 2019). It further helps organizations identify risk fac- tors. The continuous access to real-time data provides man- agers with the opportunity to react before problems occur, resulting in potential cost savings (Parviainen et al., 2017). Thus, we believe that the more parts along the value chain are digitalized, the higher are the resource savings. Replacing manual tasks with digital technologies can also render some tasks previously performed by employees obsolete (Parviainen et al., 2017), resulting in potential staff reductions. Having fewer team members might also affect the office space needed. Moreover, the more digital orga- nizations are, it seems the greater opportunity for flexible work styles such as remote work, which can potentially fur- ther decrease the need for office space (Parviainen et al., 2017). When all the information and services are digitalized, the necessity of collocated work teams is minimized (Hull et al., 2007) because employees have access to all necessary tools and information digitally (Iivari et al., 2016). In addi- tion, the greater the degree of digitalization in the new ven- ture, the less infrastructure is needed to store documents or other physical products, which also appears to result in less need for office space, which in turn might lead ultimately to lower costs (Ladeira et al., 2019). Those potential resource savings through digitalization lead to the first hypothesis: H1. A higher degree of digitalization in new ventures leads to greater resource savings. Digitalization also facilitates the development of im- proved working routines in new ventures (Hair et al., 2013). Using digital technologies in entrepreneurial organizations allows, for example, for immediate replies to customer que- ries, either automatically for standard requests or with just- in-time replies through online applications, such as chat bots (Ladeira et al., 2019; Mazhelis et al., 2013). Such technol- ogies appear to save time and thereby potentially influence new ventures’ operational efficiency. Digitalizing further provides firms with the potential to have digital payment or customer relationship management systems (Mazhelis et al., 2013), which looks as if it leads to faster response times and less routine work. Moreover, the more digital an orga- nization is, it seems, the greater the amount of new oppor- tunities for communication and internal collaboration (Hair et al., 2013; Joshi et al., 2018). This is especially relevant when members of the new ventures are dispersed in terms of time or geography (Hair et al., 2013). Employees’ digital capabilities can also include the ability to engage in active exchange of information and documents through digital platforms such as cloud services (Fischer & Reuber, 2011). These digital capabilities support decision making and ul- timately influence digital collaboration. Moreover, digital 62 A. F. Rosin, D. Proksch, S. Stubner, & A. Pinkwart Journal of Small Business Strategy / Vol. 30, No. 2 (2020) / 59-71 means of communication also provide new opportunities to share information with external stakeholders such as sup- pliers (Hull et al., 2007; Ladeira et al., 2019). By providing suppliers with direct access to diverse digital platforms, it appears that the operational efficiency in new ventures can be increased in the sense that information does not need to be manually shared with these stakeholders. A high degree of digitalization in new ventures therefore seems to result in more operational efficiency (Iivari et al., 2016). These aspects give rise to the second hypothesis: H2. A higher degree of digitalization in new ventures re- sults in more operational efficiency. Digitalizing various parts of the value chain in new ventures means that team members have access to all digital information regardless of their location. The more digital a new venture is, the greater appears the work flexibility, as the number of actions team members must physically per- form in the office decreases (Parviainen et al., 2017). In- stead, they are able to work remotely from any place with internet connection, resulting in potentially increased work- ing flexibility. Digitalization further influences the market flexibility for organizations (DeLone et al., 2018; Ladeira et al., 2019; Von Briel et al., 2018). The more digitalized a new venture is, the more opportunities the firm has to generate valuable information about stakeholders such as customers and the greater its access to other markets due to the internet (Ladeira et al., 2019). In addition, with digita- lization comes the “ability to turn existing products or ser- vices into digital variants, and, thus, offer advantages over tangible products” (Parviainen et al., 2017, p. 64). This way, new products can be introduced to the market more easily. Furthermore, a high degree of digitalization enables firms to get digital customer feedback through digital platforms. This way, new ventures can integrate customers’ opinions as they develop digital innovations. As such, digital tech- nologies seem to speed up the time to market and to affect the market flexibility (DeLone et al., 2018; Von Briel et al., 2018). This reasoning results in the third hypothesis: H3. A higher degree of digitalization in new ventures re- sults in greater flexibility. Method Data We collected data of German digital