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When Starting Small Can Be an Advantage

An entrepreneur with experience at a small firm has a better chance of success than his or her counterpart from a larger company, according to Damon Phillips, professor of organizations and strategy and Neubauer Family Faculty Fellow. Based both on income according to individual tax data and whether the new venture stays in business, owners with small firm experience have an advantage, Phillips told the Entrepreneurial Roundtable September 18 at Illinois Institute of Technology in suburban Wheaton.

“The advantage applies mostly to the first few years,” he said. “After several years, those from larger firms—if they survive—learn what the person coming from the smaller firm has already learned.”

Employees at smaller firms are more likely to experience a wider variety of roles, manage and execute while in the red, get access to social networks for new ventures, and learn how to structure a business, said Phillips, whose father launched a manufacturing company. “When I was working for my family business, it didn’t really matter what my title was,” he said. “Internally, I just did whatever needed to be done and so did everybody else.”

However, those who work at small firms may only be exposed to a relatively narrow set of ideas and can’t leverage the reputation of a larger firm in gaining access to financing, Phillips said.

In his research, Phillips said he also found evidence that entrepreneurs unconsciously replicate ideas from their previous employers, even though they don’t realize it. “New firms tend to look like where the founder worked,” Phillips said. “When you talk to founders or read a magazine, you hear about the radical employee who saw the wrong way and is charting a new direction. But when you look at the numbers, that’s not what’s going on.”

There is also evidence that former junior employees who launch a start-up are more likely to unconsciously replicate the operational and structural aspects of their previous employers than senior counterparts “because that’s all they know,” Phillips said. “The people who tend to deviate are those who had to make the decisions or were involved in the decision-making at a previous firm,” he said.

And founding partners who come from a variety of companies are more likely to fold during the first few years than entrepreneurial teams who come from the same firm, Phillips said. “There are a lot of coordination costs in ways of doing business. The upside is, when you found a company with somebody who comes from another organization, those things that were unconscious actually come to the fore. They’ll ask you why you do things this way versus some other way.”

—Phil Rockrohr