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THE NEW VENTURE CREATION PROCESS: HOW NASCENT ENTREPRENEURS

BEHAVE WHEN FORMING A NEW VENTURE
John Perry, Wichita State University
1845 Fairmount, Box 88
316-978-6787; john.perry@wichita.edu
Steven Farmer, Wichita State University
Gergana Markova, Wichita State University
Timothy Pett, Wichita State University
Derek Ruth, Wichita State University
James Wolff, Wichita State University
Xin Yao, Wichita State University

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ACADEMIC ABSTRACT
New venture creation involves nascent entrepreneurs recognizing opportunities and exploiting
those opportunities by taking action to create a new venture. In this symposium, we address the
topic of new venture creation through studies of opportunity recognition, entrepreneurial
identity, nascent entrepreneurs financial bootstrapping, and human resources practices in
nascent ventures. Our collective study provides a more holistic approach to understanding the
process of new venture creation, and our results provide more comprehensive guidance than is
typically offered in individual studies.

EXECUTIVE SUMMARY
New venture creation topics (e.g., opportunity recognition, nascent venture funding) have often
been studied in isolation. The result of the isolated studies has been guidance to entrepreneurs in
one topic without considering how that topic might interact with another topic. The main purpose
of this symposium is to examine several topics related to new venture creation that will elicit a
conversation among symposium participants about how the topics may interact. The results
might then provide entrepreneurs with more holistic guidance.
The new venture creation involves nascent entrepreneurs recognizing opportunities and
exploiting those opportunities by taking action to create a new venture. The actions entrepreneurs
take include actions related to financing and human resources. Moreover, the financial and
human resources related actions that an entrepreneur takes are constrained by the entrepreneurs
notions of what s/he thinks an entrepreneur is. In this symposium, we address the topic of new
venture creation through studies of opportunity recognition, entrepreneurial identity, nascent
entrepreneurs financial bootstrapping, and human resources practices in nascent ventures.

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RESOURCES, QUALITY, AND THEIR INFLUENCE ON THE EXPLOITATION OF

ENTREPRENEURIAL OPPORTUNITIES
Central to the concept and process of entrepreneurship is the ability of an individual1 (an
entrepreneur) to recognize and exploit opportunities. Although several researchers have pointed
to the importance of opportunity in the entrepreneurial process (e.g., Gaglio & Taub, 1992; Hills
1995; Venkataraman, 1997), it has only been the last ten to fifteen years that this area has
received significant attention in the literature. As recently as 2000, researchers continued to
argue that understanding entrepreneurial opportunity has been a neglected area in
entrepreneurship research (Shane & Venkataraman, 2000).
Subsequent to Shane and Venkataraman (2000) many significant works have appeared (e.g.,
Ardichvili, 2003; Arenius, 2005; Choi, 2004 ; Mitchell et. al., 2007; Plummer, Haynie &
Godesiabois, 2007; Shane, 2003) that examine entrepreneurial opportunitiesthose
opportunities in which a person can create a new means-ends framework for recombining
resources that the entrepreneur believes will yield a profit (Shane, 2003, p. 18). The individualopportunity nexus framework (Shane & Venkataraman, 2000) grounds research in
entrepreneurship to examining how. . .opportunities. . .are discovered, evaluated, and exploited
(p. 218). The implication of this statement is a sequential process with distinct stages by which
new ventures (means-ends framework) are created. As a result of this conceptualization, research
that examines entrepreneurial opportunities has tended to focus on only one stage of the process
at a time rather than taking a more holistic approach to the issue. The purpose of this paper is to
contrast the sequential analytic approach with that of a holistic gestalt approach for research into
the recognition and exploitation of entrepreneurial opportunities.
We use the Shane & Venkataraman (2000) article as a watershed from which to examine
opportunity recognition and exploitation. Shane & Venkataraman (2000) put a spotlight on
entrepreneurship research and stimulated a large number of entrepreneurship-related articles with
a significant number focused on entrepreneurial opportunity and the authors articulation of the
individual-opportunity nexus (ION) as a focal point for entrepreneurship research. Our review of
the body of work in this area is framed by the discovery-evaluation-exploitation process that
arguably forms the core of the entrepreneurship field.
Analysis of the extant research reveals significant gains with respect to definitions, assumptions,
boundary conditions, and important research questions surrounding the conceptualization of
entrepreneurial opportunity. A recent example of the development taking place is Plummer,
Haynie & Godesiabois (2007) who articulate a framework for the origins of entrepreneurial
opportunity. However, within much of the work there is an implicit linear sequencing of the
discovery-evaluation-exploitation process such that one flows from the other and concludes in
the establishment of a venture. Alternatively, researchers deal with one stage (discovery or
exploitation) independently from the others.

