Entrepreneurial Success As Determined By An Evaluation Of Premarket Entry Risks

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Entrepreneurial Success As Determined By An Evaluation Of Premarket Entry Risks

  1. 1. ENTREPRENEURIAL SUCCESS AS DETERMINED BY AN EVALUATION OF PREMARKET ENTRY RISKS by J. Phillip Harris A Dissertation Presented in Partial Fulfillment of the Requirements for the Degree Doctor of Business Administration UNIVERSITY OF PHOENIX April 2011
  2. 2. © 2011 by J. PHILLIP HARRIS ALL RIGHTS RESERVED
  3. 3. ENTREPRENEURIAL SUCCESS AS DETERMINED BY AN EVALUATION OF PREMARKET ENTRY RISKS by J. Phillip Harris April 2011 Approved: William Stokes, D.B.A., Mentor Donald Bronsard, Ph.D., Committee Member Timothy Clifton, Ph.D., Committee MemberAccepted and Signed: William Stokes, DateAccepted and Signed: Donald Bronsard DateAccepted and Signed: Timothy Clifton Date __________________Jeremy Moreland, Ph.D. DateDean, School of Advanced StudiesUniversity of Phoenix
  4. 4. ABSTRACTThe purpose of this quantitative study sought to use discriminant analysis to learn ifawareness of antecedent risks can improve success rates of entrepreneurs by earlydevelopment of risk management strategies. The basis for this idea comes from the beliefthat public firms that go through underwriting have an improved chance of success.Because underwriting forces those companies to plan for early stage risk, public firmshave a better chance to succeed. Discriminant analysis separates successful fromunsuccessful firms by using ratio analysis. The firms in the study’s sample showed wheneach firm started to plan certain types of risks as noted in Securities and ExchangeCommission (SEC) Form S-1. The study’s results revealed surprising information. Thebiggest surprise came from companies’ resistance to take part in the study because ofsensitivity about disclosing information about risks. Entrepreneurial firms do considerplanning for risk important, but plan for risk as needed when necessary. Other issues takeon greater importance such as the window for exploiting new opportunities. The resultsbenefit prospective entrepreneurs by offering some general guidelines for dealing withspecific types of early stage risks. Little evidence exists that underwriting improved thesuccess rates of the firms subjected to the process. This study revealed the surprisingimplication that firms that go public are not necessarily any better-off than firms that stayprivate. Holding off going public may contribute to creativity and growth conditions.Entrepreneurs may find these results important in planning for financing anddevelopment of their companies. Further study about these conditions may help confirmthe results. Another study may also develop more specific guidelines for dealing withearly stage risks.
  5. 5. v DEDICATION I would like to dedicate this work to my wife, Rebecca Hendrickson, and familyto express my sincere appreciation for allowing me to take part in completing thisresearch. I could not have carried out fulfilling this journey without them. I am gratefulfor this opportunity and for the support I received in the process. I also want to thank myLabrador retrievers, Nike and Abby, who walked me through the process.
  6. 6. vi ACKNOWLEDGMENTS I want to express my gratitude to my mentor, Dr. William Stokes, for guiding methrough the research process. I found Dr. Stokes always available when I neededguidance. I want also to express my gratitude to the other members of my committee. Iwant thank Dr. Donald Bronsard for his encouragement and guidance. I want to thank Dr.Timothy Clifton for his support and advice. I could not have succeeded this projectwithout both my committee members. I also want to thank Dr. Michael Fellner at SouthDakota State University, who provided valuable guidance and advice with my surveyresults and statistical analysis. I am grateful to all these people for their help.
  7. 7. vii TABLE OF CONTENTSLIST OF TABLES .................................................................................................... xiLIST OF FIGURES ................................................................................................. xiiCHAPTER 1: INTRODUCTION .............................................................................. 1Background of the Problem ....................................................................................... 1Statement of the Problem ........................................................................................... 5Purpose of the Study .................................................................................................. 6Significance of the Problem ....................................................................................... 8 Significance of the Study .................................................................................... 8 Significance of the Study to Leadership ............................................................. 8Nature of the Study .................................................................................................... 9 Overview of the Research Method ..................................................................... 9 Overview of the Design Appropriateness ........................................................... 9Research Questions .................................................................................................. 10Theoretical Framework ............................................................................................ 12 Broad Theoretical Area..................................................................................... 12 Theoretical Gap Filled by the Study ................................................................. 13Definition of Terms.................................................................................................. 14 Entrepreneurial Terminology............................................................................ 14 Risk Terminology ............................................................................................. 15Assumptions............................................................................................................. 15Scope, Limitations, and Delimitations ..................................................................... 16Plan of Study ............................................................................................................ 17
  8. 8. viii Chapter 2, Literature Review ............................................................................ 17 Chapter 3, Research Methodology ................................................................... 21 Presentation and Analysis of Generated Data .................................................. 22Summary .................................................................................................................. 23CHAPTER 2: REVIEW OF THE LITERATURE .................................................. 25Title Searches, Articles, Research Documents, and Journals .................................. 25Literature Review..................................................................................................... 26 Historic Overview ............................................................................................. 26 Review of Current Results ................................................................................ 36 Defining and Extracting Risk from Uncertainty ............................................... 42 Dependent Variable: Determinants of Success................................................. 49 Independent Risk Variables: Determined from Form S-1 Filings .................... 51 Entrepreneurial Entry and Success in Green Energy Industry ......................... 52Conclusions .............................................................................................................. 57Summary .................................................................................................................. 58CHAPTER 3: METHOD ......................................................................................... 59Research Method and Design Appropriateness ....................................................... 60Research Questions and Hypotheses ....................................................................... 67Population, Sampling, and Data Collection Procedures .......................................... 68 Population ......................................................................................................... 68 Sampling Frame ................................................................................................ 68Validity and Reliability ............................................................................................ 71 Internal Validity ................................................................................................ 71
  9. 9. ix External Validity............................................................................................... 73 Reliability ......................................................................................................... 74Data Analysis ........................................................................................................... 75Summary .................................................................................................................. 78CHAPTER 4: COLLECTION AND ANALYSIS OF DATA ................................ 79Pilot Study................................................................................................................ 80Limitations ............................................................................................................... 81Factor Analysis ........................................................................................................ 83Discriminant Analysis .............................................................................................. 86Kruskal Wallis H Test .............................................................................................. 91Summary of Results of Hypotheses Testing and Results ........................................ 91 Research Question and Hypotheses Tests ........................................................ 91 Limitations ........................................................................................................ 93Summary .................................................................................................................. 93CHAPTER 5: SUMMARY AND CONCLUSIONS ............................................... 95Overview of the Results ........................................................................................... 95 Pilot Study ........................................................................................................ 95 Limitations ........................................................................................................ 96 Factor Analysis ................................................................................................. 97 Discriminant Analysis ...................................................................................... 98 Kruskal-Wallis H Test ...................................................................................... 99 Hypothesis Testing and Results ........................................................................ 99Implications of the Results..................................................................................... 103
  10. 10. xRecommendations for Future Study ...................................................................... 111Summary ................................................................................................................ 112REFERENCES ...................................................................................................... 114APPENDIX A: SURVEY INSTRUMENT ........................................................... 139APPENDIX B: INFORMED CONSENT FORM ................................................. 141APPENDIX C: SURVEY INSTRUMENT USED ................................................ 142APPENDIX D: TABLES ....................................................................................... 149
