To Start Or Not to Start? an Empirical Examination of the Decision to Start a Business

TO START OR NOT TO START? AN EMPIRICAL EXAMINATION OF THE DECISION TO START A BUSINESS

Justin Kelly Kent

A dissertation submitted to the faculty at the University of North Carolina at Chapel Hill in partial fulfillment of the requirements of the degree of Doctor of Philosophy in Business Administration from the Kenan-Flagler Business School in the Strategy and Entrepreneurship area.

Chapel Hill 2020

Approved by: Atul Nerkar Christopher Bingham Isin Guler Hugh O‘Neill Elad Sherf

ABSTRACT

Justin Kelly Kent: To Start or Not to Start? An Empirical Examination of the Decision to Start a Business (Under the direction of Atul Nerkar)

The decision to start a business is a fundamental issue in entrepreneurship research and has significant economic implications for policymakers and individuals. In this dissertation, I build on the entrepreneurial decision-making literature by exploring certain contextual and cognitive factors associated with the decision to start a business.

Using data collected from potential entrepreneurs over four years (2015–2019), I analyze how work experience, motivation, and cognitive style influence decisions to engage in entrepreneurial action in two situations: (a) entrepreneurship through acquisition decision context and (b) forming a new business. I find that experience length, experience type, implicit motivations of status, and cognitive style are associated with the decision to proceed with an entrepreneurial opportunity.

Keywords: entrepreneurial decision-making, entrepreneurship through acquisition, implicit motivations, cognitive style

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Dedicated to my wife, Jami, and my girls, Emma, Macie, Annie, and Livvy.

ACKNOWLEDGEMENTS This dissertation is the culmination of many years of effort spent on my behalf by family, faculty, and fellow PhD students. It is an honor to express my gratitude to those who have helped me along my doctoral journey.

First and foremost, I want to thank my wife, Jami. With her encouragement, I left a stable but unfulfilling career to pursue my dream of becoming a professor. She has supported me from the beginning as I struggled to adjust to the rigors of academia including preparation for comprehensive exams, the job market, and dissertation defense. She was always ready with words of encouragement and love whenever I was nervous or discouraged. Without complaint, she took on a larger portion of the parenting responsibilities while I worked late and on weekends. Certainly, I could not have done this without her.

I also want to thank my wonderful girls, Emma, Macie, Annie, and Livvy. So many times they were patient when I had to work on Saturday or teach in the evenings. The prospect of spending time with them also motivated me to be efficient at the office. We made a point to spend time together as a family, however infrequently, during my time as a doctoral student. It meant lunches in the McColl cafeteria, and no screen weekend trips and Sunday family time. I always felt energized for work after spending time with these wonderful little people.

Outside of my family, I would like to acknowledge the tremendous contributions of Atul

Nerkar in my doctoral journey. As soon as I finished my comprehensive exams, Atul brought me on as an instructor in his intro to entrepreneurship course. From there, our relationship grew. Our discussions on how to teach entrepreneurship flowed into interesting research ideas that

v ultimately sparked my interest in research. Not only did Atul teach me how to be an effective instructor, he also suggested we work together after he learned of my frustration with research.

There‘s a good chance I would not have finished my PhD without Atul‘s help. I cannot thank him enough for his time, including the Saturdays and Sundays he spent helping me prepare for the job market and dissertation defense, and his patience as I learned the art of research. I consider Atul a lifelong friend and mentor and look forward to working with him on future projects.

I would also like to thank the other members of my dissertation committee, Chris

Bingham, Isin Guler, Hugh O‘Neill, and Elad Sherf, for their input and support. Their input and timely feedback have been of significant help throughout the dissertation phase and my development as a scholar. Chris and Hugh, in particular, met with me early and often during my time as a doctoral student and have had a profound effect on research interests and how I approach research in general.

In addition to the outstanding faculty at UNC, I would like to thank my fellow doctoral students. Kevin Miceli was a great resource to new PhD students, and I looked forward to his daily visits to my desk during his time in Chapel Hill. Kevin was one of a few doctoral students interested in entrepreneurship and our discussions have led to collaborations that I hope will continue in the future. Another entrepreneurship scholar, Travis Howell, has been a great resource and friend always willing to discuss ideas or provide feedback. My advice to any PhD student has been, ―Do what Travis has done.‖ I also appreciate the help and friendship I received from Tian Chen, Deepak Jena, Ting Yao, Shirish Sunderesan, and other PhD students. Together, we celebrated and commiserated the ups and downs of the PhD program, which has resulted in friendships that I hope will last a lifetime.

vi Finally, I thank my parents, Kelly and Connie Kent. As I was growing up, they fostered an environment at home that valued education, self-improvement, and hard work. I‘m sure neither could have predicted my pursuit of a doctorate given my apathetic attitude and proclivity to cut class in high school. I credit my father for my interest in entrepreneurship. As a young college student, I approached him for help in starting my first venture. He was highly willing to help me get started and was always ready to help if needed. Without his support I would not have experienced entrepreneurship and probably would have chosen a different career path.

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TABLE OF CONTENTS

LIST OF TABLES ...... x

CHAPTER 1: INTRODUCTION ...... 1

CHAPTER 2: LITERATURE REVIEW AND RESEARCH QUESTIONS ...... 4

Organic Form of Entrepreneurship ...... 6

Inorganic Form of Entrepreneurship ...... 6

CHAPTER 3: THEORY AND HYPOTHESIS DEVELOPMENT ...... 19

CHAPTER 4: DATA AND METHODOLOGY ...... 30

Measurement of Dependent Variable-Organic Entrepreneurship...... 30

Measurement of Dependent Variable-Inorganic Entrepreneurship ...... 31

Measurement of Independent Variables ...... 36

Control Variables ...... 39

Model Specification ...... 40

CHAPTER 5: RESULTS ...... 42

CHAPTER 6: DISCUSSION AND CONCLUSION ...... 46

Contributions...... 46

Limitations and Future Research ...... 50

Implications...... 52

TABLES ...... 53

APPENDIX ...... 60

viii Jim Southern Case Information ...... 59

Intro to Entrepreneurship Syllabus ...... 60

REFERENCES ...... 77

LIST OF TABLES

Table 1: ETA, LBO, and Franchise Comparison ...... 53

Table 2: Study 1 Descriptive Statistics and Correlation Table ...... 54

Table 3: Study 1 Main Results ...... 55

Table 4: Course Outline and Questions used to Evaluate Cognitive Factors ...... 56

Table 5: Study 2 Descriptive Statistics and Correlation Table ...... 57

Table 6: Study 2 Main Results ...... 58

CHAPTER 1: INTRODUCTION Why do some individuals and not others become entrepreneurs? This fundamental question in entrepreneurship research motivated early scholars from a wide range of disciplines including economics, sociology, and psychology to investigate the differences between entrepreneurs and non-entrepreneurs (McClelland (1961; Collins and Moore (1964; Brockhaus

(1975; Wilken (1979; Baumol (1993; Stinchcombe (1965). These avenues of research have yet to find a strong unifying explanation that would predict the likelihood of an individual‘s becoming an entrepreneur (Gartner (1988).

Given the absence of a unifying explanation, an associative rather than causal approach can help us understand the decision to become an entrepreneur. For example, medical researchers found that the incidence of cholera was higher in communities that collected water from polluted sources than communities that collected water from wells (Cameron and Jones

(1983). This initial finding by John Snow was based on associations that eventually led to the development of the field of epidemiology. In this dissertation, similar to epidemiological researchers, I examine the relationship between factors that may influence, though not cause, individuals to become entrepreneurs (MacMillan and Katz (1992).

There are several ways to become an entrepreneur, yet most entrepreneurship research focuses on new venture creation. Entrepreneurship through acquisition (ETA), or inorganic entrepreneurship, is an alternative path to entrepreneurship that allows the entrepreneur to bypass the uncertainty associated with organic or start-up entrepreneurship. Unlike corporate strategy where both organic and inorganic growth strategies have been extensively researched (Haspelagh

1 and Jemison (1991), entrepreneurship scholars have focused attention on organic new venture creation while neglecting the inorganic mode of entrepreneurship (Hunt and Fund (2012).

In this dissertation, I explore both organic entrepreneurship and inorganic entrepreneurship and how several contextual and cognitive factors are associated with a decision to take entrepreneurial action. Through two studies, I explore how an individual‘s previous experience and cognitive characteristics are associated with taking entrepreneurial action. For both studies, I create a unique dataset of aspiring entrepreneurs whom I follow over time.

Because almost anyone can become an entrepreneur, finding a suitable risk set from which to study entrepreneurship can be challenging (Shaver, Gartner, Crosby, Bakarlarova, and Gatewood

(2001). This approach mitigates these challenges by identifying individuals who have demonstrated their interest in entrepreneurship before the study was initiated.

In both studies, I use a non-experimental field survey research design that does not manipulate independent variables but measures these variables and tests their associations using statistical methods. In study one, I use a longitudinal approach to study how an individual‘s experience, cognitive style, and confidence are associated with actual new business formation.

The second study builds on the first but uses a cross-sectional field survey to examine how work experience—both type and duration—and motivation are associated with the decision to proceed with an ETA opportunity. ETA is an understudied phenomenon, and this study provides some needed insight into the characteristics of individuals who would proceed with this alternative approach to entrepreneurship.

This dissertation is structured as follows: In the second chapter, I review the relevant literature on entrepreneurial decision-making and identify my research questions. In chapter three, I draw on entrepreneurship and cognitive theories to develop my hypotheses. I provide

2 information on my sample, data, and methodology in chapter four and explain my results in chapter five. Finally, I provide a discussion on my findings, identify limitations, and identify future research opportunities in chapter six.

This dissertation contributes to the entrepreneurship literature in several ways. First, I address one of the primary questions in entrepreneurship: Why do some individuals pursue entrepreneurial opportunities while others do not? I show that both cognitive factors, such as motivations and cognitive style, and contextual factors, such as prior work experience and age, influence the decision to take entrepreneurial action.

Second, I shed light on ETA as an alternative path to entrepreneurship. Despite the large role it plays in economies, ETA has thus far been understudied by researchers. To my knowledge, this study represents the first empirical analysis on ETA and provides a starting point for future research.

Finally, I demonstrate how linguistic measures based on computer-aided text analysis

(CATA) can be used to measure cognitive factors. Psychometric measures of cognitive constructs can be biased by question-wording, order of questions, and respondents‘ understanding, among others (Couch & Keniston (1960; Cronbach (1946). Using linguistic measures alleviates the biases of self-reported data leading to a higher level of construct validity.

This approach also supports Armstrong, Cools, and Sadler-Smith‘s (2012) appeal to develop cognitive style research through the deployment of valid and reliable methods of assessment.

CHAPTER 2: THEORY AND RESEARCH QUESTIONS

For many years, scholars have debated the definition of ―entrepreneurship‖ (Brockhaus and Horowitz (1985; Carsrud, Olm, and Edy (1985; Gartner (1990). For example, economists have described entrepreneurs as risk-takers (Mill, 1848), uncertainty bearers (Knight (1921), innovators (Schumpeter (1934), and arbitrageurs (Kirzner (1973). Other research has explored the effects of entrepreneurship on economies (Acs and Szerb (2007; Wennekers and Thurik

(1999) and communities (Barth (1963; Austin, Stevenson, and Wei-Skillern (2006), and still many others have explored discovery, evaluation, and exploitation processes (Bhave (1994; Shah and Tripsas (2007; Ajuha and Lampert (2001). More recently, Venkatraman (1997) has integrated these perspectives into a definition that has found some consensus in the entrepreneurship community, stating, ―How, by whom, and with what effects opportunities to create future goods and services are discovered, evaluated, and exploited (pg. 120).‖ However, the underlying assumption regarding how opportunities to create future goods and services come to fruition is grounded in de novo entrepreneurship. Except for corporate entrepreneurship, the vast majority of entrepreneurship research has focused on new venture creation as the primary mode of entrepreneurial entry while under-exploring alternative paths to entrepreneurship such as through the acquisition of an existing business (Cooper and Dunkelberg (1986; Parker and

Van Praag (2012).

Exploiting opportunities to create future goods and services can be accomplished through both organic and inorganic means. By ―organic entrepreneurship,‖ I mean the process of

4 discovering, evaluating, and exploiting an opportunity that begins with an idea and grows from inception into an organization. Similar to inorganic growth strategies in the mergers and acquisitions literature, inorganic entrepreneurship involves entering entrepreneurship through the acquisition of an existing organization (Haspelagh and Jemison (1991). The process of discovery, evaluation, and exploitation are present in inorganic entrepreneurship because the entrepreneur must discover a suitable business to acquire, evaluate both the terms of a purchase agreement and their ability to successfully manage the business, and exploit the potential acquisition by creating new value from existing business systems and underutilized assets

(Stevenson, Sharpe, Roberts (2012). For example, opportunities positioned in new industries that are surrounded by a high degree of uncertainty regarding demand and design might be more attractive to organic entrepreneurs. Entrepreneurs who are comfortable with uncertainty and prefer to experiment with different business models or product innovations stand to reap substantial financial returns if they are able to establish the dominant design and become the market leader (Murmann and Tushman, 2001). They also risk failure if their assumptions about the market are wrong (Aldrich and Fiol (1994). This high-risk high-reward approach to entrepreneurship is not for everyone. Many individuals would prefer to create future goods or services in a context where business processes have been established and uncertainty has been reduced. ETA is an alternative mode of entrepreneurship that allows individuals to exploit their human, social, and financial capital to become business owners (Parker and Praag, 2012).

This dissertation is focused on how contextual and cognitive factors are associated with both organic and inorganic entrepreneurship. To be clear, I am not comparing the organic approach with the inorganic approach, although that is a future research path. Given the paucity of empirical research on inorganic entrepreneurship, I aim to provide a starting point by

5 clarifying ETA, or inorganic entrepreneurship, and identifying characteristics associated with a decision to proceed with an ETA transaction.

Organic Form of Entrepreneurship

Organic entrepreneurship is the act of creating a new organization to facilitate the production of future goods or services. The act of creating an organization requires the entrepreneur to recognize and correctly evaluate potentially valuable opportunities (Baron

(2006), acquire financial and human resources (Shane (2003), and respond effectively to environmental change (Brown and Eisenhardt (1997). Recognizing valuable opportunities relies on the entrepreneur‘s ability to identify situations where new goods, services, raw materials, markets, and organizing methods can be introduced through the formation of new means, ends, or means-ends relationships (Eckhert and Shane (2003). After the decision to exploit an opportunity has been made, the entrepreneur organizes the financial and human resources needed to develop the product or service. Financial resources most often come from the entrepreneur‘s savings (Aldrich and Ruef (2006), but external debt and equity funds can also be secured from banks and investors. If the entrepreneur does not possess the human capital needed to successfully exploit the opportunity, they can recruit cofounders, or if sufficient financial capital is available, employees to supply the needed expertise. Finally, entrepreneurs are more likely to successfully create a business if they remain flexible with their business model and are willing to change if environmental conditions change (Eisenmann, Ries, and Dillard (2012).