new ventures from May 2018 until November 2018. We asked the found- ers to fill out our online survey. For the data collection, we initially dispersed our survey link within our university network as well as shared the survey at two entrepreneur- ship conferences. We then used a snowballing sampling technique, meaning that we asked respondents to refer us to other potential participants. Using this technique for data collection is common in entrepreneurship research (Khelil, 2016; Kuhn & Galloway, 2015; Singh et al., 2015; Verver & Koning, 2017) because it provides an effective method to create a homogeneous sample in a population in which the total size is unknown. This holds true in the case of the German entrepreneurial landscape. Due to its continuous increase but also disappearance of new ventures the overall size of the market is unidentified (Khelil, 2016; Neergaard, 2007). This is especially the case as we aimed to have a high share of digital new ventures in our dataset. To develop items to measure the degree of digitaliza- tion and evaluate its benefits, we referred to academic lit- erature (Berghaus et al., 2017; Davidsson et al., 2017; Hull et al., 2007). We made adjustments to our items by consid- ering the characteristics of new ventures. Two experts on our author team guided the process, a common academic practice (Davidsson et al., 2017): One author is a successful digital entrepreneur with 20 years of experience who has founded four digital new ventures and is an investor in more than 35 digital businesses. A second author serves as minis- ter for digitalization on the state level. Furthermore, we also discussed our items with two other founders as well as four other researchers from our field. For these discussions, we put special focus on comprehensiveness and comprehensi- bility. We then conducted two pretests involving a total of 17 people, with the aim of gaining feedback on the survey questions. As a result of this feedback, we again adapted our items. In addition, we paid special attention to outliers in our constructs, which might have been caused by mis- understandings. Again, we adjusted the items accordingly. Following the first two pretests, we conducted a pilot study with 24 participants to determine the reliability of the con- structs and significant items (Davidsson et al., 2017). We observed a high reliability in the constructs; therefore, we began the final data collection using the questionnaire items that remained. After 116 responses, we were not referred to any more new ventures, meaning that we already had included all new referrals in our data set. We removed 14 responses from our final calculations: 4 of the participating firms were older than 10 years and 10 were not headquar- tered in Germany. Our final model therefore contains 102 cases. On av- erage, the new ventures were 3.4 years old (median: 3). The majority of the participants (70.6%) were part of the founding team, 15.7% were members of the management team and the rest included other team members (13.7%). The industry distribution was diverse, with participating or- 63 A. F. Rosin, D. Proksch, S. Stubner, & A. Pinkwart Journal of Small Business Strategy / Vol. 30, No. 2 (2020) / 59-71 ganizations active in information technology (IT)/consumer electronics (12 participants), consumer services (11 partic- ipants) and consumer commerce (9 participants), among others. Participants’ ages were diverse as well: seven par- ticipants were between 18 - 24 years of age, 61 were be- tween 25 - 34 years, 25 were between 35 - 44 years, eight were between 55 - 65 years, and one was over 65 years. The majority of participants (59%) had a business/econom- ics background; the remainder of respondents had varied backgrounds: IT: 11, social science: 8, life science: 6, engi- neering 4, law: 1 and other: 11. We measured the degree of digitalization with four dimensions: digital product and services, digital process- es, digital customer interaction and digital collaboration. To measure the items for the construct of digitalization, we used a multi-indicator approach. Because the degree of digitalization cannot be measured directly, we used partial least squares (PLS) structural equation modeling to cre- ate a latent variable score for the construct. This type of variance-based structural equation modeling has recently gained popularity in entrepreneurship and management re- search and is the method of choice for explorative studies (Cannavale & Nadali, 2018; Kuckertz & Prochotta, 2018; Shinnar et al., 2012). We found that all four constructs ex- ceeded a Cronbach’s alpha of 0.7, a composite reliability of 0.8 and an average variance extracted of 0.5 (Hair Jr. et al., 2016; Kline, 2015), indicating high construct reliability. In addition, we tested for the discriminant validity using three approaches: the Fornell-Larcker criterion, the cross-loading approach and the heterotrait-monotrait ratio (Henseler et al., 2015). Our model passed all tests. We then extracted the la- tent variable score of the degree of digitalization constructs, which captures the value of all items per construct, thereby obtaining a single variable for each construct of the degree of digitalization. We then used cluster analysis to group the new ven- tures according to the four dimensions of digitalization. The goal of cluster analysis