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Founders’ experience allows new firms to adapt, learn and survive

It seems obvious—and volumes of research support the notion—that the greater the knowledge and experience an entrepreneur brings to a new venture, the greater its chance of survival. But why? And how?

According to a University of Washington Foster School of Business study, a founder’s industry knowledge and management experience increase the likelihood of success by enhancing the new firm’s ability to adapt.

“Existing research has found evidence that the more experience you have, the better your chances of survival,” says the paper’s co-author Sonali Shah, an assistant professor of management at the Foster School. “But understanding why has been an open question. In this study we have found that firms are not inert, they are capable of adapting to their environment. And the pre-entry knowledge and experience of the founders moderates the ability to adapt.”

Early stage learning

To measure the relationship between founder experience, learning and firm survival, the researchers examined the fortunes of 436 early stage companies created by individuals in Munich as an alternative to unemployment. The companies ranged from an African drum shop to an engineering consulting firm.

At issue was the effect of pre-entry knowledge on two significant learning opportunities that face virtually every new business: early stage business planning and product-line change. While Shah and her co-authors found that changing the product line is generally always positive for a new firm, preliminary business plans tend to reduce a firm’s chance of survival. “Not all learning is equal,” she says. “Early stage business planning can actually lead to rigidity, resulting in less learning over time.”

But a founder’s prior knowledge and experience, Shah adds, exerts a positive effect on these learning activities. It enhances the success of a product line change, and mitigates the negative effects of a rigid early stage business plan by enabling the firm to adjust on the fly.

Study applies to wide range of entrepreneurs

Shah believes that the findings are especially revealing due to the unusually representative sample of firms examined: a broad spectrum of new ventures that includes, but is not limited to, the high-technology firms that are so often the focus of entrepreneurial studies.

“In one sense, this is the most conservative test of these ideas,” Shah says. “If pre-entry knowledge is important for even this set of entrepreneurs who, in general, are establishing less technologically-intensive and knowledge-intensive companies, it’s probably going to be even more true for companies that require a higher knowledge base. Because their technical domains are so rapidly changing, their ability to adapt is even more important.”

“Pre-Entry Knowledge, Learning, and the Survival of New Firms,” is the work of John Dencker of the University of Illinois at Urbana Champaign; Marc Gruber of the Ecole Polytechnique Fédérale de Lausanne; and Sonali Shah of the University of Washington Foster School of Business. The paper is published in the May-June 2009 issue of Organization Science.