Inorganic Form of Entrepreneurship

I define ―inorganic entrepreneurship‖ as the acquisition of an existing business by an individual (or group of individuals) with the intent to enact their vision and actively manage the

6 venture.1 ETA is an important part of the entrepreneurial ecosystem because it involves the revitalization of existing systems of wealth and contributes to the well-documented interplay between entrepreneurship and economic growth (Hunt & Fund (2012). Using InfoUSA reports, the Dunn and Bradstreet database, and interviews with 15 business brokers, Hunt and Fund

(2012) conservatively estimate that out of 700,000 total ownership transfers in the United States

(20,000–30,000 ETA transactions are completed each year representing $25–40 billion in total value. ETA‘s economic impact is likely far greater than these statistics show given Hunt and

Fund‘s restricted definition of ETA.

ETA as a model of entrepreneurship is also growing in acceptance in MBA programs.

Harvard, Stanford, Northwestern, University of Chicago, and other top universities offer courses in ETA for MBA students, and an annual conference has been established through a joint partnership between the Booth-Kellogg schools of business to help facilitate best practices and connect nascent entrepreneurs with potential investors.

ETA is also important for policymakers. There is an increasing demand for capable entrepreneurs to take over existing businesses. Populations are aging in both the United States and Europe, and many small business owners do not have children who want to take over the family business (Levesque and Minniti (2011). A significant value is at risk if business owners are unable to find successors for their businesses including the loss of jobs, potential experience, and economic output. ETA provides a vehicle for succession and provides a way to preserve and renew the economic, intellectual, and cultural value contained in these aging businesses.

1 This definition is similar to the definition put forth by Hunt and Fund (2012) but does not restrict acquisition size to revenues greater than $500,000 or less than 50 million. Hunt and Fund argue that acquisitions with revenues less than $500,000 should be excluded from the ETA classification because they cannot support a living wage for the entrepreneur, capital for transformational initiatives, or cover the debt maintenance associated with the acquisition. This overly narrow definition excludes entrepreneurs who are willing and able to take less than a living wage because they believe in the future prospects of an opportunity or entrepreneurs who self-fund an acquisition with sufficient resources to enact their vision for the acquired business.

7 Notwithstanding the growing interest in ETA and its impact on the economy, little is known about the characteristics of potential entrepreneurs attracted to ETA opportunities. Some scholars have explored the factors that influence entrepreneurial entry mode decisions by comparing entrepreneurs who take over a business, either a family business they are associated with or an external takeover, with entrepreneurs who founded their venture (Cooper and

Dunkelberg (1986; Parker and Van Praag (2012). While these comparisons help understand the differences between start-up entrepreneurs and take-over entrepreneurs, it is difficult to study these preferences after the decision to exploit has already been made. This project complements the research on entry mode preferences by using a risk set of potential entrepreneurs to explore the factors that influence their decision to proceed or not proceed with an ETA opportunity.

A Pluralistic Approach to Entrepreneurship

In their seminal work, March and Simon (1958) question the assumptions of neoclassical economics and identify individuals as boundedly rational who satisfice to cope with incomplete information, which led to the emergence of behavioral theory. I use the underlying assumptions of behavioral theory as a starting point in developing a non-causal pluralistic approach of entrepreneurship (Ripsas (1998; Fisher (2012).

Entrepreneurs must take on multiple roles to exploit an opportunity, whether organic or inorganic. First, the entrepreneur must find a suitable opportunity to pursue. Next, the entrepreneur assembles the resources needed to exploit the opportunity. Finally, the entrepreneur enacts its vision within the organization. Each step in this process creates value and requires the entrepreneur to fulfill a specific role that connects to a specific entrepreneurship tradition.

Entrepreneur as Arbitrageur

8 The entrepreneur as arbitrageur has roots in the Austrian tradition of economics. As opposed to the steady equilibrium world of neoclassical economics, the Kirznerian entrepreneur operates in a dynamic market where prices fluctuate in response to constantly changing supply and demand. Shortages, surpluses, and misallocated resources create opportunities for entrepreneurs to buy when prices are too low and sell when prices are high, thus moving the market in the equilibrating direction (Kirzner (1997). Individuals can create an organization to buy undervalued assets at a low price with the intent to resell them in the future at a higher price as shown by many wealth management organizations. Alternatively, the individual can view the firm itself as an undervalued asset that can increase in value under the direction of the entrepreneur. The act of searching for a company to purchase with the intent to sell in the future for a profit is an act of arbitrage. As a result of incomplete information, ETA entrepreneurs believe they are more aware of the market value of the target business than others, including the owners (Kirzner (1973). Put differently, ETA involves the purchase of a set of tangible and intangible assets that, as a whole, are undervalued from the entrepreneur‘s point of view. The entrepreneur expects, in the context of uncertainty, that the value of the bundle of assets will appreciate in value over time. Purchasing an undervalued business with the expectation of reselling it in the future for a profit is the first step in value creation in an ETA opportunity.

Entrepreneur as Organizer of Resources

After an arbitrage opportunity has been discovered by the entrepreneur, acquiring the business requires the entrepreneur to act as an organizer of resources (Herbert and Link (1989).

The entrepreneur acquires and organizes capital from institutions and investors by raising debt and equity financing to exploit the opportunity. The entrepreneur typically believes and convinces debtors and investors that the creation or purchase of the business is a more efficient

9 use of capital than alternatives given its comparable risk profile. Variation exists within the potential future capital structures of the business. A more levered structure increases the risk to the entrepreneur and the associated cost of capital but multiplies the equity holder‘s return on investment. To efficiently organize resources, the entrepreneur must take into account the risks associated with the creation or acquisition of the business. Because of information asymmetry, the entrepreneur knows more about the quality of the acquisition and their abilities to successfully manage the business in the future than the resource providers. Therefore, debtors and investors will require terms that reduce their risk such as collateralization of assets or flexible investment instruments. Through negotiation, the entrepreneur can create value by structuring the transaction in a way that positions them for the best chance of success.

Entrepreneur as Recombinor

In contrast to the Kirznerian entrepreneur, the Schumpeterian entrepreneur recombines resources in new ways to create new opportunities that lead to market disequilibrium. The entrepreneur enacts their vision in a process of creative destruction by introducing new products/services, entering new geographical markets, using new raw materials, implementing new methods of production, and/or organizing in new ways (Schumpeter (1934). Recombination can also occur in inorganic entrepreneurship where the innovations introduced by the entrepreneur revitalize dormant assets and direct company vision and strategy to new opportunities. Recombination occurs in both organic and inorganic entrepreneurship, but important differences exist. Inorganic entrepreneurship proceeds within existing structures and routines that may be part of the creative destruction process while structure and routines within organic entrepreneurship are created as the organization grows (Nelson (2009).

The individual creates value in entrepreneurship through three mechanisms. They create

10 value as a Kirznerian entrepreneur through arbitrage by procuring undervalued assets with the intent to sell in the future at a profit. These undervalued assets could include the acquisition of an undervalued company and selling it in the future at a profit. They also create value as a resource organizer by assembling the debt and equity financing needed to develop or acquire the business and structuring the transaction. Finally, they create value as a Schumpeterian entrepreneur by enacting their vision for the business through recombination. Each of these mechanisms affects the motivation and choice to become an entrepreneur.

The earlier description paints a picture of the entrepreneur as an individual who is boundedly rational with incomplete information and who satisfices while engaging in arbitrage, organization, and re-combination. However, how individuals generally and entrepreneurs specifically process information and arrive at conclusions is relevant in understanding the decision to start or not to start a business (Mitchell et al. (2002; Mitchell et al. (2004; Smith,

Mitchell, Mitchell (2009).

Cognitive Style

Research in entrepreneurial cognition often paints a rather unflattering picture of the aspiring entrepreneur as a brash, overconfident maverick who relies on ―gut feel‖ or intuition to decide to start a business (Anderson and Warren (2011). However, the decision to enter entrepreneurship is non-trivial and will likely result in significant life changes for the aspiring entrepreneur which should encourage planning, analysis, and forethought. If entrepreneurs generally rely on intuition to make decisions, including the decision to start or acquire a business, how does an analytic mindset influence entrepreneurial entry?

Cognitive style has been defined as an individual's preferred way of gathering, processing, and evaluating information relating to creativity, problem-solving, and decision-

11 making (Hayes and Allinson (1998; Streufert and Nogami (1989). Brigham and De Castro

(2003) described cognitive style as a consistent approach toward understanding and solving problems, implying that cognitive style is an enduring dimension of personality (Hayes &

Allinson (1994). Cognitive style influences both individual and organizational behavior (Sadler-

Smith and Badger (1998). Cognitive styles are unique and distinct from cognitive ability, suggesting that one style is not preferred over another (Witkin et al. (1977). Cognitive ability refers to general mental capability comprised of reasoning, problem-solving, planning, abstract thinking, complex idea comprehension, and learning from experience (Gottfredson (1997). In contrast, ―cognitive style reflects ‗how,‘ rather than ‗how well‘ we perceive and judge information. It emphasizes individual traits rather than cognitive ability, focusing on ‗preferred styles‘ as opposed to ‗more is better‘ psychometric measures such as IQ‖ (Hough & Ogilvie

(2005: 421).

Cognitive style has been viewed through many lenses beginning with Witkin‘s theory of field dependence-independence (FDI) (Witkin, Moore, Goodenough, and Cox (1977). FDI is grounded in education theory and measures how individuals experience their environment.

Building on Witkin, industrial organizational psychology and management scholars have explored how cognitive style influences business and management practices (Hayes and Allinson

(1994). Much of the cognitive style research in industrial-organizational psychology relies on the theory of psychological types operationalized by the Myers-Briggs Type Indicator (MBTI)

(Carey, Fleming, and Roberts (1989). Within MBTI, cognitive style has typically been measured by comparing and contrasting how individuals perceive and process information which is reflected in MBTI‘s sensing versus intuitive dimension (Garner and Martinko (1996). The Kirton

Adaption-Innovation Inventory (KAI) has also been used by management scholars to measure

12 cognitive style (Kirton (1976). KAI was developed specifically for bureaucrats and managers to measure how they approach problem-solving and decision-making. Similar to FDI and MBTI,

KAI measures cognitive style on a continuum ranging from adaptive to innovative. Other conceptualizations of cognitive style include the cognitive style index (Allinson and Hayes

(1996), the cognitive style indicator (Cools and Van den Broeck (2007), and the linear-non-linear thinking style profile (Vance, Groves, Paik, and Kindler (2007).

In summary, there are many similarities among the different conceptualizations of the cognitive style. Each has an analytic dimension that in some way refers to judgment based on mental reasoning and a focus on detail and an intuitive dimension that describes non-conformity, open approaches to problem-solving, and exploration (Allinson & Hayes (1996). These contrasting styles have foundations in cognitive systems theory but differ in important ways.

Cognitive systems theory identifies two methods used to process information. The first, often identified as System 1 (Kahneman (2011; Stanovich and West (2000) or Type 1 (Evans and

Stanovich (2013), is intuitive (Hammond (1996), experiential (Epstein (1994), impulsive (Strack and Deustch (2004), holistic (Nisbett, Peng, Choi, and Norenzayan (2001), and automatic

(Schneider and Schifferin (1977). The second, System 2 or Type 2, is rational (Epstein and

Pacini (1999), systematic (Chen, Duckworth, and Chaiken (1999), analytic (Evans (2006) and conscious (Wilson 2004). Whereas the Types 1 and 2 cognitive processes are discrete, inherently different, and related to cognitive ability, cognitive style is independent of cognitive ability.

Also, cognitive style lies on a continuum and is related to personality and context (Evans (2010).

In other words, the Types 1 and 2 cognitive processes are universal but vary in the frequency and intensity of use. Cognitive style is an individual‘s preferred mode of processing information and lies on a continuum between intuitive (Type 1) to analytic (Type 2) (Allinson and Hayes (1996).

13 Consistent with other studies of cognitive style in management and entrepreneurship

(Mittenness, DeJordy, Ahuja, and Sudek (2014; Brigham, DeCastro, and Shepherd (2007;

Kickul, Gundry, Barbosa, and Whitcanack (2007), I conceptualize the cognitive style as a mode of processing information that ranges on a continuum between intuitive and analytic.

Analytic Style and Related Constructs

Effectuation

Similar constructs to the cognitive style can be found in the entrepreneurship literature.

For example, effectuation and causal mindsets can be seen as differing cognitive styles. The causal mindset relies on planning and analysis where the distribution of outcomes is predictable through calculation or statistical inference (Sarasvathy (2001; Chandler, DeTienne, McKelvie, and Mumford (2011). In contrast, effectuation has been proposed as an alternative approach that emphasizes the controllable set of means available to the entrepreneur to pursue multiple future contingent goals rather than acquiring the means needed to pursue a singular goal (Sarasvathy

(2001). Effectuation is based on the premise that, ―To the extent we can control the future, we do not need to predict it‖ (Sarasvathy (2001, pg. 252). Given this point of view, those with an effectuation mindset see the world as open and endogenous to the actions of the individual

(Sarasvathy (2009). The contrast between the causal and effectual mindset suggests that the decision to employ one or the other is rooted in the cognitive processes of the individual (Perry,

Chandler, & Markova (2012). Cognitive characteristics, such as risk preferences and tolerance for ambiguity, influence how individuals think and make decisions under uncertainty including the decision to start a business (Baron (2000; Fox & Tversky (1995; Koudstaal, Sloof, Praag

(2016; Sarasvathy, Simon, and Lave (1998). The causal mindset favors predictive strategies that will seek out the optimal course of action based on available external information such as market

14 trends, forecasts, or competitor analysis (Porter (1980). The causal logic is similar to the analytic cognitive style with seeking to gather external information to optimize decisions. This approach is consistent with rational decision-making that assumes information is available that allows preferred future states to be identified and ordered according to preference. Conversely, effectual logic will favor control based strategies that will focus on the resources available to the entrepreneur, including potential relationships with key stakeholders who are willing to engage with the new venture. Control based strategies are internally focused where strategic actions are based on who the individual is, what they know, and whom they know (Sarasvathy (2001).

Human, social, and financial capital are seen as opportunities rather than constraints that allow for creative problems-solving, consistent with an intuitive cognitive style.

The causal and effectuation logics are situational approaches to problem-solving under uncertainty that have roots in an individual‘s cognitive style. Effectuation principles are prescriptive actions entrepreneurs can take to improve the likelihood of a new venture‘s success

(Sarasvathy (2009), whereas cognitive style is an enduring attribute that is relatively stable over time (Kirton (1984). Entrepreneurs who have more analytic cognitive styles are likely to favor rational approaches to problem-solving consistent with the causal logic. Entrepreneurs with an intuitive cognitive style are likely to favor creative problem-solving approaches that take into account multiple possible solutions that are in line with the effectuation logic.

