Article No. 350
Business Practice Findings, by James Larsen, Ph.D.
Starting a New Business
Research arrives at a surprising conclusion.
There are sparks afoot. In dorm rooms, laboratories, college classrooms, garages, and basements throughout the world, people dream of starting their own businesses. Many go beyond dreaming to scheming, planning, and acting, and the first thing they encounter is decisions that must be made.
The first round of decisions answers the question: What is the business? What is it's product? Who needs it? What need does it fill? Who will buy it?
The second round of decisions answers the question: Who is the business? Is it one person, a sole proprietorship? A group, and if it's a group, who is invited to join?
Research into the psychology of business explores every facet of business that researchers can imagine. "Who is the business?" was a recent topic explored by David Brannon from Towson University in Baltimore. Anyone facing decisions involving this question needs to know the findings from this research.
Professor Brannon began with data collected from a previous study, the Panel Study of Entrepreneurial Dynamics I. Of 64,000 people who responded to this study, 829 identified themselves as people "now trying to start a new business." Further questions revealed that 49% were working alone, and 51% were part of a team. Brannon chose the 51% to study, and after eliminating people who didn't meet his criteria, he arrived at his final sample, 295 new-venture teams who were actively trying to start a business. A large majority (74%) were 2-person teams. Of the rest, 13% were 3-person teams, 8% were 4-person teams, and 5% were 5-person teams.
Business textbooks and most researchers assume a rational approach to new-venture teams, i.e. entrepreneurial teams are formed by a lead entrepreneur who selects individuals who possess needed skills and knowledge to form the team, but Brannon found that nearly 60% of the new-venture teams he identified were made up of people with family ties. It seems that for a majority of new teams, trust, familiarity, and support are more important selection criteria for new-venture teams than complementary skills.
Next, Brannon considered the kind of family relationships that existed in the teams. Cohabitating couples made up 42% of the sample. Biologically-linked groups made up 15%, and teams lacking family connections made up 43% of the sample. He wanted to know if this made a difference.
Brannon watched the teams over a period of time, collecting data in three subsequent waves. (He did not specify the length of this period.) He wanted to know if and when the new businesses reached the milestone of achieving their first sale.
Cohabitating couples had the highest success rate and the lowest abandonment rate (giving up on the business). Conversely, groups with biological links had the lowest success rate and the highest abandonment rate. These were statistically significant differences. Teams lacking a family connection fell between them on both measures. Interestingly, the average level of initial investment for biologically-linked teams was double that of the other two, yet they reported the most difficulty in raising funds. Still, the relatively high level of investment in the poorest performing teams attracted Brannon's attention, and he investigated further. He found that the level of investment mediated the relationship between biologically-based teams and success, that is, the larger the investment, the greater the success of the biologically-based teams in achieving first sales. Putting money into a biologically-based business offset some of the disadvantages reflected in their low rate of success.
Brannon explained his findings by pointing out the advantages and disadvantages offered by family ties. Biologically-based teams come to the business with well-defined family interaction patterns that interfere with the efficient progress of business. Older sister always was bossy even when she didn't know what she was talking about. Junior always keeps quiet around the old man even if he knows he's right. Conversely, cohabitating teams come to the business with one successful joint venture already achieved: they have established a household and a relationship. Despite all the competing pressures acting on them, they have a household and a relationship. As a result, they are well suited to negotiate between themselves once again to resolve all the needs and problems new businesses face. They are also well positioned to integrate work life and family life to achieve a workable balance.
Entrepreneurial teams lacking family ties lack both the advantages of cohabitating couples and the disadvantages of biologically-based teams. Brannon's data found them between the two other groups.
Finally, for biological families, monetary investment seems to trump family relationships. When there is a big investment at stake, family members are more inclined to step away from comfortable, familiar family roles and to embrace what makes good rational sense, for the good of the business.
For young entrepreneurs dreaming of a business of their very own and facing decisions about Who is the business?, Brannon's research offers some guidance. Who would have imagined that your next step would be to show some genuine interest in that attractive young lady or handsome young man sitting next to you in class?
Reference: Brannon, David L., Johan Wiklund, and J. Michael Haynie. (2013) The Varying Effects of Family Relationships in Entrepreneurial Teams. Entrepreneurship Theory and Practice, 37(1), 107-132. www.businesspsych.org
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New Business Formation
Involving Family in the Business, or Not