DYNAMICS OF DECISION MAKING IN THE ENTREPRENEURIAL PROCESS

BRIAN T. MCCANN Lecturer Strategic Management Vanderbilt University Owen Graduate School of Management 401 21st Avenue South Nashville, TN 37203 Tel: (615) 343-7702 Fax: (615) 343-7177 e-mail: brian.mccann@owen.vanderbilt.edu

GOVERT VROOM Assistant Professor of Strategic Management University of Navarra IESE Business School Avenida Pearson, 21 08034 Barcelona, Spain Tel: +34.932534200 Fax: +34.932534343 e-mail: vroom@iese.edu

Version: March 4, 2010 Please do not cite or forward without authors permission

DYNAMICS OF DECISION MAKING IN THE ENTREPRENEURIAL PROCESS

ABSTRACT This research investigates how the determinants of the decision to exploit an entrepreneurial opportunity change during the evaluation stage of the entrepreneurial process. In contrast to much of the prior literature that views the decision to pursue an entrepreneurial opportunity as a one-time dichotomous choice, we contend that both performance expectations and perceptions of uncertainty, two key constituent elements of the decision, are likely to be revised as entrepreneurs investigate entrepreneurial opportunities. As such, this research provides a broader view of the evaluation stage of the entrepreneurial process, arguing that it consists of more than just the gathering of resources by fully committed entrepreneurs. Using the Panel Study of Entrepreneurial Dynamics, a nationally representative dataset of US adults working to start new businesses, we demonstrate that entrepreneurs expectations of financial performance and perceptions of environmental uncertainty undergo significant changes as they work to establish their new ventures, consistent with a learning view of the process. The degree of these changes is influenced by entrepreneurs information gathering activities. We find little evidence, however, that the main effect of information gathering activities on expectations is moderated by the prior entrepreneurial experience of the nascent entrepreneur.

1 INTRODUCTION Economic theories view entrepreneurship primarily as a career choice (e.g., Lucas, 1978; Kihlstrom and Laffont, 1979; Lazear, 2005), in which the choice to pursue an entrepreneurial opportunity is a comparison between the utility gained in entrepreneurship versus the utility gained in the individuals next best alternative. This view implies that an individual will pursue an entrepreneurial opportunity when its projected return exceeds some minimum level of return. It is an empirical fact, however, that not all those who initially decide to pursue an entrepreneurial opportunity will conclude the pursuit with a venture launch. Some will launch, others will quit, and some will remain stuck in the process. This variance in outcomes suggests that some of the factors underlying the decision to pursue an entrepreneurial opportunity change during the evaluation stage. We argue in this research that the comparative decision to engage in entrepreneurship has an inherent dynamic component; that is, as potential entrepreneurs investigate entrepreneurial opportunities, the factors underlying this comparison decision are likely to change as the potential entrepreneur learns more about the opportunity under consideration. The purpose of this research is to investigate the existence and determinants of these changes during the entrepreneurial process. This work is distinctive in its view of the decision to pursue an entrepreneurial opportunity as a dynamic process subject to continuing revision. While prior literature recognizes new venture creation as a process of opportunity identification, evaluation, and exploitation, it seems to characterize the entrepreneurial career choice as a binary, one-time decision. Once this choice is made, the entrepreneur then begins work to actualize his or her decision. For example, Carter, Gartner and Reynolds (1996: 152) investigate the start-up activities of nascent entrepreneurs describing the studys focus to be on the process of organization creation or those factors that lead to and influence the process of starting a business [emphasis added]. Similarly, Reynolds and White (1997: 6) argue that once conception has taken place, gestation occurs as the business

2 structure develops and the operational procedures emerge. Thus, much of the somewhat sparse extant literature examining the evaluation stage seems to view the primary purpose of this stage to be the gathering of resources by fully committed entrepreneurs. Rather than viewing the decision to pursue an opportunity a one-time, static choice, we believe it is better characterized as a dynamic decision process in which the decision is subject to updating and revision as more information about the opportunity is gathered and learning occurs. We argue that the entrepreneurial process involves continuing evaluation, which leads to significant changes in both projections of financial performance and perceived uncertainty of the prospective opportunity. Our approach relates strongly to learning-based views of the entrepreneurial process in which the evaluation stage provides the opportunity to reduce technological and market ignorance through knowledge accumulation (e.g., Choi, Levesque and Shepherd, 2008). It is also consistent with a real options view of entrepreneurship in which opportunities are characterized by high levels of uncertainty, and endogenous uncertainty encourages investment to explore the opportunity (Folta, 1998). Finally, the arguments are also reflective of creation-based perspectives of entrepreneurial opportunities (Alvarez and Barney, 2007). Despite the strong theoretical underpinnings of these views, we have little empirical evidence to determine whether and why a fundamental part of the evaluation process involves revision of expectations regarding the entrepreneurial opportunity. Using the Panel Study of Entrepreneurial Dynamics, a nationally representative data set of United States adults in the process of starting businesses who are tracked over multiple waves of data collection, this research demonstrates that nascent entrepreneurs projections of financial performance undergo both positive and negative changes as they learn more about their opportunity. We further find that the magnitude of these changes increases as individuals complete more information-gathering gestation activities (activities nascent entrepreneurs initiate when trying to establish a business). The evidence also indicates that completion of these activities leads to

3 reductions in perceived environmental uncertainty. We focus on this factor because uncertainty features so prominently in the entrepreneurship literature, and because individuals must be compensated for bearing uncertainty, given standard risk aversion assumptions. Therefore, higher levels of environmental uncertainty should result in higher required financial returns from the opportunity. Overall, our evidence is consistent with a more dynamic view of the decision to pursue an entrepreneurial career. Rather than a one-time choice to which an individual is fully committed, the decision process unfolds over time and is subject to revision as the nascent entrepreneur learns more about his or her opportunity. This research offers a number of contributions to the entrepreneurship literature. First, it adds to our knowledge of what occurs during the evaluation stage of the entrepreneurial process, expanding an area in which there is very little, solid empirically-based knowledge (Davidsson, 2006: 13). Second, it provides a test of competing views of the nature of entrepreneurial opportunities and the entrepreneurial process. Our evidence of significant revision of expectations and perceptions of uncertainty is more consistent with creation-based views of entrepreneurial opportunities rather than discovery-based views (Alvarez and Barney, 2007). This research indicates that entrepreneurs use the evaluation stage to revise their knowledge of the value and feasibility of economic opportunities. The research also extends this viewpoint by investigating what factors are related to greater changes in these revised expectations. In particular, it argues and shows a link between planning activities and learning during the entrepreneurial process. We are able to overcome the challenge of directly relating these activities to changes in expectations and perceptions held by nascent entrepreneurs through the use of a comprehensive, longitudinal data set. Third, the results provide a more subtle understanding of the relationship between completion of gestation activities and the likelihood of launching an entrepreneurial venture. One obvious explanation is that gestation activities involve gathering resources, leading to greater launch

4 likelihood; however, a less obvious idea is that engaging in gestation activities might result in learning and revised performance expectations. This perspective helps explain why gestation activities such as business planning might have an unclear relationship to likelihood of launch; some positive effects have been found by Delmar and Shane (2003), while no relationship was noted by Newbert (2005) and Parker and Belghitar (2006). The informational feedback of planning can generate either positive or negative information regarding the opportunity; that is, a nascent may learn that an opportunity is either more or less valuable than initially believed, leading to indeterminate effects on the likelihood of launch. Finally, this research suggests that scholars should consider a more cautious approach in labeling attrition from the entrepreneurial process as a failure. An equally compelling explanation is that information and learning generated during the evaluation stage results in a rational decision to no longer pursue the opportunity. If a nascent entrepreneur learns during evaluation that an opportunity is less valuable than originally believed, failure to exploit that opportunity is not necessarily evidence of a bad outcome. If expected returns are no longer sufficient to compensate for bearing the uncertainty of the opportunity, the decision to abandon pursuit of the opportunity should be seen as a correct decision rather than a failure. THEORETICAL BACKGROUND AND HYPOTHESIS DEVELOPMENT Prior empirical research regarding the evaluation or gestation phase of the entrepreneurial process has investigated (a) what happens during this phase of the process and (b) why it might matter. Initial efforts focused on determining the types of activities undertaken by nascent entrepreneurs. In one early noteworthy study, Carter et al. (1996) investigated the nature, number, and timing of gestation activities. Those who eventually launched a business acted more aggressively than those who failed to achieve launch, completing a greater number of activities and focused on tasks that directly facilitated launch, such as looking for facilities, gathering financial

