PRE START-UP PROBLEMS AND ABANDONMENT OF NASCENT VENTURES

Transcription

1 PRE START-UP PROBLEMS AND ABANDONMENT OF NASCENT VENTURES Marco van Gelderen* Pankaj Patel James Fiet Massey University University of Louisville University of Louisville ABSTRACT Much research in the field of small business has been directed to explanations of firm performance. However, the first success that must be attained with a firm is actually getting it started. What are the problems that people encounter when setting up a business? How do encountered problems correlate with characteristics of the people, the firms-in-gestation, the start-up environment, and the start-up process? Which of the problems tend to be overcome and which of these problems cause people to abandon the start-up effort? This research reports on a Dutch research project comparable in design to the U.S. PSED (Panel Study of Entrepreneurial Dynamics). Phoning numbers resulted in interviews in which the question was asked: Are you currently, alone or with others, setting up a business? A sample of 527 persons was identified of which 414 were followed over a three year period. Using phone interviews, qualitative as well as quantitative information was asked with regard to many topics, including problems encountered, and reasons for abandonment. One general result is that analyses of open questions suggest that regulations, finance, and information problems are often encountered but not often lethal. Problems getting sales and market risks are not often experienced as a problem, but often cited as a reason to give up the start-up effort. Quantitative analyses confirm these results. The internationally conducted PSED study was the first systematic, large scale study of firm emergence using a representative, randomly selected sample. Its results are new from an academic perspective, of practical interest to people setting up a business and their advisors, and relevant for policy insofar as stumbling blocks include problems that can be affected by policy (e.g., regulations, finance) * Contact Details: Marco van Gelderen, Massey University, Auckland Campus, Dept. of Management and International Business, Private Bag , North Shore MSC, Auckland, New Zealand, Tel 64 (9) ext. 9338, margeld@dds.nl 1

2 INTRODUCTION Much research in the field of small business is directed to explanations of firm performance. However, the first success that must be attained with a firm is actually getting it started. Gartner (1985) points out that firms in gestation all differ in terms of the characteristics of the entrepreneur, the intended organization, the environment, and the start-up process. This paper focuses on an element of process, namely the role of problems encountered in the process of getting a firm started. A full understanding of new venture creation cannot be developed unless one looks through the lens of problems faced. Focusing on major problems faced helps understand the lynchpin between efforts and outcome. How certain characteristics or processes culminate into problems, and the extent to which entrepreneurs are able to mitigate such problems, may explain for success or abandonment. Understanding key problems faced during the commercialization process, and their eventual impact on venture outcomes, is of critical importance to understanding entrepreneurial failure. Given high failure rates, the importance of understanding the role of problems encountered cannot be overstated. However, empirical work on problems in the pre-start-up phase has been scarce. Only in recent years various longitudinal large scale studies of the prestart-up phase have been conducted (Davidson, 2006), and this paper employs the data of one of those efforts. In sum, a comprehensive framework and analysis of the role of problems is of critical importance to aspiring entrepreneurs, as well as to teachers and policy makers. Not only will such understanding help entrepreneurs prepare, but may also help better utilize social resources. In an effort to understand the types of problems faced by entrepreneurs and their impact on venture outcomes, we proceed as follows. First, we explain the process of venture creation. Second, we identify the nature of problems faced by ventures. We categorize them, by means of Katz and Gartner s (1988) framework, into resource-oriented, boundary-related, and exchange-related. Third, we analyse the role of problems in explaining venture outcomes, using data of 414 people who were all in the process of setting up a business when initially sampled, and who were followed over a three year period. THE VENTURE CREATION PROCESS 2

