Entrepreneurial team characteristics that influence the

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Entrepreneurial team characteristics that influence the successful launch of a new venture

Entrepreneurial team characteristics 567

Myleen M. Leary College of Business, Montana State University, Bozeman, Montana, USA, and

Michael L. DeVaughn Opus College of Business, University of St Thomas, Minneapolis, Minnesota, USA Abstract Purpose – The purpose of this paper is to identify the characteristics of an entrepreneurial team that influence the likelihood a new venture will successfully launch. Design/methodology/approach – This paper uses a sample of prospective start-up banks that applied for a charter application in Florida between 1996 and 2005. Logistic regression was used to test the hypotheses. Findings – Analysis suggests that entrepreneurial teams where: the CEO is strongly embedded into the team; no team member holds 10 per cent or more of the firm’s total equity; team members have less rather than more industry experience; and more team members have prior founding experience, all point to a successful new venture launch. Research limitations/implications – This study focuses on start-up success in a single industry and thus may not be generalizable to other research contexts. Practical implications – Results suggest that bank regulators in charge approving new bank charters would be well advised to revisit their guidelines and recommendations for prospective new bank founders. Originality/value – Given the unique regulatory requirements of the US banking industry, the successful as well as failed efforts to launch a new bank can be identified and the ‘‘success bias’’ present in many entrepreneurship studies can be averted. Keywords Entrepreneurialism, Teams, United States of America, Business formation, Banking, Chief executives Paper type Research paper

Introduction Much of the focus of entrepreneurial research is on the success of the organization after it has made the transition from a start-up to an operational business. A literature review by Bamford et al. (2004) showed that most research on entrepreneurial new ventures is focused on the period after the firm has opened its doors for business. Of the 39 studies they identified, seven focused on the long-term impact of founding conditions; none of the research studied what influenced the firm’s ability to actually open for business. This focus on operational businesses ignores the challenge each entrepreneur faces of transiting a business idea to a viable firm. While the prior experience of founders has been found to influence new venture strategy (Carpenter et al., 2003) we are specifically interested in what characteristics of the founding team influence a firm’s ability to successfully launch a firm. Another challenge posed by entrepreneurial research is the difficulty in studying new ventures that moved through the initial start-up phases but did not actually open for business. While researchers have studied failure in entrepreneurship before, failure

Management Research News Vol. 32 No. 6, 2009 pp. 567-579 # Emerald Group Publishing Limited 0140-9174 DOI 10.1108/01409170910962993

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has been defined as a commercial failure (Sandberg and Hofer, 1987), not reaching a sales goal (Roure and Maidique, 1986), or when a firm is closed, merged, or acquired within the study period (Bamford et al., 2000). Including failed entrepreneurial companies in a research study is often difficult as it necessarily means accounting for an entrepreneur’s idea rather than a tangible entity. Without including the start-ups that never transitioned to operational businesses, entrepreneurial research is biased towards the characteristics of successfully launched ventures. We aim to address these challenges of entrepreneurial research by examining whether or not the characteristics of the entrepreneurial founding team influence the likelihood of a successful new venture in the context of the US banking industry. Given the unique regulatory environment of the US banking industry, we are able to identify both successful and unsuccessful attempts to launch a new firm. Therefore, the sample frame of this study includes failed start-up firms, new ventures that went through the start-up process but did not transition to an operable business, as well as start-up firms that successfully made the transition. In addition, our research question explicitly focuses on the characteristics of the founding team, thus contributing to the growing literature that recognizes the importance of the entire founding team rather than the individual entrepreneur (i.e. Eisenhardt and Schoonhoven, 1990; Bamford et al., 2004). Our emphasis on the founding team at large is consistent with existing research that links new venture success with founding team characteristics (Roure and Keeley, 1990). Moreover, anecdotal evidence from key players in our research context, bank regulators, also suggests that our focus is appropriate: regulators maintain that specific founding team attributes are important considerations in deciding which new firms ultimately receive approval for launch. In sum, we argue that three general characteristics of the founding team predict a successful new venture launch: concentration of ownership, founding team experience, and CEO embeddedness. We explicate these factors in turn in the theory development section. Theory development and hypotheses Ownership concentration in the entrepreneurial founding team Existing research argues that ownership imbalance, or ownership concentration, is typically beneficial ( Jensen and Meckling, 1976; Iannotta et al., 2007). A proportionately large equity stake in a firm provides an incentive for the owner to become more involved with the organization and to take a longer-term view of the firm’s success (Hoopes and Miller, 2006). However, one potential problem with a concentrated ownership structure is that an owner with a relatively high ownership percentage also tends to hold a disproportionate amount of the power in the firm as well. In the context of a founding team, having one overly powerful member in the group can promote conflict and, as a result, may force the team to devote valuable time and resources to managing team dynamics rather than other critical start-up tasks. As opposed to concentrated ownership, dispersed ownership limits the opportunity for any owner to impose his or her will on the firm; without the equity stake to back up individual demands founding team members have an equal interest in developing strategies for the success of the firm. Though often seen as a shortcoming, diffuse ownership can result in owners favoring short-term results (Laverty, 1996). However, we argue that such an outcome can be seen as advantageous. A short-term focus, precipitated by dispersed ownership on the founding team, can be valuable in the early