5 support, and forming legal entities. Interestingly, those who gave up on the process followed a similar pattern of more rapid, aggressive action. This result led the authors to speculate that these individuals may very well have tested their ideas out, received negative feedback, and rationally decided to end the process. As we will argue later, we believe that ensuing literature in this stream has failed to adequately incorporate this viewpoint of those who abandon the process as rational decision makers who have engaged in learning. Liao and Welsch (2002) found similar results to those of Carter et al. (1996) noting that those who eventually launched their businesses were more active and engaged in significantly more activities than those still engaged in the process. More recent work has attempted to discover the determinants of progress through the evaluation stage (e.g., completing more gestation activities). Davidsson and Honig (2003), for example, found that certain human capital and social capital variables were associated with the completion of future gestation activities. Comparison of different groups or types of entrepreneurs has been the subject of a number of other similar studies of the evaluation stage. Technology-based ventures completed more activities than non-technology-based ventures (Liao and Welsch, 2003) as did parallel founders compared to novice and serial founders (Alsos and Kolvereid, 1998) and innovative versus imitative ventures (Samuelsson and Davidsson, 2009). In a sample of Canadian nascents, Menzies, Diochon, Gasse and Elgie (2006) found no difference in activity completion between men and women. A final stream of research in this area has focused on investigating determinants of successful outcomes such as launching the venture and the level of performance achieved after launch. In a series of papers, Delmar and Shane have examined the relationship of start-up activities to achieving launch and successful post-launch outcomes. Using a sample of Swedish nascent entrepreneurs, Delmar and Shane (2003) showed that engaging in business planning lowered the hazard of disbanding and increased future product development and organizing

6 activities. In Delmar and Shane (2004) the authors argued and found evidence for the proposition that undertaking activities to generate legitimacy (such as business planning and legally organizing the business) reduced the hazard of disbanding and increased the number of future organizing activities completed. In contrast to these results, other researchers (e.g., Newbert, 2005; Parker and Belghitar, 2006) found no relationship between business planning and successful outcomes. Empirical investigations of the evaluation stage of the entrepreneurial process are influenced by how one views the nature of entrepreneurial opportunities, a central question in the entrepreneurship literature (e.g., Shane and Venkataraman, 2000; Gaglio and Katz, 2001; Eckhardt and Shane, 2003). In one prominent view that has informed much of the prior empirical research discussed above, opportunities are objective phenomena resulting from exogenous shocks, such as technological or demographic changes, amenable to discovery by entrepreneurs. Within this discovery perspective, some scholars argue that entrepreneurial opportunities are not amenable to focused search activities (e.g., Kirzner, 1997) and are instead discovered by alert individuals who are at all times scanning the horizon, as it were, ready to make discoveries (Kirzner, 1997: 72). In contrast, another group emphasizes that opportunities can be identified though systematic search and that search is a natural activity of entrepreneurs (e.g., Krueger and Brazeal, 1994; Fiet, 1996; Busenitz, 1996; Fiet, 2002). Regardless of which of these perspective one adopts, opportunities are seen to be objective phenomena discovered in a readily exploitable form, and barriers to exploitation concern implementation challenges. As noted above, these discovery approaches have informed much of the prior literature on the evaluation stage of the entrepreneurial process because a natural extension of this perspective is to expect that an individual who has entered the evaluation period is committed to launching a venture and is using the process to overcome barriers (lack of legitimacy, lack of resources, etc.) that stand between the nascent and the launch of a venture. This appears to be the predominant

7 view in much of the literature. Reynolds (2007), for example, argues that the new firm creation process is a two-step process: initial entry into the start-up process through the conception of an entrepreneurial opportunity followed by the actual creation of a new business. Van Gelderen, Thurik, and Bosma (2006) echo a similar view although they argue that the process consists of four stages: i) development of the intention to start a business, ii) recognition of an entrepreneurial opportunity and development of the business concept, iii) assembly of resources and creation of the organization, and iv) commencement of exchange with the market. Both of these perspectives reflect a common view of the firm creation process. Once a potential entrepreneur discovers an entrepreneurial opportunity, he or she begins to engage in start-up activities or actions pursued to organize and implement a new firm (Reynolds, 2007: 25). We contend that these discovery perspectives and their associated view of the entrepreneurial process are inconsistent with the inherent uncertainty surrounding entrepreneurial opportunities. Given this uncertainty, a fundamental purpose of the evaluation stage is to gather more information related to the opportunity itself, not just the feasibility of implementation. Our approach is consistent with three prominent views in the entrepreneurship literature. It first relates strongly to learning-based views of the entrepreneurial process in which the evaluation stage provides the opportunity to reduce technological and market ignorance through knowledge accumulation (e.g., Choi, Levesque and Shepherd, 2008). Second, it is also consistent with a real options view of entrepreneurship in which opportunities are characterized by high levels of uncertainty, and endogenous uncertainty encourages investment to explore the opportunity (Folta, 1998). Third, it echoes the logic of creation-based views of entrepreneurial opportunities, in which opportunities are created by the endogenous actions, reactions, and enactments of entrepreneurs (Alvarez and Barney, 2007).

8 Adopting this different perspective leads to the consideration that the activities of the evaluation stage might actually cause individuals to revise their decision to pursue an opportunity. We contend that while these activities do potentially further the goal of organizing and implementing the new firm, they also generate a continuing stream of information about the opportunity itself, affecting the decision of whether to continue pursuit of the opportunity. To examine how this information might impact the decision to pursue an entrepreneurial opportunity, we build from a foundation of economic views of entrepreneurship that view the decision to exploit an opportunity as a career choice (e.g., Lucas, 1978; Kihlstrom and Laffont, 1979; Lazear, 2005). That is, the decision to enter entrepreneurship is a comparative decision in which an individual compares returns from entrepreneurship to returns available in alternative employment. We first consider changes that may occur to projected financial performance of the entrepreneurial venture as they are a fundamental part of the comparative decision and they are likely to be revised as learning occurs.1 We next consider the perceived uncertainty surrounding the opportunity because exploitation requires that the entrepreneur believe that entrepreneurial returns provide a premium for bearing uncertainty (Shane and Venkataraman, 2000: 223). Since the seminal work of Knight (1921), uncertainty has featured prominently in the entrepreneurship literature, and perceptions of higher market risk have been shown to be associated with lower probability of launching a new venture (Van Gelderen et al., 2006). In sum, we argue below that after a potential opportunity has been identified, projections of economic performance will change through the evaluation stage (although the direction of these changes will be indeterminate), perceptions of uncertainty will be reduced, and that the number of activities engaged in by the nascent will be associated with these changes. Thus, our perspective provides insight into whether
Positive and negative changes in expected performance should be driven by reductions in uncertainty regarding the value of the opportunity. An alternative approach would be to examine changes in perceptions of value uncertainty; however, the data set we employ to test the research questions does not include measures of perceived uncertainty regarding the financial value of the opportunity.
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9 and how the activities of the entrepreneurial process might influence the decision to exploit an entrepreneurial opportunity. Changes in Performance Expectations Delmar and Shane (2004) argue that nascent entrepreneurs must convince potential employees, customers, suppliers, and investors of the value of the venture idea in order to gain legitimacy. While it is hard to disagree with this statement, it assumes that the nascent entrepreneur is already personally convinced of the value of the venture idea. Given the high degree of uncertainty surrounding entrepreneurial opportunities, a reasonable first step is for the entrepreneur to gather information for himself or herself that helps resolve uncertainty regarding the expected financial returns of the opportunity. A critical distinction in the argument of whether information is likely to affect performance projections is the distinction between risk and uncertainty. According to Knight (1921: 233), The practical difference between the two categories, risk and uncertainty, is that in the former the distribution of the outcome in a group of instances is known (either through calculation a priori or from statistics of past experience), while in the case of uncertainty this is not true. An entrepreneur facing a risky opportunity is able to characterize a probability distribution of possible outcomes, which leads to an expected value calculation. Efforts to reduce risk would have no effect on the expected value of the opportunity; it would merely involve reduction of standard deviation of the known probability distribution. In contrast, an entrepreneur facing an uncertain opportunity has no valid basis of any kind for classifying instances to determine probability from past experience or statistical calculation (Knight, 1921: 225). Rather than calculating an expected value from a probability distribution, an entrepreneur facing Knightian uncertainty regarding the value of an opportunity relies on judgment to create an estimate or forecast of future performance. The higher the uncertainty, the less accurate