  11. 11. xi LIST OF TABLESTable 1 Structure Matrix…………………………………………………………….…88Table 2 Standardized Canonical Discriminant Function Coefficients…………….……..88Table 3 Tests of Equality of Group Means…………………………………………………...89Table 4 Classification Results………………………………………………………….………90Table D1 Calculation of Ratios……………………………………………………….149Table D2 Risk Factors and Hypotheses Tests Using Z Test…………………………..150Table D3 Eigenvalues………………………………………………………………....151Table D4 Correlation Matrix………………………………………………………….152Table D5 Altman z-scores……………………………………………………………..153Table D6 Group Descriptive Statistics………………………………………….……..154Table D7 Kruskal-Wallis H Test………………………………………………….…...155Table D8 Hypothesis Testing………………………………………………………….156Table D9 Risk Priorities Based on Mean Rank……………………….………………157
  12. 12. xii LIST OF FIGURESFigure 1. Scree Plot of Eigenvalues……………………………………………………………85Figure 2. Scatterplot Covariance Matrices for Each Group…………………………….87
  13. 13. 1 CHAPTER 1: INTRODUCTION Entrepreneurial success rates falter because entrepreneurs overlook risks before marketentry (Proimos & Murray, 2006). Entrepreneurs might improve the chance of success byidentifying antecedent risks and devising strategies to mitigate such risks. Addressing theessential causes of risk at an early stage improves a firm’s wherewithal to gain the financingneeded to continue. By balancing both the opportunities and the risks, the entrepreneur can directattention to the most fitting procedures critical to launching a new venture. In this research study,the goal sought to examine the risks evaluated in underwriting by firms preparing to “go public”and make a comparison with the premarket entry risks faced by entrepreneurial firms. The resultsof this examination helps entrepreneurial firms develop risk management plans before enteringthe market. Background of the ProblemSocial Concern Classical characterizations of entrepreneurial business owners include responsibility foraccretion of capital, innovation, and a close alliance of a business owner’s skills with the firm’swork. Although entrepreneurs encompass only seven to eight percent of the population in theUnited States (U.S.), they account for roughly 30% of the top decile of wealth. Such individualsintroduce new products, contribute skills and ideas, and develop new business strategies throughrisk-taking. Entrepreneurs pioneer innovation through business knowledge and directly managethe firms created. Because entrepreneurs usually invest in a firm from personal wealth, thefounders take a more active role in management (De Nardi, Doctor, & Krane, 2007). With the fiscal benefits of entrepreneurship in focus, the Global EntrepreneurshipMonitor for North America reported net business creation provides an excellent measure of
  14. 14. 2entrepreneurism for firms with fewer than 10 employees (Bosma, Acs, Autio, Coduras, & Levie,2008). For firms in the United States during 2002-2003, Nevada topped the list of statesproducing the highest rate of net business creation with 5.21%, followed by Florida with 4.67%,and Utah with 4.46%. Of total businesses, small businesses with 10 or fewer employees rankedhighest in Montana with 79.2%, followed by Quebec with 78.9%, and Newfoundland with78.6% for the years 2003-2004. The list showed the next highest ranking U.S. states as Wyomingwith 78.4% and Florida with 77.6% (Godin, Clemens, & Veldhuis, 2008). In venture capitalinvested for each person for 2005, Massachusetts ranked highest with $379.39 followed byCalifornia with $295.50, Colorado with $134.99, Washington with $123.14, and Utah with$102.06. Despite the economic boost entrepreneurism provides, Sternberg and Wennekers (2005)showed that entrepreneurism varies among countries in different stages of development.Entrepreneurism unleashes a positive effect on the growth of developed countries, whereaspoorer countries benefit less from entrepreneurial pursuits because mostly nascent entrepreneursare present. In a more developed country, other entrepreneurs innovating new and existingproducts are also part of the mix. Well-developed countries should promote business start-upsbecause they stimulate fiscal growth (Sternberg & Wennekers, 2005). Wong, Ho, and Autio(2005) noted that in particular, high-growth businesses and opportunity entrepreneurshippromote monetary growth. Gelderen, Thurik, and Bosma (2006) recognized that promotion ofentrepreneurial development contributes to innovation, economic growth, job creation, andcompetition.
  15. 15. 3Theoretical Interest Although entrepreneurism promotes fiscal benefits, a disparity exists betweenentrepreneurs and the venture capitalists that serve to fund them. Proimos and Murray (2006)argued the disparity occurs because venture capitalists have a different idea of when a ventureproves “investor ready” (p. 23). Venture capitalists evaluate the management team, the market,and technology to assess investor readiness. Venture capitalists rely on “intuition” in financingventures early in development, creating frustration for the entrepreneur. In assessing investorreadiness, venture capitalists have less tolerance for risk-taking than do entrepreneurs. Risk andreturn play an integral role in the venture capitalists’ evaluations. Entrepreneurs can growdisillusioned by this practice (Proimos & Murray, 2006). Similar to venture capitalists, angel investors also provide risk capital to entrepreneurs,but spoon-feed it in small amounts as a project progresses. Agency theory reflects diverginginterests between the investor and the investee. Angel investors manage such risk by adjustingexpected rates of return to compensate for added risks, by setting milestones to providecontinuing funding during the project. Angel investors specify contractual rights and duties, andwatch progress while working with investees on new projects (Kelly & Hay, 2003). Because of the divergence in seeing risk between entrepreneurs and the investors servingto fund new projects, entrepreneurs experience difficulty accurately assessing the risk and returnof new ventures. By viewing entrepreneurial ventures through a different lens, both investors andinvestees can garner new insight in evaluating the likelihood of survival, assessing riskmanagement, and in forecasting realistic projections of expected returns. Through makingentrepreneurs aware of risk at an earlier stage, individuals can develop risk managementstrategies to achieve more success in gaining financing and benefiting the United States
  16. 16. 4economy. Stifling the innovation provided by entrepreneurism only serves to hold back fiscalprogress. With these divergent views in mind, America continues to serve as one of the mostvibrant economies for entrepreneurs ("Seed capitalism," 2008). Easterly (2001) inferred thatthose countries that have a larger middle class find such a group serves as the backbone of theeconomy. Economies with a larger middle class grow more rapidly than economies without alarger middle class, provided the constituent population is not too ethnically diverse. Max Weber(2001) remarked that entrepreneurs rise from the middle class because of a tolerance for delayedrewards. Entrepreneurs provide employment and growth in productivity for the entire society(Banerjee & Duflo, 2008). With the outcome of entrepreneurism contributing to the financialadvancement of the United States, the goal of this study is to examine how addressing risk beforeentering the market leads to improved entrepreneurial success. Although entrepreneurs contribute heavily to well-developed economies, Parhankangasand Hellstrom (2007) viewed several approaches entrepreneurs use to deal with risk in theliterature. Parhankangas and Hellstrom noted plans for managing such risk associated withoriginal entry to the market remains a mystery. Proimos and Murray (2006) found that a disparityexists between entrepreneurs and those who serve to fund them because of a different view ofwhen a venture proves “investor ready.” Diverse views may account for entrepreneursunintentionally ignoring risk because overconfidence exceeds the distaste for risk (Busenitz,1999; Gelderen, Thurik, & Bosma, 2006; Wu & Knott, 2006). Unlike those companies seekingpublic financing, many entrepreneurs lack professional managers to plan for risk and deal withmisgivings. Resultantly, many entrepreneurs address risks only after exposure to them.
  17. 17. 5 Because of this inattentiveness to premarket entry risk, the entrepreneur faces high failurerates (Singh, Corner, & Pavlovich, 2007). Further, entrepreneurs can grow disenchanted by anysuggestion that risk remains unnoticed and insist new ventures are not risky (Proimos & Murray,2006). Coping with such blind risk creates a major challenge (Busenitz, 1999). Besides,Busenitz’s observation suggests that by making entrepreneurs aware of risk, an opportunityexists to engage in risk management to improve the likelihood of success. Statement of the Problem Although risk-taking is a prime characteristic of entrepreneurs, such firms fail more oftenthan those that “go public” because public firms are aware of the risks and prepare to deal withrisks earlier. By “going public,” a firm complies with underwriting procedure improving thelikelihood of success because it may cause a firm to identify and address early stage risks(Corwin & Schultz, 2005; Hebb & MacKinnon, 2004). The problem is that entrepreneurs fail toidentify and plan for risk before entering the market (Gelderen, et al., 2006; Parhankangas &Hellstrom, 2007). Despite the benefits offered by providing employment and invigoratingmonetary growth, high failure rates hamper entrepreneurs because of the lack of attention toearly stage risks. Ill-prepared entrepreneurs fail to achieve satisfactory levels of financingbecause of the inability to deal effectively with investors. The goal in this quantitative study sought to compare risks identified throughunderwriting of public firms with the awareness and risk management practices of more nascententrepreneurs. The objective of this comparison is to discover if unrecognized risks inhibitentrepreneurial success rates. The study draws on a sample of alternative energy firms filingForm S-1 with the Securities and Exchange Commission (SEC). The plan of this study is to usethis sample to decide if an association exists between risks identified by underwriting practices
  18. 18. 6with the success of more nascent firms. Similarly, in the conduct of the study the objective is todevelop a survey to give to a sample of nascent alternative energy firms taken from the UnitedStates Department of Energy website ("U. S. Department of Energy," 2008). Purpose of the Study The purpose of this quantitative study sought to use discriminant analysis to learn ifawareness of antecedent risks can improve success rates of entrepreneurs by early developmentof risk management strategies. Classification of risks ranging from antecedent to the time offunding influences the success or failure of entrepreneurs because the earlier the firm starts riskmanagement, the greater the chance of success. The population sought to include nascententrepreneurs in the alternative energy industry from a list on the Department of Energy website("U. S. Department of Energy," 2008). Companies with headquarters in the United States asidentified on the website provide the sample for a survey to find how the identified risksinfluence self-reported success rates. To identify antecedent risks, the research included an examination of a sample of filingsof Form S-1 from the Securities and Exchange Commission website for 2009. The sample soughtto include alternative energy firms applying to “go public.” For example, some of the risksidentified are as follows: 1. The dependency on few suppliers of critical services or products may present a problem. 2. Environmental risks and rules may have an unfavorable effect on business. 3. Strong competition from competitors may create difficulty gaining enough of a share of the market. 4. Local, legal, and political risk may hinder the firm’s ability to market products.
