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Nancy M. Carter, Marquette University
William B. Gartner, San Francisco State University
Paul D. Reynolds, Marquette University
This research analyzed new venture startup activities undertaken by 71 nascent entrepreneurs. Nascent entrepreneurs are individuals who were initially identified as taking steps to found a new business, but who had not yet succeeded in making the transition to new business ownership. The nascent entrepreneurs were identified and surveyed between 1992 and 1993 and re-interviewed 6 to 18 months after their initial interview. Three broad questions were addressed: (1) What activities do nascent entrepreneurs initiate in attempting to establish a new business? (2) How many activities do nascent entrepreneurs initiate during the gestation of the startup? and (3) When are particular activities initiated or completed? Significant differences in what activities, how many activities, and the timing of specific activities were found among nascent entrepreneurs who were able to get a business up and running, those still working on putting a business in place, and those who had given up.
This study focused on nascent entrepreneurs and the process of organization creation. Other terms for this period of time are: organizational emergence (Gartner, Bird and Starr, 1992); the preorganization (Katz & Gartner, 1988; Hansen, 1990), the organization in-vitro (Hansen & Wortman, 1989), pre-launch (McMullan & Long, 1990), gestation (Reynolds & Miller, 1992; Whetten, 1987) and start-up (Van de Ven, Angle & Poole, 1989; Vesper, 1990). Organization creation involves those events before an organization becomes an organization, that is, organization creation involves those factors that lead to and influence the development of the organization. The concept of organization "creation" is not the same as the concept of organization "newness." The problems that new organizations encounter (e.g., the liability of newness, see Aldrich & Auster, 1986; Stinchcombe, 1965) are not the same problems that are encountered by emerging organizations (Reynolds, 1994). In more pedestrian terms, the problems of getting into business (organization creation) are not the same kinds of problems encountered when attempting to stay in business (organization newness).
Reynolds (1994) estimates that nearly 4% of working age adults in the United States are, at any one time, actively involved in the process of starting a business. He found that nearly 10% of the nascent entrepreneurs in his study reported a new firm in place with 12 to 18 months of initial contact, while it took, on average, over 2 years before nascent entrepreneurs indicated they had given up on efforts to start a business. Coupled with Birch's (1987) findings that, on average, over one million businesses are founded in the United States each year, substantial efforts are undertaken and resources utilized (both successfully and unsuccessfully) to create new organizations. Are there activities that nascent entrepreneurs undertake that are more likely to result in the creation of an ongoing business? Is it possible for individuals considering getting into business to undertake the activities of organization creation in a more efficient and effective manner?
This study explored the activities undertaken by nascent entrepreneurs during the organization creation process. Three broad questions were addressed: (1) What activities do nascent entrepreneurs initiate in attempting to establish a new business? (2) How many activities do nascent entrepreneurs initiate during the gestation of the startup? and (3) When are particular activities initiated or completed?
A number of scholars have offered frameworks for exploring the characteristics of the organization creation process. Gartner (1985) outlined a framework of four dimensions that should be accounted for when studying new ventures: the individuals involved in the creation of the new venture, the activities undertaken by those individuals during the new venture creation process, the organizational structure and strategy of the new venture, and the environmental context of the new venture. Van de Ven, et. al. (1989) suggested that researchers explore the business creation process by looking at " (1) how a business idea (or strategy) emerges over time, (2) when and how different functional competencies are created to develop and market the first proprietary product, (3) when and how these functional competencies are redeployed to develop subsequent new products in a family of products believed to result in a sustainable business, and (4) how these business development efforts both influence and are constrained by organization and industry contexts." (224-225). Vesper (1990) argues that a new company is composed of five key ingredients: (1) technical know-how, (2) a product or service idea, (3) personal contacts, (4) physical resources, and (5) customer orders and he offers some insights into various startup sequences that occur among the five key ingredients. Katz & Gartner (1988) explored the organization theory and entrepreneurship literature's to identify a theoretical and empirically based framework for identifying the properties that would indicate an organization in the process of creation. Their literature review found that most theories on organizations assume complex properties that occur only after organizations achieve some particular size (e.g., Mintzberg, 1979; March & Simon, 1958; Miles, 1980) rather than some minimal set of characteristics that might differentiate an emerging organization from other types of social situations. Katz & Gartner (1988) suggested four emergent properties that would be indicators that an organization is in the process of coming into existence: intention to create an organization, assembling resources to create an organization, developing an organizational boundary (e.g., incorporation), and exchanges of resources across the boundary (e.g., sales).