10 will these forecasts be, a fact Knight acknowledges by noting that a striking feature of the judging faculty is its liability to error. Individuals strive to reduce uncertainty to lessen the error and arrive at more accurate estimates: rational conduct strives to reduce to a minimum the uncertainties involved (Knight, 1921: 238). Reduction of Knightian uncertainty leads to better judgment and a revised, more accurate assessment of the value of the opportunity, allowing the nascent to make a more informed evaluation of whether the proposed venture provides adequate financial returns to justify exploitation of the opportunity. This viewpoint is consistent with viewing the evaluation stage as a learning process. For example, Choi, Levesque and Shepherd (2008: 335) argue that during the exploration period, entrepreneurs attempt to reduce ignorance about technology and market through knowledge accumulation arising from experimentation and search. Similarly, Delmar and Davidsson (2005: 89) note that new venture creation behavior can be seen as a learning experience, where the nascent entrepreneur enters the process with limited knowledge of the outcome and the process leading to the outcome. Learning reduces uncertainty regarding the value of the opportunity, which will lead to more accurate judgments, reflected in both positive and negative changes in the projection of opportunity value. Hypothesis 1a: The mean of the absolute change in expected financial performance of nascents potential entrepreneurial ventures from time t to time t+1 will be significantly different from zero. Changes in Perceived Uncertainty The learning garnered through this process will likely not be restricted to the value of the opportunity itself. In addition, the nascent entrepreneur is likely to learn more about the surrounding environment and its relationship to the entrepreneurial opportunity. Milliken (1987: 136) defines uncertainty as an individuals perceived inability to predict something accurately due

11 to a perceived lack of sufficient information. Environmental uncertainty implies that the something that can not be predicted accurately is located in the individuals external environment. Milliken further suggests that there are at least three different types of environmental uncertainty experienced by decision makers. State uncertainty occurs when individuals perceive the external environment, or a particular part of that environment, to be unpredictable. Effect uncertainty occurs when individuals are unsure of the impact of changes in the environment on themselves or their organization. Finally, response uncertainty refers to an inability to predict the consequences of a change undertaken by the individual. Consistent with the prior studies of uncertainty in the new venture process (Matthews and Human, 2000; Delmar and Shane, 2003; Delmar and Shane, 2004; Matthews and Human, 2004; Liao and Gartner, 2006), we will focus on state uncertainty. Examples of state uncertainty include inability to predict the behavior of potential stakeholders (e.g., suppliers or financing sources), competitors, and other external actors. Another important distinction in types of uncertainty is the difference between exogenous and endogenous uncertainty. Exogenous uncertainty is largely unaffected by firm actions and is predominantly resolved over time (Folta, 1998: 1011). Examples of exogenous uncertainty include when the technological trajectory of an industry is not well established or when important legislation is pending that will affect a particular firm/industry. Actions of the firm or individual are unlikely to have an impact on how these events ultimately resolve. In contrast, endogenous uncertainty can be lessened by firm action. As Folta (1998: 1010) notes, this kind of uncertainty can only be resolved by learning. We contend that a significant portion of state uncertainty is endogenous. That is, individuals can take actions that reduce their inability to predict the behavior of potential stakeholders / competitors, and these actions can impact how these relationships with external players ultimately resolve. As a potential entrepreneur moves through the entrepreneurial

12 process, he or she is likely to become more aware of the motivations, expectations, and likely behaviors of these external actors. This learning leads to reductions in state uncertainty. Hypothesis 1b: The mean of entrepreneurs perceptions of state uncertainty will be lower at time t+1 compared to time t. Determinants of Changes Having argued that changes to expected financial performance and reduction of state uncertainty are likely to occur during the evaluation stage, we next turn to potential determinants of these changes. First, we argue that what the individual does during the evaluation stage will impact changes in performance expectations and reduction of uncertainty. The prior literature characterizes a variety of activities under gestation activities, including tasks like adopting a legal form for the business, opening a bank account, applying for an employer identification number, and the like. While these types of activities are unlikely to result in learning by nascent entrepreneurs, other gestation activities, like business planning or market investigation, are likely to generate information about the external environment and the value of the opportunity. Castrogiovanni (1996) argues that these types of pre-venture planning activities result in proactive learning (Miles and Randolph, 1980). Proactive learning is the outcome of attempting to discover causal relationship prior to acting (as opposed to enactive or experiential learning in which learning flows from experience). Proactive learning is similar to Hubers (1991) Searching and Noticing source of knowledge acquisition in which information is acquired through scanning and focused search. Gestation activities that generate information about the opportunity and the environment will lead to learning, which in turn contributes to revised performance expectations and reduced uncertainty. As Knight (1921) notes, securing better knowledge of the future is one of the most thoroughgoing methods of dealing with uncertainty.

13 A clear example of trying to secure better knowledge is engaging in business planning. While Delmar and Shane (2004) focus on the external, legitimating aspects of business planning, it also serves internal purposes allowing the nascent to explore the potential of the business idea and develop a detailed road map for converting an opportunity into a profitable venture (Baron and Shane, 2008: 206). The exploration of the opportunity and the creation of the road map produce information and provide learning opportunities that lead to changes in performance projections. The information may be positive, increasing performance projections, or it may be negative, decreasing the performance projections. The learning that occurs during planning will also lead to reductions in state uncertainty as the nascent entrepreneur learns more about his or her external environment. Thus, each information-generating gestation activity in which the nascent engages provides potential feedback about the value of the opportunity, driving both changes in judgments regarding performance projections and decreases in state uncertainty. Hypothesis 2a: The number of information-generating gestation activities completed from time t to time t+1 will be positively associated with absolute value changes in nascents expected financial performance from time t to time t+1.2 Hypothesis 2b: The number of information-generating gestation activities completed from time t to time t+1 will be negatively associated with levels of perceived state uncertainty at time t+1. We next consider how the relationship between completion of gestation activities and expectation changes will be moderated by the prior experience of the founder. We acknowledge that not only might this factor serve as a moderator of the main effects, but it might also influence the decision of whether and how many gestation activities to complete. While other literature has examined the determinants of completion of gestation activities (e.g., Davidsson and Honig, 2003),
2

We emphasize that we investigate the absolute value of changes because while we expect changes to occur, we have no ex ante expectations of whether those changes will be positive or negative.

14 our particular interest here is whether and how this factors influences the relationship between gestation activities and changes in expectations.3 Castrogiovanni (1996: 814) argues that knowledge also reduces the need for learning and efficiency aspects of planning. With regards to learning, much of what might be learned through planning is already known. As an example, Castrogiovanni cites the case of a prospective entrepreneur who is considering opening a tavern after managing a similar type of tavern for the past twenty years. This entrepreneur likely already has a deep knowledge of the opportunity and is unlikely to experience large learning benefits from further investigation of the opportunity. There is simply less for highly knowledgeable individuals to learn during the evaluation stage of the entrepreneurial process. This effect, however, should manifest itself in lower levels of initial uncertainty. As we are interested in how perceived uncertainty changes during the evaluation stage, the question becomes how might founder knowledge affect the efficacy of learning, holding constant the level of initial uncertainty. Larger founder knowledge stocks will result in greater absorptive capacity. Cohen and Levinthal (1990) developed the term absorptive capacity to describe firms ability to recognize the value of new external information, assimilate it, and apply it to commercial ends. Although this construct is often applied at the firm level in management research, one of the key foundational elements of this ability is knowledge held at the individual level. Drawing on research from cognitive psychology, Cohen and Levinthal (1990) argue that individual-level absorptive capacity is a function of the level of prior related knowledge held by the individual. Thus, we expect that individuals with higher levels of prior related knowledge have a greater absorptive capacity and ability to learn from information-generating gestation activities.

