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Journal of Small Business Management 2012 50(3), pp. 365–388

Planning and the Entrepreneur: A Longitudinal Examination of Nascent Entrepreneurs in Sweden jsbm_357 365..388

by Benson Honig and Mikael Samuelsson*

We studied 623 nascent entrepreneurs during a six-year period, examining how their planning decisions impact venture-level performance. Our study is unique in that we tracked nascent ventures, examining their planning behavior, including changes to plans. Relying on the theory of legitimacy, this paper adds to the scholarly debate over the merits of business planning by examining, longitudinally, the impact of planning during a six-year period, accounting for both pre-emergent nascent activity and post-emergent success factors. We found that neither formal planning nor changes in the business plan increased venture-level performance over the six-year study period.

Introduction Each year, nearly one million North Americans start a business (Aldrich and Ruef 2006), with new firms accounting for a significant percentage of employment and economic development. Given the importance of entrepreneurship to economic development, considerable effort continues to be expended on promoting entrepreneurship through programs, courses, and other support mechanisms. Entrepreneurship education is growing rapidly in universities and colleges throughout the world

(Honig 2004; Katz 2003; Kuratko 2005; Vesper and Gartner 1997). This trend is fuelled by (1) a recognition that entrepreneurship can play an important role in economic growth (Casson 1982; Kuratko 2005; Schumpeter 1934; Shane and Venkataraman 2000); and (2) assertions that entrepreneurship education can play an important role in developing more and/or better entrepreneurs (e.g., Fiet 2001; Gorman, Hanlon, and King 1997; Katz 2007; Pittaway and Cope 2007). Though courses in entrepreneurship continue to be both popular and

*Both authors contributed equally and are listed alphabetically. Benson Honig is professor in the DeGroote School of Business, McMaster University. Mikael Samuelsson is Assistant Professor of Business Administration in the Stockholm School of Economics. Address correspondence to: Benson Honig, DeGroote School of Business, McMaster University, Hamilton, ON, Canada, L8S4M4. E-mail: [email protected] or Mikael Samuelsson, Stockholm School of Economics, Box 6501, 113 83 Stockholm, Sweden. E-mail: [email protected].

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ubiquitous, pedagogical assessments related to entrepreneurship education are quite scarce. With but a few exceptions (notably, Souitaris, Zerbinati, and Al-Laham 2007), evaluations rarely include control samples that monitor possible changes in attitudes or knowledge. Further, there is little agreement regarding common course content. For instance, teaching entrepreneurship from a theoretical as opposed to a practical perspective is normatively thought to undermine the delivery of relevant competencies to students (Fiet 2001). However, our informal observations regarding the content of common entrepreneurship textbooks, as well as more systematic examinations of course descriptions and syllabi for a wide range of entrepreneurship courses, shows that most entrepreneurship courses rely strongly on the teaching and development of a business plan (Menzies 2009). Thus, understanding the role and impact of business planning on entrepreneurial performance should be particularly important to educators and advocates. Despite widespread popularity, the pedagogical goals of business planning education remain poorly understood (Castrogiovanni 1996), and there has been growing criticism of this particular educational emphasis (Gumpert 2003; Honig 2004). Some research has shown that business plans may be either unrelated to entrepreneurial success (Karlsson and Honig 2009) or primarily beneficial in signaling institutional support (Spence 1974) as opposed to helping with the entrepreneurial process itself (Honig 2004; Karlsson and Honig 2009). However, there continues to be substantial scholarly debate regarding the merits or liabilities of writing business plans for nascent entrepreneurs (Brinckmann, Grichnik, and Kapsa 2010). For example, Brinckmann, Grichnik, and Kapsa (2010), controlling for endogeneity and entrepreneurial experience, found that new ventures that

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planned grew faster. On the other hand, they found less conclusive evidence for emergent entrepreneurial firms, stating: “our findings suggest being cautious concerning a process mindset where planning is the first step and execution of the plan is the second step” (Brinckmann, Grichnik, and Kapsa 2010, p. 37). In addition, their work is based on research conducted largely on much older and newly established firms, and fails to carefully examine activities during the nascent pre-start-up process, which is the typical assumed target period of entrepreneurship classes. In contrast, the empirical work of Delmar and Shane (2003) found that planning helped entrepreneurs facilitate goal attainment, make rapid and more effective decisions, and turn goals into operational activities more quickly. However, the Delmar and Shane (2003) study was based on a relatively short time frame of only two years—a period that may well have been insufficient to fully examine the role of business planning on the full range of entrepreneurial activity from start-up, through the various life cycles, and toward maturation. In particular, they were unable to examine the relationship between business planning and success, choosing instead to focus on persistence, organizing activities, and product development, due to the same data limitation faced by Honig and Karlsson (2004). In sum, the data on the effectiveness of business planning for emergent entrepreneurs are still a matter of considerable debate. From a methodological perspective, most research regarding business planning examines whether or not a plan was made at a particular point in time, and attempts to impose causality on subsequent events such as disbanding, first sales, or various other significant events in the life of a new venture (cf. Brinckmann, Grichnik, and Kapsa 2010; Delmar and Shane 2003; Shane and Delmar 2004). When adding longitudinal

JOURNAL OF SMALL BUSINESS MANAGEMENT

studies to our study of business planning, new methodological perspectives are required. In the established literature, few studies show how a plan emerges over time and whether a change in the venture or in the plan has an impact on subsequent performance. We seek to bridge this gap by providing new knowledge in two areas. First, our research design captured nascent venture activity early in the entrepreneurial process, which we followed over a period of six years. This distinguishes our effort from earlier research in that we were able to study actual performance, such as venture-level profit, over time. Second, we included changes in business planning, which may increase our understanding of the dynamism we so often find in case studies of entrepreneurship.

