Understanding the Entrepreneurial Process

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  • (c) 2009 Paul D. Reynolds 12/16/09 PSEDII_Mercatus_Seminar_21Oct09
  • (c) 2009 Paul D. Reynolds 12/16/09 PSEDII_Mercatus_Seminar_21Oct09
  • (c) 2009 Paul D. Reynolds 12/16/09 PSEDII_Mercatus_Seminar_21Oct09
  • (c) 2009 Paul D. Reynolds 12/16/09 PSEDII_Mercatus_Seminar_21Oct09
  • (c) 2009 Paul D. Reynolds 12/16/09 PSEDII_Mercatus_Seminar_21Oct09
  • (c) 2009 Paul D. Reynolds 12/16/09 PSEDII_Mercatus_Seminar_21Oct09
  • (c) 2009 Paul D. Reynolds 12/16/09 PSEDII_Mercatus_Seminar_21Oct09
  • (c) 2009 Paul D. Reynolds 12/16/09 PSEDII_Mercatus_Seminar_21Oct09
  • (c) 2009 Paul D. Reynolds 12/16/09 PSEDII_Mercatus_Seminar_21Oct09
  • (c) 2009 Paul D. Reynolds 12/16/09 PSEDII_Mercatus_Seminar_21Oct09
  • (c) 2009 Paul D. Reynolds 12/16/09 PSEDII_Mercatus_Seminar_21Oct09
  • (c) 2009 Paul D. Reynolds 12/16/09 PSEDII_Mercatus_Seminar_21Oct09
  • (c) 2009 Paul D. Reynolds 12/16/09 PSEDII_Mercatus_Seminar_21Oct09
  • (c) 2009 Paul D. Reynolds 12/16/09 PSEDII_Mercatus_Seminar_21Oct09
  • (c) 2009 Paul D. Reynolds 12/16/09 PSEDII_Mercatus_Seminar_21Oct09
  • (c) 2009 Paul D. Reynolds 12/16/09 PSEDII_Mercatus_Seminar_21Oct09
  • (c) 2009 Paul D. Reynolds 12/16/09 PSEDII_Mercatus_Seminar_21Oct09
  • (c) 2009 Paul D. Reynolds 12/16/09 PSEDII_Mercatus_Seminar_21Oct09
  • (c) 2009 Paul D. Reynolds 12/16/09 PSEDII_Mercatus_Seminar_21Oct09
  • (c) 2009 Paul D. Reynolds 12/16/09 PSEDII_Mercatus_Seminar_21Oct09
  • (c) 2009 Paul D. Reynolds 12/16/09 PSEDII_Mercatus_Seminar_21Oct09
  • (c) 2009 Paul D. Reynolds 12/16/09 PSEDII_Mercatus_Seminar_21Oct09
  • (c) 2009 Paul D. Reynolds 12/16/09 PSEDII_Mercatus_Seminar_21Oct09
  • (c) 2009 Paul D. Reynolds 12/16/09 PSEDII_Mercatus_Seminar_21Oct09
  • (c) 2009 Paul D. Reynolds 12/16/09 PSEDII_Mercatus_Seminar_21Oct09
  • (c) 2009 Paul D. Reynolds 12/16/09 PSEDII_Mercatus_Seminar_21Oct09
  • (c) 2009 Paul D. Reynolds 12/16/09 PSEDII_Mercatus_Seminar_21Oct09
  • (c) 2009 Paul D. Reynolds 12/16/09 PSEDII_Mercatus_Seminar_21Oct09
  • Understanding the Entrepreneurial Process

    1. 1. <ul><ul><ul><li>12/16/09 </li></ul></ul></ul><ul><ul><li>PSEDII_Mercatus_tSeminar_21Oct09 </li></ul></ul><ul><ul><li></li></ul></ul>21 October 2009 Research Seminar Mercatus Center George Mason University Arlington, VA Understanding the Entrepreneurial Process: Tracking New Firm Creation with the PSED [Panel Study of Entrepreneurial Dynamics] Paul D. Reynolds George Mason University [pauldavidsonreynolds@gmail.com]
    2. 2. <ul><li>Where do new businesses come from? </li></ul><ul><ul><ul><li>12/16/09 </li></ul></ul></ul><ul><ul><li>PSEDII_Mercatus_tSeminar_21Oct09 </li></ul></ul><ul><ul><li></li></ul></ul>
    3. 3. Why care about new firms? <ul><li>Provide half of all net new job creation </li></ul><ul><li>Contribution to improved sector productivity </li></ul><ul><li>Major source of economic innovation </li></ul><ul><li>Associated with economic growth </li></ul><ul><li>Significant work career option for many </li></ul><ul><li>Mechanism for immigrant social integration </li></ul><ul><li>Universal route for upward social mobility </li></ul><ul><ul><ul><li>12/16/09 </li></ul></ul></ul><ul><ul><li>PSEDII_Mercatus_tSeminar_21Oct09 </li></ul></ul><ul><ul><li></li></ul></ul>