3 The founding of a new venture requires conducting numerous activities that depend on an entrepreneur, a venture or organization, and the environment (Cooper, 1982; Carter, Gartner & Reynolds, 1996; Gartner, 1985, 2001; Vesper, 1990). Lacking a formal organizational structure, entrepreneurs play a great role in organizing and coordinating tasks, developing effective procedures, and garnering needed resources, commitments and approvals from participants (Aldrich, 1999; Becker & Gordon, 1966; Penrose, 1959). Because of this informality, traditional organizational theories offer only limited insight (Vesper, 1990; Reynolds and Miller, 1992). In this paper the person undertaking activities to create a business is referred to as the nascent entrepreneur, and the founding effort is called nascent entrepreneurship (Reynolds and White, 1992). Empirical work on nascent entrepreneurship has become available only in recent years (see for an overview Davidson, 2006), and has been preceded by an abundance of conceptual work modelling (parts of) the pre-start-up process (e.g. Bhave, 1994; Busenitz and Lau, 1996; Greenberger and Sexton, 1988; Herron and Sapienza, 1992; Johnson, 1990; Kamm and Nurick, 1993; Larson and Starr, 1993; Learned, 1992; Naffziger, Hornsby, and Kuratko, 1994; Starr and Fondas, 1992; Vanderwerf, 1993). Some models are based on a single approach, such as a motivational model (Naffziger et al., 1994), a cognitive model (Busenitz and Lau, 1996), or a network model (Larson and Starr, 1993). Most models build on a variety of approaches. Usually, there is also a temporal aspect to the models. Some authors describe the process of setting up a business as entailing the execution of a number of activities, with high variation in the sequence and amount of activities (Carter, Gartner, and Reynolds, 1996; Reynolds and Miller, 1992). While acknowledging this variation, some authors still discern sub-phases in the pre-start-up process (Bhave, 1994; Kamm and Nurick, 1993). Three phases are often mentioned. The first phase concerns the development of an intention to start an enterprise (Shapero and Sokol, 1982; Krueger, Reilly and Carsrud, 2000), and an entrepreneurial opportunity is recognized, at least at a rudimentary level. In the second phase the product/service and the business model are further developed, resources are assembled, and the organization is created. In the final phase the organization is perceived by its owner(s) to be up and running. 3

4 Nascent entrepreneurship is considered the active pursuit of organization creation (phase two); in this paper we focus on nascent entrepreneurship rather than on potential entrepreneurs (the first phase), or starting entrepreneurs (the third phase). The next section describes the concepts that will guide our empirical work. ENCOUNTERING PROBLEMS IN THE PRE START-UP PHASE Nascent entrepreneurs are by definition already working on their business, and thus at least have a rudimentary idea of an opportunity of which their evaluation has been positive. Various problems can be encountered while pursuing organisation creation. Nascent entrepreneurs try to solve these issues, mitigate their impact, or work around them. We categorise problems by means of Katz and Gartner s (1988) properties of emerging organisations: resource acquisition, boundary, and exchange. The fourth property they propose intention - is what propelled people from potential entrepreneurship into nascent entrepreneurship and is not considered here. Resource acquisition problems can be of various types. One is finance, where the nascent entrepreneur has problems obtaining the desired amount of finance, or when the funding can only be obtained under unfavourable conditions. Another category refers to the premises of the venture, when the nascent entrepreneur has problems finding or obtaining a suitable location. Yet another problem are information problems, where the nascent entrepreneur needs to find out certain things but lacks of information, difficulty finding or accessing information, lack of guidance in finding information, contradictory information, or information overload. Product/service problems relate to problems in developing the product or service. Finally, time is an important resource. Setting up a business takes considerable amounts of time which becomes problematic when there is too little time to work on the business. Not seldom people find that various start-up activities turn out to be far more time consuming than initially expected. Boundary problems can be regulatory: governmental laws and regulations that are experienced as problematic by the nascent entrepreneur as they prevent the organisation being established. Examples are diplomas that are required before a particular trade can be practiced, licenses that are needed, zoning regulations, requirements of social welfare 4