stage of firm development, especially during the founding period. For a start-up firm the most important goal is to open for business; without accomplishing that crucial step any long-term plans for the firm are moot. Therefore, in a situation where the most important goal is a short term one, diffuse ownership rather than concentrated ownership could be beneficial. H1.

A concentrated ownership structure within the entrepreneurial team decreases the likelihood of a successful new venture launch

Entrepreneurial team experience While we maintain that overall entrepreneurial founding team experience is important, we suggest that it may be more instructive to specify the various types of founding team experience that might have some bearing on whether or not a prospective new firm successfully launches (Argote et al., 2003). We argue that four specific types of experience in the entrepreneurial team may be relevant: prior founding experience on the team; heterogeneity of experience represented by the team; prior shared ( joint) experience on the team; and combined industry experience represented by the team. We develop hypotheses for each of these variables in the following sections. Prior founding experience Research in entrepreneurship has argued that prior founding experience represents a source of domain specific knowledge that an entrepreneur can tap into during the startup stage of the new venture. Shane and Stuart (2002) point out that prior founding experience can help entrepreneurs raise start-up capital, speed a prospective new venture’s transition to a liquidity event and avoid outright failure of the prospective new firm. Similarly, Hsu (2004) argues that entrepreneurs with prior founding experience demonstrate an ability to access their first round of financing more quickly and amass higher levels of capital for their current venture than those founders that do not. Therefore, in the context of entrepreneurial teams, we expect more favorable outcomes on teams where more of its members have prior founding experience as such founding teams will have a larger pool of relevant, start-up specific knowledge from which they can draw. H2.

Greater prior founding experience on the entrepreneurial team increases the likelihood of a successful new venture launch.

Heterogeneity of experience There is a stream of research that suggests diversity, conceived as variety or heterogeneity within a team, is deemed beneficial for achieving desirable outcomes (Harrison and Klein, 2007). The key idea is that the team can be viewed as an information-processing instrument for the organization (Hinsz et al., 1997) and that teams that maintain a ‘‘requisite variety’’ (Ashby, 1956) are better able to parlay greater information richness into positive outcomes. Simply stated, teams whose members represent heterogeneous information pools, via their knowledge, functional background, experience or external social ties are likely to outperform more homogeneous teams (Argote and Ingram, 2000). In our context, heterogeneity in terms of occupational background and experience suggests that a team has access to knowledge about different industries and also to non-overlapping external network ties, thus enabling such teams to better generate demand and resources for the new venture’s launch. This means that entrepreneurial teams that are more homogeneous in


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occupational background may have a more difficult time producing such benefits, relative to entrepreneurial teams that are more heterogeneous. H3.

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Greater occupational diversity on the entrepreneurial team increases the likelihood of a successful new venture launch.

Prior shared experience A wave of recent research has demonstrated a link between prior shared ( joint) experience among entrepreneurial team members and firm outcomes. The outcomes range from the influence on the goals and aspirations of the prospective new firm (Delmar and Shane, 2006) to the type of strategy that the prospective new firm chooses to pursue at start-up (Beckman, 2006). Collectively, this research suggests that prior shared experience (PSE) helps entrepreneurial teams by facilitating efficient interpersonal processes and interaction routines among team members (Zheng et al., 2007). Moreover, such teams tend to exhibit improved coordination and mutual trust which are key benefits derived from a shared history of working together. H4.

Greater PSE on the entrepreneurial team increases the likelihood of a successful new venture launch.