For the purpose of this paper we couch our arguments in terms of an individual entrepreneur. We acknowledge
that entrepreneurial activity may be undertaken by two or more individuals or by a business entity comprised of
many individuals (e.g., West 2007).

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We conclude our paper with arguments that sufficient recursive elements exist within the
opportunity discovery-evaluation-exploitation process to render the sequential analytical
examination of the phenomena incomplete. Specifically, we propose that resources possessed by
the entrepreneur may be employed in a traditional sequence, reverse sequence, random sequence
or simultaneously in the process that leads to venture formation. A complementary view is that
opportunity discovery-evaluation-exploitation is a gestalt.
ENTREPRENEURSHIP PROTOTYPES ACROSS THREE CULTURES
Entrepreneurship is a social role that individuals may try out, adopt, and discard over time
(Davidsson, 2007). Roles are shared social objects, suggesting that different communities and
societies will hold different expectations for who the entrepreneur should be (i.e., personal
characteristics) and how an entrepreneur acts (behaviors). Although roles are socially
constructed, individuals experience roles as objectively real (Callero, Howard, & Piliavin, 1987).
Individuals may put on and take off roles like clothing (Turner, 1978, p. 1), or over time may
come to adopt a particular role as a central part of self-identity. Thus, roles link persons with
social structures (Stryker & Statham, 1985), suggesting that examination of the entrepreneurial
role and how it viewed and adopted by individuals could help us understand more about nascent
entrepreneurial development as a process rather than as an event.
We describe the results of two studies that elucidate the content and assess the generalizability
and cultural uniqueness of the entrepreneurial role in three cultures: the United States, China, and
Taiwan. We do so by examining the prototypes, or culturally-shared implicit theories or schema
(Lord & Maher, 1991; Gerstner & Day, 1994) that individuals hold about the attributes and
behaviors that characterize the entrepreneurs role. We suggest that these will have some
overlapping content across these three cultures, but that they will also reflect cultural uniqueness
due to different political, economic, and social histories and conditions (Shane, 2003; Tung,
Walls, & Frese, 2007).
The first study was an initial inductive study designed to elicit a comprehensive list of
representative characteristics and behaviors that are commonly recognized in each society as
typical of an entrepreneur. Based on the methodology reported by Lord, Foti, and De Vader
(1984), we first generated a list of characteristics and behavioral items by asking working adults
in mainland China, Taiwan, and the U.S. to freely list the characteristics and behaviors that
would describe an entrepreneur (n for China = 27, n for Taiwan = 17, n for U.S. = 17) in their
own language (for a total of 725 entrepreneur characteristics and behaviors). We then used an
iterative categorization process (Lord et al., 1984) to create an inclusive list of prototype items
(e.g., persistent, alert not new information, creative/innovative), along with a number of counterrole or anti-prototype items, for a total of 95 items. These items were used in a second study (n =
450 working adults; 150 per culture) to assess the specific content that each culture endorses as
prototypical of an entrepreneur. Respondents also filled out measures of exposure to
entrepreneurship and individual cultural values (Schwartz, 1992).
Both theoretically and empirically, a formative model fit the data better than an indicator model,
suggesting that the prototypical entrepreneur schema is caused by the prototype items rather
than being the cause of the items. Thus, we constructed an index of the highest ranking items

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within each culture; this index indicated the extent to which an individual agrees with culturelevel norms about entrepreneurs and the entrepreneurial role. These summate measures of topranked items, although consisting of different items across cultures, consistently correlated 1)
positively with exposure to entrepreneurship, 2) positively with Schwartzs (1992) cultural
dimension of openness to change (stimulation and self direction), and 3) negatively with the
cultural dimension of conservation (tradition, conformity, and security). Agreement with cultural
norms about the content of the entrepreneurial role was greater for individuals with greater
exposure to entrepreneurship (e.g., from family members or friends creating or working in
startups), and for individuals with higher levels of values consistent with openness to change.
Interestingly, the content of the prototype (i.e., the particular characteristics and behavioral items
endorsed) differed from culture to culture, probably due to specific cultural, economic, and
historic contexts. This suggests that processes giving rise to shared social views of entrepreneurs
might be etic, or common, across cultures, but that the particular content of the entrepreneurial
role might be emic, or culturally-specific.
While research suggests that cultures differ in their propensity for entrepreneurship (e.g., Hayton,
George & Zahra, 2002; Tung et al., 2007; GEM Executive Report, 2002), researchers have rarely
systematically examined the content of the entrepreneurial role itself, and in particular, how it
may or may not vary across cultures. Our two studies, using both inductive and deductive
methodologies, address this gap. From the perspective of role theory and role identity, ascribed
roles and corresponding role-consistent actions are central aspects of the social fabric of any
culture. Our role-based approach allows us to account for the unique content of entrepreneurial
role prototypes, and suggests future research that may describe an identity-based process that can
account for nascent entrepreneurial activity in cross-cultural settings.
BOOTSTRAPPING AMONG NASCENT ENTREPRENEURS: THE ANTECEDENTS
OF OWNER-RELATED BOOTSTRAPPING AND ITS ROLE IN ORGANIZATION
EMERGENCE
In this study, we switch from focusing on why entrepreneurs start businesses to how they start
businesses. In particular we examine the question, are the founders of new ventures who use
certain types of financial bootstrapping techniques more successful in having their venture
become operational? If so, why? Are the founders who focus on raising funds to support the
venture more successful than those that focus on limiting expenses? Are the founders who focus
on obtaining money and free services from individuals outside the venture more successful than
those who focus on obtaining money and free services from insiders?
Bootstrapping in new ventures refers to a variety of techniques that founders use to raise funds
from non-traditional business funding sources (e.g., spouses, friends and family) and limit
business expenses (e.g., by utilizing used machinery, delaying salaries) (Bhide, 1992; Payne,
2007; Winborg & Landstrom, 2001). For the founders of new ventures, bootstrapping is a
particularly important source of financing because they often do not have access to traditional
sources of business funding e.g., bank loans, venture capital financing, public equity (Stouder,
2002). Although bootstrapping research has investigated the type of bootstrapping techniques
companies use (Carter & Van Auken, 2005; Ebben & Johnson, 2006; Van Auken, 2004; Van
Auken, & Neeley, 1998), no research has investigated whether the founders of new ventures who

