Arnold C. Cooper

Initial human and financial capital as predictors of new venture performance

Investigates the probability of new firm success or failure based on factors that can be observed at the time of initial startup. Four categories of human and financial capital were considered: (1) general human capital--which may reflect the extent to which the entrepreneur has had the opportunity to develop relevant skills and contacts--including the entrepreneurs race, gender, education; (2) management know-how--which reflects management skills and knowledge--including the entrepreneurs own skills or skills available through advisors or partners; (3) industry-specific know-how--which reflects specific experience in other businesses; and (4) financial capital--which can create a buffer against random shocks and allow the pursuit of more capital-intensive strategies. Data were gathered from 1,053 responses from questionnaires sent to owners of firms established within the previous 1 1/2 years. The firms, from a variety of industry sectors and geographical regions in the United States, were tracked over a three-year period, during the years 1985 to 1987. Findings show that measures of general human capital impacted both firm survival and growth. One exception to this was gender--female-owned enterprises were less likely to grow, but just as likely to survive. Amount of initial capital was also shown to influence both survival and growth. However, management know-how, number of partners, and having parents who had owned a business had a more limited impact. Significant effects were not found for management level, prior employment in non-profit organizations, not having been in the labor force, and the use of professional advisors. It should be possible to predict the future success or failure of new ventures using the four categories of human and financial capital utilized in this study (after dropping the insignificant components of personal characteristics). These measures are readily identifiable at startup, and in some cases potential problems can be identified and remedied. (SFL)

Entrepreneurs' Perceived Chances for Success

Abstract Entrepreneurs involved in planning or starting firms must engage in a continuing process of appraising prospects for success. These assessments presumably bear upon the preparations they make, as well as, at some later point, whether they decide to make major changes or even to discontinue the business. In this study, data from 2994 entrepreneurs who had recently become business owners were analyzed to determine their perceived changes of success. Although previous evidence on business survival led to the hypothesis that the entrepreneurs would only be cautiously optimistic, this was not the case. They perceived their prospects as very favorable, with 81% seeing odds of 7 out of 10 or better and a remarkable 33% seeing odds of success of 10 out of 10. In considering the prospects for other businesses like their own, they perceived odds which were significantly lower, but still moderately favorable. Based upon previous research on factors associated with new business success, it was hypothesized that those who were “more likely to succeed” (based upon their personal backgrounds and the nature of their new firms) would be more optimistic. However, this was not the case. Those who were poorly prepared were just as optimistic as those who were well prepared. At this point, shortly after having become business owners, the assessment by entrepreneurs of their own likelihood of success was dramatically detached from past macro statistics, from perceived prospects for peer businesses, and from characteristics typically associated with higher performing new firms. The psychological literature on “post-decisional bolstering” suggests that decision makers, in many settings, tend to bolster or exaggerate the attractiveness of an option after it has been chosen. This, coupled with the tendency of entrepreneurs to believe that they can control their own destinies, implies that the extreme optimism observed here is probably a typical occurrence. For entrepreneurs the findings suggest that it is probably natural to experience feelings of entrepreneurial euphoria when first becoming a business owner. With the available evidence, it is difficult to judge whether this leads to inadequate preparations or an inability to diagnose problems and make adjustments after the business is started. This extreme optimism probably does contribute to the heavy personal commitments observed here, in which the median entrepreneur devoted more than 60 hours per week to the business. The entrepreneur would seem well advised to form relationships with outsiders, such as board members and professional advisors, who can be objective and detached in diagnosing problems and assessing objectively the prospects for the business in its current form.

Strategic responses to technological threats

Technological innovation can create new industries and transform or destroy existing ones. At any time, many businesses are confronted with a host of external technological threats. Managements of threatened firms realize that many threats may not materialize, at least in the short run. However, one or more of those potential threats may develop in ways that will have devastating impact. Providers of kerosene lamps, buggy whips, railroad passenger service, steam radiators, hardwood flooring, passenger liner service and motion pictures all have had to contend with such threats. Few environmental changes can have such important strategic implications. A typical sequence of events involving the traditional firms responses to a technological threat begins with the origination of a technological innovation outside the industry, often pioneered by a new firm. Initially crude and expensive, it expands through successive submarkets, with overall growth following an

