In this paper we explore the factors that condition the likelihood that an entrepreneur starts a second firm. We use data from survey responses of 1,789 entrepreneurs to examine firm founding behavior. Results indicate that multiple entrepreneurs differ from single-firm entrepreneurs in certain demographic and educational characteristics prior to starting a first firm. The phenomenon of graduates embarking on careers of multiple entrepreneurship appears to be growing over time.
The results also show that the first firms of eventual multiple entrepreneurs differ from the first firms of single-firm only entrepreneurs. The paper indicates that those entrepreneurs with the highest probability of starting a second firm have greater time and access to financial resources to undertake a new venture. Starting a first firm sooner after graduation, being divorced, the first firm being acquired, and raising initial capital for the first firm from angel investors all increase the probability that the entrepreneur will start a second firm.
I. Introduction A growing literature in strategy and economics has noted that an important source of new entrants is incumbent firms in the same industry (Klepper 2001; Gompers, Lerner, and Scharfstein, 2005). However, these studies have developed and emphasized theories regarding employees leaving incumbent firms to start new ventures. Various lenses, such as agency theory, organizational capability theories, employee learning theories, and evolutionary theories have been used to evaluate why employees decide to leave their firms to spin-off new firms.
Most of these theories emphasize some sort of conflict between the spin-off and the incumbent’s top management. On the other hand, in the finance literature, a growing group of scholars have examined the determinants of CEO turnover. However, these authors typically focus on forced CEO turnover in relation to firm and industry performance. CEOs who voluntarily leave and what they do after leaving are seldom studied (for important exceptions see Wasserman 2003; Bertrand and Schoar 2003).
At the intersection is a relatively important gap in our understanding– the founder or CEO who is pushed out or voluntarily leaves a firm and decides to start a new firm. The existing theories of spin-off activity (with the possible exception of evolutionary-based theories) do not explain or fit this phenomenon well, and the existing work on CEO turnover with an emphasis on corporate governance of large firms does not shed much light on the phenomenon either. As a result, it has proven difficult to determine how prior founding experience should be interpreted (i.
e. as a measure of risk aversion, learning, or reduced asymmetric information on quality for investors). The importance of the entrepreneur who starts multiple firms over the course of a lifetime has been recognized in the academic literature as a potentially widespread aspect of new firm creation for at least 35 years (Cooper, 1970). However, in relation to its likely significance for economic growth and for the field of entrepreneurship the phenomenon has been understudied (see Table 1).
With some recent exceptions (Sarasvathy ; Monon, 2005), almost no theoretical work has been done (Westhead, 1998). As a result, the few empirical studies use different definitions, populations, and control variables leaving little consensus on foundational questions about how important or how widespread is this phenomenon in the U. S. or internationally. This deficiency is especially true in regard to companies formed to exploit new technology. The purpose of this paper is to advance our understanding of what factors condition the likelihood that a founder will leave a firm and start a new firm.
Is it differences in underlying individual demographic characteristics or differences in characteristics of the first firm experience or performance that motivate novice founders to initiate a new firm founding. To answer these questions, we use a founder-firm matched panel data set, where we track over time founders across different firms that they start or choose to remain with. Our cross-industry data also allow us to examine how industry characteristics may affect how likely a founder will be to try founding a second new firm.
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