Industry experience Several studies have supported the notion that past relevant industry experience is a hallmark of successful entrepreneurs (Cooper and Bruno, 1977; Van de Ven et al., 1984). Prior industry experience is beneficial because it provides entrepreneurs with the opportunity to accumulate knowledge about tasks and roles and master routines and practices that might be germane in their new entrepreneurial setting (Reagans et al., 2005). In an entrepreneurial team, prior industry experience is important because it means that members of the team are likely to share knowledge and information and thus increase the pool of knowledge that is available to the entire team. Moreover, this pool of knowledge can represent knowledge that is often distinct from the knowledge that a single team member accumulates directly (Reagans et al., 2005). Having access to such knowledge may increase the likelihood of a successful launch since the entrepreneurial team will have greater knowledge of industry practices and routines at its disposal. H5.

Greater industry experience on the entrepreneurial team increases the likelihood of a successful new venture launch.

CEO embeddedness in the entrepreneurial founding team A final characteristic of the entrepreneurial team we propose as a predictor of a successful new venture launch concerns the completeness of the founding team and whether or not critical positions are filled on a permanent rather than interim basis. Specifically we suggest that a complete founding team that includes the CEO will be better positioned for a successful launch compared to an organization that intends to identify the CEO at a later date. The completeness of the founding team has been studied as a predictor of sales and profit goals (Roure and Maidique, 1986) and of higher internal rates of return for shareholders in high tech new ventures (Roure and Keeley, 1990) and of new venture growth among banks in their initial years of operations (Bamford et al., 2004). The results of these studies support the idea that the

cohesiveness of the team during critical early stage strategy development is important to the long-term success of the firm. Extrapolating from these results, we suggest that a cohesive founding team is also valuable for the short-term goals of the firm. With a cohesive founding team and an embedded CEO, a new venture can ensure that all members of the founding team participate in the development of the firm’s short-term and long-term planning. Without an identified CEO, the founding team may develop the same plans but will need to instruct a new CEO on the logic of the firm’s strategy, goals, and business plan. In the context of the banking industry, new ventures that add a CEO after its charter application has been submitted for regulatory approval are susceptible to material changes in strategic direction imposed on it by its new leader, threatening a timely an successful launch. H6.

A CEO that is embedded in the entrepreneurial team increases the likelihood of a successful new venture launch

Research method Sample We began with the population of prospective start-up state banks in Florida, based on new bank charter applications submitted to the Florida Office of Financial Regulation for approval between 1996 and 2005. A total of 143 bank applications were received: 129 of these applications ultimately resulted in successful new bank launches while 14 applicants resulted in unsuccessful launches due to either an outright rejection by the Florida Office of Financial Regulation or a voluntary application withdrawal. We included all 143 banks in our initial sampling frame. Two observations were ultimately dropped from the sample because of missing information on one or more variables for a final sample size of 141. Data Information on the entrepreneurial team was collected from biographical entries on new bank charter applications submitted to the Florida Office of Financial Regulation. This information was also checked and cross-referenced with data compiled using local, regional and national bank trade publications as well as local business publications from a variety of geographic locations in Florida. Demographic and structural information on the banks in the study was collected from the FDIC’s Institution Database. Information on the macroeconomic conditions of the markets of the prospective new banks was collected from the US Department of Commerce’s Bureau of Economic Analysis. Finally, Thomson’s North American Financial Institutions Directory was also used as a final check to identify bank founding team members and to cross-validate other demographic entries taken from the previously mentioned sources. Measures Dependent variable. Our dependent variable for this study is a binary indicator variable representing whether or not a proposed bank opens for business. A successful launch requires not only approval from the appropriate bank chartering regulatory agency, but also market acceptance as indicated by a successful initial private or public offering in a given geographic market to raise enough capital to satisfy bank regulators. This variable (launch) is scored one for a successful opening or 0 otherwise.


