Title of the Article : Variable risk preferences in new venture growth and survival
Author Information : Alexander McKelvie (Whitman School of Management, Syracuse University) Karl Wennberg (Linköping University & Ratio Institute, Sweden) Frederic Delmar (Lund University, Sweden)
Year of Publication : Journal of Business Venturing (forthcoming)
Summary of Findings : We develop and test a model of how entrepreneurs make decisions under risk to explain when and how decisions related to venture exit and growth are made as new ventures evolve.
Research Questions : 1. How and when are decisions related to exit and growth made as new ventures evolve? 2. How do risk preferences affect these decisions?
What we know : We develop and test a model of how entrepreneurs make decisions under risk to explain when and how decisions related to venture exit and growth are made as new ventures evolve. Previous models of new venture growth and exit have tended to focus on differences between ventures, assume that ventures either grow or exit, or that venture growth and exit are triggered by aspirations or performance thresholds that differ between entrepreneurs. Such models do not account for how changes in thresholds and aspirations over time may affect growth or how past performance may influence future decision making. We address these gaps by conceptually and empirically linking venture growth and exit to each other and theorizing about the conditions in a venture’s evolution where entrepreneurs will prefer growth or exit. Our approach thereby offers a more nuanced view of decision making under risk and provides a theoretical explanation for the common patterns of new ventures’ probability of exit and growth diminishing with venture age and size.
Novel Findings : We examine growth and exit in two domains: 1) the domain of extreme losses (when the venture is close to its survival point and most of its resources are depleted) and 2) the domain of gains and losses (when the venture is relatively close to its aspired level of performance and where survival is not threatened in the short-term). We find that entrepreneurs whose ventures face threats to survival (e.g. in the domain of extreme losses) are more likely to seek growth to restore performance rather than to cut losses and terminate their ventures, especially as the venture ages. When the venture is larger and decision complexity increases, entrepreneurs are also less likely to terminate their ventures when facing threats to survival. However, they are less likely to seek growth to restore performance. Further, we find that when entrepreneurs operate relatively close to their aspired level of performance (e.g. in the domain of gains and losses), they are less likely to choose growth the older the venture and when it is larger. Growth is a more common option when entrepreneurs perform below aspirations, especially as they age or manage larger, more complex ventures.
Novel Methodology : We use detailed matched employee-employer data for 14,760 new ventures in the professional services industry in Sweden. We follow these firms during their first eight years of existence or until they exited. While most of these firms were founded with fewer than two employees, some firms grew larger over time.
Implications on Research: While much entrepreneurship research celebrates the well-known cases of rapidly growing ventures, most new ventures do not survive, and only a few grow. We outline and empirically test a theory of decision making that explains what triggers new ventures to exit and/or grow in size. Our focus is on the growth patterns of firms over time and size (e.g. within-firms), rather than between-firm comparisons. New ventures’ age and size create important boundary conditions that affect entrepreneurs’ preferences to exit or grow. This provides an explanation for the erratic patterns of new venture development whereby path dependence can be explained by decision making based on two decision domains and venture age and size. We offer an alternate theory to standardized decision and growth models. That theory explains when and how decisions related to exit and growth are made as new ventures evolve as a function of entrepreneurs’ variable risk preferences. Entrepreneurial preferences to grow or exit a new venture are judgments based on the actual performance of the firm relative to aspirations, resource levels, and the willingness to minimize losses rather than maximize gains.
Full Citations : Wennberg, K., Delmar, F. & McKelvie, A. Variable risk preferences in new venture growth and survival. Journal of Business Venturing. Forthcoming.
Abstract : We outline and test a decision-making theory of new venture growth and survival. Building upon research in entrepreneurship and decision making under risk, we hypothesize that entrepreneurs’ attention to survival and aspiration reference points changes based on venture age (experience-based learning), size (differences in decision complexity) and performance decision domain. Examining a panel of 14,760 new ventures in the professional services sector, our findings show how risk preferences change as a venture ages and increases in size. This approach offers a more nuanced view of decision making under risk and provides a theoretical explanation for the common patterns of new ventures’ probability of exit and growth diminishing with age and size.
This research develops and tests a model of how entrepreneurs make decisions under risk to explain when and how decisions related to venture exit and growth are made as new ventures evolve.
Latest posts by Alexander McKelvie (see all)
- Signaling for More Money: The Roles of Founders’ Human Capital and Investor Prominence in Resource Acquisition across Different Stages of Firm Development - March 13, 2018
- Variable risk preferences in new venture growth and survival - May 16, 2016
- Making sense of entrepreneurial exit strategies: A typology and test - August 13, 2015