A second new firm Essay
Especially compared to the early years when entrepreneurs were seen as a homogeneous group, a number of different groupings of entrepreneurs has emerged in recent years. As Hsu (2006b) notes, an important recent theme in the literature is heterogeneity among entrants prior to the development of the venture, especially in terms of the experience of the founder or founding team. Compared to the literature on differences between entrepreneurs and non-entrepreneurs, scholarly attention to the heterogeneity among entrepreneurs has been very limited until recently. Prior literature has examined the determinants of self-employment.
Carroll and Mosakowski (1987) show that the transition to self-employment depends on factors including family background and prior experiences with self-employment. Our research differs in its focus on high technology entrepreneurs and their firms. As pointed out earlier (Shane & Khurana, 2003), self-employment does not necessarily involve the founding of a new firm, such as when an individual does independent consulting or contract work. Further, firms started to commercialize new technologies tend to be larger and have a strong impact on economic productivity.
Therefore repeat entrepreneurs who focus on technology represent a particularly important and relatively unexplored area of study. Wasserman (2003) examines Founder-CEO succession in 202 venture-backed Internet start-ups. His
Need essay sample on "A second new firm"? We will write a custom essay sample specifically for you for only $ 13.90/page
Unlike the previous studies looking at the effects of prior career experiences or prior firm founding on the likelihood of subsequent firm founding, the present study examines individual and firm-level factors related to the transition from an active founding role in one firm to starting a second firm. In addition, our research takes advantage of data on the timing of the entire founding history and on the entrepreneur’s personal success. In this paper we develop and test a theory of entrepreneurial exit and then re-entry into entrepreneurship.
Through entrepreneurial experience the founder builds up social and financial capital in addition to personal experience and human capital. As these three forms of capital are raised by the entrepreneur, he or she may choose to invest them in continuing and advancing the entrepreneurial career. If the entrepreneur chooses to “reinvest” these forms of capital produced by the first firm, one possibility is that the capital is invested in such a way as to maximize the number of high quality business opportunities available to the entrepreneur to pursue at minimal cost to the entrepreneur in terms of time, effort and/or money.
This process of reinvesting the fruits of entrepreneurship can be conceptualized as a continuum from the initial startup to repeat entrepreneurship. The entrepreneur may be able to become involved in new firms because the older “new” firm has progressed to a more stable state where he/she does not need to worry about it as much and others, perhaps more experienced managers have taken over the day to day operations. While we portray the progress as a continuum, obviously steps could be skipped, perhaps indicating a more rapid personal development as a successful multiple entrepreneur.
A nascent entrepreneur begins with relatively little human, social, and financial capital and access to many ideas, but probably only a few high quality entrepreneurial opportunities. If the entrepreneur succeeds in the first start-up and decides to start a second firm, the various forms of capital raised through the first startup will presumably tend to make this second effort somewhat easier. The buildup of human, social and financial capital with the entrepreneur is likely to occur with a substantial lag after the founding of the initial firm.
The first firm of a nascent entrepreneur requires an incredible amount of effort, time and energy. As the firm gains its operational experience, the entrepreneur has increasing opportunity to reflect and begins to accumulate skills related to the entrepreneurial process along with important social contacts and, slowly, financial capital as well. As a result of the startup and operation of the first firm, the entrepreneur may see various business opportunities or shadow options (McGrath, 1999) that he or she may not have been able or willing to pursue at the time, but which can now serve as the basis for a subsequent firm.
An emerging literature has been developing to apply real options theory to strategy as a way of increasing flexibility (Bowman & Hurry, 1993; McGrath, 1996). As McGrath (1996, p. 103) points out, among several factors that may relate to the likelihood of recognizing viable new opportunities is previous entrepreneurial experience. While McGrath and MacMillan (2000) suggest that entrepreneurs with previous founding experience have developed a “mindset” or the ability and competence to pursue only the best opportunities, this may not be the entire story.
It may be that while novice entrepreneurs only pursue what they see as the very best opportunities, repeat entrepreneurs may take a longer view. Repeat entrepreneurs may pursue a wider range of opportunities in round 1, allowing them to see many shadow options and choose only the best opportunities to invest in as real options for greater performance in round 2. Having reached the level of repeat entrepreneur, the individual will have built up higher levels of all types of capital and, also through the operation of the previous businesses, customer contacts or social contacts will have perceived a number of other business opportunities.
At any point in this progression, as the entrepreneur builds sufficient financial capital, he or she may invest a portion of assets in early-stage ventures. In the investment community jargon, investments made by wealthy individuals have become known as angel investing and such individuals have been coined as angel investors or informal investors to distinguish them from venture capital institutions (Freear, Sohl, & Wetzel, 1994; Wetzel, 1983).
These deals may be undertaken serially or in parallel and offer the entrepreneur multiple opportunities for entering into the venture as an active entrepreneur as well. In each stage of the continuum (from the bottom left of Figure 2 to the top right), a greater number of business opportunities will arise (or perhaps be sought out by the entrepreneur) and will be available for pursuit or active involvement as a founder. Further, these opportunities become available to the entrepreneur at smaller and smaller cost in terms of relative time and effort necessary to encounter them and commercialize them.
Indeed, other scholars have asserted that prior startup experience reduces the costs of entrepreneurial activity and increases the probability of acting on opportunities (Carroll & Mosakowski, 1987). Depending on personal preferences and style, an entrepreneur may not choose to reinvest her or his capital in further entrepreneurship. Especially if the first firm is still in operation and he is happy with his role there, the founder may choose to stay with the first firm and not continue down the path of multiple entrepreneurship.
Our point is simply that this option becomes open to him or her and is easier to achieve after a first founding. One may also think of the progression described above as shifting into a role of opportunity recognition and generation, of “rainmaker” so to speak in the entrepreneurial process. The entrepreneur may then be in less of a day to day operational role in any one firm, but is engaged more fully in a business idea generation and evaluation role. These rare individuals may be playing a very valuable role in the entrepreneurial processes within one or more industries.