Subsequent empirical explorations (Reynolds & Miller, 1992; Reynolds & White, 1993, Reynolds, 1994) of the Katz and Gartner (1988) framework have found that no one pattern or sequence of events is common to all emerging organizations. While the most common first event in the creation of an organization is a personal commitment by individuals involved in the new venture (five out of six new firms), some emerging organizations (two in five) reported the first event as having sales, while others began with hiring or financial support (one in four). The most common last events in the creation of an organization were likely to be hiring first employees and first sales income (one half of new ventures), financial support (two in five), and a major personal commitment to the venture (one in four new ventures). In general, the average time a firm was in the process of emergence was one year, though 20% completed gestation within one month, and 90% completed gestation within three years. In contrast, Van de Ven, et. al. (1989) in a study of high technology ventures found that entrepreneurs engaged in a set of activities for nearly four years before business initiation.
In conducting this study, we sought to reexamine the literature on entrepreneurial behaviors and develop linkages between certain cogent entrepreneurial behaviors and their efficacy for organization creation. The theoretical and empirical literature on entrepreneurial behaviors is very diverse and few efforts have been undertaken to identify and validate a set of comprehensive and parsimonious behaviors necessary to create new businesses (Gartner & Starr, 1993). For the purposes of this research, we identified 14 activities that may be necessary for the creation of a new business (see Appendix 1). Rather than offer hypotheses regarding the impact of these behaviors on the creation of new businesses, our primary objective was to explore the three questions listed earlier: What activities were undertaken? How many activities were undertaken? When were these activities undertaken? It was our assumption that nascent entrepreneurs who were able to get a business up and running undertook different behaviors (or sequences of behaviors) in starting their businesses than those nascent entrepreneurs who failed to start a business. What specific behaviors, or sequences of behaviors would result in the successful creation of a business would be discovered through exploration of the survey responses.
Source of Data
Longitudinal data for the study comes from two representative samples, one of 683 adult residents in Wisconsin (Reynolds & White, 1993) and the other of 1,016 adult residents of the United States (Curtin, 1982). A procedure has been developed that starts with a random selection of households, followed by a random selection of an adult member of the household. During the course of a phone interview these randomly selected adults were asked: "Are you, alone or with others, now trying to start a business?" If they answered yes, they were asked if they had "given serious thought to the new business" and whether a number of different activities associated with starting a new firm had been initiated or completed. They were also asked the month and year all reported actions were initiated. Those that reported two or more firm gestation behaviors were considered "nascent entrepreneurs". Follow-up interviews were completed on both samples. When the follow-up sample was restricted to autonomous startups and franchises, data were available for 71 nascent entrepreneurs. Subsidiaries, branches or purchases of another business were excluded from the study.
Precursor Activities - During the phone interviews the nascent entrepreneurs were asked about a series of activities associated with the gestation process. For each activity respondents indicated whether the activity was: (1) not yet initiated; (2) initiated; (3) complete; or (4) not relevant. If the behavior had been initiated or completed they were asked to indicate the month and year of initiation and/or completion. The entrepreneurs also were asked if the new business was included in any of the standard lists of businesses: Dun and Bradstreet files, unemployment insurance files, social security files, or the federal tax return listing. At the time of the second interview the respondents were again asked to indicate the status of the startup activities and whether they were included on the various standard lists of businesses. We classified 14 of the activities as precursor behaviors that entrepreneurs commonly undertake to establish a new business (e.g., develop a business plan, look for facilities or equipment or location, ask for funding). The activities and their intercorrelations are displayed in Appendix 1.