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use certain types of financial bootstrapping techniques are more successful in having their
venture become operational
Building on research that has categorized bootstrapping techniques (Payne, 2007; Winborg &
Landstrom, 2001), and utilizing arguments based in the resource-based view of the firm and
institutional theory, we hypothesize that the new ventures of founders who use higher
percentages of cash-increasing and externally oriented bootstrapping techniques will more likely
become operational than the new ventures of founders who use higher percentages of costdecreasing and internally oriented bootstrapping techniques. Thus, we hypothesize:
Hypothesis 1: Among new ventures, those that have founders who successfully employ a
higher percentage of cash-increasing bootstrapping techniques versus cost-decreasing
techniques will be more likely to become operational.
Hypothesis 2: Among new ventures, those that have founders who successfully employ a
higher percentage of external bootstrapping techniques versus internal bootstrapping
techniques will be more likely to become operational.
To test our hypotheses, we used data from the PSED I dataset. The PSED I dataset is composed
of 830 individuals who were in the new venture process when the study began and 431
comparison individuals. (For more information about the PSED, see Gartner, Shaver, Carter, and
Reynolds, 2004). After eliminating the comparison individuals, ventures that should not have
been in the dataset because they were past the nascent stage, and spinoffs, we were left with a
sample of 817 new ventures. Excluding ventures with missing data further reduced the sample
size. The final sample consisted of 250 new ventures.
Building on prior research that has operationalized organizational emergence as positive
operating cash flow, we measured whether a venture become operational by noting whether it
had achieved a positive monthly cash flow. To measure the percentage of cash-increasing versus
cost-decreasing bootstrapping techniques used, we first categorized techniques as cashincreasing or cost-decreasing, Cash-increasing techniques included spousal financing, family and
friend financing, employer financing, using a second mortgage, using credit cards, using personal
financing, continuing to work for others, and owner investing; and cost-decreasing techniques
included using free owner-provided services and using free helper-provided services. We then
divided the number of cash-increasing techniques a venture used by the total number of
techniques that it used. Similarly, to measure the percentage of external versus internal
bootstrapping techniques used, we first categorized techniques as external or internal. External
techniques included spousal financing, family and friend financing, employer financing, and
using free helper-provided services; and internal techniques included using a second mortgage,
using credit cards, using personal financing, continuing to work for others, owner investing, and
using free owner-provided services. We then divided the number of external techniques a venture
used by the total number of techniques that it used.
After analyzing our data using binary logistic regression, we found support for our second
hypothesis, but not for our first hypothesis. That is, we found that the new ventures of founders
who use higher percentages of externally oriented bootstrapping techniques were more likely to

