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Business experience and start-up size: Buying more lottery tickets next time around?

Abstract

This paper explores the determinants of start-up size by focusing on a cohort of 6,247 businesses that started trading in 2004, using a unique dataset on customer records at Barclays Bank. Quantile regressions show that prior business experience is significantly related with start-up size, as are a number of other variables such as age, education and bank account activity. Quantile treatment effects (QTE) estimates show similar results, with the effect of business experience on (log) start-up size being roughly constant across the quantiles. Prior personal business experience leads to an increase in expected start-up size of about 50 %. Instrumental variable QTE estimates are even higher, although there are concerns about the validity of the instrument.

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Fig. 1
Fig. 2

Notes

  1. 1.

    According to the ‘Hubris theory of Entrepreneurship,’ Proposition 5 in Hayward et al. (2006, p. 167) posits that: “More overconfident founders start their ventures with smaller resource endowments and this increases the likelihood that their ventures will fail.”

  2. 2.

    Note that this is not the usual meaning of the word ‘entrepreneurial learning.’ In our model, entrepreneurs do not apply their learning to improve their post-entry performance, but instead they ‘learn’ to increase their chances of success by starting large—all the while recognizing that they are playing a random game.

  3. 3.

    Da Rin et al. (2010) measure entry size as the median total assets at the country-industry level, but do not apply quantile analysis.

  4. 4.

    This could be the case of those ‘necessity entrepreneurs’ who enter self-employment after a spell in unemployment (see e.g. Thurik 2003; Andersson and Wadensjö 2007; Santarelli et al. 2009; Caliendo and Kritikos 2010).

  5. 5.

    For example, in the UK, the threshold for value added tax (VAT) registration was set at a turnover of GBP 73,000 for the 12 months from 1 April 2011. Firms below this threshold are not required to register.

  6. 6.

    We are grateful to a reviewer for bringing this to our attention.

  7. 7.

    Since we are analyzing a cross-section of data corresponding to the first year of a cohort of firms that start in the same quarter, there is no variation in time period, and hence there is no need to include year dummies.

  8. 8.

    We can infer the start-up size of those firms that do not survive their first year by taking the number of owners as a proxy for startup size. Following Colombo et al. (2004, p. 1192), we have information on number of owners at start-up for 1,053 businesses that do not survive their first year (76.5 % of which have just one owner) and 5,176 businesses that do survive their first year (71.5 % have just one owner). On this basis, it seems that there are no major differences in size between those businesses that exit before the end of the first year, and those that survive.

  9. 9.

    A Skewness-Kurtosis test of normality returns a p value of 5.63E−13.

  10. 10.

    The variable ‘number of owners’ has mean 1.320, standard deviation 0.573, minimum = 1 and maximum = 6, for 6,229 observations in the first year.

  11. 11.

    Further analysis, available from the authors upon request, shows that the effects of prior business experience (both personal and parental) show no clear trend over the quantiles (neither increasing nor decreasing).

  12. 12.

    When we repeated the estimations in Table 4 excluding these bank account variables, our results were similar to those obtained previously.

  13. 13.

    These contrasting results for availability and use of overdraft can be compared to findings in Colombo and Grilli (2005, their Table 2) that bank debt is not significantly associated with start-up size.

  14. 14.

    Previous studies that take parental characteristics as an instrument for entrepreneur’s characteristics include Dahl and Sorenson (2012).

  15. 15.

    For a similar line of reasoning, see e.g. Cassiman and Veugelers (2002, p. 1174).

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Acknowledgments

We are grateful to Marco Capasso, Gianluca Capone, Giovanni Cerrulli, Alex McKelvie, Francesca Melillo, Puay Tang, Bram Timmermans and Bart Verspagen and seminar participants at INGENIO (Valencia), Universitat Rovira i Virgili (Reus) and the University of Maastricht and the 2012 Schumpeter Conference (Brisbane), as well as 2 anonymous referees, for many helpful comments. Any remaining errors, however, are ours alone. A.C. gratefully acknowledges financial support from the ESRC, TSB, BIS and NESTA on grants ES/H008705/1 and ES/J008427/1 as part of the IRC distributed projects initiative, as well as from the AHRC as part of the FUSE project.

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Correspondence to Alex Coad.

Additional information

J.S.F. and R.G.R. write only in a personal capacity and do not seek to represent the views of Barclays Bank. This paper includes references to analyses of Barclays customer records undertaken by the authors with the permission of the bank. All research was conducted in a manner consistent with data protection obligations. No personal details were released to individuals outside of the Barclays Group.

Appendix

Appendix

See Table 8.

Table 8 Variables description

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Coad, A., Frankish, J.S., Nightingale, P. et al. Business experience and start-up size: Buying more lottery tickets next time around?. Small Bus Econ 43, 529–547 (2014). https://doi.org/10.1007/s11187-014-9568-2

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Keywords

  • Start-up size
  • Entrepreneurship
  • Business experience
  • Learning
  • Quantile treatment effects

JEL Classifications

  • L26
  • L25