We investigate the impact of prior entrepreneurial experience on current performance of firms with employees (employer firms). We distinguish between external entrepreneurial experience obtained outside of the current firm and internal entrepreneurial experience obtained within the boundaries of the employer firm currently run. Regarding the latter we focus on a special type of prior internal experience, i.e. as an own-account worker before scaling up to employer firm. Theoretically, both types of prior entrepreneurial experience are associated with different processes of learning-by-doing. Empirically, we find that both external entrepreneurial experience and internal experience as an own-account worker enhance employer firm performance. Our results therefore imply that, for individuals without any prior entrepreneurial experience wishing to start a new firm, a lean start-up strategy (as an own-account worker) is to be preferred over a more resourceful strategy hiring employees from the start.

Introduction

The ‘liability of newness’ (Hannan & Freeman, 1989; Stinchcombe, 1965) which is manifested in the high risk of failure for new business start-ups is a major concern for entrepreneurs, financiers, employees hired in new ventures and policy makers seeking wealth and sustainable job creation. Although some authors report that there is an initial “honeymoon” period of a year or two in which business closures are relatively infrequent (Fichman & Levinthal, 1991; Frank, 1988; Jovanovic, 1982; Mahmood, 2000; Van Praag, 2003), more than half of business start-ups never survive to reach their 5th birthday (Bartelsman, Scarpetta, & Schivardi, 2005; Phillips & Kirchhoff, 1989) and in highly turbulent markets with a high foreign firm presence less than half survive to reach their 3rd birthday (Burke, Görg, & Hanley, 2008). Individual characteristics of the founder-manager have been extensively used to establish why some start-ups stop operating shortly after they started, while others survive (see, for example, Kalleberg & Leicht, 1991; Cooper, Gimeno-Gascon, & Woo, 1994; Boden & Nucci, 2000; Thornhill & Amit, 2003; Williams, 2004; Millán, Congregado, & Román, 2012, 2014a, 2014b). In its most basic form, variations in firm performance across entrepreneurs are attributed to differences in entrepreneurial ability that entrepreneurs possess. This is the basis of the classic Lucas model of occupational choice (Lucas, 1978). However, this model is completely static in the sense that entrepreneurs are endowed with a certain level of entrepreneurial ability which does not change over the entrepreneur’s lifetime. Although entrepreneurial talent is certainly an important determinant of firm performance (Bosma, Van Praag, Thurik, & De Wit, 2004), in everyday life there is also an important role of learning-by-doing (Jovanovic, 1982). Indeed, several studies show that entrepreneurial experience and business success are positively related (Bosma et al., 2004; Burke, FitzRoy, & Nolan, 2008; Millán et al., 2012; Shane, 2000; Staniewski, 2016). However, not many studies distinguish between different types of prior entrepreneurial experience (Ucbasaran, Westhead, Wright, & Flores, 2010). In the present paper we study employer firms (firms with employees) and distinguish between external entrepreneurial experience obtained outside of the current firm and (a special type of) internal entrepreneurial experience obtained within the boundaries of the employer firm currently run, i.e. as an own-account worker before scaling up to employer firm. In particular we investigate whether both types of entrepreneurial experience may enhance firm performance. It is important to distinguish between the two sorts of entrepreneurial experience because the specific relationship between prior internal entrepreneurial experience as an own-account worker and current firm performance as an employer firm, has important implications for those individuals without any prior entrepreneurial experience wishing to start a new firm (i.e., novice entrepreneurs). In particular, if internal experience as an own-account worker enhances firm performance later on in the firm life cycle when the firm has reached employer status, it would imply that for novice entrepreneurs, a lean start-up strategy (as an own-account worker) is to be preferred over a more resourceful strategy hiring employees from the start.