  19. 19. 7 5. Limited financing may hamper the firm’s ability to preserve the expense to uphold regulatory needs. 6. The power may not exist for the company to achieve market acceptance for products. 7. Difficulty attracting key management and board members may hinder the ability to carry out business plans and manage growth. 8. Technological changes could make products and services obsolete. 9. Safety and product liability could result in unforeseen damages. 10. The company may find gaining necessary licenses for products difficult.Gilmore, Carson, and O’Donnell (2004) found that major determinants of risk arose from cashflow, company size, entry into new markets, and entrusting staff. Each of the risks can fall intoone of these categories. With an idea of the risk involved, this study sought to conduct a survey by querying asample of alternative energy firms to decide if any firms took steps to manage risks before start-up or within the first year. Alternative energy firms are those companies dealing inunconventional energy sources not attributed to fossil fuels. The study incorporated a factoranalysis to decide which identified risks bear the greatest influence on success rates. Creswell(2005) asserted that a quantitative method presents an opportunity for descriptive research andanalysis. A quantitative study using multiple discriminant analysis provided a proper researchmethod to perform the stated objective. This method is proper because discriminate analysisstudies simplify describing early stage risk and aid in deciding the influence of risks onentrepreneurial success rates.
  20. 20. 8 Significance of the ProblemSignificance of the Study Because entrepreneurs neglect risk mitigation in the early stages of firm development,high failure rates hinder overconfident entrepreneurs (Wu & Knott, 2006). Opportunisticentrepreneurs miss a chance to mitigate risks before entering the market. Proimos and Murray(2006) asserted that early mitigation of risk prepares entrepreneurs for discovering newopportunities for financing by making them “investor ready.” Taking risk readiness into consideration, investors are more likely to invest in a firm thathas identified potential risks and has developed plans to address them. Identifying potential risksand developing plans for risk management helps the investor build confidence in the talents ofthe entrepreneur. Conversely, potential investors view entrepreneurs who have neglected riskplanning as too risky and may select other investment alternatives.Significance of the Study to Leadership Leaders take the lead in developing a vision by learning to transform a mission throughnew business enterprises laden with risk (Becherer, Mendhall, & Eickhoff, 2008; Kotter, 1996).Leaders surface among individuals with a high tolerance for the risk-taking (Becherer, et al.,2008; Kets de Vries, 1997). Schumpeter (1951b) credited early stage risks to “a phenomenon thatcomes under the wider aspect of leadership” (p. 259). People without a high tolerance for riskrarely rise to a leadership position. To develop a reasonable open-mindedness about risk, the nascent entrepreneur must havemany leadership qualities. The qualities include vision, creativity, achievement, tenacity, self-confidence, assertiveness, risk taking, and an inclination for power and control (Becherer, et al.,2008). Thus the objective of the study is to prepare the nascent entrepreneur for leadership
  21. 21. 9challenges. Without such qualities, a new entrepreneur has a difficult time taking the venturefrom birth to an enduring existence. Nature of the StudyOverview of the Research Method Apart from the leadership significance of examining premarket risks, a suitable method isimportant to detect the relationships among the independent and dependent variables. Neuman(2003) asserted that “correlation” research often relies on surveys as a rigorous test for cause andeffect and providing alternative explanations. Using surveys involves six distinct steps. The firststep involves designing an instrument to address research questions and theories and the mediumused to give the survey. Methods can include personal interviews, direct mail, telephoneinterviews, e-mail invitations, or web-based surveys. The next step involves deciding how torecord and test the results. Next, the research protocol entails extracting a sample from asampling frame of the entire target population. Once sample selection is complete, the next step entails finding respondents, conductinginterviews, and recording data. After entering the data into computer software such as SPSS, thedata is ready for statistical analysis. Finally, the cleaning procedure allows a discussion of themethods and results of the statistical analysis. In essence, a quantitative analysis gives aresearcher the opportunity to test a theory by using statistical inference (Neuman, 2003).Overview of the Design Appropriateness In this quantitative analysis, the testing procedure affords a method to assess if a strongassociation exists between identified risks and the success or failure rates. The 10 risksindentified earlier came from SEC Form S-1. The SEC uses this form for firms to discloseimportant information about their intent to “go public.” In designing the study, these risks
  22. 22. 10appeared most often with comments expressing a concern. To perform an assessment, the plan ofthe study sought to examine success and failure rates of nascent entrepreneurial ventures withinthe alternative energy industry. Further, a Pearson correlation coefficient statistical analysishelped to uncover the relationships of each independent variable to the dependents variable andto each of the other independent variables (Neuman, 2003) As an alternative to qualitative analysis that explores a broad theoretical problem areaand converges on a central phenomenon, quantitative analysis provides a deeper analysis byfocusing on more specific relationships among variables (Creswell, 2005). Because the literaturealready identified broad theoretical research, the purpose of this research sought to achieve amore specific focus about the influence of risk on improving entrepreneurial success. Theobjective of the study is to contribute to existing research by extending the literature on risk tofocus on ways in which early stage risks affects the success of entrepreneurs. Discriminantanalysis offered a research method useful in separating entrepreneurs into successful andunsuccessful groups through analysis of the variables (StatSoft, 2007b). Research Questions Although entrepreneurs provide many positive benefits to the economic environment,overconfidence and undisciplined preparation are an enigma to their success. Larger firms havethe opportunity to identify and mitigate risk before entering the market because of theunderwriting process. For example, larger firms that decide to go public and identify premarketentry risks through underwriting procedures develop plans for risk management, and improve thefirm’s chances of long-term success (Corwin & Schultz, 2005; Hebb & MacKinnon, 2004). In aquantitative study, the objective is to address the obvious disparity by looking at the relationship
  23. 23. 11of risk to the success and failure of divergent firms in the United States’ alternative energyindustry. The disparity between success and failure rates for such groups leads to the followingquestion:Q. How does the timing of gaining awareness of risk affect entrepreneurial success rates in thealternative energy industry? Hypotheses Such questions imply a cause and effect association exists between the timing of riskawareness and risk management with entrepreneurial success rates. The research questionssuggest the following theories are possible (Creswell, 2005):Set One: DirectionalHo1. No difference exists between entrepreneurs gaining an awareness of risks before and afterentry to the market resulting in a significant improvement in their success rates within the UnitedStates’ alternative energy industry.Ha1. A difference exists between entrepreneurs gaining an awareness of risks before marketentry and after entry to the market resulting in a significant improvement in their success rateswithin the United States’ alternative energy industry.Set Two: NondirectionalHo2. No difference exists between entrepreneurs gaining an awareness of risks before and afterentry to the market resulting in a significant improvement in their success rates within the UnitedStates’ alternative energy industry.
  24. 24. 12Ha2. A difference exists between entrepreneurs gaining an awareness of risks before and afterentry to the market resulting in a significant improvement in their success rates within the UnitedStates’ alternative energy industry. Theoretical FrameworkBroad Theoretical Area Adam Smith distinguished the capitalist from the entrepreneur by noting the sole role ofthe capitalist is to provide capital and bear the risk of loss (Schumpeter, 1951). By contrast, anentrepreneur does not always supply capital or bear the risk of loss. Although often suchconditions do exist for the entrepreneur, the true defining characteristic of an entrepreneur stemsfrom uncertain conditions. Montanye (2006) defined entrepreneurs as talented individualsconfronted with doubt and scarcity with a goal to capture monetary returns beyond thoseprovided by perfect competition. Through such efforts entrepreneurs are able achieve a superiorlifestyle (Montanye, 2006). Although Schumpeter (1951) singled out uncertain conditions as a defining characteristicof entrepreneurs, others credit entrepreneurs for risk management responsibilities. Bernstein(1996) described how the French mathematician, Jules Henri Poincare, explained risk by causeand effect as a way to protect against sizable losses. Poincare argued a firm can allay riskthrough insurance to cover significant losses, but must pay a small loss in the form of a premiumto do so. A firm should take measures to reduce the doubt involved by addressing the source ofthe risk. Such actions decrease the small loss incurred in the form of insurance premiums tolessen the payment for a potential large loss (Bernstein, 1996; Knight, 1921). Risk-aligningbehavior works to lower risk exposure and moderate the cost of a disastrous loss.
