Carolyn Y. Woo

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.

Entrepreneurial information search

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.

Entrepreneurship and the initial size of firms

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.

Multimarket Contact, Economies of Scope, and Firm Performance

We integrate the efficiency and competitive effects of product-market scope choice into a comprehensive model of economic performance and empirically test the model in the context of the U.S. airli...

The development and interpretation of entrepreneurial typologies

Abstract The impact of the entrepreneur on the development and subsequent success of a new venture has been demonstrated in many studies. Indeed one of the most important judgement calls of professionals assisting entrepreneurs is to evaluate their strengths, limitations, management practices, and likelihood of success. Research has responded to the need for such evaluation with different attempts to identify the relevant characteristics of the entrepreneur that may bear upon the management practices and subsequent success of new ventures. One direction of this research has led to the identification of different types of entrepreneurs. Entrepreneurs within each typology share common traits but differ significantly from those of other types. Such attempts are useful in that they identify key differences within the larger population of entrepreneurs and do so in a way that yields holistic and meaningful portrayals. More importantly, classifications allow us to make better predictions, based on membership in a specific typology, about the likely behavior, responses, and success of the entrepreneur. These offer a powerful conceptual tool for the evaluation of entrepreneurs during the start-up or early stages of a venture before the track record of the individual involved can be established and observed. Research studies over the last decade appear to converge on two types of entrepreneurs, craftsmen and opportunists. Craftsmen usually come from a blue collar background with limited education and managerial experience. They prefer technical work to administrative tasks and are generally motivated by needs for personal autonomy rather than the desire for organizational or financial success. In contrast, opportunists are characterized by broader experiences and higher levels of education. They are more likely to be motivated by financial gains and the opportunity for building a successful organization. These two types have been widely accepted and have been found to differ in regard to an array of characteristics and behavior. For example, the two types appear to engage in different levels of explicit planning and information gathering in preparation for the start-up of business. The ventures shared by the two types can also be contrasted along such dimensions as size, capital, the presence of partners, and relatedness to prior experience. The two types also manage differently as exhibited in the formality of administrative procedures, allocation of time to different functions, spans of control, and levels of authority. Some evidence suggests that the typology even appears to distinguish entrepreneurs in terms of attitudes toward risk, adaptiveness to change, and cognitive processing of opportunities. Most important, the classification seems to suggest that typologies differ in regard to growth potential and the likelihood that ventures will proceed to the next life cycle stage. The classification consisting of these two types of entrepreneurs represents a critical contribution to the extent that it possesses strong predictive power regarding a range of entrepreneurial behavior and performance. This study focuses upon the conceptual frameworks used and specific methods applied in developing entrepreneurial typologies. It examines the extent to which different entrepreneurial typologies are consistent. It seeks to alert us to how the methods used in developing typologies affect the results. It suggests that typologies developed to date lack comparability and predictive power. A close examination of previous studies disclosed major differences in the criteria used to classify entrepreneurs. Thus, craftsmen in one study might have been identified on the basis of two characteristics, whereas another study employed as many as 50 criteria. In some studies, all entrepreneurs are classified into typologies, whereas in others, many entrepreneurs are “in-betweens” and left unclassified. The same labels have often been applied to types derived through divergent methodologies, suggesting a degree of commonality that may be misleading. There is the appearance of a body of consistent and additive knowledge about craftsmen and opportunist entrepreneurs that does not rest upon a careful consideration of the methodologies employed. Yet, how likely are we to obtain the same groupings of entrepreneurs from different classification schemes as implicitly assumed in the cross-references we have accepted? This study explicitly evaluated the impact of such differences by contrasting the groupings of entrepreneurs obtained through three different classifications. It is, we think, the first empirical examination of the extent to which traditionally defined entrepreneurial typologies are sensitive to the classification criteria used. Patterned after demonstrated practices in the literature, this study grouped entrepreneurs using: (1) goals; (2) goals and background (education and experience); and (3) goals, background, and management style. Within each classification, entrepreneurs were divided into two groups using cluster analysis. The results showed that different classification criteria did result in different groupings. In particular, classification based solely on goal orientation demonstrated the most pronounced differences from the results of the other classifications. Second, we found that none of the three pairs of groups patterned closely the craftsman/opportunist delineation as described in the literature. The primary conclusion that different groupings result from different classification frameworks should not be surprising, at least from a methodological standpoint. Yet the problem has been totally overlooked in the analysis and interpretation of entrepreneurial types. Very likely, the same labels may have been applied to rather different entities. What then are the implications for the use of this typology as an evaluative tool? First, we note that the definitions of craftsman and opportunist have not been resolved and take on as many variations as the number of studies on the topic. Second, the findings of each study have not really been corroborated by findings in other analyses. As such, the level of generalizability and confidence attached to each must be checked. Third, the cumulative evidence in the body of literature on entrepreneurial typologies cannot be taken as additive knowledge about the wide range of characteristics associated with each type. Hence, the predictive power of the craftsman-opportunist typology cannot be taken for granted. Fourth, it remains to be demonstrated what percentage of the population of entrepreneurs can be represented by the two types. How universal are craftsman and opportunist entrepreneurs or can only some entrepreneurs be classified in this way? Do other types, though yet unidentified, exist? The above reservations lead us to conclude that while the craftsman-opportunist classification appears to serve as a useful yardstick for measuring the potential behavior and likely success of entrepreneurs, its applicability and scope may have been exaggerated to this point. This is not to say that typologies have little value, but rather to demonstrate the need for consistency and careful consideration of the definition of types before integrated and validated portrayals of entrepreneurs can be developed. Without these, the validity of our yardstick remains questionable.

