Slow burn beats big bang

2014

So you want to start your own business? How are you going to go about it? Before you jump in head-first and throw in the day job - even if you’re in the fortunate position of being able to do so - you might want to pause and think. Because according to new research, ventures that start out life as part-time projects and grow slowly while their founders hold down another job are significantly less likely to fail than those that are launched from the outset as full-time enterprises.

The study, by Joseph Raffiee and Jie Feng of the University of Wisconsin, Madison, found that founders who launch ‘hybrid’ ventures while they are still in paid employment and only later become a full-time entrepreneur are exactly a third less likely to fail than founders who embark on their enterprises full-time.

"The hazard of exit is 33.3% lower for individuals who enter full-time self-employment in a staged process relative to those who enter directly from paid work," the authors wrote.

"A lot of people want to go out on their own but are concerned about the risks,” Joseph Raffiee said. “They have a family, they have bills to pay every month.

“A hybrid arrangement permits one to start a business on a small scale with less sunk cost and downside risk. Equally important, it provides a learning experience about the enterprise in question and one's suitability for it. One gets a realistic preview of life as an entrepreneur as distinct from all the glamorous portrayals of that life.

"Given these benefits," he added, "it should come as no surprise that the hybrid route to enterprise is superior in terms of business survival.”

That might seem to be common sense, but it flies in the face of much of the bullish advice given to entrepreneurs and the conventional view of them as self-confident risk-takers who are prepared to make large sacrifices to achieve their dream.

"Individuals who jump into full-time self-employment are less risk-averse than non-entrepreneurs," the study, published in the Academy of Management Journal confirmed. However, "individuals who enter hybrid entrepreneurship appear to have risk preferences that are indistinguishable from those who remain in paid employment."

In other words, the authors suggest, an individual’s level of risk aversion influences the process of how they decide to start a business, not necessarily whether they are going to start a business or not.

Much the same was found to be true with respect to core self-evaluation (CSE), a psychological concept that measures self-esteem, self-confidence, emotional stability and a sense of being in control.

While low CSE decreases the likelihood of someone jumping directly from paid employment into full-time self-employment, it does not decrease the likelihood of entry into hybrid entrepreneurship.

“Like risk aversion, CSE influences how rather than if entrepreneurial entry occurs,” the authors said.

One finding that was unexpected was that the slow-burn route is more beneficial in terms of business-survival benefit to people of modest intelligence than it is to more intelligent ones, something the authors attribute to the fact that "individuals with less cognitive ability learn at a slower pace."

Yet in contrast, experienced entrepreneurs derive more business-survival benefit from the hybrid route than novices do, perhaps because they are quicker than novices to pull the plug on a struggling venture, the authors suggest, something that a staged entry makes less likely.

“So strong is the stereotype of entrepreneurs as brave mavericks who quit their day jobs to pursue their dreams that we are only now coming to realize that there may be a better way than plunging right in," Joseph Raffiee said.

Indeed, as the study points out, many high-profile entrepreneurs followed a hybrid route. Steve Wozniak remained a Hewlett-Packard employee long after co-founding Apple with Steve Jobs while Pierre Omidyar launched eBay while working for a software-development company.

The findings are based on an analysis of information collected by the U.S. Bureau of Labor Statistics National Longitudinal Survey of Youth, 1979 cohort, which covers a nationally representative sample of about 12,700 men and women who were aged 14 to 22 when first surveyed in 1979. The cohort was interviewed annually until 1994 and biennially thereafter, and measures of intelligence and risk aversion, were among the data obtained through the project. The new study's analysis covers the years 1994 to 2008, focusing on newly hired or newly self-employed individuals and monitoring their employment over the course of time.

“Our results suggest that it is worthwhile to take steps to determine if the business idea warrants large-scale commitment prior to doing so,” Raffiee and Feng conclude.

“Given the uncertainty associated with new businesses, entrepreneurs are best served by making small initial commitments early on, giving themselves the option to commit fully to their business after they have had a chance to accumulate information and assess its potential and prospects."

"Should I Quit my Day Job?: A Hybrid Path to Entrepreneurship," is published in the August/September 2014 issue of the Academy of Management Journal.

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