    4. 4. <ul><li>New firm creation is clearly a critical feature of advanced market economies! </li></ul><ul><li>What United States data sets might be available to explore the important features and causal mechanisms involved in new firm creation? </li></ul><ul><ul><ul><li>12/16/09 </li></ul></ul></ul><ul><ul><li>PSEDII_Mercatus_tSeminar_21Oct09 </li></ul></ul><ul><ul><li></li></ul></ul>
    5. 5. <ul><ul><ul><li>12/16/09 </li></ul></ul></ul><ul><ul><li>PSEDII_Mercatus_tSeminar_21Oct09 </li></ul></ul><ul><ul><li></li></ul></ul>Conception Gestation process Firm Birth Educational preparation Work career entry Disengagement, retirement Firm life course Human Labor Force Business Population 1,2,3,5,6,7,8,9,10,14,16,18,19,20,22,24 [21] [23] [6] [4,11,12,13,15,17] [26] [25] Firm B Job 2 Job 3 Job n Job 1 Firm A Firm C [22] Fig 4.4, pg 68, from Haltiwanger, J., L. Lynch, & C. Mackie (Eds) (2007) Understanding Business Dynamics . Washington, DC: The National Academies Press.
    6. 6. Where can one find: <ul><li>Cohorts of nascent entrepreneurs and nascent enterprises </li></ul><ul><li>Longitudinal data that begins with firm conception and tracks start-up efforts until a new firm has been established </li></ul><ul><li>Data that is fully documented and in the public domain [http://www.psed.isr.umich.edu] </li></ul><ul><li>Representative samples to facilitate extrapolation to the entire US population of nascent entrepreneurs and nascent enterprises </li></ul><ul><ul><ul><li>12/16/09 </li></ul></ul></ul><ul><ul><li>PSEDII_Mercatus_tSeminar_21Oct09 </li></ul></ul><ul><ul><li></li></ul></ul>
    7. 7. The U.S. Panel Study of Entrepreneurial Dynamics Datasets <ul><li>PSED I </li></ul><ul><ul><li>Initial screening of 63,000 in 1998-2000 </li></ul></ul><ul><ul><li>Tracked 830 nascent entrepreneurs/enterprises over 4 years </li></ul></ul><ul><ul><li>Sponsored by Entrepreneurial Research Consortium and the Kauffman Foundation </li></ul></ul><ul><li>PSED II </li></ul><ul><ul><li>Initial screening of 34,000 in 2005-2006 </li></ul></ul><ul><ul><li>Tracking 1,214 nascent entrepreneurs/enterprises </li></ul></ul><ul><ul><li>Waves A, B & C data [0, 12, 24 month] available </li></ul></ul><ul><ul><li>Major support from the Kauffman Foundation, supplemental support from SBA Office of Advocacy </li></ul></ul><ul><ul><li>Wave D [36 month] now completed [NSF support] </li></ul></ul><ul><ul><li>Wave E & F [48,60 month] in process [NSF support] </li></ul></ul><ul><li>Unique national resource providing descriptions of the fundamental aspects of the firm creation process </li></ul><ul><ul><ul><li>12/16/09 </li></ul></ul></ul><ul><ul><li>PSEDII_Mercatus_tSeminar_21Oct09 </li></ul></ul><ul><ul><li></li></ul></ul>