Strategic experimentation: Understanding change and performance in new ventures

Abstract This research was motivated by an interest in understanding more about the extent to which entrepreneurs initiate changes along various dimensions of strategy, the nature of those changes and their implications for firm performance. Our interest in this topic began with the observation that, within the large body of strategic-change literature, the research effort has focused almost exclusively on large and established firms. Moreover, a fundamental assumption underlying much of this work is that strategic change involves movement from one dominant strategic approach to another. This premise does little to motivate or contribute to the understanding of change and strategy in new ventures, where it is less likely that a dominant approach exists. Thus, we drew upon the literature in managerial cognition to develop the idea of strategic experimentation as the conceptual foundation for studying change and strategy in new ventures. Our basic premise is that in new ventures, changes along dimensions of strategy are reflective of a process of trial and error learning, whereby the entrepreneur seeks to develop an understanding of the competitive situation and determine how to compete within that context. Further, we suggest that some aspects of the firms strategy are more likely to be the focus of experimentation than others. Building on these premises we developed a series of research hypotheses which propose that the greater the level of perceived environmental hostility, the higher the level of strategic experimentation that will be undertaken. We also propose that experimentation will always be greater along some dimensions of strategy than others, and that the degree of environmental hostility will influence the extent to which there are performance benefits associated with strategic experimentation. Our hypotheses are tested using data from a three-year study of over 400 young businesses. Overall, we find support for our assertions. For entrepreneurs and their advisors, this study has several important implications. First, it suggests that strategic experimentation is a normal part of the process by which entrepreneurs seek to position their businesses. Although the present study does not empirically address the linkage between formal planning and experimentation, the learning and cognition literature upon which the construct of strategic experimentation is based suggests that, no matter how much attention to detail is involved in the preparation of the business plan, the actual formation and development of the business will involve considerable adjustment to and/or deviation from that plan. This is because the process of new business development involves iterative changes in the way the entrepreneur positions his/her firm as he/she develops an understanding about what does and does not work. The results of this study further suggest that some dimensions of the firms strategy are more likely to change than others. Specifically, it appears that peripheral changes (competitive emphasis and time allocation) are more likely to be the focus of such learning and adaptation efforts than core features (product scope and partnership status). This, in part, is because the former dimensions are easier to change than the latter. Moreover, our results show that ventures in more hostile environments clearly face difficult dilemmas. Although poor performance may stimulate experimentation along various dimensions of strategy, the complexity of learning within a hostile environment suggests that entrepreneurs will have a particularly difficult time determining the type of changes that will make a difference.

Strategies of high performing new and small firms: A reexamination of the niche concept

Abstract Entrepreneurs seeking to position new or small firms in industries populated by well established competitors are frequently advised to seek the protection of a market niche. There, shielded by market characteristics which render the niche uninteresting to larger rivals, small firms are urged to compete at the fringe of the market. This article challenges this conventional wisdom, citing industry and firm characteristics which, under certain conditions, create opportunities for successful direct competition by some small or new firms against much larger and established competitors. However, the authors caution that the conditions which created the opportunity may erode in time, rendering the successful challenger vulnerable either to retaliation by the larger firm or challenge from subsequent entrants. Examples of successful direct confrontation by relatively small competitors are drawn from mature, low-tech industries, a rapidly growing high-tech industry and the service sector.