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DOCUMENT DE TRAVAIL 2004-008
INSIGHT INTO THE DYNAMICS OF CANADIAN NASCENT ENTREPRENEURS STARD-UP EFFORTS AND THE ROLE
INDIVIDUAL FACTORS PLAY IN THE PROCESS Monica DIOCHON Teresa V. MENZIES Yvon GASSE
Version originale : Original manuscript : Version original :
ISBN – 2-89524-198-8
Série électronique mise à jour : On-line publication updated : Seria electrónica, puesta al dia
02-2004
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Dr. Monica Diochon
St. Francis Xavier University
Dr. Teresa V. Menzies Brock University
Dr. Yvon Gasse Université Laval
AABBSSTTRRAACCTT Of the people who attempt to start a business, how many actually bring their venture to fruition? Until now, the answer to this question has eluded researchers, owing to the difficulty in identifying and contacting people in this �gestation� phase of business start-up. In overcoming this sampling challenge, the research upon which this article is based tracks the start-up efforts of 151 Canadian nascent entrepreneurs (individuals engaging in activities to start a business from scratch) over a two-year period. In addition to providing new insights into the dynamics of small business �births� and �deaths,� the paper explores the role individual-level factors play in sustaining efforts to start a business. While finding no significant differences in personal background factors (socio-demographic, work and career backgrounds) within the sample, certain aspects of personal context and personal predispositions were shown to differentiate those who disengaged from the start-up process from those who persevered. Problem-solving style and goal orientation were especially significant. The implications of the findings are discussed.
1 Presented to the 20th Annual CCSBE Conference, Victoria, Nov 6-8, 2003
2
IINNTTRROODDUUCCTTIIOONN
Throughout the world, building a more �entrepreneurial economy� has been a key policy
objective for close to a decade (ACOA and OECD 1996). The extensive adoption of this
objective stems largely from the contribution to economic development that new and growing
firms have been shown to make (Industry Canada 2001; Reynolds 2000). Indeed, starting a new
business is the quintessential hallmark of being entrepreneurial.
Yet, very little is known about the process leading to the creation of a business (Delmar and
Davidsson 2000; Reynolds 2000). Indeed, despite a plethora of policies and programs designed
to encourage the formation of new firms (Shanklin and Ryans 1999; Maillat 1998; Taylor and
Wren 1997), there is little evidence to validate the efficacy of existing forms of assistance or
training. Moreover, if the increasing interest and demand for courses on how to start a small
business in colleges and universities is to be effectively responded to, a better conceptual
understanding of the gestation process is needed.
One of the main reasons why the formation of businesses is so poorly understood is that
researchers have relied exclusively on data collected from people who succeeded in establishing
a business (Davidsson and Honig 2003). As a consequence, the proportion of individuals who
attempt to start a business but give up or fail in their efforts is indeterminate. Additionally, very
little is known about start-up dynamics, primarily because of problems with the validity, and
indeed, the reliability of the classification procedures used in determining business �births� and
�deaths�. For example, if a business incorporates after previously being established as a
proprietorship, a �birth�, a �death�, or both could be recorded.
3
This paper reports some of the findings from a Canadian research project that addresses these
issues by studying a random sample of people trying to start a business. The project is part of an
international study involving nine countries. Its research design, particularly its longitudinal
nature, provides an unprecedented capacity to more accurately establish the outcomes of nascent
entrepreneurs� efforts. In addition to providing insight into the participation rates and dynamics of
the start-up process, this paper also aims to determine the impact individual factors have on
whether nascent entrepreneurs persevere in their start-up efforts. Clearly, businesses do not
materialize �out of the blue.� People create them. Therefore, by comparing the attributes of
people who are continuing their start-up efforts with those who are not, we explore whether a
range of individual level variables from the extant literature may be useful in predicting who will
persevere in their efforts to start a business.
The paper begins by reviewing what is known about the dynamics of start-up and the individual-
level factors influencing the process. Next, it introduces a framework for exploring these issues.
The methodology section describes the research design, sampling and data collection process.
Results are then presented and discussed.
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The Dynamics of Start-up
The high rate of turnover among businesses is well documented in the literature (Pinfold 2001).
Indeed, firms less than five years old are known to be particularly vulnerable to failure. This
suggests that the gestation period - between conception and inception of a business - would
4
generate even more casualties. However, owing to the nature of the research strategies employed
by previous studies, the number of people trying to start a business, the number that give up, and
the factors influencing the outcome of these efforts is unknown. Clearly, if the odds for success
are to be improved, such knowledge is important.
Historically, three strategies have been used in studying business start-ups. One involves
examining the context of new organizational listings to determine how contextual differences
may affect birth rates. The second relies on retrospective accounts of surviving firms. The third
relies on large-scale longitudinal data sets of labour force participation or business registries (for
a review of these strategies see Reynolds 2000). None of these strategies are able to provide
insight into start-up dynamics as they lack a capacity to systematically compare start-up efforts
that continue and those that do not. For example, Statistics Canada�s Business Register relies on
income tax files and the payroll deduction account files to determine the total number of business
establishments in Canada. Accordingly, it defines the year of entry as the first year for which
payroll data exists for an enterprise and the year of exit as the last year for which payroll data
exists for that firm. Using this criterion, an average of 144,000 firms are created each year, with
25 % exiting after one year and 40- 45 % exiting after year two.
While there are many benefits associated with being able to track businesses through time, this
type of monitoring ignores the start-up process and the individuals engaging in it. Moreover, the
validity of making the existence of a new firm contingent upon having employees is problematic.
