21 October 2009 Research Seminar Mercatus Center George Mason University Arlington, VA

1. Understanding the Entrepreneurial Process: Tracking New Firm Creation with the PSED [Panel Study of Entrepreneurial Dynamics] Paul D. Reynolds George Mason University [pauldavidsonreynolds@gmail.com] 21 October 2009 Research Seminar Mercatus Center George Mason University Arlington, VA PSEDII_Mercatus_tSeminar_21Oct09

2. Where do new businesses come from? PSEDII_Mercatus_tSeminar_21Oct09

3. Why care about new firms? • Provide half of all net new job creation • Contribution to improved sector productivity • Major source of economic innovation • Associated with economic growth • Significant work career option for many • Mechanism for immigrant social integration • Universal route for upward social mobility PSEDII_Mercatus_tSeminar_21Oct09

4. New firm creation is clearly a critical feature of advanced market economies! • What United States data sets might be available to explore the important features and causal mechanisms involved in new firm creation? PSEDII_Mercatus_tSeminar_21Oct09

5. [4,11,12,13,15,17] Business Population [23] [22] Firm life course [21] Firm A Firm Birth Conception Gestation process Firm B Firm C Human Labor Force [6] Work career entry Job 1 Educational preparation Job 2 Job 3 Disengagement, retirement Job n [25] [26] Fig 4.4, pg 68, from Haltiwanger, J., L. Lynch, & C. Mackie (Eds) (2007) Understanding Business Dynamics. Washington, DC: The National Academies Press. 1,2,3,5,6,7,8,9,10,14,16,18,19,20,22,24 PSEDII_Mercatus_tSeminar_21Oct09

6. Where can one find: • Cohorts of nascent entrepreneurs and nascent enterprises • Longitudinal data that begins with firm conception and tracks start-up efforts until a new firm has been established • Data that is fully documented and in the public domain [http://www.psed.isr.umich.edu] • Representative samples to facilitate extrapolation to the entire US population of nascent entrepreneurs and nascent enterprises PSEDII_Mercatus_tSeminar_21Oct09

7. The U.S. Panel Study of Entrepreneurial Dynamics Datasets • PSED I • Initial screening of 63,000 in 1998-2000 • Tracked 830 nascent entrepreneurs/enterprises over 4 years • Sponsored by Entrepreneurial Research Consortium and the Kauffman Foundation • PSED II • Initial screening of 34,000 in 2005-2006 • Tracking 1,214 nascent entrepreneurs/enterprises • Waves A, B & C data [0, 12, 24 month] available • Major support from the Kauffman Foundation, supplemental support from SBA Office of Advocacy • Wave D [36 month] now completed [NSF support] • Wave E & F [48,60 month] in process [NSF support] • Unique national resource providing descriptions of the fundamental aspects of the firm creation process PSEDII_Mercatus_tSeminar_21Oct09

8. Central Assumption: • People start businesses, not • Market characteristics • Macro-economic conditions • Regional, geographic attributes • National R & D intensity • Presence of opportunities • Availability of financing • Positive entrepreneurial climate • Social networks • Speeches by politicians PSEDII_Mercatus_tSeminar_21Oct09

9. Primary Objective • Who gets involved? • What do they do? • What is the outcome? PSEDII_Mercatus_tSeminar_21Oct09

10. CONCEPTUAL MODEL – The Start-up Process Social, Political, Economic Context Growth Adult Population NE Firm Birth Start-up Processes Persist ? NI Business Firm Population Quit ? NE = NASCENT ENTREPRENEURS NI = NASCENT INTRAPRENEURS ? GEM PSED PSED PSEDII_Mercatus_tSeminar_21Oct09

11. Data collection procedure • Large scale screening to locate candidate nascent entrepreneurs • Completed by a commercial market research firm • Based on a representative household sample • Captures nascent enterprises long before they are included in business registries • Detailed interviews to identify active nascent entrepreneurs and gather information on what they are doing • Completed by U Michigan Institute for Social Research • Follow-up interviews to determine the outcomes of their efforts • Completed by U Michigan Institute for Social Research PSEDII_Mercatus_tSeminar_21Oct09

12. PSEDII_Mercatus_tSeminar_21Oct09

13. PSEDII_Mercatus_tSeminar_21Oct09

14. PSEDII_Mercatus_tSeminar_21Oct09

15. Outcome Date PSEDII_Mercatus_tSeminar_21Oct09

16. PSEDII_Mercatus_tSeminar_21Oct09

17. OUTCOME VARIABLE • Status at end of 6 years • 32 % New firm in place • 68 % No new firm in place • 33 % Active start-up continues • 35 % Start-up terminated • What factors, prior to the 6 year outcome, are associated with new firm creation? PSEDII_Mercatus_tSeminar_21Oct09