  25. 25. 13 Beyond protecting against a disastrous loss by addressing the source of risk and movingmore from the uncertain to the certain, identifying risks should also improve the chance ofsuccess. Knight suggested one should distinguish risk from the uncertain conditions because anentrepreneur can appease risk through insurance, hedging, and diversification. Conversely,uncertain conditions stem from ignorance or acting on opinion rather than knowledge (Knight,1921). Max Weber described the motivation inspiring the capitalist as the pursuit of profitthrough rational restraint and supported such an attitude over the pursuit of profits for greed(Mises, 1944; Weber, 2001). Compatible with the need to balance risk management with optimism, entrepreneuriallifestyles benefit the economy by fostering innovation and creativity, providing growth inproductivity, and employment for the entire society (Banerjee & Duflo, 2008). Sternberg andWennekers (2005) agreed that promotion of business start-ups stimulates fiscal growth. Byaligning entrepreneurial optimism with suitable risk management improves success ratescontributing to improved monetary conditions for society.Theoretical Gap Filled by the Study Because risk-taking and opportunism characterizes the entrepreneur, improving thechances of success by early risk management initiatives benefits society. The objective is toidentify early stage risks to relieve potential losses and improve entrepreneurs’ abilities to seesuch risks. Geldren et al. (2006) noted only limited literature exists about risk management plansfor people with ambitions to launch new business ventures, and the literature would benefit frommore research. Parahankangas and Hellstrom (2007) noted, “interrelations between theantecedents of risk taking, investment decisions and risk reduction strategies still remain alargely unexplored territory” (p. 184). Ottesen and Gronhaug (2006) asserted that exploiting
  26. 26. 14opportunities with an uncertain future remains a difficult task, but surprisingly little literatureexists on why some firms succeed in the search to exploit opportunities, while the majority fail.The insights gained by exploring the problem can lead to improved success rates. In response to the gap in the literature, the goal of the study sought to address antecedentrisk. Addressing early stage risks depends on ways to improve entrepreneurial success rates byidentifying risks at an earlier stage and starting risk management sooner. An inference exists inthe study that entrepreneurs who balance an opportunistic vision with attendant early stage risksstand a better chance of surviving. Displaying this ability allows entrepreneurs to earn enoughfinancing to propel new ventures through start-up. Such research only addresses a small part ofthe total population of entrepreneurs as the study limits the results to alternative energycompanies. Companies in other industries may find the risks in such industries are different fromthe alternative energy industry. The results in this study only address a small part of newventures by the entire population of entrepreneurs. This research may justify further expansion togain insight into other parts of the population. Definition of Terms Certain terms are particular to the study of entrepreneurs and risk management. Suchterms warrant further definition. Other terms vary in meaning, depending on the author. For thesake of clarity, this section defines terms for use here. To define such terms helps impel clarityand consistency.Entrepreneurial Terminology Bootstrapping. The term refers to an effort to conserve cash when a firm cannot raisecapital through conventional sources such as issuing stock or bonds. Entrepreneurs use
  27. 27. 15bootstrapping by bartering and sharing supplies to aid survival when conventional financing isunavailable (Ebben, 2009; Ekanem, 2007; Winborg & Landström, 2001). Nascent. Nascent is a term often found in the literature used to mark the emergence orbirth of an organization.(Diochon, Menzies, & Gasse, 2007; Gelderen, et al., 2006) Nascentrefers to emergent organizations in an embryonic stage of development. Entrepreneurs launchembryonic organizations and lead new firms during the beginning stage.Risk Terminology Risk. According to Knight (1971) risk is anything resulting in a known hazard that canresult in a loss if insurance is not present. Risk is any danger or condition subject to an insurancepolicy. Without such a policy, loss is a more likely result. Uncertainty. The term uncertainty arises from a lack of knowledge resulting insuspicion, doubt, skepticism, or mistrust. Uncertainty means a condition in which risk isunknown or has gone undetected because of a lack of knowledge. Unlike risk, uncertainty isuninsurable (Knight, 1971). Assumptions In this research study, the assumption is that entrepreneurs wish to improve success ratesand are open to balancing the pursuit of opportunities with the attendant risks. Such anassumption suggests that an awareness of premarket entry risks leads entrepreneurs to riskmanagement. Entrepreneurs may still believe in beating the competition by taking a first-moverposition despite the risks. Besides the possibility of entrepreneurs taking such a position, the central question of thestudy suggests the entrepreneur is expert with planning to address risk cutting. Some
  28. 28. 16entrepreneurs may not have the proper experience and may not have any idea how to find help.Further, the entrepreneur may not have the financial ability to deal with such problems. Scope, Limitations, and Delimitations Although entrepreneurial ventures in the alternative energy industry limit the scope of theresults, other industries face similar risks by “going public.” This study also only extends tocompanies within the United States and does not include foreign entrepreneurs engaged inalternative energy ventures. Ventures in other locations may present other risks besides those inthe domestic domain. Because the study includes only domestic ventures, risk present in theglobal domain remains unexamined. On the other hand, some of the companies listed on the U.S.Department of Energy website used to decide the sampling frame are either divisions of globalcompanies or domestic subsidiaries ("U. S. Department of Energy," 2008). The study hereexcludes risks present in business outside the United States. Because the study only extends to companies that have either gained renewable energycertificates or applied for such certificates, the study excludes other companies that have not yetreached that point. The results in the study rest on the assumption that a firm without renewableenergy certificates would not have yet reached a stage in which it can reach profitability in thealternative energy market. Similarly, the results rely on the assumption that a firm must findways to raise or produce enough capital before reaching profitability. Because the alternativeenergy industry is new, the results presume the industry can achieve profitability by providing asupplement or replacement for conventional fossil fuels. Most important, the major underlyingassumption for the companies in the industry rests in the ability to convert such energy intoelectrical power. Transmitting this energy depends on the ability to carry the power by an energygrid with enough capacity (Walter, 2009).
  29. 29. 17 Despite the industry’s embryonic existence, the study excludes firms solely engaged inexploration as the growth of the industry depends on the products drawn from explorationalready successful. Thus the study only considers firms able to convert existing sources intoelectric power. Plan of StudyChapter 2, Literature Review Although some scholars argue that self-employment via entrepreneurship may not offerthe benefits the self-employed expect, such a notion depends on the location, the entrepreneur’smotivations, and the specific need. Besides, many people working as employees of others wantto work for themselves, but one of the most significant obstacles facing the entrepreneur comesfrom the lack of capital. Another significant result is that self-employment increases with age(Blanchflower, 2004). Because “baby boomers” are overabundant and depressed economic conditions exist,entrepreneurism offers an opportunity that otherwise is unavailable. Self-employment in theUnited States is highest among men, Whites with larger families, and people with a highereducation. For example, Organization for Economic Cooperation and Development (OECD) datashows that people with no education have almost no chance of reaching self-employment. Peoplewho finish eighth grade have a probability of 0.0141 of achieving self-employment. Conversely,people who earn a bachelor’s degree have a probability of 0.1959, and people who earn adoctorate degree have a probability of 0.4195 of achieving self-employment (Blanchflower,2004). As a further illustration, according to the 2008 Global Competitiveness report a study of43 countries classified the countries by stage of economic development as factor-driven,
  30. 30. 18efficiency-driven, and innovation-driven. This study used12 pillars to rank the countries. Theleast developed nations fall into the factor-driven classification, while the most sophisticatedcountries fall into the innovation-driven group as determined by the rankings within each pillar.The pillars characterizing the factor-driven group include an institutional environment,communications networks, macroeconomic endeavors, health, and primary education. Besidesthese pillars, efficiency-driven economies complement these features with higher education,market efficiency for goods, labor market efficiency, a sophistication of financial markets, atechnologically ready environment, and a large market size. The innovation-driven groupcomplements these fundamentals with innovation and business sophistication (Bosma, et al.,2008; Porter & Schawb, 2008). Considering these rankings, Bosma et al. (2008) determined the rate of the adult-agedpopulation most actively engaged in nascent entrepreneurism arises from the factor-driven groupfollowed by the efficiency-driven group. For example, in the 25-34 age group 23% of thepopulation engage in nascent entrepreneurial occupations, whereas in the efficiency-drivengroup only 14% take on such occupations followed by the innovation group with only 10%participation. Concurrently, between 2001 and 2008 a slightly upward-to-static trend supportsthese rates (Bosma, et al., 2008). In all classifications the self-employed category is significant tothe other parts of the population working for others. The central question of the study proposesthat improving success rates through early knowledge of risk management eventually contributesto more efficient conditions for the community. Participation in nascent entrepreneurial pursuits is lower in innovation-driven economiesbecause monopolistic disincentives such as patent protection discourage nascententrepreneurism. Monopolies with patent protection wish not to compete with nascent