We also acknowledge that this discussion implies that completion of gestation activities may be endogenous, a fact that we will address in the empirical analysis.

15 Prior start-up experience has featured most prominently in the prior literature as an explanation for the development of entrepreneurial knowledge. McGrath and MacMillan (2000) argue that prior experience facilitates the development of an entrepreneurial mind set and a set of finely honed skills that make individuals more knowledgeable entrepreneurs. Aldrich and Martinez (2001) contend that the trial and error aspects of prior experiences foster knowledge accumulation by generating valuable feedback on what works and what does not in an entrepreneurial setting. We expect that those with prior entrepreneurial experience will be better able to learn from gestation activities completed during the entrepreneurial process. Hypothesis 3a: The positive relationship between the number of information-generating gestation activities completed from time t to time t+1 and absolute value changes in nascents expected financial performance from time t to time t+1 will be strengthened for those with prior entrepreneurial experience. Hypothesis 3b: The negative relationship between the number of information-generating gestation activities completed from time t to time t+1 and levels of perceived state uncertainty at time t+1 will be strengthened for those with prior entrepreneurial experience. METHODS Data Investigation of the research questions requires a longitudinal data set of individuals who have decided to enter the entrepreneurial process along with a detailed set of characteristics of those individuals. Furthermore, the data must include evaluations of expected performance and perceptions of environmental uncertainty at separate stages of the panel while tracking the activities completed by the respondents. One of the few data sets that includes this type of information is the Panel Study of Entrepreneurial Dynamics (PSED). The PSED is a nationally representative, longitudinal data set of US adults in the process of starting businesses, and it provides ideal data for

16 studying the evaluation stage of the entrepreneurial process. The initial screening survey based on a random digit dialing telephone survey of 64,622 individuals conducted in 1998-2000 identified a cohort of 830 nascent entrepreneurs who were subsequently tracked over multiple waves of data collection (for a review of the PSED data, see Gartner, Shaver, Carter and Reynolds, 2004). The PSED used a series of screening questions to identify nascent entrepreneurs. As a first screen, respondents were asked the following two questions: (i) Are you, alone or with others, now trying to start a new business?, and (ii) Are you, alone or with others, now starting a new business or new venture for your employer? An effort that is part of your job assignment? Individuals who replied yes to either of the two questions needed to meet three additional criteria to be considered nascents by the PSED: (i) they expect to be owners or part owners of the new firm; (ii) they have been active in trying to start the new firm in the past 12 months, and (iii) the effort is still in the start-up or gestation phase and is not an infant firm (infant firms are those that have had a positive monthly cash flow that covers expenses and owner-manager salaries for more than three months). The dataset of nascent entrepreneurs was cleaned using the kscleans06.sps algorithm recommended by Kelly Shaver.4 As part of this cleaning, nascent entrepreneur cases that should have been classified as infant firms were removed from the sample. To focus on autonomous nascent entrepreneurs, we elected to remove cases in which those expected to own part of the business were non-human persons, such as a corporation (Reynolds and Curtin, 2004). These adjustments reduced the starting potential sample size to 715. For both the performance expectations and the uncertainty analyses, reductions to the sample were associated with attrition from the panel between waves of data collection. We utilized data from the initial (Wave 1) and second (Wave 2) waves of data collection. Wave 2 interviews occurred approximately twelve months after the completion of Wave 1; however, 193 of

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17 the 715 Wave 1 participants did not respond to the Wave 2 survey reducing the sample to 522. second source of reductions was associated with the way in which data were collected from the respondents, and this attrition was driven by different factors in the performance expectations and the uncertainty analyses. In the case of the performance expectations analyses, the dependent variable (as described below) is the respondents estimate of fifth-year sales of the venture. In the second wave, however, this question was asked only of people who answered that an employee had been hired either in the first wave or in the second wave. This reduced the potential sample size to 114 individuals. The two sources of attrition from our sample raise concerns about potential bias in the results. For example, one might anticipate that those who have greater reductions in sales expectations might be more likely to drop out of the panel. Additionally, those who have hired an employee may be more likely to have increases in expectations. We addressed this potential bias in two ways. First, we included a robustness check from a related data set (the Panel Study of Entrepreneurial Dynamics II), in which the sales expectation question is not limited to just those who have hired an employee. Second, as part of that robustness check, we included a Heckman correction to control for potential non-random attrition from the sample. In the case of the uncertainty regressions, the main dependent variables were drawn from the mail survey of the PSED. Respondents completed both a phone and a mail survey; however, only approximately 70% of the phone respondents completed the mail survey. 135 of the 522 respondents who participated in both the Wave 1 and Wave 2 phone survey did not complete the Wave 1 mail survey leaving 387 respondents. Of these 387, 56 did not complete the Wave 2 mail survey leaving a starting sample size of 331. While we had no ex ante expectations that those completing the mail survey were different than those who did not, we again included a robustness check in which we controlled for potential non-random attrition from the sample. A

18 Finally, we note that individual case weights, as developed by the Institute for Survey Research at the University of Michigan were utilized in all analyses following the advice of Reynolds and Curtin (2004). These weights account for differences in selection probabilities and response rates. Dependent Variables Absolute value changes in expected financial performance are measured by the respondents estimates of fifth-year sales of their new ventures at Wave 1 and Wave 2. While respondents provided estimates of both first-year and fifth-year sales, we elected to utilize fifth-year sales because the early sales figures from start-up ventures may not be reflective of the potential of the business. Perceptions of environmental uncertainty were drawn from a series of eleven question included in the mail survey portion of the PSED. These questions focus on state uncertainty, or the nascents difficulty in predicting the state of the external environment. Each question was preceded by the phrase, Considering the economic and community context for the new firm, how certain are you that the new business will be able to accomplish each of the following?, and the response scale was anchored by very high (5) to very low (1). We reverse scored these items such that high scores indicate high levels of uncertainty. As suggested by the prior literature using these items (Matthews and Human, 2000; Matthews and Human, 2004; Liao and Gartner, 2006), three factors were extracted from the 11 questions representing financial, competitive, and operational uncertainty. Financial uncertainty consists of four items dealing with obtaining capital from external sources such as banks and venture capitalists. Competitive uncertainty is made up of four items concerned with attracting customers, competing with other firms, complying with regulations, and keeping up with technological advances. Operational uncertainty consists of three items dealing with obtaining

19 raw materials, attracting employees, and dealing with distributors. We utilized these three dimensions as three separate dependent variables.5 Independent Variables Information-related gestation activities completed is a summation of a series of binary variables indicating whether between Wave 1 and Wave 2 a nascent had completed a business plan, worked to define the market for the opportunity, completed financial statement projections, devoted full-time to working on the venture, taken classes related to entrepreneurship, started marketing efforts, sought funding for the venture, and completed a prototype for the product or service. Entrepreneurial experience is a dummy variable indicating whether the nascent entrepreneur has previously been involved in a start-up effort. Control Variables Demographic controls include gender, age, race, and years of education. We also controlled for the amount of time each individual has spent in nascency. This control is necessary because the PSEDs process for identifying nascents leads to wide variance in the amount of time the individuals have been involved with trying to start their business prior to the first interview. The length of time individuals have already spent in the process could influence subsequent changes in performance expectations and perceptions. For similar reasons, we also included a measure of the number of information-generating gestation activities completed prior to the Wave 1 data collection. We also included dummy variables to control for possible differences driven by the nascents status as of Wave 2, either launched, abandoned, or still in process (the excluded category). Because the confidence level of the nascent might affect changes in expected performance and perceived uncertainty, we added a confidence measure based on the nascents
The Cronbach alphas of the three measures were 0.79, 0.71, and 0.43 for the Wave 1 responses and 0.81, 0.67, and 0.66 for the Wave 2 responses. To ensure compatibility and comparison with prior research in this area (e.g., Matthews and Human, 2004; Liao and Gartner, 2006), we decided to proceed with this operational uncertainty measure despite its somewhat marginal reliability.
5