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Independent variables Ownership concentration structure. We assess the equity ownership concentration structure of the entrepreneurial team by examining the equity holdings of the largest shareholder on the team. We note whether or not the largest shareholder holds ten per cent (10 per cent) or more of the total equity of the new bank. This level of equity is significant as bank regulators consider founders who hold at least 10 per cent of the equity to have a controlling interest in the bank and requires such information to be disclosed as part of the bank chartering process. We measure the ownership concentration structure of the entrepreneurial team using the indicator variable max shareholder 10 per cent, scored 1 when the largest shareholder on the team holds ten per cent or more of the available equity or 0 otherwise. Experience. We account for the prior start-up experience on the entrepreneurial team by taking a count of the number of team members who have been involved in previous bank start-up efforts. We label this variable repeat founders. We also calculate a Blau index score (1977) using the occupations of the entrepreneurial team members to measure the relative diversity of the team. Higher index scores indicate that the team is more diverse. This variable is labeled occupational diversity. We measure a third aspect of entrepreneurial team experience, PSE, by noting the number of team members who have previously worked together at a prior banking institution before the launch of the proposed bank (team PSE ). Finally, we account for another aspect of entrepreneurial team experience, the total industry experience of the team (industry experience), by taking the sum of the total years of banking industry experience represented by each member of the team. CEO embeddedness. We recognize the degree of CEO embeddedness and integration in the entrepreneurial team by observing whether or not the CEO of the prospective start-up bank is actually identified at the time that the bank’s charter application is submitted to bank regulators for approval. We denote the embeddedness of the CEO with an indicator variable, CEO identified, scored 1 if the CEO has been identified at the time of bank charter application or 0 otherwise. Control variables We account for macroeconomic conditions in the markets where the prospective new banks are expected to launch. We measure the yearly change in population (population), employment (employment) and personal income (income) in the year prior to the bank’s charter application filing. These three measures have been shown to impact the potential success of a new bank (Kim and Miner, 2000). We also control for the competitive environment of the bank by accounting for the density of existing banking institutions already present in the prospective bank’s geographic market. The variable institutions represents a count of the number of existing banking firms already in the market. We control for several resources that might be available to the entrepreneurial team or the firm that could impact the likelihood of launch. First, we control for potential financial resources, in the form of initial start-up capital (initial capital), available to the firm. Greater availability of capital might improve the prospects of a successful launch. Initial capital is measured as the amount of start-up capital available prior to the start of a bank’s initial operations. Second, we control for access to outside expert assistance in the form of new bank consultants (DeVaughn and Leary, 2007). These specialized consultants have a specific charge: to facilitate the successful launch of a new bank by assisting in various aspects of the start-up process. We use an indicator variable,

consultant, (scored 0 or 1) to denote whether or not a bank received consulting assistance prior to start-up. Third, we control for the size of the founding team (team size). Not only do we control for size because our experience variables are size dependent, we also view founding team size as a proxy for the gross amount of human capital and knowledge/ information resources available to the prospective new bank (Eisenhardt and Schoonhoven, 1990). We measure team size using a simple count of the number of people on the founding team. Finally, we control for complexity of the organizational form assumed by the prospective new bank (DeVaughn and Leary, 2007). In the context of US commercial banking industry, a bank’s organizational form determines which bank regulatory agency (or agencies) supervises and oversees its operations. Bank regulators advise prospective new bank founding teams that the odds of approval and successful launch increase when bank plans are simpler and less complex (Austin, Anderson and Bires, 1999). When a new bank elects a single bank holding company structure (SBHC), it complicates its potential launch because it must file an additional bank charter application with another bank regulatory agency, the Federal Reserve Bank. We use an indicator variable, SBHC, to identify a bank’s designation as a SBHC and thus as a proxy for complexity. Analysis We use logistic regression to test our hypotheses we enter our independent research variables into the model in a hierarchical manner to better evaluate the explanatory power of each variable or set of variables. Results The descriptive statistics and pair wise correlations for the variables used in the study are shown in Table I. While approximately 90 per cent of all prospective new banks ultimately launch successfully, there are at least two variables that are strongly associated with a failure to launch: the number of existing financial institutions already present in the geographic market of the prospective new bank and whether or not a founding team includes a member that holds at least a 10 per cent equity ownership stake in the bank. Turning to the regression results (Table II), model 1, our baseline model that includes only control variables, indicates that initial capital and team size are statistically significant and positively related to launch, while institutions and consultant are also statistically significant, but negatively related to launch. Table II, models 2-4, shows the effect of including the hypothesized research variables in the model. Our full model, model 4, indicates that following control variables are statistically significant: income, initial capital, consultant and SBHC. All of these variables, with the exception of consultant, are in the expected direction. With respect to the independent variables in the full model, ownership concentration structure (max shareholder 10 per cent) is statistically significant and negatively affects venture launch as hypothesized (H1). However, the results concerning the various aspects of founding team experience are mixed. Founding teams that have more members with prior founding experience in the industry (repeat founders) are more likely to successfully launch as indicated by the variable’s positive and statistically significant coefficient. This finding is consistent with our (H2). The amount of prior industry experience represented by the team (industry experience) is


