When asking who starts multiple firms and what conditions this choice, we are essentially asking about what motivates or enables an entrepreneur to start a second firm. At the individual level and at the first firm level, a number of factors may lead to the choice to start another firm. If starting a second firm is motivated by expectations of the returns to reinvesting financial, human and social capital back into further entrepreneurial activities, then factors that increase the expected return should result in a higher likelihood for starting a new firm.
Similarly, factors which decrease the expected return should decrease the probability the entrepreneur will decide to undertake a second firm. The “expected returns” to investing in entrepreneurial activities may be financial or non-financial. Nonetheless, the first firm experience is likely to condition the level of non-financial rewards anticipated as well as the relative importance of these compared to financial returns. During the first firm experience, the entrepreneur may discover, in fact, whether the non-pecuniary benefits to entrepreneurship make it more attractive than returning to regular employment (Barton 2002).
First, simply having the time and energy to start another firm may be an important factor. If the entrepreneur is quite old,
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This would lead one to hypothesize that the better the outcome of the first firm or the better its performance relative to the entrepreneur’s expectations, the more likely the entrepreneur will undertake another start-up. Of course it is difficult to disentangle the effect that better first firm performance would have on confidence and the expectations of future success from the effect success has on the level of financial and social capital. The arguments outlined previously as to human, social and financial capital provide strong support that a successful first venture should increase the likelihood of starting a subsequent firm.
Albeit, a very successful first venture could last so long as to diminish the time available for a second firm, or generate so much wealth or personal satisfaction as to diminish the motivation to do it again. Higher financial performance of a first firm may also mean that the firm has progressed to a more steady state where the founder does not need to worry about its survival and has time to think about a new start-up. Either way would suggest that higher success would generally lead to more second firms.
This is especially true since performance below a reasonable return to the founder’s human capital or attractive outside options for regular employment should lead to an exit from entrepreneurship (Gimeno, Folta, Cooper, & Woo, 1997). However, very high levels of success, especially financial success could result in the entrepreneur simply retiring and thus lower the chances of a second firm founding. Moderate levels of success should lead to higher probabilities of a second founding, since if the first firm was not particularly successful then the entrepreneur would have had a taste of success and may desire even more in a subsequent firm.
Hypothesis 2: We anticipate an inverse U-shaped curve relating success of a prior new venture and the likelihood that a subsequent new venture will be undertaken. If it is true that the financial capital of the entrepreneur increases with multiple firm foundings, then we should see the net worth of the founders increasing with the number of prior firms. This statement may seem obvious. However, if multiple entrepreneurs are typically starting a series of small firms that are relatively unsuccessful, then the result would not necessarily hold.
Hypothesis 3: The performance of the entrepreneur in terms of net worth (financial capital) will be higher with a greater number of prior firms. Alsos (1998) has investigated differences in firm formation processes between multiple entrepreneurs and first-time entrepreneurs. Few significant differences were found between novices and repeat entrepreneurs. Differences in motivation were found with repeat entrepreneurs more likely to indicate motivations related to instrumentality of wealth. Novice entrepreneurs were more likely to stress a need for independence.
This study could not discern whether the repeat entrepreneurs’ motivations changed between the first firm and later firms or whether these results may indicate that the multiple entrepreneur was destined to start multiple firms even prior to starting his/her first firm. Hypothesis 4a: Repeat entrepreneurs differ from single-firm entrepreneurs even prior to starting the first firm in terms of demographic variables. One motivation for starting a second firm may be that the entrepreneur is highly innovative and does not have the freedom to innovate as widely as he would like within the confines of the prior firm.
This idea is supported by Klepper and Thompson’s (2006) model of spinoff activity resulting from disagreements within the existing firm. In this case, it is likely that those whose backgrounds suggest they may be highly innovative would be more likely to initiate a career of multiple foundings. Hypothesis 4b: Entrepreneurs with a background in the sciences or engineering will be more likely to start a second firm. At the first firm level, the tendency to be highly innovative should manifest in founding first firms that hold patents as opposed to first firms which do not hold patents.