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become operational, but the new ventures of founders who use higher percentages of cashincreasing bootstrapping techniques were more likely to become operational. This finding
suggests that when bootstrapping a new venture, getting outsiders to help is more important than
raising money.
TEACHING HUMAN RESOURCES MANAGEMENT TO FUTURE ENTREPRENEURS
In this study, we discuss the role of training in Human Resource Management (HRM) for nascent
and practicing entrepreneurs. We begin by examining the needs of future entrepreneurs for HRM
knowledge and skills. We believe that adequate HRM competencies may enhance the confidence
of nascent entrepreneurs to successfully pursue their ideas. Furthermore, new ventures rarely can
purchase HRM competences from the external market (i.e., professional consultants or HR
specialists). This makes it mandatory for venture creators to possess some skills in developing
HR practices and policies. We emphasize that Entrepreneurship curriculum should include
courses that enhance HRM competences particularly relevant to entrepreneurial firms.
Accordingly, we outline the array of HR issues that are generally encountered by entrepreneurs
at various stages of venture creation. Thus, the main goal of the paper is to encourage educators
to incorporate a more intensive training of future entrepreneurs in HRM.
Although the research on HRM practices in small and entrepreneurial firms is limited, there is a
growing body of research that can guide future entrepreneurs. Thus, drawing on previous
conceptual (Leung, 2003, Marlow, 2006) and empirical studies (Rutherford, Butler, &
McMullen, 2003), we propose three directions of HRM training for individuals thinking of start
their own businesses. First, we recognize differences in HRM practices between established and
entrepreneurial firms. Second, we point out those HR practices that can be universally successful
and should be followed from the very early venture planning and development. Finally, we
identify practices that are particularly applicable for small businesses. Creative strategies to
address challenges at various stages can become a source of generate competitive advantage.
We emphasize the unique challenges in managing people at the very initial stages of venture
creation. We also claim that nascent entrepreneurs who realize the importance of HR decisions at
these stages can make a huge difference for the survival and growth of the business. Previous
research provides some evidence that human resources are managed differently in small
entrepreneurial firms than in large established firms (Jack, Hyman, & Osborne, 2006). Other
studies (Way, 2001) cast doubts on the effectiveness of the HRM practices that are borrowed
from large, established firms and applied in small and new enterprises. Since the HRM discipline
has evolved around large organizations, the HRM curriculum heavily reflects their practices. As
a result, students are generally exposed to best practices and examples that work in successful
but large and established ventures. Recently, some texts have begun to incorporate success
stories of smaller and newer companies to exemplify creative HRM strategies.
We also discuss particular HRM issues necessary to prepare nascent entrepreneurs for each stage
of venture creation - from developing a businesses idea to growing and sustaining the business.
We highlight the importance of human resource planning to address both immediate needs and
future strategic goals. Future entrepreneurs are encouraged to aggressively develop strategies for
attraction and retention of qualified talent. This challenge can be addressed with adequate

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recruitment and compensation despite limited resources. Additionally, development of fair and
appealing work environments through creative benefits and practices can be used to counter the
lack of affluent resources. Along with some apparent limitations, small and new businesses have
advantages that if harvested wisely can be sources of competitiveness. Some advantages are
informality, flexibility, and strong culture originating from the founder. Ventures can capitalize
on these features by developing respective personnel policies to save on cost and create
inimitable advantage. Additionally, starting businesses may experience extreme pressure to
comply with industry norms and follow certain HR practices to gain legitimacy. Entrepreneurs
who understand the motivation behind the mimicry that certain business practices have, may
have the advantage of avoiding unnecessary and costly practices that do not serve business
purposes. Finally, we urge more attention in research, teaching, and practice to the HRM
practices in the initial stages of venture creation.
SO WHAT?
The components of our symposium advance entrepreneurial practice in the following ways.
- In general, prior research in opportunity recognition has tended to focus on only one
aspect of opportunity recognition at a time rather than taking a more holistic approach to
the issue. However, entrepreneurs both identify and exploit opportunities. By offering a
more comprehensive approach to opportunity recognition and exploitation, we recognize
the importance of opportunity quality and resources and provide an explanation for why
some entrepreneurial ventures may be more likely than others to become operational.
- National cultures provide meanings to roles, including entrepreneurial roles; and
entrepreneurial roles provide a basis for how a nascent entrepreneur believes s/he should
behave. Therefore, our development of culturally based entrepreneurial prototypes
provides entrepreneurs with a means of understanding how they may be viewed and what
behavior may be expected of them in different countries.
- Nascent entrepreneurs commonly engage in financial bootstrapping. But research on
bootstrapping is sparse. We offer guidance to entrepreneurs regarding what bootstrapping
techniques might be effective.
- Research suggests that best HRM practices in mature firms may not be effective in
nascent ventures. We explicate differences between mature firms and newer ventures,
and how these differences may influence HRM practices. Furthermore, we strongly
advocate deliberate HRM training to prepare nascent entrepreneurs for the unique
challenges in planning and starting their ventures that can provide them with insights to
adapt effective compensation, selection, and training practices.
Through the four studies outlined above, we predict different nascent entrepreneurship dependent
variables i.e., what type of person will become an entrepreneur, what type of training fosters
entrepreneurship, when will a venture be started and, when will a venture emerge from the
nascent stage. Separately, therefore, the studies address different research questions. They are
similar, however, in that they each address a topic crucial to nascent entrepreneurship and the
new venture process. Taken collectively, therefore, the studies provide a more holistic approach
to understanding the process of new venture creation than is typically offered by individual
studies.

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