is to classify the data into ho- mogeneous groups (Hair et al., 2014): The elements within one group should have very similar characteristics, and the elements from two distinct groups should be different. We used hierarchical cluster analysis with Ward’s method and Euclidian distances to group the new ventures in our sample accordingly. Measures We distinguish between the constructs that measure the degree of digitalization and those that measure the benefits of digitalization. In the following subsections, we describe how we capture these variables. The degree of digitalization. We created four con- structs to measure the degree of digitalization: digital prod- uct and services, digital processes, digital customer inter- action and digital collaboration. We initially based these constructs on items from Berghaus et al. (2017), but we adjusted them during the pretests to reflect the conditions of new ventures. We used five-point Likert scales for all items. With regard to digital products or services, we asked respondents to rate whether their level of digitalization of their products and services is high compared with their competitors, whether they exploit all opportunities for dig- italization in the market to develop their products and ser- vices, whether they successfully implemented new digital business ideas or business models within the last three years and whether they are able to quickly adopt their digital of- ferings. We also asked them to provide information on the integration of feedback in the technical development pro- cess of their products and services. For the construct digital processes, we asked partici- pants to rate how often the new venture used digital tech- nology to support standard processes, whether they imple- ment the most current digital channels (including mobile and social media) in their processes, whether their decision making was supported by data analytics, whether digital channels were used to integrate and improve core and stan- dard processes and whether they collect control metrics for their digital channels. For the variable digital customer interaction, we asked such questions as whether the new venture was able to han- dle customer requests digitally, how much of the customer journey occurred in a digital format, whether the custom- er interactions take place on multiple digital channels and whether marketing and communication were individualized using customer data. Items for the construct digital collaboration covered whether the new venture regularly used digital tools for communication, collaboration and information sharing (e.g., SharePoint, Jive, Trello, Slack, Dropbox, Google Drive) and whether team members were able to work from any location because they had access to digital collabora- tion tools. The benefits of digitalization. To assess the benefits of digitalization in new ventures, we asked respondents to rate the extent to which they experienced a variety of benefits. We derived these items from the literature (Bleicher & Stan- ley, 2018; Bogner et al., 2016; Katz & Koutroumpis, 2013; Kuester et al., 2018; Lenka et al., 2017; Nambisan, 2017; Unruh & Kiron, 2017) and measured them with five-point Likert scales (1: Very weak; 2: Weak; 3: Average; 4: Strong; 5: Very strong). To examine whether digitalization leads to 64 A. F. Rosin, D. Proksch, S. Stubner, & A. Pinkwart Journal of Small Business Strategy / Vol. 30, No. 2 (2020) / 59-71 resource savings, we asked new ventures to rate the extent to which they experienced cost savings, fewer team mem- bers and less office space needed. To study whether digi- talization leads to higher operational efficiency, we asked participants to rate the degree of time savings, decrease in routine work, decrease in response time and increase in col- laboration through the use of digital technologies. To inves- tigate whether digitalization leads to greater flexibility, we asked new ventures to rate the extent to which they experi- enced greater market and work flexibility. Results Our cluster solution results in three clusters. The clus- ter solution assigned 21 participants to Group 1 (low degree of digitalization), 50 to Group 2 (medium degree of digita- lization) and 31 to Group 3 (high degree of digitalization). We chose this cluster solution for the following reasons. First, a solution with four or more clusters would lead to one cluster having only seven elements, less than 10% of the elements of our data set, which is not feasible (Hair et al., 2014). Second, a cluster solution with more than three clus- ters leads to a situation in which at least one of the outcome variables does not differ significantly within the clusters. Table 1 shows the means of the cluster variables (degree of digitalization). Note that the greatest differences between the means between Groups 1 (low degree of digitalization) and 3 (high degree of digitalization) are in terms of digital processes and digital products/services. To assess the validity of our cluster approach, we Table 1 Means of the cluster variables Digital Products and Services Digital Processes Digital Customer Interaction Digital Collaboration Group 1 −1.481 −1.430 −1.207 −1.295 Group 2 0.017 −0.243 −0.169 −0.052 Group 3 0.611 0.751 0.612 0.576 Group 3 - Group 1 2.091 2.181 1.819 1.871 Note: the scores are standardized, with a mean of 0 and