Accounting for the Business PlanningEntrepreneurship Linkage The subject of the “liability of newness” has been well-examined in the entrepreneurship literature (Aldrich 1999; Aldrich and Fiol 1994; Stinchcombe 1970), showing that failure rates are higher for new organizations and that they gradually diminish with age. Legitimacy is a critical resource in overcoming this liability for nascent enterprises as it demonstrates acceptance and validation by various stakeholders, allowing for social endorsement and support from a firm’s environment (Powell and DiMaggio 1991; Scott 1995). It becomes important in obtaining financial capital and investors, as well as in establishing a clientele or customer base (Aldrich and Ruef 2006; Suchman 1995). Legitimation results when new ventures benefit by complying with institutional pressures, and business planning should positively impact the performance of new ventures in this way (Delmar and Shane 2003, 2004). Legitimation theory holds that business plans are useful for their

value in conferring and signaling status, quality, prestige, and capability, as opposed to alternative propositions that planning helps to prepare the nascent entrepreneur for successful activities. However, due to their limited time perspective, studies to date have only evaluated the influence of emergent legitimation forces. Some qualitative work suggests that the legitimation stemming from business plans occurs primarily during the initial period of organizational formation (Karlsson and Honig 2009). What remains unclear is the extent to which legitimation processes, particularly those related to business planning activities, persist over an extended life cycle of a firm’s development. Advocates of planning often point out that there is some evidence that planning leads to persistence (Delmar and Shane 2003; Honig and Karlsson 2004; Liao and Gartner 2006; Perry 2001). However, persistence alone is a poor measure of success and is a controversial dependent variable as it is very difficult to ascertain why termination occurs. Entrepreneurship is heterogeneous in that the industry and technology of a new business as well as the individual psychological and sociological entrepreneurial attributes, the organizational goals, and the resources brought to the new firm vary considerably. In some cases, planning might lead to the efficient termination of a poorly run business or, alternatively, it might lead to stronger adherence to a particular and possibly unsuccessful trajectory, even in the face of conflicting data. Entrepreneurs may be better off identifying failure early on rather than pursing an activity that will likely lead to failure. For example, one study examining the relationship between planning and failure found only weak relationships between non-planners and failure (Perry 2001). Entrepreneurship research thus becomes inconclusive in terms of the effect of business planning on the success of nascent organizations


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(Castrogiovanni 1996). In particular, the issue of persistence and success has not conclusively been researched, as few studies contain the necessary longitudinal data to adjudicate whether or not persistence eventually leads to improved performance. By utilizing a six-year longitudinal time frame, we attempt to fill this important research gap. Entrepreneurship research is largely an inductive process (Sorenson and Stuart 2008). In the empirical world, conflicting theoretical distinctions become less relevant because research must examine the process before determining the outcome (Davidsson 2005, pp. 17–18). In order to understand the bearing of legitimation forces on the general population of entrepreneurs, we maintain that it is essential to examine the phenomenon with careful longitudinal study, using a full population of nascent entrepreneurs that reflect the environment’s actual heterogeneity. Because most studies involve selecting from lists of established, registered firms, scholars frequently lose the heterogeneity perspective, focusing instead on emergent entrepreneurs who have already passed a number of stages of development and formally launched their businesses. Sampling on the dependent variable in this way severely constrains what we can learn from organizational emergence, organizational learning, and the full suite of entrepreneurial activities that may eventually yield successful organizations. In this study, we overcome this bias by uniquely examining 623 Swedish nascent entrepreneurs over a six-year longitudinal period. The list was selected by randomly sampling over 30,000 individuals in the Swedish population at large, asking individuals: “Are you, alone or with others, now trying to start a new business?” We believe the longitudinal insight provided by this study is singular, contributes substantially to the debate regarding how the entrepreneurial pro-

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cess unfolds, and points to the advantages of a more expansive theoretical framework. After summarizing contemporary nascent entrepreneurship scholarship and the implications of planning behavior, we present a discussion of our methods, hypotheses, and findings.

Business Planning and Nascent Entrepreneurs Empirical entrepreneurial legitimation studies typically fail to examine activities with a longitudinal perspective reflecting the entire life cycle of an organization. In order to fully analyze these phenomena, researchers must study the entire process of organizational formation from inception through to emergence (maturity) or death (dissolution). Though case studies are useful for showing the range of activity, they do little to inform us of the general trends and norms that exist in the overall population of would-be entrepreneurs. As previously noted, many studies based on emerging firms suffer from self-selection bias—they sample on the dependent variable of successful emergence and are unable to examine activities that occur in the conception or gestation phase of organizational activity (Haltiwanger, Lynch, and Mackie 2007). This bias is overcome through the careful study of nascent entrepreneurs. Nascent entrepreneurs are individuals engaged in gestation activities that, when carefully examined, provide a statistically representative sample of the population of individuals in the process of starting new ventures (Alsos and Kolvereid 1998; Carter, Gartner, and Reynolds 1996; Gartner et al. 2004; Reynolds 2008). The study of nascent entrepreneurship consists of sampling from the general population and asking random individuals whether they are in the process of starting a business. It provides a superior method of understanding the entire population of entrepreneurs because it eliminates a number of methodological flaws in previous research, including


hindsight bias and sampling on the dependent variable, which is typically conducted when examining various successful outcomes related to launching a new business. Because the process entails repeated resurveying of the population over time, scholars are in a position to effectively examine the comparative impact of various inputs both before and during the entrepreneurial process, as it unfolds in real time (cf. Reynolds 2008; Samuelsson and Davidsson 2009). Though entrepreneurship is a heterogeneous phenomenon, attempts to influence and promote it tend to focus on only one or two relatively narrow characterizations of what entrepreneurs do, who they become, and how they might be influenced. In this study, we define entrepreneurship more broadly as the development of new organizations (Aldrich and Ruef 2006). In agreement with Aldrich and Ruef (2006, p. 65), we define a nascent entrepreneur as someone who initiates serious activities that are intended to culminate in a viable organization. Planning is certainly one of the gestation activities in which many nascent entrepreneurs engage. It is not only ubiquitous but is also a normative standard expected by bankers, venture capitalists (VCs), angel investors, and college professors alike. Advocates of planning abound throughout the political, social, cultural, economic, and educational spheres. Planners are allocated resources in order to solve our greatest problems, be it the depletion of the ozone layer, the impact of trade tariffs, the building of a new superhighway, or the spread of disease. We teach students of public policy how to plan, just as we do our MBAs and our future teachers. Numerous books are published each year informing the reader of how best to prepare a plan, providing guidance and guidelines, suggestions, and outlines. And yet, despite this fervor of activity, there is only