5 organisations, consents, laws, bylaws, import-export rules, slowness of governmental organizations, and various delays because of dealings with government. These all refer to the legal and regulatory context in which the venture will operate. In contrast, the boundary category of organizational problems refers to internal difficulties in getting the organisation established. This is somewhat of a container category with examples such as: finding partners, partner delaying making (financial) commitments, partners not following up on commitments, partners who give up, putting administration systems in place, finding out the right legal form, and obtaining required insurances. Exchange problems are there when expected demand for the product or service may not be sufficient, or very uncertain, so that the perceived risk of the venture increases. It is the exchange with the market which is problematic, like getting customers, reaching the market, risk of the market, the emergence of competition, obstacles in getting paid, troubles with suppliers. Obviously, in theory as well as in practice the list of problems can be endless. We expect the above categories to show the highest prevalence. But several other problems can also occur. For example personal problems are not related to the nascent venture but spring forth from someone s person or life situation. Someone can become ill, physically or psychologically, or things in the personal environment of the nascent entrepreneur change that need urgent attention which goes at the expense of the nascent start-up. Our first hypothesis is that nascent entrepreneurs who managed to set up their business will have encountered less problems than those who abandoned the start up process. This seems a bit trivial, therefore we will test this at a stringent significance level. H1: The group started nascent entrepreneurs encountered far fewer problems than the group nascent entrepreneurs who abandoned the start-up process A second question is whether the started and abandoned group not only differ in quantity of problems encountered but also in kind. In other words, did the abandonment group encounter a particular type of problem more often which therefore contributed to quitting the start-up process. We hypothesize that this is the case, while leaving the actual determination of the type of problem to be an exploratory analysis. 5

6 H2: The started group encountered different problems than the abandoned group Our third question is whether the encountered problems are indeed related to abandonment for the abandonment group. Some encountered problems will be resolved, reduced in impact, or worked around, and do not need to be a reason for abandoning the start-up process. Other problems will be lethal. Apparently, the started group managed to overcome encountered problems. It is possible that the abandonment group abandoned because of the experienced problems, but they can also have discarded their venture for other reasons. We expect the encountered problems to play a role, however. H3: The encountered problems contributed to the abandonment group giving up METHOD Design. The design of this study was developed by the Entrepreneurial Research Consortium (ERC), initiated and directed by Paul Reynolds. The ERC is an international research effort (including as participants among others the United States, Sweden, Norway and the Netherlands) in which each country investigates a random and representative sample of nascent entrepreneurs during the start-up process. See Reynolds (2000), and Reynolds, Carter, Gartner and Greene (2004) for details on the research design. In the U.S. this study is called the PSED (Panel Study of Entrepreneurial Dynamics). The key idea is to obtain a statistically representative sample of ongoing nascent ventures and to follow these efforts over time in order to gain insights into process issues and determinants of outcomes (Davidson, 2006). Sample. The data collection method of the ERC is the general public survey. In the fall of 1998, a random Dutch sample of 49,936 phone numbers was dialled. An interview was held with 21,393 persons (43%) aged between 18 and 65 years. The remaining 57% roughly consisted of refusals (14.000), too young/too old (10.000), and other (e.g., not contacted) (4.500). The person picking up the phone was asked: Are you, alone or with others, currently setting up a business? If the person answered affirmatively, two possible exclusions were made. First, it is essential to have an active and manifest desire to set up a business. If the respondent is only dreaming about starting up a business, he or she is considered a potential entrepreneur instead 6

