Do Skills Predict Profits

A Study of Successful Entrepreneurship

Lanny Herron

• Publisher: Routledge
• Year: 2020
• eBook ISBN: 9781135572532
• Edition: 1
• Topic: Commerce
• Subtopic: Commerce Général

Originally published in 1994, 'Do Skills Predict Profits, A Study of Successful Entrepreneurship' is a study into the progress made by academic researchers in management over the last 15 years in determining the causes of new venture performance. The author notes that most of this research has concentrated on the effects of strategy and industry structure on new venture performance. This research looks to answer two major questions: 1.Do characteristics of the entrepreneur have a significant impact upon new venture performance in addition to strategy and industry structure? If so, what characteristics are important and what is their relationship with new venture performance?

Chapter One:
Introduction

THE IMPORTANCE OF NEW VENTURES AND THEIR PERFORMANCE

"America is, right now, in [a] great entrepreneurial age".

This quote, from the lead article by Ronald Reagan in the inaugural issue of the Journal of Business Venturing, was generally recognized as true when it was published in late 1985.¹ Today, nearly 10 years later, we recognize that our entrepreneurial age is probably only in its infancy.

New business ventures are playing an increasingly important economic and societal role in America as time goes on. During the twenty years from 1965 to 1985, the economy of the U.S. increased its net employment by approximately 49%, or 35 million new jobs. In no other peacetime period has the United States created as many new jobs, whether measured in percentages or in absolute numbers.² Of this net, government jobs combined at all levels stayed relatively constant while big business lost approximately 5 million jobs. However, small and medium size businesses added approximately 40 million jobs, many of these in the form of new ventures.³ While in the post-World War II economy, Americans created fewer than 100,000 businesses annually, they were starting over 1,000,000 per year by 1987.⁴ By contrast, during the period 1970 through 1982, net jobs in Japan grew by only 10%, or less than half the U.S. rate, and total employment in the Common Market decreased by over 3 million jobs.⁵ These trends are continuing into the 1990s with IBM, General Motors, and other Fortune 500 companies shrinking while new business start-ups continue to increase in proportion to our economy. Meanwhile, the Japanese economy is shrinking and the European economy struggles with the absorption of the former Communist states. American new business ventures are not only driving our economy now, but are keeping us competitive in the world community.

In 1980, Alvin Toffler, in his provocative publication "The Third Wave"⁶, noted that the world economy is moving away from the mass-production era for the first time and into an era of "de-massification", a time more suited than the recent past to the creation of new ventures. John Naisbitt, in his 1982 book "Megatrends"⁷, put forth ten major directions in society currendy "transforming our lives". At least five of these are favorable to increasing entrepreneurship and new ventures. The information revolution is decreasing set-up and transactions costs within the economy, and in the process is breaking down the hierarchies of large companies and changing the way we do business. We are becoming more and more a nation propelled by entrepreneurs and their new ventures, and the trend is increasing and likely to persist.

Unfortunately, the failure rate for new ventures in our economy is quite high. Van de Ven, Hudson, and Schroeder⁸, in commenting on the short life expectancies of new organizations, observed that about one fourth of all business firms in the U.S. are one year old or less, with the median age of all firms only about seven years. They further stated that only 54 per cent of all newly formed or acquired businesses survive one and a half years. Other scholars^{9 10} have reported both higher and lower mortality rates; however, a widely accepted estimate is 60 per cent failure by the second year after start-up and 90 per cent by the tenth year.¹¹

These dual phenomena, the impact of successful entrepreneurship upon our economy combined with the high cost of entrepreneurial failure, lend impetus to the search for understanding of the causes of new venture performance. An understanding of these causes is of vital importance to our business community, to academicians, and to our society as a whole.

THE LACK OF CORRESPONDENCE BETWEEN THE RESULTS OF ACADEMIC RESEARCH, AND CURRENT THEORY AND PRACTICE

Considerable progress has been made by academic researchers in management over the last 15 years in determining the causes of new venture performance. Much of this research has concentrated on the effects of strategy and industry structure on new venture performance.^{12 13 14 15 16} In fact, some of this research purports to statistically explain such a high level of variance in new venture performance (NVP) ¹⁷ that the question arises as to whether the entrepreneur him/herself has any appreciable effect on NVP apart from the initial determination of strategy and industry structure.

In an attempt to determine the causes of new venture performance, Sandberg¹⁸ developed a new model of new venture performance and tested it empirically. His model stated simply that new venture performance is a function of the characteristics of the entrepreneur, the structure of the industry in which the venture competes, and its business strategy [NVP=f(E,IS,S)]. In his testing of the model, Sandberg was able to find ample support for effects of industry structure and business strategy upon new venture performance. Unfortunately, as with many before him, he was able to find little evidence that the characteristics of the entrepreneur affect that same performance. In spite of this, however, he was unwilling to drop the "E" from his model for several very valid reasons. First, the caliber and depth of a venture's management are the traditional focus of venture capitalists' evaluations.¹⁹ Thus the wisdom of the venture capitalists provides strong support for the inclusion of the entrepreneurial variable, the superior performance of ventures backed by venture capitalists in general being well known.²⁰ Second, the theory implicit in much academic research on entrepreneurship has been that the performance of new ventures is largely determined by the entrepreneur himself [NVP=f(E)]²¹, even though the results of that research have generally been tenuous. Third, the practitioner literature has been largely oriented toward this same concept. Fourth, Sandberg was necessarily limited in the type of study he did to looking solely at entrepreneurial characteristics defined by objective biographic data. Fifth, the sample size in Sandberg's study was only 17, limiting the power and generalizability of his tests. He was thus reluctant to recommend a radical departure from the past based upon his data alone

Sandberg, of course, has not been alone in his inability to explain significant variance in new venture performance based upon empirical study of various entrepreneurial characteristics. Many excellent research studies have been conducted over the past thirty years with similar results.^{22 23 24 25 26 27 28}

Thus, despite unquestioned strides in determining the causes of new venture performance, we are faced with a serious lack of correspondence between research results, and theory and practice. On the one hand, a long history of academic studies has failed to confirm empirically the existence of a strong and significant link between the characteristics of the entrepreneur and new venture performance even though academic theory has always proceeded on the basis of the existence of that link. On the other hand, venture capitalists and others who deal daily in the practical prediction and evaluation of the causes of new venture performance continue to hold to the dictum that it is the quality of the entrepreneur that ultimately determines the decision to fund a new venture.²⁹

RESEARCH QUESTIONS

It is this disparity between theory and practice on the one hand and past research results on the other which has generated the first two major research questions guiding this study:

1. Do characteristics of the entrepreneur have a significant impact upon new venture performance in addition to strategy and industry structure?
2. If so, what characteristics are important and what is their relationship with new venture performanc...

Table of contents

• Cover
• Title Page
• Copyright Page
• Original Title Page
• Dedication Page
• Contents
• Preface
• Acknowledgements
• Chapter One: Introduction
• Chapter Two: Model Development
• Chapter Three: Research Design
• Chapter Four: Analysis and Results
• Chapter Five: Conclusions
• Appendix
• Bibliography
• Index