Biases and Heuristics

Most entrepreneurs face tremendous odds when they start a business, and many ultimately fail. New entrepreneurs often must develop new markets, raise capital from reluctant sources, and recruit and train employees while facing a range of constraints (Aldrich and Fiol

(1994; Stinchombe (1965; Freeman, Carroll, and Hannan (1983). For many, entry into

15 entrepreneurship is irrational, yet thousands of businesses are started each year (Wilmoth (2019).

The biases and heuristics literature help explain why some individuals decide to start businesses despite the high likelihood of failure (Hayward, Shepherd, and Griffin (2006). Heuristics are simplifying strategies to reduce complex decisions to more simple cognitive operations to deal with uncertainty and complexity (Kahneman, Slovic, Slovic, and Tversky (1982; Tversky and

Kahneman (1974; Holcomb, Ireland, Holmes, and Hitt (2009). However, these ―rules of thumb‖ often result in suboptimal decisions. Entrepreneurs are often overconfident in their abilities to successfully exploit an opportunity (Forbes (2005; Lowe & Ziedonis (2006; Simon et al. (2000) while overly relying on small samples of information to make important decisions (Busenitz

(1999; Busenitz & Barney (1997). The foundations of these heuristics and biases are rooted in the cognition of the entrepreneur (Kruger 2003). Individuals with an analytic cognitive style will more likely gather more information when evaluating opportunities, reducing the chance of representative bias. Those with an intuitive cognitive style are more likely to be overconfident in their gut feel and move forward with a decision they are convinced is correct.

Nascent entrepreneurs often rely on heuristics to manage the uncertainty and complexity inherent in starting a business yet some fall victim to biases that contribute to failure while others do not. The research on biases and heuristics in entrepreneurship helps explain why entrepreneurs may make irrational decisions at certain times but does not provide a complete picture of how entrepreneurs gather, process, and evaluate information. The entrepreneur‘s use of heuristics may result in biased episodic decisions, but these decisions are nested within the stable cognitive style of the entrepreneur.

Entrepreneurial Mindset

16 The entrepreneurial mindset has been described as the ability to rapidly sense, act, and mobilize, even under uncertain conditions (McGrath and MacMillan (2000). Other scholars have defined the entrepreneurial mindset as ―a growth-oriented perspective through which individuals promote flexibility, creativity, continuous innovation, and renewal (Ireland, Hitt, and Sirmon

2003 pg.968).‖ Entrepreneurially minded individuals are able to identify and exploit new opportunities because they possess the cognitive abilities that allow them to make sense of ambiguous and fragmented situations in the context of uncertainty (Alvarez and Barney (2017).

From a cognitive perspective, entrepreneurs can be seen as motivated tacticians who have multiple cognitive strategies from which to choose when confronted with a decision (Fiske and

Taylor (1991). Some of these cognitive strategies include thinking in pictures, employing analogies, and synthesizing information relative to a particular goal of the entrepreneur (Haynie,

Shepherd, Mosakowski, and Earley (2010). Altogether, the entrepreneurial mindset can be viewed as a state of mind that is ready and able to process complex information that encourages opportunity recognition, evaluation, and possible exploitation.

An individual‘s preferred cognitive style informs their entrepreneurial mindset by influencing how information is gathered, analyzed, and interpreted. Both analytic and intuitive individuals have developed their entrepreneurial mindset to some degree, but their preferred cognitive style influences the underlying dimensions differently. For example, more analytic individuals prefer a structured approach to problem-solving that will likely increase their sources of information considered and reduce their pace of action taken. In contrast, intuitive individuals will likely to search for a novel solution to a problem and discontinue their information search when they feel they have a suitable solution.

17 The main research question is: Why do some individuals decide to start a business? A process approach to entrepreneurship that involves arbitrage, recombination, and organization as described earlier by boundedly rational potential entrepreneurs with different cognitive styles allows us to develop testable hypotheses about the above research question.

CHAPTER 3: THEORY AND HYPOTHESIS DEVELOPMENT

A potential entrepreneur‘s accumulated experience plays a major role in the decision to take entrepreneurial action. Experience increases the chances of finding a suitable opportunity to exploit, both organically and inorganically, and provides a foundation of knowledge from which to evaluate the opportunity. Entrepreneurial alertness, or the ability to notice overlooked opportunities (Kirzner (1979), is an attribute that builds on prior knowledge (Ardichvili,

Cardozo, and Ray (2003) and is developed over time (Baron and Ensley (2006). More experienced potential entrepreneurs have had more time to build a stock of prior knowledge that can help them recognize opportunities that others do not see and accurately evaluate an opportunity‘s chances of success (Clouse (1990; Kautonen (2008; Kautonen, Down, and Minniti

(2014; Lévesque and Minniti (2006). This prior knowledge could include relevant industry trends or available technology that could be deployed in a new or acquired business.

Besides entrepreneurial alertness, increased experience is an advantage in financial capital acquisition. Funds to create or acquire a business can come from personal savings built up over time or through fund-raising efforts from external sources. The vast majority of start-up entrepreneurs finance their venture with their savings (Aldrich and Ruef (2006) and more experienced individuals have had more time to save the funds necessary to get their venture off the ground.

More experienced potential entrepreneurs are also better positioned to raise external funding because they have had more time to develop the breadth of their overall network and

19 strength of their network ties. Acquiring external funding in any setting is challenging because of information asymmetries and uncertainty. Resource seekers have more and better information about the opportunity than potential investors and can use that information to their advantage

(Amit, Glosten, and Muller (1990). Only the entrepreneur knows the depth of their commitment and ability to exploit an opportunity, and savvy investors are aware that the potential entrepreneur can use this information to negotiate a better deal than is otherwise warranted

(Shane and Cable (2002). To mitigate information asymmetries, investors often use social ties when making investment decisions (Granovetter (1985; Venkataraman (1997). Social ties reduce an individual‘s motivation to act in self-interest by introducing the logic of social obligation, generosity, trust, and fairness to the relationship (Gulati (1995; Uzzi (1996). Investors who share social ties with potential entrepreneurs are more likely to invest (Shane & Cable (2002; Shane &

Stuart (2002), and potential entrepreneurs with more developed social networks are more likely to share social ties with prospective investors. Individuals with more experience have a higher likelihood of securing external financing because they will have a greater number of social ties from which to solicit investment (Burton, Sorenson, and Beckman (2002; Shane and Stuart

(2002; Shane and Cable (2002).

In addition to the effect that experience has on social network development, industry and management experience also signal to potential investors that the individual can successfully exploit an opportunity (Casson (1982; Mason & Harrison (1996). More experienced potential entrepreneurs have had more time to acquire knowledge and skills that provide the foundation for their entrepreneurial logic and management acumen. This experience sends a positive signal to potential investors that the individual can successfully navigate uncertainty and effectively

20 manage the venture from inception to exit and therefore is more worthy of investment (Feeney,

Haines, and Riding (1999; Casson (1982; Mason and Harrison (1996).2

More experience positively influences the likelihood of taking entrepreneurial action for multiple reasons. Potential entrepreneurs with more experience are more likely to recognize and correctly evaluate opportunities. More experienced potential entrepreneurs are more likely to secure needed resources either from their accumulated savings or from investors.

Hypothesis 1a: Potential entrepreneurs with more experience will be more likely to start a

business.

Hypothesis 1b: Potential entrepreneurs with more experience will be more likely to

proceed with an ETA opportunity.

Besides work experience tenure, experience type also plays a role in entrepreneurial decision-making (Dobrev & Barnett (2005). Characteristics of previous employers, such as age, size, and reputation, have been shown to affect rates of entrepreneurial entry (Buenstorf &

Klepper (2009; Gompers, Lerner, & Scharfstein (2005; Stuart, Ding, & Stuart (2006). The hierarchy of large and established organizations promotes efficiency and control, which makes decision-making under uncertainty rare (Burns and Stalker (1961). Individuals with work experience in hierarchical organizations are less likely to take entrepreneurial action for many reasons. First, hierarchies have rigidly defined roles and emphasize rules and routines in a way that can lead employees to focus on strict adherence to regulations which induces timidity and conservatism (Merton (1968). Other studies have found that individuals who work in hierarchical

2 Extant research has shown that an inverted U relationship exists between age and the likelihood of starting a business (Shane (2003). However, these findings are based on studies of general populations while I am sampling individuals who have previously indicated an interest in entrepreneurship. This restricted sample of aspiring entrepreneurs does not include older individuals who would be found on the downward-sloping portion of the inverted U curve.

21 organizations have less intellectual flexibility and greater social conformity than those who work in non-hierarchical organizations (Kohn, & Schooler (1982). Hierarchy‘s effect on employee attitudes and cognitive frames may increase timidity, conservativism, rigidity, and conformity, which stands in stark contrast to attributes typically found in entrepreneurship such as boldness, risk-taking, flexibility, and going against social norms (Sorensen (2007).

Second, hierarchies may hamper or prevent employees from developing skills that might be helpful in entrepreneurial settings. Employees in hierarchical organizations are more likely to be responsible for a narrow set of tasks while missing out on opportunities to develop a broader skill-set that might be useful in entrepreneurial contexts. Lazear (2005) argued that entrepreneurs should be jacks of all trades or have some knowledge of a large number of business areas to bring together many different resources to create a firm. Entrepreneurs need to be able to come up with the initial product or service and create a plan to bring the product or service to market.

They also must build their management team and outsource responsibilities to capable service providers or perform the responsibilities themselves. Successful completion of these tasks requires a varied set of skills unlikely to be developed in hierarchical settings.

Finally, employment in hierarchical organizations is often seen as preferable to smaller, less formalized organizations. Larger organizations provide more stability and career progression potential than smaller organizations where slack resources might be insufficient to weather a period of poor performance or where career advancement might be tied to the subjectivity of personal relationships. For many, the opportunity cost of leaving stable employment with career advancement to enter entrepreneurship is just too high.

There is evidence that hierarchies discourage start-up entrepreneurship in multiple ways

(Hope, Oh and Mackin (2011). Hierarchies support rigidity and command and control processes

22 that stymie experimentation and creativity. Potential entrepreneurs with hierarchical work experience are less likely to have opportunities to develop a broad scope of knowledge and skills that would aid in taking entrepreneurial action. Finally, some individuals might self-select into hierarchical organizations because of preferences for stability and career advancement opportunities that are not available in entrepreneurial settings thus decreasing the likelihood of even considering taking entrepreneurial action.

Hypothesis 2a: Potential entrepreneurs with hierarchical work experience will be less

likely to start a business.

Hypothesis 2b: Potential entrepreneurs with hierarchical work experience will be less

likely to proceed with an ETA opportunity.

Individuals are motivated to enter entrepreneurship for a variety of reasons (Carsrud &

Brannback (2011; Yitshaki & Kropp (2016;York, O‘Neil, & Sarasvathy (2016). Early entrepreneurship theory identifies financial rewards as the primary motivation behind entrepreneurship (Knight (1921; Cantillon (1931; Schumpeter (1934), and more recent conceptual and empirical work has built on this premise (Benzing, Chu, & Kara (2009;

Naffziger, Hornsby, & Kuratko (1994). However, other empirical studies have found that financial motivations are often less important than non-pecuniary motivations (Amit,

MacCrimmon, Zietsma, & Oesch (2000; Block, Millán, Román, & Zhou (2015; Woo, Cooper, &

Dunkelberg (1991). For example, in a study comparing 51 entrepreneurs and 28 technology industry managers, Amit et al. (2000) found that innovation, independence, vision, and challenge were significantly more salient motivations for entrepreneurial entry than wealth accumulation.

While financial motivations might not be the primary reason to enter entrepreneurship,

23 individuals understand the need to make enough money to support themselves and therefore must take into account the financial prospects of a potential opportunity.

Contextual factors influence the economic drivers for aspiring entrepreneurs. Individuals are more likely to exploit an opportunity when the difference between the expected utility of entrepreneurship is larger than the alternative. Individuals with high opportunity costs such as a comfortable, high-paying job are less likely to leave reliable, steady employment to start a business (Johansson (2000). In contrast, those with low opportunity costs, such as those who are unemployed or unhappy at work, will view almost any opportunity as better than the status quo

(Ritsilä & Tervo (2002; Taylor (2001).

Besides wealth accumulation, other sources of non-economic and intrinsic motivations influence entrepreneurial entry. The desire for personal development and performing meaningful work can be accomplished through creating or managing a business that has a purpose that aligns with the entrepreneur (Edelman, Brush, Manolova, & Greene (2010; Jayawarna, Rouse, &

Kitching (2011). The goal of finding meaningful work and making a positive contribution in the world has led to a surge in social entrepreneurship. B-corporations, an organizational structure that requires firms to meet social and environmental standards, have increased from their inception in 2015 to over 2500 certified B-corporations in more than 50 countries. Miller et al.

(2012) theorize that prosocial motivations lead to integrative thinking, prosocial judgment, and commitment to alleviating other‘s suffering which drives subsequent social entrepreneurship.

Another benefit to entrepreneurship is the independence and autonomy that come from firm ownership (Renko, Shrader, & Simon (2012; Reynolds & Curtin (2008). The ability to decide when and where to work provides control over work-life balance, which can lead to a higher quality of life (Kofodimos (1993). Research has also shown that recognition and social status as

24 an entrepreneur are motivations for some aspiring entrepreneurs to exploit an opportunity

(Akehurst, Simarro, & Mas-Tur (2012; Edelman et al. (2010).

Taken together, the motivations behind entrepreneurial entry are multifaceted and depend on the individual and the opportunity. Specifically, implicit motivations of status are associated with the decision to enter entrepreneurship. From inception, entrepreneurs are often seen as larger-than-life heroes because they forge their own path and help solve society‘s problems through their creative genius (Anderson & Warren (2011). As the organization grows, the entrepreneur‘s status increases as employees are hired and the social standing of the business in the community builds. The non-financial benefit from status is similar to the socioemotional wealth construct in family business research which has been shown to impact decision-making

(Gomez-Mejia et al. (2007).

Hypothesis 3a: Potential entrepreneurs who have implicit motivations of status and

recognition will be more likely to start a business.

Hypothesis 3b: Potential entrepreneurs who have implicit motivations of status and

recognition will be more likely to proceed with an ETA opportunity.

The recognition of entrepreneurial opportunities is determined, in part, by an individual‘s search behavior (Shepherd and Levesque (2002) and attention allocation (Shepherd, McMullen, and Jennings (2007). Individuals with an analytical style are more likely to search for opportunities from a narrow opportunity space they know well because of their preference for working in familiar domains they understand (Kirton (1976). A constrained search domain has fewer opportunities available for analytical aspiring entrepreneurs to discover. Those with an analytical style are less likely to see things differently because of their conforming nature and preference for a structured approach to problem-solving (Allinson and Hayes (1996). This

25 decreases the likelihood of discovering a novel solution to a market demand. Therefore, analytic individuals will recognize fewer potential opportunities and consider less novel ways to exploit them, thus decreasing the likelihood of starting a business (Olson (1985).