Success Among High-Technology Firms

Examines the development patterns for new, high-technology firms and determines factors that relate to the success or failure of these firms. Specifically considered are the extent to which these firms discontinue, become acquired, or achieve unusual sales growth and the founder characteristics (identifiable at time of startup) that relate to the companys success or failure. Prior studies finding high rates of firm discontinuance have not focused on high-tech manufacturers. Data were gathered in 1969 through published sources, and interviews with founders and industry experts, for 250 high-technology firms founded in the San Francisco Peninsula during the 1960s. Follow-up studies--using questionnaires, interviews, and data from the California Secretary of State--were conducted in 1973 and 1976. Findings indicate that the number of discontinued firms rose from 4.8% in 1969 to 24.4% in 1973 and 29.2% in 1976. This rate of discontinuace was lower than that found for non-technical firms in other studies. The level of growth was also higher. The rate of acquisition or merger of the firms was high: 19.6% by 1969, 22.8% by 1973, and 23.3% by 1976. Since both successful and unsuccessful new firms were acquired, this may be a partial explanation of the lower discontinuance rate. Even successful firms underwent frequent changes - of management, ownership, name of firm, product lines. Overall, the 73 firms that had discontinued by 1976 were identified as unsuccessful, and 31 (or 12.4%) were defined as successful in that they had achieved annual sales of more than

Entrepreneurial information search

5 million - typically achieved by only 5% of American manufacturing firms. Finally, in this study, it was found that high growth firms were more likely to have been started by groups of individuals who came from large corporations and whose new firms used similar technologies and served similar markets as these corporations. (SFL)

Entrepreneurship and the initial size of firms

Abstract Information is a key resource for the new venture. Despite the importance of information search practices, little research has examined whether entrepreneurs show a tendency to search for more or less information under particular conditions. This article considers whether information search might be explained by concepts of bounded rationality. Such theories lead to the counterintuitive expectation that entrepreneurs with less experience or those entering unfamiliar fields would search less because of their more limited understanding of what is needed. In addition, entrepreneurs with higher levels of initial confidence would search less because their “entrepreneurial euphoria” may limit their ability to assess their own needs for additional information. This study examined the information search practices of 1176 entrepreneurs. It considered six sources of information that were widely used: accountants, friends or relatives, other business owners, bankers, lawyers, and generally available books and manuals. Three measures of search intensity were developed, with the first reflecting the relative importance of all six sources and the remaining two focusing upon the subcategories of professional and personal sources. It was found that those who had no entrepreneurial experience, on the average, sought more, not less, information. However, as expected, those who ventured into fields which were different and those who had higher levels of initial confidence sought less information. An interaction effect provides insight into these findings and reveals that inexperienced entrepreneurs varied their search depending upon whether they were in familiar or unfamiliar domains. In particular, novice entrepreneurs searched less extensively in unfamiliar domains, a behavior consistent with bounded rationality. By contrast, experienced entrepreneurs did not vary their search pattern. It was also found that entrepreneurs having high levels of confidence sought less information, as expected. The behavioral tendencies observed here appear to have clear implications for entrepreneurs and their advisors. We might expect that those venturing into fields they do not know would have more to learn and thus would search more aggressively. However, neither inexperienced nor experienced entrepreneurs acted in this way. In fact, inexperienced entrepreneurs lessened their search as they entered fields they did not know, consistent with the bounded-rationality model. Many prior studies have found that entrepreneurs entering unfamiliar fields are, on the average, less successful (Cooper and Gimeno-Gascon 1992). This certainly raises questions about whether entrepreneurs, both experienced and inexperienced, might benefit from greater emphasis upon gathering and utilizing external information as they enter fields that are new to them. Outside advisors (if the entrepreneur will utilize them) may be helpful in urging and assisting entrepreneurs who enter unfamiliar fields to engage in more extensive information search, even though they may have less developed networks of contacts and less of a feeling for what is needed in such fields. With respect to initial confidence, entrepreneurs and their advisors should recognize that high levels of confidence may lead to lower levels of information search. Recognizing this tendency, they should use care to ensure that entrepreneurial euphoria does not lead to blinders in the search for information.