limited empirical literature proving that planning is a productive, useful exercise in terms of entrepreneurial success (Mintzberg 2000). General planning theory (Ajzen 1991) measures an individual’s intentions, gauging how willing they are to pursue a particular activity. The assertion is that the harder they are willing to try, the more likely they are to perform, linking this work with selfefficacy (Bandura 1977; Chen, Greene, and Crick 1998). In entrepreneurship, this has been extensively studied in the entrepreneurship intentions literature (Krueger, Reilly, and Carsrud 2000). This range of theory is particularly useful for evaluating a set of stable opportunities and resources, and is arguably less suitable for dynamic models where resources, goals, and motivations may be a “moving target.” We suspect that, with their accompanying unspecified futures and uncertain relationships, these theories fall short in testing business plans for emerging activities. Fundamentally, all theories about (successful) planning build on two general assumptions (Mintzberg 2000): (1) the planner has the required knowledge; and (2) the future is known, to some extent. However, if we look at the general population of nascent entrepreneurs (i.e., the population of all start-ups and not only high-tech or university-based initiatives), very few have a sophisticated or even rudimentary knowledge of business planning. Many nascent entrepreneurs engaging in first time initiatives have little or no formal education in business planning. Though certain populations may have formal training (e.g., MBA graduates who have taken university courses), there is no reason to expect this knowledge to be available to the general population. Also, in planning theories to presume a foreseeable future, under conditions of true uncertainty, it would be very difficult to plan with any accuracy. On the other hand, most new ventures are based on


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imitative venture opportunities for which we can argue that the future is somewhat predictable (cf. Samuelsson 2004). Even so, our view is that there is insufficient reason to argue that a formal theory of business planning is suitable for the majority of the nascent entrepreneurial population given that this majority is characterized by limited relevant knowledge. Despite the weak empirical support for early stage nascent planning activity (Castrogiovanni 1996), business planning is commonly employed to reduce uncertainty (Gelderen, Frese, and Thurik 2000). However, a critical perspective might ask, “What is the point of reducing uncertainty if it fails to yield efficient results?” A number of studies have demonstrated that nascent entrepreneurs who formulate business plans are more persistent than those who do not (Delmar and Shane 2003; Liao and Gartner 2006), but as previously suggested, persistence can be interpreted in various ways. If we only look at the Swedish Panel Study of Entrepreneurial Dynamics (PSED) data, Delmar and Shane (2003) found empirical support for business planning and its positive effect on progress and the attainment of specific so-called gestation behaviors (milestones) during the first two years of the study. In addition, some studies have shown that planning assists with the overall growth and success of new firms (Bracker, Keats, and Pearson 1998; Schwenk and Shrader 1993). In the United States, using the PSED 1, Ford, Matthews, and Baucus (2003) found that business plan formality had a significant and positive correlation to the actual and expected revenue in year one. However, they also reported an interesting diminishing return on business planning. Over time, the relationship between planning early and subsequent performance was reduced. Similar to the Swedish study by Delmar and Shane (2003), Liao and Gartner (2006) studied U.S. nascent firms

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and found that planning early increased the likelihood of survival in uncertain financial and highly competitive situations, whereas planning late increased venture survival in financially stable and less competitive environments. Alsos and Kolvereid (1998) found that serial entrepreneurs were similar to novice founders in their early planning relationships. One particularly interesting result comes from the Delmar and Shane (2003) PSED study in which they found an ordering effect, arguing (and finding) that business planning should precede marketing activities. They were, however, unable to address issues related to long-term success or failure due to the limited time period under study. However, we view their conclusions with some degree of skepticism as, in all of their research on this subject, they used a small subsample (233, which is approximately 35 percent) of the original sample of 623 start-up respondents, possibly resulting in an unanticipated bias. Their intention in using this small subsample was to avoid left censoring and to follow a less heterogeneous sample over the first two years of the ventures. Notably, research has not demonstrated a relationship between business planning and firm performance beyond survival and different so-called gestation behaviors. For example, Lumpkin, Shrader, and Hills (1998) as well as Miller and Cardinal (1994) found that early stage companies that completed formal business plans failed to outperform projects without a formal plan. In addition, Carter, Gartner, and Reynolds (1996), using the U.S. PSED 1, found that nascent entrepreneurs more involved in internal activities, such as preparing business plans, were less likely to generate sales and positive cash flow. Likewise, Keeley and Kapp (1994) reported that successful ventures focused on action rather than planning. Others who share similar findings are Honig and Karlsson (2004), Robinson and Pearce


(1983), and Boyd (1991). It is Sahlman (1997) who rather straightforwardly states that business planning scores no more than 2 on a 10-point scale as a predictor of a new venture’s success. More surprisingly, Honig and Karlsson (2004), using the same data but a different analytical approach from that of Delmar and Shane (2003), found only a marginal effect on venture persistence. However, they did not examine relationships beyond a two-year framework, nor did they examine if changes in business planning had any affect. The empirical literature does suggest that there is some unstable and inconsistent support for a relationship between business planning and persistence. If we look at other performance measures, such as attaining first sales and venture-level profit, we continue to find mixed results. For example, using the U.S. PSED, neither Edelman, Manolova, and Brush (2008), who examined the probability of a startup as a dependent variable, nor Parker and Belghitar (2006), who studied whether nascent entrepreneurs started up, quit, or continued, nor Tornikoski and Newbert (2007), who studied organizational emergence, including using first sale, hiring of employees, and receiving external financing found a positive effect of business planning or that business planning had a positive effect on becoming operational. Further, Van Gelderen, Thurik, and Bosma (2005), who studied becoming operational, found no effect using the Dutch PSED data, and Honig and Karlsson (2004) found no effects relating planning to profit in the Swedish PSED data. Performance, however, is an illusive construct in relation to the nascent venturing process and beyond. As a concept, it may be traced back to the work of Taylor (1911) and Max Weber (in Swedberg 1998), in which performance is closely related to efficiency and productivity in relation to resource utilization. In later management literature, the