Hypothesis 4c: Entrepreneurs with patents in their first firm will be more likely to found a second firm. Aspects of the first firm may make it more likely for the founder to start a second firm. Alternatively, it is difficult to dismiss the possibility that the causation may be reversed, thus we propose the joint hypotheses 5a and 5b. Hypothesis 5a: Certain aspects of the first firm founding will condition the likelihood that a second entrepreneurial venture is started. Hypothesis 5b: Repeat entrepreneurs differ from single-firm entrepreneurs in the characteristics of the first firms they found.
Many prior studies have argued that access to financial capital is a limitation to entry, even if the level of personal assets are not predictive of who will enter self-employment (see Acs & Audretsch, 1989; Dunn & Holtz-Eakin, 2000 and others). Entrepreneurs entering industries with requirements for high amounts of initial capital should face a higher hurdle to start a second firm as well, resulting in decreased rates of second firm foundings. Alternatively, those founders in industries with low requirements for initial capital will be more likely to be able to fund a new venture themselves from the profits of the first firm.
Hypothesis 5c: Entrepreneurs starting first firms in industries requiring high amounts of initial capital will be less likely to start multiple firms. In addition, if financial capital is a constraint for entrepreneurs, then those who have been successful in fundraising and in building links to sources of initial capital should have an advantage in raising money in the future. Indeed, Hsu (2006a) finds that experienced entrepreneurs have quicker access to venture capital than inexperienced founders.
Hypothesis 5d: Entrepreneurs successful at raising initial capital from venture capital firms or angel investors will be more likely to start a second firm. Simply having access to fellow entrepreneurs who are willing and qualified to undertake the risks of a new start-up is likely to be a constraint for some entrepreneurs interested in starting a second firm. Therefore, we suggest that entrepreneurs who built larger teams for their first start-up should have more options for cofounders for a second start-up.
This may be true in part because entrepreneurs with larger founder teams have been found to be more successful than those who are sole founders or have small teams (Roberts, 1991). Consequently, we hypothesize that holding the success of the first firm constant (controlling for first firm performance), those starting the first firm with a higher number of cofounders will be more likely to start a second firm. Hypothesis 5e: All else equal, entrepreneurs who started a first firm with a higher number of cofounders will be more likely to start a second firm. IV. Methods Data and Sample
The data come from a survey administered in 2003 to all living MIT alumni who had previously self-identified as founding at least one venture. The dataset of MIT alumni contains over 40,000 records including basic information on date of birth, country of citizenship, gender, major at MIT, highest attained degree, and new venture founding history. Out of 7,798 alumni indicating that they had founded a company, 2,111 founder surveys were completed, representing a response rate of 27. 1%. Out of 3,156 alumni indicating that they had started multiple companies, 1,004 completed the survey for a multi-founder response rate of 31. 8%.
A total of 1,107 single-firm founders responded to the survey giving a 21. 8% response rate out of the 5,086 single-firm alumni founders. Some of these 1,107 single-firm founders may later go on to become multiple entrepreneurs, however we can isolate 728 single-firm founders over the age of 59 (95% of firms are started by entrepreneurs under the age of 60) and be reasonably confident in having eliminated such right-side censoring problems. One of the key features of this dataset is its long time horizon in the cross section (1930s-2001) which allows us to analyze entire entrepreneurial careers of a large number of founders.
In addition, this represents what we believe is one of the first datasets which includes both orderings and the timings of the firms of multiple entrepreneurs, but also individual level performance data in addition to firm level performance measures. To address the distinction between self employment and new ventures, we eliminate any firms identified by the respondents as architecture firms1, consulting firms, and law/miscellaneous firms from the database. 2 Eliminating these firms brings the sample size to 1,789 firms.