36th ANNUAL IMP CONFERENCE - Örebro, September 3-4, 2020 Start up-Consultant relationship in European funding application

36th ANNUAL IMP CONFERENCE
                             Örebro, September 3-4, 2020

      Start up-Consultant relationship in European funding application

                           Luigi Mersico - University of Urbino
                     Antonella La Rocca - Rennes School of Business
           Andrea Perna - Marche Polytechnic University and Uppsala University
                        Alessandro Pagano - University of Urbino

                                 Work in progress paper

                                      INTRODUCTION

A start-up, broadly defined as “a company that is in the first stage of its operations” (Grant,
2020), is often initially financed by its entrepreneurial founders. However, given the “early
stage of development, limited revenue, or high costs, many of these small-scale ventures
cannot be maintained long term without an influx of additional funding” (Herber et al., 2017,
p. 306). Therefore, it has been recognized the increasing propensity of startups to attempt to
gain access to a variety of funding channels, often without a clear and effective planning
(Bessière et al., 2019). Traditional sources of initial funding for start-ups include national or
international awards, donations from friends and family, angel investors, venture capitalist
investors (VCs), various state and local inducement programs and also innovative forms of
financing as crowdfunding (Herber et al., 2017). Startups are also increasingly involved in
European funding programs, which represent an attractive source of financing (Ciarmatori et
al., 2018). For instance, the Commission has recently awarded more than €278 million to 75
start-ups and SMEs, under the pilot phase of the European Innovation Council Accelerator
(European Commission, 2019).

The process to gain access to European funding is complex and start-ups often do not have
the required knowledge and skills to autonomously monitor, identify and eventually respond
to the announced calls for proposals. Support is often offered by consultancy companies
(including freelancers), specialized in helping the companies/organizations potential
applicants, in different activities, from identifying EU funding opportunities, developing a
project, finding partners to prepare the applications for EU funding. However, also these
consultants depend on start-ups in carrying on their work as they have only limited
knowledge of the specific content and context of start-ups’ projects. Interaction between
start-ups and consultant (Nikolova et al., 2009) is thus key for the application to take shape,
but we have limited knowledge on how this happens in practice and how this affects the
funding application process and its outcomes.

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This paper thus aims to explore the emergence and development of the relationship between a
start-up and a consultant company in the circumstance of application for European funding.
Our research question has been formulated as follows: How does the relationship between a
start-up and the consultant firm develop and how does it affect the European funding
application process? In order to address this research question, we have conducted an
explorative case study of start-up firm that has engaged with a consulting company during the
development of a EU funding application (which did not succeed). The case study is explored
adopting an IMP perspective, which is able to highlight the interactive nature of business
relationships in a networked setting, as shown in the recent surge of IMP studies on startup
processes (Aaboen et al., 2017; Baraldi et al., 2019, 2020). Therefore, this paper aims to
provide a contribution on the process of starting-up newly created companies (Aaboen et al.,
2017) by examining how start-ups attempt to obtain European funding with the support of a
consultancy company.

                              STARTUPS AND FUNDRAISING

The phenomenon of startups starting up has attracted increasing attention among IMP
scholars (Aaboen, Dubois, & Lind, 2011; Snehota, 2011; Aaboen et al., 2011). Compared to
entrepreneurship studies, IMP-related studies on new business development have taken a
relational interaction perspective on the phenomenon, focusing on how new ventures develop
their first relationships (Aaboen et al., 2017; Aaboen et al., 2011; La Rocca et al., 2013) to
get access to counterparts’ resources to complement their own (limited) resources (Ciabuschi
et al., 2012; La Rocca et al., 2019). However, the IMP research stream on entrepreneurship
has devoted limited attention to the startups’ fundraising process and business relationships in
that context (Baraldi et al., 2020). Fundraising is a key activity for start-ups in their early
phase of development (Herber et al., 2017) when relationships with customers - which should
become the main source of future revenues - are still to be developed. Research on how start-
ups get access to different forms of financing is a well-established research topic in
entrepreneurship literature (Bellavitis et al., 2017). Startups are active in trying to get access
to a wide variety of funding channels, including traditional sources - such as family and
friends, financial institutions, venture capital firms and business angels (Bessière et al., 2019)
- and innovative ones, such as crowdfunding and European funding. Accessing financial
resources through these channels is difficult in the light of the strict requirements and the
complex procedure, which implies having specialized knowledge and networking skills
(Ciarmatori et al., 2018). Therefore, the overall management of fundraising activities
represents a key challenge for startups.

