04/08/23 PSEDII_Mercatus_tSeminar_21Oct09 1
21 October 2009
Research SeminarMercatus Center
George Mason University Arlington, VA
Understanding the Entrepreneurial Process: Tracking New Firm Creation with the PSED[Panel Study of Entrepreneurial Dynamics]
Paul D. ReynoldsGeorge Mason University
04/08/23 PSEDII_Mercatus_tSeminar_21Oct09 2
Where do new businesses come from?
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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
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• 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?
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Conception Gestation process Firm
Birth
Educational preparation
Work career entry
Disengagement, retirement
Firm life course
Human Labor Force
Business Population
1,2,3,5,6,7,8,9,10,14,16,18,19,20,22,24
[21][23]
[6]
[4,11,12,13,15,17]
[26][25]
Firm B
Job 2
Job 3
Job n
Job 1
Firm A
Firm C
[22]
Fig 4.4, pg 68, from Haltiwanger, J., L. Lynch, & C. Mackie (Eds) (2007) Understanding Business Dynamics. Washington, DC: The National Academies Press.
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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
04/08/23 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
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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
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Primary Objective
• Who gets involved?
• What do they do?
• What is the outcome?
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CONCEPTUAL MODEL – The Start-up Process
AdultPopulation
Business Firm
Population
Growth
Persist
Quit
Firm Birth
Social, Political, Economic Context
?
NE
NI
?
Start-up Processes
?NE = NASCENT ENTREPRENEURS
NI = NASCENT INTRAPRENEURSGEM
PSED PSED
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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
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Participation in Business Start-ups by Age and Gender: US 1998-1999
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
Tota
l Num
ber o
f Ind
ivid
uals
0.00
2.00
4.00
6.00
8.00
10.00
12.00
#/10
0 Pa
rtici
patin
g in
Sta
rt-up
s
Total Persons #/100 Persons
Total Persons 1,142,00 2,035,002,182,00 1,453,00 502,000 107,000 31,000 497,000 1,225,00 1,377,00 989,000 269,000 40,000 20,000
#/100 Persons 8.60 10.80 9.80 8.30 4.50 1.30 0.50 3.90 6.40 6.10 5.40 2.20 0.40 0.20
Men:18-24 Yrs
Men:25-34 Yrs
Men:35-44 Yrs
Men:45-54 Yrs
Men:55-64 Yrs
Men:65-74 Yrs
Men:75-up Yrs
Women:18-24 Yrs
Women:25-34 Yrs
Women:35-44 Yrs
Women:45-54 Yrs
Women:55-64 Yrs
Women:65-74 Yrs
Women:75-up Yrs
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Participation in Business Startups: Men by Ethnic Background [US 1998-1999]
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
4,000,000
Tota
l Num
ber o
f Ind
ivid
uals
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
18.00
#/10
0 Pa
rtici
patin
g in
Sta
rt-Up
s
Total Persons #/100 Persons
Total Persons 889,000 3,380,00 1,644,00 147,000 247,000 816,000 260,000 4,000 193,000 570,000 155,000 33,000
#/100 Persons 8.50 9.90 6.90 1.20 12.90 15.90 9.70 0.40 10.10 11.40 7.50 4.40
White Men:18-24 Yrs
White Men:25-44 Yrs
White Men:45-64 Yrs
White Men:65-up Yrs
Black Men:18-24 Yrs
Black Men:25-44 Yrs
Black Men:45-64 Yrs
Black Men:65-up Yrs
Hispanic Men:18-24 Yrs
Hispanic Men:25-44 Yrs
Hispanic Men:45-64 Yrs
Hispanic Men:65-up Yrs
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Participation in Business Start-ups: Women by Ethnic Background [US 1998-1999]
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
4,000,000
Tota
l Num
ber o
f Ind
ivid
uals
0.00
2.00
4.00
6.00
8.00
10.00
12.00
#/10
0 Pa
rtici
patin
g in
Sta
rt-up
s
Total Persons #/100 Persons
Total Persons 889,000 3,380,00 1,644,00 147,000 110,000 572,000 229,000 15,000 90,000 272,000 75,000 0
#/100 Persons 3.70 6.10 4.00 0.30 5.60 9.90 6.90 0.80 5.10 5.80 3.30 0.00
White Women:18-24
White Women:25-44
White Women:45-64
White Women:65-up
Black Women:18-24
Black Women:25-44
Black Women:45-64
Black Women:65-up
Hispanic Women:18-24
Hispanic Women:25-44
Hispanic Women:45-64
Hispanic Women:65-up
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Status of start-up Following Conception
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%En
ter p
roce
ss
1:01
-1:0
3
1:07
-1:0
9
2:01
-2:0
3
2:07
-2:0
9
3:01
-3:0
3
3:07
-3:0
9
4:01
-4:0
3
4:07
-4:0
9
5:01
-5:0
3
5:07
-5:0
9
6:01
-6:0
3
6:07
-6:0
9
7:01
-7:1
2
9:01
-9:1
2
11:0
1-11
:12
13:0
1-13
:12
15:0
1-15
:12
Years and months since conception
Per
ce
nt
of
Sta
rt-u
ps
Active Start-up Inactive Start-up Going Business Leave process
OutcomeDate
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Time from conception to new firm or disengagement
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
0-6 mths 7-12 mths 13-18mths
19-24mths
25-30mths
31-36mths
37-42mths
43-48mths
49-54mths
55-60mths
61-66mths
67-72mths
Time since conception
Cu
mu
lati
ve p
rop
ort
ion
of
all c
ases
New Firm Disengage
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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?