a standard deviation of 1 used two approaches (following Birley & Westhead, 1994; Khelil, 2016; Proksch et al., 2018). First, we conducted an ANOVA using the aforementioned four variables measuring the degree of digitalization. The values of the four variables should significantly differ between the three groups. Table 2 shows that, indeed, an ANOVA based on the three cluster solutions (low, medium and high degree of digitalization) shows all variables are significant at the 99.9% level; there- fore, our cluster solution passes the first test. Second, we applied discriminant analysis using the group variable as categorical variable and the four degrees of digitalization variables as independent variable. We did so to determine whether the data could be segmented into the three groups by using the values of the four degree of digitalization variables. As Table 3 shows, the first discrim- inant function is significant, the second is not. However, the first discriminant function already explains 98.8% of the variance. Furthermore, the discriminant function achieved a high degree of accuracy (see Table 4), with a high ratio of 96% (98 of 102 cases) correctly classified. The maximum chance criterion (49% + 25% = 74% < 96 %) and the pro- portional chance criterion (37.5% + 25% = 62.5% < 96%) are fulfilled (Hair et al., 2014, p. 260). Our cluster solution therefore also passes the second test. We conducted an ANOVA to test whether the conse- quences differ between the three groups. Our findings (Ta- ble 5) show that one of the three benefits assessing H1 is significant (cost savings), but the other two are not (fewer Table 2 Results of the ANOVA with the degree of digitalization variables F-Value Significance Digital products/ services 86.194 0.000 *** Digital processes 124.254 0.000 *** Digital customer interaction 47.861 0.000 *** Digital collabora- tion 51.269 0.000 *** * Sig. on 95% level, ** Sig. on 99% level, *** Sig. on 99.9% level 65 A. F. Rosin, D. Proksch, S. Stubner, & A. Pinkwart Journal of Small Business Strategy / Vol. 30, No. 2 (2020) / 59-71 team members and less office space needed). Thus, we can only partially confirm H1. For H2, which hypothesized that a higher degree of digitalization in new ventures results in more operational efficiency, all four of our variables (time savings, less routine work, faster response time and better collaboration) are significant (with the exception of less routine work, all at the 99.9% level), confirming H2. Test- ing of H3 shows that only one variable, more market flexi- bility, is significant (99.9% level); the other variable is not. Therefore, we can only partially confirm H3. Table 6 shows the mean values for the benefits vari- ables for the three groups (low, medium and high degree of digitalization). For “cost savings” (H1), the data show that a higher degree of digitalization leads to higher cost savings. For time savings (H2), the data show that the great- er the degree of digitalization in new ventures, the higher are the time savings. The same applies for faster response time. Here, the distances from Group 1 to Group 2 and from Group 2 to Group 3 are about equal. The data for less rou- tine work indicates almost no difference between Groups 1 and 2; the value is even a bit lower for Group 2 than in Group 1. In contrast, between Groups 1 and 2 and Group 3 the difference is quite substantial. The data for better col- laboration (H2) show that the distance between Groups 1 and 2 is large. Groups 2 and 3 have almost the same average value, showing that the benefits of digitalization in terms of better collaboration are not much higher after a medium degree of digitalization is achieved. For more market flexibility (H3), the data indicate that a higher degree of digitalization leads to greater mar- ket flexibility: The distances between Groups 1 and 2 and Groups 2 and 3 are almost equal. Discussion We statistically classify the digital new ventures of our data set into three distinct groups (low, medium and high degree of digitalization), confirming Hull et al.’s (2007) findings. Similar to their results, our data show that the less digitalized group has low values in all four dimensions and the high digitalized group has higher values in these dimen- sions. The biggest difference can be observed in the area of digital processes. Our findings further show that digitalization only par- tially leads to young digital ventures needing less resources. We first looked at cost savings, which differ considerably between the less and more digitalized ventures, confirming findings from extant literature that applying digital technol- ogies can result in significant cost savings (Hui, 2014; Iivari et al., 2016; Ladeira et al., 2019; Mazhelis et al,. 