The entrepreneurship stream of research dealing with startups’ funding has mainly focused
on actors like angel and venture capitalist investors and how they decide which ventures to
invest in (Croce et al., 2018; Shafi, 2019). We know much less about the "support" and the
role of ‘intermediary actors’ such as consultants in the process of fundraising (Nikolova et
al., 2009). It has been observed that consultants may have an important role in the first phase
of start-ups development as they could be used to raise money (Bygrave & Timmons, 1992)
or helping in developing business plans (Duchesneau & Gartner, 1990). However, the use of
consultants has been also questioned, asking whether consultants really contribute to enhance
the performance of startups. Prior research suggests that hiring consultants does not always
lead to greater performance and that unfavorable results might also be expected (Chrisman et
al., 2005). Furthermore, support provided by consultants is usually temporary and often
regulated by formal contracts in which the services provided are the result of a negotiation

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between the parties (DeVaughn & Leary, 2017). Given that they can have a key role in
startups’ fundraising, and thus their development, we believe startups-consultancy firms
relationships deserve further investigation.

                                      METHODOLOGY

In line with the explorative nature of the study, this paper adopts a qualitative research
methodology based on a single case study. The main goal is to explore the relationship
between a start-up and a consulting company while collaborating in a project to gain access
to EU funding schemes. This analysis follows a processual perspective in order to highlight
the key steps and the evolution of the relationship among the two partners, as already adopted
in similar IMP studies. The case study concerns a start-up company - Alfa - based in Italy,
active in AI systems development and involved in an application of a proposal under the
SME Instrument I scheme promoted by the EU. This proposal has been developed in
cooperation with Omega, a local consulting firm active also in supporting EU projects
planning and management. This case has been chosen according to the following criteria: i)
the complex nature of the product/service; ii) the chance of following the entire process of the
application (including submission and re-submission); iii) the lack of previous experience of
Alpha regarding EU funding projects. Data collection (which is ongoing) is primarily based
on participant observations during the period of the project as one of the co-authors has been
involved as an Intern in Omega during the re-submission phase. In addition, 4 open ended
interviews have been conducted with the Project Manager in Alfa (2), the Responsible of EU
projects in Omega (1) and a University Professor cooperating with the project (1). All of
them have been highly involved in the project from the beginning until the end. Secondary
data, in form of reports, drafts of the proposals, e-mail messages, have been collected with
regard to the activities conducted for the duration of the project. Available data have been
articulated along different phases, pointing out the main events in the evolution of project.

                              CASE ANALYSIS (IN PROGRESS)

Origin of Alfa and search for EU funding
Alfa was established in the centre of Italy in 2016 as an innovative start up active in novel
applications of artificial intelligence (AI) systems. The founding team was composed by 4
co-founders with heterogeneous background: a Mechanical Engineer (Project Coordinator),
an Electronics Engineer (Technical Manager) and two Chartered Accountants (Financial
Manager and Legal Manager). In addition, a Sales Manager has been hired to manage the
commercialization of the product - in cooperation with the Project Coordinator for the
technical aspects – and to raise funds. Since its origin Alfa has been financially supported by
private investors, which were entrepreneurs experienced in the automotive and consumer
goods industries oriented to diversify their personal investment portfolio in AI-related
projects. Therefore, it was a kind of "Family and Friends" investment, as the investors were
acquaintances of two of the co-founders. The entrepreneurial idea was first developed in the
Master Program thesis of the Project Coordinator as a matching platform for engineering
services, evolving over time into an AI based service for technical and engineering design.
The main product developed by Alfa is a Design Support System (DesSS), a Software as a
Service able to predict the design features in the process of development of new products,
with potential applications in the fields of process control or optimization. The novelty in
DesSS lies in the predictive approach, as it uses Machine Learning techniques accessing to