A firm that has been operational for five years before having any employees hardly constitutes a
�new� business. Indeed, the usefulness of such a database in better understanding the
entrepreneurial process is limited, particularly since it ignores over half the population of firms.
5
In June 2002, Statistics Canada reported there were 2.17 million business establishments in
Canada (Statistics Canada 2002) of which 53% (1.13 million) were deemed to have no
employees2. Fundamentally, the Register does not capture data on start-up efforts that did not
result in the formation of a firm, nor does it concern itself with providing information on the
people responsible for firms entering or existing the registry.
This project is designed to address the deficiencies of previous research strategies by identifying
individuals who are in the process of trying to establish a business (nascent entrepreneurs) and
following these efforts over time. Specifically, this paper tracks a sample of nascent
entrepreneurs that were identified in 2000 and reports the status of these efforts in 2001 and
2002. Further details on how this was done will be provided in the methodology section.
The Role of Individual-Level Factors
Previous research has identified a number of factors that may influence the start-up process
including the context, the activities undertaken, the organizing arrangements (both formal and
informal) and the individuals involved (Reynolds 2000). The centrality of the entrepreneur to the
start-up process is reflected in the integral role of individual factors among the various models of
the entrepreneurial process presented in the literature (Kurato, Hornsby, and Naffziger 1997;
Bygrave, 1993; Herron and Sapienza 1992; Manning, Birley, and Norburn 1989; Gartner 1985).
Empirical investigations have studied the impact of individual factors on peoples� intentions to
start a business as well as how these factors affect the actions of those who succeed in
2 These businesses were categorized as indeterminate, consisting of incorporated or unincorporated businesses without employees. The Business Register classifies a business as �indeterminate� when it cannot be determined through payroll data that the firm has paid employees. The firm may well provide work under contract.
6
establishing a firm (see for example Begley and Boyd 1987, Mazzarol et al. 1999). Yet, very
little is known about the role of individual factors during gestation since this stage of the
entrepreneurial process has received limited academic attention.
Fundamentally, in relying on the accounts of people who actually succeeded in establishing a
business, previous research has ignored people who have disengaged from the start-up process
(Mazzarol et al. 1999). With the results of previous research indicating that �failure� rates are
inversely related to the age of the venture, the issue of sustaining start-up efforts through
gestation is important to our understanding of the entrepreneurial process. Indeed, while
Kuratko, Hornsby, and Naffziger (1997) have highlighted the importance of sustainable business
development efforts, their research dealt only with existing businesses. As a first step in filling
the void in our understanding of gestation, this paper deals with the relationship between
individual factors and continued engagement in start-up efforts. These factors are categorized
into four groups: socio-demographic background, work-career background, personal context and
personal predispositions (Reynolds 2000).
Socio-demographic background. These background factors include age, gender, ethnic origin,
nationality, language, and mobility. The results of previous research are remarkably consistent in
presenting the socio-demographic profiles of business founders. Founders tend to be individuals
in their late 20s to early 40s (Reynolds 2000; Dennis 1999; Timmons 1999). Indeed, since
experience has been shown to play a key role in success (Delmar and Davidsson 2000), it is not
surprising that the propensity to establish a successful business rises with age (Blanchflower
2000). Men typically account for close to two-thirds of business founders (Industry Canada
2003). Generally, successfully establishing a business is associated with not belonging to a
7
minority group (Dennis 1997; Cooper, Gimeno and Woo 1994), although particular ethnic
groups have demonstrated a greater propensity for establishing a business than other groups
(Butler and Greene 1997; Storey 1994). In Canada, founders are typically white English-
speakers. In terms of mobility, 60 percent of founders start ventures near their homes (Holt
1992). Yet, these factors have not proven to be a strong predictor of who will start a business
(Reynolds 1997; Evans and Leighton 1989). Therefore, we propose the following hypothesis
regarding engagement in the start-process:
Hypothesis 1: There will be no difference in the socio-demographic background of nascent
entrepreneurs who remain engaged in the entrepreneurial process and those who have
disengaged.
Work-career background. Work-career background encompasses three main factors: work,
career experience; educational or occupational training; and family business background.
Previous studies (summarized in Timmons 1999; Cooper, Gimeno and Woo 1994; Katz 1984)
have found that approximately 90 % of founders start their companies in the same marketplace,
technology, or industry they have been working in. These founders typically have 8-10 years of
experience, and are more highly educated than the general population. However, there is some
evidence to suggest that the least educated and the most educated have the highest probabilities
of being a business founder (Blanchflower 2000). Finally, a large proportion of founders have
self-employed parents (Delmar and Davidsson 2000; Cooper, Gimeno and Woo 1994; de Wit
and van Winden 1989) or have had previous experience being self-employed (Reynolds 2000).
Indeed, according to Ronstadt (1986), close to three quarters of founders had fathers who were
also entrepreneurs and 13 percent had mothers in entrepreneurial roles. However, since the
8
predictive ability of these factors is comparable to that of socio-demographic factors (Reynolds
1997; Evans and Leighton, 1989) we hypothesize:
Hypothesis 2: There will be no difference in the work-career background of nascent
entrepreneurs who remain engaged in the entrepreneurial process and those who have
disengaged.
