Vol. 3 No. 3 | Winter 2002


Life Insurance in the Information Age

Can the Market Add and Subtract?

Entrepreneurs: Will They Stay or Will They Go?

Tax Benefits in Acquisitions of Privately Held Corporations


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Entrepreneurs: Will They Stay or Will They Go?

Understanding Entrepreneurship Requires a Look at Both Context and Individual

Research by Stanislav D. Dobrev

Small start-up or multinational corporation. Employee or founder. Organizational structure and individual roles affect the rate at which new organizations are founded and who starts them.

When studying entrepreneurship, sociologists typically look at properties of the social structure such as socioeconomic characteristics, while psychologists tend to focus on the particular traits of individuals who become entrepreneurs. The truth, however, is more complex. New research shows that an understanding of entrepreneurship calls for the matching of contextual factors with individual experiences and the preferences borne out of them.

In their paper, "Organizational Roles and Transitions to Entrepreneurship," Stanislav D. Dobrev, assistant professor of organizations and strategy at the University of Chicago Graduate School of Business, and William P. Barnett of the Stanford Graduate School of Business begin with the premise that in the modern business world, people typically must leave existing organizations in order to found new ones.

Large corporations and small start-up ventures offer distinctly different contexts for the development of entrepreneurial potential. "The reason it is called context is because we look at it as the ground on which a potential entrepreneur grows," says Dobrev. In Dobrev's theory, there is a link between the motivation to become an entrepreneur and the type of company one worked for before actually founding a new organization. He also takes the individual into account by examining how organizations affect potential entrepreneurs differently depending on the roles they play in the lives of these organizations.

"For a long time, people have been looking mostly at the links between emerging technologies and the availability of capital to explain the importance of context in the founding of new organizations," says Dobrev. "Our first objective was to direct attention to a context that has not been studied before, particularly one that makes it possible to think of entrepreneurs as organizational products. The second objective was to see how the role of the individual within the organization gets blended with the context to determine the likelihood of entrepreneurship."

Dobrev's findings show that as an organization matures and expands, its founders become more likely to leave and start another new venture, while its employees become more likely to remain with the company.

Adjusting to Structure

"There's almost a social expectation that when we think of entrepreneurs, we think of those people who are somewhat different from us, with an extraordinary vision and drive for success," says Dobrev. "But, in reality, whether this vision is realized hinges at least in part on the opportunities and constraints embedded in the organizational context."

In small, young organizations, where there is usually little formal structure, the founder's idea and vision forge commitment and provide motivation for employees. As the organization develops, routines and processes must be established to meet increasing demands for reliability and accountability. Such routines and processes gradually lead to the proliferation of organizational structure. This structure may include the establishment of specific reporting relationships, work manuals, procedural guidelines, and strictly defined responsibilities for employees. Dobrev suggests that the growth of formal structure will result in fewer opportunities for employees to become entrepreneurs, because over time, employees will have less contact with those outside the organization, more established roles, and will have to adhere to developed norms, rules, and routines.

Additionally, well-established organizations typically offer defined career paths and possess the financial resources needed to accommodate the innovative initiatives of their employees. With such internal opportunities available, there is less desire for employees to leave to found new organizations. The risks of founding a new venture are now weighed against a combination of long-term career incentives, job security, and the opportunity to bring ideas to life within the boundaries of an existing company.

While larger, older organizations are able to keep nascent entrepreneurs among their employees from leaving, increased bureaucracy has the opposite effect on founders. As the venture transitions from an entrepreneurial to a growth stage, the organizational goals evolve to reflect a shift in emphasis from "idea development" to "organizational maintenance." With the creative component of their jobs diminishing, founders in a way lose control of their own creation. "We call this the parenting effect," says Dobrev, "because it really resembles the reluctance of parents to accept the fact that their children have grown to be fully independent and need much less parental care."

As a more bureaucratic structure takes shape, the founder's role eventually becomes reduced to that of a professional manager, yet the founder's own perception of his or her role is slower and more difficult to change. The resulting discrepancy between reality and identity perception tends to alienate founders and compels them to try to resolve it by leaving to start another new venture.

"Given the chance, we think that the founders would leave to start a new organization in order to achieve a better match between their individual identity as founders and their actual organizational roles," says Dobrev. "This match typically evaporates as their organizations grow and expand, and their roles as founders simply become outdated."