discussion typically evolved around concepts such as “stakeholders” and “multiple constituents.” Organizational efficiency was summed up with the question, “For whom are we measuring and evaluating organizational performance?” However, this could be viewed from two perspectives. The first concerns the measuring of organizational efficiency from different points of view depending on who stands to benefit from the operations of the organization (Connolly, Conlon, and Deutsch 1980; Zammuto 1984). The idea of the firm as a coalition of interests has a long tradition in management (Barnard 1938; Cyert and March 1963), and taking a stakeholder view includes consumers, coworkers, executives, owners, and the community at large (Freeman 1984). However, for an overall measure of organizational performance, the classical owner’s perspective represents a reasonable indicator, particularly for the study of entrepreneurship that focuses on the individual. The different inputs used in a firm are often priced on factor markets; there are labor markets, capital markets, markets for equipment, and raw materials. Assuming efficient markets, factors of production will be “paid” their proper market value, which is what the market determines they are “worth.” For the average of all firms, the residual (e.g., profit) is thus an adequate overall measure of organizational performance. In practice, this would be something like the firm’s gross profit and should be similar to operationalizations of the firm’s added value (revenue minus cost of production). A similar reasoning applies to survival as a measure of organizational performance. What keeps a firm together (or an individual motivated) is when the benefits of interacting within the boundaries of the firm are larger than the disadvantages. The fact that a particular firm is a going concern means that a particular constellation of productive resources and market opportunities are optimal (or at


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least worthwhile) for that organization. The idea that a business idea is “dead” is rarely based on a zero benefit to society from the product or service provided. Instead, failed firms emphasize the fact that for most types of resource bundles that can produce any particular combination of goods or services, there are alternative uses that can be worthwhile. Recent empirical literature examining the PSED framework has made use of a number of different performance indicators as dependent variables. Frequently, the systematic examination of financial profit was avoided because studies were conducted early into the firms’ life cycle—often after only two years of activity. Delmar and Shane (2004) used various milestones such as reaching first sales, positive cash flow, profit, financial input, and so forth. Others have used variations on the accumulation of gestation behaviors between two or more points in time. For example, Samuelsson (2004) used the accumulations of gestation behaviors as a sign of progress, as did Davidsson and Honig (2003). Selfreported measures of status, such as “up and running,” have been used by Parker and Belghitar (2006), to explain organizational persistence, that is, continuing to attempt to launch a business (Brush, Edelman, and Manolova 2008; Liao and Gartner 2006). Scholars have also examined planning using continuous measures of levels of sales or profits (Delmar and Shane 2006). In sum, our review indicates that there is weak but somewhat inconclusive support for a relationship between business planning and persistence, and only limited support for a relationship between business planning and other measures of performance, such as venture-level profit or income exceeding costs. Overall, persistence could just as well indicate known psychological biases such as escalation of commitment (McCarthy, Schoorman, and Cooper 1993) or the failure to seek and use

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disconfirming information (Klayman and Hay 1987). Because we have the advantage of a long time period, we decided to focus this study on the impact of business planning using venture-level profitability performance as an approximation for the creation of new economic activity. We maintain it is reasonable to believe that venture-level profit captures the underlying development of an emerging firm better than other dependent variables that have been used, such as survival or persistence. Notably, estimating profit in new ventures is known to be somewhat difficult and can include problems regarding the time periods involved as well as specifically when and how it is reported. Recent reviews in the field, however, agree that selfreported measures correspond well with actual measures (Shepherd and Wiklund 2009). In addition, Davidsson, Steffens, and Fitzsimmons (2009) and Brännback et al. (2009) showed that early profit actually drives subsequent profitable growth. Though we acknowledge that business planning may actually have either positive or negative impacts on venturelevel performance, in this study, we examine the relationship by referring to normative criteria derived primarily from data sets composed of already up and running firms (Brinckmann, Grichnik, and Kapsa 2010) as opposed to the nascent activity we are studying. In the early stages of the nascent entrepreneurial process, some planning-oriented entrepreneurs may decide to abandon their venture earlier rather than later despite the legitimation effect discussed previously. Though the theory and empirical evidence regarding planning and performance is somewhat inconsistent, there seems to be diminishing returns on business planning over time (Brinckmann, Grichnik, and Kapsa 2010). Therefore, we present the following hypothesis with a null:


H1: Entrepreneurs will benefit from legitimation derived from planning activities that will increase their venture-level performance. H1 (Null): Entrepreneurs will not benefit from legitimation derived from planning activities; planning will not increase their venture-level performance. We also propose that early formal business planning may have a diminishing return over time, indicating that later planning is more worthwhile than early planning. Once more is known about the environment as well as the type of business being pursued, planning may be a more appropriate undertaking. From a planning supportive position, one may argue that changing business plans should increase venture-level performance because the new plan will reflect increased knowledge about the venture and changes in the environment, as well as the effect of gestation behaviors. This is an important research gap that, to the best of our knowledge, has not been addressed in the literature. Therefore, we present our second hypothesis with its accompanying null as follows: H2: Entrepreneurs who change their business plans later in the nascent firm’s life cycle will demonstrate increased venture-level performance. H2 (Null): Entrepreneurs who change their business plans later in the nascent firm’s life cycle will not demonstrate increased venture-level performance. Unfortunately, few, if any studies have been able to systematically examine the full breadth of the life cycle of entrepreneurial activities that occur over time in any single location. One of the biggest barriers to doing so is that there exist no lists that comprehensively examine start-

ups before they are registered, regulated, and up and running (e.g., nascent idea generation), longitudinally, through the first critical years of operation. Virtually, every quantitative longitudinal study examines only a portion of the firm’s life cycle, either beginning with registration or some other major life cycle event (such as an initial public offering, investment, a particular dollar size transition, etc.). In this study, we examined a range of business planning parameters, including whether they formally planned and whether they changed their business plan. We believe that this provides the first comprehensive and systematic longitudinal study that effectively examines performance outcomes testing the importance of business planning activities.