  31. 31. 19entrepreneurs who have innovative ideas. As a result, the genuinely novel entrepreneur finds itdifficult to compete with firms engaged in temporary monopolies. The more sophisticated theeconomy, the less likely the small creative entrepreneur is to compete (Baumol, Litan, &Schramm, 2007 ). Baran (2009) argued the efficient planning and managing of practicesimproves conditions for entrepreneurial decision-makers and reduces misgivings enabling theentrepreneur to aid the existence of the firm. Similarly, if entrepreneurial faculty rates are a sign of the need for training, thepercentages of both primary and secondary advertised faculty positions steadily rose from 1989through 2005. For example, primary positions have risen from roughly 5% to 95% of advertisedpositions and secondary positions have grown from about 12% to 64% over the same time frame(Finkle, 2007). Finkle commented the demand for entrepreneurial faculty has outstripped thesupply. Because of such gaps in entrepreneurial support, self-employment continues to decline inthe United States. In 1997, the United States had a self-employment rate of 8.2%, which hasfallen to 7.2% in 2007, far below the OECD total in such years of 16.8% and 15.5%, respectively("OECD in Figures 2009," 2009). Baumol et al. (2007) recommended tearing down barriersstanding in the way of promoting entrepreneurial innovation. For example, Baumol et al.suggested bankruptcy reform, lowering the cost of start-up, improved protection of property andcontract rights, and minimizing overzealous taxation. Baumol et al. also recommended keeping abalance of rules and deregulation, providing rewards for university innovations, providingincentives for imitation, and disincentives for unproductive entrepreneurs (Baumol, et al., 2007). In line with heightened demand for entrepreneurial education, Collins, Smith, andHannon (2006) asserted that entrepreneurs need certain “pre-programme” capacities to engage
  32. 32. 20effectively in nascent entrepreneurial activity (p. 188). Collins et al. argued that action-orientedentrepreneurs rely on adaptive learning or learning by doing. Entrepreneurs not only representthe owners but all stakeholders and participants, and manage change and uncertain conditions inan environment laden with risks (Collins, et al., 2006). The programmed approach involves usingnascent entrepreneurs, existing entrepreneurs, and trainers to teach different entrepreneurial skills(Collins, et al., 2006). An evaluation of premarket entry risks ties into the capacity-buildingapproach and benefits many stakeholders. Thus beneficiaries of this training consist of diversestakeholder groups including employees, venture capitalists, angel investors, finance companies,banks, suppliers, and customers. As noted, different groups of investors represent a major category of stakeholders whohave employed various risk-reducing strategies. Such strategies include forming investmentsyndicates, closely watching projects while releasing small infusions of capital, and asking forpreferred stock to ensure satisfactory compensation for investments (Parhankangas & Hellstrom,2007; Proimos & Murray, 2006). Venture capitalists finance fewer than 5% of entrepreneurs whoapproach such firms because the entrepreneurs are not “investor ready” (Berlin, 1998; Proimos &Murray, 2006). Sweeney (2006) reported that an emerging trend is to hire well-connectedinvestment banking firms to round up a group of angel investors compatible with theentrepreneur. Another strategy stems from more nascent entrepreneurs using bootstrapping tomake it through the early stage of development. Bootstrapping approaches emerge whenconventional equity and debt financing is unavailable, too costly, or dilutes ownership control ofthe firm. Bootstrapping includes bartering, sharing supplies, and other methods to conserve cashflow (Ebben, 2009; Ekanem, 2007; Winborg & Landström, 2001).
  33. 33. 21 Although such methods have varying degrees of success, the presumption underlying thestudy proposes that addressing risk management early may improve effectiveness and result inimproved success rates. Some scholars have studied the problem of risk perception through theeyes of potential funding sources (Busenitz, Fiet, & Moesel, 2004; Fiet, 1995; Parhankangas &Hellstrom, 2006; Yoshikawa, Phan, & Linton, 2004). Other scholars have looked at theassociation between risk preferences and risk perceptions (Sitkin & Pablo, 1992).Chapter 3, Research Methodology The research plan included running a survey of alternative energy firms drawn from a liston the United States Department of Energy website ("U. S. Department of Energy," 2008). Thesurvey listed risks gathered from Form S-1 of the Securities and Exchange Commission (SEC).The survey asked respondents to provide data necessary to calculate the ratio of earnings to fixedcharges as described in §229-503 of the instructions for preparing a prospectus under the SECregistration statement. The self-reported data served as a proxy for discovering the likelihood ofsuccess of surveyed respondents. Similarly, the procedure called for respondents to say if suchfirms by filing Form S-1 have sought or filed for public financing. The survey asked respondentsto rank the risks by noting when awareness and planning for risk management started by using aseven-point, Likert-scale. Discriminant analysis decided which respondents fell into successfuland unsuccessful groups of entrepreneurs. After finding which respondents belong to such groups, the next step entailed analyzinghow these risks affect the self-reported success rates for each group. The procedure includedrecording the data for each respondent and coding the data for those respondents by whenawareness of the risks and planning effort began. Thus the procedure called for entering theresults for all respondents into SPSS and running descriptive statistics for each group.
  34. 34. 22Concurrently, the procedure called for an analysis of the results to detect if a difference exists insuccess rates between the groups. The analysis employed multiple discriminant analysis to testthe proposed theories (Leech, Barrett, & Morgan, 2007). Multiple discriminant analysis is atechnique that classifies observations into groupings by looking at individual characteristics onwhich the groups depend (Altman, 1968). Altman used ratio analysis to classify new venturesinto firms likely to go bankrupt and firms likely to continue. Similarly, the SEC uses the ratio ofearnings to fixed charges on Form S-1 to analyze the riskiness of investments in new ventures byassessing the firm’s chance of surviving. Multiple discriminate analysis provided a linearcharacterization of reasons that best discriminate between groups (Altman, 1968). In this studyof successful and unsuccessful entrepreneurs, the two groups needed such an analysis.Presentation and Analysis of Generated Data Once the analysis is complete, a comparison of the groups with the risks helps decide ifthe group seeking public financing fares better than the group not seeking public financing. Fromthe analysis, the expectation is for the group seeking public financing to have higher successrates because underwriting brings attention to risk identification and management. Similarly, theanalysis helps decide if any of the risks have more of an effect than others and whether the risksinfluence one another. The analysis uses the identified risks and the self-reported statistics to testthe following theories:Set One: DirectionalHo1. No difference exists between entrepreneurs gaining an awareness of risks (IV) before andafter entry to the market resulting in a significant improvement in their success rates (DV) withinthe United States’ alternative energy industry.
  35. 35. 23Ha1. A difference exists between entrepreneurs gaining an awareness of risks (IV) before marketentry and after entry to the market resulting in a greater significant improvement in their successrates (DV) within the United States’ alternative energy industry.Set Two: NondirectionalHo2. No difference exists between entrepreneurs gaining an awareness of risks (IV) before andafter entry to the market resulting in a significant improvement in their success rates (DV) withinthe United States’ alternative energy industry.Ha2. A difference exists between entrepreneurs gaining an awareness of risks (IV) before andafter entry to the market resulting in a significant improvement in their success rates (DV) withinthe United States’ alternative energy industry.The analysis helps decide the priority in which to plan for the identified risks to help improvesuccess rates. With the results of the analysis in mind, entrepreneurs from other industries may notagree with the results for alternative energy. A researcher may find other risks more relevant inother industries, and such risks can bring different results. Thus a researcher should have anawareness that some of the same risks may apply, while others do not. Summary In summary, the analysis of the study aims to concentrate on making the risks associatedwith the launch of a new venture more visible to the nascent entrepreneur so the founder canbegin risk management sooner rather than later. Usually, opportunism and enthusiasm clouds theentrepreneur’s vision so opportunity overshadows the related risks involved in such ventures(Busenitz, 1999; Gelderen, et al., 2006; Wu & Knott, 2006). Because entrepreneurs representonly seven to eight percent of the United States population but account for roughly 30% of the
  36. 36. 24top decile of wealth, an expansion of entrepreneurism is worthwhile. As a result, the growth ofentrepreneurism provides society employment and stimulates fiscal growth (De Nardi, et al.,2007; Sternberg & Wennekers, 2005). By balancing opportunities and risks, heightenedentrepreneurism provides an important first step in filling this void.