7 of a nascent entrepreneur. Persons indicating that they have not yet undertaken activities in pursuing their start-up, were thus not included in the sample. Second, someone who has set up a business that is already operational, even though in a start-up phase, is considered an entrepreneur instead of a nascent entrepreneur. The question 'Are you currently starting a business?' turned out to be quite ambiguous as a number of people consider themselves still in a starting phase whereas their business is already operational. Exclusion of started entrepreneurs was not done in the initial screening but on the basis of data gathered in the follow-up phone interview. Those who in the initial wave stated that they are setting up a business, and who in the follow-up call state that their business was operational and running, were asked to provide the start-up date. If the date was prior to the initial interview, they were excluded from the sample (148 persons). This set of protocols resulted in a sample of 527 nascent entrepreneurs (2.5% of the interviewed sample, which indicates a prevalence rate of 2,5% within the Dutch population between 18 and 65 years old). This prevalence rate is comparable with Scandinavian countries but much lower than that in the United States (Delmar and Davidson, 2000). In comparison with a control group (N=586) taken from the 21,393 persons who stated that they were not currently setting up a business, the typical nascent entrepreneur is male, young, has pursued higher education and earns a higher income. Dependent variable. Follow-up interviews were scheduled at a six month, one year, two year and three year interval (follow-up 1, 2, 3 and 4) after initial screening. They included an assessment of the current status of the start-up effort. Respondents were asked: 'How would you classify your firm? Is it (1) operational and running; (2) are you still setting up the business; (3) have you temporarily delayed your start-up effort; or (4) have you completely abandoned your start-up effort?' After three years, it could be established that 191 persons had succeeded in starting their business, and that 114 persons had abandoned their start-up effort. 113 persons were never reached after the initial phone interview. The remaining 109 nascent entrepreneurs were still trying to set up their business the last time we contacted them (follow-up 1, 2, 3 and/or 4). Thus, a minimum of 36% of the sample started and a minimum of 22% abandoned the start-up effort during the three-year period under study. Of the remaining 42% we do not have data about their eventual start-up status. If we 7

8 compare the 113 persons of whom no follow up information is available with the 305 persons who either started or quitted their effort we find, contrary to what one would expect, the people that took part in follow ups tended to be less educated and higher in push motivation than those that dropped out of the study. In our design it is the entrepreneur who defines whether his/her business is actually started or still in the start-up phase. This implies that entrepreneurs can use different criteria to judge whether they consider themselves started or not. In fact, the question why someone considered him- or herself started gave rise to a plethora of answers. This is consistent with results found by Reynolds and Miller (1992). In Table 1 these answers are classified using the properties of emerging organizations given by Katz and Gartner (1988). This heterogeneity is an argument to take the judgment of the nascent entrepreneur as the key criterion for start-up. Only in this way the particular situation of each nascent entrepreneur will be reflected. We choose to use the subjective measure as we feel that the application of uniform, objective measures creates a degree of arbitrariness (see Davidson (2006) who argues to the contrary). For example, first sales might be taken as an indicator of being started, but many people start a business based on an activity for which they previously informally received money (for example, bookkeeping or repairing computers). In an opposite fashion, some firms start out with investing, and it may take months or years before first revenues come in. So when interpreting the results, one has to bear in mind the underlying heterogeneity in the performance measure. Table 1 Different definitions of start-up moments intention boundary resources exchange wish or desire registration arranged finance first customer idea sign at magistracy hired personnel first cash flow resolution official address arranged housing acceptation in market ambition business cards production of goods a certain scale gave up job official opening bought inventory to derive income searched information bank account got license to buy stock (Reproduced from: Van Gelderen, Thurik and Bosma, 2006) 8

9 Comparison with international efforts. The study of nascent entrepreneurship in the Netherlands is identical to those in the U.S. and Sweden in terms of basic design, and in sample size. However, for budgetary reasons the Dutch research used only a sample of the ERC phone and interview questions. Amongst others, most questions on start-up activities and their timing are left out. However, given the lack of empirical data about nascent entrepreneurship, in our opinion the data still deserve thorough investigation and dissemination. Moreover, while topics covered in the ERC questionnaire were assigned to particular persons and institutions (for example, an exclusive right to publish about birth order and its relationships), this was not the case in the Dutch study. This makes it possible to present a comprehensive analysis of problems encountered and reasons for abandonment in nascent entrepreneurship. Independent variables. Categorization of problems encountered was admittedly a somewhat subtle process. For instance, problems with taxation can mean four things: if it is about such things as unfair tax rules or bureaucracy then was classified under regulatory problems; if it means that taxation causes problems in obtaining finance then falls under finance problems; if it means having difficulty setting up an appropriate administration it is grouped under organisational problems; and if there is difficulty obtaining information about taxes than it is coded under information problems. See the theory section above for a discussion of the problem categories. A range of other independent variables are in the dataset, see Van Gelderen et al. (2006) for their descriptive characteristics. It should be noted that the initial sample was collected at one point in time. This means that people who were about to open up shop, as well as people who had just begun the start-up process, are in the sample. With regard to the first group, many of them started within six months (before the first follow up). In fact, by the time of the first follow up interview, already the majority of the respondents had either started or given up. On the other hand, there were also people who had begun their pre-start-up activities a long time ago (the maximum is 84 months in our sample). With these people, the time variant variables observed values at the initial interview may already have developed since the very beginning of the start-up effort. However, we do not know with which values they started initially. 9

