Recent surveys show that more than half of American entrepreneurs share ownership in their business startups rather than going it alone. Yet the media and many scholars continue to perpetuate the myth of the lone visionary who single-handedly revolutionizes the marketplace. In The Entrepreneurial Group, Martin Ruef shatters this myth, demonstrating that teams, not individuals, are the leading force behind entrepreneurial startups. This is the first book to provide an in-depth sociological analysis of entrepreneurial groups, and to put forward a theoretical framework for understanding activities and outcomes within them.
|Publisher:||Princeton University Press|
|Series:||The Kauffman Foundation Series on Innovation and Entrepreneurship|
|Edition description:||New Edition|
|Product dimensions:||6.00(w) x 9.00(h) x (d)|
About the Author
Martin Ruef is the Egan Family Professor of Sociology and director of Markets and Management Studies at Duke University. His books include Institutional Change and Healthcare Organizations, Organizations Evolving, and Between Slavery and Capitalism (Princeton).
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The Entrepreneurial GroupSocial Identities, Relations, and Collective Action
By Martin Ruef
PRINCETON UNIVERSITY PRESSCopyright © 2010 Princeton University Press
All right reserved.
Chapter OneWho Is an Entrepreneur?
It was the fall of 1998 and Bob Moog was eager to jump on the Internet bandwagon. As the founder and president of University Games, Moog had been in the game business for well over a decade, producing mystery, trivia, and educational games for adults and children. The St. Louis native first gained media attention when he marketed a board game based on murder mystery parties, a social event conceived in Europe, replete with dramatized mysteries to intrigue guests. On April Fool's Day 1985, Moog founded University Games together with his close friend Cris Lehman, a former accountant. From that point, they went on to sell popular titles such as "Blue's Clues," "20 Questions," "Green Eggs and Ham," and "Where in the World Is Carmen San Diego?"
By the late 1990s, the business had established an international reputation in gaming. Spurred by predictions that cyber traffic would balloon during the 1998 holiday season, Moog sought to join a surge of retailers-including Macy's, Sears, and Kmart-who were rushing to develop an online presence. But how to go about it? University Games (UG) could create an in-house unit devoted exclusively to e-commerce and UG products; or Moog could spin off a new company, which would initially sell toys and games exclusively from the UG family, but would later provide specialty items from other manufacturers. Perhaps sensing that the Internet boom called for a shift in business models, Moog and his colleagues opted for the spin-off.
The new venture, AreYouGame.Com, was headquartered in Burlingame, California, near the northern edge of Silicon Valley. In many respects, this entrepreneurial experience was fundamentally different than the founding of University Games years before. Whereas Moog's earlier startup effort had relied on a shoestring budget of $20,000 in seed funding and an office sublet from the father of his former girlfriend, the new venture had the backing of a corporation with $50 million in annual revenues. Still, the social blueprint of the new business was similar to that of many dot-com startups. Jim Stern, the firm's new general manager, emphasized that "we eat together, play games together, and service our customers together." Years later, the company would continue to tout the "crackerjack team" that founded it and argue that this was the "secret formula" in the success of the enterprise.
Despite such pronouncements, the family atmosphere at AreYouGame. Com faced challenges at an early stage. In 1999, Bob Moog was courted by Toys 'R' Us, which sought to do more of its business online. Moog was publicly named CEO of the online Toys 'R' Us unit in May, but the arrangement suddenly fell through two months later. A statement from the giant toy retailer simply noted that Moog was "unable to extricate himself from his responsibilities as founder and CEO" of University Games. Moog's inability to "extricate himself" ultimately proved propitious. Toys 'R' Us ended 1999 in disarray and its e-commerce unit was soon pummeled by the bursting Internet bubble. When Moog announced, two years later, that he thought AreYouGame.Com deserved the label "last one standing" in the volatile e-commerce toy market, he could also have been referring to his own longevity in the capacity of a dot-com entrepreneur.
* * *
Around the time that Moog was developing his Internet startup, John and Emily Koslowski were pursuing their own entrepreneurial venture halfway across the country. John, age forty-four, was an experienced technician with a background as a military officer, and Emily, age fifty, worked in an office. Following John's military service, the Koslowskis had settled down in St. Clair County, Illinois, just outside of St. Louis. John had been thinking about starting his own business since he was in his early thirties and, as he approached his fortieth birthday, he decided that it was time for a change. In August 1993, he and Emily began to plan a startup that would put his technical skills to use in refrigerator repair and servicing.