20 estimate of how likely on a scale of zero to 100 it would be that the business would be operating five years in the future. Finally, we included a series of six industry dummies to account for any effects associated with particular industrial sectors. RESULTS Descriptive Statistics We begin by examining some descriptive statistics around changes in performance expectations. Panel A of Table 1 shows that the mean expected sales level at the initial wave of data collection was approximately $1.9 million; this value increased to $4.1 million at Wave 2. The mean change in expected sales was just over $2 million; however, this value understates absolute value changes. The mean absolute value change in expectations was just over $4 million, and the mean absolute value percentage change was over 300%. In both cases, these values are significantly different from zero, providing support for Hypothesis 1a. There is strong evidence that performance expectations are undergoing large changes during the evaluation stage. Panel B decomposes the mean changes in expectations. Approximately 95% of the sample changed their sales estimates from Wave 1 to Wave 2, with these changes roughly balanced between increased and decreased expectations. Because the means reported above may be influenced by extreme values, we repeat the above analysis with medians. The lower median values indicate that the means reported above are indeed influenced by a number of extreme values; however, the general pattern of results is quite similar. Panel C of Table 1 shows that the median expected sales level at the initial wave of data collection was $139,000; this value dropped to $100,000 at Wave 2. The median change in expected sales was zero; however, this should not be interpreted as evidence of little change in expectations. Rather than being driven by a lack of changes, the median value of zero is driven by

21 the pervasiveness of both positive and negative changes. The median absolute value change in expectations was $130,000, and the median absolute value percentage change was 80%. Panel D of Table 1 further decomposes the median changes in expectations. For those who increased their estimates, the median expected year 5 sales increased from $100,000 to $450,000. The median change in expectations for this group was 100% in percentage terms (i.e., the median change was for the sales expectations to double for those with increased expectations). For those who decreased their estimates, the median expected year 5 sales fell from $150,000 to $50,000. The median change in expectations for this group was -69% in percentage terms. Overall, Table 1 strongly supports the conclusion that performance expectations of nascent entrepreneurs undergo dramatic changes during the evaluation stage of the entrepreneurial process. ----------------------- Insert Table 1 about Here -----------------------------In contrast to the results regarding performance expectations, Table 2 indicates that perceptions of uncertainty do not appear to undergo changes as nascents move through the entrepreneurial process. Ratings of perceived financial, competitive, and operational uncertainty are quite similar in Wave 1 and Wave 2. ----------------------- Insert Table 2 about Here -----------------------------To examine the influence of our independent variables on the above changes, we move on to the main part of the analysis in which we test the hypotheses using hierarchical, ordinary least squares regression. Tables 3 and 4 present descriptive statistics for the variables included in the sales expectation and uncertainty regression analyses, respectively. ----------------------- Insert Tables 3 and 4 about Here -----------------------------Regression Analysis Table 5 presents the results of the analysis regarding changes in expectations of fifth-year sales. The dependent variable is the log of absolute value changes in expectations, and the sample

22 size is reduced from Table 1 based on dropping cases with missing values on the independent variables.6 We include a control for Wave 1 sales expectations, as larger initial expectations may be associated with greater changes in expectations. The coefficient of 0.701 (p=0.069) on Current Gestation Activities in Model 1 provides marginal support for Hypothesis 2a. As nascents complete more gestation activities, their expectations of future performance undergo greater changes. Model 1 also shows that entrepreneurial opportunities with higher initial sales expectations are associated with greater changes in expectations. Model 2 provides a test of the interaction hypothesis. Hypothesis 3a predicted that the positive relationship between gestation activities and expectation changes would be strengthened for those with prior; thus, we expect a positive interaction term. While the interaction term is in the predicted direction, it is not significantly different from zero, and we conclude no support for Hypothesis 3a. The relationship between completion of gestation activities and changes in performance expectation is similar for those with and without prior entrepreneurial experience. ----------------------- Insert Table 5 about Here -----------------------------Table 6 presents the results of the analysis regarding changes in perception of financial, competitive, and operational uncertainty, respectively. The dependent variable in each model is the level of perceived uncertainty at Wave 2. To capture the effect of the independent variables on changes in uncertainty, we include the level of Wave 1 uncertainty in each model. With the inclusion of Wave 1 uncertainty as an independent variable in each model, the coefficients of the other independent variables represent their effects on Wave 2 uncertainty controlling for the effect of initial levels of uncertainty. Hypothesis 2b predicted that the number of gestation activities would be associated with greater reductions in uncertainty. Thus, we expect the coefficient of Current Gestation Activities to be negative in Models 3, 5, and 7. The hypothesis receives support

The Abandoned dummy variable is excluded from these results because it did not vary within the estimation sample.

23 for both financial uncertainty and competitive uncertainty as shown by the negative significant coefficients in Models 3 and 5. The hypothesis is not supported for operational uncertainty; the Current Gestation Activities coefficient in Model 7 is in the predicted direction, but the effect is not significantly different from zero. The remaining models in Table 6 provide tests of Hypothesis 3b, and there is little support for the hypothesized moderating effects.7 Two of the three interaction terms in Models 4, 6, and 8 are in the predicted direction; however, none are significantly different from zero. The relationship between reduction of uncertainty and completion of gestation activities does not appear to depend on the prior entrepreneurial experience of the nascent entrepreneur. ----------------------- Insert Table 6 about Here -----------------------------Robustness Checks We first address the robustness of the uncertainty results. As noted above, attrition flowed from both dropping out of the panel between waves and a failure to complete the mail surveys. To address possible bias caused by attrition from the sample we included a Heckman correction (Heckman, 1979). To achieve identification, the set of variables employed in the selection models were the same as those used in the final regression models with the following exceptions. Following Parker and Belghitars (2006) suggestion for correction of sample selection bias in the PSED I, the selection equation included a set of regional dummies to capture potential differences in regional migration patterns. The selection equation also included a measure of whether participation in the Wave 1 survey had made the respondent more interested in pursuing the entrepreneurial opportunity. The selection equation did not include any variables requiring Wave 2 information, including whether the respondent achieved launch or abandonment and the count of gestation activities completed from Wave 1 to Wave 2.

We re-ran both the Table 5 and Table 6 analyses using centered versions of the variables involved in the interactions. The conclusions were unchanged.

24 To address potential endogeneity of the number of tasks completed, we used a set of instrumental variables for Current Gestation Activities, implemented through a two-stage leastsquares approach. In the first stage, the instrumental variables were used to predict Current Gestation Activities, and these predicted values were used in the second stage regression equations predicting reductions in uncertainty. We used four variables to instrument for gestation activities. They included respondent income (logged); a measure of commitment to the venture defined as whether the respondent saved money to invest between Waves 1 and 2 (coded 1), actually invested during this time period (also coded 1), did neither (coded 0) or did both (coded 2); a measure of preference for information based on the respondents answer to the question of When confronted with a difficult problem I tend to delay a decision so I can collect more information (coded from 1 completely untrue to 5 completely true); and a measure of the number of years of experience the nascent had in the industry of the entrepreneurial opportunity under consideration. To test the relevance of these instruments, we compared first-stage F-statistics to the critical values recommended by Stock and Yogo (2004). The instruments were only weakly related, raising a serious concern because weak instruments result in asymptotic bias that increases with the instruments weakness. In the absence of strong instruments, we elected to utilize limited information maximum likelihood (LIML) estimation. As Bascle (2008: 298) notes, even with weak instruments, LIML estimation is virtually unbiased. LIML estimation is also preferred for small sample sizes. We also checked the exogeneity of the instruments to confirm that they were not themselves correlated with the error term of the second-stage equation. In each regression equation, the Hansens J-statistic supports a conclusion of exogeneity. The results of these models are reported in Table 7, and they are consistent with the prior results. Hypothesis 2b is supported for financial and competitive uncertainty. Reductions of these