Method The study of nascent emerging organizations, whereas important, is still in its infancy, regardless of the prominence of the PSED and the Global Entrepreneurship Monitor projects (Carter, Gartner, and Reynolds 1996; Katz and Gartner 1988; Reynolds 2008). Traditionally, nascent organizations are inherently difficult to identify and study. For example, they do not appear in common business databases because they have not yet registered. Once registered, they are typically new organizations and not emerging or nascent firms, and therefore do not reflect the many nascent ventures that fail to establish themselves as firms. Recent studies are based exclusively or primarily on such existing firms (Brinckmann, Grichnik, and Kapsa 2010; Burke, Fraser, and Greene 2009). Significantly, nascent firms also fail to be captured in databases that rely on tax payments, employee rolls, or the like. As a result, data about nascent firms are not readily obtainable from traditional sources. In this research, we examine the role of business planning for 623 Swedish nascent entrepreneurs. This research was uniquely designed to provide population


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Table 1 Comparing U.S. and Swedish PSED

Dates of Initial Screening, Detailed Interview 1 [Q,A] Time Lag to Interview 2 Interview 3 Interview 4 Interview 5 Interview 6

[R,B] [S,C] [T,D] [E] [F]

U.S. PSED 1

U.S. PSED 2

SWE PSED 1

July 1998– January 2000

October 2005– January 2006

January–August 1998

14 months 27 months 40 months None None

12 24 36 48 60

months months months months months*

6 12 18 24 75

months months months months months

*Estimated completion, summer 2011. estimates for business start-up efforts and to follow a random sample of nascent activities leading to the possible emergence of new businesses by studying so-called “gestation activities.” The PSED project is arguably the most comprehensive research effort ever conducted to longitudinally examine the business start-up process. The Swedish version of the PSED 1 is a longitudinal effort with the same aims as its U.S. counterpart: (1) to provide population estimates for business start-ups; and (2) to systematically follow a large number of ventures during the nascent start-up process and beyond. The Swedish data used in this research project are singular in that we followed a random sample of business start-ups from conception for a full six years. Table 1 describes the differences between the Swedish and U.S. counterpart. The U.S. PSED 1 gathered data for a maximum of 40 months, but that sample collection was spread over more than one year, from 1998 to 2000, reducing the length of the study process when with to the Swedish study. The U.S. PSED 2 has had, in 2010, five interview waves following an initial screening in 2005–2006. The Swedish

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data in this study covers a period of more than 75 months, with six follow-up interviews The research design and sample have several advantages over other designs and samples used to investigate the nascent venturing process: (1) the design was constructed from a random sample of the adult Swedish population; (2) the database contains enough ventures to utilize statistical methods suitable to study development over time; (3) following the venture exploitation process over time from one particular point in the life cycle makes it possible to establish a “time order”; (4) the sample does not suffer from the selection bias present in most samples of new ventures (most samples are taken from archival sources that do not record abandoned venture exploitation processes that fail to become new firms, thereby biasing research based on lists of new firms); and (5) this sample does not suffer from bias introduced by respondents due to memory decay, hindsight bias, or rationalization after the fact. This data set examines the evolution of venture opportunities from the point of discovery onwards. This approach


allows for the examination of the process of variation, selection, and retention during the period prior to the establishment of a formal organization—a period that, although acknowledged as important to the evolution of a new firm (Bamford, Dean, and McDougall 1999), is largely understudied.

Data and Sample We obtained information about firm formation by following nascent entrepreneurs who were part of an initial Swedish study that began in 1998. In order to optimize the number of possible venture initiatives in the sample, the following screening question was used: “Are you, alone or with others, now trying to start a new business?” (see Gartner et al. 2004). A decision rule was used to determine which of the respondents could be defined as nascent and as having already started a business. Gestation behaviors, such as earned money on sales, market research, or saving money to start a business (see Appendix Table A for examples), are different behaviors associated with starting a new firm. Based on Reynolds’s (2000) suggestion, those who reported two or more firm gestation behaviors were considered “nascent ventures.” This was the lower bound. The upper bound was when the start-up process was completed, that is, when a business was considered started. The start-up process was considered completed when the following criteria were fulfilled: (1) money has been invested; (2) income has been made; and (3) the firm is already a legal entity (cf. Carter, Gartner, and Reynolds 1996; Samuelsson 2004). The sampling frame is a register of all phone numbers in Sweden. In order to also reach persons with unlisted phone numbers, we added #1 to each number and randomized the sample from the entire population. The first sample consisted of individuals between 16 and 70 years, designed to get a representative

sample of the adult population. The second sample, focusing on a demographic known to have higher start-up rates, was designed to increase the number of nascent entrepreneurs by increasing the probability of finding more entrepreneurially engaged individuals to interview. Of the 49, 979 individuals randomly selected, it was possible to obtain a telephone number for 35, 971 (71.9 percent). The remaining 28.1 percent were not listed (n = 13,338), had severe disabilities (n = 381), or had moved abroad (n = 289). Of those contacted by telephone, 30,427 individuals (84.6 percent) agreed to participate. Of these, 961 respondents qualified for the longer interview by indicating in the screening interview that they were starting a business. Failure to establish renewed contact led to the loss of 147 cases. Another 133 individuals were dropped from the active case file after it became clear in the longer interview that they did not qualify. As a result, 623 individuals completed the longer interview. Response rates for eligible cases in the successive waves were 90.5 percent (6 months), 91.9 percent (12 months), 87.2 percent (18 months), 98.5 percent (24 months), and 86 percent (75 months—230 respondents out of 267). Eligibility was determined by the survival of the business and agreement from individuals to participate in follow-up surveys over time. We did not include projects in cases where all members of the team disbanded the new start-up. Scholars have pursued various strategies to compensate for known shortcomings associated with the PSED design. The Swedish PSED data provide certain advantages and excellent response rates; however, there are also some known problems and limitations. Basically, these problems involve three dimensions: (1) choosing the right sample and appropriate weights; (2) handling left censoring—that is, dealing with the variation in initial status; and (3) han-


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dling right censoring; for example, if we choose profit as a dependent variable, not all cases will be able to reach profitability in any subsequent time period. In this study, we provide some potential solutions to these three problems. First, the Swedish data come from two different samples and are weighted against the adult population. Second, left censoring is a problem if we are studying progress in gestation behaviors or any other dependent or independent variables that vary over time. For example, in 1998, one respondent reported getting financing in 1996 and writing a business plan in 1998, suggesting an error in causality. Variation in start values, however, will only be a problem if we use variables with related aspects associated with them. Our model is based on a sample that includes information in a time order that minimizes complications with left censoring. Third, right censoring concerns cases where the dependent variable has not yet occurred. For example, only a few cases reported profit after six months. After six years, however, most ventures report performance, either negative or positive. Our research design and data follow and expand the strategies used by other PSED scholars (e.g., Davidsson and Honig 2003; Honig and Karlsson 2004; Ruef, Aldrich, and Carter 2003; Samuelsson and Davidsson 2009).

