Motives of the Portfolio Based Entrepreneur

The research method used in this bachelor thesis will be a literature review of the world’s leading journals in the field of entrepreneurship, small business management and others.

As stated earlier the literature will come from the world’s top rated journals, journals that have an impact factor larger than 1. These journals will be gathered from the database of Tilburg University (Get It) and the search engine of Google Scholar. On top of this the reference lists of these journals will be used to find the sources these scientists used; this process is known as “snowballing”. Searches will be based on the following keywords: Portfolio Entrepreneurship, Entrepreneurial motivation, Entrepreneurship, Entrepreneurial goals. (Add more along the way)

1.5 Structure of the thesis.

The following chapter will define the idiosyncratic entrepreneur; an entrepreneur with a single firm. A definition will be found of what an idiosyncratic entrepreneur is and later what motives can be found in the literature of why these people start a firm. After a short review of the research question this thesis will continue with the view on portfolio entrepreneurship and see if it is possible to find distinctions or similarities between the idiosyncratic entrepreneur and the portfolio entrepreneur.

Chapter 2

Goals and motives of idiosyncratic entrepreneurs

Introduction

In the following section the motives of individuals that engage in entrepreneurial activities will be reviewed intensively. The motives reviewed are: Need for Achievement, Risk Taking, Tolerance for Ambiguity, Locus of Control, Self- Efficacy and Independence. In order to explain these motives more clearly different papers on the field of entrepreneurship will be used.

2.2 Motives

6 entrepreneurial motives have been provided in the paper of Shane et al. (2003), below is a short overview of these motives.

2.2.1 Need for achievement: This is one of the more traditional motives of entrepreneurs and has been explored intensively. In Shane et al. (2003) McClelland argued that individuals who feel a high need for achievement are more likely to engage in activities with a high degree of individual responsibility for outcomes, require individual skill and effort, have a moderate degree of risk, and include clear feedback on performance. McClelland (1962) states that entrepreneurial jobs often include these characteristics, therefore it is likely that individuals that display these characteristics engage in entrepreneurial activities.

This vision has been proven by several different other studies. Johnson (1990) reviewed 23 studies and based on this group he concluded that there is a connection between the founding of organisations and the need for achievement.

In 2000, Collins, Locke and Hanges conducted a meta-analysis of the need for achievement. The conclusions of this research were that the need for achievement is an effective tool for differentiating between firm founders and the general population, but less so between firm founders and managers. In addition, they believe that the need for achievement could be effective in discovering differences between successful and unsuccessful entrepreneurs.

2.2.2 Risk Taking: A second characteristic and motivator of entrepreneurs is the willingness to take risk. McClelland (1961) stated that this willingness to take risk is related to the need for achievement of the entrepreneurs. A high need for achievement leads to a moderate willingness to take risk. Being an entrepreneur means you have to accept risk with respect to your financial status, psychic well-being and career security (Liles, 1974). In the eyes of Atkinson (1957) individuals with a high need for achievement are more likely to engage in activities of intermediate risk, because these offer more of a challenge and are still attainable. Alternatively, individuals with fear to fail will avoid these risks, because they prefer a high probability of success.

Studies by Corman, Perles & Vancini, (1998); Fry (1993) and Sarasvathy, Simon and Lave (1998) show that entrepreneurs do have a higher willingness to take more risk than normal members of the population, but the entrepreneurs do not perceive their actions as risky. (Shane et al. 2003)

2.2.3 Tolerance for Ambiguity: Tolerance for ambiguity has been defined by Budner (1982) as the propensity to view situations without clear outcomes as attractive rather than threatening. As can be derived from the risk taking paragraph above, entrepreneurs have a higher tolerance for ambiguity and risk than normal individuals. They face far more uncertainty in their lives and learn how to deal with it accordingly. This is in sharp contrast with for example managers. Empirical research found that firm founders score far higher in tolerance for ambiguity than managers did (Begley & Boyd , 1987)

However, there is some contradiction in this particular motive. Research done by Babb and Babb (1992) and Begley (1995) give no difference between firm founders and managers at all in the comparison of their levels of tolerance for ambiguity. Therefore it cannot be said if tolerance for ambiguity is a motivator for entrepreneurs.