Using the dates associated with when the activities were initiated, a time frame of firm development was constructed. An activity was considered "initiated" if the entrepreneur reported in either of the two interviews that they had initiated or completed the activity. Each activity was categorized according to the length of time separating its initiation or completion from that of the earliest reported activity. The time scale was separated into categories beginning with the first month of activity and progressing by quarter through the 4th year. All activities commencing in the fifth year were grouped together. We created three measures from the time scale. First, each activity was dummy coded to designate whether the respondent reported initiating or completing the behavior (1=yes; 0=no). This information was used to examine what activities entrepreneurs engaged in during their firms' development. Second, a count was made of the total number of activities initiated (range possible; 0=14). This measure was used to assess the rate of activity initiation. Third, each category of the time scale was assigned a value designating the time period in which the action was initiated. Values ranged from 1 (corresponding to activities initiated within a month of the first behavior) to 18 (corresponding to the 5th year of activity). Thus, for example, a value of 3 signified activities that were initiated during the second quarter of the first year of the firm's development, whereas a value of 16 represented activities initiated in the third quarter of the fourth year. This measure was used to examine the sequencing of startup activities.
Startup Indicators - During the second interview, the respondents were asked a self perception measure of the current status of the development of their firm: (1) still working on putting the business in place; (2) given up, do not expect to start that business; (3) the business is now in operation, up and running. Responses to this question were used to group the entrepreneurs into one of three "outcome" categories which we refer to as "outcome status". Additionally, several other startup indicators were assessed. Using the same scale as that used to assess the precursor behaviors, respondents were asked to indicate whether their business was included on 4 standard business listings ( (i.e., Dun and Bradstreet files, unemployment insurance files, social security files, or the federal tax return listing), whether they had received any money from the sales of goods or services, and if they had achieve a positive cash flow (monthly revenues exceeded the monthly expenses). If they responded "yes," they were asked to indicate the date when the startup indicator first happened.
Discriminant analysis and one-way analysis of variance were used to test whether there were significant differences among the three outcome categories. Additionally, descriptive statistics were displayed to illustrate sequencing of the startup activities. The discriminant variables (precursor activities) were entered stepwise according to the Wilks' lambda criterion. Stepwise analysis was appropriate since the relationship between the discriminant variables and the status outcomes was not know from previous research. The functions were rotated using varimax rotation to aid in the interpretation of the functions' meanings.
Table 1 shows the outcome status of the gestation efforts. Between the first and the second interview, 48% of the nascent entrepreneurs reported they had gotten a business in operation, up and running. Over 20% had given up and were no longer actively trying to establish the new venture. Almost a third of the respondents reported they were still trying to establish a firm.
Table 2 reports the results of a forward step-wise discriminant analysis used to examine whether the kinds of activities nascent entrepreneurs initiate varies by outcome status. The discriminant analysis revealed that the first discriminant function had an eigenvalue of .279 accounting for 62.7 percent of the variance, with a canonical correlation of .467. The second discriminant function had an eigenvalue of .166, accounting for 37.3 percent of the variance. Wilks' lambdas prior to extraction of each function were .67 and .86. Both lambdas were significant at .005 or less.
The first function, which explained the most variance, differentiated the entrepreneurs that started businesses from the other two groups. These nascent entrepreneurs were more likely to get financial support and buy facilities or equipment. They were not likely to have developed models or prototypes. The second function separated entrepreneurs who gave up and were no longer actively trying to establish a new business from the other two groups. Those who gave up were more likely to get financial support and developed models or prototypes.
Table 3 provides further insight about the kinds of activities nascent entrepreneurs in the three outcome status groups initiated. A review of the precursor activities that did not statistically discriminate the groups indicates that a substantial percentage of all entrepreneurs in the study reported having saved and invested their own money in the startup, having looked for equipment or facilities, and having organized a startup team.
A review of the startup indicators shows that over 90% of the entrepreneurs who had a business in operation at the time of the second interview had sales from goods or services, 71% had filed federal income tax returns, and 50% reported having a positive cash flow. These rates far exceed those of the other two groups.
We used a one-way analysis of variance to examine whether the number of activities entrepreneurs initiate varies across the outcome status groups. The results reported in Table 4 indicate a statistical difference. Pairwise comparisons of the means revealed that the average total number of precursor activities initiated by entrepreneurs who have a business operating (mean=8.00) are significantly greater than the number initiated by entrepreneurs who gave up (mean=6.56), or those who are still trying (mean=5.05).
Figure 1 plots the initiation of activities across the time scale. The trends indicate that entrepreneurs who had started a business had initiated more activities at all time periods. By the end of the 1st quarter, a test of means reveal that this difference was statistically significant. Entrepreneurs who gave up were similar in the level of their initiation rate as those who had started a business. After the first year however, the rate of initiation begins to taper off the pace of those who got a business operating. Those who reported they were still in the gestation process, still trying to establish a business, initiate significantly fewer activities across all time periods than either of the other two groups.
