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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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