18. Consider 100+ Independent Variables • Who they are • What they are like • Their personal, cognitive strategies • Their perceptions and attitudes • The context of the start-up HAS LIMITED IMPACT • Shift emphasis to what they do! • Consider difference in level • Consider differences in emphasis PSEDII_Mercatus_tSeminar_21Oct09

19. Major findings: Process • Level of Activity • New firms and quits most active • Continuing start-ups less active • Duration • From one month to decades • Median time start-up, 18-24 months • Median time to quit, 25-30 months • Activity domains related new firm development • Business Presence • Production Implementation • Creating Organizational, financial structure PSEDII_Mercatus_tSeminar_21Oct09

20. Implications • Socio-demographic, personal, contextual factors • Major impact on who enters the process • Less impact on outcome of the process • Business experience has a major effect • Increase new firm birth rate--emphasize training, support during business start-up process • Presence of the business • Producing the goods or services • Setting up the organization, financial structure • Need an early indicator of the “hobby nascents”, who are unlikely to make the major effort • To be an entrepreneur • Walk the walk, “Do it”, etc. • Intensity of investment seems to be important IT’S WHAT YOU DO – NOT WHO YOU ARE! PSEDII_Mercatus_tSeminar_21Oct09

21. Financial Support • Informal financing, before legal business • Amount • Sources • Formal financing, after legal business • Amount • Sources • Additional owner’s equity • Relationship to outcome • New firm, discontinued, still active PSEDII_Mercatus_tSeminar_21Oct09

22. Informal Financial Structure[n = 882; Values in $1,000] PSEDII_Mercatus_tSeminar_21Oct09

23. Formal Financial Structure: Debt Only[n = 435, values in $1,000] PSEDII_Mercatus_tSeminar_21Oct09

24. Financial Investments and Outcomes PSEDII_Mercatus_tSeminar_21Oct09

25. PSEDII_Mercatus_tSeminar_21Oct09

26. Financing: Concluding Observations • Assembling financial support only one of many start-up activities • Informal/formal distinction seems useful • Pre and post legal registration seems useful • Very skewed distributions • Substantial minority with no support • Small proportion in the millions • Relationship to outcomes • Amount of informal support has some impact • May reflect the level of commitment among start-up team • Absence of formal support has a major impact • May be the event that triggers disengagement • Need to explore why formal financial support not forthcoming • Aggregate amounts • First approximations, more precision would be desirable • In same order of magnitude when compared to national estimates • Substantial sums involved, a quarter of a trillion dollars • Less than 20% associated with reports of profitable new firms PSEDII_Mercatus_tSeminar_21Oct09

27. Cross National Harmonization • Proportions that finish process with new firm may vary • U.S. nascents less serious about effort • PSED I Sibling Projects • Canada, Netherlands, Norway, Sweden • Argentina [status unknown], Greece [not now active] • UK proposal not funded • PSED II Sibling Projects • Australia [CAUSEE], China, Denmark, Germany, Latvia • GEM Potential • Harmonized nascent entrepreneur screening • Many GEM teams considering follow-ups • Trying to raise funds for project coordination PSEDII_Mercatus_tSeminar_21Oct09

28. References[Note: Bibliography of publications available on the project website.] • ‘http://www.psed.isr.umich.edu’. • Carter, Nancy, William B. Gartner, and Paul D. Reynolds. (1996) Exploring Start-up Event Sequences. Journal of Business Venturing, 11(3):151-166. • Gartner, W.B., K.G. Shaver, N. M. Carter, and P. D. Reynolds (Eds). (2004). Handbook of Entrepreneurial Dynamics: The Process of Business Creation. Thousand Oaks, CA: Sage Publications. • Reynolds, Paul D. (2007). Entrepreneurship in the United States: The Future is Now. Boston, Kluwer Academic. • Reynolds, Paul D. (2007). New Firm Creation in the U.S.: A PSED I Overview. Hanover, MA: now Publishers, Inc. • Reynolds, Paul D. and Richard T. Curtin. (2008). Business Creation in the United States: Entry, Startup Activities and the Launch of New Ventures. Chapter 8 in U.S. Small Business Administration. The small Business Economy: A Report to the President. Washington, DC: U.S. Government Printing Office (in press). • Reynolds, Paul D. and Richard Curtin (2008). Business Creation in the United States: Panel Study of Entrepreneurial Dynamics II Initial Assessment. Foundations and Trends in Entrepreneurship. V(3):155-307. • Reynolds, Paul D. and Richard T. Curtin (Eds). (2009). New Firm Creation in the United States: Preliminary Explorations with the PSED II Data Set. New York City, NY: Springer.   PSEDII_Mercatus_tSeminar_21Oct09