Cognitive style also influences how opportunities are evaluated once a suitable opportunity has been discovered. Research has shown that entrepreneurs see opportunities where others see risks (Ziestma (1999; Sarasvathy, Simon, and Lave (1998). Those with an analytic cognitive style are more likely to become aware of risks associated with discovered opportunities because of their thorough approach to information search and analysis. This analysis will increase the number of perceived risks and challenges associated with potential opportunities and discourage new venture creation. Besides formal analysis, analytic individuals will spend considerable time in an informal analysis by conducting mental simulations of possible exploitation strategies and their attendant probable outcomes (Witt 2004; Gaglio 2004). This comprehensive approach to opportunity evaluation, both formal and informal, takes time and resources, which can lead to ―analysis paralysis,‖ especially if the analytic entrepreneur is evaluating multiple opportunities or multiple variations of the same opportunity at once. Finally, analytic individuals process information in a systematic, sequential, step-by-step approach

(Armstrong et al. 2012) often through the use of decision rules. Decision rules allow aspiring entrepreneurs to evaluate contexts, situations, and information logically (Wood and Williams

(2014). Explicit decision-making rules increase the number of hurdles a potential opportunity must overcome to be exploited. In sum, analytic aspiring entrepreneurs will discover fewer opportunities because they search from problem spaces constrained by their preference for familiarity and aversion to creativity. Furthermore, opportunity evaluation will be hampered because of the propensity of analytic individuals to see risks where others see opportunities, the

26 time required for a thorough evaluation of the opportunity, and rigid decision rules that provide ample opportunity for the aspiring entrepreneur to abandon the opportunity. Therefore:

Hypothesis 4a: Potential entrepreneurs who are more analytic will be less likely to start a

business.

Hypothesis 4b: Potential entrepreneurs who are more analytic will be less likely to

proceed with an ETA opportunity

Experience can help more analytic individuals overcome the challenges they face in starting a venture in several ways. As previously stated, analytic individuals search for opportunities within an existing paradigm, yet search and evaluation activities within existing paradigms likely differ between more experienced and less experienced individuals. Experienced potential entrepreneurs who are more analytic are more likely to know where to search for and how to exploit external information that is necessary for opportunity discovery and evaluation.

This targeted search decreases the time needed to find a suitable opportunity to exploit and allows them to see more and better opportunities from within the existing paradigm, thus increasing the likelihood of starting a business. In other words, the effect of an analytic cognitive style in more experienced individuals promotes rigorous information gathering and analysis, but their entrepreneurial absorptive capacity, developed over time, allows these processes to be carried out quickly and efficiently (Qian & Acs (2013). In contrast, less experienced individuals who are more analytic are more likely to struggle in their information search and opportunity evaluation processes which will decrease the likelihood of entering entrepreneurship. Their analytic cognitive style leads them to search for information from diverse sources but their youth presents a challenge to their ability to successfully assimilate, adapt, and exploit new knowledge

(Zahra & George (2002). Younger, more analytic individuals are less likely to know where to

27 search for opportunities within their existing paradigm and will take longer to analyze the information they gather because they have not had the life experience necessary to develop their entrepreneurial absorptive capacity. Therefore:

Hypothesis 5a: The negative relationship between analytic cognitive style and the

likelihood to start a venture is attenuated as experience increases.

Hypothesis 5b: The negative relationship between analytic cognitive style and the

likelihood to proceed with an ETA opportunity is attenuated as experience increases.

Expertise is related to experience, but they are not the same thing. Expertise requires extensive, deliberate practice over time, whereas experience suggests a regular pattern of engagement or participation but does not require a prolonged and focused effort (Baron & Henry

(2010). Analytic individuals who have had prior entrepreneurship experience have overcome the struggle to ―pull the trigger‖ of engaging in entrepreneurial action despite their proclivity to gather more information and conduct more analysis. The individual‘s prior entrepreneurship experience has resolved much of the personal uncertainty that surrounds entrepreneurial entry, and they are likely to move forward with an opportunity because they have an idea of what to expect. Analytic individuals with prior entrepreneurship experience will also know the right questions to ask when evaluating opportunities and arrive at a decision sooner than someone without experience, which allows them to evaluate opportunities more efficiently thus leading to an ability to evaluate more opportunities. Finally, individuals with prior entrepreneurship experience will be ―in the flow,‖ meaning they will know where to look for the opportunities that will have the greatest chance of success. Entrepreneurship experience provides unique opportunities to create partnerships, to vertically or horizontally integrate, or create a complementary product or service (Amaral, Baptista, and Lima (2011). Entrepreneurs must

28 understand the value chain as well as customers, and operating a business helps with this understanding much more than doing market research and reaching out to suppliers with hypothetical scenarios. This understanding is enhanced when the individual has a more analytic style because their approach to problem-solving is more effective than the intuitive style when operating within a known paradigm. Therefore:

Hypothesis 6a: The negative relationship between analytic cognitive style and the

likelihood to start a business is attenuated by prior entrepreneurship experience.

Hypothesis 6b: The negative relationship between analytic cognitive style and the

likelihood to proceed with an ETA opportunity is attenuated by prior entrepreneurship

experience.

CHAPTER 4: DATA AND METHODS

In this dissertation, I explore the associations between experience, cognition, and the likelihood of taking entrepreneurial action, the latter of which I analyze in two contexts: starting a business and exploiting a case-based ETA opportunity. I will consider each in turn.

Measurement of Dependent Variable—Organic Entrepreneurship

Organic entrepreneurship is the act of creating a new organization to facilitate the production of future goods or services. The creation of an entity that did not exist previously requires individuals with expertise to seek out resources and organize them in a way that competitors view them as a new market entrant and potential customers view them as a new source of supply (Gartner (1985). For example, the foundation of Uber involved the recruitment of individuals capable of developing the platform, business development experts to build the business, and other employees in supporting roles. Uber was able to hire these employees because the entrepreneurs were successful in their solicitation of financial resources from investors. Through the organization of human and financial resources, Uber is viewed as a competitor to taxi companies and a means of transportation to customers. A new restaurant also organizes human and financial resources to create the business but does so on a much smaller scale than does Uber. Both small and big companies represent organic entrepreneurship.

According to the Small Business Association, over 1 million new business are created each year in the United States,3 which accounts for close to 4 million new jobs.

3 SBA only recognizes small businesses that hire at least one employee (https://www.sba.gov/sites/default/files/advocacy/2018-Small-Business-Profiles-US.pdf)

30 I used LinkedIn data to identify individuals who started a business after their enrollment in an Introduction to Entrepreneurship class had ended. LinkedIn is the largest professional networking site on the internet with over 610 million profiles. LinkedIn is used by 92% of

Fortune 500 companies, and many MBA programs require students to have a LinkedIn profile.

LinkedIn profiles in management research have been used to study entrepreneurship in developing economies (Avnimelech, Zelekha, and Sharabi (2014), business model evolution

(Snihur and Zott (2019 and diffusion (Dokko and Gaba (2012). These individuals voluntarily enrolled in this elective course offered in their MBA curriculum, and the majority of individuals expressed interest in participating in entrepreneurship in some capacity in the future. Any student with a job in their work history that was titled founder/cofounder, owner, CEO, president, principal, or proprietor in the work experience was identified as a possible entrepreneur. From this subset, I independently verified actual entrepreneur status through the company website or social media sources. Within my sample of 996 MBA enrollees, 39 people started a business after completion of the course.

Measurement of Dependent Variable—Inorganic Entrepreneurship

As previously stated, inorganic entrepreneurship is the acquisition of an existing business by an individual (or group of individuals) with the intent to enact their vision and actively manage the venture. In finance, ETA is one of several forms of buyouts yet research has focused almost exclusively on large, public companies leveraged buyouts (LBOs), despite their rarity

(Harris, Siegel, & Wright (2005). In (1988, the year LBOs were at their peak, 410 public company LBOs were completed at terms totaling $188 billion (Olsen (2003). This represents a small fraction of the total buyouts completed when management buyouts, management buy-ins, divisional buyouts, and ETA transactions are taken into account.

31 ETA and LBOs both seek to identify and acquire undervalued assets, but ETA differs from LBOs in several ways. First, the goal of an LBO is to improve efficiency and reduce costs to generate free cash flows sufficient to service the debt used to acquire the assets. Over time, value is created by paying down the debt and incrementally improving performance. Equity holders in an LBO will typically pursue an exit within three-to-five years through a sale to a strategic buyer, IPO, or recapitalization (Olsen (2003). In contrast, ETAs use free cash flows to fund growth initiatives such as new products, services, and/or markets to increase value.

Entrepreneurs who acquire an existing business have a longer time horizon than LBO funds to allow initiatives to come to fruition. LBOs and ETAs also differ in their governance. LBOs maintain a principle-agent structure with fund managers (agents) overseeing management. An

ETA is free from the monitoring and incentive alignment issues associated with principal-agent governance because the entrepreneur who acquires the business is both the principal and the agent (Jensen and Meckling (1976).

The act of franchising could be considered a type of ETA, but I argue that franchising is fundamentally distinct from ETA. Franchising is a contractual arrangement between two independent entities whereby the franchisee pays the franchisor for the right to sell the franchisor's product or service and/or the right to use their trademark at a given place and for a certain period of time (Lafontaine (1992). Under the franchise agreement, franchisees are required to operate under the direction of the franchisor thus limiting their ability to manage the business their way. Moreover, most franchisees purchase a franchise for the express purpose of operating a business with a proven operating system that does not require the implementation of new strategies for success. In contrast, the freedom to implement transformational strategies is a

32 key component of ETA. Franchising is also contractually limited in duration while ETA continues in perpetuity or when the entrepreneur decides to sell or close the business.

ETA and franchising also differ in their governance and strategy. Franchisees purchase a residual claim but do not have full decision rights and must operate within the boundaries outlined by the franchisor to maintain trademark value. Some decision rights (e.g., menu selection, building design) are maintained by the central company. The central company has the authority to monitor the franchisee for product quality and to terminate the contract if the quality is not maintained (Brickley and Dark (1987). Consequently, strategies of efficiency and cost control are preferred while long term growth is accomplished through geographic expansion. In contrast, participants in ETA have full decision rights including the freedom to implement any changes they believe will enhance the future prospects of the business without oversight from an outside entity. They have the freedom to pursue a variety of strategies including introducing new products or services, entering new markets, or reconfiguring the value chain.

In summary, ETA, LBOs, and franchising all involve the purchase of assets but are dissimilar in their purpose, governance, strategy, and time horizon. The key difference is that

ETA entrepreneurs have the freedom to operate the business, including the autonomy to pursue organizational changes, to grow the business over a long term time horizon.

In the entrepreneurship literature, ETA represents an alternative path to business ownership because many of the challenges facing potential entrepreneurs in de novo opportunities are absent in ETA opportunities. For example, nascent entrepreneurs must first have an idea for a business, develop a business model, and conduct activities to reduce uncertainty and mitigate risk. Start-up entrepreneurs increase their chances of success by remaining flexible and adapting as they reduce the uncertainty surrounding their opportunity. In

33 contrast, an ETA entrepreneur‘s early success depends on their ability to forecast the future performance of the business and negotiate acquisition terms with current owners. Once a decision to exploit an opportunity has been made, start-up entrepreneurs identify and seek to acquire the necessary financial, social, and human capital needed to support the new venture.

Activities are focused on growing the business and developing legitimacy (Aldrich and Ruef

(2006). ETA entrepreneurs, meanwhile, become managers of established businesses that own a specific stock of human, social, and financial capital as well as a certain level of legitimacy.

Activities for ETA entrepreneurs, post-acquisition, are focused on implementing their vision for the business and executing the strategy they believe will lead to success.

Research on ETA has been hampered by data access and identification. Despite the significant number of ETA deals completed each year, most details surrounding the transactions remain private. Additionally, it is difficult to identify ex ante entrepreneurial intent in business acquisitions. Not all acquisitions are entrepreneurial in nature, and growth is not necessarily an indicator of entrepreneurship (Davidsson, Delmar, & Wiklund (2006). Many acquisitions are completed to secure patents or human capital or as a competitive response to a perceived threat.

My research design addresses some of these concerns. My sample consists of potential entrepreneurs who all evaluate the same ETA opportunity.

The surveys captured the students‘ decision to proceed or not proceed with an ETA opportunity and their rationale behind their decision. My approach to use a classroom setting to study entrepreneurial decision-making is consistent with Schwenk's (1995) assertion that classroom settings may be especially beneficial in examining cognitive processes. Other researchers have used similar methods to study risk-taking (Sitkin & Weingart (1995) and the propensity to start a business (Simon et al. 2000). This quasi-experiment eliminates alternative

34 explanations that could be attributed to the heterogeneity of opportunity and creates a risk set of potential entrepreneurs, a challenge to research on entrepreneurial entry (Kim, Aldrich, Keister

2006).

I use the HBS Case ―Jim Southern‖ (5-389-073) as the setting for ETA. This case features Jim Southern as the protagonist, a recent MBA graduate, and his experience as the first search fund entrepreneur. Search funds are a subset of ETA where aspiring entrepreneurs raise capital to search for and acquire undermanaged businesses that have the potential to increase in value through an infusion of capital and entrepreneurial strategic intent (Grousebeck (2010). The case begins with Jim‘s search for investors who are interested in helping him acquire and a low tech company which he will subsequently manage. Following his search, Jim negotiates a purchase with the owner of a printing company while raising both debt and equity financing.

Once the financing is secured, Jim must decide whether to continue with the purchase despite a last-minute ultimatum from the seller to personally guarantee a set of accounts payable or abandon the printing company and begin a new search. Jim acts as an arbitrageur by searching for an undervalued company to acquire. As an organizer of resources, Jim secures debt and equity financing to purchase the company. Finally, Jim plans to enact changes within the company to improve profitability should he decide to proceed with the acquisition. I ask each student to respond to the questions, ―As Jim Southern, would you proceed with the purchase of

American Printing? Why or Why not?‖

The responses to the case questions provide insight into the mindset of each individual on how they evaluate opportunities and are the basis for my model. Each individual read the Jim

Southern case and responded to the prompt: ―As Jim Southern, would you proceed with the deal?

Why or Why not?‖ In response, 28% of the students indicated they would proceed with the deal

35 and responses ranged from very short sentences to long paragraphs to explain their reasoning.

Students who indicated they would proceed with the deal were coded as 1; those who voted to abandon the deal were coded as 0. Consistent with past research on decision-making (Dearborn

& Simon (1958; Houghton & Goldberg (2000; Simon et al. (2000), I use student responses to surveys based on several case studies to test my hypotheses.

Measurement of Independent Variables

Independent variables were collected from individual LinkedIn profiles, the university provided demographic information, and case surveys. The construct of ―Experience‖ is measured by the age of each student (Mincer (1974). I also capture the construct ―Hierarchy‖ from

LinkedIn as employment in the military at some point in the individual‘s career. From class rosters I identify gender and cohort.

The construct ―Prefounder‖ was measured as any prior entrepreneurship experience included on the LinkedIn profile for each student. I began by tracking each student‘s employment history. Any student with a job in their work history that was titled founder/cofounder, owner, CEO, president, principal, or proprietor in the work experience was identified as a possible entrepreneur. From this subset, I independently verified actual entrepreneur status through the company website or social media sources.