Personal context. These factors include: work and family situation/responsibilities, income/net
worth, and the presence of supportive social networks. In terms of employment status, both
Reynolds (1997) and Delmar and Davidsson (2000) found the vast majority (over 80% and 68 %
respectively) of those trying to start a new firm were engaged in full-or part-time work or were
self-employed. This contrasts with the findings of more macro-level research indicating that a
rise in the unemployment rate is positively related to higher rates of new firm births (Storey
1994). In terms of marital status, over 60 % of business founders tend to be married while 24 %
are single (Dennis 1997). Although a lack of financial resources has been shown to constrain
entrepreneurship (Jovanovic 1982), Reynolds (1997) found that financial well-being plays a
minor role in the decision to start a firm. Most founders have also been found to have supportive
social networks (Johannisson and Monsted 1997). Considering these findings, we hypothesize:
Hypothesis 3: There will be no difference in the personal context of nascent entrepreneurs who
remain engaged in the entrepreneurial process and those who have disengaged.
Personal predispositions. There are a number of attitudinal and behavioral characteristics
associated with entrepreneurs, generally. Among the most commonly focused upon
9
psychological characteristics are risk preferences, personal aspirations and motivation (Reynolds
2000; Carland et al. 1984). Typically, entrepreneurs are profiled (see for example, Mazzarol et
al. 1999; Longnecker et al. 1998) as having a risk-taking propensity, growth aspirations, need for
achievement and an internal locus of control (a belief that the outcome of events can be
controlled, as opposed to a belief that they occur by chance or luck). Yet, empirical investigation
is far less definitive with regard to these factors. Much of the discrepancy among the findings has
been attributed to sampling issues such as selection bias, lack of comparability; hindsight bias,
and memory decay (Davidsson and Honig 2003; Carland et al. 1984). Therefore, the extent to
which the personal predispositions of nascent entrepreneurs will influence their continued
engagement in the start-up process is unclear.
Although starting a new venture is an inherently risky endeavour, there is considerable empirical
evidence indicating that founders do not have a higher risk-taking propensity than the general
population (for a review, see Busenitz 1999). In offering an explanation for this paradox,
Busenitz (1999) draws on the cognitive literature to propose that founders use biases and
heuristics in making decisions and therefore are likely to perceive less risk in the pursuit of their
chosen opportunity. The ensuing empirical work supports this contention in demonstrating that
new venture founders differ from managers of large organizations in how they perceive and think
about risk. This suggests that decision-making is important to our understanding of the
entrepreneurial process.
One aspect of decision-making is that of problem-solving. In studying the problem-solving style
of small business founders, Buttner and Gryskiewicz (1993) used the Kirton Adaptation-
Innovation theoretical framework that positions individuals on a continuum ranging from
10
extreme adaptor to extreme innovator. According to the theory, individuals with an adaptive
style are conservative, taking a problem as initially defined and developing solutions within
currently accepted guidelines. Their behavior and solutions tend to reinforce these guidelines
because they generally concentrate on the refinement of existing frameworks. In other words,
their emphasis is on efficiency � doing things better. Individuals who focus on efficiency prefer
structured situations, generate well-developed solutions to ongoing problems, and have a
tendency to solve problems within existing parameters. In contrast, �innovators� see guidelines
as part of the problem and often incorporate new and untried processes into their solutions. In
other words, their emphasis is on effectiveness - doing things differently. These individuals
prefer unstructured situations, solve problems while ignoring constraints, take greater risk, and
have difficulty operating within organizational demands. Among the small business founders
studied by Buttner and Gryskiewicz, those with an �adaptive� problem solving style were found
to be more likely to continue operating the business over time than more �innovative� founders.
Indeed, these findings are consistent with those of Ronstadt (1986) and suggest that among
nascent entrepreneurs, problem-solving style will be related to engagement.
Goal orientation and motivation are two interrelated concepts that not only influence decision-
making but also are central to our understanding of the entrepreneurial process (Bird 1989,
Kuratko, Hornsby and Naffziger 1987). Indeed, goal orientation has been used (Hodgetts and
Kuratko 2001; Carland et al. 1984) as the basis for distinguishing between entrepreneurs and
small business owner/managers. Accordingly, scholars argue that entrepreneurs seek profit and
growth while small business owners aim to further personal goals.
11
Empirical evidence supports the notion that an intention to grow is an identifiable characteristic
of entrepreneurial behaviour (Sadler-Smith et al. 2003; Georgelli, Joyce, and Woods 2000) and is
related to higher-than-normal intensities of psychological traits typically associated with
entrepreneurship such as risk taking (Timmons 1999, Brockhaus 1982; Welsh and White 1981)
and achievement motivation (Sexton and Bowman-Upton 1991). Moreover, individuals� level of
motivation to sustain their efforts is related to the extent to which they believe their actions will
lead to or continue to lead to the accomplishment of personally relevant goals (Kuratko, Hornsby
and Naffziger 1997).
Within the small business sector, most of the economic growth is generated by a very small
percentage of firms. Powers (1999) indicates that three percent of small firms are responsible for
70 percent of the growth across all industry sectors. This would suggest that the vast majority of
individuals who attempt to start a business would possess neither a growth orientation nor an
�innovative� problem-solving style. In light of evidence indicating founders with an �innovative�
problem-solving style give up on their venture more quickly than their �adaptive� counterparts,
and that �innovative� behaviour has been equated with entrepreneurial behaviour as well as a
growth orientation (Sadler-Smith et al. 2003; Carland et al. 1984), we propose the following
hypotheses:
Hypothesis 4a: Nascent entrepreneurs with an innovative problem-solving style will be more
likely to disengage from the entrepreneurial process than those with an adaptive
problem-solving style.
