Research

Risky business: Winning the entrepreneurial race

What does it take to get a new venture up and running? Conventional wisdom suggests that the entrepreneurs should hit the pavement in high gear and then keep up the pace. Research shows, however, that speed alone is not a guarantee for success. A W. P. Carey School professor and entrepreneur has evidence that entrepreneurs need to allow enough time to make good decisions, to be creative, and to capitalize on serendipity. Executing tactical events through a slow and steady pace, rather than rushing to get to market first, gives entrepreneurs the experience and confidence necessary to make important strategic and visionary decisions that help them over the tipping point.

2006-01-31

Starting a business is always a risky game, but a lot of people think they know the winning formula. Conventional wisdom tells us that the entrepreneur who runs quickest out of the gate will win. Other experts claim the successful entrepreneur must achieve certain milestones, like writing a business plan or quitting their day job. One W. P. Carey School of Business researcher is finding that it's not only what you do, but when you do it.

Timing matters — a lot. In research to be published in the Journal of Business Venturing, Kevin Dooley, professor of supply chain management with the W. P. Carey School of Business, and colleagues found that successful firm creation has everything to do with the way that startup events unfold over time.

"If we envision the entrepreneur as a bicyclist, the successful entrepreneur starts in a low gear to get going, keeps on going no matter what potholes are encountered, and eventually builds up momentum and switches into high gear as they pass from start-up to growth," says Dooley. While somewhat counterintuitive, this building up of momentum may make as much a difference to success as what type of actions are taken, according to research by Dooley and colleagues Benyamin Lichtenstein from University of Massachusetts, Nancy Carter from Catalyst Woman, and Bill Gartner from Clemson University.

These entrepreneurs build up knowledge of the customer through pilot interactions, acquire experience, and take the time to make good decisions instead of overwhelming themselves with so much to do that they end up making poor decisions, Dooley explains.

And he should know. An entrepreneur himself, Dooley is founder and COO of Chandler-based Crawdad Technologies, a text analysis firm. Crawdad's technology, which Dooley co-invented, helps users glean insights from unstructured text — such as news articles, speeches, e-mail messages, or interview transcripts, among others — by analyzing the contents for prominent keywords, themes, tones, and emotions.

Crawdad's newly released software is already used by some 40 academics, and the company plans to target the commercial sector shortly, specifically in the areas of customer relationship and brand management. Dooley's passion for entrepreneurship and his interest in studying systems over time led him to this line of research.

While most studies on nascent entrepreneurship focus on identifying the specific set of startup activities that lead to successful firm creation — tasks such as obtaining financial support, preparing a business plan, hiring employees, purchasing facilities, equipment, or property, etc. — Dooley's unconventional approach looks instead at the processes and time frames in which these activities unfold.

The research stems from a belief that "if you study something over time, you're able to understand its story, and see why things happen the way they do," says Dooley. "There hasn't been a consensus on whether a specific set of activities tend to lead to successful organization emergence. That's what made us think maybe it's not the activities themselves, but rather how they flow over time."

And while stories of entrepreneurial glory in the business media usually focus on venture-capital funded businesses or big names such as Gates, Dell, Bezos, and the like, Dooley hones in on small, mom-and-pop-type businesses. Not as sexy perhaps, but far more relevant to the reality of most emerging businesses.

The importance of timing

By studying emerging entrepreneurial ventures through both a broad lens and through the telescope of an in-depth case study analysis, Dooley and his research team were able to measure the importance of the timing of startup activities to entrepreneurs' strategic and tactical visions for their businesses — and their ultimate success or failure at emerging as a viable company.

Dooley's first study used data from the large-scale Panel Study of Entrepreneurial Dynamics (PSED) — a national survey of 335 individuals in the process of launching new businesses — conducted by The University of Michigan's Institute for Social Research. These individuals were prescreened through telephone surveys to be actively engaged in an entrepreneurial venture — either alone or with a group — in the "pre-organizing" stage, defined as having less than three months of cash flow.

Some 12 to 18 months after the initial wave of the survey, the participants were called again, at which point 121 were still in active startup mode. Dooley's work centers on the data from this group of 121 entrepreneurs, who were interviewed regarding 27 business organizing activities. Questions determined whether they had performed these activities, and in what timeframe they did so.

By examining the timelines, Dooley determined the importance of three time-related dynamics that are crucial to the success of early-stage businesses:

• Pace: how fast or slow startup activities occur over time

• Punctuation: the concentration of startup activities over time

• Timing: the point in the process when startup activities occur (toward the beginning or the end)

"The successful archetype is a high rate of activities, a low concentration of activities, and activities that tend to occur later in the life cycle of the venture," explains Dooley. The reasoning is largely common sense, he says. Performing the numerous activities necessary to starting a business — but doing so in a slow, measured pace that builds the momentum necessary to maneuver the crucial startup phase while allowing entrepreneurs to maintain options — is key to avoiding failure. In other words, successful entrepreneurs constantly give themselves many ways for their venture to succeed.