  37. 37. 25 CHAPTER 2: REVIEW OF THE LITERATURE In the review of the literature, the objective is to query the literature about the history anddevelopment of risk management. The review of the literature also queries the role of theentrepreneur, developing the study of risk, and alternatives improving risk management. Severalstrands have developed in the literature about risk management. These strands includedistinguishing between risky and uncertain events, and the lack of ability to detect early stagerisk because opportunism overshadows the sight of risk. Similarly, other risk managementmethods have developed such as alternative funding mechanisms provided by angel investorsand venture capitalists, and the use of prediction and control. Although the literature has developed distinct threads of research about risk managementfor the entrepreneurial venture, researchers have yet to develop much about risk managementbefore market entry. This study helps to fill the void in the literature about the effects of riskmanagement before entering the market. This study evaluates early risk management rather thanwaiting until after the entrepreneur launches a venture. The intent is to continue to develop theliterature to improve entrepreneurial success rates. Title Searches, Articles, Research Documents, and Journals To fill such a void, the objective of the review of the literature is to scan current literatureabout the history of entrepreneurism and risk management. The chapter provides an analysis ofthe recent strands of risk management literature. These strand include types of risk faced byfounders of firms whether seen or not, and characteristics marking a successful launch of aventure. The historic development of entrepreneurism and risk management serves as afoundation to understand the need for more research about improvement of entrepreneurial
  38. 38. 26success rates by starting early to plan for applicable risks. Such research helps frame the researchproblem about risk and uncertain conditions by distinguishing between the two. After reviewing the literature, a classification of alternative types of risks forms the basisfor deciding applicable features that affect the successful launch of the business. A look at recentliterature helped discover applicable risks. With this review, a view of the underwriting for firmsseeking to “go public” provided an improved backdrop for analyzing the timing of such risks.Thus in the conduct of the research, a scan of the Securities and Exchange Commission (SEC)Form S-1 for firms applying to “go public” helped decide on risks revealed in the underwritingprocedure. Both an awareness of such risks and a plan to deal with the risks are critical outcomesof such analysis. The analysis helped isolate proper risks serving as independent variables for thestudy. Similar to indentifying suitable risks, the objective of the analysis is to identify riskcharacteristics believed proper to settle on the causes of a successful business launch. Such acourse of action helped identify characteristics from the literature and from the SECrequirements for firms seeking to “go public.” Thus the research analysis looked at the needs ofSEC §229.503 of Regulation C to discover proper measures for deciding success to supplementthe measures found in the literature. The combined measures formed the basis for decidingsuccess and failure rates, the dependent variables for the study. Literature ReviewHistoric Overview Risk management. Modern risk-taking theory has roots in the Hindu-Arabic numberingthat emerged in the Western world in the 1200 to1300s (Bernstein, 1996, p. 218). Two prominentFrench mathematicians, Blaise Pascal and Pierre de Fermat engaged in a new game of chance in
  39. 39. 27the summer of 1654 discovering the modern theory of probability. The “unfinished game”sometimes known as “the problem of points” resulted in the first try to quantify how to managerisk (Bell, 1998; ORourke, 2008). Pascal and Fermat used chance to forecast the likelihood offuture events. Before this time, probability analysis had no place in risk management (Bernstein,1996). Quantifying such a game of chance prompted Chevalier de Mere, a gambler, andchallenged Pascal and de Fermat. This revelation could not have happened without the discoveryof the Hindu-Arabic numbering. In 1202, the Italian mathematician, Leonardo Pisano, alsoknown as Fibonacci, visited the Algerian city of Bugia in which his father served as Pisanconsul. An Arab mathematician introduced the Hindu-Arabic numbering to Fibonacci, whichFibonacci later published in Liber Abaci or the Book of Abacus (Bernstein, 1996; Danesi, 2005).The numbering has its roots in India where the Hindus developed the technique and the Arabsbecame familiar with the method during India’s invasion (Bernstein, 1996). Quantifying risk through probability analysis further developed through the efforts ofGirolamo Cardano, a gambling scholar and prominent doctor. Cardano provided one of the firstdefinitions of probability before Pascal and de Fermat’s time in the 1550s. Cardano did not havethe work published until after death. Cardano defined probability as the result found by dividingthe number of favorable outcomes by the number of possible cases (Bernstein, 1996; Ekert,2008). Shortly after Pascal and Fermat, other notable individuals began applying probability todifferent applications. John Graunt, a merchant, used probability to estimate the population andapplied the idea to demographic information. William Petty, a doctor, aided Graunt with studiesof population statistics (Bernstein, 1996; Kreager, 1988). Edmund Halley, an astronomer, used
  40. 40. 28probability to predict when comets would appear and to calculate the value of annuities based onlife expectancies (Bernstein, 1996; Ciecka, 2008). Further development of the use of probability analysis came from the Bernoulli family. In1703, Jacob Bernoulli became the first to build on the theory from sample data (Bernstein, 1996).Jacob introduced epistemic probability and used the idea of guessing about the future by lookingat data from the past (Hon, 2008). By watching what happened in the past, a reasonableexpectation exists for the same to happen in the future. Bernoulli also developed utility theorythat relies on a person’s power to measure utility. Utility theory enables one to decide on rationalalternatives to avoid uncertain conditions and conquer risks (Bernstein, 1996). For example, onecould decide to either lease or buy a piece of equipment. Leasing preserves cash and reduces thechance of running out of cash. Similar to the work on probability analysis, Jacob’s nephew, Nicholas continued Jacob’swork and invited the French mathematician, Abraham de Moivre to help. De Moivre developedthe normal distribution or bell-shaped curve from such work by using a sample. This innovationhelped discover the degree of dispersion about the mean and the related standard deviation(Bernstein, 1996). Pierre Remond de Montmort claimed credit for the same innovation and deMoivre and de Montmort both complained of plagiarism. Both men worked with Bernoulli andeventually began working collegially (Bellhouse, 2008). In the early 1800s, a prominentmathematician, Carl Friedrich Gauss, named the bell-shaped curve. Gauss used the bell-shapedcurve to study the curvature of the earth and taking measurements forming a distribution of therecorded measures (Bernstein, 1996). Today research uses the bell-shaped curve and normaldistributions extensively in scientific inquiry for hypothesis testing.
  41. 41. 29 In line with such analysis, risk-taking theory further developed with another innovationwidely credited to Sir Francis Galton in the late 1800s (Bernstein, 1996). Such innovationoriginated from the law of regression or return to the mean published in 1885 (Bernstein, 1996;Bulmer, 1998; Sandall, 2008). Such an idea motivates most forecasting involved in managingrisk-taking (Bernstein, 1996). In, 1901, Karl Pearson worked as a student of Galton anddeveloped the chi-square or goodness-of-fit technique to improve accuracy of predictions(Magnello, 1998). For instance, business today relies on such techniques to help predict manyissues such as market demand, defect rates in products, warranty claims, and many otherapplications. To frame the history of risk management, Bernstein (1996) decided the fundamentalnature of risk management rests in increasing the areas in which a person has control (risks). Atthe same time, Bernstein settled on lessening such areas in which a person has no control(uncertainties) or in which envisaging cause and effect is difficult. Bernstein’s revelationprovides a foundation for the study on how timing affects risk management by identifying risksearly and minimizing uncertain conditions by culling out and controlling risks. For example, afirm might wish to exert control over its supply chain or its procurement and distribution tasks.By vertically integrating, the firm can bring such applications under its control. The role of the entrepreneur. In framing the context of risk management, capitalismemerged to underpin modern entrepreneurism. In 1732, Cantillon, an Irish-banker working inFrance, introduced classical entrepreneurship. Cantillon argued entrepreneurship emanates fromsupply and demand differences (arbitrage) by setting up equilibrium models between buying andselling prices leading to a more stable economic environment. Cantillon’s forethought using suchmodels helped deal with uncertain conditions and risk (Minniti & Lévesque, 2008; Murphy,
  42. 42. 30Liao, & Welsch, 2006; Sobel, 2008). In 1848, John Stuart Mill in his book, Principles of thePolitical Economy, expanded on the role of the entrepreneur to include management of the firm(Sobel, 2008). Although both Cantillon and Mill helped develop the place of the entrepreneur inthe fiscal environment, the literature widely recognizes Adam Smith as the father of capitalism(Bassiry & Jones, 1993; Renesch, 2008). Apart from Cantillon’s equilibrium models, Smith launched capitalism from a utilitarianperspective. This perspective intended to avoid the Marxist economic model largely present atthe time as opposed to the state-based capitalistic model that exists today (Bassiry & Jones,1993). Smith rooted the capitalistic model based on John Locke’s notion of human liberty. ThusSmith condemned the authoritarian economic models in favor of a model highlighting the rightsof the people (Wren, 2005). For example, supply and demand equilibrium models aid inregulating the transfer of wealth to the people rather than the state arbitrarily granting wealth tomonopolies. Concentrating power in monopolies shielded by the state Smith feared most aboutthe capitalistic model. The Western world viewed capitalism as a more efficient economic modelto provide for the needs of the average citizen (Bassiry & Jones, 1993; Renesch, 2008).Consistent with such a view of capitalism, both Weber and Mises explained the capitalistmotivation as coming from the pursuit of profit through rational restraint. Weber and Misesfavored the approach over the pursuit of profits for greed (Mises, 1944; Weber, 2001). With such a foundation in mind, Smith distinguished the entrepreneur from the capitalistby noting the sole role of the capitalist is to make capital available to the firm and bear the risk ofloss (Schumpeter, 1951a). Montanye (2006) described entrepreneurship as a person facingscarcity and uncertain conditions. An entrepreneur successfully produces and seizes “economicrents” to achieve economic rewards surpassing the rents existing from perfect competition in
  43. 43. 31which the forces of equilibrium are in balance. Under such conditions, the gifted entrepreneurreaps the rewards of a higher standard of living (Montanye, 2006). Thus the ability to competesuccessfully in the market offers motivation to the entrepreneur to achieve such rewards. Recognizing this definition, the entrepreneur differs from the capitalist because theentrepreneur competes by managing scarce supplies and uncertain conditions fraught with risks.The entrepreneur’s role emanates from managing risky conditions in such a way to earn a returnon the capital invested in the firm. Knight (1971) asserted that an entrepreneur should distinguishrisk from uncertain conditions as a person can mitigate risk through insurance, hedging, anddiversification. Conversely, uncertain conditions stems from ignorance or acting on opinionrather than knowledge (Knight, 1971). By identifying risks and removing risks from theunknown to the known, the presumption is the entrepreneur can improve the likelihood ofstarting successful ventures through risk management. Mises (1944) confirmed the thinking thesuccess or failure of a venture depends on how good an entrepreneur anticipates uncertainoutcomes. Although Knight expressed the entrepreneur’s role by separating risk from uncertainconditions, Coase (1937) argued that entrepreneurs are unnecessary. Coase believed thisargument because a firm can substitute for such a role within the firm, which makes the firmmore competitive. Coase in his theory on transaction costs viewed the market pricing apparatusesas the outlet for controlling scarce supplies and managing risk. Kirzner (1999) argued the pricingapparatuses are imperfect and stresses “mutually gainful exchanges” instead of the false restingequilibrium prices inferred by Mises (p. 218). Mises (1944), similar to Knight, credited theentrepreneurs with responsibility for dealing with uncertain conditions and argued managerialwork represented only part of the entrepreneur’s role.