Table I. Descriptive statistics and correlations Max

1

2

3

6

7

8

9

10

11

0.09 0.02 0.47 0.05 0.05 0.17

0.49

12

13

14

0.13 0.02 0.09 0.19 0.20 0.10 0.00 0.13 0.10 0.19 0.17

0.26 0.17 0.17 0.14 0.03 0.11 0.11 0.19 0.08 0.05 0.00 0.10 0.07 0.06 0.06 0.04 0.00 0.01 0.22 0.09 0.03 0.04 0.26 0.02 0.18 0.05 0.38 0.05 0.29 0.20 0.12 0.41 0.05 0.30 0.01

5

0.14 0.06 0.07 0.02

0.38 0.06 0.05 0.03 0.12 0.15 0.03 0.04 0.08

4

Notes: Correlations > 0.22 significant @ p > 0.01; correlations > 0.16 significant @ p > 0.05

143 143 143 143 143 143 143 143 143 143 143 143 143 141

Min

Launch 0.90 0.30 0 1 Institutions 29.60 17.07 5 79 0.26 Population 2.20 1.14 0.1 6.9 0.13 0.25 Employment 2.70 2.48 4.1 16.6 0.09 0.19 0.39 Income 5.76 2.11 0.9 11.9 0.10 0.28 0.31 Initial captial (mil.) 10.67 10.74 3.95 100.6 0.08 0.23 0.06 Consultant 0.64 0.48 0 1 0.05 0.08 0.03 Team size 9.73 2.75 5 20 0.23 0.34 0.10 SBHC 0.13 0.34 0 1 0.08 0.04 0.11 Repeat founders 1.00 1.32 0 6 0.09 0.01 0.25 Occup diversity 0.75 0.08 0.46 0.88 0.12 0.14 0.09 Team PSE 2.84 2.32 0 10 0.16 0.03 0.09 Industry experience 74.35 38.40 0 203 0.05 0.05 0.04 Max shareholder 10 per cent 0.27 0.45 0 1 0.41 0.23 0.11 15 142 CEO identified 0.94 0.24 0 1 0.30 0.23 0.15

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

Mean SD

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ID Obs Variable

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Model 1 Institutions Population Employment Income Initial captial (mil.) Consultant Team size SBHC Max shareholder 10% Repeat founders Occup diversity Team PSE Industry experience CEO identified Observations Constant Pseudo R2

0.04** 0.14 0.07 0.36 0.00*** 1.52*** 0.37** 1.23

(0.02) (0.42) (0.19) (0.22) (0.00) (0.82) (0.17) (0.88)

Model 2 0.04 0.52 0.05 0.56** 0.00 2.58** 0.25 1.55 2.95*

143 2.00 0.27

(0.03) (0.63) (0.25) (0.28) (0.00) (1.11) (0.25) (1.07) (1.17) 1.00** 4.17 0.00 0.04**

141 0.33 0.45

Model 3 0.04 (0.03) 1.15 (0.78) 0.27 (0.27) 0.55*** (0.34) 0.00*** (0.00) 3.77** (1.50) 0.47 (0.34) 1.89 (1.26) 4.55* (1.63) (0.52) 1.57** (6.21) 5.85 (0.30) 0.11 (0.02) 0.05** 3.86** 141 3.27 0.53

Model 4 0.04 1.00 0.15 0.56*** 0.00* 3.93** 0.52 3.30** 4.39* (0.80) (7.17) (0.32) (0.02) (1.77) 141 2.98 0.60

(0.04) (0.84) (0.29) (0.35) (0.00) (1.64) (0.36) (1.61) (1.64)

Notes: *p < 0.01, **p < 0.05 and ***p < 0.10

also statistically significant, as expected, but its negative effect is counter to our (H5). Moreover, neither the occupational diversity represented by the founding team (occupational diversity) nor the number of founding team members who share prior industry work experience (team PSE) is statistically significant. Thus, H3 and H4 are unconfirmed. Finally, we find that CEO embeddedness (CEO identified) is statistically significant and is consistent with our (H6 ). Discussion and conclusion The results are largely supportive of our initial view of characteristics of the entrepreneurial team that are likely to impact the launch of a new venture. Our analysis suggests that entrepreneurial teams where: the CEO is strongly embedded into the team; no team member holds 10 per cent or more of the firm’s total equity; team members have less rather than more industry experience; and more team members have prior founding experience all point to a successful new venture launch. Moreover, CEO embeddedness and prior founding experience seem to have the greatest impact on launch. Exponentiation of the logistic regression coefficients of these two variables indicate that a one unit increase in the number of entrepreneurial team members with prior founding experience increases the likelihood of a successful launch by a factor of nearly five (about 381 per cent) while an entrepreneurial team where the CEO is embedded increases the likelihood of a successful launch by a factor of about 47 (about 4,626 per cent). These findings follow both theory and logic. Much of the entrepreneurship literature supports the view that prior entrepreneurial experience is a big factor in subsequent entrepreneurial success. In addition, since a firm’s CEO is charged with executing a plan and carrying out the direction set by the founding team and its board of directors, a CEO’s effectiveness in accomplishing this task is likely greatly influenced by whether or not he or she has been included in the development of such


