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Slow and Steady Wins the Startup Race

Slow and Steady Wins the Startup Race
BusinessNewsDaily.com
By Chad Brooks
Published: September 23, 2014
>> Slow and Steady Wins the Startup Race

Rather than throwing all they have into a new business, entrepreneurs are best-served by starting off slowly, new research suggests.

New businesses that are launched while the founder is employed and still collecting a paycheck, and only later become full-time, are one-third less likely to fail than those that begin as a full-time operation, according to a study in the current issue of the Academy of Management Journal.

"The hazard of exit is 33.3 percent lower for individuals who enter full-time self-employment in a staged process relative to those who enter directly from paid work," the study's authors wrote.

Many would-be-entrepreneurs want to go and start their own business, but those with a family are concerned about the risk of not being able to pay their bills each month, said Joseph Raffiee, a doctoral candidate at the University of Wisconsin, Madison, and one of the study's authors. He said launching a business slowly allows new entrepreneurs to start on a small scale, with less up-front costs and downside risks.

"Equally important, it provides a learning experience about the enterprise in question and one's suitability for it," Raffiee said in a statement. "One gets a realistic preview of life as an entrepreneur as distinct from all the glamorous portrayals of that life."

Given the benefits, it's not much of a surprise that the "hybrid" route to starting a business is superior in terms of survival, Raffiee said.

"Yet, so strong is the stereotype of  entrepreneurs as brave mavericks who quit their day jobs to pursue their dreams, that we are only now coming to realize that there may be a better way than plunging right in," he said.

The researchers said many well-known popular entrepreneurs took this exact route. According to the study, Steve Wozniak remained an employee at Hewlett-Packard long after co-founding Apple with Steve Jobs and Pierre Omidyar launched eBay while working for a software-development company. Even Henry Ford founded the Detroit Automobile Company while he was employed by the Edison Illuminating Company.

Additionally, a 1997 survey revealed that 20 percent of the CEOs of the U.S.'s fastest-growing companies had continued to hold paying jobs long after founding their organizations.

The research revealed that those who have a low  risk tolerance as well as a low core evaluation - which measures self-esteem, self-confidence, emotional stability and sense of being in control - were more likely to become entrepreneurs through hybrid arrangements than via full-time self-employment. 

The current study was based on the analysis of information collected by the National Longitudinal Survey of Youth, 1979 cohort. Directed by the U.S. Bureau of Labor Statistics, the survey enlisted a nationally representative sample of about 12,700 men and women who were ages 14 to 22 when first surveyed in 1979. The members of the cohort were interviewed annually until 1994 and biennially thereafter. The study's analysis covers the years 1994 to 2008, focusing on newly hired or newly self-employed individuals and monitoring their employment over the course of time.

The study's authors acknowledge that their findings may be viewed as being somewhat at odds with the commonly held belief that, in order to be successful, entrepreneurs must devote their full attention to their business.

"While this may be the case, our results suggest that it is worthwhile to take steps to determine if the business idea warrants large-scale commitment prior to doing so," the study's authors wrote. "Given the uncertainty associated with new businesses, entrepreneurs are best-served by making small initial commitments early on, giving themselves the option to commit fully to their business after they have had a chance to accumulate information and assess its potential and prospects."

The study, "Should I Quit my Day Job?: A Hybrid Path to Entrepreneurship," was co-authored by Jie Feng, a doctoral student at the University of Wisconsin, Madison.

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