The business was set up as a service franchise that John and Emily would operate out of their home. John would be responsible for the day-to-day operation of the business, while Emily would handle occasional clerical functions. One barrier to getting the franchise off the ground was financial: John believed that the business would need a large cash infusion to be self-sustaining and he had soon invested some $50,000, culled from savings, credit card debt, and a loan from a personal finance firm. Despite a contribution from Emily, the funds did not seem sufficient to cover the costs of supplies and hiring an employee to help John. The Koslowskis decided to approach Emily's elderly mother, who offered to give them another $12,000 in financial assistance.
A second barrier for the startup was John's own lack of entrepreneurial experience. John had plenty of opportunities to "manage" in the military, but this exercise of authority did not necessarily translate well in the private sector. Shortly after he started working full time on the service franchise, in March 1994, John began to take classes and workshops on starting a business. Over the next few years, he would complete a dozen courses to bolster his entrepreneurial skills and clock about 2,000 hours in the classroom.
By the fall of 1998, the Koslowskis had much to be proud of. Their business was listed in the phone book and they had hired an employee, albeit on a part-time basis. John believed that his own business training, which was now extensive, was the most important contribution that he brought to the enterprise. Still, all was not well in the refrigerator repair business. Although the startup had first posted revenue in October 1994, monthly revenue typically did not exceed expenses some four years later. Surprisingly, John himself did not put money problems at the top of his list of worries about the business. Instead, he wondered about the strain of the partnership on his marriage and how he could better balance business and family life. John was also aware that he was missing other opportunities as a result of the entrepreneurial endeavor.
In September 1999, the Koslowskis pulled the plug on the service franchise. John spent some time looking for work and remained ambivalent about his time as an entrepreneur. Asked whether he would give it another go, he answered that it would need to be under the right conditions.
* * *
Paralleling much of the academic literature on the topic, the Koslowskis' refrigerator repair franchise and Bob Moog's game e-commerce site offer very different images of entrepreneurship. Is entrepreneurial activity a matter of innovation? Of organizational creation? Of branching out on one's own? Or of risk-bearing and uncertainty? Entrepreneurship scholars have tackled these images in the abstract, offering taxonomies of entrepreneurs and discussions that seek to adjudicate definitional disputes (for recent reviews, see Aldrich and Ruef 2006: chapter 4; Ruef and Lounsbury 2007). It takes the experiences of real entrepreneurs, however, to put flesh on the bones of these distinctions.
The economist Joseph Schumpeter famously declared that "the function of entrepreneurs is to reform or revolutionize the pattern of production" (1942: 132) and that we ought to pay special attention to new combinations of existing methods and technologies (Schumpeter 1934). Moog's effort to reorganize the board game industry through an online mechanism of marketing and distribution conforms reasonably well to Schumpeter's conception. In effect, Moog combined an established product (board games) with an emerging technology (the Internet). By contrast, the Koslowskis' refrigerator repair business was comparatively humdrum, especially when pursued within a franchise model. Schumpeter's description of "innovative" entrepreneurship would seem to exclude such mundane instances of organizational replication.
A similar conclusion holds if we apply a second definition, which conceptualizes entrepreneurship as a successful act of organizational founding (see Carroll and Khessina 2005). Here the locus of attention shifts from individual entrepreneurs to the emergence of viable enterprises. But when can we claim that the founding process of an organization is complete? By 1998, the Koslowskis had an entry in the phone book, fulltime commitment to the startup (at least, on John's part), some external funding, and numerous completed service calls to customers. Yet their franchise lacked other features-including positive cash flow, a physical presence outside of the home, and full-time employees-often used to demarcate operating businesses from other arrangements (e.g., self-employment). Given the processual nature of organizational startups, this definition of entrepreneurship contributes to considerable variation in the businesses enumerated by different markers of founding (Aldrich et al. 1989; Ruef 2005).