Table II. Logisitic regression of likelihood of new venture launch

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initial plans. Clearly, this is difficult to achieve if CEO is not firmly embedded as part of the team. Moreover, if a CEO has not been identified or embedded into the founding team at the time of charter application, he or she is not likely to be privy to the debate, discussion and rationale behind the bank’s plan and as a result, may be less committed to it, thus potentially inhibiting a successful launch. Finally, the lack of a CEO at the time of application may also send a signal to bank regulators that there may be future problems if the application is approved and thus may have an inadvertent spillover effect on the regulatory approval process. While it is not a regulatory requirement that a CEO is named prior to filing a bank charter application, some bank regulators suggest that having a CEO in place at the time of application, provides some evidence that the CEO has been involved in developing the bank’s business plan. Our finding that a concentrated ownership structure has a negative impact on the success of a new venture launch is consistent with our hypothesis but contrary to the generally accepted view that concentrated ownership is beneficial to organizations. Our results suggest that the goals of the organization must be considered when determining the most beneficial ownership structure; short-term goals are best supported by diffuse ownership structures where owners are less likely to focus on decisions with longer term implications for the organization. An interesting source of future research would be to see if the ownership structure that predicts a successful launch also coincides with the long-term success of the firm. The surprising results of this study concerns the various aspects of entrepreneurial founding team experience that were unsupported in our analysis. Only our hypothesis regarding prior founding experience on the founding team (H2) resulted in an outcome that we fully predicted. The fact that occupational diversity and team size were not statistically significant in the study suggests that the benefits of team diversity and PSE are not realized (at least in this context), as suggested by prior research. On the other hand, the fact that the amount of prior industry experience on the founding team (industry experience) is negatively rather than positively related to launch is perhaps not so surprising in retrospect, considering more recent organizational learning theoretical perspectives. These theoretical views argue that knowledge can depreciate over time and that in some circumstances, too much antiquated knowledge can hinder rather than help firms achieve desirable outcomes (Argote, 1999). This explanation is not inconsistent with our data. We find that the average founding team has more than 74 years of total industry experience. It is not difficult to imagine that founding teams with fewer years of industry experience might be better off because of their ‘‘fresher’’ and more relevant knowledge. Our explanation for the seemingly counter-intuitive effect of industry experience is compatible with the view of at least one federal bank regulator whom we interviewed as part of this study. This regulator maintained that founding teams with high levels of prior industry experience might ‘‘raise a red flag’’, especially if the experience was acquired in a large, rather than a small bank setting. He suggested that an overly experienced founding team might signal that its members have been far too removed from the essential ‘‘hands-on’’ operations of the bank. Like all research, this study has limitations. First, this study focuses on start-up success in a single industry and thus may not be generalizable to other research contexts. While it will be left to future research to completely resolve this issue, we believe that these results are indeed generalizable to other industries that share similar core features, such as strong regulatory oversight the (e.g. transportation, utilities, media, telecommunications, etc.). A