To further analyze the trends we recalculated the scores plotted in Figure 1 as a percentage of total activities initiated by their group. The results indicate that by the end of the first year, almost 2/3 of all activities that would be initiated by each of the groups already had been undertaken. We then should to determine whether the "kinds" of activities initiated early in the developmental process varied by outcome status.
The analytic techniques that could be employed to address this issue were limited. The number of activities initiated early in the process resulted in the time scale variable being highly skewed to the left. We relied on median values to examine the sequencing of activities initiated during the first year. The results are displayed in Table 5.
The results from this analysis provide further insight into the apparent passive approach of entrepreneurs still in the gestation process. During the first six months of startup, these entrepreneurs were focused on saving money to invest in the business, preparing a business plan and organizing a startup team. In contrast, entrepreneurs who got a business operating looked for and bought facilities or equipment, invested their own money, prepared a business plan, asked for and got financial support, organized a startup team, formed a legal entity, and devoted full time to the business. Appendix 2 displays additional information about the sequencing patterns. The data indicates that six months after initiating their first startup activity, 50% of the entrepreneurs who reported staring a business had received money from sales. Entrepreneurs who had given up and were no longer actively trying to establish a business appear to be somewhat less aggressive than those who started operations. Those who gave up were distinct in their early efforts by developing models or prototypes. By the sixth month, only 25% of this latter group had money from sales.
It should also be noted that we conduced analyses to determine whether the results were affected by industry. There was no industry affect among the three groups of nascent entrepreneurs (i.e., started, gave up, trying to start). For example, developing a model or prototype is an activity that differentiates those nascent entrepreneurs who "gave up" from those nascent entrepreneurs who continued to try, and, therefore, it seemed plausible that those entrepreneurs who had developed a model and gave up would likely be in industries that are in manufacturing or other types of industries that might be more capital intensive than service industries. Yet, of the 14 nascent entrepreneurs who indicated they had initiated or completed models or prototypes, nearly seven of these individuals were in the "gave up" category in such industries as: 1 in non-durable manufacturing, 1 in rest./bars/clubs, 2 in consumer services, and 3 in business services.
1 Categorized by median value of those who had initiated the activity
2 Median values reported only if more than five entrepreneurs in the group had initiated activity
As way to summarize the results and as a springboard towards some insights into the implications of this research for practice and future research, we developed the following activity profiles of the three types of nascent entrepreneurs studied. These profiles are offered as a combination of both fact and some intuition about the findings.
Profiles of Types of Nascent Entrepreneurs
STARTED A BUSINESS. Nascent entrepreneurs who were able to start a business were more aggressive in making their businesses real, that is, they undertook activities that made their businesses tangible to others: they looked for facilities and equipment, sought and got financial support, formed a legal entity, organized a team, bought facilities and equipment, and devoted full time to the business. Individuals who started businesses seemed to act with a greater level of intensity. They undertook more activities than those individuals who did not start. The pattern of activities listed in Table 5 seem to indicate that individuals who started firms put themselves into the day to day process of running an ongoing business as quickly as they could, and that these activities resulting in starting firms that generating sales (94% of the entrepreneurs) and positive cash flow (50% of the entrepreneurs). What is not known is how successful or profitable these new firms will be over time. For example, the 50% of the firms started that have not reached positive cash flow may be firms started by individuals who were foolhardy and rushed into operation of a business that can not be sustainable.
GAVE UP. The pattern of activities for the group of entrepreneurs who gave up seem to indicate that these entrepreneurs discovered that their initial idea for their businesses would not lead to success. The finding that the activity of developing a model or prototype differentiated individuals who gave up from those who were still trying would suggest that those who gave up had "tested" their ideas out, and found that they would not work according to their expectations. Nascent entrepreneurs who gave up seemed to be similar in their activity patterns compared to those who started their firms, that is, individuals who gave up pursued the activities of creating a business in a aggressive manner at the beginning of the process, but as the business unfolded over time, these entrepreneurs decreased their activities and then ceased startup activities. This group of individuals might be seen as either having the wisdom to test their ideas out before jumping into something that might lead to failure, or lacking the flexibility to find more creative ways to solve the problems that they were confronted with.