Still other perspectives on entrepreneurship lead to the conclusion that the Koslowskis' venture may have been more entrepreneurial than Moog's e-commerce spin-off. The German sociologist Max Weber, in particular, is credited with a definition that opposes the role of the entrepreneur with that of the managerial bureaucrat (Hartmann 1959; Swedberg 2005: 87-88). In his influential discussion of bureaucracy, Weber noted that the "[entrepreneur] is the only type who has been able to maintain at least relative immunity from subjection to the control of rational bureaucratic knowledge" (Weber 1968: 225). Because Moog's new endeavor was so intimately tied to University Games, this definition raises the question as to whether he was truly "immune" from the bureaucratic demands of his other business. Indeed, the statement by managers at Toys 'R' Us following their unsuccessful recruitment effort would seem to claim the opposite: Moog "was unable to extricate himself from his responsibilities as founder and CEO" of University Games.
A complementary image of an entrepreneur follows the eighteenth-century economists Richard Cantillon and Jean-Baptiste Say, who emphasized the literal interpretation of the term as someone who "undertakes" the risks of a business or enterprise (see Xu and Ruef 2004 and Brockhaus 1980 for empirical critiques). Here again, the Koslowskis' venture arguably appears more entrepreneurial than that of Bob Moog. While their refrigerator service franchise required that much of their personal savings and credit be placed at risk, Moog's Internet spin-off could rely on the deep pockets and reputation of an established fi rm. By sponsoring a new venture (rather than creating an in-house unit), Moog and his team also insulated University Games from the risks of a novel e-commerce site.
The apparent incompatibility of different definitions of entrepreneurship has led many scholars to seek an alternative approach. Some have suggested that the term "entrepreneur" be dropped altogether, given its ambiguity in both everyday language and in the academic literature. Others, most notably William Gartner and his colleagues (1988), have proposed that asking "Who is an entrepreneur?" is simply the wrong question. Instead of focusing on individual entrepreneurs, their personality traits, and accomplishments, they have argued that entrepreneurship be seen as a series of activities culminating in the process of organizational creation. This conception substitutes an emphasis on properties of emerging organizations for properties of viable organizations and their founders (Katz and Gartner 1988).
Building on the "emerging organization" perspective, this book offers yet a third alternative. It begins with the intuition that startup efforts such as those initiated by Moog or the Koslowskis share important features because they involve collective action that is oriented toward the founding of a new organization. In contrast to a state of self-employment, these individuals have an active interest in recruiting others to work with them, as co-founders, employees, investors, advisors, or unpaid helpers. This social process allows John Koslowski's partnership with his wife and Bob Moog's "crackerjack team" at AnyOneGame.com to be studied using a common lens. Entrepreneurs, in this conception, are defined by their intention to form a social group.
An emphasis on entrepreneurial groups does not lead to an elision of the question as to "who is an entrepreneur?" but reconceptualizes it in fundamental respects. Rather than split individuals into discrete categories of entrepreneurs and non-entrepreneurs, the perspective considers entrepreneurship to range on a continuum that connects individuals to entrepreneurial groups based on their material and time investments, social networks, identities, and goals. Considering the Koslowskis' refrigerator repair franchise as one example, the perspective asks to what extent might Emily Koslowski be considered an entrepreneur? Or Emily's elderly mother, who has served as an "angel" investor for the business? Or the Koslowskis' part-time employee, whose commitment to the venture may range from disinterested to opportunistic to altruistic? The porous boundaries of entrepreneurial groups argue against simple answers to these questions and, instead, call attention to the social and economic processes that embed individuals in entrepreneurial activity.
Why Study Entrepreneurial Groups?
At first glance, a definition of entrepreneurship that emphasizes social groups may appear to be at odds with empirical evidence. In 2005, the Internal Revenue Service received income returns from more than 21 million nonfarm sole proprietorships and another 8.5 million partnerships and corporations (U.S. Department of Commerce 2009). Classified based on legal status, then, one might argue that over 70 percent of the businesses in the United States involved a single entrepreneur. Using employment statistics as another criterion, it is well established that the majority of business enterprises are extremely small (Granovetter 1984). While the Small Business Administration (SBA) identified more than 640,000 new employer firms created between 2004 and 2005, estimates for nonemployer firms account for approximately three times that total, even when restricted to enterprises with receipts of $1,000 or more (U.S. SBA 2009). Whether based on owners or employees, the number of individuals involved in "entrepreneurial groups" must therefore seem quite modest relative to a residual category of self-employed workers, or solo entrepreneurs.
