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Businesses begun in stages are more likely to survive than those launched full-time, study finds

September 22, 2014

For more information, contact: Ben Haimowitz, +1 (718) 398-7642 or +1 (917) 903-9287,

Which is the better way to launch a business -- to dive right in or to wade in gradually? Although there is undoubtedly no simple answer to that question, new research that controls for an array of factors affecting business survival suggests that, in general, slower is better -- indeed, quite a lot better. 

In the process, the research calls into question conventional views of entrepreneurs as a breed apart, a group distinguished from the general run of workers by their abundant self-confidence and willingness to court risk. 

To be sure, those traits can drive decisions to quit a paid job and embark on an enterprise full-time, according to a study in the current Academy of Management Journal. But business survival is another matter. The paper finds that hybrid ventures, which are launched while the founder is employed for wages and only later become full-time, are one third less likely to fail than those begun as full-time enterprises.

In the words of the new study, "The hazard of exit is 33.3% lower for individuals who enter full-time self-employment in a staged process relative to those who enter directly from paid work." 

How are the two groups different? True to the prevailing stereotype of entrepreneurs, "individuals who jump into full-time self-employment are less risk-averse than non-entrepreneurs," write the study's co-authors Joseph Raffiee and Jie Feng of the University of Wisconsin, Madison. In contrast, "individuals who enter hybrid entrepreneurship appear to have risk preferences that are indistinguishable from those who remain in paid employment." 

In sum, "our findings suggest that risk aversion influences the process of how an individual decides to start a business (i.e., full-time versus hybrid), not necessarily whether   the individual decides to start a business or not." 

The authors find much the same with respect to core self-evaluation, a psychological construct combining measures of self-esteem, self-confidence, emotional stability, and sense of being in control. While low CSE decreases the likelihood of direct entry from a wage job into full-time self-employment, it does not decrease the likelihood of entry into hybrid entrepreneurship. Like risk aversion, CSE influences how rather than if   entrepreneurial entry occurs." 

Comments Mr. Raffiee: "A lot of people want to go out on their own but are concerned about the risks. They have a family, they have bills to pay every month. A hybrid arrangement permits one to start a business on a small scale with less sunk cost and downside risk. Equally important, it provides a learning experience about the enterprise in question and one's suitability for it. One gets a realistic preview of life as an entrepreneur as distinct from all the glamorous portrayals of that life.

"Given these benefits," he continues, "it should come as no surprise that the hybrid route to enterprise is superior in terms of business survival. 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." 

Also gone largely unnoticed, the study observes, is that some of the best-known figures in the history of entrepreneurship followed the hybrid route. As the new study notes, Steve Wozniak remained an employee at Hewlett-Packard long after co-founding Apple with Steve Jobs; Pierre Omidyar launched eBay while working for a software-development company; and further back in history Henry Ford founded the Detroit Automobile Company while employed by the Edison Illuminating Company. Meanwhile, a 1997 survey, in the midst of the entrepreneurial explosion inspired by the Internet, revealed that 20% of the CEOs of the U.S.'s 500 fastest-growing companies had continued to hold paying jobs long after founding their organizations. 

The findings of the new research emerge from an 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 aged 14 to 22 when first surveyed in 1979. The cohort was interviewed annually until 1994 and biennially thereafter, and measures of intelligence and risk aversion, were among the data obtained through the project. The new 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. 

As Raffiee and Feng hypothesized, persons low in risk tolerance and in core self-evaluation were more likely to become entrepreneurs through hybrid arrangements than via full-time self-employment. As expected, too, enterprises launched via the hybrid route were more likely to survive than those undertaken full-time. Unexpected was that staged entry bestows a greater business-survival benefit on people of modest intelligence than it confers on smarter ones, a result the authors attribute to the fact that "individuals with less cognitive ability learn at a slower pace." 

In contrast, experienced entrepreneurs derive more business-survival benefit from the hybrid route than novices do. Surmising that experienced types are quicker than others to pull the plug on struggling ventures, the authors suggest that staged entry helps obviate the need to do so. 

In conclusion, Raffiee and Feng acknowledge that their findings "may be viewed as being somewhat at odds with the commonly held believe that, in order to be successful, entrepreneurs most 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....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," is in the August/September issue of the Academy of Management Journal. This peer-reviewed publication is published every other month by the Academy, which, with more than 19,000 members in 115 countries, is the largest organization in the world devoted to management research and teaching. The Academy's other publications are The Academy of Management Review, Academy of Management Perspectives, Academy of Management Learning and Education,   and Academy of Management Annals   .A sixth publication, Academy of Management Discoveries,  is currently accepting submissions and will begin publishing in January 2015.

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