Analysis In order to understand how business planning, supported by theory, influences venture-level performance, our analysis consists of ordinary least squares regression. Although our data are longitudinal, we measured a set of independent variables at the time of the first interview. Our dependent variables were measured in real time subsequent to our independent variables.

Measures Our aim was to understand whether business planning is beneficial during

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the nascent entrepreneurial process and beyond. We therefore had to operationalize performance in the nascent process and thereafter with an overall measure of organizational performance. For this, the owner’s perspective represents a reasonable indicator. For the average of all firms, the residual is an adequate overall measure of organizational performance. In practice, this would be the firm’s gross profit and should be similar to operationalizations of the firm’s added value (revenue minus cost of production). A similar reasoning applies to survival as a measure of organizational performance. What keeps a firm together (or an individual “going”) is whether the benefits of interacting within the boundaries of the firm are greater than its disadvantages. The idea that a business idea is “dead” is based on the fact that for most types of resource bundles that can produce the goods or services in question, there are more worthwhile alternatives. In this paper, we are interested in examining the efficiency of new ventures; the logic is that profit should be one of few sustainable indicators of venture-level performance, because no venture will survive without profit. We measured venture-level profit by asking each respondent about his or her previous year’s profit. We asked this question in each follow-up interview and recorded the results of both profit and loss over time. We used the natural log of venture-level performance, measured as self-reported profit or loss, in years two and six as dependent variables. Our independent variables are related to business planning and changes to business plans. Business planning can be assessed by objective measures of whether respondents made a business plan or not, as well as by subjective measures, such as whether or not entrepreneurs indicated they changed their plan. The changing of plans may reflect a dynamic environment and the need to modify strategic action. In order to


capture these two dimensions, we included the following independent variables. First, we used a nominal measure of business planning by identifying nascent entrepreneurs who indicated they did not have a business plan at the time of their first interview. Those that indicated they did not have a business plan were coded 0 and those that reported having a business plan were coded 1. This variable is called business plan. Further, we used another measure of formalization of business plan activity by asking nascent entrepreneurs whether their plan was formal or not. Most nascent entrepreneurs seemed to have at least some kind of plan (e.g., it could be informal and unwritten, only “in their heads”), and this group reported having a written business plan formally prepared for external use (coded 1, with all others as a referent, coded 0). This variable is called formal business plan. We were also interested in whether changes in business plans have an impact on venture-level performance. Therefore, we asked whether the respondent changed anything in the business plan since it was first completed (1 = yes and 0 = no). This question was posed to respondents reporting working with the same start-up after the first two years and in the sixth year. We call this variable “changed business plan.” In order to control for effects that might otherwise influence a nascent entrepreneur’s ability to obtain resources and create a successful firm, we controlled for the following market-, individual-, and organizational-level effects that might influence venture-level performance. For example, entrepreneurs are more likely to be men than women (e.g., Aldrich 1999). To the extent that this rate may be a function of an individual’s needs for additional resources (i.e., comparatively undercapitalized) or a function of an individual’s perceived likelihood of acquiring

resources (i.e., biases in lending practices), we controlled for gender by including a dummy variable with a value of zero for female respondents and one for male respondents. In addition, we controlled for resource and network effects. Greater amounts of social capital, more likely to increase an entrepreneur’s resource base, could have a positive impact on venture-level profit (Davidsson and Honig 2003). We therefore included a measure for social capital: At the time of the first interview, we asked whether respondents had been in contact with any programs that help new businesses to start and operate their new venture. Those that indicated such contact were coded 1 and all others as a referent (coded 0). In addition, as a random sample of nascent entrepreneurs includes a certain level of variation in starting date, we included a control for the accumulation of gestation behaviors at the time of the first interview (cf. Samuelsson 2004). Research also suggests that resource gatekeepers, such as venture capitalists, evaluate the age, education, and growth motivation experience of the lead entrepreneur in making investment decisions (Macmillan, Siegel, and Narasimha 1985). Thus, we also controlled for age (operationalized as the age in years of the respondent), education (operationalized as the number of years in formal education), and the nascent entrepreneur’s growth aspirations. At the time of the first interview, we asked each respondent about their expected sales revenue in five years’ time rounded to the nearest thousand SEK (Swedish currency). Because this variable was highly skewed in its raw form, its log, plus one, was utilized to normalize the distribution.

Findings Descriptive results and correlations are displayed in Appendix Tables B and C. We begin with the results of our regressions.


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Table 2 OLS Regression Predicting Venture-Level Performance (Profit) Year Two—Standardized Coefficients Regression Two Years

Gender Support Organization Gestation Behaviors at Time 0 Formal Education Age Growth Aspirations Business Plan Formalized Business Plan Changed Business Plan Model Fit Statistics Adjusted R-Square Change in F-statistic N

Control Model

Business Plan Model

B

Standard Error

B

Standard Error

-0.078 -0.118 0.085** 0.052 0.008 0.392**

0.282 0.246 0.032 0.180 0.013 0.080

-0.047 -0.185 0.087** 0.014 0.009 0.388** -0.028 -0.041 0.392

0.288 0.258 0.036 0.184 0.013 0.081 0.357 0.284 0.243

0.311 9.817*** 118

0.310 0.900 118

**p < .01. ***p < .001.

Table 2 first reports our control model, using venture-level profit at year two as our dependent variable. Table 3 reports the same model with venture-level profit at year six as the dependent variable. It is evident that two of our controls are statistically significant in the year two model. Both accumulation of gestation behaviors (B = 0.087**) and growth aspiration (B = 0.388**) are significant when related to venture-level profit for year two. Table 3 shows similar results with the exception that the accumulation of gestation behaviors is no longer significant in either the control model or the business plan model. Our findings show that gestation behaviors (and the more these activities were conducted) led to higher profits during the first two years of operations. In addition, having high