second potential limitation is that our work may simply reflect ‘‘policy capturing’’, merely identifying bank regulators’ latent ‘‘screening’’ algorithm for new entrants into the industry. Though this is a possibility, we believe that this is not the case. Many of our findings run counter to the policies and guidelines laid out for prospective new bank founders by bank regulators. For example, regulators claim to look favorably on founding teams with PSE in the industry, suggesting that such experience demonstrates group cohesiveness and decision making efficiency. By contrast, our study finds that such experience among the founding team has no bearing on whether or not the bank successfully launches. Second, regulatory rules do not require that a CEO be either identified or included as part of the bank’s founding team at the time of application. However, our study points out that this is the single most important factor in determining whether or not a bank successfully launches. Our work has important implications for both theory and practice. Theoretically speaking, our findings support the nearly universal view that prior entrepreneurial experience increases the likelihood of subsequent entrepreneurial success. However, our study considers the added element of looking at entrepreneurial experience at the level of the team. Also, our study is noteworthy in that we take a ‘‘fine-grained’’ approach to assess the impact of experience (Argote et al., 2003). Many studies evaluate a single type of experience and then imply that it subsumes all kinds of experience. In our study, we distinguish between different types of experience and find that certain types of experience matters more than others. Thus, future studies should carefully specify the type of experience it intends to investigate and be more cautious about broadly generalizing to other types of experience. Finally, our work is important because it averts the ‘‘success bias’’ present in many entrepreneurship studies. Unlike these studies, our work is based on firms that were both successful and unsuccessful in launching. We were in the enviable position of being able to collect information from original data sources and thus were not forced to rely solely on data from successfully launched firms. Our more comprehensive data allows us to state our results with greater confidence. With respect to practice, our results suggest that bank regulators in charge of approving new bank charters would be well advised to revisit its guidelines and recommendations for prospective new bank founders. One obvious change would be to require all banks to have a CEO in place at the time of application. Another perhaps more unexpected recommendation would be to limit the role of the bank consultant in the application process. While consultants provide many valuable services to founders, the use of a bank consultant as the primary spokesperson and correspondent for the bank actually reduces the likelihood of a successful launch. Like the lack of a named CEO at the time of application, perhaps the use of a consultant signals that a bank’s business plan is being driven by consultants, rather than by the founding team itself. This information may unintentionally infiltrate the regulatory approval process and adversely impact a successful launch. Finally, while this work addresses the important question of the impact of entrepreneurial founding team characteristics on whether or not a new venture successfully launches, we deem the related question of the impact of the entrepreneurial founding team on the time to launch worthy of future research. This question is economically significant because founders and investors tie up considerable resources, both human and financial, and thus, the sooner a new venture can get off the ground, the sooner the venture can begin to earn a return for its founders and investors.


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References Argote, L. (1999), Organizational Learning: Creating, Retaining, and Transferring Knowledge, Kluwer Academic, Boston, MA. Argote, L. and Ingram, P. (2000), ‘‘Knowledge transfer: a basis for competitive advantage in firms’’, Organizational Behavior & Human Decision Processes, Vol. 82 No. 1, pp. 150-69. Argote, L., McEvily, B. and Reagans, R. (2003), ‘‘Managing knowledge in organizations: an integrative framework and review of emerging themes’’, Management Science, Vol. 49 No. 4, pp. 571-82. Ashby, W.R. (1956), An Introduction to Cybernetics, J. Wiley, New York, NY. Austin, D.V., Anderson, D.F. and Bires, S.A. (1999), How to Charter a Commercial Bank. CCH, Riverwoods, IL. Bamford, C.E., Dean, T.J. and Douglas, T.J. (2004), ‘‘The temporal nature of growth determinants in new bank founding: implications for new venture research design’’, Journal of Business Venturing, Vol. 19, pp. 899-919. Bamford, C.E., Dean, T.J. and McDougall, P.P. (2000), ‘‘An examination of the impact of initial founding conditions and decisions upon the growth of new bank startups’’, Journal of Business Venturing, Vol. 15 No. 3, pp. 253-77. Beckman, C.M. (2006), ‘‘The influence of founding team company affiliations on firm behavior’’, Academy of Management Journal, Vol. 49 No. 4, pp. 741-58. Blau, P.M. (1977), Inequality and Heterogeneity: A Primitive Theory of Social Structure, Free Press, New York, NY. Carpenter, M.A., Pollock, T.G. and Leary, M.M. (2003), ‘‘Governance, the experience of principals and agents, and global strategic intent: testing a model of reasoned risk taking’’, Strategic Management Journal, Vol. 24, pp. 803-20. Cooper, A.C. and Bruno, A.V. (1977), ‘‘Success among high-technology firms’’, Business Horizons, Vol. 20 No. 2, p. 16. Delmar, F. and Shane, S. (2006), ‘‘Does experience matter? The effect of founding team experience on the survival and sales of newly founded ventures’’, Strategic Organization, Vol. 4 No. 3, pp. 215-47. DeVaughn, M.L. and Leary, M.M. (2007), ‘‘Consultants to the rescue? Antecedents and consequences of hiring consultants during the startup process’’, Academy of Management Proceedings, Philadelphia, PA, pp. 1-6. Eisenhardt, K.M. and Schoonhoven, C.B. (1990), ‘‘Organizational growth: linking founding team, strategy, environment, and growth among US semiconductor ventures, 1978-1988’’, Administrative Science Quarterly, Vol. 35 No. 3, pp. 504-29. Harrison, D.A. and Klein, K.J. (2007), ‘‘What’s the difference? Diversity constructs as separation, variety, or disparity in organizations’’, Academy of Management Review, Vol. 32 No. 4, pp. 1199-228. Hinsz, V.B., Tindale, R.S. and Vollrath, D.A. (1997), ‘‘The emerging conceptualization of groups as information processors’’, Psychological Bulletin, Vol. 121 No. 1, p. 43-64. Hoopes, D.G. and Miller, D. (2006), ‘‘Ownership preferences, competitive heterogeneity, and family-controlled businesses’’, Family Business Review, Vol. 19 No. 2, pp. 89-101. Hsu, D.H. (2004), ‘‘Experienced entrepreneurial founders and venture capital funding’’, working paper, Social Science Research Network, 15 August, available at: http://ssrn.com/abstract¼584702 Iannotta, G., Nocera, G. and Sironi, A. (2007), ‘‘Ownership structure, risk and performance in the European banking industry’’, Journal of Banking and Finance, Vol. 31, pp. 2127-49. Jensen, M.C. and Meckling, W.H. (1976), ‘‘Theory of the firm: managerial behavior, agency costs, and ownership structure’’, Journal of Financial Economics, Vol. 3, pp. 305-60.

