Stanford Business Offers New Perspectives on Entrepreneurship

New research from Stanford Graduate School of Business Prof. Kathryn Shaw sheds new light on the age-old question of whether entrepreneurs are “born” or “made.”   The answer: entrepreneurs are “made” NOT “born.”

Shaw’s research focused on 2.8 million small retailers in Texas.  A key finding was that entrepreneurs are more likely to be successful if they had run businesses in the past.  “Entrepreneurship appears to be more of a craft than an aptitude,” writes Elizabeth MacBride in the Sept. 30, 2014 “Stanford Business,” a free on-line newsletter.

McBride also observes from Shaw’s research that entrepreneurs could focus on the lessons and experiences of failed businesses  and thus lower the risk for the entrepreneur’s new venture.  “An entrepreneur can view a business that didn’t work out as a sign that he or she is not a failed entrepreneur but rather an experienced one,” writes MacBride.

Working with Francine Lafontaine of the University of Michigan, Shaw examined the fortunes of 2.5 million retail businesses over a 22-year period.   To nobody’s  surprise they found the odds were overwhelmingly stacked against the small retailer.  They found the median time the new business continued to operate was 24 months and the average was 40 months.

“Failure is very common,” says Shaw.  “It remains common even for those businesses that are led by serial entrepreneurs.”

The analysis of the serial entrepreneur is a key to the findings.  The serial entrepreneur creates a chain of new businesses and presumably continues to learn lessons from mistakes along the way.   The research concludes that those more experienced entrepreneurs increased their odds of success with each new venture.  They experienced better fortune the second, third and fourth time around.

A Second Perspective on Entrepreneurship

Another perspective on entrepreneurship involves the possibilities of success when moving into a “hot” new industry versus attempting to establish a business in a lower-profile field.

Stanford Graduate School of Business Prof. William P. Barrett working with University of Chicago Booth School of Business Prof. Elizabeth G. Pontikes have issued a working paper entitled “When to Be a Nonconformist Enterpreneur? Organizational Responses  to Vital Events.”  Information is based on an article in the Oct. 2, 2014, issued of Stanford Business written by Eilene Zimmerman.

Analyzing 15 years of data, Barnett and Pontikes found that businesses created in the midst of a start-up frenzy were easier to survive investor scrutiny but unlikely to survive in the long run even if the business had a successful public offering.  “On average, our findings showed that businesses entering a frenzied market were less likely to succeed,” according to Barrett.

On the other hand, the “nonconformist” entrepreneurs who go against the popular wisdom and choose to enter a less popular field may have a better chance for success.  These innovators face far “more rigorous scrutiny by investors and potential partners,” according to Barnett, “but they are more likely to survive as a result.”

Barnett and Pontikes use Google as an example.  They point out in the late 1990s, many of the firms specializing in Internet search had failed and market watchers questioned if search was, indeed, a viable business.  Google, in a few years, reversed that skepticism.  Barnett points out how carefully Google was examined because the search market was so questionable.

“That scrutiny makes it more difficult for a company to get into the market,” according to Barnett. “But we hypothesized that if they do get in, there is a better chance they will do well and stick around for a while.”