The study of new ventures is increasingly viewed as an important aspect of organizational research (Carter, Stearns, Reynolds & Miller, 1994; Eisenhardt & Schoonhoven, 1990; Romanelli, 1989). Indeed, new ventures are seen as a valuable source of administrative and technological innovation (Tushman & Anderson, 1986), job growth (Birley, 1986), and the competitive disciplining of industries (Scherer & Ross, 1990). However, new ventures fail at an alarming rate and many new ventures achieve only a type of marginal survival (Cooper, Gimeno-Gascon & Woo, 1994), which is certainly short of the Schumpeterian view of the innovative, growth-oriented and wealth accumulating venture (Schumpeter, 1934). As a result, researchers have been persistent in attempting to delineate the determinants of venture success. For example, Cooper, Gimeno-Gascon and Woo (1994) found a number of initial human and financial factors that were related to the venture performance outcomes of failure, marginal survival and growth (evaluated over a 3-year period after startup). In a similar vein, McDougall, Covin, Robinson and Herron (1994) evaluated the performance relationship between industry growth and strategy on a sample of new ventures. They found combinations of the environment and strategy that lead to new venture growth.

Unfortunately, much of the literature in this area has been hampered by the lack of data on both initial founding conditions and subsequent venture performance. Consequently, research has rarely been able to examine the impact of initial organizational and environmental conditions on venture performance. A review of the extant entrepreneurial research suggests that many studies of new ventures are cross-sectional in nature, focusing on young organizations using independent variable predictors that are measured subsequent to their founding (i.e., Cooper & Gimeno-Gascon, 1992; Low & MacMillan, 1988). Yet, the theory and empirical evidence that is available on initial founding conditions points to their importance in the performance of new ventures.

Theorists representing multiple models of organizations give fundamental prominence to the role of initial founding conditions in the subsequent performance of new ventures. An external control perspective suggests that organizations are imprinted by the environment at the time of founding in a manner that impacts their subsequent development and performance (Boeker, 1989; Stinchcombe, 1965). This approach suggests that the ability of the new venture to survive and thrive may be determined by environmental factors that are outside the control of the entrepreneur (Aldrich, 1990). Strategic management models imply that the primary locus of organization choice exists in the selection of goals and domain, with the most consequential act of domain selection being performed at the time of founding (Child, 1972; Weick, 1979). A third perspective focuses on the resources obtained by the venture and posits "that effectiveness rests on the ability to control critical and scarce resources" (Woo, Daellenbach & Nicholls-Nixon, 1994:508). The ability of the new venture to acquire critical resources, both human and financial, appears to have an immediate, survival-dependent aspect to it (Birley, 1986; Boyd, 1990; Eisenhardt & Schoonhoven, 1990; Pfeffer & Salancik, 1978). At their basic conceptual level all three of these perspectives suggest that initial founding conditions are preeminent due to the persistence of their effects on organizations over time. Thus, it is suggested that the decisions made and conditions existing at the formative stages of an organization have lasting effects that imprint the firm, limit its strategic choice, and, most importantly, continue to impact its performance. Furthermore, the empirical studies that have been completed in this area support theoretical arguments for the potential potency of initial founding conditions on new venture performance. Eisenhardt & Schoonhoven (1990), for example, found that the initial conditions and resources of a new venture, be they positive or negative, amplify with time. Indeed, evidence suggests that firms coalesce very quickly around standardized structures, practices, and routines that establish their future course (Boeker, 1989; Gersick, 1989).

However, the essential question of the extent to which founding conditions impact venture performance remains largely unanswered. In addition, this question is not quite as simple as it might appear, as we are interested in a range of issues relative to the impact of initial founding conditions on the performance of the venture. Merely stating that initial founding conditions impact venture performance is useful, but not nearly as valuable as specifying which theoretical perspectives on initial founding conditions are most predictive. Are initial environmental conditions (as suggested by the external control perspective), strategies (as suggested by the strategic management perspective), or human and financial resources (as suggested by the resource perspective) preeminent in predicting the success of new ventures? Furthermore, accepting the view of organizational performance as multi-dimensional (Cameron & Whetton, 1983; Cooper & Gimeno-Gascon, 1992), we might expect some variance in the effect of initial founding conditions on different measures of performance. Are some perspectives on initial founding conditions more relevant to the growth of a venture, while others are more explanatory of profitability? Finally we are concerned with the persistence of the effect of founding conditions over the time paths of new ventures. Do initial founding conditions, as deterministic theorists might argue, persist throughout the life of the venture, or, as strategic choice theorists would argue, do the impacts diminish over time due to organizations' ability to adapt to emerging environmental and organizational issues?