25 types of uncertainty are associated with the completion of more gestation activities. The results for operational uncertainty are in the predicted direction but insignificant.8 ----------------------- Insert Table 7 about Here -----------------------------We turn next to consideration of robustness of the performance expectation results. As mentioned earlier, a major source of attrition in this analysis was due to asking sales expectation questions in the second wave only of those who had hired employees; however a data set closely related to the PSED does not suffer from this problem. The Panel Study of Entrepreneurial Dynamics II, a follow-on study of a different set of nascent entrepreneurs identified in 2005-2006, has a very similar structure to PSED I. Although a number of questions in this data set are slightly modified from PSED I, the majority of the measures are the same. The main advantage of PSED II is a larger sample size and less attrition. We began the robustness check by re-calculating the descriptive statistics reported in Table 1, with the only difference being the use of first-year sales from PSED II rather than fifth-year sales from PSED I (not all nascents in PSED II are asked about fifth-year sales expectations in follow-up waves). The pattern of statistics for PSED II as reported in Table 8 is quite similar to the pattern of PSED I. The mean (median) expectation dropped from $450,000 ($50,000) to $212,000 ($35,000). The expectations of 90% of the respondents underwent changes with 41% increasing and 50% decreasing. ----------------------- Insert Table 8 about Here -----------------------------Table 9 presents the results of regression analyses both without and including corrections for sample attrition9 and the possible endogeneity of task completion. The variables employed in the selection model were the same as those used in the final regression models with the following
8

We do not investigate the interaction effects using an instrumental variables approach due to an inability to find appropriate instruments for each of the individual interaction effects. 9 From a starting sample of 998 nascent entrepreneurs, the estimation sample falls to just over 500. Sample attrition flows from those dropping out of the panel (202 cases) and those who abandon the venture from the first wave to the second wave (182 cases). Remaining attrition is primarily associated with those who were unable to provide estimates of sales at either the first or second wave (81 cases).

26 exceptions. Following Parker and Belghitars (2006) suggestion in correction for sample selection bias in the PSED I, the selection equation included a set of eight regional dummies to capture potential differences in regional migration patterns. The selection equation also included measures of the respondents attitude toward the initial survey and his or her understanding of the initial survey. The selection equation did not include any variables requiring information from future waves, i.e., the count of total gestation activities completed between the two waves and whether the nascent achieved launch. We used three variables to instrument for gestation activities. They included a measure of commitment to the venture defined as the sum of three binary variables that indicate whether the respondent bought materials, major items, or liability insurance for the business; a binary measure of whether the respondent had friends in business or relatives in business; and a binary variable indicating whether being first to market was important for the business; The first-stage F-statistics indicated that instruments were only weakly related (Stock and Yogo, 2004), so we again used limited information maximum likelihood (LIML) estimation. The Hansens J-statistic supports the exogeneity of the instruments. The results of Table 9 support the conclusions of the prior analysis.10 The main effect of Current Gestation Activities is positive and significant across the models. Overall, the robustness checks produce results that are consistent with the main analyses. Greater changes in performance expectations and greater reductions in financial and competitive uncertainty are associated with the completion of information-generating gestation activities. ----------------------- Insert Table 9 about Here -----------------------------DISCUSSION

10

The Table 11 regressions do not include the Confidence control variable because this measure is not available in PSED II.

27 The search for information about entrepreneurial opportunities does not stop with the identification of the opportunity. Instead, the identification of a potential opportunity and the ensuing efforts to establish a new venture are merely the start of a continuing process of learning about the opportunity, which impacts the decision of whether to exploit the opportunity. Thus, rather than characterizing an entrepreneurial career choice as a binary, one-time choice, we should view the decision to pursue an entrepreneurial opportunity as a dynamic decision process in which the decision is subject to updating and revision as more information about the opportunity becomes available. In particular, this research indicates both performance expectations and perceptions of uncertainty are revised as a nascent entrepreneur completes information-related gestation activities. Learning about the opportunity continues throughout the evaluation stage as new information arrives. Our results indicate that we should be very hesitant to interpret the initial decision to start working on setting up a new venture as a commitment to launch that venture. The factors that underlie the decision to engage in an entrepreneurial career through a venture launch continue to undergo significant changes during the evaluation stage of the entrepreneurial process, and these results provide at least a partial answer to Shane and Venkataramans (2000:222) question of Why, when, and how do some people and not others exploit the opportunities that they discover? The answer to the question of why some do not exploit discovered opportunities may be that upon further evaluation, opportunities turn out not to be as valuable as first imagined. The most notable outcome of the learning that occurs through the evaluation stage of the entrepreneurial process is the degree of change in nascent entrepreneurs expectations for the eventual performance of their business. Fully 95% of the nascent entrepreneurs in the main sample saw their projections of the future sales of their business change as they went through the process of trying to start a new business. Furthermore, the magnitude of these changes is economically quite

28 significant. The median percentage increase in expectations was 100% while the median percentage decrease in expectations was just under 70%. This research also again highlights the importance of the completion of gestation activities in the entrepreneurial process; however, unlike prior literature that has focused on the resource generation aspects of completion of these activities, the present research highlights the learning aspects of these activities. As nascents complete more of these activities, their performance expectations undergo greater changes and they perceive less uncertainty. This study provides illumination of the value of planning activities in the context of new ventures. While a significant amount of research has investigated the relationship between planning and performance outcomes (see Brinckmann, Grichnik, and Kapsa, 2010 for a recent meta-analysis of these studies), little research has investigated the link between planning and learning. Our results imply that we should question whether planning and learning activities in the entrepreneurial process should be seen as mutually exclusive activities. A recent meta-analysis of the value of planning to the performance of new ventures seems to paint these as exclusive activities: The positive yet limited performance effect of business planning in the first years suggests that basic planning activities might suffice. At this stage, resources should be allocated to other value creation activities in parallel that enable information gathering, uncertainty reduction, and learning. (Brinckmann, Grichnik and Kaspa, 2010: 36). In contrast to this dichotomized view of planning versus learning, our results are consistent with the idea that planning activities result in learning. The relationship between completion of gestation activities and changes in performance expectations also provides an explanation for why we may not see a strong relationship between these activities and the probability of an eventual launch of a business. The lack of a robust relationship likely flows, at least in part, from a failure to appreciate the information-gathering and learning aspects of the evaluation stage of the entrepreneurial process. While the learning that

29 flows from completion of these activities might generate positive information increasing the likelihood of launch, it may also produce negative information that decreases the likelihood of launch. Overall, our results provide strong empirical support to learning views of the entrepreneurial process. This view of the evaluation stage is also consistent with a real options perspective on entrepreneurial opportunities. When facing uncertain opportunities, individuals can invest to resolve uncertainty and then decide whether to exercise or abandon the option. This perspective further informs us that a decision to not launch a business (i.e., abandon the option) should not necessarily be interpreted as a failure. While it is literally true that a significant portion of those attempting to establish a new business fails (Van Gelderen et al., 2006: 319), these failures may actually represent successes in the sense that nascents may have generated refined information that indicates the entrepreneurial opportunity will not generate sufficient returns and rationally decided not to launch. Finally, these results relate strongly to a recent theoretical debate on the nature of entrepreneurial opportunities; Alvarez and Barney (2007) label these differing views as the discovery and creation perspectives. Our evidence of significant revision of expectations and perceptions of uncertainty is more consistent with the creation view, in which entrepreneurs creating opportunities might engage in an iterative learning process (Alvarez and Barney, 2007: 11). The arguments supporting an expectation of revised performance expectations relied on the idea that the entrepreneurial context is characterized by uncertainty rather than risk. Reductions in risk would not change the expected value of an opportunity; rather it would simply result in reduced variance in the predicted distribution. In contrast, revisions in expected value are consistent with reduction in uncertainty. Again, this logic is more consistent with the creation view, which characterizes the entrepreneurial environment as uncertain rather than the discovery view, which

30 characterizes the environment as risky. Our results also support the idea that entrepreneurs engage in reasoning that should be described more as effectual rather than causal. An effectual process, for example, allows a decision maker to change his or her goals and even to shape and construct them over time (Sarasvathy, 2001: 247). CONCLUSION This research began with the argument that the predominant view in the literature of the entrepreneurial entry decision as a static one-time choice fails to recognize continuing learning that occurs while nascent entrepreneurs evaluate opportunities. We argued for a broader view of the evaluation stage and demonstrated that it consists of more than just the gathering of resources by fully committed entrepreneurs. This research provided a unique investigation of the existence and determinants of changes in expectations regarding financial performance and perceptions of uncertainty during the evaluation stage of the entrepreneurial process. This stage of the process truly involves evaluation, resulting in significant changes in expectations and perceptions. The degree of these changes is influenced by the activities in which the entrepreneur engages. Completion of more information-related gestation activities leads to greater changes in performance expectations and greater reductions in perceived uncertainty.