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different types of data. To develop its solution, Alfa implemented informal cooperation -
exploiting previous personal contacts of two co-founders - with the Department of
Information Engineering (DII) of Gamma University (GU), for the development of
algorithms and of the back-end, and with a local high-tech company for the front-end of the
software, whose involvement has been suggested by GU partners. The first marketable
version of the software has been tested to predict the characteristics of new variants of
electric motors (design) with an Italian company operating in the design of electromagnetic
devices. Other possible applications are process quality and sales. In this way, the software
meets the needs of two main types of customers: manufacturing companies, engineering and
design studios. A preliminary analysis of demand conducted by Alfa - in cooperation with the
local Delta University (DU) - showed that DesSS might have about 2.5 million potential
customers geographically in United States and Europe. To obtain additional funds to enter the
market and to gain an assessment of the economic and technical feasibility of their
innovation, the founders, following the advice of a GU professor partner, started considering
funding through the EU program SME-Instrument Phase I, which is a scheme dedicated to
both startups and long-standing SMEs. This program represents the financing scheme of
Horizon 2020 programme dedicated to the SMEs launched in 2014 with a budget of around €
3 billion (European Commission, 2015). In the meanwhile, Alfa attempted to collect financial
resources - without success - also through an "Acceleration program" in the United Kingdom
managed by an Italian business community. Obtaining the EU funding was therefore
absolutely necessary to continue the startup activities. The financial support of the Regional
Government - the so-called "voucher" for consulting services - to promote EU funding
applications has been a key incentive to carry on with this option.

Evolution of the EU project application
Preliminary interaction (June-July 2018)
In order to assess the feasibility of a funding proposal within the SMEs Instrument 1 scheme,
Alfa contacted a local consulting firm, Omega, following the advice of a GU Professor
partner. Omega is a small consulting firm active in consulting services on EU projects,
Systems for Managerial control and Risk Management and Lean Technology. Omega has a
partnership with GU for R&D projects in the area of Industry 4.0 and has gained experience
in EU project management over the years with both large and small customer firms in a
variety of sectors. Between 2018-2019 the incidence of the revenue of EU SME Instrument
project design on total revenue for Omega was about 2%; thus, the service in itself was not
strategically relevant, but it represented a preparatory phase to the actual management of EU
projects, as highlighted by the Senior Consultant:
   “We don't make money on the project design, but we do with the management of approved
   projects…therefore you have to help to design well, otherwise you don't win them”
The first meeting between Omega and Alfa aimed at analysing and discuss the project idea.
The startup’s aim was to gain access to the EU SME-Instrument to finance the
commercialization of the DesSS, since the development of the product had exhausted the
available funds. Omega is interested in selecting projects with more chances to be eligible for
funding. For the preliminary analysis, two experts were involved: The Head of Lean
Technology Department in Omega and the GU Professor who acted as advisor to Alfa.
During the meeting, Omega expressed some doubts about the innovativeness of Alfa’s
solution, but the positive assessment of GU Professor, who plays often the role of EU Referee
for Industry 4.0 projects, convinced Omega to collaborate with Alfa:
   “from the point of view of the technology, I tend to ask the opinion of those who have expertise in
   the technology, because I cannot have expertise in tourism, health, industry, artificial intelligence

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…in this case the Professor of the university and he told me that it was a very interesting and
   innovative thing, certainly to be developed a little more ... [but] beyond the state of the art. Then I
   saw that they [Alfa] were serious because they had already developed a sort of business plan
   which in the end is what is needed for the proposal. They showed me numbers on a target market
   ... that, if it is true what they wrote, was of interest ... these are the evaluations I do [before taking
   a decision]”