10 RESULTS The first research question concerns whether those who abandoned the start-up process encountered more problems than those who started. Table 2 shows the numbers and percentages of problems encountered classified by outcome status. The totals show that about half of the sample did not state any problems in response to the open question, asked by phone, in each round: What problems have you encountered so far? Even among the group of people who have definitely abandoned their venture project, 40% had not mentioned any encountered problems. This can mean various things. Some people may indeed not have encountered any problems. People may have used high tresholds before labelling something as a problem to a researcher. Some respondents may have encountered problems, but these issues were resolved before the next interview round, and the problems may not have been remembered (as problems). It should also be noted that not every respondent participated in every interview round, although everyone in the sample studied for this article participated at least twice (the initial wave and at least one follow up). Nascents participating in more than two rounds had more opportunities to list problems encountered. Table 2 Prevalences of problems encountered by outcome status started still trying temporarily definitely total abandoned abandoned no problem encountered 100 (52%) 31 (51%) 25 (52%) 46 (40%) 202 (49%) did encounter problems 91 (48%) 30 (49%) 23 (44%) 68 (60%) 212 (51%) Table 2 shows that the group definitely abandoned had a higher incidence of problems encountered. Comparing the started and definitely abandoned group, a chi-square test shows the difference to be significant at the 5% (chi square = 4.123, p<0.05). Still, 48% percent of those who started recorded problems encountered, and 40% of those who abandoned reported no problems. Hypothesis 1 is therefore tested at the 1% level and is therefore rejected - we expected far fewer problems encountered for the group that started, not marginally fewer problems. 10

11 The second research question is whether the started and abandonment group differ in the prevalence of the type of problems encountered. Table 3 compares the two groups and shows that they did not differ in the problems that they encountered, neither in frequency, nor in rank ordering. For both groups regulatory issues had the highest frequency, followed by organisational problems, followed by finance tribulations. Nearly all problems have very comparable prevalence rates for the two groups, as also indicated by the chi-square statistics. The only exception is time pressure or time shortage, but since this concerns only five cases, this result should not be given any importance. So Hypothesis 2 must also be rejected. Table 3 Differences in prevalence of problems encountered between the started and definitely abandoned groups. problems encountered of def. abandoned (N=68) problems encountered of started (N=91) chisquare p no problem problem no problem problem regulation 38 (56%) 30 (44%) 53 (58%) 38 (42%) finance 47 (69%) 21 (31%) 66 (72%) 25 (28%) organisational 45 (66%) 23 (34%) 60 (66%) 31 (34%) market 59 (87%) 9 (13%) 73 (80%) 18 (20%) information 56 (82%) 12 (18%) 75 (82%) 16 (18%) housing 60 (88%) 8 (12%) 80 (88%) 11 (12%) product/service 64 (94%) 4 (6%) 84 (96%) 4 (4%) time shortage 64 (94%) 4 (6%) 90 (99%) 1 (1%) other 59 (87%) 9 (13%) 80 (88%) 11 (12%) So interestingly the encountered problems for the groups started and definitely abandoned did not differ in frequency nor in kind, or in ranking. The third question is about the impact of encountered problems on abandonment. Impact of encountered problems on abandonment can be expected if, although the quantities and types of problems encountered were similar, the qualities of the problems differed. For example, the abandonment group may have had more difficult regulatory problems than the started group. Alternatively, other characteristics may have caused the problems to lead to abandonment in the abandonment group, but to be 11

