DIFFERENCES AMONG SURVIVING FIRMS

Entrepreneurs have different early goals for their firms. Some want to start out with high sales levels. Others accept a more modest start but have a desire for very rapid sales growth. Still others may be more concerned with steady sales growth rather than initial high sales or achieving high sales growth. A few may even think in terms of employment growth rather than sales growth. And some entrepreneurs want it all -- high start, fast and consistent sales growth, and rapid employment growth.

In this section we attempt to point to those factors which help to account for the differences between those firms which have soared in terms of sales and those which have merely survived. We want to see if there are notable differences among firms that have grown rapidly or slowly, grown steadily versus those which have not grown steadily, and those which started with higher versus lower sales. We also look at factors which may be related to employment growth. We would like to be able to tell entrepreneurs if there are easily recognized characteristics of the entrepreneurial team or process that can more likely lead to greater success on one or all of these dimensions.

High Sales Start Level

Are there some characteristics of these "established" firms which are related to higher sales' starts? We divided the population of surviving firms into two parts at the average level of first year sales. We then examined over 35 characteristics of these firms to see whether any characteristics are associated with higher initial sales. The results are displayed in Table 1.

As we look down the first section, we find that there are three characteristics of the start-up team which are significantly different. High-start teams average 1.91 members compared to 1.68 members for low-start businesses. Some 60% of the high-start firms started their business lives as either Subchapter S corporations or as corporations (as opposed to partnerships, sole proprietorships, or other options) compared to only 36% of the low-start firms. And heads of high-start teams had significantly higher 1994 average household incomes than heads of low-start firms. These all seem logical. Although there are several other start-up team characteristics which appear to be different, none are statistically.

In terms of finance, high-start firms are larger in many ways than those firms which started at lower levels of sales. High-start teams invested twice as much initially. Bank borrowings and total average debt are two times larger. First year assets are three times greater. Average total equity in 1993 is over three times greater for the high-start firms. And average total invested in the business as of December 1993 was 15 times greater in high start-ups. But out all of these differences, only two -- first year assets and first year bank loans-- are statistically different. The other differences appear to be dramatic, but there is too much variation among the firms to say that any particular relationship exists. Thus, for higher sales it appears that more bank borrowing contributes, resulting in more sales and the generation of higher early assets.

When we examine a series of 19 other experiences firms have had over their early years, we find only a few with very significant differences. Obviously, first year sales, by definition, are very different. Also different in the expected ways are fourth year sales and first and fourth employment levels. What may seem initially surprising is that the rates of sales growth are significantly smaller for the high starters. Upon reflection, this should be expected, given that we are computing rates of change from a much larger base for the high-start firms.

Beyond these few differences, however, there are no factors on which we were able to gather data that help to differentiate between high and low sales starts. We can say that only team size, legal form of the corporation, first year assets, 1992 bank loans, and first year employment are characteristics entrepreneurs might initially control that are statistically related to high-start levels. If entrepreneurs aim to achieve high initial sales, they are more likely to reach this goal if their firms have these characteristics. This is obviously not the only prescription. But to the degree a firm takes these steps, it is somewhat more likely to achieve the goal of higher initial sales.

The only other start-up team factor that may be of use to nascent entrepreneurs is the finding that a larger team size does seem to contribute to higher initial sales.

As we have learned, however, higher initial sales do not guarantee any more rapid growth or any more stable growth. If we look at each of these goals separately, we find a rather different prescription for each. In fact, no single factor is associated with success in all three sales areas. That is not to say that individual firms have not achieved all three; they have. But overall, utilizing an ingredient such as a larger start-up team may lead to higher initial sales, but it is not related in any particular way to stable increases in sales or more rapid growth.

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Last Updated 4/1/97 by Cheryl Ann Lopez

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