1. 9/25/2016 PSEDII_Mercatus_tSeminar_21Oct091 21 October 2009 Research Seminar Mercatus Center George Mason University Arlington, VA Understanding the Entrepreneurial Process: Tracking New Firm Creation with the PSED [Panel Study of Entrepreneurial Dynamics] Paul D. Reynolds George Mason University [pauldavidsonreynolds@gmail.com]

2. 9/25/2016 PSEDII_Mercatus_tSeminar_21Oct092 Where do new businesses come from?

3. 9/25/2016 PSEDII_Mercatus_tSeminar_21Oct093 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

4. 9/25/2016 PSEDII_Mercatus_tSeminar_21Oct094 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?

5. 9/25/2016 PSEDII_Mercatus_tSeminar_21Oct095 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.

6. 9/25/2016 PSEDII_Mercatus_tSeminar_21Oct096 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

7. 9/25/2016 PSEDII_Mercatus_tSeminar_21Oct097 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

8. 9/25/2016 PSEDII_Mercatus_tSeminar_21Oct098 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

9. 9/25/2016 PSEDII_Mercatus_tSeminar_21Oct099 Primary Objective Who gets involved? What do they do? What is the outcome?

10. 9/25/2016 PSEDII_Mercatus_tSeminar_21Oct0910 CONCEPTUAL MODEL – The Start-up Process Adult Population Business Firm Population Growth Persist Quit Firm Birth Social, Political, Economic Context ? NE NI ? Start-up Processes ? NE = NASCENT ENTREPRENEURS NI = NASCENT INTRAPRENEURS GEM PSED

11. 9/25/2016 PSEDII_Mercatus_tSeminar_21Oct0911 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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13. 9/25/2016 PSEDII_Mercatus_tSeminar_21Oct0913

14. 9/25/2016 PSEDII_Mercatus_tSeminar_21Oct0914

15. 9/25/2016 PSEDII_Mercatus_tSeminar_21Oct0915 Outcome Date

16. 9/25/2016 PSEDII_Mercatus_tSeminar_21Oct0916

17. 9/25/2016 PSEDII_Mercatus_tSeminar_21Oct0917 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?

18. 9/25/2016 PSEDII_Mercatus_tSeminar_21Oct0918 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

19. 9/25/2016 PSEDII_Mercatus_tSeminar_21Oct0919 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

20. 9/25/2016 PSEDII_Mercatus_tSeminar_21Oct0920 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!

21. 9/25/2016 PSEDII_Mercatus_tSeminar_21Oct0921 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

22. 9/25/2016 PSEDII_Mercatus_tSeminar_21Oct0922 Informal Financial Structure [n = 882; Values in $1,000] Sum all owners: 1 to 5Per CentMinMaxMean PERSONAL SAVINGS 84.4% 05,00022.69 FAMILY, RELATIVES 17.1%01,4005.05 FRIENDS, COLLEAGUES 5.5%01,0002.84 CREDIT CARD LOANS 11.5%01600.92 PERSONAL BANK LOANS 9.2%04,0008.62 ASSET BACKED LOANS 5.6%04,0007.82 OTHER SOURCES 0.7%03000.44 TOTAL ALL SOURCES 87.4%013,00048.37

23. 9/25/2016 PSEDII_Mercatus_tSeminar_21Oct0923 Formal Financial Structure: Debt Only [n = 435, values in $1,000] All reports after Legal RegistrationPer CentMinMaxMean ASSET BACKED DEBTS 10.3%05,00056.7 LEASE OBLIGATIONS 4.3%03501.9 CREDIT LINE/WORKING CAPITAL 9.5%01,1006.0 SUPPLIER CREDIT 6.2%03871.8 PERSONAL LOANS OWNER 1 26.2%05,00018.5 PERSONAL LOANS OWNERS 2-5 6.5%015,00052.8 LOANS FROM OWNER'S FAMILY,KIN 5.9%02501.2 LOANS FROM EMPLOYEES 0.3%0200.1 LOANS FROM OTHER INDIVIDUALS 1.6%04651.0 BUSINESS CREDIT CARD LOANS 8.9%0800.8 OTHER BANK LOANS 1.8%01,0002.4 VENTURE CAPITAL FIRM LOANS 0.8%0600.4 GOV GUARANTEED LOANS (NOT SBA) 0.0%000.0 SBA GUARANTEED BANK LOANS 26.2%05,00018.6 OTHER LOANS 2.5%02030.3 TOTAL DEBT, ANY SOURCE 34.5%017,100145.7

24. 9/25/2016 PSEDII_Mercatus_tSeminar_21Oct0924 Financial Investments and Outcomes New Firm Active Start- UpQuit Wave B, C outcomes9.4 %65.0 %25.6 % Total Informal: n cases83573226 Total Informal: Avg [$1,000]42.454.535.1 Owner's Additional Equity: Avg [$1,000]29.347.31.8 Total Debt: Avg [$1,000]79.9219.62.4 Total Invested: Avg [$1,000]109.1267.04.2

25. 9/25/2016 PSEDII_Mercatus_tSeminar_21Oct0925

26. 9/25/2016 PSEDII_Mercatus_tSeminar_21Oct0926 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

27. 9/25/2016 PSEDII_Mercatus_tSeminar_21Oct0927 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

28. 9/25/2016 PSEDII_Mercatus_tSeminar_21Oct0928 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.