12 solved or mitigated in the started group, such as a difference in human or social capital. The counter hypothesis is that the problems encountered were not lethal, and did not impact on abandonment. In that case, still other reasons caused the abandonment group to give up the nascent venture. The impact of the problems encountered on abandonment can be studied in various ways. One method is to study means of the responses of the abandonment group to the question why they gave up, and to compare the prevalence rates to those of problems encountered. Table 5 provides that information. Before we turn to the analyses, Table 4 shows that the data are limited. Unfortunately for a sizeable group of 33% of the abandonment group we were not able to obtain a reason for abandoning. Table 4 Prevalence of encountering problems and giving reasons for abandoning no reason for reason for abandonment total abandonment given given no problem encountered 15 (13%) 31 (27%) 46 (40%) did encounter problems 23 (20%) 45 (40%) 68 (60%) total 38 (33%) 76 (67%) 114 (100%) Note: This concerns only the definitely abandoned group (N=114%). Table 5 Frequencies of problems encountered and reasons to abandon for the abandonment group (N=76) problems encountered reasons as N and as % of problems encountered reasons as N and as % of total reasons regulation 17 (22%) 3 (18%) 3 (4%) finance 15 (20%) 3 (20%) 4 (5%) organisational 11 (15%) 4 (36%) 11 (15%) market 5 (7%) 1 (20%) 21(28%) information 8 (11%) 1 (13%) 1 (1%) housing 4 (5%) 0 (0%) 2 (3%) product/service 4 (5%) 1 (25%) 2 (3%) time shortage 3 (4%) 0 (0%) 4 (5%) 12

13 other: - other - job - study 8 (11%) (13%) (42%) 18 (23%) 12 (15%) 2 (3%) Note: Analysis limited to the 76 cases that provided one or more reasons for abandoning their start-up effort. Table 5 provides several insights. First, it shows that the reasons for abandonment greatly differ from the problems encountered. The highest frequency for encountered problems to be also a reason for abandonment is 36% (organisational problems). Regulatory, finance, and information problems are regularly listed when asked about problems encountered, but are hardly mentioned as reasons for abandonment. For example, of those 15 people who encountered finance problems only three mentioned these problems as reasons to abandon. Columns one and two concern only those 45 respondents who had provided both problems encountered and reasons for abandonment, so the data need to be interpreted with caution. However, the suggestion is that every problem can be overcome or worked around, and that only in a minority of cases the problems encountered turn out to be lethal. The third column lists the frequencies of reasons given for abandonment. Comparison with the first column shows a difference between market risk and other problems. Few people mention market or risk as problems encountered, and only one of them stated that market risk was a reason to quit. However, many people voice market issues to be the reason to quit, who had not listed market issues as a problem encountered. Organisational problems were also not often lethal for those people who had mentioned these as problems encountered, however an additional seven persons quit for organisational reasons while they had not listed any of those as organisational problems. Worth noting is the high incidence of the other category for reasons to abandon. This includes a new category for finding a job, which was for 15% of this subsample a reason to stop the venture start-up process, and an additional two persons decided to take up a study rather than starting a venture. The results suggest that the abandonment group did not encounter problems of a different quality, because that would have shown up in the responses for reasons to abandon. Encountered problems seem to play only a small role in the explanation of abandonment. 13

