Master thesis: Learning from entrepreneurial failure

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1 Master thesis: Learning from entrepreneurial failure Name: Marc Wijdoogen Student number: Address: van Zeggelenplein 72, 2032 KC, Haarlem Telephone number Supervisor: Dhr. W. Stam University: VU University Amsterdam Faculty: Faculty of Economics and Business Administration Study: Master Business Administration Specialty: Management Studies 1

2 Preface During attending the master program of Business Administration at the VU University Amsterdam, I have chosen to write my master thesis about entrepreneurship and learning from entrepreneurial failure. This topic seemed to me very interesting and challenging. Especially, because it is an underexposed subject in the entrepreneurship literature. There is a real stigma of failure in the Netherlands. Nevertheless, I think that failed entrepreneurs may learn a lot of entrepreneurial failure and that is why I decided to shed some light on this subject. Therefore, as a result of my master thesis I did research in what extent entrepreneurs learn from entrepreneurial failure. I also looked for the factors that affect the learning from entrepreneurial failure. During the process of writing, there were some people that made a contribution to complete this thesis. First of all, I would like to thank my supervisor Wouter Stam for giving advice and support. Without him it would be a lot more difficult to complete this thesis. Furthermore, I would like to thank the entrepreneurs I interviewed. They were prepared to talk about their negative experiences despite that it might be threatening to talk about entrepreneurial failure. Last but not least I would like my family for their love and support. I hope you all enjoy reading this master thesis. Yours sincerely, Marc Wijdoogen Haarlem, June

3 Table of Contents Abstract... 6 Introduction... 8 Problem definition... 9 Scientific contribution Practical contribution Chapter 1: What is entrepreneurship? Classic views about entrepreneurship Schumpeter Knight Kirzner Recent definitions about entrepreneurship The entrepreneur Trait approach Cognitive approach Behavioural approach Novice, nascent, habitual, serial and portfolio entrepreneurs Conclusion Chapter 2: What is entrepreneurial failure and what are the causes and benefits of entrepreneurial failure? Entrepreneurial failure Causes of entrepreneurial failure Internal causes of failure External causes of failure Benefits of failure Conclusion Chapter 3: What are the learning outcomes of an entrepreneur? Entrepreneurial knowledge

4 3.1.1 The existence of entrepreneurial opportunities The discovery of entrepreneurial opportunities The exploitation of entrepreneurial opportunities Conclusion Chapter 4: What are the factors that influence the learning of an entrepreneur? Emotions Self-efficacy Locus of causality Networks Prior experiences Conclusion Chapter 5: Methodology Methods Data collection Data analysis Chapter 6: Results The discovery of entrepreneurial opportunities The exploitation of entrepreneurial opportunities Emotions Self-efficacy Locus of causality Networks Prior experience Other factors Comparison cases Conceptual model Chapter 7: Discussion and Conclusion Discussion

5 7.2 Implications for further research Implications for practice Research Limitations Conclusion References Appendix 1: Interview questions (in Dutch) Appendix 2: Profile of the participants Appendix 3: Transcript of the interviews Figures and Tables Figure 1: Conceptual model 1 learning from entrepreneurial failure Figure 2: Conceptual model 2 learning from entrepreneurial failure Table 1: Different types of entrepreneurs Table 2: Description of four cases included in study Table 3: Opportunity discovery Table 4: Opportunity exploitation Table 5: Emotions affected by entrepreneurial failure Table 6: Self-efficacy of entrepreneurs Table 7: Locus of causality of entrepreneurs Table 8: The networks of the entrepreneurs Table 9: Prior experience of the entrepreneurs Table 10: The stigma of entrepreneurial failure

