Explaining the exit of young firms: A quantitative and qualitative analysis

Transcription

1 Explaining the exit of young firms: A quantitative and qualitative analysis Zulaicha Parastuty*, Erich J. Schwarz, Robert J. Breitenecker Department of Innovation Management and Entrepreneurship Alpen-Adria-Universität Klagenfurt Universitätsstraße 65-67, Austria *Corresponding author: zulaicha.parastuty@aau.at

2 1. Problem statement In European Union countries, only 50% of businesses survive until their fifth year after establishment (Eurostat 2009). Some firms are closed even though they have performed quite well, while others are closed because of poor performance. Both situations have a significant impact not only on the firms and the entrepreneurs but also on the economy, as many jobs get lost. Entrepreneurial exit is an important event in entrepreneurship journey (DeTienne 2010). It can be regarded as a double-edged sword. In broad scope, entrepreneurial exit can be a source of evolution of industries and economies (Audretsch, Houweling, & Thurik, 2004) because entrepreneurial exit may change the competition in industry. As for the entrepreneurs, entrepreneurial exits may also be a career choice. With accumulated experience, the entrepreneurs who exit may involve in other more prosperous entrepreneurial activities (DeTienne 2010). They may set up new ventures (Westhead, Ucbasaran, & Wright, 2005) or become business angels (Mason & Harrison, 2006). However, there are also unfavourable events which follow entrepreneurial exit. When entrepreneurial exit is synonymous with failure, entrepreneurs bear high costs of failure. Financially, some entrepreneurs take years to clear their debt (Cope, 2011). Psychologically, there are number of negative emotions associated with business failure, namely shame, pain, anger, blame and fear (Shepherd, 2003). Socially, they also have to face stigma of failure, given by banks, financial institution and society (Collewaert, 2012). Despite the significant impact, research shows little attention to those firms which exit compared to the vast number of studies on successful firms and entrepreneurs (DeTienne 2010). The research question that is addressed in this contribution is to analyse how and why firms exit in early stage. 2. Theoretical basis Research on the entrepreneurial exit can be divided into three streams. The first one deals primarily with large and publicly-traded companies by utilizing statistical data from the stock market. Most studies examine the relationship between financial firm performance and how firms exit (e.g. Fortune and Mitchell 2012; Huynh et al. 2012). The second stream is concerned about the exit of nascent entrepreneurs, utilising data of the Panel Study of Entrepreneurial Dynamics (PSED) (e.g. Reynolds et al. 2004; Yusuf 2011) and Global Entrepreneurship Monitor (GEM) (e.g. Hessels et al. 2011b). This kind of research mostly analyses the discontinuance of nascent entrepreneurs who are starting a business during the pre- and start-up phase. Thirdly, attention is given to privately-owned firms (e.g. Gimeno et al. 1997; Wennberg et al. 2010). The studies in this stream cover small and large firms and focus on the relationship between the exit of firms, human capital (e.g. education) and firm characteristics (e.g. legal form). Not only do they study the actual exit, but this group of researchers also analyses the exit intention or exit strategy. Nevertheless, little attention is given to young firms even 50% of them are closed within the first five years. There are various definitions of entrepreneurial exit, firstly the exit of entrepreneur from entrepreneurial activity (e.g. Bates 2005; Stam et al. 2010; Hessels et al. 2011a), secondly the exit of firm from a specific market (Anderson and Tushman 2001), and thirdly the discontinuation of the firm (Gimeno et al. 1997; Strotmann 2007; e.g. Pe'er and Vertinsky 2008; Plehn-Dujowich 2009). Definition on entrepreneurial exit are based on its assumptions for example the level of analysis (Wennberg and DeTienne

3 2014). Entrepreneurship research offers an opportunity to examine the intersection of entrepreneur (individual) and the firm (organization) they create (Davidsson and Wiklund 2001). On the individual level, entrepreneurial exit has often been defined as the process by which the founders of privately held firms leave the firm they helped to create; thereby removing themselves, in varying degree, from the primary ownership and decisionmaking structure of the firm (DeTienne 2010, p. 203). This definition focuses on the event when entrepreneurs leave the firms which they found. Looking at the existence of those habitual and portfolio entrepreneurs, definition of entrepreneurial exit is being narrowed to the exit of an entrepreneurial career (Dyer 1994; Stam et al. 2010). This definition implies that the individual shifts from entrepreneurial activity to other activities. On the organization level, firm exit is defined as business closure or business discontinuance with varying reasons regardless the financial condition (Bates 2005). This definition do not distinguish between a voluntary closure and an insolvency (Strotmann 2007). Pe'er and Vertinsky (2008) cone the definition of exit by geographical location by showing the exits of firms in a location create a stimulus for the entry of new firm in that location. The exit of a founder or individual entrepreneur may happen simultaneously with the exit of the firm from the market. Looking at mentioned definitions on entrepreneurial exit on both levels of analysis, the focus of this article is on the entrepreneurs whose firms exit from the market. In this case, entrepreneurs either stay in the entrepreneurial activity or engage in non-entrepreneurial activity. We are interested to investigate the relation between the exit of firms from the market and the intention of entrepreneur to re-enter entrepreneurial activity. This is also due to the facts that firms may exit may in conditions of both, bad and good performances (Wennberg et al. 2010). 3. Research design To analyse the pathways of exit of young Austrian firms and to contribute in exit research, we will conduct literature research and an empirical study. First, the literature review on exit is designed to define the entrepreneurial exit and to identify theoretical predictors of the entrepreneurial exit. Second, for the analysis of secondary data we have access to a database containing detailed information about the founding condition and exit of firms. The data about the founding condition covers the entrepreneurs, the strategy, the structure and the business environment. This data was recorded 3-6 months after the firms establishment. Whilst the data about the exit of firms consist of the reasons for the exit, the financial condition when the exit occurs, the way to exit and the post-exit activity. This data was gathered at least three years after the date of founding. Third, in order to gain a deeper understanding about the decision making process on exit, eight qualitative in-depth interviews will be carried out with entrepreneurs who exit their firms. A quantitative study in this research was conducted in December 2012 by sending mail and online questionnaire to 381 young firms who had participated in the earlier survey in December All 381 firms founded their firms during summer 2009 in eight of the nine Austrian provinces. Thus, the quantitative study gathered data after 3-3.5