14 This is confirmed by a logistic regression explaining starting versus abandoning by means of problems encountered as well as a range of covariates (see Van Gelderen et al. (2006) for a description of the data). None of the problems encountered contributes to explaining the difference in outcome status. The various ways of analysing Hypothesis 3 all suggest that this hypothesis must also be rejected: Encountered problems are often not lethal. Table 6 Logistic Regression explaining outcome status by means of problems encountered as well as a range of covariates B S.E. B S.E. gender female - male dummy trade age young - old dummy business services push motivation dummy consumer services education low - high ambition becoming rich work experience ambition becoming large management experience techno nascent experience in setting up solo team business plan regulation problems enc inf. and guidance finance problems encountered start part-time - fulltime.66*.32 organisational problems enc industry experience market problems encountered start up capital -.51**.17 information problems enc third party loan housing problems encountered risk of the market -.65**.17 product problems encountered dummy manufacturing 1.58*.65 time problems encountered constant other problems encountered Chi-square Model Test 67.39** Nagelkerke R 2.27 ** p<.01 * p<.05 14

15 The question than becomes why one group got started and the other group gave up. Both groups seem to be capable of preventing the problems encountered from becoming reasons to give up. For some nascent entrepreneurs, encountered problems were directly lethal. It is still possible however that encountered problems had an indirect negative effect, resulting in the increased perception of market risk, or influencing the decision to take up a job. But apparently the started group is able to the prevent the reasons for abandonment from occurring, while the abandonment group is not able to do so. One way to analyse this issue is by looking at how reasons to abandon vary with other characteristics. Unfortunately the N is very small for most reasons for abandonment. However, organisational problems as a reason to give up correlate with being higher educated (p<.01), a team effort (p<.01), and wishing to use a higher amount of capital (p<.05). Market or risk as a reason for abandonment is correlated with work experience (p<.05). Another possibility is that other mechanisms are at play. This hints at differences between the two groups. Table 6 reveals that starting out in manufacturing, starting the business full-time, wishing to start out with a small amount of capital, and perceiving a low degree of market risk were factors associated with setting up the business. Vice versa, setting up a part-time business, wishing to start out with a high amount of capital, and perceiving a high amount of market risk were factors associated with abandonment. Finally, given the relative similarity between the starting and abandoning group in terms of problems encountered and their impact, we analysed the differences between the respondents that reported encountering problems versus those who reported having had no problems. Using the logistic regression again employing the same covariates as in Table 6, we found that for the sample as a whole, experiencing problems is associated with having a business plan, and not having problems with being higher educated. Repeating the same analysis now within the group of abandoned ventures, we find that management experience is associated with reporting no problems. In the discussion we will come back to all of these findings. DISCUSSION 15

16 This research failed to establish that nascent entrepreneurs who abandon their start-up effort encounter more problems, different problems, or usually suffer fatal consequences from the problems that they encounter. This lead to the rejection of all three hypotheses. For the part of the sample who reported problems along the way, abandoning nascent entrepreneurs appeared rather similar to started entrepreneurs with regard to the role of problems encountered, just as Carter, Gartner and Reynolds (1996) found that abandoning and starting nascent entrepreneurs resembled each other in terms of the amount of start-up activities performed. In their research, both groups performed significantly more start-up activities than the still trying group. Our results do not necessarily need to be taken face value there is always the possibility of methodological flaws. It is possible that some abandoning entrepreneurs did not report the complete picture when providing true reasons for giving up. This can be the case with those people who cited finding a job or taking up a study the choice for a job or study may have been influenced by problems in the start-up process. Attribution processes such as the self serving bias may have lead respondents to offer an explanation that would not include a connotation of problematic or failure. However, a logistic regression did not show problems encountered to impact on eventual survival status. It should be noted though, that all results were obtained for the sample as a whole. It is possible that for particular sub samples a different picture emerges and one or more of the hypotheses will hold. It is also possible to take the results at face value, and to accept that, at least in this sample, in this time period, in the setting of the Netherlands, resource-acquisition problems were in the end not very problematic, neither for starters nor for abandoners. This result has been found previously in other researches with regard to the role of finance (Davidson, 2006). In spite of popular beliefs and perhaps also of policy makers, the finance sector finds no blame, at least in this study. The most often cited reason for abandoning were exchange-related, primarily perceived market risk and lack of demand. When nascent entrepreneurship is seen as an experiment (see Davidson, 2006, p25) to find out whether a particular business idea is viable, this is the best reason to abandon. By means of trial and error one arrives at the point of go or no go, and for some, it is a no go (cf. Sarasvathy s notion of effectuation, 2001). 16