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growth aspirations were also strong and statistically significant in predicting higher venture-level profits over time. Next, we included our business plan variables in our subsequent regressions. The control model in year two generated an adjusted R-square of 0.311 and in year six 0.088. All in all, our control model is reasonably stable. Both controls remained statistically significant, and the model’s adjusted R-square was nearly identical in year two and decreased in the year six model. The lack of statistically significant results for the business plan variables suggests that venturelevel profit is influenced by factors other than business planning. Thus, our first hypothesis (H1), which stated, “Entrepreneurs will benefit from legitimation derived from planning activities that


Table 3 OLS Regression Predicting Venture-Level Performance (Profit) Year Six—Standardized Coefficients Regression Six Years

Control Model

Gender Support Organization Gestation Behaviors at Time 0 Formal Education Age Growth Aspirations Business Plan Formalized Business Plan Changed Business Plan Model Fit Statistics Adjusted R-Square Change in F-statistic N

Business Plan Model

B

Standard Error

B

Standard Error

0.181 0.332 0.043 -0.301 -0.008 0.308*

0.422 0.374 0.046 0.280 0.021 0.117

0.232 0.241 0.031 -0.286 -0.011 0.343** 0.316 0.422 0.145

0.434 0.398 0.051 0.297 0.021 0.125 0.535 0.479 0.337

0.088+ 2.157 73

0.059 0.326 73

+p < .10. *p < .05. **p < .01. will increase their venture-level performance” was not supported. Rather, the null was upheld. Our second hypothesis (H2) predicted “Entrepreneurs who change their business plans later in the nascent firm’s life cycle will demonstrate increased venture-level performance.” This was not supported by the empirical data. The null, stating, “Entrepreneurs that change their business plans later in the nascent firm’s life cycle will not demonstrate increased venture-level performance” was upheld by the findings. In sum, our data provide a reasonably good case for rejecting the idea that business planning has a positive impact on venture-level performance over time. We also show that changing business plans, over time, fails to lead to successful out-

comes. Instead, our study suggests that there are other factors more important in the nascent venturing process and beyond than business planning. Both higher growth aspirations and engaging in additional gestation activities from the start were strong indicators of eventual financial success.

Discussion We began this paper by discussing business planning and the legitimacy that it theoretically provides to potential entrepreneurs. In addition, we outlined the importance of examining the entire life cycle of entrepreneurial ventures in order to extend previous work in this area. Our primary focus was to explore the relationship (if any) between formal business planning activities on a unique


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set of nascent entrepreneurs studied over a six-year period. To our knowledge, these data are the only longitudinal sample of a nascent population that continues for more than 40 months, representing an important contribution to the empirical landscape. Further, although our general conclusion is similar to Honig and Karlsson (2004), we were able to empirically validate the lack of association between planning and performance by using clear and explicit measures of performance over a significantly long time period—something they were unable to do. Our findings contradict the assertion that planning in entrepreneurial ventures will eventually yield profitable results (Delmar and Shane 2003, 2004). Even when hypotheses are not confirmed, the resulting null hypotheses provide important research information and statistical power (Kerlinger 1956). Thus, our finding that business planning fails to correlate with performance does advance our knowledge of entrepreneurial practices that may (or may not) lead to performance outcomes. Negative findings are sometimes as important as positive ones, because they reduce ignorance and can provide direction for new hypotheses and lines of future investigation. In our case, the empirical support for business planning is inconclusive; however, the usefulness of our investigation may enhance our understanding of business planning and its consequences for venture-level performance. Legitimation theory applied to nascent entrepreneurs holds that business planning will provide resources to benefit new organizations (Delmar and Shane 2003, 2004) and help them overcome their liability of newness (Aldrich 1999; Aldrich and Fiol 1994; Stinchcombe 1970). Resources such as credit and capital may be linked to legitimation activities such that they may be difficult to obtain without a formalized business plan. Suchman (1995) highlighted the role of agency, defining strategic legiti-

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macy as the active involvement by organizational actors seeking to generate legitimacy to secure organizational resources and capabilities (Pfeffer and Salancik 2003). Actors entering emergent organizational fields must define legitimacy by determining new schemata consisting of mental structures, such as aspirations, dispositions, or patterns of appreciation, as well as classifiable practices and strategies (Sewell 2005). Business plans may help with this process, which implies that seeking legitimacy is “both by the knowledge of cultural schemas that enable them to mobilize resources and by the access to resources that enable them to enact schemas” (Sewell 2005, p. 151). Thus, different types of legitimacy, including planning, are an outcome of social action, which shapes and reshapes the interplay between resources and cultural definitions that “determine how the organization is built, how it is run, and simultaneously, how it is understood and evaluated” (Suchman 1995, p. 576). From a pedagogical perspective, the idea that business plan writing is a useful and necessary skill for emergent entrepreneurs is one asserted reason for teaching students business planning. Our findings, showing that planning failed to yield positive financial outcomes, challenges this pedagogical assertion. Of course, business plans are not the only possible legitimation activity nascent entrepreneurs may undertake. Other examples include gaining membership in different organizations, obtaining certification (including higher education), observing industry norms, dressing appropriately, and perhaps even designing an appealing logo to put on one’s business card. Because the range of legitimation activities is so vast, it may well be the case that focusing on only one particular activity may be a poor strategy for blanketing all entrepreneurs. This appears to be the case in our study. This research suggests that teachers,


advisors, and nascent entrepreneurs should be very skeptical in terms of focusing on only one particular legitimation activity whereas ignoring the entire stable of other activities that may, conditionally, lead to obtaining important resources. As with other entrepreneurial pedagogical approaches, teaching the theory of legitimation may be a more robust way to prepare potential entrepreneurs than teaching them a specific applied skill (Fiet 2001). Our analysis also showed that planning had little relation to performance. We found that formal planning did not increase venture-level profit, nor did changing business plans. The study of changing business plans is virtually absent in the literature, and we believe this study makes an important contribution in that regard. Though there continues to be considerable debate on this subject (Brinkmann et al. 2010), we maintain that the failure to examine entrepreneurial planning that occurs before a firm becomes a going concern accounts for much of the confusion in the literature. In other words, it may be the case that planning is useful for existing companies, but we found that it is not helpful at the emergent stages we examined. A surprising finding in our study was the importance of growth aspirations for nascent entrepreneurs in predicting profitability. We found that higher growth aspirations positively predicted performance for both the two-year and the six-year venture-level performance indicators. Nascent entrepreneurs are a heterogeneous group, and it is interesting to note the relationship between expectations and achievement. Not all nascents share the same growth expectations or desires; further, there are numerous transitory reasons why individuals may choose entrepreneurship, such as unemployment and underemployment. Considerable research has shown that entrepreneurs are motivated not only by wealth, but by autonomy, achievement,