Kim, J.Y. and Miner, A.S. (2000), ‘‘Learning from the failure of others: a longitudinal study of the US commercial banking industry 1984-1998’’, Academy of Management Proceedings, Toronto. Laverty, K.J. (1996), ‘‘Economic ‘short-termism’: the debate, the unresolved issues, and implications for management’’, Academy of Management Review, Vol. 21 No. 3, pp. 825-60. Reagans, R., Argote, L. and Brooks, D. (2005), ‘‘Individual experience and experience working together: predicting learning rates from knowing who knows what and knowing how to work together’’, Management Science, Vol. 51 No. 6, pp. 869-81. Roure, J.B. and Maidique, M.A. (1986), ‘‘Linking prefunding factors and high-technology venture success: an exploratory study’’, Journal of Business Venturing, Vol. 2, pp. 5-28. Roure, J.B. and Keeley, R.H. (1990), ‘‘Predictors of success in new technology based ventures’’, Journal of Business Venturing, Vol. 5 No. 4, pp. 201-20. Shane, S. and Stuart, T. (2002), ‘‘Organizational endowments and the performance of university start-ups’’, Management Science, Vol. 48 No. 1, pp. 154-70. Van de Ven, A.H., Hudson, R. and Schroeder, D.M. (1984), ‘‘Designing new business startups: Entrepreneurial, organizational, and ecological considerations’’, Journal of Management, Vol. 10 No. 1, pp. 87-107. Zheng, Y., DeVaughn, M.L. and Zellmer-Bruhn, M.E. (2007), ‘‘The influence of founding team prior shared experience on new venture performance: a contingent view’’, paper presented at the Academy of Management Meetings, Philadelphia, PA, 3-8 August. Further reading Hannan, M.T. and Carroll, G.R. (1992), Dynamics of Organizational Populations, Oxford University Press, New York, NY. Klepper, S. (2001), ‘‘Employee startups in high-tech industries’’, Industrial & Corporate Change, Vol. 10 No. 3, pp. 639-74. Shane, S. (2000), ‘‘Prior knowledge and the discovery of entrepreneurial opportunities’’, Organization Science, Vol. 11 No. 4, pp. 448-69. About the authors Myleen M. Leary, PhD is an Assistant Professor in the College of Business at Montana State University. She received her doctoral degree in Organizational Theory and Strategy from the University of Wisconsin-Madison. Her research focuses on top management teams and boards of directors in for-profit and non-profit organizations. She has published in the Strategic Management Journal, The Action Research Journal, and The Handbook of Organization Development and International Entrepreneurship. Dr Leary has presented her research at the annual conferences of Academy of Management, the Academy of International Business, the Strategic Management Society and the Association for Research on Non-profit Organizations and Voluntary Action. Myleen M. Leary is the corresponding author and can be contacted at: [email protected] Michael L. DeVaughn is an Assistant Professor in Management at the University of St Thomas in Minneapolis, Minnesota, USA. He completed his undergraduate studies at Brown University and holds an MBA from Indiana University and a PhD from the University of Wisconsin. His research interests include organizational learning and performance implications of initial decisions and strategies in new ventures. He has presented his research at major national and international conferences in Strategy, Management and Organizational Learning. Prior to his academic career, he spent almost ten years working in a variety of managerial positions with Ralston Purina, PepsiCo and Bank of America. To purchase reprints of this article please e-mail: [email protected] Or visit our web site for further details: www.emeraldinsight.com/reprints