12
Hypothesis 4b: Nascent entrepreneurs with an innovative problem-solving style will have the
same propensity toward risk as those with an adaptive problem-solving style.
Hypothesis 4c: Nascent entrepreneurs with an innovative problem-solving style will be more
likely to use biases and heuristics when making decisions that involve risk than their
adaptive counterparts.
Hypothesis 4d: Nascent entrepreneurs with a growth orientation will be more likely to disengage
from the entrepreneurial process than those lacking a growth orientation.
Hypothesis 4e: The more nascent entrepreneurs believe they can achieve their personal goals the
more likely they will continue their engagement in the entrepreneurial process.
In summary, this segment of our study tests the hypotheses that socio-demographic background,
work-career background, and personal context are not associated with whether nascent
entrepreneurs sustain their efforts to start a business; and that particular personal predispositions
- specifically an innovative problem-solving style and a growth orientation � will be related to
disengagement from the start-up process. The exploration of other factors and their interactive
impact on the entrepreneurial process is an issue for future work.
13
METHOD
Research Design
The research design for this project is contingent upon meeting a number of criteria including:
standardization of procedures (for selecting a representative sample and for developing
systematic descriptions of the entrepreneurial process); incorporation of all major perspectives in
data collection (so that the direct and interactive influences can be identified); longitudinal
design (to track the process); and the inclusion of a wide range of scholarly input for research
design and analysis (to deal with the complexity inherent in the project) (see Reynolds 2000 for
further details).
Sample and Data Collection
In accordance with the procedures established by the ERC, we engaged SOM, a national polling
firm, to select a representative sample of people engaged in the start-up process (nascent
entrepreneurs) in Canada. From the initial 49,763 randomly selected telephone numbers, there
were 29,855 usable numbers. Using a Computer Assisted Telephone Interviewing System
(CATIS) interviews were completed with individuals in 21,116 households. This represents a
71% response rate with a non-response rate of 12.2% and a refusal rate of 16.8%. As a result of
this process, nascent entrepreneurs were identified in 1.8% of households (margin of error less
than .2%) during the Winter of 2000. This stratified proportional sample is representative of all
Canadian households with adults (those 18 years of age and older) from all provinces.
During the initial screening interview, the respondent was asked: �Among the adults living your
household, is there anyone who, alone or with others, is now trying to start a new venture?� If
14
(s)he answered yes, (s)he was asked if �Will you be an owner, in part or in whole of this
company or venture that you are trying to launch, alone or with others for your own business or
that of your employer?�. �During the last 12 months, have you done anything to help start this
new business, such as looking for equipment or a location, organized a start-up team, worked on
a business plan, begun to save money, or any other activity that would help launch a business?�
As shown in Table 1 below, the completed telephone interviews produced a sample of 593 as
some households had multiple nascent entrepreneurs. Out of these, 463 qualified for the longer
telephone interview by answering affirmatively to all three questions outlined above. Of these,
416 agreed to participate in a follow-up interview.
The next phase of the research began in June 2000 and involved detailed data collection using
phone and mail survey instruments. These surveys covered a wide range of topics (which are
detailed in Reynolds 2000). Upon receiving the names, addresses and phone numbers for the
nascent entrepreneur interview from SOM, they were equally distributed among members of the
research team. If a respondent was involved in several start-ups, (s)he was asked to focus on the
most recent one. Moreover, if any start-up was found to have a positive monthly cash flow that
covers expenses and the owner-manager salaries for more than three months, the effort was
considered an operating business. Approximately one fifth (19%) of the respondents were
dropped at this stage as they were too far advanced to be considered in the gestation phase of the
entrepreneurial process.
Among the remaining respondents, it was not possible to locate and contact about 24%. Another 17% of
the remaining group would not or could not complete the phone interview. Therefore, the response rate is
15
59% of those that can be contacted and are eligible. On average, the phone interview took an hour to
complete. In concluding the interview, the respondents were asked if they would be willing to complete a
brief self-administered questionnaire and all were sent a year�s subscription to Profit magazine as a token
of appreciation. 151 verified and accessible nascent entrepreneurs completed the initial telephone
interview, while 81 completed the mail questionnaire.
During the final stage of the research, follow-up phone and mail interviews were completed with nascent
entrepreneurs to provide more information on the process as well as the outcome of their efforts to launch
a new business. The first follow-up was conducted 12 months after the initial detailed telephone interview
and consisted of a phone interview only (n=132), while the 24-month follow-up included both a phone
(n=119) and a mail questionnaire (n=41).
Table 1: The Nascent Entrepreneur Sample
Respondent category Number of cases Number of cases Currently involved in start-up effort
Will not be one of the owners Has not been active during the last 12 months
593
(55) (75)
Qualified for longer interview Refused to participate
463 (47)
Eligible to complete longer interview Double-check disproved nascent entrepreneur/intrapreneur status Business closed/ start-up abandoned Refused to participate No further contact/unclear if involved in start-up Wrong number/not in service/no one in household starting business
416 (81) (49) (56) (44) (35)
Initial sample of nascent entrepreneurs/intrapreneurs 151 Refused to participate/no further contact
12 month follow-up sample
132 (19)
Refused to participate/no further contact 24 month follow-up sample
119
(13)
A critical component of the follow-up interview is a single item that specifies the current status
of the start-up effort. Previous studies indicate that four alternatives are commonly reported
(Reynolds, 2000):
• going concern � the start-up has become an �infant� business
16
• active start-up � continued efforts to start a new firm
• dormant/inactive start-up � no current efforts to implement a new firm
• abandoned start-up/ no longer worked on by anyone � not successful and no
further efforts are expected
A different set of questions was asked depending upon the current status of the start-up effort.