4 years establishment. We received 212 responses, which is 55.6% of response rate. The response consists of 171 firms which are still in the business and 41 firms who exit/close the business. However, the usable data are 170 existing firms and 38 exit firms. For this research, we will present these 38 exit firms. All firms are sole-proprietorship. Nearly all firms did not have partner when they found the company excluding one case. The firms operated in different industries from personal service, trade, real estate to manufacturing. When entrepreneurs founded the company, their age were ranging from 19 years old till 58 years old. The average age is 39.2 years old with 9.7 years old standard deviation. There are 22 (57.9% ) male and 16 female (42.1%). When they found their company, most of them (55.3%) invest their capital less than There are 9 firms had the capital between and 8 firms invested above Qualitative study approach is being applied to examine the phenomena of entrepreneurial exit for several reasons. First, qualitative method is useful to build theory and to focus on under-researched ideas (Eisenhardt and Graebner 2007). Secondly, qualitative research offers the contextual embedment when studying a specific phenomenon within a population (Marshall and Rossman 1999). Third, qualitative data offer description of rich detail in the ability to answer how and why questions (Yin 2009). A qualitative study is being conducted involving eight firms out of the 38 exit firms. This study aims to reveal more information about the decision making process on the exit. A problem-focused and face-to-face interview is conducted because we would like to focus on specific issue, which is exit decision. Interviews are then analysed using content analysis. We expect to get the results from the qualitative study by June Preliminary results From the quantitative study, regarding the reason of exit, firms exit due to primarily to calculative and alternative reasons. Only few normative reasons were detected like family issue and illness in exiting business. The reasons of exit in a descending order of importance are Problems with low demand or sales, Very strong competition, Pursuing another more attractive activities/job, Didn't make the expectation, Product/service already exist in the market. Of the most cited reasons support the argument that new firms face liability of newness such as lack of trust, unknown brandname which leads to low demand or sales (Aldrich & Auster, 1986). Of the second most cited reason, it supports the conceptual argument provided by DeTienne (2010) that during early development, firms exit from the business because they encounter a more attractive career. Concerning options for exit, there were 16 firms (42.1%) out of 38 firms which were closed permanently; interestingly nearly half of the firms were (47.4%) temporarily closed. The rests (4 firms) exit by reallocating their resources to other business and selling the firm. When firms were closed and inactive, there were only a small number indicating a financial loss (6 firms). Surprisingly, 11 firms (28.9%) gained financially. The rest (more than half of them) either lost or win financially.

5 After they closed (deactivate) their business, most entrepreneurs became employees (44.7%). Interestingly, 9 entrepreneurs (23.7%) stayed as an entrepreneur in a different company or self-employed. Some entrepreneurs became jobless and went into pension (21.1%). There were a small number who continued to study (10.5%). Regarding to becoming an entrepreneur in the future, 13 firms either already engage in setting up new firms or plan to have new company in future. The same number of 13 was those who are undecided regarding their intention to re-enter entrepreneurial activity. There are 12 persons who stated that they are not going to become an entrepreneur (again). 5. Implications Compared to the study of success factors, research focusing on failure firms (in the case of poorly performing firms which exit) is lagging behind. The implications of this proposed study are twofold. Scientifically, this study contributes to the limited literature on the entrepreneurial exit concerning the reasons and options for exit in the early development phase of the firm. Practically, for entrepreneurs, the study of the exit will lead to a better understanding about the entrepreneurial exit and the strategies required. A clearer picture of the entrepreneurs who exit will assist financiers in making decisions. In addition, financiers may also assist entrepreneurs in choosing exit options. For policy makers, this study will contribute to the development of regulations or incentives to give entrepreneurs a second chance, as well as to promote entrepreneurship. Summing up, the results of the study are expected to be of interest for the research community, the entrepreneurs, the financiers and the policy makers. REFERENCES Anderson P, Tushman ML (2001) Organizational Environments and Industry Exit: the Effects of Uncertainty, Munificence and Complexity. Industrial and Corporate Change 10 (3): doi: /icc/ Bates T (2005) Analysis of young, small firms that have closed: delineating successful from unsuccessful closures. Journal of Business Venturing 20 (3): doi: Davidsson P, Wiklund J (2001) Levels of Analysis in Entrepreneurship Research: Current Research Practice and Suggestions for the Future. Entrepreneurship: Theory & Practice 25 (4):81 DeTienne DR (2010) Entrepreneurial exit as a critical component of the entrepreneurial process: Theoretical development. Journal of Business Venturing 25 (2): doi: /j.jbusvent Dyer JWG (1994) Toward a Theory of Entrepreneurial Careers. Entrepreneurship: Theory & Practice 19 (2):7-21 Eisenhardt KM, Graebner ME (2007) Theory building from cases: Opportunities and challenges. Academy of Management Journal 50 (1): doi: /amj Eurostat (2009) European business - Facts and figures. Eurostat: European Commission, Luxembourg

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