security, and flexibility (Birley and Westhead 1994; Davidsson 1989). High growth expectations are by no means normative (Davidsson 1989), and they have been shown to be affected by a range of factors, including social capital (Liao and Welsch 2003). Our results provide a striking example of the implications of entrepreneurial heterogeneity, which strongly suggests that advocates and educators should make a concerted effort to distinguish between the types of enterprises they are attempting to nurture and support. In sum, we found no evidence that planning activities supported enterprise development for those firms that continued through the six-year period. We surmise that because little is known during the formative years regarding the eventual properties and outcomes of future organizational activity, careful planning appears to give way to more pragmatic approaches that focus on the necessities of daily market activity. We interpret our findings as a clear demonstration that unforeseen environmental and structural requirements that necessitate organizational changes are particularly evident in the nascent entrepreneurial process, and attest to the role of dynamism that makes ex ante planning a difficult proposition. Our findings stand in opposition to the planning paradigm, and they should be of concern to scholars, advisors, and practitioners. We suggest directing these individuals to consider the importance of learning relevant theoretical perspectives as well as simulations and contingency models that might be more helpful for navigating the uncertainties of entrepreneurial activities (Fiet 2001; Honig 2004).

Limitations As with all studies, this particular research has limitations. First, as it was conducted in Sweden, there may be aspects of the Swedish economic and political environment that significantly


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differentiate our findings and diminish their applicability to other locations. Second, we would like to have studied more carefully measured strategic actions and orientations beyond planning activities. Further, it would have been very useful to examine the plans actually produced by respondents, both for comparative purposes as well as to ascertain issues relating to the thoroughness and specificity of the planning activities. Finally, we have no exact information regarding the content or quality of the business plans referred to in the study. We believe an effort examining the quality of plans and their relative impact would be a worthy contribution. Overall, however, we believe this study provides a unique contribution to both adjudicating, with empirical support, the prevalence and relevance of two competing perspectives on business planning, as well as providing more specific longitudinal input into the utility of planning and causal-based approaches to startups. We maintain that by carefully studying a representative sample of nascent entrepreneurs for a full six years, we are in a better position to examine the longterm consequences and influences of planning activities. Our findings suggest that business plans may have little to do with determining which nascent entrepreneurs eventually prosper and achieve organizational and/or economic success.

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Appendix Table A Gestation Behaviors Gestation Behaviors Performed and Accumulated over Time from Start to Year Six Asked for Finance Received Income Credit with Supplier Financial Statement Team in Process, All Waves Team Complete, All Waves Hired Employees Information about Market and Competitors IPR Granted IPR in Process

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Marketing and promotion, all waves Phone line AW Product and services tested on customers Product and services ready to sell Product and services initial idea Purchased raw material Purchased major item Revenue exceeded costs Saving own money, all waves Entrepreneurial classes



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Profit (Log) Year Two Gender Support Organization Gestation Behaviors Time 0 Formal Education Age Growth Aspirations (Log) Business Plan Formalized Business Plan Changed Business Plan 0.036 0.003 0.200** -0.073 -0.03 0.191* 0.07 0.142 0.055

2

-0.100* 0.033 -0.090* -0.007 0.261** 0.016 -0.012 -0.032

n = 118. Two-year follow-up. *Correlation is significant at the 0.05 level (two-tailed). **Correlation is significant at the 0.01 level (two-tailed).

1 2 3 4 5 6 7 8 9 10

Variables

1

0.119** 0.076 0.080* -0.042 0.109** 0.202** 0.107**

3

4

0.034 0.124** 0.379** 0.363** 0.412** 0.119**

4.6635 1.77 0.44 10.6356 1.1611 36.7458 13.3487 0.1695 0.3475 0.26

Profit (Log) Year Two Gender Support Organization Gestation Behaviors at Time 0 Formal Education Age Growth Aspirations (log) Business Plan Formalized Business Plan Changed Business Plan

n = 118.

Mean

Variables

0.097* 0.05 0.074 0.121** 0.087*

5

0.131** 0.112** 0.158** 0.012

6

Table B Descriptive Results and Correlations Year Two

0.212** 0.205** 0.04

7

0.368** 0.120**

8

1.51065 0.422 0.499 4.26808 0.64872 8.91861 1.69335 0.37679 0.47819 0.497

0.068

9

Standard Deviation

388


Profit (Log) Year 6 Gender Support Organization Gestation Behaviors Time 0 Formal Education Age Growth Aspirations (log) Business Plan Formalized Business Plan Changed Business Plan 0.165 0.097 0.175 0.059 0.026 0.279** 0.06 0.1 -0.002

2

-0.100* 0.033 -0.090* -0.007 0.261** 0.016 -0.012 -0.032

n = 73. Six-year follow-up. *Correlation is significant at the 0.05 level (two-tailed). **Correlation is significant at the 0.01 level (two-tailed).

1 2 3 4 5 6 7 8 9 10

Variables

1

0.119** 0.076 0.080* -0.042 0.109** 0.202** 0.107**

3

4

0.034 0.124** 0.379** 0.363** 0.412** 0.119**

4.5893 1.74 0.37 10.3836 1.2864 36.9315 13.4759 0.2055 0.274 0.32

Profit (Log) Year Six Gender Support Organization Gestation Behaviors at Time 0 Formal Education Age Growth Aspirations (log) Business Plan Formalized Business Plan Changed Business Plan

n = 73.

Mean

Variables

0.097* 0.05 0.074 0.121** 0.087*

5

0.131** 0.112** 0.158** 0.012

6

Table C Descriptive Results and Correlations Year Six

0.212** 0.205** 0.04

7

0.368** 0.120**

8

1.6045 0.442 0.486 4.30965 0.65629 8.83857 1.69162 0.40685 0.44908 0.574

0.068

9

Standard Deviation