The Introduction to Entrepreneurship class follows a course progression beginning with opportunity recognition followed by securing resources and venture growth (See appendix for class syllabus). This approach complements the approach put forth by Venkataraman (1997) that entrepreneurship is a process focused on opportunity discovery, evaluation, and exploitation.

Students evaluate opportunities from cases centered on all three aspects of the entrepreneurial process over the five-week course, thus providing longitudinal data on how they evaluate

36 opportunities and a measure of their cognitive style. Students are required to evaluate a case study each week. Weeks 1–4 required the students to decide whether they would proceed or not proceed with an opportunity and explain the rationale behind their decision. Data from week five were omitted because the case did not ask about opportunity evaluation. Table 5 provides an overview of the instrument and survey questions.

To measure the construct of ―Implicit motivations of status and recognition,‖ I use computer-aided text analysis (CATA) to examine student responses to surveys on the two cases before the ―Jim Southern‖ case. Traditional methods of measuring implicit motivations use semantic coding of imaginative stories that require a significant contribution from subjects and highly trained coders (Schultheiss, and Pang (2007). CATA provides a more efficient and reliable alternative to implicit motivation measurement by eliminating the human element

(Neuendorf (2002). Using CATA to measure implicit motivation, Schultheiss (2013) found that both traditional and CATA methods capture the implicit motives for power, achievement, and affiliation for both US and German University students and did not overlap with measures of self-attributed motivational needs thus demonstrating discriminate validity from self-reported motivations.

Like the ―Jim Southern‖ case, the two previous cases were also focused on opportunity evaluation. For each case, students were asked whether they would proceed or not proceed with the opportunity and were asked to explain their rationale behind their decision. I analyzed the rationale offered for the responses to each question for each week independently using the

Linguistic Inquiry Word Count (LIWC) dictionary (Pennebaker et al. (2015). I then found the average from the two previous cases to predict the likelihood of proceeding with an ETA opportunity put forth in the Jim Southern case in week three. Taking the average from the

37 previous two cases provides a more robust estimate of the individual‘s true implicit motivations and reduces any bias idiosyncratic to a single case. Implicit motivations of status and recognition was determined using the LIWC ―Power‖ dictionary. The ―Power‖ dictionary is a subcategory of the ―Drives‖ dictionary and consists of 518 words associated with power such as superior and bully. The drives category within LIWC was assembled to measure needs and motivation

(Pennebaker et al. (2015). Other ―Drive‖ categories include affiliation, achievement, reward, and risk. One advantage of using LIWC as opposed to other CATA programs is that it produces results as a percentage of overall content which normalizes answers and eliminates variance that could result from the overall length of an individual response (Wolfe & Shepherd (2015a).

LIWC has been used to study entrepreneurial orientation (Moss, Neubaum, & Meyskens (2015;

Wolfe & Shepherd (2015b), customer service (Olekalns & Smith (2006), and negotiations

(Olekalns & Smith (2009).

The construct of analytic cognitive style was also measured using CATA. I used the rationale provided by students for each of the four weeks to measure cognitive style using the

LIWC content analysis software. CATA methods provide a more efficient and reliable alternative to cognitive style measurement by eliminating the human element (Neuendorf (2002).

Traditional measures of cognitive style such as the cognitive style index (Allinson and Hayes

(1996), Kirton‘s (1976) adaption-innovation inventory, and the cognitive style indicator (Cools and Van den Broeck (2007) rely on self-reported data, which is often susceptible to bias

(Podsakoff, MacKenzie, Lee, and Podsakoff (2003). While self-reported measures of cognitive style require recall, interpretation, and evaluation of previous experience, CATA provides a more precise measure of cognitive style through the collection of objective data than an individual‘s perception of their cognitive style. Because all participants in our study were all given the same

38 information each week and asked to make a decision, the only variation in this construct comes from their interpretation of the data which provides a clean measure of cognitive style.

Cognitive style is provided by LIWC‘s algorithm analytic as the degree of analytical, logical, and consistent thinking, as opposed to more intuitive, narrative writing (Pennebaker,

Boyd, Jordan, & Blackburn (2015). This category is derived from prior studies linking the use of articles, prepositions, and conjunctions to logical and analytical thinking (Pennebaker, Chung,

Frazee, Lavergne, & Beaver (2014). One advantage of using LIWC other than CATA programs is that it produces results as a percentage of overall content that normalizes answers and eliminates variance that could result from the overall length of an individual response (Wolfe &

Shepherd (2015a). LIWC has been used to study entrepreneurial orientation (Moss, Neubaum, &

Meyskens (2015; Wolfe & Shepherd (2015b), customer service (Olekalns & Smith (2006), and negotiations (Olekalns & Smith (2009).

Control Variables

I control for gender, word count, student responses to case scenarios (to proceed or not proceed), and cohort in my models. There‘s reason to suspect that gender could be related to the decision to start a business in my model. Research has shown that men and women differ in their propensity to start a business so it is appropriate to control for gender (Fischer, Reuber, and Dyke

(1993; Elam (2014). I control for word count to ensure that response length is not a factor in the results. I also control for each student‘s decisions to proceed or not proceed with hypothetical case opportunities. This measure was operationalized by coding the student decisions 1 for a decision to proceed and 0 for a decision not to proceed. The cumulative total for all four cases was added together for each student. For example, if a student voted to proceed with all four hypothetical opportunities, then their measure would be four. The average value of

39 entrepreneurial decision across 996 students was 1.9, with 58 students having a value of 0 (voted against all four opportunities) and 25 students having a value of 4 (voted for all four opportunities). Finally, data collection took place over five years, and world events, as well as instruction, differed between cohorts which could be related to the dependent variables.

Model Specification

I run two separate analyses to test my hypotheses. First, I test the association between my independent variables and the decision to start a business. In the second set, I examine the linkage between my independent variables on the decision to proceed with an ETA opportunity. I run my analysis using the STATA statistical package.

In the first analysis I use a Cox proportional hazard model (Cox (1972) to test hypotheses

1a, 2a, 3a, 4a, 5a, and 6a.

where Xi=(Xi1,Xi2,⋯,Xip) is the predictor variable for the ith subject, h(Xi,t) is the hazard rate at time t for Xi, and h0(t) is the baseline hazard rate function. Cox proportional hazard models are appropriate when the final state of some observations is unknown at the end of the study

(Spruance, Reid, Grace, and Samore (2004). In this study, it is unknown whether the individuals in the sample will start a business in the future. The Cox proportional hazard model estimates the effect of an analytic cognitive style, age, and prior entrepreneurship experience has on starting a business. The Cox models provide exponential beta values (eβ), which specify the effect that each independent variable has on the probability of the event happening. In my study, eβ greater than 1.0 suggests that the variable increases the probability of starting a business, while eβ less than 1.0 suggest that it decreases the probability of starting a business

40 In the second analysis I use a logit model to test hypotheses 1b, 2b, 3b, 4b, 5b, and 6b.

Logit models are appropriate when the dependent variable of the regression model is binary such as the decision to proceed with an ETA opportunity.

, where Y is the binary dependent variable, and x represents the independent and control variables.

CHAPTER 5: RESULTS

Table 2 presents the descriptive statistics and correlation coefficients for the study variables related to study 1. The correlation coefficient between Veteran Status and Gender is the highest (-0.2573) but less than 0.04. I conducted a variation inflation factor analysis and found that all variables have a VIF of less than two. Consistent with previous research, a VIF of less than 10 is indicative of inconsequential collinearity (Hair, Black, Babin, and Anderson (1998).

Table 3 presents the Cox proportional hazard model estimates of the effect experience length, experience type, and implicit motivations of status/recognition an analytic cognitive style on the propensity to start a business. Table 3 also includes the interaction effects of experience and prior entrepreneurship on the analytic style-propensity to start a business relationship. All hypotheses are one-directional, so I use a one-tailed test. The coefficients for the control variables and the corresponding statistical tests are two-tailed. Model 1 includes all the control variables. The results show that prior entrepreneurship experience, gender, word count, and case decisions do not impact the likelihood to start a business in a statistically significant way. Models

2, 3, 4, 5, and 6 include each of the independent variables separately into the control model, whereas Model 6 is also the full model that adds all independent variables to the control model.

As shown in Model 2, the coefficient for experience is positive, as predicted, indicating that the likelihood of starting a business increases with age. Using hazard ratios, my results show a one- year increase in experience is associated with a 10.6% increased likelihood of starting a business, showing support for hypothesis 1a. Model 3 shows that prior work experience in a hierarchical

42 organization is not associated with the likelihood of starting a business. Thus, hypothesis 2a is not supported. Model 4 tests the relationship between implicit motivations of status and recognition and the likelihood of starting a business. Results show no statistically significant relationship and leave hypothesis 3a unsupported. Model 5 shows the coefficient for analytic cognitive style is negative and significant at the .01 level, suggesting that a more analytic cognitive style reduces the likelihood that a potential entrepreneur will start a business, thus supporting hypothesis 4a. When exponentiating the coefficient of -0.0781, a hazard ratio of

.9248 is given indicating a one-unit increase in analytic cognitive style is associated with a decrease in the likelihood of starting a business by 7.5%.

Model 7 introduces the interaction term between experience length and an analytic cognitive style. The coefficient for this interaction term is positive and statistically significant at the 0.05 level, indicating that age attenuates the negative effect an analytic cognitive style has on starting a business. Thus, hypothesis 5a is supported. Model 8 shows the interaction term between prior entrepreneurship experience and analytic cognitive style. The coefficient on the interaction term is positive and statistically significant at the .01 level, thus demonstrating support for hypothesis 6a. Like experience length, prior entrepreneurship experience attenuates the negative relationship between an analytic cognitive style and the decision to start a business.

Table 5 presents the descriptive statistics and correlations for the variables related to

Study 2. The correlation between hierarchy and gender is higher than all others, and the correlation between ETA and hierarchy is also high. To address the concern of multicollinearity,

I ran a variation inflation factor analysis and found that all variables have a VIF of less than two.

Consistent with previous research, a VIF of less than 10 is indicative of inconsequential collinearity (Hair, Black, Babin, and Anderson (1998).

43 Table 6 presents the logistic regression estimates of the effect work experience length, hierarchical work experience, implicit motivation, and analytic cognitive style have on the likelihood of proceeding with an ETA opportunity. Similar to Study 1, all hypotheses are one- directional, and statistical tests are therefore one-tailed for independent variables and two-tailed for control variables. It is important to note that each hypothesis is tested using a one-tailed test because I hypothesize the direction of the relationship between the independent variable and the dependent variable. Model 1 includes all the control variables. Model 2 tested the main effect of experience length. The coefficient is positive and significant (p<.10), showing weak support for hypothesis 1b. Potential entrepreneurs with more experience are more likely to proceed with an

ETA opportunity. Model 3 tested the association between hierarchical work experience and the likelihood to proceed with an ETA opportunity. The coefficient is negative and significant

(p<.001), showing support for hypothesis 2b. Potential entrepreneurs with hierarchical work experience are less likely to proceed with an ETA opportunity. Model 4 tested the association between implicit motivations of status and recognition and the likelihood to proceed with an

ETA opportunity. The coefficient is positive and significant (p<.05), showing support for hypothesis 3b. Potential entrepreneurs with implicit motivations of status and power are more likely to proceed with an ETA opportunity. Next, I tested the association that an analytic cognitive style has on the decision to proceed with an ETA opportunity. Results show that an analytic cognitive style is not associated with the decision to proceed with an ETA opportunity in a statistically significant way. Thus, hypothesis 4b is unsupported. Finally, I tested the moderating effect experience length and previous entrepreneurship experience on the relationship between an analytic cognitive style and the decision to proceed with an ETA

44 opportunity. Neither interaction effects are statistically significant which shows that hypotheses

5b and 6b are not supported.

CHAPTER 6: DISCUSSION AND CONCLUSION

Contributions

This dissertation investigates the associations between work experience, motivation, and cognitive style and what these have on taking entrepreneurial action. In summary, experience length, experience type, and implicit motivations influence the likelihood that potential entrepreneurs will proceed with a hypothetical ETA opportunity. Potential entrepreneurs with more experience are more likely to proceed with an ETA opportunity, whereas those with experience working in hierarchical organizations are less likely to proceed with an ETA opportunity. Motivation also influences opportunity evaluation. Potential entrepreneurs who have stronger implicit motivations of status and recognition are also more likely to proceed with an ETA opportunity.

This research also supports earlier work on the negative effect working in hierarchical work environments can have on entrepreneurship as well as the positive effect experience has in opportunity exploitation. These findings open the door for future research on other variables that might affect the decision to proceed with an ETA opportunity as well as shed light on alternative modes of entrepreneurial entry.

Building on the hypothetical case study used to explore ETA, the findings of this dissertation also show that cognitive style and experience play roles in a potential entrepreneur‘s decision to start a business. Adding to entrepreneurial cognition, I find that aspiring entrepreneurs who are more analytic are less likely to start a business. I also show that work

46 experience has a positive relationship to starting a business and prior entrepreneurship experience attenuate the negative effect of an analytic cognitive style. Existing research on the link between intuition and starting a business has shown that intuition is involved in the initial spark of initial business ideas that are subsequently developed (Dimov2007a; Dimov (2008b).

Intuition is also positively related to the number and innovativeness of identified opportunities

(Baldacchino (2013). This research implicitly suggests that those with a proclivity to analysis are less likely to start a business. We empirically show this is the case but demonstrate that age and prior entrepreneurship experience can attenuate the negative effect of an analytical cognitive style on starting a business.

I also find some interesting results when I compare and contrast the two studies. First, experience length is associated with both starting a business and proceeding with an ETA opportunity. However, experience in a hierarchical organization is only associated with proceeding with an ETA and not with starting a business. Hierarchical organizations emphasize exploitation over exploration to reap the benefits of efficiency. The act of starting a business is inherently explorative as the entrepreneur tests product or service iterations and business models to solve customer needs. In contrast, ETA opportunities have established structures, routines, and norms that support an existing business model. While exploration can occur after a business has been acquired, much of the value that is created in an ETA transaction occurs through improving efficiency. The ability to recognize opportunities for efficiency improvement is a skill that can be honed while working in a hierarchical organization.

Like experience in a hierarchical organization, implicit motivations of status and recognition are associated with proceeding with an ETA opportunity but not with starting a business. It takes time to build a business to a level that accumulates status and recognition

47 within the organization and in the community. Status and recognition increase for the entrepreneurs as their business grows, and acquiring an existing business provides a fast track to firm size. ETA entrepreneurs often experience a higher level of collective status and recognition from existing employees who remain after the acquisition than start-up entrepreneurs who begin with a small founding team or no employees.