STILL TRYING. It would seem that those who are still trying are not putting enough effort into the startup process in order to find out whether they should start the business, or give up. The still trying had undertaken fewer activities than individuals in the other two groups. The still trying entrepreneurs were devoting their short term efforts towards activities internal to the startup process (e.g., saving money and preparing a plan) and less effort towards activities that would make the business real to others. The still trying entrepreneurs may be all talk, and little action. Or, these still trying entrepreneurs might be involved in developing businesses that take longer for these particular opportunities to unfold. (Yet, as noted earlier, there was no industry affect.)
Implications for Practice
In terms of advice to individuals considering starting a business, it would seem that the results provide evidence that nascent entrepreneurs should aggressively pursue opportunities in the short term, because they will quickly learn that these opportunities will either reveal themselves as worthy of startup, or poor choices that should be abandoned. Individuals who do not devote the time and effort to undertaking the activities necessary for starting a business may find themselves in the limbo of perennially still trying, rather than succeeding or failing. It would seem that a certain level of effort and activity is necessary to determine success or failure in starting a business.
Consultants, advisors, and investors involved in helping nascent entrepreneurs may find in these results evidence that entrepreneurs are action oriented, rather than passive. Individuals who do not begin a business or reach a decision to abandon efforts to start a business within a year, are likely to remain in a constant state of abeyance, and thereby wasting the valuable time and resources of advisors that could be devoted to helping individuals who will actually undertake the activities to discover whether they can start a business, or not.
These findings may lead to a better diagnostic to help nascent entrepreneurs and entrepreneurship advisors determine whether these nascent entrepreneurs should abandon their efforts at startup sooner, change their activities, or continue their efforts. The analytical results may also be useful for the development of a set of indicator variables for use in identifying those nascent entrepreneurs who are likely to develop ventures that have the potential for substantial growth in sales and employment.
Implications and Directions for Research
It is technically feasible to study the pre-organization or startup process in detail. Nascent entrepreneurs can be identified in the general population and their efforts can be studied and tracked over time. With this ability to track nascent entrepreneurs over time, we will learn more about the activities and processes that lead to success or failure at starting new firms. In addition, the sample size needs to be expanded. With a larger sample further insights into various interactions among specific variables can be generated.
Parts of the nascent entrepreneur survey might be modified to capture additional information about various factors and behaviors that might influence the venture startup process. For example, it would be valuable to explore the expectations of these nascent entrepreneurs regarding their perceptions of the future success of their ventures and their subsequent activities. It would also be valuable to explore whether nascent entrepreneurs expect to start their firms quickly (i.e., in less than six months) compared to other nascent entrepreneurs that may expect the startup process to take longer. Some nascent entrepreneurs may also expect to start firms that grow more rapidly compared to other nascent entrepreneurs.
Startup behaviors that were not explored in this research might have some influence on the outcome of the startup process, such as behaviors involved with: gathering marketing information (e.g., on competitors and customers), acquiring know-how or expertise, seeking advice from mentors and advisors, and the activities involved with selling, marketing, and distribution. It might also be appropriate to develop measures of the activities that reflect estimates of the number of hours the nascent entrepreneur devoted to a particular activity between the date of inception and its completion.
It would also be of value to collect additional information on the types of ventures that nascent entrepreneurs are planning to create. Characteristics of these emerging ventures that would be appropriate to study would include: strategy (e.g., pricing policy, perceived distinctive competence), and industry characteristics (e.g., growth rates, technological change, competition and barriers to entry). In addition, the firms that were started should be studied to find out about their long term success.
What entrepreneurs do in their day-to-day activities matters. The kinds of activities that nascent entrepreneurs undertake, the number of activities, and the sequence of these activities, has a significant influence on the ability of nascent entrepreneurs to successfully create new ventures. This study suggests that the behaviors of nascent entrepreneurs who have successfully started a new venture can be identified and differentiated from the behaviors of nascent entrepreneurs who failed. We believe that future studies will more precisely identify the kinds of behaviors appropriate for certain new venture conditions. If such contingency information can be generated, entrepreneurship research is likely to have significant benefits for entrepreneurship practice, education and public policy.
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