6 Abstract This paper gives an answer to the question: How does an entrepreneur s prior business failures affect his/her subsequent ability to start a new firm and which factors have an influence on this? This thesis gives a contribution to the scientific debate because it extends the understanding of in what extent entrepreneurs learn from entrepreneurial failure and what factors affect this learning from failure. This thesis suggests that entrepreneurs can learn a lot from entrepreneurial failure. There are more benefits of failure but I only focused on the learning benefits from failure. Entrepreneurial failure can be defined as an initiative that is terminated as a consequence of actual or anticipated performance below a critical threshold. In this thesis I divide entrepreneurial learning into two learning outcomes: (1) the discovery of entrepreneurial opportunities; (2) the exploitation of entrepreneurial opportunities. Entrepreneurial opportunities are those situations in which new goods, services, raw materials, and organizing methods can be introduced and sold at greater than their cost of production. Entrepreneurs only discover opportunities if they possess information necessary to identify an opportunity and have the ability to see new means-ends relationships. The exploitation of an opportunity is a decision to act upon a perceived opportunity, and the behaviours that are undertaken to achieve its realization such as acquisition of resources, legitimacy building, market research, network building etc. The results show that entrepreneurial failure can have a major impact on the discovery of opportunities. It discovers uncertainties that were previously unpredictable and it can function as a real option. The results also show that entrepreneurs I interviewed learned quite different things in the field of the exploitation of opportunities. The entrepreneurs learned lessons in the following domains: acquisition of resources (labour and capital), timing, accounting, network building, marketing, sales etc. I also looked for factors that affect the learning from entrepreneur. Beforehand, I selected the following factors from the literature: emotions, self-efficacy (people s beliefs about their capabilities to exercise control over their own level of functioning and over the events that affect their lives), locus of causality (indicates whether a failure is due to reasons internal to the entrepreneur experiencing the event, or due to reasons outside of their control), networks, prior start-up experience. I found that emotions had a negative impact on learning. However it seemed that the extent in which an entrepreneur has negative emotions is dependent on the alternative opportunities in reserve, the structure of the business, the self- 6

7 efficacy of an entrepreneur, and the feedback of the network. Self-efficacy has a two-folded effect. First, it has a direct effect because entrepreneurs with a high self-efficacy see failure as a learning experience and thus they are more prepared to learn from it. Second, it has an indirect effect because it affects emotions. It seemed that entrepreneurs with an internal locus of control had the ability to realistically appraise the situation and thus are better to learn from entrepreneurial failure. I also found that networks were very important to learn from failure. First, it has a direct effect because support from the informal network is important to cope with entrepreneurial failure, feedback from the formal and informal network increases the understanding why a business failed and how to organize and manage a business in the future, and feedback provides information to recognize entrepreneurial opportunities. Second, networks have an indirect effect because negative reactions from the environment may lead to a low self-efficacy and an increase in negative emotions. I did not find any evidence that prior experience had any influence. Instead, I found that the stigma of failure has a negative influence on learning. Keywords: Entrepreneurial failure; learning; emotions; self-efficacy; locus of causality; networks. 7

8 Introduction Would you like me to give you a formula for success? It's quite simple, really. Double your rate of failure. You are thinking of failure as the enemy of success. But it isn't as all. You can be discouraged by failure - or you can learn from it. So go ahead and make mistakes. Make all you can. Because, remember, that's where you will find success.- Thomas J. Watson (former CEO of IBM) 1. Within the field of entrepreneurship, there is a tendency for many theorists and practitioners to focus on identifying successful entrepreneurs and picking winners. The literature provides many insights but they predominantly focus on entrepreneurial success. Research on entrepreneurial failure to date is dwarfed by the amount of research on entrepreneurial success. Academics thus know very little about entrepreneurial failure or the ability to cope and learn from failure (Shepherd, 2003). Entrepreneurial failure is often viewed negatively, even though firm failures may be important inputs into entrepreneurial success (Sarasvathy, 2004). The scientific understanding of the negative effects of failure is much better developed than the potential positive effects of failure (Van Dyck et al., 2005). McGrath (1999) argues that the benefits of failure have not been given sufficient attention. She stated that the tendency to view failure negatively introduces a pervasive bias in entrepreneurship theory and research. Consequently, there is a resounding recognition that a clear understanding of entrepreneurial failure remains elusive (McGrath, 1999; Zacharakis, Dale Meyer & De Castro, 1999). Also in Europe there is a stigma attacked to entrepreneurial failure. In the United States bankruptcy laws allow entrepreneurs who fail to start again relatively quickly and failure is considered to be part of the learning process. In Europe those who go bankrupt tend to be considered as losers. They face great difficulty to finance a new venture (European Commission, 1998). Entrepreneurs do not only learn from success, but they also generate certain learning benefits from entrepreneurial failures (Cardon & McGrath, 1999; McGrath, 1999; Minniti & Bygrave, 2001; Sitkin, 1992). Prior failures may increase the entrepreneur s subsequent success in creating new organizations due to learning. The so-called serial entrepreneurs are very important in this process. Serial entrepreneurs are entrepreneurs who exit one venture before entering into a subsequent one (Wright, Robbie & Ennew, 1997). Many of them faced 1 8