This study attempts to address these questions and thereby enhance our theoretical understanding of the role of venture founding conditions on subsequent performance. We hypothesize new venture performance effects for three classes of founding conditions (environment, strategy, and resources) corresponding to three theoretical perspectives (external control, strategic management, and resource viewpoints) and test their relative explanatory power. The empirical analysis examines the hypotheses for a sample of de novo banks and analyzes the impact of the three perspectives using multiple performance constructs measured over a six-year time frame.




Initial Founding Conditions and New Venture Performance

Beginning with the seminal work by Stinchcombe (1965), a fundamental proposition of much of the research on new firms has been that they are imprinted at the time of founding and that this imprinting has lasting effects on subsequent strategy (Boeker, 1988, 1989), structure (Stinchcombe, 1965), and performance (Eisenhardt & Schoonhoven, 1990; Cooper, Gimeno-Gascon, & Woo, 1994; Romanelli, 1989) of those firms over time. Accordingly, Stinchcombe emphasized the role of social structure on the form of new firms and argued that this form was temporally stable since forms become institutionalized within the organization. As a result, the structural characteristics of the organization tend to persist and there is strong correlation between organizations' current structure and the time of their formation. Penning (1980: 254) viewed organization birth as the "overriding factor in molding and constraining the organization's behavior during subsequent stages of its life cycle." Boeker (1988,1989) emphasized the critical importance of initial founding conditions in determining the strategy that new firms pursue throughout their life and concluded that firms are set on a course at founding.

The proposition regarding the enduring effect of initial founding conditions is founded on two assumptions regarding the operation of organizations and the effect of the environment on them. First, it is assumed that the environment in which the organization forms impacts its basic structures, processes, and strategies (Boeker, 1988; Stinchcombe, 1965). Second, the salience of these effects is bolstered by the assumption that firms are more or less inertial over time and that it is difficult to change structure, processes, and strategy in periods subsequent to organizational formation (Stinchcombe, 1965; Boeker, 1988; Hannan & Freeman, 1984). Combined, these two assumptions point to the importance of initial founding conditions, both organizational and environmental, on organizational outcomes at later stages in an organization's life.

The first assumption, that of the extent and manner to which the environment imprints the organization at founding, has received little direct empirical attention (Boeker, 1988). However, theoretical arguments and empirical research regarding the role of initial resources supports the idea that initial environmental conditions have important, immediate effects on the structures, processes, and strategies of the new venture. Within organizational research, the environment has often been viewed as the source of resources necessary for survival and growth (Dess & Beard, 1984; Pfeffer & Salancik, 1978), and that obtaining these resources requires the organization to pursue structures, strategies, and processes that are acceptable to resource providers (Aldrich, 1979). For example, obtaining financing often requires new firms to go through certain planning processes, hire specific personnel, and target specific markets (Timmons, 1994). Within the literature on new firms, researchers have also given prominence to the ability of the environment to provide necessary resources and for the entrepreneur to garner them from the environment. Firms with higher and broader levels of critical resources appear to grow faster and face a more certain future (Chandler & Hanks, 1994). As a result, it appears that the environment has an immediate impact on the new firm through the resources it can provide as well as through structural, process, and strategic conformance pressures of constituencies who provide the resources.

Regarding the second assumption, there has been more direct empirical examination of the belief that it is difficult to change structure, processes, and strategy in periods subsequent to organizational formation. Indeed, the extent to which organizations are able to modify their strategies, structures and processes to adapt to environmental changes has been a central debate in organizational research. Authors of the deterministic perspective suggest that firms are largely inertial due to the need for reliability and accountability (Hannan & Freeman, 1984), while authors of the strategic choice tradition argue that firms have substantial ability to adapt their organizations to changing environments (Child, 1972). While early discussions of these positions was largely dichotomous (researchers taking either one side of the debate or the other) (Hrebiniak & Joyce, 1985), recent developments suggest that firms can be both adaptive and inertial. Some researchers, for example, have adopted punctuated equilibrium models wherein organizations move through long periods of momentum that are occasionally punctuated by fundamental transformations (Romanelli & Tushman, 1994). Looking directly at the concept of inertia, Kelly and Amburgey (1991) concluded that managers have substantial discretion regarding organizational change, but are still constrained by their organizations' history. More directly relevant to new firms and the imprinting proposition, Boeker (1989) supported the constraining role of initial founding decisions but also observed some change in initial strategy.