Classical treatments of entrepreneurship echo this emphasis on solo entrepreneurs. In his Theory of Economic Development, Schumpeter offered a vision of heroic individual entrepreneurs, possessed of "supernormal qualities of intellect and will," who pushed the frontiers of capitalism (Raines and Leathers 2000: 377; Harper 2008). Considering the locus of innovation in advanced capitalism, he later juxtaposed large-scale corporations to this individualist ideal-type (Schumpeter 1942), without considering entrepreneurial groups as an intermediate social form. In Economy and Society, Weber's analysis was likewise implicitly concerned with solo entrepreneurs, noting that "it is the peculiarity of the modern entrepreneur that he (sic) conducts himself as the 'first official' of his enterprise" (1968: 957). James Coleman (1986) cites Weber's earlier landmark study, the Protestant Ethic and the Spirit of Capitalism, as a useful application of methodological individualism, tracing the impact of worldly asceticism on the values of individuals and then suggesting how these individual entrepreneurs might engender change in the (capitalist) economic system as a whole. By contrasting a macro-level analysis that emphasizes entire cultures and economies with a micro-level analysis that focuses exclusively on individuals, Coleman's interpretation ignores group processes that may mediate the relationship between these levels.
Although conceptual and empirical treatments continue to sustain an image of the solo entrepreneur, it is a central thesis of this book that this image is at best misleading and at worst, mythological. While a number of factors may have contributed to an individualist view of entrepreneurs, four appear particularly relevant: (a) official statistics (such as those collected by the IRS, Census, and SBA) are poorly equipped to measure the social scope of organizational startup activity; (b) past empirical and conceptual treatments have overwhelmingly focused on the social scope that entrepreneurs were able to achieve, not what they intended to achieve, when they initiated their startup; (c) the narratives advanced by the mass media and entrepreneurs themselves place a spotlight on heroic individuals rather than dutiful or recalcitrant members of entrepreneurial groups; and (d) academic conceptions have also tacitly adopted the popular portrayal of entrepreneurs as rugged individualists, without subjecting this view to critical reflection.
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Table of Contents
List of Illustrations vii
List of Tables ix
Part One: Concepts, Theories, and Puzzles
Chapter One: Who Is an Entrepreneur? 3
Chapter Two: Images of Entrepreneurial Groups 17
Chapter Three: Empirical Puzzles 38
Part Two: Creating the Entrepreneurial Group
Chapter Four: Group Formation 57
Chapter Five: Boundaries of the Startup Firm 85
Part Three: Collective Action within the Group
Chapter Six: Allocation of Rewards and Control 113
Chapter Seven: Effort and Opportunism 138
Part Four: Performance of the Group
Chapter Eight: Innovation 163
Chapter Nine: Goals and Group Dynamics 185
Chapter Ten: Implications and Extensions 206
Appendixes: A. Data Sources 227
B. Sampling of Groups 233
C. Analysis of Groups 236
What People are Saying About This
Even many of those well read in the research on entrepreneurship believe that Ayn Rand best captured the character of the typical entrepreneur: an individualistic, heroic, modern-day cowboy transforming the economic landscape against all odds. In The Entrepreneurial Group, Ruef effectively dispels this myth. The typical entrepreneur is not an individual but a team. This insight has important implications for academics and legislators.
Olav Sorenson, Yale University
For millennia, economic progress was driven by small migrant groups introducing innovations to fit new places. Ruef shows how today's entrepreneurs are a lot like those early families and tribes in movement, adapting social organization to localities and opportunities. The Entrepreneurial Group is a drop of sanity in an ocean of fraud about entrepreneurship, especially in teaching positions financed by corporations.
Arthur L. Stinchcombe, professor emeritus, Northwestern University
Ruef explodes the myth of the lone entrepreneur, showing how those who start businesses assemble productive groups around themselves. He explains in a brilliant, original way how groups evolve into viable organizations and why some succeed while others fail. This is a must-read for anyone who wants to understand how entrepreneurs build businesses and why growing an enterprise is a team sport.
Philip Anderson, INSEAD, director of the Rudolf and Valeria Maag International Centre for Entrepreneurship
The Entrepreneurial Group systematically looks at theories that guide the explanation of the entrepreneurial process. In an interesting way, Ruef grounds these theories in the real-life experiences of entrepreneurs. He takes on some important issues. This book also brings together all of the research in the sociology of entrepreneurship.
John Sibley Butler, University of Texas, Austin