Those reporting an inactive start-up effort or one that has been abandoned completed a much
shorter interview than those reporting infant firms or an active start-up effort. However, all
respondents received the same self-administered mail questionnaire during the 24-month follow-
up (which is a reduced form of the questionnaire used in the initial data collection). It should be
noted that a small number of start-up efforts (5) underwent a change in the type of economic
activity engaged in between the 12 and 24-month follow-up. Since this occurred late in the
investigation, these cases were not included in the analysis reported here.
Measures and Analysis
Dependent variable. In this study, a categorical variable was used to classify respondents
according to whether their start-ups efforts were: operating, active, inactive, no longer worked on
by anyone, or something else. For subsequent analysis, this variable was dichotomized to
facilitate a comparison of engaged (sustained) vs disengaged (discontinued) start-up efforts.
Accordingly, operating and active ventures were reclassified as �engaged� while those deemed
to be inactive or no longer worked on by anyone were reclassified as �disengaged.�
17
Independent variables. The independent variables examined in this paper are presented in table
3. They include: socio-demographic background (age, gender, ethnic origin, nationality,
language, and mobility), work, career background (educational training, family business
background), personal context (work and family situation, income and social networks) and
personal predispositions (problem-solving style, goal orientation and risk-taking). With one
exception, they are all categorical. To determine the extent to which heuristics were used in
decision-making, five three-point (1= unimportant; 2=somewhat important; 3 = very important)
scales were used to measure the value of more information in making a choice between ALPHA
and BETA. ALPHA is defined as �A business that would provide a good living, but with little
risk of failure, and little likelihood of making you a millionaire.� while BETA was defined as �A
business that was much more likely to make you a millionaire but had a much higher chance of
going bankrupt.�: The five scales are: �The chances of going bankrupt for both ALPHA and
BETA; The exact amount of earnings if ALPHA and BETA were successful; The time and
effort required to manage ALPHA and BETA; The experience of those managing businesses like
ALPHA and BETA; and Your feelings about the type of business activity represented by
ALPHA and BETA. A value of information index was created by averaging the scores on these
five items (Chronbach alpha =.71) In this index, a high score indicates less use of biases and
heuristics in decision-making.
Using SPSS, chi square analysis has been employed for the comparison of categorical variables.
A t-test was conducted in analyzing the scale data as is typically done when there are fewer than
30 cases in two groups being analyzed and one independent variable (Jackson 1999).
18
RESULTS
Two sets of results are presented. The first, reporting on start-up dynamics, is based on data
collected from the phone interviews (2000, 2001, 2002). These findings profile the start-up status
of the nascent entrepreneurs efforts to start a business over the period studied. In accordance with
the ERC protocol, we have classified respondents according to whether their efforts would be
considered an: operating business, active start-up, inactive start-up or no longer worked on by
anyone. The second set of results, reporting on how individual level factors are associated with
engagement in the start-up process as of 2002, is based on individual-level data collected from
both the phone and mail surveys administered in 20003.
The Start-up Dynamics
What has been the outcome of peoples� efforts? Of our original sample of people trying to start a
business, 29.8 % had established an operating business after 12 months, 33.8 % were still trying,
11.2 % were inactive, 12.6 % had given up entirely and 12.6 % could not be reached. After 24
months 25.2 % of the original group had operating businesses, 5.3 % were still trying, 5.3 %
were inactive, 25.2% had given up entirely and 21.2% could not be reached. Yet, these findings
do not provide a complete picture of the dynamics involved.
Exhibit 1 tracks the nascent entrepreneurs� start-up status from the time of the initial phone
interview through each of two subsequent twelve-month periods. In doing so, the dynamic nature
of the start-up process is clearly evident, particularly when attention is directed toward the
19
Operating (n=45)
Active start-up (n=51)
Inactive start-up (n=17)
No longer worked on by anyone (n=19)
categories commonly referred to as business �births� and �deaths�. Using summary data alone,
45 businesses were deemed �operating� (births) at the time of the first year follow-up while 38
were classified as such at the time of the second year follow-up. This would suggest an 84%
survival rate. Yet, Exhibit 1 clearly shows how inaccurate this conclusion is in accounting for the
true reality of events. In fact, only 24 first year operating businesses survived to year two, for a
survival rate of 53%. The other 14 operating businesses emerged from first year active start-ups
(13) and inactive start-ups (1).
Exhibit 1: Status of Start-up Efforts Over Time
3 The 2001 and 2002 surveys did not collect comprehensive data from all respondents.
Operating 24
Active start-up 1
Inactive start-up 4
No longer worked on by anyone 7
Operating 1
Active start-up 2
Inactive start-up 9
No longer worked on by anyone 4
Operating -
Active start-up -
Inactive start-up -
No longer worked on by anyone 19
Operating 13
Active start-up 16
Inactive start-up 6
No longer worked on by anyone 8
Year 0 Nascent entrepreneurs (n=151)
12 month follow-up (n=132)
24 month follow-up (n=114)
20
Considering these results in terms of exits (deaths), nascent entrepreneurs were found to exit at a
rate of 47% after one year of operating. Comparatively, this is almost double the 25% exit rate
among first year establishments tracked by Statistics Canada�s Business Register. Sheer size of
establishment would be one factor contributing to this discrepancy, as it is well known that exit
rates are inversely related to size. As the establishments being tracked by Statistics Canada have
employees, they would be larger in size than those started by the nascent entrepreneurs in our
sample (the vast majority of which have no employees).