Arguments and empirical evidence on the ability of firms to change strategy, structure, and processes, and to adapt to an emerging environment are critical to the role played by initial founding conditions. Adopting a deterministic perspective assumes organizations are largely inertial, and we would expect to see a strong temporally stable predictive effect of initial founding conditions on subsequent new venture performance. If on the other hand, we accept a strict strategic choice perspective, we might see little persistence in the effect of initial founding conditions over time. If we take the moderate view that organizations are both inertial and adaptive we would expect an initial performance effect of initial founding conditions, but the predictive ability of those conditions would diminish over time. Therefore, we hypothesize the following regarding the impact of initial founding conditions on new venture performance:

H1a: A set of variables representing initial founding conditions will explain a significant amount of variance in new venture performance.

H1b: The variance in new venture performance explained by a set of variables representing initial founding conditions will diminish over time.

In examining the impact of initial founding conditions on new venture performance, researchers have adopted three fundamental perspectives. The first perspective we term the external control perspective and focuses on the environmental conditions at founding. This perspective rests within the Stinchcombe (1965) tradition and focuses on the impact that the environment has on imprinting the organization at founding. The second perspective is the strategic management perspective that suggests that it is the strategies which firms adopt that are most critical in determining subsequent venture performance. This perspective corresponds quite well with much of the entrepreneurship literature that focuses on the impact of strategy (not necessarily initial strategy) on performance (Duchesneau & Gartner, 1990; McDougall, et. al., 1994; Miller & Camp, 1985). It is also consistent with strategic management models which imply that the primary locus of organization choice exists in the selection of goals and domain, with the most consequential act of domain selection being performed at the time of founding (Child, 1972; Weick, 1979). Finally, we find a great deal of attention given to the initial resources of the new firm in determining subsequent performance. Again, this theme is common in the entrepreneurship literature, but has also received a great deal of attention elsewhere. Its roots lie in resource dependence theory which suggests that the ability of a firm to survive and grow is dependent upon its ability to garner resources from the environment (Pfeffer & Salancik, 1978). It is also strongly validated by Eisenhardt and Schoonhoven's findings that the performance effects of initial resources of new ventures (i.e., human capital) appear to amplify over time.

In the sections below we develop specific hypotheses from each of these perspectives and then test the relative explanatory power of each of these perspectives on new venture performance over an extended period. The results allow a comparison of the relative impact of each of the perspectives.


The External Control Perspective

The external control perspective on initial founding conditions proposes that the environment in which the organization forms has critical impacts on the success of the venture. Stinchcombe (1965) and much of the empirical work on initial founding conditions within the population ecology literature (Boeker, 1988, 1989; Carroll & Delacroix, 1982; Carroll & Hannan, 1989) exemplifies this perspective. Authors of this perspective argue that the environmental conditions at founding shape the form of the organization and that this imprinting has lasting strategic, structural, and performance impacts. Most importantly however, this perspective asserts that the environment present at founding is the source of the resources that a firm needs for organizational survival and growth (Aldrich, 1979; Dess & Beard, 1984). As such it appears that the environment that a new venture enters is crucial to success because of the new venture’s need to acquire resources to achieve the immediate goals of firm growth and survival (McDougall, et. al., 1994; Carroll & Delacroix, 1982; Boeker, 1989).

Eisenhardt and Schoonhoven (1990) examined the effect that initial environments (described as market stages) had on firm growth. Examining U.S. semiconductor ventures, they found that new firms grew larger in growth-stage markets as compared to either mature or emergent markets. Though not a prescription for success, they concluded that growth-stage markets provide superior resources to the new firm. In a study of organizational mortality, Carroll and Hannan (1989) found that population density (the number of organizations in a population) had a significant impact on organizational death rates across populations. Finally, although not directly examining initial environmental conditions, various studies within the entrepreneurship literature suggest that organizational environments have a critical impact on the performance of new firms (Chandler & Hanks, 1994; Covin & Slevin, 1989; McDougall, et. al., 1994). For example, McDougall, et. al. (1994) found that scale of entry, new product development and the choice of strategy differed significantly between young ventures in high growth and low growth environments. They further supported the contention that market attractiveness (high growth) seemed to be the most important factor to consider when beginning a new venture.

Thus, it appears that the competitive environment that the new venture enters may have immediate, substantial performance implications. Furthermore, support for a longer term impact is provided through research by Eisenhardt and Schoonhoven (1990) who found that "the effects of the founding team and environment grew, not faded with time" (emphasis added) and concluded "that the effects of initial conditions among this cohort of ventures exhibited positive-feedback behavior and were amplified, not diminished with time" (Eisenhardt and Schoonhoven, 1990: 526). Thus, we hypothesize an impact of initial environmental conditions on new venture performance:

H2: A set of variables representing the initial environmental conditions of ventures explains a significant amount of variance in new venture performance, above and beyond the variance explained by other variables.


