understanding the entrepreneurial process

04/08/23 PSEDII_Mercatus_tSeminar_21Oct09 1

21 October 2009

Research SeminarMercatus Center

George Mason University Arlington, VA

Understanding the Entrepreneurial Process: Tracking New Firm Creation with the PSED[Panel Study of Entrepreneurial Dynamics]

Paul D. ReynoldsGeorge Mason University

[[email protected]]


Where do new businesses come from?


Why care about new firms?

• Provide half of all net new job creation • Contribution to improved sector productivity• Major source of economic innovation• Associated with economic growth• Significant work career option for many • Mechanism for immigrant social integration • Universal route for upward social mobility


• New firm creation is clearly a critical feature of advanced market economies!

• What United States data sets might be available to explore the important features and causal mechanisms involved in new firm creation?


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.


Where can one find:• Cohorts of nascent entrepreneurs and

nascent enterprises• Longitudinal data that begins with firm

conception and tracks start-up efforts until a new firm has been established

• Data that is fully documented and in the public domain [http://www.psed.isr.umich.edu]

• Representative samples to facilitate extrapolation to the entire US population of nascent entrepreneurs and nascent enterprises


The U.S. Panel Study of Entrepreneurial Dynamics Datasets

• PSED I– Initial screening of 63,000 in 1998-2000– Tracked 830 nascent entrepreneurs/enterprises over 4

years– Sponsored by Entrepreneurial Research Consortium and

the Kauffman Foundation• PSED II

– Initial screening of 34,000 in 2005-2006– Tracking 1,214 nascent entrepreneurs/enterprises– Waves A, B & C data [0, 12, 24 month] available – Major support from the Kauffman Foundation,

supplemental support from SBA Office of Advocacy – Wave D [36 month] now completed [NSF support]– Wave E & F [48,60 month] in process [NSF support]

• Unique national resource providing descriptions of the fundamental aspects of the firm creation process


Central Assumption:• People start businesses, not

– Market characteristics – Macro-economic conditions– Regional, geographic attributes – National R & D intensity– Presence of opportunities – Availability of financing – Positive entrepreneurial climate– Social networks – Speeches by politicians


Primary Objective

• Who gets involved?

• What do they do?

• What is the outcome?


CONCEPTUAL MODEL – The Start-up Process

AdultPopulation

Business Firm

Population

Growth

Persist

Quit

Firm Birth

Social, Political, Economic Context

?

NE

NI

?

Start-up Processes

?NE = NASCENT ENTREPRENEURS

NI = NASCENT INTRAPRENEURSGEM

PSED PSED


Data collection procedure• Large scale screening to locate candidate

nascent entrepreneurs– Completed by a commercial market research firm– Based on a representative household sample– Captures nascent enterprises long before they are

included in business registries

• Detailed interviews to identify active nascent entrepreneurs and gather information on what they are doing– Completed by U Michigan Institute for Social Research

• Follow-up interviews to determine the outcomes of their efforts – Completed by U Michigan Institute for Social Research


Participation in Business Start-ups by Age and Gender: US 1998-1999

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

Tota

l Num

ber o

f Ind

ivid

uals

0.00

2.00

4.00

6.00

8.00

10.00

12.00

#/10

0 Pa

rtici

patin

g in

Sta

rt-up

s

Total Persons #/100 Persons

Total Persons 1,142,00 2,035,002,182,00 1,453,00 502,000 107,000 31,000 497,000 1,225,00 1,377,00 989,000 269,000 40,000 20,000

#/100 Persons 8.60 10.80 9.80 8.30 4.50 1.30 0.50 3.90 6.40 6.10 5.40 2.20 0.40 0.20

Men:18-24 Yrs

Men:25-34 Yrs

Men:35-44 Yrs

Men:45-54 Yrs

Men:55-64 Yrs

Men:65-74 Yrs

Men:75-up Yrs

Women:18-24 Yrs

Women:25-34 Yrs

Women:35-44 Yrs

Women:45-54 Yrs

Women:55-64 Yrs

Women:65-74 Yrs

Women:75-up Yrs


Participation in Business Startups: Men by Ethnic Background [US 1998-1999]

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

Tota

l Num

ber o

f Ind

ivid

uals

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

#/10

0 Pa

rtici

patin

g in

Sta

rt-Up

s


Total Persons 889,000 3,380,00 1,644,00 147,000 247,000 816,000 260,000 4,000 193,000 570,000 155,000 33,000

#/100 Persons 8.50 9.90 6.90 1.20 12.90 15.90 9.70 0.40 10.10 11.40 7.50 4.40

White Men:18-24 Yrs

White Men:25-44 Yrs

White Men:45-64 Yrs

White Men:65-up Yrs

Black Men:18-24 Yrs

Black Men:25-44 Yrs

Black Men:45-64 Yrs

Black Men:65-up Yrs

Hispanic Men:18-24 Yrs



Hispanic Men:65-up Yrs


Participation in Business Start-ups: Women by Ethnic Background [US 1998-1999]

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

Tota

l Num

ber o

f Ind

ivid

uals

0.00

2.00

4.00

6.00

8.00

10.00

12.00

#/10

0 Pa

rtici

patin

g in

Sta

rt-up

s


Total Persons 889,000 3,380,00 1,644,00 147,000 110,000 572,000 229,000 15,000 90,000 272,000 75,000 0