    8. 8. Central Assumption: <ul><li>People start businesses, not </li></ul><ul><ul><li>Market characteristics </li></ul></ul><ul><ul><li>Macro-economic conditions </li></ul></ul><ul><ul><li>Regional, geographic attributes </li></ul></ul><ul><ul><li>National R & D intensity </li></ul></ul><ul><ul><li>Presence of opportunities </li></ul></ul><ul><ul><li>Availability of financing </li></ul></ul><ul><ul><li>Positive entrepreneurial climate </li></ul></ul><ul><ul><li>Social networks </li></ul></ul><ul><ul><li>Speeches by politicians </li></ul></ul><ul><ul><ul><li>12/16/09 </li></ul></ul></ul><ul><ul><li>PSEDII_Mercatus_tSeminar_21Oct09 </li></ul></ul><ul><ul><li></li></ul></ul>
    9. 9. Primary Objective <ul><li>Who gets involved? </li></ul><ul><li>What do they do? </li></ul><ul><li>What is the outcome? </li></ul><ul><ul><ul><li>12/16/09 </li></ul></ul></ul><ul><ul><li>PSEDII_Mercatus_tSeminar_21Oct09 </li></ul></ul><ul><ul><li></li></ul></ul>
    10. 10. CONCEPTUAL MODEL – The Start-up Process <ul><ul><ul><li>12/16/09 </li></ul></ul></ul><ul><ul><li>PSEDII_Mercatus_tSeminar_21Oct09 </li></ul></ul><ul><ul><li></li></ul></ul>Adult Population Business Firm Population Growth Persist Quit Firm Birth Social, Political, Economic Context ? NE NI ? Start-up Processes ? NE = NASCENT ENTREPRENEURS NI = NASCENT INTRAPRENEURS GEM PSED PSED
    11. 11. Data collection procedure <ul><li>Large scale screening to locate candidate nascent entrepreneurs </li></ul><ul><ul><li>Completed by a commercial market research firm </li></ul></ul><ul><ul><li>Based on a representative household sample </li></ul></ul><ul><ul><li>Captures nascent enterprises long before they are included in business registries </li></ul></ul><ul><li>Detailed interviews to identify active nascent entrepreneurs and gather information on what they are doing </li></ul><ul><ul><li>Completed by U Michigan Institute for Social Research </li></ul></ul><ul><li>Follow-up interviews to determine the outcomes of their efforts </li></ul><ul><ul><li>Completed by U Michigan Institute for Social Research </li></ul></ul><ul><ul><ul><li>12/16/09 </li></ul></ul></ul><ul><ul><li>PSEDII_Mercatus_tSeminar_21Oct09 </li></ul></ul><ul><ul><li></li></ul></ul>
    12. 12. <ul><ul><ul><li>12/16/09 </li></ul></ul></ul><ul><ul><li>PSEDII_Mercatus_tSeminar_21Oct09 </li></ul></ul><ul><ul><li></li></ul></ul>
    13. 13. <ul><ul><ul><li>12/16/09 </li></ul></ul></ul><ul><ul><li>PSEDII_Mercatus_tSeminar_21Oct09 </li></ul></ul><ul><ul><li></li></ul></ul>
    14. 14. <ul><ul><ul><li>12/16/09 </li></ul></ul></ul><ul><ul><li>PSEDII_Mercatus_tSeminar_21Oct09 </li></ul></ul><ul><ul><li></li></ul></ul>
    15. 15. <ul><ul><ul><li>12/16/09 </li></ul></ul></ul><ul><ul><li>PSEDII_Mercatus_tSeminar_21Oct09 </li></ul></ul><ul><ul><li></li></ul></ul>Outcome Date
    16. 16. <ul><ul><ul><li>12/16/09 </li></ul></ul></ul><ul><ul><li>PSEDII_Mercatus_tSeminar_21Oct09 </li></ul></ul><ul><ul><li></li></ul></ul>
    17. 17. OUTCOME VARIABLE <ul><li>Status at end of 6 years </li></ul><ul><ul><li>32 % New firm in place </li></ul></ul><ul><ul><li>68 % No new firm in place </li></ul></ul><ul><ul><ul><li>33 % Active start-up continues </li></ul></ul></ul><ul><ul><ul><li>35 % Start-up terminated </li></ul></ul></ul><ul><li>What factors, prior to the 6 year outcome, are associated with new firm creation? </li></ul><ul><ul><ul><li>12/16/09 </li></ul></ul></ul><ul><ul><li>PSEDII_Mercatus_tSeminar_21Oct09 </li></ul></ul><ul><ul><li></li></ul></ul>