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34 TABLE 1 Changes in Sales Expectations

Analysis of Means Panel A Wave 1 $1,876,557

Mean Year 5 Sales Expectations Mean Change in Expectations Mean Absolute Value Change in Expectations Mean Absolute Value % Change in Expectations

Wave 2 $4,144,404

Changes $2,267,847 $4,047,712 ** 332.4% **

Panel B Increased Decreased Unchanged Expectations Expectations Expectations 46.5% 48.2% 5.3% $1,031,609 $2,754,415 $656,598 $8,013,809 $977,002 $656,598 659.9% -67.9% N/A

% of Sample Mean Initial Year 5 Sales Expectations Mean Revised Year 5 Sales Expectations Mean Percentage Change in Expectations Notes: n=114 + p<0.10, * p<0.05, ** p<0.01

Median Year 5 Sales Expectations Median Change in Expectations Median Absolute Value Change in Expectations Median Absolute Value % Change in Expectations

Analysis of Medians Panel C Wave 1 $139,000

Wave 2 $100,000

Changes $0 $130,000 80.0%

Panel D Increased Decreased Unchanged Expectations Expectations Expectations 46.5% 48.2% 5.3% $100,000 $150,000 $150,000 $450,000 $50,000 $150,000 100% -68.8% N/A

% of Sample Median Initial Year 5 Sales Expectations Median Revised Year 5 Sales Expectations Median Percentage Change in Expectations Notes: n=114

35 TABLE 2 Changes in Perceived Uncertainty

Financial Competitive Operational Uncertainty Uncertainty Uncertainty 2.96 1.87 2.01 2.96 1.86 2.07 0.00 -0.01 0.05 0.02 0.17 0.77 286 324 264

Mean Wave 1 Rating Mean Wave 2 Rating Difference T-Test of (Revised Mean < Initial Mean) N + p<0.10, * p<0.05, ** p<0.01

36 TABLE 3 Descriptive Statistics for Performance Expectations Regressions

Correlations* (1) (2) -0.04 0.06 -0.26 0.20 -0.13 -0.10 -0.05 -0.22 -0.10 -0.20

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11)

Variable Mean Current Gestation Activities 2.369 Entrepreneurial Experience 0.519 Wave 1 Estimated Sales (Log) 11.034 Prior Gestation Activities 5.461 Confidence 84.591 Time in Nascency 5.509 Launched 0.558 Gender (Male=1) 0.738 Age 39.587 Race (White=1) 0.568 Years Education 14.413 n=101; correlations in bold are significant at p<0.05

SE 0.129 0.055 0.202 0.169 2.626 0.688 0.055 0.040 1.204 0.055 0.254

(3)

(4)

(5)

(6)

(7)

(8)

(9)

(10)

0.01 0.07 -0.12 0.09 -0.12 -0.13 0.35 0.03 0.21

0.23 -0.04 0.06 -0.10 0.29 -0.04 0.02 0.02

-0.06 0.10 0.14 0.10 0.13 0.16 0.06

-0.13 0.01 -0.09 -0.11 -0.08 -0.13

-0.03 0.11 0.21 -0.21 0.17

-0.14 0.20 0.24 0.10

-0.24 -0.18 -0.07

0.30 0.28

-0.02

TABLE 4 Descriptive Statistics for Uncertainty Regressions

Variable Mean SE Current Gestation Activities 1.386 0.103 Financial Uncertainty Wave 1 2.953 0.069 Competitive Uncertainty Wave 1 1.821 0.050 Operational Uncertainty Wave 1 2.004 0.055 Entrepreneurial Experience 0.457 0.036 Prior Gestation Activities 4.794 0.121 Confidence 80.666 1.841 Time in Nascency 5.179 0.444 Launched 0.303 0.033 Abandoned 0.145 0.027 Gender (Male=1) 0.681 0.030 Age 38.843 0.787 Race (White=1) 0.691 0.034 Years Education 14.162 0.157 n=224; correlations in bold are significant at p<0.05 (1) -0.12 0.00 -0.01 0.14 0.11 0.09 -0.02 0.30 -0.40 -0.09 0.04 -0.01 0.03 (2) (3) (4) (5) Correlations* (6) (7) (8) (9) (10) (11) (12) (13)

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14)

0.24 0.23 0.10 0.08 -0.14 0.08 -0.13 -0.03 0.03 0.14 0.09 -0.04

0.40 -0.12 -0.15 -0.02 -0.03 0.17 -0.11 -0.07 -0.15 0.11 0.11 -0.01 -0.09 -0.05 0.02 -0.05 0.04 -0.13 -0.02 -0.02 -0.01 0.09 0.09 0.21 -0.06 0.01 0.06 0.05 -0.04 0.22

0.00 0.15 0.04 0.19 0.17 -0.06 -0.03 0.12 0.01 0.09 -0.04 0.05 -0.15 0.11 -0.12

0.00 -0.05 -0.27 0.12 -0.13 0.13 0.30 -0.03 -0.05 0.04 0.12 0.10 0.03 0.16 -0.16

0.02 -0.01 -0.04

0.15 0.12

0.02

37 TABLE 5 Performance Expectation Regressions

Current Gestation Activities Prior Entrepreneurial Experience Current Gestation Activities * Entrepreneurial Experience Wave 1 Estimated Sales (Log) Prior Gestation Activities Confidence Time in Nascency Launched Gender (Male=1) Age Race (White=1) Years of Education Constant Industry Fixed Effects R-Squared F-Value Number of Observations + p<0.10, * p<0.05, ** p<0.01

Model 1 0.701 + (0.381) 0.524 (0.786)

Model 2 0.495 (0.464) -0.341 (1.772) 0.382 (0.563) 0.861 ** (0.123) 0.415 * (0.203) 0.01 (0.015) -0.068 (0.054) 1.688 * (0.736) 0.189 (0.689) -0.005 (0.031) -1.889 * (0.749) 0.392 * (0.161) -8.416 * (3.843) YES 0.467 7.645 ** 101

0.86 ** (0.123) 0.405 * (0.201) 0.009 (0.015) -0.069 (0.055) 1.634 * (0.739) 0.112 (0.676) -0.005 (0.031) -1.908 * (0.772) 0.402 * (0.166) -8.793 * (3.798) YES 0.464 7.968 ** 101

Dependent variable: log(absolute value change in projected Year 5 sales)

38 TABLE 6 Financial Uncertainty Regressions

Financial Uncertainty Model 3 Model 4 -0.093 * -0.143 * (0.041) (0.063) 0.068 -0.057 (0.106) (0.158) 0.091 (0.076) 0.458 ** (0.063) -0.025 (0.036) -0.002 (0.003) 0.01 (0.007) 0.271 + (0.139) 0.352 * (0.178) -0.064 (0.108) 0.002 (0.005) -0.055 (0.119) -0.021 (0.025) 2.031 ** (0.564) YES 0.33 8.309 ** 266 Competitive Uncertainty Model 5 Model 6 -0.072 ** -0.061 (0.027) (0.039) 0.01 0.04 (0.079) (0.110) -0.022 (0.051) 0.361 ** (0.060) -0.007 (0.023) -0.003 * (0.001) -0.001 (0.004) 0.045 (0.088) 0.089 (0.119) -0.05 (0.076) 0.001 (0.004) 0.093 (0.080) 0.018 (0.018) 1.136 ** (0.355) YES 0.247 4.523 ** 300 Operational Uncertainty Model 7 Model 8 -0.046 -0.006 (0.036) (0.058) -0.062 0.045 (0.114) (0.154) -0.076 (0.070) 0.223 ** (0.066) 0.003 (0.033) 0 (0.002) 0.005 (0.006) -0.001 (0.136) -0.021 (0.148) -0.116 (0.107) 0.002 (0.005) -0.019 (0.115) -0.009 (0.026) 1.483 ** (0.558) YES 0.154 3.073 ** 245