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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
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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
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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!
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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
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Informal Financial Structure
[n = 882; Values in $1,000]
Sum all owners: 1 to 5 Per Cent Min Max Mean
PERSONAL SAVINGS 84.4% 0 5,000 22.69
FAMILY, RELATIVES 17.1% 0 1,400 5.05
FRIENDS, COLLEAGUES5.5% 0 1,000 2.84
CREDIT CARD LOANS 11.5% 0 160 0.92
PERSONAL BANK LOANS9.2% 0 4,000 8.62
ASSET BACKED LOANS 5.6% 0 4,000 7.82
OTHER SOURCES 0.7% 0 300 0.44
TOTAL ALL SOURCES 87.4% 0 13,000 48.37
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Formal Financial Structure: Debt Only
[n = 435, values in $1,000]All reports after Legal Registration Per Cent Min Max Mean
ASSET BACKED DEBTS 10.3% 0 5,000 56.7
LEASE OBLIGATIONS 4.3% 0 350 1.9
CREDIT LINE/WORKING CAPITAL 9.5% 0 1,100 6.0
SUPPLIER CREDIT 6.2% 0 387 1.8
PERSONAL LOANS OWNER 1 26.2% 0 5,000 18.5
PERSONAL LOANS OWNERS 2-5 6.5% 0 15,000 52.8
LOANS FROM OWNER'S FAMILY,KIN 5.9% 0 250 1.2
LOANS FROM EMPLOYEES 0.3% 0 20 0.1
LOANS FROM OTHER INDIVIDUALS 1.6% 0 465 1.0
BUSINESS CREDIT CARD LOANS 8.9% 0 80 0.8
OTHER BANK LOANS 1.8% 0 1,000 2.4
VENTURE CAPITAL FIRM LOANS 0.8% 0 60 0.4
GOV GUARANTEED LOANS (NOT SBA) 0.0% 0 0 0.0
SBA GUARANTEED BANK LOANS 26.2% 0 5,000 18.6
OTHER LOANS 2.5% 0 203 0.3
TOTAL DEBT, ANY SOURCE 34.5% 0 17,100 145.7
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Financial Investments and Outcomes
New Firm
Active Start-
Up Quit
Wave B, C outcomes 9.4 % 65.0 % 25.6 %
Total Informal: n cases 83 573 226
Total Informal: Avg [$1,000] 42.4 54.5 35.1
Owner's Additional Equity: Avg [$1,000] 29.3 47.3 1.8
Total Debt: Avg [$1,000] 79.9 219.6 2.4
Total Invested: Avg [$1,000] 109.1 267.0 4.2
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Annual Financial Support by Outcome Status
$0
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
$140,000
$160,000
An
nu
al F
inan
cial
Su
pp
ort
($1
,000
,000
)
New Firm, Initial Profits $15,725 $4,403 $13,949 $19,125
Discontinued $15,802 $332 $435 $768
Continuing Start-up $71,170 $17,429 $107,508 $124,769
Informal Formal Equity Formal Debts Total Formal
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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
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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
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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.