First submission (July 2018-November 2018)
The first submission stage consisted of five phases: 1) preliminary draft of the project, 2)
development of the project proposal, 3) refinement of the project proposal, 4) submission of
the final version of the proposal in the EU portal. The initial phase started after the
acceptance of the ‘bidding document’. First, the consultant shared the form of the proposal
and the work schedule with Alfa, whose Sales Manager was in charge of interacting with
Omega. The main sections of the proposal are: Impact, Excellence and Implementation. The
development phase was characterized by frequent exchange of e-mails leading to five
different drafts of the proposal. This process was iterative, shaped by the timing of the
deadlines set up by Omega and based on Omega’s feedback on identified weaknesses. While
Alfa’s Sales Manager easily followed the procedures - in terms of project management tools
and timing of the work processes - he had some difficulty in collecting data on market and
economic feasibility, aspects of the proposal that the Consultant was trying to improve.
Another problem concerned the provision of requested data on the technological quality of
the project, which implied the involvement of the Alfa’s technical managers. The two
managers had very limited interaction with Omega, while most of the work of revising and
filling the form has been undertaken by the Sales Manager. Omega was looking for further
commitment by Alfa:
  “…the relationship was not ... I was not very satisfied ... the Project coordinator and the Technical
  Manager of Alfa, they were always serious. They came twice to the office at Omega, they never
  gave feedback. They were probably overworked but they let the commercial manager do
  everything but he was there to do the commercial part, so he did not have the skills [for the rest].
  It was him who made the link between them and us, in my opinion they had to intervene more”
According to Alfa’s sales manager, Alfa’s confidence in Omega has increased over time,
strengthened by the initial referral of the GU Professor as the Sales Manager highlights:
  “maybe there was a bit of diffidence at the beginning to disclose all information about your
  business idea to a consultant ... but it seemed like a good opportunity, we trusted the Professor,
  and therefore despite the first meeting [being not satisfactory] …. already from the second [which
  went better] ... then when you start to collaborate ... things improve"
Six drafts were created before the proposal was completed. In the final version all the
required information for a SME-instrument Phase 1 proposal was included. Although the GU
Professor was included in the proposal as external consultant on AI technology, GU was not
mentioned as an official partner due to the absence of formal agreements. The proposal was
submitted in November 2018, even though Alfa was pushing for submitting it before to have
the feedback earlier in terms of funding. The evaluation report by the EU was sent back on
December 2018 with an overall evaluation of 12.11 (minimum threshold to obtain the funds
is 13/15) articulated as follows (all with minimum threshold 4): Impact 4.10, Excellence 3.85,
Implementation 4.10.

Re-submission
After a meeting to discuss the outcome the partners agreed on the re-submission. Omega
accepted because, according to their experience, resubmissions have more chances when the

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score is over 12, while Alfa perceived it as an opportunity because the costs were still
covered by the Regional voucher. However, it was not easy for the two partners to agree on
how to improve the proposal. Furthermore, they found the EU report was lacking details on
the criteria adopted for evaluating the various subsections and interaction with members of
the evaluation committee was not allowed. Omega proposed - based on previous experience
with EU projects - to devote more attention to the Impact, with additional content on the
competitive analysis, the financial and sale forecasts, and the range of potential applications
of the product/service. Alfa’s Sales Manager followed up to the request, by providing through
e-mail all the information needed to create a first revised version of the proposal. In this
phase, Omega was supported by an Intern Phd Student of DU. The first draft resulted
incomplete in relation to the economic and market analysis and the issue was explained like
that by the Sales Manager:
   “It hasn't been very easy, especially if you have a potential market... that you haven't actually
   served. This is a critical aspect that I noticed, in addition to the difficulty tied to evaluating the
   business of a startup that doesn't have any business yet...there is another difficult thing to
   evaluate... you have to estimate possible revenue based on a revenue that you don't have...”
A new meeting was thus requested by Omega to address the missing information and after
new iterative exchanges on the proposal, the sixth draft received positive feedback by
Omega. In May 2019, the final draft of the proposal was approved and submitted. The final
evaluation was sent in mid-June 2019. The total score of 12.49 (4.10 in Impact, 4.20 in
Excellence and 4.25 in Implementation) was slightly higher than in the first submission
(12.11), but it was not enough to obtain the funding. After receiving the feedback on the
resubmission, Omega proposed to exploit the ideas and the content of the project to attempt
other more specific call for tenders by the EU, but Alfa did not show interest in this proposal
and since then has not been active in searching for other funding. Therefore, the relationship
between Omega and Alfa has ended. Looking back, Omega’s consultant does not see any
clear weak spot in the way the project was managed, but he perceives that a greater effort
could have been done in terms of interactions/communication with Alfa in particular with the
‘technicians’:
   “maybe I had to push more those who had the business idea in their minds, request a greater
   contribution from the technicians of the Alfa project team …; not the guy they put as interface
   with us, but the others. So I had to insist more on the collaboration on their part … maybe a more
   direct confrontation, do more meeting or calls, try together to do a sort of brainstorming ...
   reading, reasoning together, proposing ideas… by doing so you might get a new idea …”

