Understanding Entrepreneurship Requires a Look at Both Context and Individual
Research by Stanislav D. Dobrev
Small start-up or multinational corporation. Employee or founder. Organizational structure and individual roles affect the rate at which new organizations are founded and who starts them.
When studying entrepreneurship, sociologists typically look
at properties of the social structure such as socioeconomic
characteristics, while psychologists tend to focus on the
particular traits of individuals who become entrepreneurs.
The truth, however, is more complex. Recent research shows
that an understanding of entrepreneurship calls for the matching
of contextual factors with individual experiences and the
preferences borne out of them.
In the paper "Organizational Roles and Transitions to
Entrepreneurship," Stanislav D. Dobrev, an associate
professor at the University of Chicago Graduate School of
Business, and William P. Barnett of the Stanford Graduate
School of Business begin with the premise that in the modern
business world, people typically must leave existing organizations
in order to found new ones.
Large corporations and small start-up ventures offer distinctly
different contexts for the development of entrepreneurial
potential. "The reason it is called context is because
we look at it as the ground on which a potential entrepreneur
grows," says Dobrev. In the authors' theory, there is
a link between the motivation to become an entrepreneur and
the type of company one worked for before actually founding
a new organization. They also take the individual into account
by examining how organizations affect potential entrepreneurs
differently depending on the roles they play in the lives
of these organizations.
"For a long time, people have been looking mostly at
the links between emerging technologies and the availability
of capital to explain the importance of context in the founding
of new organizations," says Dobrev. "Our first objective
was to direct attention to a context that has not been studied
before, particularly one that makes it possible to think of
entrepreneurs as organizational products. The second objective
was to see how the role of the individual within the organization
gets blended with the context to determine the likelihood
of entrepreneurship."
Dobrev and Barnett's findings show that as an organization
matures and expands, its founders become more likely to leave
and start another new venture, while its employees become
more likely to remain with the company.
Adjusting to Structure
"There's almost a social expectation that when we think
of entrepreneurs, we think of those people who are somewhat
different from us, with an extraordinary vision and drive
for success," says Dobrev. "But, in reality, whether
this vision is realized hinges at least in part on the opportunities
and constraints embedded in the organizational context."
In small, young organizations, where there is usually little
formal structure, the founder's idea and vision forge commitment
and provide motivation for employees. As the organization
develops, routines and processes must be established to meet
increasing demands for reliability and accountability. Such
routines and processes gradually lead to the proliferation
of organizational structure. This structure may include the
establishment of specific reporting relationships, work manuals,
procedural guidelines, and strictly defined responsibilities
for employees. Dobrev suggests that the growth of formal structure
will result in fewer opportunities for employees to become
entrepreneurs, because over time, employees will have less
contact with those outside the organization, more established
roles, and will have to adhere to developed norms, rules,
and routines.
Additionally, well-established organizations typically offer
defined career paths and possess the financial resources needed
to accommodate the innovative initiatives of their employees.
With such internal opportunities available, there is less
desire for employees to leave to found new organizations.
The risks of founding a new venture are now weighed against
a combination of long-term career incentives, job security,
and the opportunity to bring ideas to life within the boundaries
of an existing company.
While larger, older organizations are able to keep nascent
entrepreneurs among their employees from leaving, increased
bureaucracy has the opposite effect on founders. As the venture
transitions from an entrepreneurial to a growth stage, the
organizational goals evolve to reflect a shift in emphasis
from "idea development" to "organizational
maintenance." With the creative component of their jobs
diminishing, founders in a way lose control of their own creation.
"We call this the parenting effect," says Dobrev,
"because it really resembles the reluctance of parents
to accept the fact that their children have grown to be fully
independent and need much less parental care."
As a more bureaucratic structure takes shape, the founder's
role eventually becomes reduced to that of a professional
manager, yet the founder's own perception of his or her role
is slower and more difficult to change. The resulting discrepancy
between reality and identity perception tends to alienate
founders and compels them to try to resolve it by leaving
to start another new venture.
"Given the chance, we think that the founders would
leave to start a new organization in order to achieve a better
match between their individual identity as founders and their
actual organizational roles," says Dobrev. "This
match typically evaporates as their organizations grow and
expand, and their roles as founders simply become outdated."