Finally, analytic cognitive style is associated with starting a business and not with proceeding with an ETA opportunity. The reason for this could be the differences in uncertainty between contexts. Navigating uncertainty when starting a business is a challenge for anyone, but individuals with an analytical cognitive style might have a particularly difficult time. Uncertainty introduces a set of unknowns, making a thorough opportunity analysis impossible (Knight

(1921). Individuals with an analytic cognitive style can become overburdened with the limitless opportunity to over-analyze opportunities where uncertainty is significant. Compared to starting a business, ETA opportunities have resolved much of the uncertainty as customers have been identified, prices have been set, and structures, procedures, and policies have been established.

Therefore, the analytic cognitive style is more salient in starting a business than in an ETA opportunity.

This dissertation collects longitudinal data from potential entrepreneurs and tracks new business formation. Whereas most studies on entrepreneurial entry use data collected from the general population to track who, when, and why individuals start businesses (Renko (2013;

Schjoedt and Shaver (2007), I look at a specific risk set of individuals who have shown interest in starting a business. Given our unique sample, our study helps answer another interesting research question: Why don‘t individuals who have a predisposition for entrepreneurship decide against starting a business?

48 This research also adds to the literature on cognitive style and complements existing research on entrepreneurial cognition. While heuristics and biases help explain how entrepreneurs make decisions under uncertainty, an entrepreneur‘s cognitive style explains how individuals approach everyday decision-making as well as specific, major decisions such as starting a business. The theory of planned behavior is often used to explain why individuals start businesses, but this research has primarily focused on how entrepreneurial intentions are formed while neglecting the business creation outcome of the intentions-behavior relationship

(Kautonen, Van Gelderen, and Fink (2015). This research goes beyond entrepreneurial intentions by showing that cognitive factors influence actual business creation by potential entrepreneurs.

In the future, it would be helpful to study other moderating effects between cognitive style and the decision to start a business such as culture, work experience type, and educational background.

I also add to the debate on the role business planning has on entrepreneurial success. The analytic cognitive style is characterized by a propensity to engage in planning activities

(Armstrong (2000). Within entrepreneurship, an interesting debate related to the utility of business planning exists. Some researchers argue that business planning helps new ventures make decisions, balance resources supply and demand, and turn abstract goals into concrete steps

(Delmar and Shane (2003), especially in dynamic environments (Gruber 2007). Researchers who challenge the value of business planning claim that planning can impede new venture adaptability and takes time away from more important business development activities such as acquiring resources and building up the organization (Bhide (2000). Opponents also contend that planning can introduce organizational inertia and strategic rigidity (Brinkman, Grichnik, Kapsa

(2010). The discussion on the value of planning in entrepreneurial settings has centered on new

49 venture performance while its role in entrepreneurial entry has been underexplored. This research sheds light on how business planning influences new venture creation by emphasizing the role of a nascent entrepreneur‘s cognitive style plays in opportunity discovery and the evaluation processes.

This research also makes empirical contributions to the entrepreneurship literature.

Implicit motivations and cognitive style have been studied in entrepreneurship, but most measures have relied on survey data that are prone to respondent bias. I use linguistic measures captured through computer-aided text analysis to provide a measure that has perfect coding reliability and reduces respondent bias. While self-reported measures of cognitive style require recall, interpretation, and evaluation of previous experience, CATA provides a more precise measure of cognitive style through the collection of objective data when compared to an individual‘s perception of their cognitive style.

Limitations and Future Research

As previously mentioned, ETA is an understudied phenomenon, and more research is needed to understand who engages in ETA from both the entrepreneur and investor perspective.

Continued exploration into other drivers of ETA, such as network size, density, and structure could help shed light on how ETA opportunities are found and funded. Continued exploration of the moderators that might affect the relationship between the antecedents of ETA and the decision to proceed with an ETA transaction are also potential avenues for future research. For example, how do workplace culture and other types of experience moderate the relationship?

Although the study‘s design provided a unique setting to study the ETA opportunity evaluation, there are some drawbacks. First, the sample was drawn exclusively from entrepreneurial MBA students which limits the external validity. Future research is needed to

50 understand if the findings from the study hold for non-MBA students. The high opportunity costs associated with stable, high-income employment likely induce MBA students to evaluate entrepreneurial opportunities more severely because the expected utility of taking entrepreneurial action will rarely exceed the expected utility of immediate, secure, and high-paying employment.

Unobserved heterogeneity such as ability or effort could also be a factor in the determination of the results. Individuals with more entrepreneurial talent are more likely to self- select into entrepreneurship (Eesley and Roberts (2012). Additionally, the robustness of the results of this study would be improved with a control group without a predisposition to entrepreneurship. Finally, entrepreneurial action was measured by responses to a case study and not by actual behavior. To understand if the responses to proceed or not proceed really do indicate a proclivity to entrepreneurial action, it would be helpful to follow the respondents over time to observe who actually engages in ETA in their future careers.

In exploring an individual‘s cognitive style on decision-making, this research used the entrepreneurial process as a whole to predict entrepreneurial entry, but exploring the effect cognitive style has on each specific phase within the entrepreneurial process would provide insight into how the path-dependent nature of decision-making influences opportunity discovery and evaluation. For example, are analytic individuals more efficient at discovering opportunities than their intuitive counterparts? How does that efficiency in conjunction with cognitive style influence opportunity evaluation? In contrast, do intuitive individuals discover higher-quality opportunities because they prefer divergent and creative thinking? Do individuals employ a more analytic style in one phase of the entrepreneurial process while using a different cognitive style in another phase of the process? It is possible that more analytical individuals are less likely to enter entrepreneurship but could have greater success once they do move forward as uncertainty

51 is resolved and routines are established. Alternatively, can the analytic processes associated with opportunity search, evaluation, and exploitation be outsourced to ―big data‖? This could be helpful to intuitive individuals by allowing them to shift the hardcore analytical work to powerful computers while making the intuitive decision to become an entrepreneur in the first place.

Finally, how do teams of individuals consisting of both analytical and intuitive individuals balance the decision-making and conflict? Future research could explore these questions.

Implications

This dissertation began by highlighting a fundamental question in entrepreneurship research: why do some individuals and not others decide to start businesses. By identifying a unique set of potential entrepreneurs, I shed light on how experience, motivation, and cognitive style are associated with taking entrepreneurial action. While developing a causal theory of entrepreneurship might be in the future, this associative study of entrepreneurial action provides insight into the factors that influence entrepreneurial decision-making and sets the stage for future research opportunities.

52 TABLES Table 1: ETA, LBO, and Franchise Comparison

ETA LBO Franchise

Definition The acquisition of an The acquisition of a company A contractual arrangement existing business by an or division of a company with between two independent entrepreneur (or group a substantial portion of firms, whereby the of entrepreneurs) with borrowed funds. franchisee pays the the intent to enact franchisor for the right to transformational sell the franchisor's changes to improve the product or service and/or venture. the right to use their trademark at a given place and for a certain period of time Governance Principal and agent are Classic owner-agent structure. Franchisee purchases a one in the same, Acquirers act as principals residual claim but does not eliminating the need to who monitor existing agents have full decision rights. monitor and risk who manage the business. They are the principal and preference differences agent of the firm that between the owners and operates under the managers. franchisor. The franchisor has authority to monitor the franchisee for product quality and to terminate the contract if the quality is not maintained. Strategy Long-term growth Public firm taken private then Operate within bounds of accomplished by create value through financial franchise agreement-very implementing engineering, incremental little room for transformational efficiency improvements, and transformational change changes. Growth comes debt reduction. even if the franchisee from expansion into wanted to. Focus on new products, services efficiency and cost control. and/or markets. Growth occurs primarily through geographic scale Financing Self-financed, bank Private equity firms raise Upfront fee self-financed loans, and/or investors outside capital from limited (or with bank loans or partners and banks with the investors) and then expectation that cash flows residual royalty payments will cover the debt service Time Perpetual or until the Short term, usually 3–5 years, Long-term but limited to horizon owner decides to sell or after which the business will franchise contract. close the business. be taken public again or sold. Franchise license can be revoked or allowed to expire.

Table 2: Study 1 Descriptive Statistics and Correlation Table

M SD 1 2 3 4 5 6 7 8 9

1. ETA 0.2820 0.4504 1.0000

2. Experience 34.5812 5.7147 0.0698 1.0000

3. Hierarchy 0.3082 0.4622 -0.1425 0.1087 1.0000

4. Motivation 4.3519 2.1931 0.0777 -0.0592 -0.0477 1.0000

5. Analytic 84.2205 10.2894 0.0193 0.1145 0.0212 -0.0059 1.0000

54 6. Prefounder 0.0591 0.2361 0.0523 0.1166 -0.0680 0.0337 -0.0154 1.0000

7. Gender 0.2652 0.4419 0.0402 -0.0869 -0.2573 -0.0281 -0.0619 -0.0624 1.0000

8. Word Count 52.3423 25.3660 0.0519 0.0481 -0.0252 -0.3283 0.0376 -0.0131 -0.0158 1.0000

9. Ent. Decisions 0.9474 0.6674 -0.0821 -0.0003 0.0349 -0.0035 0.0760 -0.0512 -0.0803 -0.0348 1.0000

Table 3: Study 1 Main Results

Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8 Experience 0.0949* 0.1004* -0.6884 0.1442** (0.0464) (0.0461) (0.4299) (0.0524) Hierarchy 0.5710 0.3311 0.9181 0.8822 (0.8174) (0.9024) (0.9419) (0.9258) Motivation 0.0483 -0.0604 -0.0605 -0.1699 (0.1669) (0.1953) (0.1829) (0.2035) Analytic -.0678** -0.0781** -0.4139* -.1280*** (0.0285) (0.0300) (0.1863) (0.0372) Analytic*Experience 0.0097* (0.0052) Analytic*Prefounder 0.1927**

(0.0714) 55

Prefounder 0.0208 -0.7872 0.1808 -0.0463 0.1246 -0.4885 0.1719 -16.9058** (0.7772) (0.8224) (0.8037) (0.1665) (0.7256) (0.8568) (0.8805) (6.153) Gender 0.3217 -0.1048 0.5015 0.3089 0.3223 0.0041 0.6283 0.4550 (0.5247) (0.5786) (0.5924) (0.5276) (0.5142) (0.6334) (0.7375) (0.6923) Word Count -0.0127 -0.0240* -0.0084 -0.0127 -0.0107 -0.0205 -0.0197 -0.0215 0.0109 (0.0119) (0.0128) (0.0108) (0.0116) (0.0142) (0.0149) (0.0150) Ent. Decisions 0.4794 0.6061 0.4187 0.5149 0.4074 0.4733 0.7591* 0.2043 (0.3904) (0.4430) (0.4084) (0.4101) (0.4046) (0.4409) (0.4579) (0.4298) Cohort, Yes Yes Yes Yes Yes Yes Yes Yes Fixed Effects

N 996 996 996 996 996 996 996 996 Std. Error in parentheses †p<0.10,*p<0.05, ** p<0.01, *** p<0.001

Table 4: Course Outline and Questions used for Implicit Motivation and Cognitive Style Evaluation

Week 1 2 3 4 Question As Bob Reiss, would As Paul Olsen, would As Jim Southern would you As a small stock portfolio you proceed with you proceed with the proceed with the deal (agree to manager would you consider Whoozit? Why or Piano Bar/Restaurant O'Leary's terms and sign the PSS to be an attractive why not? Why or why not deal)? Why or why not? investment at $10/Share? Why or why not?

Table 5: Study 2 Descriptive Statistics and Correlation Table

M SD 1 2 3 4 5 6 7 8 9

1. ETA 0.2820 0.4504 1.0000

2. Experience 34.5812 5.7147 0.0698 1.0000

3. Hierarchy 0.3082 0.4622 -0.1425 0.1087 1.0000

4. Motivation 4.3519 2.1931 0.0777 -0.0592 -0.0477 1.0000

5. Analytic 84.2205 10.2894 0.0193 0.1145 0.0212 -0.0059 1.0000

6. Prefounder 0.0591 0.2361 0.0523 0.1166 -0.0680 0.0337 -0.0154 1.0000 57

7. Gender 0.2652 0.4419 0.0402 -0.0869 -0.2573 -0.0281 -0.0619 -0.0624 1.0000

8. Word Count 52.3423 25.3660 0.0519 0.0481 -0.0252 -0.3283 0.0376 -0.0131 -0.0158 1.0000

9. Ent. Decisions 0.9474 0.6674 -0.0821 -0.0003 0.0349 -0.0035 0.0760 -0.0512 -0.0803 -0.0348 1.0000

Table 6: Study 2 Main Results

Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8 Experience 0.0264† 0.03400* 0.0476 0.0330* (0.0172) (0.0176) (0.1460) (0.0176) Hierarchy -0.7491*** -0.7716*** -0.7724*** -0.7714*** (0.2416) (0.4450) (0.2447) (0.2447) Motivation 0.0987* 0.0989* 0.0990* 0.0988* (0.0481) (0.0493) (0.0493) (0.0492) Analytic 0.0049 0.0017 0.0073 -0.0003 (0.0101) (0.0104) (0.0600) (0.0107) Analytic*Experience -0.0002 (0.0017) Analytic*Prefounder 0.0316

(0.0414) 58

Prefounder 0.4269 0.3566 0.3226 0.4101 0.4284 0.2033 0.2064 -2.4664 (0.3953) (0.3997) (0.4001) (0.3998) (0.3956) (0.4105) (0.4119) (3.5349) Gender 0.1297 0.1594 -0.0541 0.1552 0.1364 0.0063 0.0069 0.0057 (0.2221) (0.2232) (0.2300) (0.2228) (0.2225) (0.2322) (0.2323) (0.2323) Word Count 0.0086* 0.0082* -0.0085* 0.0109** 0.0085* 0.0103* 0.0103* 0.0108* (0.0044) (0.0044) (0.0044) (0.0045) (0.0044) (0.0046) (0.0046) (0.0046) Ent. Decisions -0.2838* -0.2863* -.2852* -.2824* -.2899* -.2910* -0.2898 -0.2910* (0.1511) (0.1513) (0.1528) (0.1517) (0.1516) (0.1545) (0.1550) (0.1549) Cohort, Yes Yes Yes Yes Yes Yes Yes Yes Fixed Effects

N 532 532 532 532 532 532 532 532 Std. Error in parentheses †p<0.10,*p<0.05, ** p<0.01, *** p<0.001

APPENDIX Jim Southern Case (9-387-009) by Howard H. Stevenson and H. Irving Grousbeck. Used with permission by Harvard Business School Publishing. Access to the full case is available at no charge to active faculty members by registering online at the HBP educators site http://hbsp.harvard.edu/ and are verified as current, university faculty (usually verification is done within one to two business days). If the professor has any questions about negotiating the HBP Educators site, they can contact our Academic Customer Service: https://hbsp.harvard.edu/contact-us/

(800) 545-7685 [or 617-783-7600], [email protected] Individuals (who are not university faculty) who are interested in reading the full HBS case can also purchase a download of this case at the hbr.org site here: https://store.hbr.org/product/jim- southern/387009?sku=387009-PDF-ENG

COURSE SYALLABUS

MBA835 Introduction to Entrepreneurship

Syllabus: Requirements, Overview, and Daily Assignments

Note:

A computer (web-based) assignment is due before 11:55 p.m. the day before each class. THIS IS A BASIC COURSE REQUIREMENT.