9 failure, but they are resolute to start a new firm and try to use the experiences of failure to make the following venture a success. Problem definition In my research I want to focus how serial entrepreneurs learn from prior failure. The research question will be: How does an entrepreneur s prior business failures affect his/her subsequent ability to start a new firm and which factors have an influence on this? Failure can be defined as an initiative that is terminated as a consequence of actual or anticipated performance below a critical threshold (Gimeno, Folta, Cooper & Woo, 1997). With the ability to start a new firm I mean the entrepreneurial knowledge capacity of an entrepreneur to start a new firm. Politis (2005) defines entrepreneurial knowledge as knowledge that enables an entrepreneur to recognize and act on entrepreneurial opportunities and to organize and manage new ventures, i.e., exploitation of opportunities. The discovery and the exploitation of opportunities are considered to be among the most important abilities of a successful entrepreneur (Ardichvili, Cardozo & Ray, 2003; Ronstadt, 1988; Shane, 2000; Shane and Venkataraman, 2000). Opportunities are situations in which new goods, services, raw materials, markets and organizing methods can be introduced through the formation of new means, ends, or means-ends relationships (Shane & Venkataraman, 2000). To answer my research question, I have created some sub questions: What is entrepreneurship? (Chapter 1) In chapter 1, I explain what entrepreneurship is. I do this with the help of some classic views of entrepreneurship ( 1.1) and some recent definitions of entrepreneurship ( 1.2). I also introduce the definition of Shane and Venkataraman (2000) about entrepreneurship. This definition forms the guide in this thesis. After that, I discuss what an entrepreneur is by introducing three different kinds of approaches ( 1.3): (1) trait approach; (2) cognitive approach; (3) behavioural approach. Finally, I give an important behaviour-based categorization ( 1.4) in which the serial entrepreneur gets attention. 9

10 What is entrepreneurial failure and what are the causes and benefits of entrepreneurial failure? (Chapter 2) In chapter 2, I explain the meaning of entrepreneurial failure ( 2.1). I also tell something about the causes of entrepreneurial failure ( 2.2). Here, I make a distinction between internal and external causes of entrepreneurial failure, because they differ in the extent of influence a business can have on them. Finally, I discuss the benefits of entrepreneurial failure ( 2.3). One of the benefits of entrepreneurial failure is learning. The learning benefits get more attention in the chapter 3. What are the learning outcomes? (Chapter 3) In chapter 3, I introduce a learning approach. The starting point here is the conceptual framework of Politis (2005) and the article of Shane and Venkataraman (2000). The two learning outcomes I focus are: (1) the discovery of entrepreneurial opportunities, and (2) the exploitation of entrepreneurial opportunities. I try to link these learning outcomes to entrepreneurial failure. But first I explain something about the existence of opportunities. What are the factors that influence the learning of an entrepreneur? (Chapter 4) In chapter 4, I explain the factors that can moderate the strength of the relationship between entrepreneurial failure and learning. These factors are emotions, self-efficacy, locus of causality, prior knowledge and networks. Three of them (e.g. emotions, selfefficacy, and locus of causality) are from a psychological background. The sub questions are answered in the literature part of my thesis. The aim of the literature research is to give a give a theoretical framework of entrepreneurial failure and the learning benefits of failure. After that, I explain the methodology of my research (chapter 5). The method of data is of a qualitative nature. Based on multiple case studies, this thesis presents the views and experiences of four serial entrepreneurs with regard to failure. The thesis has a theory-building approach because the existing literature does not address the research question I want to answer. The aim of this thesis is to develop an appropriate theory that can explain what entrepreneurs learn from failure and which factors have an influence on entrepreneurial learning. In chapter 6, I review the results based on the interviews. Chapter 7 is the discussion. In this chapter, I discuss the implications and limitations of these results for entrepreneurship research and practice. This thesis ends with a conclusion. 10