    18. 18. Consider 100+ Independent Variables <ul><li>Who they are </li></ul><ul><li>What they are like </li></ul><ul><li>Their personal, cognitive strategies </li></ul><ul><li>Their perceptions and attitudes </li></ul><ul><li>The context of the start-up </li></ul><ul><li>HAS LIMITED IMPACT </li></ul><ul><li>Shift emphasis to what they do! </li></ul><ul><ul><li>Consider difference in level </li></ul></ul><ul><ul><li>Consider differences in emphasis </li></ul></ul><ul><ul><ul><li>12/16/09 </li></ul></ul></ul><ul><ul><li>PSEDII_Mercatus_tSeminar_21Oct09 </li></ul></ul><ul><ul><li></li></ul></ul>
    19. 19. Major findings: Process <ul><li>Level of Activity </li></ul><ul><ul><li>New firms and quits most active </li></ul></ul><ul><ul><li>Continuing start-ups less active </li></ul></ul><ul><li>Duration </li></ul><ul><ul><li>From one month to decades </li></ul></ul><ul><ul><li>Median time start-up, 18-24 months </li></ul></ul><ul><ul><li>Median time to quit, 25-30 months </li></ul></ul><ul><li>Activity domains related new firm development </li></ul><ul><ul><li>Business Presence </li></ul></ul><ul><ul><li>Production Implementation </li></ul></ul><ul><ul><li>Creating Organizational, financial structure </li></ul></ul><ul><ul><ul><li>12/16/09 </li></ul></ul></ul><ul><ul><li>PSEDII_Mercatus_tSeminar_21Oct09 </li></ul></ul><ul><ul><li></li></ul></ul>
    20. 20. Implications <ul><li>Socio-demographic, personal, contextual factors </li></ul><ul><ul><li>Major impact on who enters the process </li></ul></ul><ul><ul><li>Less impact on outcome of the process </li></ul></ul><ul><ul><ul><li>Business experience has a major effect </li></ul></ul></ul><ul><li>Increase new firm birth rate--emphasize training, support during business start-up process </li></ul><ul><ul><li>Presence of the business </li></ul></ul><ul><ul><li>Producing the goods or services </li></ul></ul><ul><ul><li>Setting up the organization, financial structure </li></ul></ul><ul><li>Need an early indicator of the “hobby nascents”, who are unlikely to make the major effort </li></ul><ul><li>To be an entrepreneur </li></ul><ul><ul><li>Walk the walk, “Do it”, etc. </li></ul></ul><ul><ul><li>Intensity of investment seems to be important </li></ul></ul><ul><ul><li>IT’S WHAT YOU DO – NOT WHO YOU ARE! </li></ul></ul><ul><ul><ul><li>12/16/09 </li></ul></ul></ul><ul><ul><li>PSEDII_Mercatus_tSeminar_21Oct09 </li></ul></ul><ul><ul><li></li></ul></ul>
    21. 21. Financial Support <ul><li>Informal financing, before legal business </li></ul><ul><ul><li>Amount </li></ul></ul><ul><ul><li>Sources </li></ul></ul><ul><li>Formal financing, after legal business </li></ul><ul><ul><li>Amount </li></ul></ul><ul><ul><li>Sources </li></ul></ul><ul><ul><li>Additional owner’s equity </li></ul></ul><ul><li>Relationship to outcome </li></ul><ul><ul><li>New firm, discontinued, still active </li></ul></ul><ul><ul><ul><li>12/16/09 </li></ul></ul></ul><ul><ul><li>PSEDII_Mercatus_tSeminar_21Oct09 </li></ul></ul><ul><ul><li></li></ul></ul>