  44. 44. 32 In line with Knight’s perspective, Mises separated entrepreneurism from promotion bynoting how entrepreneurs set up the reasons for production. Such a view is consistent with JeanBabtiste Say’s classical view of the entrepreneur’s role in directing and spreading goods’creation from unproductive domains to more productive ones (Murphy, et al., 2006; Sobel,2008). Mises believed consumer sovereignty caused a controlled economic model becauseconsumer preferences decide production and entrepreneurs serve as agents of the consumers(Kirzner, 1999). Alternatively, Kirzner (1999) believed pure profit based on “the best currentinformation” served to motivate the entrepreneur and government intervention is unnecessary (p.226). For example, today supply side economics avoids consumer sovereignty as the consumerlacks satisfactory information to make more educated choices. As a result, business controlsinformation, and gains comparative advantage over consumers. For example, until recentlybusiness has found it could withhold country of origin information on various foods and drugs. In contrast to the notion the entrepreneur serves as an agent to support consumersovereignty, Coase (1937) denigrated the entrepreneur to a mere marketer, while both Knightand Mises assigned the entrepreneur’s role to other unique purposes. Knight argued the lifebloodof the entrepreneur emanates from facing uncertain conditions (Knight, 1971; Mises, 1966;Montanye, 2006). Schumpeter (1975), on the other hand, noted risk-bearing belonged to thecapitalist rather than the entrepreneur because the entrepreneur does not necessarily have to riskcapital. However, Schumpeter assigned responsibility for “creative destruction” and innovationto the entrepreneur. Such advances come through improvement of goods and services,production variations, unique organizational structures, expanded markets, and unique supplysources. In other words, the entrepreneur disrupts the economic environment by creatinginnovative replacements for existing goods, services, processes, and structures. In contrast to the
  45. 45. 33Schumpeterian notion of “creative destruction,” Kirzner believed the entrepreneur’s primemotivation is exploitation of undiscovered opportunities. Such opportunities serve to bring themarket into equilibrium as opposed to disrupting the equilibrium as suggested by Schumpeter(Sobel, 2008). A recent example of exploiting such opportunities comes from the financialservice industry selling risky subprime mortgage products. Schumpeterian thought would put therisk on the financial institutions by allowing them to fail. The Kiznarian notion promotesexploiting the consumer without the risk and by proclaiming these institutions “too big to fail.” In line with such ideas, Schumpeter recognized separating ownership and control isimportant and suggested that eventually institutions would reform the roles of the entrepreneur asinternal tasks. To strip such roles from the entrepreneur removes the threat resulting from“creative destruction” (Montanye, 2006, p. 553). In his work, Entrepreneurship, management,and the structure of payoffs, Baumol shed suspicion on the rent-seeking opportunities ofentrepreneurs. Baumol also viewed how some corporate managers destroyed value ofentrepreneurial firms by churning out bad takeovers or overpaying for other ventures that hadlittle chance of succeeding (Caves, 1995). Baumol’s revelation suggested a place still exists forthe entrepreneur because, unlike the corporate manager, the entrepreneur cannot find protectionby hiding under the corporate veil. The association between risk and return rests squarely on theentrepreneur’s shoulders. Consistent with the idea that a place exists for the entrepreneur, Baumol (1993)characterized the entrepreneur as a participant in the economy. Baumol argued the entrepreneuruses boldness, imagination, ingenuity, leadership, determination, and persistence to chase profits,power, and wealth. Baumol believed that both the Schumpeterian view of innovation andKirznerian notion of arbitrage transactions offered prospects for entrepreneurs seeking pure
  46. 46. 34economic profit opportunities (Baumol, 1990; Sobel, 2008). Besides, Baumol (1990) made nomention in the historic case study of the “rational restraint” proposed by Mises and Smith toprevent unproductive entrepreneurism leading to “creative destruction” (Mises, 1944;Schumpeter, 1975; Smith, 1904). Baumol did note that rent-seeking entrepreneurs could pose abarrier to competition (Baumol, 1990). As Mehlum, Moene, and Torvik (2003) proposed,“Entrepreneurs must find it profitable to create rather than to destroy” (p. 3). By showing a place exists for the entrepreneur, Leibenstein supported Baumol’s claimthe entrepreneur takes up nonroutine tasks in developing the “X-efficiency” theory. Leibensteinnoted that within a firm incentives are necessary to motivate an employee to take on the tasksusually taken on by the entrepreneur (Leibenstein, 1983; Montanye, 2006). If extra incentives arenecessary to do these tasks within the firm, Coase’s (1937) transaction cost theory is irrelevant.This condition exists because the firm does not remove the cost to the firm by erasing theentrepreneur. Instead, the firm simply replaces the cost internally. Mises also noted thatconsumer sovereignty only neglects achieving a harmony between owners and consumers undermonopolistic conditions. In such case, consumers must appeal to politicians (Kirzner, 1999;Mises, 1966). Although Kirzner (1999) argued for pure profits and the absence of governmentintervention, Adam Smith’s vision of mercantilism stressed heightening the power of the nation-state in pursuit of self-sufficiency. Smith argued the nation-state should “maximize exports andminimize imports” (Bassiry & Jones, 1993, p. 622). Smith feared monopolistic conditions andstressed democratic government to foster self-sufficiency and serve as a watchdog againstmonopolistic conditions. Smith argued monopolistic conditions shielded the entrepreneur fromthe need to compete (Bassiry & Jones, 1993).
  47. 47. 35 Because of these opposing views of the entrepreneur, one can argue replacing theflexibility and creativity of the entrepreneur with the politics and bureaucracy does not offer abetter solution. Creating an environment conducive to innovating new ideas and stimulatingheightened productive methods is unique to the entrepreneur. Conversely, the corporate worldpresents an environment more apt to stymie and frustrate the traditional role of the entrepreneur.Casson (2005) asserted the routine of the manager cannot serve to replace entrepreneurialimprovisation. Improving conditions for entrepreneurs should afford a better strategy fordeveloping innovations and improved productive methods than absorbing this role in thecorporate environment. The motivation for corporate interest in the entrepreneurial role emanatesmore from control and fear of competition than from removing transaction costs. In line with improving the competitive environment, Baumol, Litan, and Schramm (2007)recommended several ideas to tear down some of the barriers imposed on entrepreneurs. Suchrecommendations included start-up cost cuts, encouraging imitation through incentives, andimproving protection of property and contract rights. Similarly, the recommendations includedbankruptcy reform, lessening obsessive taxation, preserving a balance between law andderegulation, providing inducements for university innovations, and disincentives forwastefulness (Baumol et al., 2007). Baumol’s major contribution arose from distinguishinginnovative productive entrepreneurship that provides economic growth, jobs, and wealth creationfrom unproductive political behavior emanating from lobbying and lawsuits (Sobel, 2008).Baumol (1990) charged today’s lack of economic growth and prosperity to the rules of the gamenot favoring the entrepreneur because of unproductive rent-seeking, political, and legal actions.Thus Baumol suggested reforms that support changing the rules of the game to improveproductive entrepreneurship and entrepreneurial success rates.