11 Scientific contribution My scientific contribution is to give a clear understanding of the value of entrepreneurial failure for the creation of new organizations in the future, because this is an underexposed subject in the entrepreneurship literature. In my thesis, I wish to develop a greater understanding of how entrepreneurs learn from entrepreneurial failure. Many entrepreneurs fail, but it is important to know that this is not fatal. If we look to the quotation of Thomas J. Watson, I suggest that failure is not the enemy of success. You may make mistakes all the time, as long as you learn from your mistakes. It is important to empirically verify the positive aspects of entrepreneurial failure, so that entrepreneurs know how to treat entrepreneurial failure. Practical contribution The practical relevance of my paper is that it provides entrepreneurs information about how to learn from entrepreneurial failure. This thesis also shows that entrepreneurial failure is not fatal. The important thing is that entrepreneurs learn from their mistakes. It is interesting for entrepreneurs to read this thesis because it provides a clear view about how other entrepreneurs dealt with entrepreneurial failure. It is also useful for non-entrepreneurs to read this thesis because it increases their understanding of how entrepreneurs experienced entrepreneurial failure. And maybe they can better understand how difficult it is for entrepreneurs who go bankrupt. Hopefully, this will lead to a reduction of the stigma attacked to entrepreneurial failure in the Netherlands. 11

12 Chapter 1: What is entrepreneurship? In the literature there are many definitions given to entrepreneurship which lead to one of the greatest frustrations, namely the lack of a common understanding what precisely entrepreneurship is (Davidsson, 2004). In this chapter I give an overview of the different views of entrepreneurship. First, I start with some classic ideas of important economists in the past: Schumpeter, Knight and Kirzner. After that, I give some definitions that are given in the last decades. I also introduce the definition of Shane and Venkataraman (2000). Third, I explain what an entrepreneur is. Finally, I focus on the serial entrepreneur because he or she is the main focus of this thesis. 1.1 Classic views about entrepreneurship Hérbert and Link (1989) have identified three distinct intellectual traditions in the development of the entrepreneurship literature. These three traditions can be characterized as the German Tradition, based on von Thuenen and Schumpeter, the Chicago Tradition, based on Knight and Schultz, and the Austrian Tradition, based on von Mises, Kirzner and Shackle. These traditions share a heritage and a common language but they point at different aspects of the function of the entrepreneur. The Chicago Tradition stresses the role of the entrepreneur in leading markets to equilibrium through their entrepreneurial activities. The Austrians concentrate on the ability of the entrepreneur to perceive profit opportunities, usually after some exogenous shocks. The Austrian entrepreneur combines resources to fulfil currently unsatisfied needs or to improve market inefficiencies or deficiencies. The German Tradition concentration the entrepreneur as a creator of instability and creative destruction (Wennekers and Thurik, 1999). Below I discuss one economic theory of each tradition (e.g., Schumpeter, Knight, and Kirzner) Schumpeter One of the first economist who wrote something about entrepreneurship is Schumpeter. According to Swedberg (2000), Schumpeter is by far the most important economist who tried to develop an economic theory centred around the entrepreneur. Schumpeter s approach has deeply influenced the history of economic thought, and is still the dominant one (Swedberg, 2000). Schumpeter stresses that the role of innovation was of major importance in defining entrepreneurship. His theory was the first to treat innovation as an endogenous process (Van Praag, 1999). 12