Current Gestation Activities Prior Entrepreneurial Experience Current Gestation Activities * Entrepreneurial Experience Wave 1 Uncertainty Prior Gestation Activities Confidence Time in Nascency Launched Abandoned Gender (Male=1) Age Race (White=1) Years of Education Constant Industry Fixed Effects R-Squared F-Value Number of Observations + p<0.10, * p<0.05, ** p<0.01

0.459 ** (0.063) -0.031 (0.034) -0.002 (0.003) 0.01 (0.007) 0.238 + (0.137) 0.362 * (0.179) -0.078 (0.108) 0.003 (0.005) -0.05 (0.120) -0.02 (0.025) 2.014 ** (0.565) YES 0.326 8.543 ** 266

0.36 ** (0.060) -0.006 (0.022) -0.003 * (0.001) -0.001 (0.004) 0.051 (0.087) 0.087 (0.118) -0.047 (0.075) 0.001 (0.004) 0.093 (0.080) 0.018 (0.018) 1.143 ** (0.354) YES 0.247 4.763 ** 300

0.22 ** (0.066) 0.008 (0.032) 0 (0.002) 0.005 (0.006) 0.02 (0.132) -0.032 (0.149) -0.107 (0.106) 0.001 (0.005) -0.027 (0.116) -0.009 (0.026) 1.503 ** (0.558) YES 0.15 3.136 ** 245

Dependent variables: perceived uncertainty at Wave 2

39

TABLE 7 Robustness Checks for Uncertainty Regressions

Financial Uncertainty Heckman + LIML IV Model 10 -0.482 ** (0.178) 0.217 (0.221) 0.374 ** (0.111) -0.034 (0.074) -0.002 (0.004) 0.013 (0.014) 0.397 * (0.174) -0.21 (0.287) -0.161 (0.129) -0.004 (0.021) -0.215 (0.498) 0.01 (0.072) 0.644 (1.769) 1.978 (1.477) YES 0.076 6.832 ** 261 Competitive Uncertainty Heckman + LIML IV Model 12 -0.327 ** (0.100) 0.173 (0.108) 0.331 ** (0.061) -0.017 (0.026) -0.005 ** (0.002) 0.002 (0.006) 0.127 (0.095) -0.299 (0.190) -0.023 (0.088) -0.013 + (0.008) -0.238 (0.170) 0.033 (0.023) 1.104 * (0.512) 0.904 + (0.483) YES 0.03 3.708 ** 295 Operational Uncertainty Heckman + LIML IV Model 14 -0.203 (0.172) 0.035 (0.157) 0.247 ** (0.080) 0.009 (0.036) 0 (0.002) 0.005 (0.008) 0.1 (0.160) -0.207 (0.280) -0.065 (0.134) -0.003 (0.010) -0.118 (0.154) -0.02 (0.029) 0.389 (0.641) 1.686 * (0.683) YES 0.086 2.368 * 241

Current Gestation Activities Prior Entrepreneurial Experience Wave 1 Uncertainty Prior Gestation Activities Confidence Time in Nascency Launched Abandoned Gender (Male=1) Age Race (White=1) Years of Education Selection Correction Constant Industry Fixed Effects R-Squared F-Value Number of Observations + p<0.10, * p<0.05, ** p<0.01

Heckman Model 9 -0.093 * (0.041) 0.043 (0.167) 0.472 ** (0.086) -0.033 (0.068) -0.002 (0.003) 0.011 (0.011) 0.238 + (0.140) 0.329 + (0.182) -0.107 (0.111) 0.005 (0.017) 0.023 (0.415) -0.013 (0.061) -0.166 (1.465) 1.976 (1.285) YES 0.336 8.381 ** 261

Heckman Model 11 -0.078 ** (0.027) 0.094 (0.092) 0.339 ** (0.063) -0.027 (0.023) -0.005 ** (0.002) 0.003 (0.005) 0.033 (0.088) 0.054 (0.127) 0.001 (0.080) -0.01 (0.007) -0.14 (0.138) 0.034 (0.021) 0.819 + (0.441) 0.734 + (0.431) YES 0.252 4.59 ** 295

Heckman Model 13 -0.042 (0.036) -0.017 (0.140) 0.232 ** (0.078) 0.004 (0.037) 0 (0.002) 0.006 (0.007) 0.017 (0.132) 0.021 (0.154) -0.078 (0.137) -0.003 (0.010) -0.106 (0.153) -0.017 (0.029) 0.306 (0.650) 1.562 * (0.690) YES 0.153 3.065 ** 241

Dependent variables: perceived uncertainty at Wave 2

40 TABLE 8 Changes in First-Year Sales Expectations from PSED II

Analysis of Means Panel A Mean First Year Sales Expectations Mean Change in Expectations Mean Absolute Value Change in Expectations Mean Absolute Value % Change in Expectations Wave A $450,009 Wave B $212,126 Changes -$237,884 $453,569 ** 294.6% **

Panel B Increased Decreased Unchanged Expectations Expectations Expectations 40.7% 49.7% 9.6% $97,245 $796,541 $79,882 $366,295 $114,300 $79,882 $269,050 -$682,241 N/A

% of Sample Mean Initial First Year Sales Expectations Mean Revised First Year Sales Expectations Mean Change in Expectations Notes: n=533 + p<0.10, * p<0.05, ** p<0.01

Analysis of Medians Panel C Median First Year Sales Expectations Median Change in Expectations Median Absolute Value Change in Expectations Median Absolute Value % Change in Expectations Wave A $50,000 Wave B $35,000 Changes $0 $20,000 58.3%

Panel D Increased Decreased Unchanged Expectations Expectations Expectations 40.7% 49.7% 9.6% $30,000 $60,000 $50,000 $50,000 $20,000 $50,000 $22,500 -$27,000 N/A

% of Sample Median Initial First Year Sales Expectations Median Revised First Year Sales Expectations Median Change in Expectations Notes: n=533

41 Table 9 Robustness Checks for Performance Expectations Regressions using PSED II

Model 15 Model 16 Model 17 Heckman 0.409 ** (0.110) 0.272 (0.363) Model 18 Heckman + LIML IV 0.973 + (0.591) 0.144 (0.379)

Current Gestation Activities Entrepreneurial Experience Current Gestation Activities * Entrepreneurial Experience Wave 1 Sales Expectation ($0,000) Prior Gestation Activities Time in Nascency Launched Gender (Male=1) Age Race (White=1) Years of Education Selection Correction Constant Industry Fixed Effects R-Squared F-Value Number of Observations + p<0.10, * p<0.05, ** p<0.01

0.412 ** (0.110) 0.27 (0.361)

0.445 ** (0.155) 0.394 (0.569) -0.073 (0.223) 0.002 ** (0.000) 0.217 * (0.089) 0.015 (0.048) 0.274 (0.386) 0.312 (0.352) -0.007 (0.014) 0.025 (0.457) 0.062 (0.056)

0.002 ** (0.000) 0.217 * (0.089) 0.015 (0.047) 0.285 (0.383) 0.309 (0.349) -0.007 (0.014) 0.026 (0.457) 0.063 (0.056)

7.109 ** (1.242) YES 0.121 4.138 ** 519

7.057 ** (1.262) YES 0.121 3.993 ** 519

0.002 ** (0.000) 0.24 * (0.099) 0.027 (0.057) 0.287 (0.385) 0.265 (0.357) 0.002 (0.020) -0.007 (0.447) 0.08 (0.058) -0.799 (1.442) 7.036 ** (1.239) YES 0.121 3.935 ** 519

0.002 ** (0.000) 0.313 * (0.132) 0.041 (0.061) 0.154 (0.400) 0.255 (0.358) 0.003 (0.021) 0.139 (0.475) 0.074 (0.058) -0.54 (1.408) 5.687 ** (1.964) YES 0.084 3.126 ** 519

Dependent variable: log(absolute value change in projected Year 1 sales)