The Strategic Management Perspective

The strategic management perspective on new venture performance emphasizes the role of venture strategy on the performance of entrepreneurial firms. This perspective has its conceptual roots in strategic choice theory (Child, 1972) , the seminal study by Sandberg and Hofer (1987), as well as in the developing stream of entrepreneurship research motivated by Sandberg and Hofer's findings. Although this stream does not typically examine initial venture strategies, one of its fundamental premises is that the strategic approach of the new venture has a crucial impact on its performance (Carter, Stearns, Reynolds & Miller, 1994, McDougall, et. al., 1994; Miller & Camp, 1985). Although not entirely consistent, empirical results from this stream of entrepreneurship research suggests an important performance impact of venture strategy. Moving away from the traditional focus of entrepreneurial research on entrepreneur characteristics, Sandberg and Hofer (1987) found that strategy played a prominent role in predicting the performance of various types of ventures. Duchesneau & Gartner (1990) examined twenty-six fresh juice distributors and found evidence that an aggressive entry strategy and a broad market focus led to improvement in both the market share and profitability of new ventures. A more recent study by McDougall, Covin, Robinson & Herron (1994) examined the impact of strategies within selected environments. They found that new ventures grew faster in high growth markets by pursuing a broad breadth strategy, while ventures in low growth markets grew faster by pursuing a focus strategy. Combined, this stream of research suggests an important role for strategy in the performance of new firms. However, much of this research examined the strategies of firms subsequent to their founding and did not specifically address the impact of initial strategies on performance. Exceptions to this include the studies of Sandberg and Hofer (1987) and Eisenhardt and Schoonhoven (1990), both of whom found a performance effect resulting from initial strategies.

Theoretically, the argument for the impact of initial strategies is supported by strategic choice theory which suggests that management has strategic choice in the selection of organizational domain and scope and that greatest degree of latitude in selecting organizational domain occurs at the time of founding (Child, 1972; Weick, 1979). Thus, we expect a significant role for initial strategy in predicting the subsequent performance of new ventures.

H3: A set of variables representing initial venture strategy explains a significant amount of variance in new venture performance, above and beyond the variance explained by other variables.


The Resource Perspective

Within the entrepreneurship literature, a great deal of attention has also been given to the predictive value of the resources of the firm. The resources (especially financial) required for a new venture are normally beyond the individual entrepreneur's personal means (Bhave, 1994) which obligates the entrepreneur or entrepreneurial team to acquire these resources from outside sources. A new venture must compete in established markets for the fundamental resources needed to survive and prosper. This perspective parallels the resource dependence view which specifically argues that organization success is dependent upon its ability to garner resources from the environment (Pfeffer & Salancik, 1978).

The importance of various types of resources have been discussed in the new venture literature. Initial capital provides the new venture with the ability to adjust to the conditions in the environment and establish a competitive position vis--vis its competitors (Cooper, Gimeno-Gascon & Woo, 1994; Porter, 1980). In addition to the financial resources needed by the new venture, it must be noted that the process of founding a new venture is fundamentally one of teamwork, mutual dependencies and the collective efforts not only of the founder(s), but also those that have a vested interest in the survival and success of the firm (Larson, 1992; Van de Ven, 1993). Teams of human resources provide the skills and breadth of knowledge needed to chart a course for the firm, especially when that firm has no history. These teams may take the form of directly employed members of the top management team (Chandler & Hanks, 1994; Eisenhardt & Schoonhoven, 1990) or a less formal team of stakeholders who provide contacts, capital and unique skills to the new venture such as a board of directors (Boyd, 1990). The ability to attract skilled individuals to the firm offers a broader range of knowledge and security to the new venture which improves its ability to deal with the uncertainty inherent in the founding of a firm (Pfeffer & Salancik, 1978). Finally, as discussed above, evidence exists to suggest that the performance effect of initial resources amplifies with time due to a positive-feedback mechanism (Eisenhardt and Schoonhoven, 1990). This suggests that new venture performance should be influenced by the venture's acquisition of initial human and financial resources.

H4: A set of variables representing initial venture resources explains a significant amount of variance in new venture performance, above and beyond the variance explained by other variables.

Previous Page | Main Menu | Next Page


1997 Babson College All Rights Reserved
Last Updated 1/15/97 by Geoff Goldman & Dennis Valencia

To sign-up for the Center for Entrepreneurial Studies' publication lists,
please register with the
Entrepreneurship WebTeam.