13 The entrepreneur seeks opportunities for profit. He introduces new combinations or innovations to reach this goal. New entrepreneurial combinations destroy the equilibrium in the economy and lead to a process of development, which forever alters and displaces the equilibrium state previously existing (Schumpeter, 1934). So entrepreneurial combinations lead to a new higher equilibrium. Ongoing innovation therefore implies permanent change and permanent disequilibrium (Van Praag, 1999). Thus Schumpeter uses a disequilibrium approach to explain entrepreneurship. According to Schumpeter (1934), five new combinations are possible: (1) the introduction of a new good that is one with which customers are not yet familiar or of a new quality of a new good. (2) The introduction of a new method of production. (3) The opening of a new market, that is a market into which the particular branch of manufacture of the country in question has not previously entered, whether or not this market has existed before, whether of not this market has existed before. (4) The conquest of a new source of supply of raw materials or half-manufactured goods, again irrespective of whether this source already exists or whether it has first to be created. (5) Reorganizing a new industry, like the creation of a monopoly position or the breaking up of a monopoly position (Schumpeter, 1934: p. 66). According to Schumpeter (1934), the entrepreneur is the one whose function is to carry these new combinations out. An entrepreneur is not necessarily the director and independent owner of a business Knight Knight was the first to explicitly distinguish between risk and uncertainty. The economic function of an entrepreneur is to bear the real uncertainty. Uncertainty, unlike risk, comprises a type of probability for which there is no valid basis at all for classifying instances because it concerns the outcome of a unique event. Hence, the judgement should be exercised both for the formation of an estimate and the estimation of its value. The true uncertainty forms the basis of Knight s theory of profit, competition and entrepreneurship. Entrepreneurs are held responsible for the economic progress, like improvements in technology and business organization. The essence of the entrepreneur s position in an organization is his responsibility for direction and control whenever uncertainty is involved. He is responsible for the decisions include the planning of where, when and what kind of products to create. Entrepreneurial ability heavily depends on one s ability to effectively deal with uncertainty. The differences in abilities to deal with uncertainty between entrepreneurs, explains the fact why some entrepreneurs become successful and others not. The power to 13

14 effectively deal with uncertainty requires the following qualities: a high degree of selfconfidence, the power to judge your own personal qualities as compared to those of other individuals, a disposition to act on one s opinion, a venturesome nature, and foresight. The entrepreneurial task is rewarded with the residual income (profit), the reward for bearing uncertainty (Van Praag, 1999) Kirzner Kirzner (1973) defines the essence of entrepreneurship as alertness to profit opportunities. Entrepreneurial alertness refers to an attitude of receptiveness to available (but hitherto overlooked) opportunities (Kirzner, 1997). The pure entrepreneur is a decision-maker whose entire role arises out of this alertness to hitherto unnoticed opportunities. Entrepreneurs are the persons in the economy who are alert to discover and exploit profit opportunities. They have to achieve the kind of adjustment necessary to move economic markets toward the equilibrium state. Kirzner defines the equilibrium state as a state in which each decision correctly anticipates all other decisions (Kirzner, 1973). Yet, the equilibrium position is never reached; entrepreneurs may have erred in their assessments concerning the presence of profit opportunities or may have completely overlooked them (Van Praag, 1999). Kirzner (1973) likens entrepreneurial opportunity with the analogy that the entrepreneur is a person who, upon seeing a $10 bill on the ground in front of him, is alert to the opportunity and quickly grabs it. The alert person will seize it rapidly; the less alert will take longer to recognize the opportunity to act on it. By stressing pure alertness in this fashion, Kirzner emphasize the quality of perception, recognizing an opportunity that is a sure thing: whereas in reality every profit opportunity is uncertain (Hébert and Link, 1989). Kirzner (1997) compares the entrepreneur as an arbitrageur, a person who discovers the opportunity to buy where prices are "too low" and sells where prices are "too high", because of differences in intertemporal or intersectional demands. The entrepreneurs only need to perceive profit opportunities in an earlier stage than others. They are the most alert to profit opportunities in the economy and they have, more than average, the ability to learn from mistakes. The exploiting of opportunities, as opposed to discover them, requires additional qualities such as creativeness and leadership (Van Praag, 1999). 14