The image of the stressed-out entrepreneur pulling all-nighters to finish business plans or marketing concepts is not untrue — both successful and unsuccessful entrepreneurs work hard at their tasks. The difference is that the successful entrepreneur is trying to do a task in two-thirds or three-quarters the amount of time they'd ideally like to spend doing it; in contrast, the unsuccessful entrepreneur spends 1 to 10 percent over the amount of time they should on their start-up tasks — because they're trying to do them all at once.

Especially if the entrepreneur immediately obtains the resources (e.g. funding) to grow quickly, they tend to want to accomplish all the growth all at once before doing their homework. This is a recipe for failure, Dooley explains. "The failed venture is often the overwhelmed venture," he says. "These businesses tend to do things too rapidly and end up making decisions that are not well thought out. They may make decisions on multiple fronts that end up contradicting each other, but they can't see it, because everything is happening so rapidly."

With some 60 percent of all new businesses failing within the first six years of operation, according to the U.S. Small Business Administration, it's easy to see why taking the time to think through critical initial decisions has a large impact on success.

For example, when defining market opportunity (one of the activities found by the PSED to be common in successful nascent ventures), an entrepreneur needs to determine marketplace dynamics, understand potential customers' needs, and examine the competitive marketplace, among other things.

Clearly, this critical task is one that requires extensive due diligence. "The type of decisions you make if you give an hour versus a week to these activities is very different," Dooley confirms. For example, the firm's first employees are critical to the firm, and it takes much effort and time on the entrepreneur's part to find and hire the right people, often through extensive networking.

So why do some firms rush through these activities? Obtaining the much-hyped "first-to-market" advantage may be the motivator for some failed ventures. Fear of being trumped by a competitor with a similar business plan is common.

"The whole concept of first-mover advantage is something very attractive to the management world, but it's an oversimplification," states Dooley. "Many times entrepreneurial ventures are too early for the market - standards have to be developed to be able to take advantage of their technology/product/service. Sometimes you have to wait for a big player to come in and set the baseline."

Under the microscope

Another unexpected timing dynamic emerged from Dooley's case study analysis of a single nascent entrepreneur as she went through the startup process: evidence of a "definable event that punctuates organizational emergence," he says.

To get a microscopic view of the timing dynamics surrounding new ventures, Dooley and his team interviewed one entrepreneur every two weeks for four years to gauge her perceptions about the startup process as she went through it — a type of longitudinal case study that had not been used previously in entrepreneurial research.

The team picked apart the interviews for significant concepts within the text that gave clues about her cognitive and emotional state as she started the business; mined the data to see how often she was conducting startup activities, and whether or not they were following the temporal dynamics previously found to indicate a higher likelihood of success; and watched for key changes in her ultimate goals for the business.

Remarkably, at one nearly simultaneous point within the startup process, a significant shift occurred in all three areas. Specifically, she completed numerous tactical startup activities — including filing the paperwork to become an LLC — overcame doubts about whether her main product should be a book or a Web site, and shifted her overall vision of the company's business concept and market opportunity during the same time period.

Sometimes single case studies are criticized because it's easy to make the "theory" fit the "story." In order to guard against this, Dooley, who did the statistical analysis of the data, was not told anything about the case ahead of time. "I was happily shocked when I told my colleagues that there was this critical change point in all the data around month 36, and this also corresponded to the interview that was most 'transformational' in its nature," Dooley explains. Then they told me, "Oh — that's interesting. That's exactly when the entrepreneur filed the paperwork to become a legal firm!"

Act before you think?

It is clear then, that executing tactical events through that slow and steady pace gives entrepreneurs the experience and confidence necessary to make important strategic and visionary decisions that help them over the tipping point. The end result? Successful emergence as a functional business. This idea that success in tactical activities can drive strategic change, however, goes counter to conventional thinking in organizational behavior, explains Dooley.

"The cognitive model we usually associate with humans is that you think before you act. There's truth to that, but there's also as much truth to the opposite model," he says. "Certain circumstances will lead people to move in one direction or another in a specific moment in time, and those tactical actions might lead to a change in strategy." For entrepreneurs, actions may spark the creative thinking necessary to drive vision and strategy.

Ultimately, do these findings tie in with Dooley's real-life entrepreneurial experiences? Absolutely.

"As an entrepreneur, I was amazed at how complex and interrelated all decisions are in a startup, and how much uncertainty there is to most of the decisions. We've consciously tried to make good decisions, get momentum, and keep our options for success open, and things are working out well. We recently obtained a Phase II STTR grant from the Air Force Office of Scientific Research to develop a product for media tracking, so we feel good about the future," said Dooley.

"And no doubt, many of our successes have come from being responsive to chance opportunities that have come out of the blue." Sometimes then, an entrepreneur just has to act — slowly and methodically, of course — and let the rest come naturally.

Entrepreneurship Management Faculty