2013; Par- viainen et al., 2017). In this aspect, digitalization can help new ventures handle the liability of smallness. We observed multiple places where costs could be saved. For example, the digitalization of information-intensive processes helps streamline actions, so that unnecessary actions can be re- duced, resulting in cost savings (Parviainen et al., 2017). Digital processes also enable new ventures to make work- flows more transparent, leading to the potential to identify issues more easily (Hui, 2014; Iivari et al., 2016; Mazhelis et al., 2013; Parviainen et al., 2017). However, our results show that digitalization does not lead to a reduction of staff or office space. Especially with small founding teams, each team member must fulfill multiple roles (e.g., product development, sales, human re- sources); thus, a high coordination effort for all endeavors Table 3 Summary of the three-group discriminant analysis Discriminant Function Eigenvalue % of Variance Canonical Correlation Wilks’ Lambda Chi-Square Significance 1 4.826 98.800 0.910 0.162 177.566 0.000 2 0.061 1.200 0.239 0.943 5.732 0.125 Table 4 Accuracy of the prediction by the discriminant analysis Cluster Number of Cases 1 2 3 Percentage of Cases Correctly Classified 1 21 19 90.5% 0 0% 2 9.5% 21 90.5% 2 50 0 0% 49 98% 1 2% 50 98.0% 3 31 1 3.2% 0 0% 30 96.8 30 96.8% 66 A. F. Rosin, D. Proksch, S. Stubner, & A. Pinkwart Journal of Small Business Strategy / Vol. 30, No. 2 (2020) / 59-71 Table 5 Results of the ANOVA with the 9 outcome variables Consequences F-Value Significance H1 Cost savings 8.141 0.001 *** Fewer team members needed 0.322 0.726 Less office space needed 0.263 0.769 H2 Time savings 7.280 0.001 *** Less routine work 5.682 0.005 ** Faster response time 13.392 0.000 *** Better collaboration 9.055 0.000 *** H3 More work flexibility 1.199 0.306 More market flexibility 19.046 0.000 *** * Sig. on 95% level, ** Sig. on 99% level, *** Sig. on 99.9% level Table 6 Means of benefits per group Benefits Group 1 Group 2 Group 3 H1 Cost savings 3.48 3.81 4.26 Fewer team members needed 3.05 3.13 3.26 Less office space needed 3.57 3.32 3.42 H2 Time savings 3.57 4.03 4.32 Less routine work 3.48 3.35 3.98 Faster response time 3.48 4.06 4.44 Better collaboration 3.48 4.23 4.26 H3 More work flexibility 4.29 4.32 4.54 More market flexibility 3.24 3.81 4.30 is more easily handled when all team members are working together physically in one office (e.g., handling application processes, meeting customers or investors). Moreover, new ventures typically increase rather than reduce number of team members in the first years after inception. In our analysis, a high degree of digitalization results in more operational efficiency. First, digitalization leads to time savings. Standard processes can be supported by IT systems, which reduces the manual labor needed. This find- ing is also supported by the second variable, less routine work. However, only Group 3 was able to leverage this par- ticular benefit. A possible explanation is that we must dis- tinguish between digitalization and automation. Doing the same tasks digitally instead of using a paper-based method does not necessarily lead to an improvement of the pro- cess itself. Only a redesign of the process with, for exam- ple, some form of automation might result in significantly less routine work. Possibly, only the third group in our data set had the necessary level of process digitalization to also enable automation. In addition, digitalization enables new ventures to respond more quickly to customer requests. Ex- amples include chat bots, which allow an immediate reply to customer queries. New ventures can use this benefit to derive competitive advantage in line with the RBV, for ex- ample, having a better customer relationship management system than other ventures. Furthermore, a higher degree of digitalization supports better collaboration among team members. They can use digital tools to support communi- cation and to engage in active exchange of information and documents through digital platforms such as cloud services (Hull et al., 2007; Ladeira et al., 2019). Effective collabo- ration ultimately also influences the working environment for team members, as it facilitates the flow of information (Sievert & Scholz, 2017). However, we did not see a differ- ence between Groups 2 and 3, which means that digital new ventures only need a moderate level of digitalization to inte- 67 A. F. Rosin, D. Proksch, S. Stubner, & A. Pinkwart Journal of Small Business Strategy / Vol. 30, No. 2 (2020) / 59-71 grate such tools. Nevertheless, we can see that digitalization can be helpful in supporting new ventures in managing the liability of newness. Our results further show that a high degree of digita- lization results in greater market flexibility, such that new ventures integrating digital technologies are able to react quickly to changing market conditions. We speculate two reasons for this finding; first, digital analysis of customer feedback can quickly reveal a change in customer needs and requirements, and second, a digital product can be adapt- ed more quickly than a physical production (DeLone et al., 2018; Ladeira et al., 2019; Parviainen et al., 2017). There- fore, new ventures might be more robust to a volatile exter- nal environment. This finding is in line with the RBV, which posits that digital capabilities are a source of competitive advantage. In contrast, a high degree of digitalization does not lead to more work flexibility, possibly because the nec- essary IT infrastructure, including cloud storage and online accessible office tools, is a commodity and present in every new venture. In summary, we show that a high degree of digitaliza- tion in new ventures leads to a reduction in costs, but not in terms of other resources such as number of team members or office space needed. However, a higher degree of digita- lization also results in greater operational