Strategic management: New ventures and small business

Abstract It is clear that entrepreneurs and their firms can vary widely. Nevertheless, most of the research to date on entrepreneurship has examined central tendencies, with relatively little attention devoted to entrepreneurial diversity. This study examines one of the most distinguishing characteristics of young firms—initial size. The focus is whether smaller start-ups differ from larger ones in the backgrounds of the entrepreneurs, their processes of starting, or the subsequent patterns of development. In this longitudinal study, an initial sample of 1903 young firms was examined to determine differences in characteristics of the entrepreneurs and in their processes of starting. One year later, data were obtained from 742 of these firms, permitting analysis of how initial firm size was related to subsequent difficulties encountered and changes made, as well as to performance. As expected, along almost every dimension, these starting larger firms had the backgrounds that would seem to be necessary for the assembly of substantial resources. They tended to have more education, more management experience, and goals that were more managerial in nature. They also were more likely to have partners. Women were associated more often with smaller ventures, but, for this sample, there were no differences in the representation of minorities between the smaller and larger start-ups. Those starting larger ventures tended to rely more upon external investors and to start ventures more closely linked to their previous jobs. Both groups of entrepreneurs sought information from a number of sources, but those founding larger ventures utilized professional advisors more, whereas those starting smaller ventures utilized informal sources. In the year after the first questionnaire, differences between the two groups were less marked than expected. Both groups of surviving firms reported low levels of serious problems, with the smaller ventures (somewhat surprisingly) reporting serious problems less often. There were not many differences in changes made except that smaller ventures were more likely to lose partners and larger ventures were more likely to add branches or locations. Both groups reported high rates of mean growth in sales. The smaller ventures (with their small initial bases) showed larger percentage increases. Smaller ventures also showed higher percentage increases in employment and, surprisingly, a greater increase in the absolute number of employees. Somewhat more of the smaller ventures had discontinued. Both groups included many firms that grew substantially and others that scaled back, demonstrating the fluidity and experimentation characteristic of young firms. For entrepreneurs and their advisors, for public-policy makers, and for researchers, any progress in understanding entrepreneurial processes should, in the long run, enhance venture performance. The patterns observed here indicate that firms of different initial size tend to be associated with particular entrepreneurial characteristics, processes of formation, and subsequent patterns of development. This diversity should be recognized in the development of assistance programs and university courses, as well as in the interpretation of previous research. For public-policy makers, the growth of these firms, both small and large, indicates the potential of economic contributions from entrepreneur ship. Further, the growth of the smaller start-ups suggests that even those ventures that appear to have few resources and modest potential can, in the aggregate, contribute substantially to the economy.

Determinants of satisfaction for entrepreneurs

Abstract This paper examines the factors influencing the formulation and implementation of strategy in new and small firms. Small businesses vary substantially in their resource positions, the goals of their founders and their potential. They also vary in stage of development: thus strategic management is examined separately in the start-up stage, the early-growth stage, and the later-growth stage. Intracorporate entrepreneurship in established firms is also considered. Despite this diversity, small firms create an environment for strategic management in which both the opportunities and constraints are different from those in large organizations.