Testing this theory required finding a unique pool of individuals who are "at risk" of becoming entrepreneurs even if they do not ultimately start a new business. Rather than sampling from the population at large, where entrepreneurship is relatively rare, Dobrev used data collected from the 1997 Stanford Graduate School of Business career history survey administered to all of the school's M.B.A. alumni. The sample proved very useful for the study because the rate of entrepreneurship is much higher among M.B.A. students and because Stanford is in Silicon Valley.

Alumni were asked to provide a complete account of their career histories, describing important features of their previous positions and the organizations where they were employed. They were also asked to indicate if and when they had started a business.

Dobrev coded years in which alumni started a business on their own or became members of an organizational founding team as years in which a transition to entrepreneurship occurred. He also distinguished between an "employee to founder," a "founder to founder," and a "founder to employee" transition in order to test and eliminate several alternative explanations for his results.

The data were restructured to reflect each job held per person in each year since graduating from the M.B.A. program. The final data set consists of 52,519 records representing the career histories of more than 2,000 people, with the range of years per person varying from 1 to 44. Statistical models were used to determine the effect of different variables on the timing and likelihood of entrepreneurship.

The results based on Dobrev's models support his earlier prediction that as an organization ages and grows in size, employees become less likely to leave and found new organizations, while founders become more likely to again engage in entrepreneurship. For example, working in a 58-year-old company was found to reduce the likelihood of an employee becoming a founder by 15 percent. However, in a 10-year-old company, the potential for a founder to leave to found another organization was increased by 15 percent.

Other Contributing Factors

Dobrev also tested several demographic variables and characteristics of job experiences to gauge how they influenced tendencies toward entrepreneurship. The results show that foreign-born, nonwhite respondents were more likely to found new organizations. Regarding age, during the period between graduation from the M.B.A. program and age 31, the rate of entrepreneurship rises, but after age 31, this rate declines. Initially, this effect indicated that the propensity to become an entrepreneur increases until age 43, but further examination showed that the increase after age 31 is merely a product of the knowledge and experience accumulated by nascent entrepreneurs through multiple organizational experiences rather than simply a function of age.

People who were very satisfied with their job were 75 percent less likely to become entrepreneurs. Employees with high salaries were also unlikely to leave. For every $100,000 earned, an individual's propensity to leave his or her current job to start a new venture decreased by about 3 percent.

Employees who performed marketing functions in their most recent job were 24 percent more likely to found their own organization. Working in a high-tech industry also increased the rate of entrepreneurship by a third. However, results suggest that employment in a family business discourages the transition to entrepreneurship by about
20 percent.

Dobrev also found that the more organizations a person worked for, the more likely they were to become an entrepreneur. "Gaining exposure and experience with the routines and practices of many different organizations clearly increases your arsenal of solutions for tackling the difficult problems that are an inevitable part of running a start-up," says Dobrev. "Though prior experience with more organizations doesn't necessarily mean experience with better organizations, variation allows you to choose the best set of options and solutions by selecting from the high end of the distribution of your experiences."

The results show that the likelihood of becoming a founder increases by 25 percent with each previously founded organization and by 6 percent with each organization in which a person has worked as an employee.

Different interpretations regarding the impact of organizational age and size required that Dobrev account for alternative explanations for his results. He was able to rule out the following counter-arguments: that individual differences, not role distinctions, can explain whether people leave large, old organizations; that founders will become less likely than employees to leave an organization if they stay long enough; and that founders have a higher turnover rate in general, regardless of whether they go on to found another organization.

Repeat Entrepreneurship

Dobrev's results show how an existing organization can encourage or discourage entrepreneurial tendencies, and he is able to predict for whom and under what conditions these opposing effects will appear. Over time, he expects that many entrepreneurs will follow the pattern of the repeat founder who builds multiple organizations throughout his career.

"Our results also indicate that while founders are more likely to leave to found another organization, they are not more likely to leave to become employees of other organizations," says Dobrev.

However, the vast majority of individuals can be expected to contribute their ideas to the growth of existing organizations rather than the founding of new ones.

"People always ask me how this thesis can explain Bill Gates, but Bill Gates probably would not be as well known as he is today if he had gone down the path we are predicting. The very reason that we know about him is because he is the exception, and this is partly what makes him so famous," says Dobrev. "The very fact that an exception to the general pattern implied by our theory is so notable is a testimony to the ubiquity of the pattern itself."

Stanislav D. Dobrev is assistant professor of organizations and strategy at the University of Chicago Graduate School of Business. His research on "Organizational Roles and Transitions to Entrepreneurship" was supported by a research grant from the Kauffman Center of Entrepreneurial Leadership, the University of Chicago Graduate School of Business, and the Center for Entrepreneurial Studies at the Stanford Graduate School of Business.




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