  48. 48. 36 Although corporate control fails to provide an environment conducive for theentrepreneur to succeed, a lesson from corporate risk management offers entrepreneurs anopportunity to improve. In “going public,” underwriting compels companies to become moreaware and begin to plan to manage risks. Instead, entrepreneurs neglect this important stepbecause of the inability to extract risks from existing unknown conditions. This inability to findrisks drives the entrepreneur to deal with more uncertain conditions and reduces the likelihood ofsuccess (Ugur, 2005). Mohan-Neill (2008) provided evidence that takeover by a public companyserved as a source of funding for firms in the biotechnology industry. However, investee firmsneed an improved state of readiness to achieve financing through this source of capital.Review of Current Results Risk perception, risk-taking propensity, and entrepreneurial opportunism. Inharmony with entrepreneurs overlooking risks during early stages in a firm’s development,venture capitalists shy away from investing in such ventures despite holding a reputation asdaring risk-takers (Parhankangas & Hellstrom, 2007). Casson (2005) asserted the view of theentrepreneur taking undue risk emanates from inaccurate opinions. These opinions arise becausethe entrepreneur may hold information that if known to the investor and outsiders may counterthe view of extravagant risk-taking. Thus the optimism of the entrepreneur may arise fromholding “privileged information” (Casson, 2005, p. 330). For example, in the airline industrypricing fares is not common knowledge to the public. Once again, this example shows supplyside economics resulting in a comparative advantage. Similarly, Janney and Dess (2006) arguedthat risk perceptions of entrepreneurs stem not only from the risk of loss, but from the risk of alost opportunity. Obviously, the positive nature of opportunism may temper the negativity of
  49. 49. 37risk. Janney and Dess play down risk as a variance through statistical and ratio analysis such asrequired returns expected by investors or by raising funds through a public offering. Although entrepreneurs’ view of opportunity is often unclear, Ottesen and Gronhaug(2006) reduced such opportunities to the following formula: “P(S/A) > P(S/ Ā) where P =probability, S = success, A = action, and Ā = no action” (p. 102). Thus entrepreneurs seeopportunities positively as circumstances in which an opportunity for gain exists and result fromapplying some action to an observation that results in a gain. However, the entrepreneur’s viewsof opportunities typically are overoptimistic, which poses a threat in predicting a sensed outcome(Ottesen & Gronhaug, 2006). To explain the influence of opportunism on pursuit of opportunities, Ottesen andGronhaug (2006) studied how one successful firm in the fishing industry achieved success whenother firms found difficulty in surviving. The successful firm restricted investment while othersin the industry saw a chance to beat the competition and tried to capitalize on the opportunitybefore the sensed conditions happened. The general manager of the successful firm explained therationale is not to invest money when the future looks bright, but to hold capital to support atleast three years when experiencing difficult times. This explanation implies timing influencesrisk taking. How a person views an opportunity may not result in the most fitting time to investin a new venture. The entrepreneur may find improved chances for success in times when othersfind conditions difficult to invest in an opportunity. Preservation of capital provides a valuablelesson to the excessively enthusiastic entrepreneur (Ottesen & Gronhaug, 2006). With such a lesson in mind, in a study of risk-taking behavior at start-up point, Grichnik(2008) studied 252 entrepreneurs and entrepreneurial students. Grichnik found the higher theoverconfidence, the lower the risk awareness and the higher the risk selected. Similarly, Grichnik
  50. 50. 38found the risk-taking inclination plays a minor role with a 95% chance of no change in the risklevel. In other words, making the entrepreneur aware of risk is of prime importance to improvingentrepreneurial success rates. The entrepreneur’s appetite for risk-taking has little effect. Theseresults infer that making the entrepreneur more aware of antecedent risk should improve thesuccess rate of entrepreneurs launching new ventures. Although Grichnik (2008) found that risk-taking inclination plays a small part inentrepreneurial risk taking, the literature on risk-taking propensity offers conflicting evidence.For example, Gilmore, Carson, and O’Donnell (2004) determined that several articles found nodifference between the general population and entrepreneurs about risk-taking inclination(Brockhaus, 1980; Caliendo, Fossen, & Kritikos, 2009). Other articles did find differencesexisted (Begley & Boyd, 1987; Hull, Bosley, & Udell, 1980). In another study, Gilmore et al.(2004) noticed how valuable tools emerged from managerial competence and networking inmanaging risk to improve the risk-taking inclination of entrepreneurs. Despite society and educational sources playing down individualism and stressingteamwork and community, Alstete (2008) determined in a study of 159 entrepreneurs self-employment is the prime motivation (44% of the people surveyed). The attraction to self-employment arose from the desire for individual independence. Besides, the survey found theability to control one’s own destiny important to another 19% of the people surveyed. One of thebenefits of the reliance on individual efforts emanated from the capacity to benefit thecommunity. Only 13% of entrepreneurs surveyed suggested risk acted as a major deterrent. Ofthe people surveyed, 21% advised aspiring entrepreneurs to engage in a thorough planning effortbefore starting a new business (Alstete, 2008).
  51. 51. 39 In line with balancing entrepreneurial opportunism with risk perception, Bishop andNixon (2006) asserted that evaluating opportunities with antecedent goals would help to predictthe likelihood of entrepreneurial success. Bishop and Nixon noted the literature lacksinformation about prenascent venture evaluation. For example, venture capitalists rely oninformation contained in business plans and market research to evaluate such ventures. Analysisof strength, weaknesses, opportunities, and threats (SWOT) helps the venture capitalist decide onplans. The literature lacks evidence of planning by the entrepreneur in performing suchevaluations. Not enough attention to the addressing what venture capitalists consider criticalsuccess factors may contribute to the high failure rates of entrepreneurs (Bishop & Nixon, 2006;Proimos & Murray, 2006). Related to needed venture planning by nascent entrepreneurs, Gelderen, Thurik, &Bosma (2006) determined that nascent entrepreneurs with limited experience benefit fromstarting small. Gelderen et al. noted people with experience understood how seeking guidanceand knowledge is important. Similarly, Geldren et al. also found that employing a plancontributes to a firm’s future success. This study included a sample of 517 nascent entrepreneursover a three-year period. Gelderen et al. used logistic regression analysis to test whether aventure is successful or unsuccessful using four variables. The variables included the presence ofa business plan, perception of market risk, part-time or full-time start-up, and a team versus soloeffort. The study divided the results between people with high and low ambition. The researchersdetermined that start-up capital and market risk provided the highest contribution to success orfailure (Gelderen, et al., 2006). Although the study confirmed the need for venture planning as applied to riskmanagement, the study did not deal with the cause of the risk perception. Neither did the study
  52. 52. 40settle on the influence of the timing of risk awareness nor management influence on successrates. The researchers did recognize that risk management strategies should lead to lowerperception of risk (Gelderen, et al., 2006). Similarly, Gelderen et al. showed further that riskmanagement improves the potential for earning more start-up capital from sources other thanconventional lenders. Geldren et al. noted that such results run counter to Delmar and Shane(2004) in which the planning efforts mainly contribute to legitimizing efforts rather thanpredicting success. Gelderen et al. finished by noting that a need exists for more research in theprestart-up phase about the use of predictors to evaluate performance. In harmony with Gelderen’s assertion, Wiltbank, Read, Dew, and Sarasvathy (2009)found investors who focused on opportunities at an earlier stage realized fewer negative exits. Inuncertain settings, prediction and control of risk take on a greater role in planning for success.Investors who stress prediction invest greater amounts; whereas investors who focus on controlhave fewer negative exits. The study implies investors do not all have the same appetites for riskand return. Some investors focus on high-risk, high-return ventures, and others focus onachieving a greater number of lower-risk, lower-return successes. Investors focusing onprediction invest higher amounts, and those who concentrate on lower risk-return investmentsstress control (Wiltbank, et al., 2009). In contrast to the view risk management is more a matter of strictly risk perception,traditional economic literature views risk as either stand-alone risk that a firm can manage or thesystematic risk credited to market conditions. A firm has little control over market risk becausean individual firm cannot control market volatility (Brigham & Houston, 2001; Ross,Westerfield, & Jaffe, 2005). Casson (2005) asserted that competition spurs volatility of marketdemand and that demand shocks caused by competition provides a source of risk to the

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