    22. 22. Informal Financial Structure [n = 882; Values in $1,000] <ul><ul><ul><li>12/16/09 </li></ul></ul></ul><ul><ul><li>PSEDII_Mercatus_tSeminar_21Oct09 </li></ul></ul><ul><ul><li></li></ul></ul>Sum all owners: 1 to 5 Per Cent Min Max Mean PERSONAL SAVINGS 84.4% 0 5,000 22.69 FAMILY, RELATIVES 17.1% 0 1,400 5.05 FRIENDS, COLLEAGUES 5.5% 0 1,000 2.84 CREDIT CARD LOANS 11.5% 0 160 0.92 PERSONAL BANK LOANS 9.2% 0 4,000 8.62 ASSET BACKED LOANS 5.6% 0 4,000 7.82 OTHER SOURCES 0.7% 0 300 0.44 TOTAL ALL SOURCES 87.4% 0 13,000 48.37
    23. 23. Formal Financial Structure: Debt Only [n = 435, values in $1,000] <ul><ul><ul><li>12/16/09 </li></ul></ul></ul><ul><ul><li>PSEDII_Mercatus_tSeminar_21Oct09 </li></ul></ul><ul><ul><li></li></ul></ul>All reports after Legal Registration Per Cent Min Max Mean ASSET BACKED DEBTS 10.3% 0 5,000 56.7 LEASE OBLIGATIONS 4.3% 0 350 1.9 CREDIT LINE/WORKING CAPITAL 9.5% 0 1,100 6.0 SUPPLIER CREDIT 6.2% 0 387 1.8 PERSONAL LOANS OWNER 1 26.2% 0 5,000 18.5 PERSONAL LOANS OWNERS 2-5 6.5% 0 15,000 52.8 LOANS FROM OWNER'S FAMILY,KIN 5.9% 0 250 1.2 LOANS FROM EMPLOYEES 0.3% 0 20 0.1 LOANS FROM OTHER INDIVIDUALS 1.6% 0 465 1.0 BUSINESS CREDIT CARD LOANS 8.9% 0 80 0.8 OTHER BANK LOANS 1.8% 0 1,000 2.4 VENTURE CAPITAL FIRM LOANS 0.8% 0 60 0.4 GOV GUARANTEED LOANS (NOT SBA) 0.0% 0 0 0.0 SBA GUARANTEED BANK LOANS 26.2% 0 5,000 18.6 OTHER LOANS 2.5% 0 203 0.3 TOTAL DEBT, ANY SOURCE 34.5% 0 17,100 145.7
    24. 24. Financial Investments and Outcomes <ul><ul><ul><li>12/16/09 </li></ul></ul></ul><ul><ul><li>PSEDII_Mercatus_tSeminar_21Oct09 </li></ul></ul><ul><ul><li></li></ul></ul>New Firm Active Start-Up Quit Wave B, C outcomes 9.4 % 65.0 % 25.6 % Total Informal: n cases 83 573 226 Total Informal: Avg [$1,000] 42.4 54.5 35.1 Owner's Additional Equity: Avg [$1,000] 29.3 47.3 1.8 Total Debt: Avg [$1,000] 79.9 219.6 2.4 Total Invested: Avg [$1,000] 109.1 267.0 4.2
    25. 25. <ul><ul><ul><li>12/16/09 </li></ul></ul></ul><ul><ul><li>PSEDII_Mercatus_tSeminar_21Oct09 </li></ul></ul><ul><ul><li></li></ul></ul>
    26. 26. Financing: Concluding Observations <ul><li>Assembling financial support only one of many start-up activities </li></ul><ul><li>Informal/formal distinction seems useful </li></ul><ul><ul><li>Pre and post legal registration seems useful </li></ul></ul><ul><li>Very skewed distributions </li></ul><ul><ul><li>Substantial minority with no support </li></ul></ul><ul><ul><li>Small proportion in the millions </li></ul></ul><ul><li>Relationship to outcomes </li></ul><ul><ul><li>Amount of informal support has some impact </li></ul></ul><ul><ul><ul><li>May reflect the level of commitment among start-up team </li></ul></ul></ul><ul><ul><li>Absence of formal support has a major impact </li></ul></ul><ul><ul><ul><li>May be the event that triggers disengagement </li></ul></ul></ul><ul><ul><ul><li>Need to explore why formal financial support not forthcoming </li></ul></ul></ul><ul><li>Aggregate amounts </li></ul><ul><ul><li>First approximations, more precision would be desirable </li></ul></ul><ul><ul><li>In same order of magnitude when compared to national estimates </li></ul></ul><ul><ul><li>Substantial sums involved, a quarter of a trillion dollars </li></ul></ul><ul><ul><li>Less than 20% associated with reports of profitable new firms </li></ul></ul><ul><ul><ul><li>12/16/09 </li></ul></ul></ul><ul><ul><li>PSEDII_Mercatus_tSeminar_21Oct09 </li></ul></ul><ul><ul><li></li></ul></ul>
    27. 27. Cross National Harmonization <ul><li>Proportions that finish process with new firm may vary </li></ul><ul><ul><li>U.S. nascents less serious about effort </li></ul></ul><ul><li>PSED I Sibling Projects </li></ul><ul><ul><li>Canada, Netherlands, Norway, Sweden </li></ul></ul><ul><ul><li>Argentina [status unknown], Greece [not now active] </li></ul></ul><ul><ul><li>UK proposal not funded </li></ul></ul><ul><li>PSED II Sibling Projects </li></ul><ul><ul><li>Australia [CAUSEE], China, Denmark, Germany, Latvia </li></ul></ul><ul><li>GEM Potential </li></ul><ul><ul><li>Harmonized nascent entrepreneur screening </li></ul></ul><ul><ul><li>Many GEM teams considering follow-ups </li></ul></ul><ul><li>Trying to raise funds for project coordination </li></ul><ul><ul><ul><li>12/16/09 </li></ul></ul></ul><ul><ul><li>PSEDII_Mercatus_tSeminar_21Oct09 </li></ul></ul><ul><ul><li></li></ul></ul>
    28. 28. References [Note: Bibliography of publications available on the project website.] <ul><li>‘ http://www.psed.isr.umich.edu’. </li></ul><ul><li>Carter, Nancy, William B. Gartner, and Paul D. Reynolds. (1996) Exploring Start-up Event Sequences. Journal of Business Venturing , 11(3):151-166. </li></ul><ul><li>Gartner, W.B., K.G. Shaver, N. M. Carter, and P. D. Reynolds (Eds). (2004). Handbook of Entrepreneurial Dynamics: The Process of Business Creation . Thousand Oaks, CA: Sage Publications. </li></ul><ul><li>Reynolds, Paul D. (2007). Entrepreneurship in the United States: The Future is Now . Boston, Kluwer Academic. </li></ul><ul><li>Reynolds, Paul D. (2007). New Firm Creation in the U.S.: A PSED I Overview . Hanover, MA: now Publishers, Inc. </li></ul><ul><li>Reynolds, Paul D. and Richard T. Curtin. (2008). Business Creation in the United States: Entry, Startup Activities and the Launch of New Ventures. Chapter 8 in U.S. Small Business Administration. The small Business Economy: A Report to the President. Washington, DC: U.S. Government Printing Office (in press). </li></ul><ul><li>Reynolds, Paul D. and Richard Curtin (2008). Business Creation in the United States: Panel Study of Entrepreneurial Dynamics II Initial Assessment . Foundations and Trends in Entrepreneurship. V(3):155-307. </li></ul><ul><li>Reynolds, Paul D. and Richard T. Curtin (Eds). (2009). New Firm Creation in the United States: Preliminary Explorations with the PSED II Data Set . New York City, NY: Springer.   </li></ul><ul><ul><ul><li>12/16/09 </li></ul></ul></ul><ul><ul><li>PSEDII_Mercatus_tSeminar_21Oct09 </li></ul></ul><ul><ul><li></li></ul></ul>

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