Entrepreneurship and the initial size of firms

Abstract It is clear that entrepreneurs and their firms can vary widely. Nevertheless, most of the research to date on entrepreneurship has examined central tendencies, with relatively little attention devoted to entrepreneurial diversity. This study examines one of the most distinguishing characteristics of young firms—initial size. The focus is whether smaller start-ups differ from larger ones in the backgrounds of the entrepreneurs, their processes of starting, or the subsequent patterns of development. In this longitudinal study, an initial sample of 1903 young firms was examined to determine differences in characteristics of the entrepreneurs and in their processes of starting. One year later, data were obtained from 742 of these firms, permitting analysis of how initial firm size was related to subsequent difficulties encountered and changes made, as well as to performance. As expected, along almost every dimension, these starting larger firms had the backgrounds that would seem to be necessary for the assembly of substantial resources. They tended to have more education, more management experience, and goals that were more managerial in nature. They also were more likely to have partners. Women were associated more often with smaller ventures, but, for this sample, there were no differences in the representation of minorities between the smaller and larger start-ups. Those starting larger ventures tended to rely more upon external investors and to start ventures more closely linked to their previous jobs. Both groups of entrepreneurs sought information from a number of sources, but those founding larger ventures utilized professional advisors more, whereas those starting smaller ventures utilized informal sources. In the year after the first questionnaire, differences between the two groups were less marked than expected. Both groups of surviving firms reported low levels of serious problems, with the smaller ventures (somewhat surprisingly) reporting serious problems less often. There were not many differences in changes made except that smaller ventures were more likely to lose partners and larger ventures were more likely to add branches or locations. Both groups reported high rates of mean growth in sales. The smaller ventures (with their small initial bases) showed larger percentage increases. Smaller ventures also showed higher percentage increases in employment and, surprisingly, a greater increase in the absolute number of employees. Somewhat more of the smaller ventures had discontinued. Both groups included many firms that grew substantially and others that scaled back, demonstrating the fluidity and experimentation characteristic of young firms. For entrepreneurs and their advisors, for public-policy makers, and for researchers, any progress in understanding entrepreneurial processes should, in the long run, enhance venture performance. The patterns observed here indicate that firms of different initial size tend to be associated with particular entrepreneurial characteristics, processes of formation, and subsequent patterns of development. This diversity should be recognized in the development of assistance programs and university courses, as well as in the interpretation of previous research. For public-policy makers, the growth of these firms, both small and large, indicates the potential of economic contributions from entrepreneur ship. Further, the growth of the smaller start-ups suggests that even those ventures that appear to have few resources and modest potential can, in the aggregate, contribute substantially to the economy.