15 1.2 Recent definitions about entrepreneurship In the recent literature there are many definitions given to entrepreneurship. The problem is that though each captures an aspect of entrepreneurship, none captures the whole picture (Low and MacMillan, 1986). Recent reviews of entrepreneurship research have indicated the lack of an agreed-upon definition of entrepreneurship (Gartner, 1990). Below I give a few examples: according to Lumpkin and Dess (1996), entrepreneurship is new entry. Low and MacMillan (1986) defined entrepreneurship as the creation of enterprise. Gartner (1988) sees entrepreneurship as the creation of new organizations. Wiklund (1998) defined entrepreneurship as taking advantage of opportunity by novel combinations of resources in ways which have impact on the market. Stevenson and Jarillo (1990) defined entrepreneurship as the process by which individuals either on their own or inside organizations pursue opportunities without regard to the resources they currently control. Hisrich and Peters (1989) defined entrepreneurship as the process of creating something different with value by devoting the necessary time and effort; assuming the accompanying financial, psychological, and social risks; and receiving the resulting rewards of monetary and personal satisfaction. In this paper I will use the definition of Shane and Venkataraman (2000). They defined entrepreneurship as the scholarly examination of how, by whom, and with what effects opportunities to create future goods and services are discovered, evaluated and exploited. This definition is in line with the definition of Stevenson and Jarillo (1990) and Wiklund (1998). They also talk about opportunities. Three sets of research questions are important in the field of entrepreneurship: (1) why, when, and how opportunities for the creation of goods and services come into existence; (2) why, when, and how some people and not others discover and exploit these opportunities; and (3) why, when, and how different modes of actions are used to exploit entrepreneurial opportunities. The answers on these questions are treated in chapter 3. I have chosen for this definition because I agree with Shane and Venkataraman (2000) that both discovery and exploitation are required for entrepreneurship to happen, and that both should be studied in entrepreneurship research. Second, the conceptual framework of Politis (2005) about entrepreneurial learning, which I use as starting point in chapter 3, is also highly based on the view of Shane and Venkataraman about entrepreneurship. Shane and Venkataraman (2000) argue that entrepreneurship does not require, but can include, the creation of new organizations. As Amit, Glosten and Muller (1993) and Casson (1982) explain, entrepreneurship can also occur within an existing organization. Moreover 15

16 opportunities can be sold to other individuals or to existing organizations. The view of Shane and Venkataraman (2000) about entrepreneurship partly corresponds with the view of Kirzner. Kirzner also focus on the discovery and exploitation of opportunities to make a profit. The main difference between Kirzner and Shane and Venkataraman is that the later takes, even as Schumpeter, a disequilibrium approach instead of an equilibrium approach. They argue that in equilibrium approaches, entrepreneurial opportunities either do not exist or are assumed to be randomly distributed across the population. Because people in equilibrium approaches cannot discover opportunities that differ in value from those discovered by others, who becomes an entrepreneur depends solely on the attributes of people. 1.3 The entrepreneur In this section, I introduce different kinds of approaches to get a better understanding about what an entrepreneur is, and what he does. The literature makes a distinction between different kinds of approaches: (1) the trait approach (Gartner, 1988), (2) the cognitive approach (Keh et al., 2002; Baron, 2004), and (3) the behaviour approach (Gartner, 1985, 1988). In behavioural approaches an entrepreneur is seen as a set of activities involved in organization creation, while in trait approaches an entrepreneur is a set of personality traits and characteristics. The cognitive approach involves the perception and interpretation of information by entrepreneurs. Below I discuss the different approaches Trait approach Psychologists have proposed theories in which entrepreneurship is a function of stable characteristics possessed by some people and not others. According to this perspective, enduring human attributes lead some people and not others to choose entrepreneurship (Shane and Venkataraman, 2000). The psychological literature suggests that entrepreneurs possess certain characteristics or traits. The most common traits mentioned in the literature are: Need for achievement: McClelland s theory of the need to achieve is one of the most commonly applied theory in research on entrepreneurship (Littunen, 2000). According to McClelland s theory individuals who have a strong need to achieve are among those who want to solve problems themselves, set targets, and strive these targets through their own efforts. The theory suggests that individuals with strong need to achieve often find their way to entrepreneurship and succeed better than others as entrepreneur (McClelland, 1961). Locus of control: this is based on the work of Rotter (1966). Internal versus external control of reinforcement, often referred to as locus of control, have been one of the 16