                      DISCUSSION AND CONCLUSION (PRELIMINARY)
The case shows the development of a relationship between a startup firm and a consultancy
firm within an application project for European funding promoted by the startup firm. There
are some aspects of the relationship that might explain how the project evolved.

The decision to undertake the proposal for EU funding - the SME Instruments program -
emerged thanks to the involvement of a third party, belonging to the academic setting (the
GU professor), who has made possible the first contact between Alfa and Omega. The same
actor had a key role in the decision of Omega to commit to Alfa’s project application.
Without the GU Professor’s endorsement of Alfa’s solution (positive assessment of the
innovativeness of the solution), Omega would not have started the collaboration. The
relationship between Alfa and Omega thus started in an ambiguous atmosphere, in which
Alfa and Omega were still not fully convinced about being committed to the project, thus
showing initial difficulties (La Rocca & Snehota, 2014).

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Once the drafting of the proposal started, the management of the project has been smooth and
the application easy to handle by both parties, however showing a low interaction intensity,
unlike to what has been found in the study by Kronlid and Baraldi (2020), despite the tight
timing of the application process. Interactions between Alfa and Omega appear episodical,
often limited to meetings where parties gained only partial understanding of the relevant
issues. Omega does not find the ‘right’ speaking partner in Alfa’s team, as the founders with
technical knowledge delegated the task to the Sales Manager –who became the almost sole
interface with Omega. This behaviour seems to be caused also by the parallel involvement of
all the actors involved in other activities and projects, requiring further time and commitment.
Joint endeavors for tacit knowledge exchange and transfer were lacking throughout the
project development. There is no sign of appreciation among the actors of the ‘tacit
knowledge’ on the one hand nor of the role of interaction in developing new knowledge,
especially related to practical applications at the core of the proposal. Instead there is an
emphasis on specialization and division of tasks between the startup and the consultancy
firm. Therefore, what emerges is a low awareness of Alfa of the need of effectively
integrating and interfacing the various parts and activities of the funding proposal.

While the case and its analysis is in progress, this paper represents a preliminary contribution
on startup firm and funding, focusing on the process of developing a European funding
proposal with the support of a consultancy company. This paper, confirms finding of
previous studies evidencing startup firms' difficulties in relating with external actors (La
Rocca & Snehota, 2014) and highlights the nature and means of interaction with consulting
partners (Nikolova et al., 2009) as a key feature of the funding process, to be further explored
in this research.

This paper offers interesting insights also with regard to managerial and policy implications.
From the case analysis seems that fundraising and relationships with concerned actors –as
with consultancy firms in our case– requires high involvement and high interaction intensity
to be productive, as for relationships with other business actors. This is particularly true for
EU funding processes, which require skills in managing the application procedure and high
quality and innovativeness in terms of content (Ciarmatori et al., 2018).

In terms of policy implications, the case study points out the role of specific policy measures,
as the voucher for consulting services, which are supposed to promote interaction and
cooperation within the networks of public and private actors for undertaking innovative
projects. Their effectiveness could be negatively influenced by the misalignment between the
established practices of the involved actors (La Rocca & Perna, 2014) and by the lack of
interaction with key institutional actors in the funding process, as the European Commission.
The role of the policy would then deserve major attention as it may activate or even hinder
certain types of funding processes which are fundamental for the startups. A deeper
understanding of the mechanisms which regulate the funding process especially oriented for
supporting the development of startups – such as the voucher or similar forms – could be a
way to continue developing this ongoing research.

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