Knowledge of �what� happens is useful in building our understanding of new firm emergence.
However, it is also important to learn more about �why� 21 businesses ceased to exist between
year one and year two. According to self reports, the three main reasons, in order of importance,
were that (s)he was: 1) working too hard or too many hours, 2) wanting to achieve a better
balance between work and other parts of his or her life, and 3) looking for or taking a job with
another company. Among all people who reported giving up on their start-up in the year two
follow-up (n=38), the most important reason was to look for or take a job with another company,
while the next most important reason was to achieve a better balance between work and other
aspects of their life, followed by the fact that they felt they were working too hard or too long.
As seen in table 2, losing money was not among the top reasons for giving up on the venture.
These findings suggest that �deaths� and �unsuccessful� efforts to start a business are the result
of a conscious choice rather than �failure�.
21
Table 2: Reasons for Giving up on the Venture
Operating Business status as of 12 month follow-up
All Respondents (that have given up as of 24 month follow-up)
Couldn�t get along with partners 7a 7 Losing too much money 5 (tie) 5 To look for or take a job with another company 3 1 To start another company 6 6 Working too hard/too many hours 1 3 To achieve a better balance between work and other aspects of your life
2 2
Wasn�t fun any more 4 4 To retire 5 (tie) 8
a. Rank ordered with 1 being the most important (frequent).
b.
The Role of Individual Factors In Start-Up Engagement
In this section, the individual characteristics of nascent entrepreneurs who were still engaged in
the entrepreneurial process at the time of the 24-month follow-up (57) are compared to those of
individuals who have disengaged (57). Table 3 presents the results of analyses.
Socio-demographic background. The first hypothesis, which predicted no difference in the
socio-demographic background of the two groups - those engaged and those disengaged - was
confirmed. No statistically significant difference was found in the age, gender, ethnic origin,
nationality, language or mobility of nascent entrepreneurs who were still actively engaged in the
entrepreneurial process and those who were not. Interestingly, although the literature has
established that men typically account for close to two-thirds of business founders and our
sample, at the outset of the study, mirrored these proportions with 63.2% being men, over time
men were shown to be no more likely than women to sustain their efforts to establish a new
22
venture. In fact, of the nascent entrepreneurs we were able to contact and collect gender data for
at the 24-month follow-up (110), men accounted for two-thirds of those who disengaged from
the process even though the proportion of men in the sample declined only slightly - to three-
fifths.
Another interesting finding, in terms of this group of factors relates to the issue of mobility.
While the literature indicates that people typically start businesses near their homes, our findings
indicate that the vast majority of people trying to start a business have lived in their respective
communities less than two years. This indicates that Canadian nascent entrepreneurs may be
more mobile than originally believed. Furthermore, it raises the issue of the role social networks
play among highly mobile nascent entrepreneurs.
Work-career background. The second hypothesis, proposing no difference in the work-career
background of nascent entrepreneurs who remain engaged in the entrepreneurial process and
those who have disengaged was likewise confirmed. In terms of industry experience,
management experience, education and having self-employed parents, there were no statistically
significant differences between the two groups. Yet, when considered in relation to the literature,
one finding among this group of factors is somewhat intriguing. With evidence consistently
reporting a high proportion of founders having self-employed parents, the literature has stressed
the importance of positive role models in the entrepreneurial process. Yet, Table 3 shows that
those who disengaged from the process were just as likely to have self-employed parents. This is
a notable finding. It suggests that having self-employed parents might encourage people to get
involved in the entrepreneurial process. Indeed, 51.6% of the nascent entrepreneurs for whom we
had data (114) reported having self-employed parents. This is comparable to the findings of
23
Delmar and Davidson (2000) who reported that 49.6% of Swedish nascent entrepreneurs had
self-employed parents. Yet, this factor does not appear to play a key role in determining who will
sustain his/her involvement.
Personal context. In terms of work and family situation/responsibilities and income/net worth,
the findings were consistent with those reported in the literature. 50% of the nascent
entrepreneurs were working for others for pay, 66% were married or cohabitating, and over 50%
had limited financial resources (as indicated by having a household net worth and income of less
than $60,000). Yet, none of these factors were associated with engagement in the entrepreneurial
process. Interestingly, the nature of support provided by family, relatives and friends was
significantly different for the two groups. Among those who had disengaged from the process,
73.7% reported being encouraged by family, relatives and friends to start a business of their own.
Accordingly, our third hypothesis � that there would be no difference in the personal context of
nascent entrepreneurs who remain engaged in the entrepreneurial process and those who have
disengaged � is only partially supported.
Personal predispositions. Both decision-making style and goal orientation were found to be
associated with nascent entrepreneurs� engagement in the entrepreneurial process. Those who
described themselves as someone who preferred doing things differently (�innovators�) were
more likely to be disengaged than their counterparts describing themselves as someone who
preferred doing things better (�adaptors�) [ χ2 (1, N=94)=4.029, p=.022]. Furthermore, the
nascent entrepreneurs who were less likely to perceive their problem-solving style as being a
good match for the type of problems encountered in starting a business were more likely to
discontinue their efforts to start a business [χ2 (2, N=101)=20.259, p=.001]. These findings are
24
consistent with those of Buttner and Gryskiewicz (1993) that found �adaptive� problem-solvers
more likely to continue operating over time and support hypothesis 4a.