The role of incubator organizations in the founding of growth-oriented firms☆

This study considers the extent to which entrepreneurs are satisfied with their businesses in their third year of business ownership. Entrepreneurial satisfaction might be viewed as a basic measure of performance. It may bear upon decisions by individual entrepreneurs about whether to invest more time and money, whether to cut back, or whether to close down. It may also influence whether entrepreneurs work effectively with their customers and employees. For researchers, the investigation of why, in particular settings, some entrepreneurs may be more satisfied than others may aid in the interpretation of past research, which has used this as a performance measure. This research draws upon a theoretical framework used in investigations of employee satisfaction. Called discrepancy theory, it suggests that individual satisfaction is determined, in part, by whether there is a “gap” between actual rewards or performance and the individuals goals or expectations. In this research, it was hypothesized that entrepreneurs emphasizing primarily noneconomic goals (such as doing the work they wanted to do) would have higher satisfaction when the business was experiencing lower levels of performance. For higher levels of performance, there would be no difference. In essence, the satisfaction of those emphasizing economic goals would vary more with economic performance. A related hypothesis was that, for this sample of start-up firms (many of which would be experiencing low levels of performance), those emphasizing noneconomic goals would have higher average levels of satisfaction. This was based upon the expectation that many start-up firms would be experiencing marginal performance, so that the “gap” between goals and performance would be greater for economically oriented entrepreneurs. The research also focused upon expectations, because one aspect of discrepancy theory suggests that satisfaction decreases if there is a gap between expectations and performance. Accordingly, it was hypothesized that, controlling for performance, entrepreneurs with higher initial expectations would subsequently have lower levels of satisfaction. Previous research suggests that membership in particular demographic groups may influence expectations. This led to hypotheses that older entrepreneurs, female entrepreneurs, and minority entrepreneurs would have lower levels of initial expectations. This, in turn, may influence later satisfaction. Thus, it was hypothesized that, controlling for performance, entrepreneurs in each of these groups would have higher satisfaction because their initial expectations would be lower. The study utilized a sample of 287 entrepreneurs who were followed over a 3-year period. The data on predictors of satisfaction were gathered in year 1, when the average owner had been in business for 11 months. The satisfaction measures were gathered 2 years later. By that time there should have been some stabilization in the routines of the business, and the entrepreneur could reflect upon historic performance and experiences in judging the extent to which business ownership had been satisfying. The data were analyzed primarily using path analysis, in which it was hypothesized that certain variables would have both direct and indirect effects upon satisfaction. It was found that the satisfaction of entrepreneurs emphasizing economic goals was not more sensitive to economic performance, at least within the range of performance considered in this sample. For this group of firms, many of which appeared to be experiencing marginal performance, those emphasizing noneconomic goals did express higher levels of satisfaction. It had been expected that those with higher initial expectations would later be less satisfied because they would have a greater expectation-performance gap. However, the opposite was found; those who were more optimistic initially were more satisfied later, even when controlling for performance. Demographic influences on initial expectations were examined. Contrary to expectations, none of the demographic traits was significantly related to initial assessment of likelihood of success. Older entrepreneurs, women entrepreneurs, and minority entrepreneurs were just as optimistic as those in other groups. The relationship between membership in these demographic groups and later satisfaction was also examined. No significant relationships were found for older entrepreneurs and minority entrepreneurs. However, there was some evidence (p = .07) that women entrepreneurs were more satisfied with business ownership. Two of the most interesting findings were those related to initial expectations and to women entrepreneurs. Contrary to discrepancy theory, those who had higher initial expectations were later more satisfied, not less. This may suggest, as Staw and Ross (1985) found in a longitudinal study of employee satisfaction, that attitudes are, in part, a function of stable individual traits. Those who had a positive view of their initial prospects later viewed the experience of business ownership more favorably, regardless of subsequent performance. For women entrepreneurs, the higher levels of satisfaction may reflect a view that they have fewer attractive alternatives; it may also be that they discover greater relative satisfaction from the day-to-day aspects of business ownership. For entrepreneurs and their advisors, the findings suggest that particular goals, attitudes, and backgrounds are likely to be associated with greater satisfaction. This may influence whether entrepreneurs stay with marginal businesses. For researchers, the study provides insight into discrepancy theory by considering its application to entrepreneurs rather than the hired employees normally studied. In addition, subjective measures of performance, such as satisfaction, have often been used in previous research on entrepreneurial performance. This study casts light on why, in particular settings, some entrepreneurs may be more satisfied than others.

A Strategic Model of the U.S. Brewing Industry: 1952-1971

The influence of an organization upon an individuals entrepreneurial endeavors has yet to be explored at length; however, reason would suggest that entrepreneurs would be greatly influenced by those industries with which they have experience. The organization at which an entrepreneur previously worked is characterized herein as an incubator. Entrepreneurs may spin out new ventures from universities, business firms, or other organization types. Although past research has focused on numerous factors which impact the relationship between incubator organizations and the entrepreneurial process, this current research focuses on four primary factors -- location of the organizations, the type of industry involved, the type of incubator organization, and the size of the incubator firm. The sample of 161 startups is amassed from new firms highlighted in national magazines, including Inc. (January 1981-November 1984) and Venture (January 1980-June 1984). The firms are categorized and analyzed based on the four factors. The findings indicate that, among the electronics and computer industries, both location and industry type significantly relate to the incubator firm. The software and biotechnology firms, while often located in close to proximity to their incubator firms, had a lower likelihood of engaging in an industry similar to their incubator firm. The implications of the findings, and local and regional assistance programs, are examined. One example: Entrepreneurs are found not to be very mobile at the early stages; encouraging local growth may therefore be more successful than attracting early stage firms to relocate. (AKP)