17 most studied psychological traits in entrepreneurship research (Mueller and Thomas, 2000). The concept of locus of control refers to the perceived control over events. Internal locus of control is the degree to which an entrepreneur expect that he or she has influence over outcomes through ability, effort, or skills. External locus of control is the degree which entrepreneurs expect that forces outside the control of him or herself determine the outcome (Rotter, 1966). It is clear that individuals with an internal locus of control are more likely to be entrepreneurs (Borland, 1974; Brockhaus and Horwitz, 1986). Individuals who cannot believe in their ability to control the environment through their actions would be reluctant to assume the risks that starting a business would entail (Brockhaus and Horwitz, 1986). Risk-taking propensity: in the literature, entrepreneurs are generally believed to take more risks than do managers because of the entrepreneurial function entails with a less structured, more uncertain set of possibilities and bearing the ultimate responsibility for the decisions. More risk-tolerant individuals are more likely to choose for an entrepreneurial career, whereas more risk-averse individuals choose contractual employment (Stewart and Roth, 2001). However, Brockhaus (1980) did not found evidence that entrepreneurs, compared with managers, are the more moderate risk takers. But according to Brockhaus (1980), this does not imply that entrepreneurs are not moderate risk takers. Desire for autonomy: Autonomy refers to the independent action of an individual or a team in bringing forth an idea or a vision and carrying it through to completion (Lumpkin and Dess, 1996: p. 140). It means the ability and will to be self-directed in the pursuit of opportunities (Lumpkin and Dess, 1996). One of the most important drivers for self-employment is that people want to run a business themselves instead of working for someone else. Many entrepreneurs like autonomy for the sake of decisional freedoms. Other entrepreneurs emphasize the fact that self-employment offers the opportunity to work in accordance with one s goals, values, and attitudes (Van Gelderen and Jansen, 2006). Tolerance for ambiguity: Tolerance for ambiguity has been defined as "the tendency to perceive ambiguous situations as desirable" (Budner, 1962: 29). Individuals with a high tolerance of ambiguity view ambiguity as a desirable and challenging goal. Individuals who are intolerant for ambiguity perceive ambiguity as undesirable, stressful, and threatening (Sexton and Bowman, 1985). Schere (1982) tested entrepreneurs and managers for ambiguity tolerance and found entrepreneurs to be 17

18 significantly more tolerant than managers. Saxton and Bowman (1984) came to similar results. High ambiguity tolerance seems to be a unique component of the entrepreneurial personality. Innovativeness: Schumpeter (1934) was among the first to emphasize the role of innovation in the entrepreneurial process. He saw an entrepreneur as disrupter of existing market structures by introducing innovative new combinations. Drucker (1985) further elaborated the innovator role of the entrepreneur and concludes that all successful entrepreneurs have some kind of commitment to the systematic practice of innovation. In the literature there appears to be strong empirical evidence to support the claim that entrepreneurs, particularly those successful at growing an enterprise, are more innovative than non-entrepreneurs (Carland et al., 1984). In the literature, there is some resistance against the trait approach. According to Low and MacMillan (1988), early entrepreneurship studies focused too narrowly on the personality background of the individual entrepreneur in explaining entrepreneurial behaviour without looking at the complex process by which new enterprises start, develop, change and possibly decay. They doubt whether the search for typical personality profile of the entrepreneur, including aspects as like need for achievement, locus of control, risk-taking propensity, tolerance for ambiguity, desire for autonomy, innovativeness etc. will be very useful to explain entrepreneurial behaviour because they did not seem to be unique to entrepreneurs. They also say that the possibility that observed entrepreneurial traits are the product of entrepreneurial experience, make it difficult to interpret the results of the past psychological studies. Gartner (1988) stresses that the startling number of traits have been attributed to the entrepreneur are full of contradictions and someone so full of traits that he or she would have to be sort of generic everyman. Shane and Venkataraman (2000) criticised the trait approach because it explicitly or implicitly assume that fundamental attributes of people, rather than information about opportunities, determine who becomes an entrepreneur. Cope (2005) stated the trait approach symbolizes a static approach and therefore represents the antithesis of a dynamic learning perspective of entrepreneurship. The assumed permanence of entrepreneurial personality traits precludes the ability of entrepreneurs to learn, develop, and change as they manage their businesses. Although, the many critics on the trait approach it is useful to know something about the possible characteristics an entrepreneur may have. 18