2.2.4 Locus of Control: Locus of control is defined as the extent to which individuals believe that they can control events that affect them (Rotter, 1966). People with high external locus of control believe that they have no effect on the events, thus they believe one is controlled by the outside world whereas individuals with high internal locus of control believe they can directly control the outcomes of the ventures they engage in. They think they can control their destiny by means of effort and skill. Rotter (1966) attached this to entrepreneurs by arguing that these firm founders prefer situations where their input has direct influence on the outcome and the result.

Interestingly enough once again there is a major similarity between managers and entrepreneurs on the one hand, and the general population on the other. Babb and Babb (1992) found no differences in the locus of control between managers and entrepreneurs. The same goes for Brockhaus (1982) and Begley (1995). This could be because founding a firm and managing one requires the same set of skills. This can be brought back to the initial definition of entrepreneurship as stated in section 1.1, where being an entrepreneur does not necessarily mean being a firm founder. It cannot be said that the locus of control is clearly applicable on entrepreneurs. Rauch and Frese (2007) did find a positive correlation between locus of control and entrepreneurs, but this was minor.

2.2.5 Self-efficacy: Bandura (1997) describes self-efficacy as follows: It is the belief in one’s ability to muster and implement the necessary personal resources, skills, and competencies to attain a certain level of achievement on a given task. Therefore people with high self-efficacy are more likely to exert more effort for a given task, have a greater stamina to retain this level of effort. Also this person will be more responsive to negative criticism and be able to spin it in a positive direction.

Entrepreneurial situations often call for resourcefulness, planning and a high dose of perseverance; therefore self-efficacy is a very important motive for entrepreneurs.

2.2.6 Independence: Independence entitles being able to take responsibility to use one’s own judgement as opposed to blindly following the assertion of others. It includes taking responsibility for one’s own life rather than living off the efforts of others (Shane et al. 2003). Often entrepreneurs pursue a career of being a firm founder because they want to be independent. They do not want to, or cannot work under a boss, so they start a firm on their own. Being a successful entrepreneur requires the owner to be in charge of his own actions and take responsibility in his decisions. Empirical research done by Aldridge (1997) proves that entrepreneurs score higher than others on measures of independence.

2.3 Conclusion

This chapter covered the motives for idiosyncratic entrepreneurs to engage in the activity their name suggests, entrepreneurship. From the paper of Shane et al. (2003) we can conclude that some motives clearly separate entrepreneurs from the general public. Examples of these are the following:

Firstly, there is the need for achievement; this motive is high among entrepreneurs, which means they are more likely to engage in activities with high individual responsibility and are not as affected by the appearance of risk. Secondly, there is the motive of risk taking, or more specifically the aversion of risk. Entrepreneurs are less averse of risk than the general public, because they do not perceive their actions as risky. (Shane et al. 2003) Thirdly, there is locus of control. This measures the extent to which people believe they can influence their personal outcomes with respect to outside events. Individuals with internal locus of control believe they can influence their fate with ability, effort and skill. On the contrary individuals with external locus of control believe outside events control them. Rauch and Frese (2007) found that entrepreneurs have a slightly higher value of internal locus of control than the general public. Fourthly, self-efficacy is a motive that entrepreneurs value as important. It implies that individuals with high self-efficacy put more effort into their tasks, retain this level for longer and are more responsive to criticism. Among entrepreneurs this is valued, as entrepreneurship requires a strong set of individual skills and perseverance. Lastly, independence scores high on the entrepreneurial scale. It entitles being able to take responsibility for one’s own opinion, judgement and the outcome of one’s actions. As an entrepreneur you do not have a superior that tells you what to do but you have to find your own way.

However not all the motives presented has proven to be important to entrepreneurs. The motive Tolerance for Ambiguity has no clear indication to be especially applicable to entrepreneurs. People with a high tolerance for ambiguity view situations with an uncertain outcome as attractive rather than worrying. No evidence could be found in the comparison of tolerance for ambiguity between entrepreneurs and others.

