1University of Minnesota
Minneapolis, MN 55455-0413
Individuals interested in starting new businesses face the prospect of significant personal financial sacrifice in order to garner the resources necessary to get a new firm up and running. Some analysts believe that potential entrepreneurs should be willing to commit all their resources to start the business: they should quit their jobs, make the new venture their only source of income and go into personal debt. Other observers believe that the strongest new ventures are apt to be initiated by entrepreneurs with connections to resources well beyond their own, sufficient to support themselves while beginning the business. To what extent does the level of personal financial sacrifice of an entrepreneur affect her/his ability to accumulate necessary initial resources? How might it affect subsequent performance of such a firm? Are firms that require high levels of personal sacrifice from their owners more or less likely to develop into something more than alternate sources of income/employment for the startup team?
Much of the previous research in this area has focused on trying to identify the individual traits of those who are most likely to make the sacrifices and commitments necessary to start a new firm. Work has been concentrated in trying to understand the personality traits of people who are most willing to take entrepreneurial risks (Fiske, 1988; Kendrick and Funder, 1988; Sherman and Fazio, 1983), as well as the situations in which such risks are most likely (Mischel, 1977; Zuckerman, 1979). A number of studies attempt to tie trait constructs to behavior within a particular kind of situation (Jaccard, 1974; Epstein, 1982). A variety of studies have been conducted to examine risk taking by managers (Harnett and Cummings, 1980; Tse et al., 1988; Miller, Kets de Vries, and Toulouse, 1982). Finally, research conducted by Brockhaus (1980, 1982) and Shapero (1975) has not upheld the proposition that there are significant differences between entrepreneurs and managers on the risk taking dimension.
Much less effort has been given to understanding the structural conditions within which potential entrepreneurs are required to make personal commitments. A willingness to make large personal sacrifices may not amount to much if an entrepreneur has few resources to sacrifice. Indeed, it is possible that an individual who is fairly risk adverse, yet with considerable resources, has a better chance to build a sustainable firm than one with little capital but an extraordinary willingness to risk. A recent study by Cooper et al. (1994) demonstrates that the amount of initial financial capital contributes significantly to both survival and growth of new ventures. The purpose of this study is to more clearly delineate the links between entrepreneurial levels of sacrifice, the amount of initial resources this garners, and subsequent performance of the firms built from these resources.
Data from 576 fledgling firms in Minnesota and Pennsylvania surveyed in 1987 and 1992 were used to explore these links. The oldest of the firms surveyed were started in 1979. Questions were asked regarding the financial and employment situation of the founders at startup, origin and amount of resources necessary to start the firm, and sales history from inception to 1991.
Forms of personal sacrifice of the founders of these firms were many and varied. 60% quit full time jobs to start their firms, 75 percent of whom could not return to them if their ventures failed. Over half had no other form of income other than the new venture when it began, and three quarters were involved in the new business full time. Little evidence was found to suggest that these types of sacrifice had a major affect on these entrepreneurs' ability to garner necessary resources to start their firms; only those who quit full time jobs to start their firms showed a slightly higher ability to garner more startup funds than those who kept working for others.
The relationship between amount of initial financial capital and subsequent survival and growth found in the literature was further confirmed by this study, but evidence on the effect of personal sacrifice on subsequent performance of these firms was mixed. Those who had devoted full time to the development of their ventures created businesses that performed better than those created by part time entrepreneurs. However, more successful companies came from those founders who would have been able to return to their old jobs if their businesses failed.
While it appears that high levels of personal commitment are necessary to beginning a successful firm, they may not be sufficient. The types of connections an entrepreneur has within an industry and ability to successfully interrelate with other players is also important. This suggests potential barriers to entry for many aspiring entrepreneurs.