efficiency, which can be interpreted as an indirect resource reduction. In addi- tion, a high degree of digitalization increases market flexi- bility, though not necessarily work flexibility, in our sample. Implications Theoretical Implications Our findings contribute to the literature by responding to current calls for more digital entrepreneurship research (Ferreira et al., 2016; Ladeira et al., 2019; Nambisan, 2017; Zhao & Collier, 2016). Our results are important in terms of research development, as only a few empirical studies ad- dress this topic. In addition, researchers have not studied the effects of a higher degree of digitalization in new ventures. The results of our empirical study provide researchers with a solid basis for understanding digitalization as a resource according to RBV to derive benefits. We show that develop- ing digital capabilities can help new ventures derive com- petitive advantages in terms of costs savings, operational efficiency and market flexibility. In addition, we also con- tribute to the literature by delivering empirical confirmation of the three distinct groups of new ventures, those with low, medium and high degrees of digitalization, as described by Hull et al. (2007). Practical Implications Our article contributes to entrepreneurial practice by providing managerial insights that highlight the most im- portant benefits of digitalization for new ventures. This is a key concern for new ventures especially, because they typ- ically have limited access to tangible resources and must carefully evaluate the costs and benefits of their investments (George, 2005; Symeonidou, 2013). We demonstrate that a high degree of digitalization does not result in a direct re- duction of resources such as human capital or office space needed. In this regard, founder and founder-support initia- tives, such as accelerators, should not invest in the digita- lization of new ventures with the goal of decreasing those resources. This result can help entrepreneurs and investors generate appropriate expectations from their investments in digitalization. That said, we find that investing in digitalization does help increase operational efficiency. One important aspect is an improvement in collaboration in new ventures, which positively influences firms’ creativity and innovativeness (McConnell, 2015; Nylen & Holmström, 2015). Thus, our study shows, on the one hand, that founders and founder ini- tiatives keen to improve the internal collaboration between team members could invest in digital supporting tools. In that case, it might be useful to offer them digitalization-re- lated training and to provide the necessary digital infrastruc- ture. In addition, digitalization leads to a faster response time, which helps satisfy customer demands. New ventures that lack these skills can be supported by investing in digi- talization. In addition, because digitalization decreases the reaction time to changed market conditions, founders and investors might especially consider investing in digitaliza- tion if the new ventures are active in a volatile environment. Limitations and Future Research Our study is subject to some limitations. We clustered new ventures with respect to their digitalization degree and tested for the benefits of digitalization. To do so our study uses cross-sectional data. We relied on participants’ percep- tion of how they experienced the benefits of digitalization. A longitudinal research design would be of interest for fu- ture research to evaluate if scaling effects could be realized using digitalization over time by increasing the degree of digitalization in their new venture. In addition, because the founders in our data set provided a self-assessment of their degree of digitalization as well as the perceived benefits of digitalization, they may have been inclined to be more positive in answering the questions to generate a positive image of their company. To reduce this possible bias, we 68 A. F. Rosin, D. Proksch, S. Stubner, & A. Pinkwart Journal of Small Business Strategy / Vol. 30, No. 2 (2020) / 59-71 clearly informed the founder that the data would be kept anonymous before distributing the survey. In addition, we did not reveal that we studied the influence of the degree of digitalization on the benefits of digitalization. Nevertheless, future studies should analyze the connection of a high de- gree of digitalization and company performance using more concrete data. Furthermore, our results are solely based on ventures in Germany. We believe that studying the entrepreneurial landscape in Germany is important for several reasons. Not only is Berlin (the capital city of Germany) known as one of the top cities worldwide for new ventures, especially with regard to digital affords (Startup-Genome, 2019), but Ger- many`s entrepreneurial ecosystem is also highly attractive for European investors. German new ventures receive 29% of Europe’s venture-capital investments (KPMG, 2018). Even though we think that our results might be transfer- able to other European countries with similar economic characteristics, a similar entrepreneurial infrastructure and similar values in a country digitalization index (see, e.g., Chakravorti et al., 2017) like France, researchers should be cautious to generalize the results. 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