Chapter 3

Goals and Motives of the Portfolio Entrepreneur

3.1 Introduction

Having investigated the different motives that move the idiosyncratic entrepreneur it is now time to have a closer look at the individuals that own multiple firms at the same time; portfolio entrepreneurs. Portfolio entrepreneurship has been a little invisible in the literature over the last 10 years or so (Carter & Ram, 2003) even though it is quite common in society. Carter and Ram(2003) describe a 12% incidence of portfolio entrepreneurship across the whole range of industry sectors, more specifically 21% of entrepreneurs in the agricultural sector (Carter, 1998) and about a third of the founders of incorporated companies, as proven in the research done by Rosa and Scott (1999). To complete the picture of the portfolio entrepreneur, he is mostly male, 18.4% versus 8.9% female (Rosa & Hamilton, 1994). The definition of a portfolio entrepreneur as used in this thesis is as follows: An entrepreneur becomes a portfolio entrepreneur if he or she founds, owns, manages and controls more than one venture at a time, while the new business is distinct from the previous one. (McGaughey, 2007). A portfolio entrepreneur differs from a serial entrepreneur because where a portfolio entrepreneur owns multiple businesses at the same time, a serial entrepreneur owns firms that succeed one another. So when Steve Jobs was fired from Apple in 1985 and founded Pixar in 1986 he engaged in serial entrepreneurship. If he would still be working for Apple while he founded Pixar it would have been portfolio entrepreneurship.

The following section will present different motives found in the literature for individuals to engage in portfolio entrepreneurship.

3.2 Motives

3.2.1 Diversification of Risk: One of the more obvious reasons for individuals to engage in portfolio entrepreneurship is the diversification and aversion of risk. Even though entrepreneurs are more open towards risk than the normal public (see section 2.2.2) it would be a false assumption to think that entrepreneurs take uncalculated risks.

Portfolio entrepreneurs are very often habitual entrepreneurs. Habitual entrepreneurs are entrepreneurs with previous experience of founding a firm (Wiklund & Shepherd, 2008). This is often an advantage for both of the firms; because the entrepreneurs can use the experience they gain in either venture and use them on the other. By using the owner, and thus the entrepreneur, Rosa and Scott (1999) found that multiple businesses belonging to a single entity of owners had much lower rates of failure than ordinary firms and thus concluded the effectiveness of portfolio entrepreneurship. On the contrary Carter and Ram (2003) conducted a wide review of previous research and came to the opposite conclusion. They found that Cross (1981) concluded his paper with the finding that only 11.5% of his sample contained entrepreneurs with previous experience and thus arguing the irrelevance of experience to reduce risk. There are numerous other researchers quoted in the paper of Carter and Ram (2003) that came to the same conclusion as they did. Therefore it can be said that the experience of an entrepreneur giving a greater chance of being successful, thus reducing risk, in subsequent ventures cannot be supported by the research literature.

Another approach to the reduction of risk besides the experience of the entrepreneur is the control of the supply chain of a product. Controlling the supply chain has the important effect of reducing uncertainty and cost in the delivery of the product at hand. It allows a better capture of brand extension and scale economics, making the corporation more self sufficient (Carter & Ram, 2003). Some real world examples of this are the acquisition of ABC broadcasting by the Disney Corporation in 1996. As a result ABC could broadcast the Disney cartoons and movies. Alternatively the director George Lucas bought stock in the toy companies Hasbro and Galoob before he sold them the right to sell the Star Wars franchise. (Klein, 2000).

Additionally portfolio entrepreneurship allows the transition of capital between the firms of the same owner; this improves the liquidity of the firms and therefore contributes to the firm’s survivability.

A third aspect of the diversification of risk is a very interesting one, originating mostly from developing countries. They do not apply the diversification of risk to the survivability of the firm like we do in the western world, but they apply it to themselves and their family (Carter & Ram, 2003). Lots of families in the third world rely heavily on the success of their ventures in order to survive. Failure results directly in having no food, for example a bad harvest, or having no money for food. Entrepreneurs use their families as a free labour resource in return for a living. (Carter & Ram, 2003) Employing the entire family has additional benefits; family members of a different age and gender represent the company in all layers of society (Kibria, 1994). It is this differentiation in the family that inspires portfolio entrepreneurship. For example the head of the family, usually the male, works in agriculture and livestock with his sons. His wife runs the shop where they sell their crops, meat, leather and knitted clothing and his father uses his contacts among professionals like lawyers, doctors and local politicians to create opportunities.

