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Founders of Startups May Develop Itchy Feet

April 2005

STANFORD GRADUATE SCHOOL OF BUSINESS—Few figures have had a larger impact on the American imagination than the cowboy. Tough, self-reliant, and brave, the mythological cowboy was America personified. But as the 20th century drew to a close, a new mythic figure captured the stage: the high-tech entrepreneur. Armed with grit, limitless imagination, and a little seed money, Hewlett and Packard, Jobs and Wozniak, and dozens more rose from their garage workshops to become the cowboys of Silicon Valley.

Given their iconic status, it is perhaps not surprising that many academic studies—not to mention articles in the mass media—tend to emphasize the individual characteristics of the entrepreneur. Nor is it surprising that researchers at the Stanford Graduate School of Business, located in the geographic and historic center of the Valley, would undertake to expand our knowledge of entrepreneurship and its consequences for business management.

In October 1997, Tom Byers and Heleen Kist, and Robert Sutton of Stanford issued a challenge to other researchers. "We begin by asserting that individual entrepreneurs get too much credit and bale for the fate of new ventures. Our perspective suggests that in trying to predict which entrepreneurs will succeed or fail, instead of turning attention to the characteristics of individual founders and CEOs, researchers and teachers would be wiser to turn attention to the other people the entrepreneur spends time with and how they respond," they wrote in a paper with the apt title, "Characteristics of the Entrepreneur: Social Creatures, Not Solo Heroes."

Meanwhile, the Business School's William P. Barnett, whose work includes studies on the benefits of intra-industry competition and the risks of simultaneous product launches, was thinking about similar problems. For some years he had wanted to conduct a study that would follow people who have started a new business—along with people who have not—throughout their career. "In medicine it is wrong to look only at people who are sick, or only look at people who are well," he said. Similarly, studies of entrepreneurship must be equally inclusive. But finding data to build such a study has been very difficult.

In 1997, however, the Business School conducted its second major survey of alums by sending questionnaires to 11,976 MBA graduates; 5,183 were filled out and returned, a surprisingly high rate of return. Using data gleaned from the study, Barnett, the Thomas M. Siebel Professor of Business Leadership, Strategy, and Organizations, and Stanislav Dobrev, then a Stanford research associate and now at the University of Chicago, built a model that examines how organizations interact with the roles of individuals working within them to predict who is most likely to leave and form a new venture.

They documented that founders are more likely to leave and start a new business as their companies mature and their own roles become more routinized. But employees are more likely to leave early on and start a company. As their employer matures, they become less likely to be lured away by an entrepreneurial opportunity.

When an entrepreneur starts a company, he or she generally fills two strikingly different roles: founder and CEO. While the CEO runs the company, the founder becomes a charismatic figure whose identity is tightly linked to the company. Since young companies tend not to be highly structured, founders fill the organizational vacuum with their own personalities. Having that much personal clout is probably one of the best parts of the job.

But as startups mature they inevitably develop what Barnett calls a "rational bureaucracy." Pressures mount for the organization to conform to institutionalized practices; investors, customers, and partners demand accountability and reliability. And as the structure develops, the founder sees his or her charisma, personal distinction, and individual eminence giving way to order and discipline. Suddenly the founder needs approval from the board to make significant changes. Put simply, the founder becomes a run-of-the-mill CEO.

Meanwhile, founders of growing companies develop relationships with investors, regulators, customers, and other businesses. These contacts expose the founder to new entrepreneurial opportunities at a time when he or she is seen as someone who succeeded once and could likely succeed again.

The more these trends develop, the more likely the founder will leave to start a new venture, the researchers conclude.

Interestingly, employees of startups are affected by the same move toward "rational bureaucracy" as the founders—but in the opposite way. In a well-managed organization, structures eventually develop that help employees put their creative ideas to good use, and then reward them.

"Larger, older firms provide opportunities for creative managers," says Barnett. "Such organizations typically have well-developed internal labor markets, complete with avenues for trying out new initiatives. We expect that managers within such organizations will be less likely to leave to start new firms than managers within smaller, newer organizations." Barnett and Dobrev found that respondents were 60 percent less likely to break away and become founders if they were in large firms rather than in small ones. They were an additional 20 percent less likely to become entrepreneurs if they were in old firms rather than young ones.

While high salaries and high job satisfaction act as deterrents to entrepreneurship, working in high-technology manufacturing increases by more than one-third the likelihood of leaving to found a new company. People who work in a family-owned business (whether they founded the company or not) are much less likely to leave, but those who have worked for multiple organizations have a greater rate of entrepreneurship.

Are there biases in this study? There may be, Barnett concedes. Since entrepreneurship is a relatively rare event in the general population, the researchers looked at an unrepresentative sample—Stanford MBAs—and found them much more likely to start a company. Therefore, the researchers are not completely comfortable with generalizing from their results.

Even so, the study has certainly deepened our knowledge of innovation and entrepreneurship, and given future researchers a new and powerful approach to answer the many remaining questions.

—by Bill Snyder

Related Information

Organizational Roles and Transition to Entrepreneurship
Stanislav Dobrev and William Barnett
Academy of Management Journal, June 2005, Vol. 48, No. 3, 433-449

Characteristics of the Entrepreneur: Social Creatures, Not Solo Heroes
Tom Byers, Heleen Kist, and Robert I. Sutton
Handbook of Technology Management, Richard C. Dorf, ed., CRC Press LLC, 1997