Predicting new venture survival and growth: Does the fog lift?

Abstract

This paper investigates whether new venture performance becomes easier to predict as the venture ages: does the fog lift? To address this question we primarily draw upon a theoretical framework, initially formulated in a managerial context by Levinthal (Adm Sci Q 36(3):397-420, 1991) that sees new venture sales as a random walk but survival being determined by the stock of available resources (proxied by size). We derive theoretical predictions that are tested with a 10-year cohort of 6579 UK new ventures in the UK. We observe that our ability to predict firm growth deteriorates in the years after entry-in terms of the selection environment, the 'fog' seems to thicken. However, our survival predictions improve with time-implying that the 'fog' does lift.

Entrepreneurship and the determinants of firm survival within regions: human capital, growth motivation and locational conditions

“…Growth, as discussed above, is therefore assumed to be random, and only after time passes and resource accumulation is realised does it become easier to predict survival (Coad et al, 2016). In this study we are able to hypothesise that those entrepreneurs with a greater general growth motivation will be more likely to survive, as they are more likely to have sufficient accumulated resources to withstand negative competitive and macroeconomic shocks.…”

“…However, this does tend to imply that the entrepreneurs themselves have no control over their fates. One particular course of action that could have profound implications for survival is the capability to grow and accumulate sufficient resources to withstand external shocks (Caliendo, Fossen, and Kritikos 2010;Coad et al 2013;Coad et al, 2016). However, a counter argument to this thesis is provided by Delmar, McKelvie, and Wennberg (2013) who find a negative relationship between growth in one period and survival in the next in the case of knowledge intensive start-ups, which they suggest may relate to growth itself being a risky activity.…”

“…A stream of literature has modelled the growth of ventures as following a random walk due to competition from rivals, making it difficult to identify factors leading to better performance, particularly for new ventures with little previous history (Gibrat 1931;Levinthal 1991;Henderson, Raynor, and Ahmed 2012). This would mean that although growth may increase the chances of survival, it is extremely difficult to identify which firms will grow, with only a small proportion of variance captured by models (Coad et al, 2016), and therefore making it just as difficult to identify firms that are more likely to survive.…”

Innovation and job creation in (high-growth) new firms

“…More importantly, as shown in other empirical studies (Haltiwanger et al, 2016;Hurst and Pugsley, 2011;Stam and Wennberg, 2009), firms located around the central percentiles of the distribution experience negligible employment growth. In other words, a substantial share of new firms experiences negative or no growth whereas expansion in employment is, by no means, a common feature of new firms dynamics (Coad et al, 2016b). However, a small fraction of new firms exhibits very high rates of employment growth.…”

“…This is important given that start-ups in services in the US and most other advanced economies surmount manufacturing start-ups roughly 8 to 1 (Kim et al, 2006). Third, a further advantage granted by employing a sample of firms established in the same year is that it allows the examination of businesses facing the same macroeconomic conditions during their development and can, therefore, be meaningfully compared (Anyadike-Danes et al, 2015;Coad et al, 2016b;Ryder, 1965). This is especially important since recent literature has shown that macroeconomic conditions have significant effects on both firm characteristics and performance at their entry and during subsequent years (Gomis and Khatiwada, 2017;Lee and Mukoyama, 2015).…”