3.2.2 Growth: The second motive presented in the literature is the perspective of Growth of the entrepreneur. Portfolio entrepreneurship is often used as a lateral growth strategy. Westhead, Ucbasaran and Wright (2003) explain that businesses in the possession of portfolio entrepreneurs report greater sales and have larger employment growth than both serial and idiosyncratic entrepreneurs (McGaughey, 2007). Additionally Westhead et al. (2003) report that portfolio entrepreneurs attain and identify more opportunities during a 5-year testing period than serial and idiosyncratic entrepreneurs, which has a positive effect on firm growth. This conclusion is supported by the research done by Rosa and Scott (1996). They claim that sometimes when growth of an individual firm is impaired by for example fiscal or geographical limitations, the founding of new firms can be used as a tool to achieve growth (Carter & Ram, 2003).

A key factor in the growth strategy is the concept of legitimacy, especially for new firms. A legitimate organisation is more credible, worthy, predictable and trustworthy towards the external environment like for example investors, the government and potential clients (McGaughey, 2007). Entrepreneurs that own a business with a high level of legitimacy have better access to resources, convey greater stability towards the external environment and have better chances of survival. All the previously mentioned benefits help greatly in the growth of the firm and especially in new firms. That is why this concept is so important to portfolio entrepreneurs when they want to found new businesses. Legitimacy is very hard for new ventures to build because society judges an organisation as legitimate mostly on its past performance. New ventures rely on relationships with strangers like for example suppliers, which can lead to trust issues (McGaughey, 2007). Portfolio entrepreneurs however, can use the reputation they have from their original firm and use that as a reference for the new ventures. This is known as legitimacy spill-over (Kostova & Zaheer, 1999). The extent of the spill-over relies to a great extent on the identities of the firms in the portfolio. An organisations identity is the set of beliefs carried out by the firm’s stakeholders about the most important fundamentals and characteristics as explained by Scott and Lane (2000) in McGhaughey (2007). Legitimacy spill-overs are not always positive; in case of a corporate takeover it is very important for the portfolio entrepreneur to have a careful look at the company’s legal issues and public reputation for this can be a severe threat to the portfolio’s legitimacy.

Portfolio entrepreneurship can thus be a very useful tool for firm growth because it allows an easier access to resources in case the portfolio is legitimate and credible. This will be further explored in the next paragraph.

3.2.3 Resource acquisition: The competitive advantage of firms relies to some extent on the availability and capture of different resources. New firms are often troubled by the inability to acquire enough resources as explained by Oviatt and McDougall (2005) in McGaughey (2007). New ventures can attain resources by putting emphasis on networks and regional clusters of suppliers and clients. As a result benefits can be achieved like access to a critical mass of specialized resources without high costs of transportation and lower cost of interaction-intensive activities for co-located firms (Etemad & Chu, 2004). A study done by Alsos and Carter (2006) on portfolio entrepreneurs in Norway shows a large amount of resource transfer to the new ventures of the portfolio. Examples of these resources are knowledge (financial knowledge for example), physical resources and organizational resources. Here one could think of networks or technology (McGaughey 2007).

An important definition for resource acquisition in portfolio entrepreneurship is the one of slack resources. Slack resources are the resources that are potentially utilizable and can be redeployed to achieve organizational goals (George, 2005). A distinction is made between high discretion and low discretion slack resources. Low discretion slack resources are specialized resources that can only be applied in specific situations, for example excess capacity of specialized machinery. In contrast high discretion slack resources are those that can be used in a wide variety of circumstances. They are very important especially for portfolio entrepreneurs because they allow flexibility in strategic options of the entrepreneur. High discretion slack resources give the entrepreneur more opportunity to experiment and take some more risk in entering new markets and extending lines of business.