Testing this theory required finding a unique pool of individuals
who are "at risk" of becoming entrepreneurs even
if they do not ultimately start a new business. Rather than
sampling from the population at large, where entrepreneurship
is relatively rare, the authors used data collected from the
1997 Stanford Graduate School of Business career history survey
administered to all of the school's MBA alumni. The sample
proved very useful for the study because the rate of entrepreneurship
is much higher among MBA students and because Stanford is
in Silicon Valley.
Alumni were asked to provide a complete account of their
career histories, describing important features of their previous
positions and the organizations where they were employed.
They were also asked to indicate if and when they had started
a business.
The authors coded years in which alumni started a business
on their own or became members of an organizational founding
team as years in which a transition to entrepreneurship occurred.
They also distinguished between an "employee to founder,"
a "founder to founder," and a "founder to employee"
transition in order to test and eliminate several alternative
explanations for their results.
The data were restructured to reflect each job held per person
in each year since graduating from the MBA program. The final
data set consists of 52,519 records representing the career
histories of more than 2,000 people, with the range of years
per person varying from 1 to 44. Statistical models were used
to determine the effect of different variables on the timing
and likelihood of entrepreneurship.
The results based on these models support the authors' earlier
prediction that as an organization ages and grows in size,
employees become less likely to leave and found new organizations,
while founders become more likely to again engage in entrepreneurship.
For example, working in a 58-year-old company was found to
reduce the likelihood of an employee becoming a founder by
15 percent. However, in a 10-year-old company, the potential
for a founder to leave to found another organization was increased
by 15 percent.
Other Contributing Factors
Dobrev and Barnett also tested several demographic variables
and characteristics of job experiences to gauge how they influenced
tendencies toward entrepreneurship. The results show that
foreign-born, nonwhite respondents were more likely to found
new organizations. Regarding age, during the period between
graduation from the MBA program and age 31, the rate of entrepreneurship
rises, but after age 31, this rate declines. Initially, this
effect indicated that the propensity to become an entrepreneur
increases until age 43, but further examination showed that
the increase after age 31 is merely a product of the knowledge
and experience accumulated by nascent entrepreneurs through
multiple organizational experiences rather than simply a function
of age.
People who were very satisfied with their job were 75 percent
less likely to become entrepreneurs. Employees with high salaries
were also unlikely to leave. For every $100,000 earned, an
individual's propensity to leave his or her current job to
start a new venture decreased by about 3 percent.
Employees who performed marketing functions in their most
recent job were 24 percent more likely to found their own
organization. Working in a high-tech industry also increased
the rate of entrepreneurship by a third. However, results
suggest that employment in a family business discourages the
transition to entrepreneurship by about 20 percent.
The authors also found that the more organizations a person
worked for, the more likely they were to become an entrepreneur.
"Gaining exposure and experience with the routines and
practices of many different organizations clearly increases
your arsenal of solutions for tackling the difficult problems
that are an inevitable part of running a start-up," says
Dobrev. "Though prior experience with more organizations
doesn't necessarily mean experience with better organizations,
variation allows you to choose the best set of options and
solutions by selecting from the high end of the distribution
of your experiences."
The results show that the likelihood of becoming a founder
increases by 25 percent with each previously founded organization
and by 6 percent with each organization in which a person
has worked as an employee.
Different interpretations regarding the impact of organizational
age and size required that the authors account for alternative
explanations for their results. They were able to rule out
the following counter-arguments: that individual differences,
not role distinctions, can explain whether people leave large,
old organizations; that founders will become less likely than
employees to leave an organization if they stay long enough;
and that founders have a higher turnover rate in general,
regardless of whether they go on to found another organization.
Repeat Entrepreneurship
The results show how an existing organization can encourage
or discourage entrepreneurial tendencies, and the authors
are able to predict for whom and under what conditions these
opposing effects will appear. Over time, the authors expect
that many entrepreneurs will follow the pattern of the repeat
founder who builds multiple organizations throughout his career.
"Our results also indicate that while founders are more
likely to leave to found another organization, they are not
more likely to leave to become employees of other organizations,"
says Dobrev.
However, the vast majority of individuals can be expected
to contribute their ideas to the growth of existing organizations
rather than the founding of new ones.
"People always ask me how this thesis can explain Bill
Gates, but Bill Gates probably would not be as well known
as he is today if he had gone down the path we are predicting.
The very reason that we know about him is because he is the
exception, and this is partly what makes him so famous,"
says Dobrev. "The very fact that an exception to the
general pattern implied by our theory is so notable is a testimony
to the ubiquity of the pattern itself."