19 1.3.2 Cognitive approach Subsequently researchers have turned to the cognitive approach, and recent evidence suggests that this approach better explains behaviour and perception than the trait approach (Keh et al. 2002). Existing theories of entrepreneurship strongly suggest that cognitive factors as perception and interpretation play a critical role in the new venture creation process. The cognitive perspective emphasizes the fact that everything we think, say, or do as human beings is influenced by mental processes by the cognitive mechanism through which we acquire information, enter it into storage, transform it, and use it to accomplish a wide range of tasks (Baron, 2004). Baron (2004) suggests that this perspective can be highly useful to the field of entrepreneurship. Specifically, it can assist the field in answering three basic questions it has long addressed: (1) Why do some persons but not others choose to become entrepreneurs? (2) Why do some persons but not others recognize opportunities for new products or services that can be profitably exploited? And (3) Why are some entrepreneurs more successful than others. Below, I address some cognitive factors that play a role in answering the questions 1 and 3. The second question will be answered in chapter 3. 1) One aspect that plays a role to become an entrepreneur is self-efficacy. This is the belief in one s ability to make good decisions (Krueger and Dickson, 1994). The higher the self-efficacy, the more likely an entrepreneur is to start a new venture. Another aspect is that many entrepreneurs suffer an optimistic bias, believing that their likelihood of experiencing positive outcomes is much higher than the objective data suggest. These entrepreneurs underestimate the risk involved in starting a business. Other cognitive biases are: confirmation basis information that confirms our current beliefs is noticed, processed, and remembered more readily than information that disconfirms our current beliefs, optimistic bias an inflated tendency to expect things to turn out well, planning fallacy the tendency to believe that we can complete more in a given period of time than we actually can, and affect infusion the tendency for our affective states to strongly influence our perceptions and decisions. According to Baron (2004), entrepreneurs, in comparison to other people, may be more susceptible to such biases. These various forms of cognitive bias play a role in the decision to become an entrepreneur (Baron, 2004). 3) Successful entrepreneurs are better able than unsuccessful ones to make an objective assessment about the risk associated with various strategies and as a result, are more adept at choosing appropriately between them. Another aspect that may distinguish relatively successful and unsuccessful entrepreneurs is counterfactual thinking the tendency to imagine different outcomes in a given situation than what actually occurred. Successful 19

20 entrepreneurs are better than less successful ones at using counterfactual thinking to formulate task strategies. It also seems that that successful entrepreneurs, as compared with unsuccessful ones, may less subject to a wide range of cognitive errors or biases (mentioned in the previous paragraph) than can serve to distort information processing and lead to less-than-optimal decisions (Baron, 2004) Behavioural approach The trait approach looks for the characteristics an entrepreneur has, while the behavioural approach looks for how entrepreneurs behave. The trait approach simply ignores the actions that an entrepreneur execute (Gartner, 1988), like the recognition of opportunities, the accumulation of resources, marketing of products and services, the production of a product, the creation of organizations etc. (Gartner, 1985). This behavioural approach views the creation of an organizations as a contextual event, the outcome of many influences. The entrepreneur is part of the complex process of new venture creation. This approach treats the organization as the primary level of analysis and the individual is viewed in terms of activities undertaken to enable the organization to come into existence. The personality of the entrepreneur are ancillary to the entrepreneur s behaviour. Research on the entrepreneur should focus what the entrepreneur does and not who the entrepreneur is (Gartner, 1988). Also Shane and Venkataraman (2000) use a behavioural approach. Although, they identify different activities to entrepreneurs: the discovery and exploitation of opportunities. They consider a broader framework than firm creation (Shane and Venkataraman, 2000), because entrepreneurship can also occur in existing organizations. In the following chapters, the behaviour approach will be dominant. An example of an important behaviour-based categorization is the distinction between novice, nascent, habitual, serial and portfolio entrepreneurs (see Ucbasaran, Westhead & Wright, 2001). I discuss this distinction in the next section ( 1.4). The main focus is on the serial entrepreneur, because he or she is the one where this thesis is all about. 20