Entrepreneurship

COURSE MATERIALS

1. R&R 386-019 2. Hustle as Strategy HBR Reprint 86503 3. Bootstrap Finance: The Art of Start-ups HBR Reprint 92601 4. Paul Olsen (A) 392-011 5. The Legal Forms of Organization 9-898-245 6. Valuation techniques 9-384-185 7. How to write a great business plan HBR Reprint 97409 8. New Venture Financing 9-802-131 9. Jim Southern 387-009 10. The Tax Aspects of acquiring a business 9-388-081 11. Physician Sales and Service, Inc.: June (1992 (A) 395-066 12. A Note on the Initial Public Offering Process 9-200-018 13. 3M Optical Systems Corporate Entrepreneurship 395-017

COURSE REQUIREMENTS

This memo describes the three grading requirements for the Entrepreneurship course— the final paper and the (almost) daily computer exercises.

FINAL PAPER

Instead of a final exam, students enrolled in my sections of the course will write a paper on an individual of their choice who is involved in starting or growing a venture. This individual (who for convenience we will call the ―entrepreneur‖) may be the founder of a new business or nonprofit, the CEO of a growing or transitional company, a venture capitalist, or even a middle manager in a Fortune 500 company. Detailed information is provided below.

Instead of writing a paper in ―real time‖ on the actions taken by an entrepreneur, you may write a paper on what you consider to be a successful venture. The venture does not have to entail the creation of a new business—you can write about new initiatives undertaken by existing businesses such as the launch of a new product, entry into a new geographic market, or securing new sources of supply overseas.

If you choose this alternative, you must pick a venture where you can make a credible case that the entrepreneur (or the shareholders of an existing company) earned a reasonable return on time and money invested. Do not write about recently launched ventures that merely show promise. (The venture does not, of course, have to be a smashing, comprehensive success.)

I would urge you to base your paper on your own interviews. If you choose to rely on public data, you must carefully document your sources and your paper must indicate how you ―added value‖ to your source materials.

The contents of an alternative final paper should also have three segments in which you do the following:

Describe the basic story of the venture and the entrepreneur(s) who made it happen. Your narrative should include the entrepreneur‘s background, the factors creating the opportunity, the obstacles faced, the means adopted to establish competitive advantage, significant milestones, and so on. (40% of credit)

Evaluate the strategies employed and the results obtained: What really made the venture a success? By what criteria was the venture successful? Where did it fall short? What did you find particularly admirable or insightful about the entrepreneur‘s actions? How could they have been improved upon? (30% of credit)

Reflect upon the broad ideas illustrated by the specific story. What general principles or rules of thumb did the story of this venture reinforce in your mind, lead you to modify, or cause you to reject? What did you learn that will influence your career in the next five years? (30% of credit)

These three basic components of your paper need not, however, be of equal length.

Other Guidelines

 Pick an industry that interests you and an entrepreneur you expect can provide a good role model for you.

 Make your descriptions and analyses precise and factual. Specific data about costs, market shares, time to market, and so on will enrich your work.

 Avoid clichés; focus on the surprises.

 In reflecting on the lessons learned (or rejected, or modified) you may find it helpful to compare the venture you studied with the cases we discussed in class and other ventures you are familiar with or discuss circumstances under which the lessons learned wouldn‘t apply.

 Interviewing the entrepreneur frequently will greatly enrich your learning. Entrepreneurs, however, may not easily give you the time that you wish. Therefore, think carefully about the question of access to your subject and the availability of data. Don‘t leave things until the last minute.

• Limit your paper to 15 double-spaced pages. Attach exhibits or appendices as you see fit, but note that I will not give additional credit for bulking up the paper.

• Give the entrepreneurs you interview an opportunity to comment on at least the descriptive or narrative segments.

Criteria for Evaluating the Papers

A good paper will:

 Clearly identify the competitive and other contextual barriers faced by the entrepreneur and how they influenced what he or she did. Ask yourself: Does my paper provide a good guide to someone seeking to enter the business or the industry that you are writing about? Make sure that you have done adequate research on the dynamics and key success factors of the business that you are writing about.

 Provide rich details about concrete actions: how precisely the entrepreneur made a sale, recruited a key employee, or secured a bank loan. Ask yourself: Does my paper provide any concrete rules of thumb to someone making a sale, recruiting employees, or securing bank loans? (―Be persistent‖ does not count as useful rule of thumb. Concrete ideas on how to be persistent without being annoying does.)

 Cover an interesting venture and a candid entrepreneur. (In some cases there simply isn‘t enough material to write a good paper. Pick your subject carefully.)

 Explain the dynamics of the entrepreneur's actions—how one decision or action led to another or precluded some other option.

 Critique the steps taken by the entrepreneur by comparison with other entrepreneurs in similar situations. The lack of such comparisons (or dubious ―pro forma‖ comparisons) provide a clear indication of a ―bad‖ paper.

 Provide good and complete evidence to back evaluations and lessons learned.

 Develop a rich set of lessons or theory that:

o Challenges or modifies the knowledge and ideas that you have encountered in your business school courses. At a minimum your paper should contain concrete evidence that you have learned something at Kenan-Flagler. If you are writing about fundraising tasks, for instance, your paper should reflect your course work in finance. o Discusses the conditions under which the lessons might not hold. (I usually find ―if- then‖ type statements more interesting than absolute claims.)

 Be well written.

Write-Up Assignments

Each student will submit write-up of one page maximum from each case discussion. These will be submitted before you can watch the video summary of the case discussion by the lead faculty.

COURSE OVERVIEW Courses in entrepreneurship have gained popularity in business schools everywhere, but it is not clear just what should be taught and how. In contrast to accounting, for example, entrepreneurship lacks a defined technical base or discipline. Moreover, individuals and organizations ranging from street vendors to transnational corporations all espouse entrepreneurial activity, which suggests that the topic should permeate all of business education. What can the focus of a special course in entrepreneurship possibly be?

The mission adopted for the Entrepreneurship course is to prepare MBA students to start and nurture their own businesses. The mission is based on the premise that student interests lie mainly in starting and building ventures in which they have a significant equity stake. Business schools admit students with great talent and high long-term expectations of responsibility, autonomy, and financial reward. Historically, some MBA students have had an innate desire to run their own businesses, but even those who didn‘t often turned to entrepreneurship after they confronted the realities of a pyramidal corporate world. Of the many that started in large corporations, only a few could rise to the top. The rest were subject to implicit or explicit up-or- out policies or shunted to positions that could not satisfy their natural ambition and drive.

Today, many MBAs are skeptical of long-term careers in large corporations. They belong to a culture that celebrates entrepreneurial individuals. They are also older and more cognizant of the realities of corporate ladders, and they may have directly witnessed the effects of downsizing. Therefore, although only a handful of MBA students start businesses right out of school, a large proportion expects to do so some years later. The IE course seeks to develop the knowledge, skills, and attitudes that will support and enhance their entrepreneurial activity.

Studying the challenges faced by startup companies and how their founders tackled them provide valuable lessons about new-venture success and about the skills that aspiring entrepreneurs should seek to develop. Research done in the area suggests two different models for successful ventures.

Opportunistic adaptation The first one entails considerable foresight and capital. The elements of this model include careful market research, well thought-out business plans to establish sustainable 65 advantages, top-notch founding teams, sagacious boards, and professional venture capitalists who provide advice, close oversight, and significant financing under carefully thought-out terms.

Start-ups that successfully follow this model grow extremely quickly. Consider, for example, Compaq Computer. Its founders—Rod Canion, Jim Harris, and Bill Murto—had all been senior managers at Texas Instruments, and they had a well-formulated plan to take on IBM with a technologically superior product. Seasoned investor Ben Rosen helped Canion raise $20 million in start-up capital—funds that allowed the new business to behave like a large, sophisticated company from the start. Canion could attract experienced managers by offering them generous salaries and participation in a stock option plan. Compaq also had a national dealer network established within a year of exhibiting its first prototype. Sales totaled more than $100 million in the first year. To use a biological analogy, ventures like Compaq are like the ―precocial‖ offspring of horses, which are relatively mature at birth and can see and walk in a matter of hours.

The alternative start-up model is not as buttoned down and much less resource intensive. William Hewlett and David Packard, for instance, first attempted to craft several electronic products in their garage, including a bowling alley foot-fault indicator, and a harmonica tuner. Their first successful product was an audio oscillator. ―With no market research,‖ reports Fortune, ―they whimsically priced it at $54.40, after ‗Fifty-four forty or fight!‘ the slogan used in establishing the U.S. border in the Pacific Northwest.‖ Entrepreneurs like Hewlett and Packard do not spend much time searching for opportunities, doing market research, or writing business plans; they merely replicate or modify an idea they encountered through previous employment or by accident. Without a great concept or proprietary product, and often without much experience in the field, the entrepreneurs cannot raise much external capital or afford to hire top-notch talent. They therefore ―bootstrap‖ their start-ups with modest personal funds. The lack of innovative ideas and capital also limits the entrepreneurs‘ ability to attract exceptional talent and requires them to make do with average, and sometimes marginal, employees.

The evolution of bootstrap companies is often characterized by more stumbles and detours than the development of precocial companies like Compaq. Like the ―altricial‖ young of creatures such as birds, red foxes, and humans, these ventures are born in an immature and precarious state. Their subsequent development often entails significant changes in markets served, strategies, and organization.

The two models present different challenges. In the capital-intensive model, which requires more significant resources upfront, it is critical to anticipate the long-term consequences of today‘s actions. The entrepreneur has to think carefully about the long-term evolution of markets and industry structure, the deals and contracts made with investors and employees, and organizational policies and structures. To justify the heavy commitment of resources, the entrepreneur also needs a long-term strategy to ―change the game.‖ In the bootstrapped and

66 improvised ventures, opportunistic adaptation is as important as anticipation, perspicacity, and long-term strategies for changing the game. In this model, entrepreneurs have to react quickly to new opportunities and problems. One entrepreneur likens the process to jumping from stone to stone to cross a stream rather than planning the invasion of Normandy. Entrepreneurs must adapt to inadequate or low-quality resources. When their products lack proprietary features, entrepreneurs have to be extremely responsive to the needs of individual customers to get the crucial first orders. When the opportunity arises, they may also have to scrap and rebuild their business model, organization, and resource base. The ultimate adaptive act is to get out of the reactive mode and into the anticipative mode as the business matures and grows.

We have chosen to emphasize the second model and the processes of opportunistic adaptation for several reasons. The core MBA curricula at business schools also emphasize the problems of resource-intensive firms and stress the importance of adopting a broad, long-term perspective. A focus on issues of opportunistic adaptation in improvised ventures would therefore form the basis of a distinctively different course. Studying opportunistic adaptation also met my goal of helping the largest possible number of business school entrepreneurs. Significant initial capital is a must in a few industries such as biotechnology and supercomputers; in most other fields, impressive companies like Hewlett-Packard, Microsoft, Walmart, and Disney have grown out of the improvised model. Past research suggests that they are in fact the rule.

An overwhelming proportion of ventures follow the improvised approach because their founders did not have the concepts or credentials to do otherwise. More than 80 percent of founders studied by Professor Amar Bhide of Columbia University and now at Tufts University, bootstrapped their ventures with modest funds derived from personal savings, credit cards, second mortgages, and so on; the median start-up capital was about $10,000. Only 5 percent raised their initial equity from professional venture capitalists. These founders also could not afford to pay for high-quality talent. They therefore usually provided most of the crucial skills themselves and recruited whomever they could for the tasks they were too stretched to perform personally.

Learning about opportunistic adaptation can be of particular value to individuals who have limited ambitions for the size of their venture or are unwilling to give up control for the sake of growth. Finally, I believe that just as issues of anticipation and fit are of value for improvised ventures, opportunistic adaptation can have a role in resource-intensive ventures, be they de novo start-ups or even corporate initiatives.*

Issues, Ideas, and Approaches As suggested above, a process of opportunistic adaptation typically entails numerous problems and issues. For convenience, the course has grouped the most important issues into

67 three ―modules‖: evaluating and developing opportunities, securing resources, and growing and sustaining the enterprise.

Module 1. Evaluating and Developing Opportunities In the typical improvised venture, the entrepreneur must analyze opportunities quickly and cheaply. Large companies have the resources and time to conduct extensive industry and market analyses. The aspiring entrepreneur, who is probably working at a full-time job while exploring and evaluating opportunities, does not. Moreover, entrepreneurs often compete in rapidly changing industries where reliable information is scarce and opportunities are fleeting. The marginal costs of additional research and analysis, therefore, rapidly exceed the marginal benefits.

Entrepreneurs must also evaluate opportunities in the light of severe capital constraints (the typical entrepreneur relies mainly on personal capital) and the lack of personal diversification, factors of little concern to most large corporations. They must also pick opportunities from a usually unpromising pool. The data show that entrepreneurs often have to start with a ―me too‖ idea or opportunities that more established players have turned down. In fact, opportunities often exist for an entrepreneur because the problems have scared away capable potential rivals. Therefore, entrepreneurs have to be more tolerant, at least in some dimensions, than decision makers in large companies. At the same time, entrepreneurs have to be careful that their enthusiasm does not blind them to fatal flaws; somehow they need an evaluation process that distinguishes ―opportunity making‖ issues from ―deal breakers.‖

Core MBA courses provide many tools and analytics for evaluating opportunities, but application of these tools by entrepreneurs without much time, money, or strong proprietary ideas is problematic. For instance, decision makers are offered little guidance on how they can balance the costs and benefits of research and analysis. Taking the special circumstances of typical entrepreneurs into account, this module suggests the following:  Screen opportunities quickly to weed out unpromising ideas before doing much research.  Assess the attractiveness of a venture (assuming that it has passed the initial viability test) using several financial and nonfinancial criteria.  Research and analyze even promising ideas parsimoniously.  Integrate action and analysis. Module 2: Securing Resources Securing resources—capital, employees, suppliers, and customers—for a new venture usually represents a serious challenge for the individual entrepreneur. The data suggest that the aspiring MBA entrepreneur often starts off with limited resources, whereas the established corporation seeking to expand its activities already controls many of the critical resources it needs. Indeed, corporations often undertake new initiatives in order to exploit existing resources

68 rather than just to exploit an opportunity. The entrepreneur also usually faces severe credibility problems in securing ―outside‖ resources. Consequently, resources may not be available at all or their price may be so prohibitively high as to make the venture unviable. At the same time, because the typical entrepreneur often lacks a proprietary concept, success may turn on a superior ability to secure and deploy the limited resources that are available.

This module explores strategies that entrepreneurs who start improvised ventures typically use to resolve these resource issues. This module suggests that they employ the following strategies.

