According to U.S. Bureau of Labor and Statistics data, only a quarter of new enterprises survive beyond 15 years. This striking statistic has shown remarkable consistency over three decades, persisting through fluctuating economic conditions within and across various markets. To unravel this enduring puzzle, recent research published in the Strategic Entrepreneurship Journal proposes that the key to a business’s sustained success might lie significantly in the conditions present at its inception rather than solely in the shifts occurring within its operational markets.

D. Carrington Motley, a lecturer specialising in entrepreneurship at Carnegie Mellon University and a contributing study author, emphasises the pivotal role of internal processes in a venture’s adaptation to environmental changes. He asserts that the initial conditions during a business’s establishment profoundly influence these processes, which swiftly become ingrained and reflected in the enterprise’s operational philosophies.

The research, undertaken by Motley along with Charles E. Eesley of Stanford and Wesley Koo of INSEAD Asia, scrutinised the trajectory of over 1,000 ventures founded between 1960 and 2011 across 19 different sectors, from agriculture to energy and utilities. Utilising data from the Bureau of Economic Analysis, the study assessed the level of dynamism within each industry over time and specifically during the year each venture was established. Furthermore, insights into the founding teams’ composition, longevity, and eventual outcomes were gleaned from alum survey data.

Eesley highlighted that ventures initiated in volatile environments by teams with diverse functional expertise demonstrated a notably higher resilience during market shifts. However, this did not necessarily correlate with a higher chance of achieving successful exits through IPOs or acquisitions.

Companies formed under such dynamic conditions tend to adopt more deliberative and decentralised decision-making processes, fostering creativity and flexibility. Founding teams composed of members with varied functional backgrounds enhance these attributes, leading to a broader strategic perspective and a more thorough information-gathering process. While these risk-averse approaches and strategies aid in navigating through periods of change, the research also found that such companies were less likely to secure IPOs or acquisitions when their respective markets reached a state of stability.

Woo commented on the advantages of aggressiveness in stable, predictable environments, pointing out that the risks associated with unverified assumptions are diminished. This makes the continued reliance on risk-averse methodologies less beneficial and potentially hinders a venture’s responsiveness to new opportunities.

The study identifies slower decision-making as a crucial distinguishing feature for businesses founded in volatile settings by diverse teams. This hypothesis was tested by evaluating their performance in sectors where rapid product development is essential for maintaining a competitive edge and by assessing the speed at which these ventures secured angel or venture capital investment. Businesses originating in dynamic conditions with diverse teams showed less favourable outcomes in both scenarios.

The research underscores that businesses typically benefit from market changes only when these alterations resonate with their original founding environment. Despite suggesting that founding processes tend to become deeply entrenched, the study offers valuable insights for entrepreneurs aiming to navigate through turbulence and seize opportunities in calmer times. It encourages businesses to critically examine their founding framework and internal mechanisms, urging a continual reassessment to ensure alignment with their market environment.

More information: D. Carrington Motley et al, Born into chaos: How founding conditions shape whether ventures survive or thrive when experiencing environmental change, Strategic Entrepreneurship Journal. DOI: 10.1002/sej.1461

Journal information: Strategic Entrepreneurship Journal Provided by Strategic Management Society