Generally, nascent entrepreneurs indicated a low preference for risk. While there appeared to be
no difference between �innovators� and �adaptors� in their risk preferences, the number of cases
in two of the table cells was insufficient to determine statistical significance. Consequently,
hypothesis 4b could not be tested. Contrary to what was expected, there was no difference
between �innovators� and �adaptors� concerning the value they placed on having more
information when making decisions that are inherently risky, t (49) =.291, p =.773. This
indicates �innovators� do not use biases and heuristics any more than �adaptors�. Therefore,
hypothesis 4c was not supported.
In terms of goal orientation, those who aspired to have a business �as large as possible,� were
found to be less likely to be still engaged in the entrepreneurial process than those who desired a
business (s)he could manage by her/himself with a few key employees [χ2 (1, N=111)=10.929,
p=.001]. These results support hypothesis 4d. Interestingly, most nascent entrepreneurs were
confident in their ability to achieve personal goals. Yet, such a belief was unrelated to continued
involvement in the entrepreneurial process. Due to the sample size, we were unable to conduct a
three variable cross-tabular analysis to determine whether confidence in ability to achieve
personal goals intervenes in the relationship between goal orientation and continued involvement
in the entrepreneurial process. Therefore, hypothesis 4e was only partially supported.
25
Table 3: Comparative Analysis of Engaged vs Disengaged Nascent Entrepreneurs (n=114) Engaged(n=57) Disengaged (n=57) Number Percent Number Percent χ2 Significance Socio-demographic background Age (n=105) 18-34 years 35-44 years 45-54 years 55 years and older
16 14 15 8
30.2 26.4 28.3 15.1
17 17 14 4
32.7 32.7 26.9 7.7
1.679
0.642
Gender (n=110) Male Female
31 26
54.4 45.6
34 19
65.4 34.6
.717
0.199
Ethnic origin (n=110) White Other
54 3
94.7 5.3
44 8
84.6 15.4
1.958
0.080
Nationality (81) Born in Canada Born elsewhere
29 9
76.3 23.7
29 14
67.4 32.6
0.406
0.263
Language (n=109) Anglophone Francophone Other
38 14 4
67.9 25.0 7.1
38 8 7
71.7 15.1 13.2
2.374
0.305
Mobility (n=108) community tenure < one year community tenure between 1-2 yrs. community tenure > two yrs.
25 14 14
47.2 26.4 26.4
32 14 9
58.2 25.4 16.4
1.910
0.385
Work/Career Background Experience in same industry (n=107) 5 years or less 6-10 years 11-20 years 21 years or more
25 7 13 10
45.5 12.7 23.6 18.2
20 13 13 6
38.5 25.0 25.0 11.5
3.274
0.351
Management experience (n=110) 5 years or less 6-10 years 11-15 years 16 years or more
26 9 9 10
48.1 16.7 16.7 18.5
31 11 6 8
55.4 19.6 10.7 14.3
1.425
0.700
Education (highest level obtained) (n=114) high school or less some post-secondary/diploma university degree
16 20 21
28.1 35.1 36.8
10 18 29
17.5 31.6 50.9
2.770
0.250
One or more parents owned own business (n=114) yes no
30 27
52.6 47.4
29 28
50.9 49.1
0.001
0.500
Parent with business (n=59) father only mother only other (joint, each had own)
13 3 14
43.3 10.0 46.7
13 1 15
44.8 3.5 51.7
a
Personal Context Working for others for pay (n=112) yes no
23 32
41.8 58.2
33 24
57.9 42.1
2.286
0.065
Marital status (n=113) Single Married/cohabit Other
8 40 9
14.0 70.2 15.8
12 35 9
21.1 62.5 16.4
0.441
0.388
Financial net worth of household (n=107) less than $60,000 $60,000-$199,999 $200,000 or more
24 11 16
47.0 21.6 31.4
32 10 14
57.1 17.9 25.0
1.093
0.579
26
Household income (n=114) less than $30,000 $30,000-$59,999 $60,000-$89,999 more than $90,000
19 12 17 9
33.3 21.1 29.8 15.8
23 9 10 15
40.4 15.8 17.5 26.3
4.124
0.248
Support of family, relatives, friends (n=113) discouraging encouraging
25 32
43.9 56.1
14 42
24.6 73.7
3.650
0.028**
Personal Predispositions Preference for: (n=94)
�doing things better� �doing things differently�
33 18
64.7 35.3
18 25
41.9 58.1
4.029
0.022**
Goal orientation (n=111) I want it [the business] to be as large as possible I want a size to manage by myself or with a few key employees
2 53
3.6 96.4
16 40
28.6 71.4
10.929
0.001***
Belief actions will lead to goal accomplishment (n=62) high confidence low confidence
30 6
83.3 16.7
20 6
76.9 23.1
0.093
0.377
Perceived extent that preferred style of solving problems matches type of problems encountered in starting a business (n=101) often a good match sometimes a good match rarely a good match
42 13 2
73.7 22.8 3.5
16 13 15
36.4 29.5 34.1
20.259
0.001***
The following three ventures have the same �expected payout� in the sense that the probability of success times the profit is the same. If your skill and energy could affect the outcome of each, which would you prefer?(n=62) A profit of $5,000,000, but a 20 percent chance of success A profit of $2,000,000, but a 50 percent chance of success A profit of $1,250,000 but an 80 percent chance of success
5 4 27
13.9 11.1 75.0
5 6 15
19.2 23.1 57.7
a
Assuming you are the sole owner, which situation would you prefer (n=63) ALPHA (as defined in methods section) BETA (as defined in methods section)
29 8
78.4 21.6
21 5
80.8 19.2
0.001
.538
Differences between “Adaptors” and “Innovators” in Perceived Importance of More Information in Making a Choice Between ALPHA and BETA (n=62) t-statisticb ρ Means Standard Deviation Adaptors Innovators
.291 .773 2.6143 2.5826
.38846
.38571 a 2 cells had expected counts less than 5. b Because Levene�s F was not statistically significant (p <.05), the �equal variances assumed� t was used. **significant at p< 0.05; *** significant at p< .01 (All tests of personal predispositions are one-tailed)
27
DISCUSSION AND CONCLUSION
The research reported here focuses on an aspect of the entrepreneurial process that very little is
known about - gestation. The purpose of this article was twofold: to provide insight into the
dynamics ensuing from this phase of the entrepreneurial process by documenting, over time, the
outcomes of people�s efforts to start a business; and to determine whether individual-level
factors are related to sustained engagement in the entrepreneurial process.