17 Resource acquisition problems may have stood in the way but were no reason to give up, unless they somehow contributed to a perception of higher market risk or reduced demand. When the nascent venture is seen as an experiment that for some is terminated because of insufficient market potential, abandoning should not be seen as failure, especially in comparison with those who start but should not have started (see the distinction between right rejects and false acceptances in decision theory). That a sizeable group of abandoners reported no problems also points to this interpretation. Some of these respondents may not have performed many start-up activities, and therefore did not encounter problems. A logistic regression showed that for the sample as a whole, a higher level of education was associated with reporting no problems. Education may have helped to prevent issues from becoming problematic, or to change the perception of when issues need to be labelled as problematic. Within the group of abandoning nascent entrepreneur, we find the same result for management experience. Even though the venture eventually abandoned, a higher level of management experience is associated with not encountering problems, which may ultimately be associated with abandoning for other reasons than problems encountered. Similarly, we found work experience to be associated with market risk as a reason for abandonment. A decision to stop the nascent venture based on market expectations suggests that the pre-start-up phase can be seen as an extended period of opportunity evaluation. In terms of the phases discussed in the theory section, in the initial phase an opportunity is identified at least at a rudimentary level, because otherwise it is very difficult to perform the start-up activities in phase two in a focused way. But although in phase one the opportunity seemed promising enough to enter the nascent entrepreneurship phase, there is still re-evaluation and adjustment taking place based on information gained and developments. The nascent entrepreneurship phase serves as a reality check. Organisational problems were regularly encountered and named as a reason for abandonment (although in the majority of cases not by the same respondents). Often these problems were team-related, including finding partners, partners who initially commit but then bail out, partners who do not live up to promises, disagreements among partners, and the like. Setting up a business in with a team did not affect outcome status for the whole sample 17

18 in the regression analysis. This may reflect two counteracting influences. On the one hand, starting a team venture can cause problems as mentioned above; on the other hand, the team can provide complementary human, social and financial capital, as well as motivation. In addition to rejecting the results on methodological grounds, or to accept the results at face value, the third way is to seek for alternative explanations. These provide grounds for several future research directions. One possibility is that some nascent entrepreneurs are better than others at resolving problems. The question here is, what attributes of the nascent entrepreneur, the venture, the environment and the start-up process help to reduce the impact of problems, or prevent them from occurring in the first place. Human capital variables are likely to influence the development of a business idea and the organization of resources. For example, start-up experience provides the nascent entrepreneur with learning opportunities that can be exploited; work experience provides skills that might function in the accomplishment of the many tasks that setting up a business entails; industry experience can be helpful in the perception and valuation of new business ideas. Generally, human capital should be helpful in reducing the impact of encountered problems. Human capital can also be investigated in conjunction with the role of time, something that has been ignored in this study. Are there interaction effects between human capital variables and the length of the pre-start-up phase? Are some problems encountered earlier than others, and does human capital play a role in resolving early phase problems especially? Which sequence of problems encountered is fatal? And the issue of co-morbidity: Which combinations of encountered problems are lethal? Alternative explanations for starting versus abandoning can also be found in other attributes of the nascent entrepreneurs. It was found that a higher desired amount of start-up capital is a risk factor, and is also associated with encountering problems. Higher capital points to a more ambitious ventures, implying a wider range of difficulties that can be encountered. Wishing to start out full time rather than part time was a success factor. Perhaps those who want to start out full time also more often work full time on the new venture, and therefore have more time to solve problems or to prevent them from occurring. Starting out in manufacturing was a success factor, and (unreported) correlations show an association between industry experience and manufacturing sector choice. Again, industry experience 18

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