#/100 Persons 3.70 6.10 4.00 0.30 5.60 9.90 6.90 0.80 5.10 5.80 3.30 0.00

White Women:18-24

White Women:25-44

White Women:45-64

White Women:65-up

Black Women:18-24

Black Women:25-44

Black Women:45-64

Black Women:65-up

Hispanic Women:18-24



Hispanic Women:65-up


Status of start-up Following Conception

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%En

ter p

roce

ss

1:01

-1:0

3

1:07

-1:0

9

2:01

-2:0

3

2:07

-2:0

9

3:01

-3:0

3

3:07

-3:0

9

4:01

-4:0

3

4:07

-4:0

9

5:01

-5:0

3

5:07

-5:0

9

6:01

-6:0

3

6:07

-6:0

9

7:01

-7:1

2

9:01

-9:1

2

11:0

1-11

:12

13:0

1-13

:12

15:0

1-15

:12

Years and months since conception

Per

ce

nt

of

Sta

rt-u

ps

Active Start-up Inactive Start-up Going Business Leave process

OutcomeDate


Time from conception to new firm or disengagement

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

0-6 mths 7-12 mths 13-18mths

19-24mths

25-30mths

31-36mths

37-42mths

43-48mths

49-54mths

55-60mths

61-66mths

67-72mths

Time since conception

Cu

mu

lati

ve p

rop

ort

ion

of

all c

ases

New Firm Disengage


OUTCOME VARIABLE

• Status at end of 6 years – 32 % New firm in place – 68 % No new firm in place

• 33 % Active start-up continues • 35 % Start-up terminated

• What factors, prior to the 6 year outcome, are associated with new firm creation?


Consider 100+ Independent Variables

• Who they are • What they are like • Their personal, cognitive strategies • Their perceptions and attitudes • The context of the start-up

HAS LIMITED IMPACT • Shift emphasis to what they do!

– Consider difference in level– Consider differences in emphasis


Major findings: Process

• Level of Activity – New firms and quits most active – Continuing start-ups less active

• Duration– From one month to decades– Median time start-up, 18-24 months– Median time to quit, 25-30 months

• Activity domains related new firm development– Business Presence – Production Implementation – Creating Organizational, financial structure


Implications• Socio-demographic, personal, contextual factors

– Major impact on who enters the process– Less impact on outcome of the process

• Business experience has a major effect

• Increase new firm birth rate--emphasize training, support during business start-up process – Presence of the business– Producing the goods or services– Setting up the organization, financial structure

• Need an early indicator of the “hobby nascents”, who are unlikely to make the major effort

• To be an entrepreneur– Walk the walk, “Do it”, etc.– Intensity of investment seems to be important

IT’S WHAT YOU DO – NOT WHO YOU ARE!


Financial Support

• Informal financing, before legal business– Amount– Sources

• Formal financing, after legal business – Amount– Sources – Additional owner’s equity

• Relationship to outcome– New firm, discontinued, still active


Informal Financial Structure

[n = 882; Values in $1,000]

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, COLLEAGUES5.5% 0 1,000 2.84

CREDIT CARD LOANS 11.5% 0 160 0.92

PERSONAL BANK LOANS9.2% 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


Formal Financial Structure: Debt Only

[n = 435, values in $1,000]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


Financial Investments and Outcomes

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


Annual Financial Support by Outcome Status

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

An

nu

al F

inan

cial

Su

pp

ort

($1

,000

,000

)

New Firm, Initial Profits $15,725 $4,403 $13,949 $19,125

Discontinued $15,802 $332 $435 $768

Continuing Start-up $71,170 $17,429 $107,508 $124,769

Informal Formal Equity Formal Debts Total Formal


Financing: Concluding Observations

• Assembling financial support only one of many start-up activities

• Informal/formal distinction seems useful – Pre and post legal registration seems useful

• Very skewed distributions– Substantial minority with no support – Small proportion in the millions

• Relationship to outcomes – Amount of informal support has some impact

• May reflect the level of commitment among start-up team – Absence of formal support has a major impact

• May be the event that triggers disengagement • Need to explore why formal financial support not forthcoming

• Aggregate amounts– First approximations, more precision would be desirable – In same order of magnitude when compared to national

estimates – Substantial sums involved, a quarter of a trillion dollars – Less than 20% associated with reports of profitable new firms


Cross National Harmonization

• Proportions that finish process with new firm may vary– U.S. nascents less serious about effort

• PSED I Sibling Projects – Canada, Netherlands, Norway, Sweden– Argentina [status unknown], Greece [not now active]– UK proposal not funded

• PSED II Sibling Projects – Australia [CAUSEE], China, Denmark, Germany, Latvia

• GEM Potential– Harmonized nascent entrepreneur screening– Many GEM teams considering follow-ups

• Trying to raise funds for project coordination


References[Note: Bibliography of publications available on the project

website.]

• ‘http://www.psed.isr.umich.edu’.• Carter, Nancy, William B. Gartner, and Paul D. Reynolds. (1996) Exploring Start-

up Event Sequences. Journal of Business Venturing, 11(3):151-166.• 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.

• Reynolds, Paul D. (2007). Entrepreneurship in the United States: The Future is Now. Boston, Kluwer Academic.

• Reynolds, Paul D. (2007). New Firm Creation in the U.S.: A PSED I Overview. Hanover, MA: now Publishers, Inc.

• 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).

• 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.

• 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.

understanding the entrepreneurial process

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