Upon tracking the status of initial start-up efforts over a two-year period, the extent of volatility
inherent in gestation becomes readily apparent. For a potential entrepreneur considering the
prospects of success, the outcomes would leave little room for optimism. Less than one third of
the initial sample of nascent entrepreneurs reported having an operating business after 12
months. Almost half of these ventures were no longer a going concern at the time of the 24-
month follow-up. Yet, the number of people who discontinued their efforts � within both inactive
and abandoned classifications � was surprisingly consistent from year to year. To date, the
findings suggest a different pattern of exits among nascent entrepreneurs than has been the case
among the strictly employer-based businesses belonging to Statistics Canada�s Business
Register. While operating and active efforts were found to be most volatile, it remains to be seen
whether this trend continues.
When the reasons for withdrawing from the entrepreneurial process are considered, it becomes
evident that most people gave up because they wanted to not because they had to. Indeed, the
same three factors were repeatedly cited as the most important reasons for giving up during both
follow-ups. A theme emerging from the self-reports was the commitment (of time and energy)
28
demanded by the venture was more than these nascent entrepreneurs wanted to make. Generally,
the findings with respect to business �stops� are consistent with those of Dennis (1999). In
studying business terminations in the United States, he found that most businesses simply fade
away, with over half of owners reporting that their business was profitable over its existence.
This suggests that the rate of small business �failures� reported in the literature is being
overstated. Clearly a decision to stop doing something is not synonymous with failure.
In light of the evidence regarding the number of people who secede from the entrepreneurial
process, the issue of sustaining efforts to start a business is important to reflect on. Just as the
results of previous studies found socio-demographic, work-career and personal context factors to
be poor predictors of who would start a business, with the one previously noted exception
(support of family and friends), we found these factors unrelated to process engagement. For
example, there was no evidence to indicate that efforts were discontinued because of deficiencies
in business or technical skills or abilities. Indeed, those who continued their efforts and those
who did not had remarkably similar profiles, thereby validating the merit of previous research
based on retrospective data.
With regard to the role played by personal predispositions in the entrepreneurial process, there is much
more work to be done in this area, particularly since the results of previous research have been mixed.
While our findings with regard to decision-making and goal orientation have some interesting
implications for educators, policymakers and future research, there are caveats. First, we were unable to
analyze the possible role of intervening, spurious or antecedent variables within relationships due to the
relatively small size of the nascent sample. Second, since we focused on process engagement, those
nascent entrepreneurs who reported being still active in trying to establish a business were included
29
within the �engaged� category. They might never get their venture up and running. Third, there are
known variations between industry sectors. Whether the relationships we found would be upheld in
specific industries has not been determined. Finally, the criterion used within this project to determine
what constitutes an operating business is different from the criteria commonly used. Indeed, although the
results concerning the impact of individual level variables should be generalized with caution, their
implications are important to consider.
With respect to education, these results suggest that more emphasis might need to be placed on
learning �how� rather than learning �what.� Decision-making, like any complex behavior, can be
learned. Exposing budding entrepreneurs to different decision-making situations would enable
them to develop greater flexibility and effectiveness in responding to the variety of situations
they might encounter when trying to start a business.
For policymakers, the findings suggest a need to rethink the validity of policy that aims to create
an �entrepreneurial economy� by encouraging the creation of new firms. Typically, the term
�entrepreneurship� is associated with �innovation� and �growth.� Yet, evidence from this
research indicates that the people who are most likely to establish a new firm (nascent
entrepreneurs who sustain their efforts to establish a business) are neither highly innovative or
growth oriented. While new firms make a valuable contribution to the economy, their role in
creating an entrepreneurial economy is difficult to defend. Indeed, if we accept the notion that
entrepreneurship involves innovation and/or growth, the term �nascent entrepreneur� may be a
misnomer.
30
Clearly the findings suggest a need for more research. The fact that women were less likely to be
involved in trying to start a business but just as likely as men to sustain their efforts suggests a
need to better understand this situation. Moreover, we need to further explore the relationship
between mobility, social networks and sustaining efforts to start a new venture. As discussed in
relation to the study�s limitations, more in-depth research into the impact of decision-making and
goal orientation is required.
The research reported here addresses a key gap in our understanding of the entrepreneurial
process through its investigation of gestation. In tracking Canadian nascent entrepreneurs over
time, it quantifies the dynamic nature of process participation. In light of the findings, dealing
with the issue of sustainability makes an important contribution to the literature. By
conceptualizing participation according to �engagement� rather than �births� and �deaths� it
offers a unique perspective on the start-up process.
31
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