1. Provide quick payoffs. Research suggests that resource providers respond to immediate rather than long-term inducements. Apparently the resource providers heavily discounted long- term outcomes. Employees did not usually ask for—nor were they offered—equity or options. They overlooked, or could be persuaded by the entrepreneurs to disregard, the long-term risks such as being let go if they could not grow with the company. The small banks that provided credit when the big banks would not apparently did not worry that, as the venture grew, it would naturally look for more prestigious lenders with higher credit limits. The customers who took risks often did ask the entrepreneur about what would happen if the start-up failed—but they proceeded to buy anyway.

2. Craft emotional appeals. The entrepreneurs studied by researchers compensated for their inability to provide compelling, well-specified rewards and reassurances by using more amorphous, psychological inducements. Moreover, entrepreneurs did not rely much on their ―social capital,‖ such as standing in the community, friendships, or family ties. Most entrepreneurs had limited prior experience and contacts in the businesses they entered, or they entered new markets where relationships among the players had not yet formed. Rather, they won over strangers or near-strangers by appealing to their sympathy for an underdog, vanity, need for attention, and so on.

The emotional or psychological appeals were especially important in allaying fears. Entrepreneurs could not provide credible, contractual protections against the losses that others might incur if their enterprise failed, so they sought to establish their personal trustworthiness and competence. Through charisma, empathy, enthusiasm, or persistence, the entrepreneurs convinced others that they cared and would deliver. They worked on appearances that they believed would influence others‘ perception of their credibility. They paid attention to their dress (―always wear blue suits,‖ one told us), address, the look of their stationery, how telephones were answered, and so on.

3. Cast a wide net. Entrepreneurs generally did not use a systematic search process to find the resource providers whose short-term needs could be easily satisfied and who were

69 willing to overlook long-term risks and respond to emotional appeals. They followed a shotgun rather than rifle-shot approach, following as many leads and calling on as many prospects as they could.

4. Learn to do without. Emotional appeals and exhaustive searches for sympathetic supporters usually do not persuade resource providers to take great risks unless the entrepreneur can also hold out the prospect of significant tangible payoffs. If the entrepreneur cannot do so, he or she must learn to live with significant resource constraints. For example, a majority of the entrepreneurs studied by researchers could not offer investors the potential of huge returns or quick paybacks and had to find creative ways to start their ventures with very little money. Similarly the limited upside potential of their start-ups also meant that they often had to make do with inexperienced or unskilled employees. They could not, of course, do without customers. Even in this respect, however, entrepreneurs often had to work their way up gradually, starting with small or difficult customers whom others did not want to serve.

This second module places greater emphasis on securing customers than on raising capital. Entrepreneurship courses often emphasize issues of fundraising, such as learning about securities law, approaching banks and venture capitalists, and structuring deals, but as mentioned earlier, many entrepreneurs started their venture with a pittance. In contrast, all ventures need customers, and in booking orders they usually have to overcome the ―liability of newness‖ and concerns about their longevity.

Another distinctive feature of this module is the special attention paid to selling. Whereas marketing concepts and techniques are well covered in an MBA curriculum, face-to-face selling is usually not given much emphasis. The data from past research suggest, however, that selling is a crucial skill for our constituency. Entrepreneurs cannot afford to advertise or implement the marketing programs commonplace in large companies. Good sales representatives also are hard to attract and may lack the zeal and conviction of the founders. Therefore, the entrepreneur has to call on customers personally to secure orders. Such skills are often not well developed among MBAs. Although they all ―sell‖ themselves to colleges, graduate schools, and employers, and some may even have worked in a sales function, they will rarely have faced the special sales challenges confronted by entrepreneurs. These challenges include:  The lack of a recognized name or track record. Entrepreneurs do not have the entree that graduating MBAs have with recruiters or that IBM sales representatives have with MIS departments.  Extreme asymmetry of power. Graduating MBAs and IBM sales representatives have some leverage with recruiters and computer buyers who are predisposed to see the talent or product offered as necessary, valuable, and distinctive. Entrepreneurs, the data show, are generally in a much weaker position. Their products or services often perform the same functions as rival offerings and may represent a discretionary purchase.

 The real-time integration of selling with marketing and strategy formulation. The data suggest that entrepreneurs often differentiate their wares by offering custom features or ancillary services. Moreover, entrepreneurs who have limited access to prospects have to make on-the-spot decisions about what features to offer, what to charge, and so on. Such decisions can have long- term implications for a firm‘s marketing and other strategies. The IBM salesperson, in contrast, operates off product and pricing policies that others have previously made and generally does not have to formulate strategy on the fly. A basic message of this material is that anyone can learn to sell. The ―born salesperson‖ appears to be as much an unwarranted stereotype as the ―born entrepreneur.‖ Many successful entrepreneurs who started without much self-confidence in their sales abilities have trained themselves to perform the task effectively. In fact, contrary to popular belief, individuals who come across as good sales types are at a disadvantage because of the suspicions they arouse. We also suggest to students that selling is not an ineffable art form—there are techniques (for objection handling, closing, and so on) and mental disciplines that they can practice and learn.

Obviously, the course cannot provide the same in-depth training as do the extended sales training programs at companies like IBM or Xerox. Our goal is to provide a nucleus of ideas that students ran later modify, refine, and internalize. Specifically, course material suggests that effective selling by an entrepreneur usually requires the following:  A low-key, nonthreatening approach  A systematic (rather than ad-hoc) process  Persistence and mental resilience  Willingness to make quick decisions Module 3: Growing and Sustaining the Enterprise The success of improvised, ventures depends on the entrepreneur‘s ability to grow and sustain the enterprise after it has been launched. The typical Inc. venture starts with marginal concepts, weak staff, and limited cash. Its early profits are often derived from the founder‘s personal skills and hustle or from temporary market dislocations rather than from durable competitive advantages. Entrepreneurs subsequently put their ventures on the Inc. list by formulating new strategies to create more sustainable advantages and by building organizational capabilities through upgrading the staff, introducing new controls, and so on.

This kind of transformation entails three types of challenges for the entrepreneurs studied in this module:

Setting priorities. Compared to the manager of a business on a well-defined trajectory, entrepreneurs often face overwhelming choices and options. The enterprise isn‘t tied to a specialized set of assets, work force, or culture. Everything is up for grabs. Whereas managers of 71 a going business might ask, What business are we in? or How can we best exploit our core competencies?, entrepreneurs must decide what business they want to be in and what capabilities they would like to develop. Similarly the manager of a public company has a fiduciary responsibility to maximize value for shareholders, whereas entrepreneurs can choose their own goals and find investors who share them—or do without outside capital altogether.

At the same time, entrepreneurs often confront weaknesses and imperfections on nearly every front. The lack of a coherent strategy, competitive strengths, talented staff, adequate controls, and organizational structures routinely experienced by young enterprises would evoke panic in a mature company. Worse, even when weaknesses are pervasive and comprehensive change seems desirable, the entrepreneur can only tackle a few problems at a time. Therefore, just as a parent should worry more about a toddler‘s motor skills than about reading abilities, the entrepreneur has to distinguish the critical issues from normal growing pains.

Building assets and capabilities from scratch. The usual challenge for executives of large companies lies in leveraging or changing the strategies or structures already in place. The entrepreneur, in contrast, usually must build from the ground up the brand names, installed base, geographic scope, and so on that give the firm its competitive advantages; the organizational structures, systems, and staff; and the purpose, norms, and culture of the enterprise. Moreover, developing these assets—which often requires a long period of trial-and-error learning—has to be undertaken in the midst of day-to-day pressures and serious resource constraints.

Defining personal roles. Unlike CEOs of large corporations who sometimes have to struggle to have any influence, the entrepreneur‘s actions naturally make—for good or ill—a huge difference. Fledgling ventures rarely evolve through spontaneous, front-line employee efforts, such as 3M‘s development of the Post-it business. Successful initiatives to build competitive advantages and organizational capabilities require forceful leadership from the top. Subordinates rarely have the knowledge or credibility to make things happen. But entrepreneurs who totally dominate everything stunt the growth of their organizations. Somehow the entrepreneur must find a balance between doing too much and too little, and this balance has to be dynamic. What the entrepreneur does has to change as the venture evolves.

Our basic perspective on building sustainable advantages and capabilities is also different from the one implicit in some models of competition in which the player who makes the right first move wins. My research suggests that there is usually a very long and difficult road between having the right idea and building a sustainable business. Fledging ventures often face competitors following similar strategies as well as skepticism from potential customers, employees, and investors. Outmaneuvering rivals and winning over skeptics requires considerable tactical creativity, skill, and patience. The cases in this module therefore place considerable emphasis on how the entrepreneur gets it done. We explore the practical challenges of creating a brand, setting industry standards, consolidating a fragmented industry, exploiting

72 international economies of scope, and so on. Our approach recognizes the need for an entrepreneur to change their role to facilitate the development of the organization. It challenges the traditional notion, however, that change mainly entails delegating more authority and responsibility to subordinates. The evidence rather suggests that to transform a fledgling enterprise into an entity capable of independent existence requires the founders to undertake many new and paradoxically more difficult roles. Weaning an organization from its founders is not a simple matter of ―letting go.‖ Before they have the option of doing less, entrepreneurs must first do a lot more.

Developing Skills and Attitudes The IE course emphasizes developing skills and attitudes that complement the frameworks and concepts described above. Research suggests that a venture‘s success depends as much on the entrepreneur‘s ability to use and apply ideas as on the ideas themselves. Feedback from business school alumni also is consistent with an emphasis on skills and attitudes. Conversations with graduates who have taken such courses suggest that the emotional and visceral aspects leave a profound and often more long-lived impression than many of the analytical aspects.

Skill building in the context of this course refers to:  Fostering deep internalization of core business concepts and the ability to apply these concepts to entrepreneurial situations. I have observed in case discussions and field studies that many students routinely fail to apply basic concepts of strategy and marketing in analyzing new or young ventures, perhaps because they have been exposed to these concepts mainly in the context of more stable, going concerns.  Selecting the framework (or frameworks) most appropriate to the situation. Entrepreneurial problems do not come labeled as ―marketing‖ or ―interpersonal‖ or ―negotiation‖ problems. Indeed, the best approach to solving entrepreneurial problems often entails using multiple theories and frameworks.  Understanding the limitations of frameworks and analytical techniques. For example, it is important for entrepreneurs to know and think through the implications of the great variance embedded in the discounted value of a new venture‘s expected cash flows.  Developing and using a library or “playbook” of heuristics and analogies. Entrepreneurs rarely have the time and information to reason from first principles. Instead, they frequently use rules of thumb and their knowledge of roughly similar prior situations—a process of decision-making often referred to as relying on ―gut instinct.‖ It is impossible to provide students with all the expertise that an experienced entrepreneur draws on, but we can get them started on building their own ―playbooks,‖ or at least point out the important issues they should develop rules about. Attitudinal developments this course tries to facilitate include:

 Self-knowledge. The evidence suggests that going into business for yourself does not require conformance to an unusual personality type. Business school alumni with varied temperaments and aptitudes can succeed in entrepreneurial careers provided there is an adequate fit between the person and the opportunity. For instance, the person who would flop as a film producer may have just the right personality to start a money management firm for conservative clients. By exposing students to a diverse group of entrepreneurs, the course both reassures students who might lack self-confidence in their ―entrepreneurial‖ qualities and encourages them to think carefully about where and how they could best deploy their abilities.  Refinement of personal goals. Entrepreneurs, the data suggest, seek quite varied rewards from their ventures. Therefore, to a considerable degree, the success of a venture depends on the goals and aspirations of the entrepreneur. The course accordingly encourages students to think, in concrete terms, about their own metrics for success.  Sophisticated empathy. Entrepreneurs rarely have power over others and often start from weak bargaining positions. They should, therefore, try to understand the expectations, hopes, and fears of the individuals whose resources they need in order to offer the appropriate terms and reassurances. My experience suggests that MBA students sometimes lack these empathetic reflexes. They are usually better at forceful advocacy than at listening and picking up on cues. They can also be prone to focus on others‘ pecuniary interests, overlooking the importance of perceptions and emotions. In this course, therefore, we relentlessly stress the importance of seeing the situation through others‘ eyes.  “Smart audacity.” Entrepreneurs who are willing to act in the face of great uncertainty, limited information, and widespread skepticism have an almost arrogant self-confidence. They believe they are smarter, more creative, harder working, and therefore more capable of recognizing and exploiting opportunities than everyone else. These attitudes are useful. Entrepreneurs need great confidence in their talent and ideas to help them persevere through adversity and rejection.

Entrepreneurs who strongly believe in themselves must also, however, have the smarts to recognize their mistakes and change their strategies as events unfold. Successful ventures do not always proceed in the direction in which they initially set out—many have to adopt entirely new strategies. Therefore, although perseverance and tenacity are valuable entrepreneurial traits, they must be complemented by flexibility and a willingness to learn. Capable entrepreneurs are like good bond or currency traders who have confidence in their ability to outwit markets but will close out their positions if events disprove their initial assumptions.

It might seem unnecessary to foster any additional confidence in MBAs. However, the prior educational and work experiences of some students 74

suggest that they are not accustomed to bucking conventional practice. They may be hard driving but often within the existing paradigm. Also, their experiences in class and elsewhere may condition students to stick with their initial positions rather than to test, modify and, if necessary, discard hypotheses.

To conclude, Entrepreneurship faculty in business schools are often skeptically asked, ―Can you really teach entrepreneurship? Aren‘t entrepreneurs born and not made?‖ In fact, in a good business school, the issue of turning individuals into entrepreneurs is moot. Many individuals in the population at large may lack the basic drive to start a business, but such individuals are unlikely to apply to a top business school or to secure admission if they do. Moreover, the wide range of potential opportunities that entrepreneurs can pursue allows many different types of individuals to succeed. Graduates of an MBA program need not be out of the ordinary, therefore, to start their own venture.

Although many MBAs would probably start their own businesses with or without any special training, an entrepreneurship course can make a useful contribution to an individual‘s education. As we have seen, individual entrepreneurs face distinctive challenges, especially if they take the improvised route to starting and nurturing their businesses. The core portion of an MBA program, which serves a broader audience than the IE course, cannot fully cover important issues that such entrepreneurs typically face in evaluating opportunities, securing resources, and growing their businesses. At the same time, we must be realistic about what a 30-session course can accomplish. Some important skills, such as selling, take years of ―learning by doing‖ to refine and develop. An important objective of the course, therefore, is to highlight key issues and help students develop an agenda for future learning.

COURSE GRADING

Item Description Points 1 Online assignments 20 2 Class participation 20 3 Learning journal (one page each session to be 25 turned in after session) 4 Final paper 35 Total 100

SCHEDULE AND COURSE OUTLINE ENTREPRENEURSHIP

Class # Case Name/Required Readings Optional Readings

Module 1: Evaluating and Developing Opportunities Start-Ups 1 R&R Hustle as Strategy

2 Paul Olsen (A) The legal forms of organization

Module II: Acquiring an Existing Business/Contracting for Resources 3 Jim Southern The Tax Aspects of Acquiring a Business

Module III: Growing and Sustaining the Enterprise

4 Physician Sales and Service, Inc. (1992 (A) A Note on the IPO Process

5 3M Optical Systems Managing Corporate Entrepreneurship

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