William C. Dunkelberg

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.

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.

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.

Investment and Capital Diversity in the Small Enterprise

Competitive markets are driven by the decisions of business owners and consumers’ responses to those decisions. The efficiency outcomes of these decisions in response to known prices and technologies have been extensively examined. However, in a world in which future prices and technologies are unknown and are revealed incompletely in a time-dependent process through “market experimentation”, the role of the “firm” or the owner of the firm is supplanted by the role of the “entrepreneur”. Entrepreneurs are economic agents that must make resource allocation decisions in the context of risk, uncertainty and imperfect information, and market imperfections not faced by the business automatons of textbook markets (Herbert and Link, 1989).

Risk and Return in Small Business Lending: The Case of Commercial Banks

The paper proposes a framework for modeling the risk-return tradeoff faced by institutions lending to small firms. A loan contract is viewed as a vector of several negotiable attributes including the interest rate to be paid, the term of loan, the size of both the loan and collateral, and the rate at which the loan to be repaid. A model of the loan contracting process is outlined. Then some “stylized” facts about the relation between small businesses and their banks are presented. Empirical models of the loan granting decision and of the determinants of the interest margin paid by small firms is estimated.

The Changing Landscape of Small-Firm Finance

This chapter reflects on the changes in financing small firms during the past 25 years by reviewing the extant literature on how small businesses are financed at their inception, how continuing operations are financed, and how changing technologies have shaped capital markets for small firms. Our review of a unique small firm time series data set shows that many of the obstacles small firms faced in the early 1980s have mostly disappeared. New firm formations continue to depend on owner savings, friends, and family, while venture capital remains a microscopic proportion of total new firm financing in any given year. Once operating, small firms depend primarily on banks for operating support and capital investment, but the use of credit cards (business and personal) and nonbank sources (finance/leasing companies) is increasing in importance. We end with a discussion of two current issues in small firm finance: the cumulative impact of banking consolidation in the USA and the effect of the current financial crisis in the USA on small firm access to capital.

The “Output Gap” and Excess Labor Employment

The debate surrounding the current status of monetary policy and inflation has appealed to the existence of an output gap that will prevent the resurgence of substantial inflation. This paper presents evidence that the expansion in the late 1990s was unusual and should not be used as a basis for benchmarking the output gap at zero. In particular, there was an unusual psychology that prevailed in the late 1990s and 2000 that led to excessive capital spending and hiring. If policymakers overestimate the magnitude of the output gap by overestimating excess labor supply, they run the risk of making timing errors in the implementation of economic policy.