The hardest resource required for novice entrepreneurs to found new firms, allow firm growth and survival is very likely the financial one. Business angels, individuals that supply a large part of the financials required to found a firm in exchange for a substantial part of the company’s shares, banks and informal investors still cannot solve the gap in demanded venture capital (McGaughey, 2007). Portfolio entrepreneurs can use the cash flows of previous ventures to fill the gap themselves. It allows easier founding of new firms within the portfolio and a better chance of survival of these firms. This is shown in McGaughey (2007) by a quote of an Australian portfolio entrepreneur Stephen Gumley:

“The firm’s finances were engineered, intertwined. Cash flow was king, so if a company was throwing off free cash flow, you’d use different ways of investing that in new enterprises. Sometimes the cash flow was diverted into salaries and new ideas, and then marketing rights and other things were sorted later. (…) At other times the cash flow was distributed to individuals, who then used the cash to buy shares in the new entity.”

The easier acquisition of resources by having a portfolio of firms is a great advantage for those entrepreneurs involved in these activities. It puts portfolio entrepreneurs in a better situation than for example serial entrepreneurs, who once they sell their firm and start a new one, have to start all over again without the possibility of transferring some of those previous resources (apart from knowledge gained in their previous venture and possibly financial resources coming from the sale of the company).

3.2.4 Succession and Learning: A fourth motive for entrepreneurs to engage in portfolio entrepreneurship is the continuation of the business for their spouse or successors. Splitting the business in several components allows the potential successor to learn the business in a relatively safe environment without the need for the gathering of resources and business contacts. A real-life example of succession is shown by Ram (1994). During his research on the employment in small firms one of the corporations he was investigating split from one into five different firms. It was not because of the demand offered in the market, but because they had to accommodate seven different family members with the opportunity to learn entrepreneurship (Ram, 1994). This personal growth is called entrepreneurial learning. Entrepreneurial learning will be defined as the process leading to the development of knowledge required for starting and managing a firm (Politis, 2005).

Portfolio entrepreneurship is ideal for experiential learning; where knowledge is created by the acquisition of experience. The process of experiential learning is best explained by Kolb (1984). Kolb (1984) describes learning to be a four-stage cycle of adaptive learning styles: concrete experience, reflective observation, abstract conceptualization and active experimentation. Firstly one experiences an important change in the corporation, for example the loss of an important client or achieving a big supply deal. After the experience one reflects on this to find the meaning of the event, followed by the formation of an opinion or theory (abstract conceptualization). Finally the opinion or theory is tested through experimenting (Huovinen, 2008). The goal of learning is to form knowledge, Kolb (1984) defines four basic forms of knowledge, namely: Assimilative, convergent, divergent and accommodative knowledge. The first two will try and form an abstract theory, whereas the latter are learning styles based on practical experience. Corbett (2005) applied this theory on the entrepreneur and found that convergent and assimilative learning are mainly applied to finding entrepreneurial opportunities. This is because in this phase the ability to find and solve problems quickly is needed. Divergent and accommodative learning are more often used in the evaluation and execution.

Applying this to portfolio entrepreneurship it can be shown that in order to become a successful portfolio entrepreneur one needs all four aspects, because portfolio entrepreneurs run old- and start new companies at the same time. The assimilative and convergent learning are particularly useful in the start-up phase of a company, whereas the divergent and accommodative styles are used in the running-phase (Huovinen, 2008).

Additionally, in the portfolio of corporations the management does not necessarily have to be the same across all ventures. Subgroups of managers can start corporations of their own without having to worry about possible lack of interest of the other investors of the ventures. That makes succession easier firstly because if one of the managers disagrees in appointing someone in the new venture, others can take over and support the new founder without the previous ventures being affected. Secondly if the new corporation of the successor (whether he is new to entrepreneurship or not) does not perform well, the other connected managers can either help the new entrepreneur with knowledge and guidance or on the other hand their original corporation can financially make up for the loss of the new venture.

3.2.5 Negative aspects of the portfolio entrepreneurship

Limitations: This thesis, like most others in this field, does have some limitations. External variables like legal restrictions, currency stability, state of technology, population demographics and availability of a skilled labour market are some examples of variables that will not be include

study
http://au.au.freedissertation.com

You must be logged in to post a comment