To exit or not to exit?

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To exit or not to exit?

A Case Study Aimed at Explaining the Emergence of and Refraining from an Entrepreneurial Exit Decision

By

Jorrit H. Pot

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To exit or not to exit?

A Case Study Aimed at Explaining the Emergence of and Refraining from an Entrepreneurial Exit Decision

By

Jorrit H. Pot

University of Groningen

Faculty Economics and Business

Master Business Administration

Small Business & Entrepreneurship

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ABSTRACT

Recent research on the concept of entrepreneurial exit has focused largely on (i) entrepreneurs that follow a sequence of steps towards growth, and (ii) on the decision of entrepreneurial exit itself. Although this recent research provides a valuable and necessary emphasis on the role of the concept of entrepreneurial exit within the entrepreneurial process, I believe that insights are also valuable with regard to (i) underperforming entrepreneurs; (ii) the process of how an entrepreneurial exit decision emerges; and (iii) how it can be explained that an underperforming entrepreneur might refrain from this decision. The case study’s results demonstrate that the emergence of an entrepreneurial exit decision is mainly caused by a decrease in autonomous motivation. The decision of an entrepreneur to refrain from it is mainly caused by an increase in intrinsic motivation. In addition, also the perception of environmental munificence played an important role in the decision to refrain. Finally, these insights have been interpreted and speculated on to demonstrate its practical relevance for economic policy makers.

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PREFACE

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1 INTRODUCTION

“Like many successful entrepreneurs, Paul Spiegelman often refers to his company as his “baby,” and he becomes emotional when he talks about issues relating to succession or the sale of all or part of his company — an opportunity he recently sought out. His goal was to find a way to help his company, Beryl — a call center that caters to hospitals and is based near Dallas — keep growing while also allowing him to free up time to pursue other ventures. In January 2010, Mr. Spiegelman signed a letter of intent to sell a majority interest in the company to a private equity firm. But after considering the risks of letting someone else control his company, which has 350 employees and annual revenue of $35 million, he decided to walk away from the deal.” (Dahl, 2011).

1.1 Introduction and research objective

As was the case with Paul Spiegelman, entrepreneurs sometimes refrain from an entrepreneurial exit (i.e. the separation of an entrepreneur from their venture) decision. The research that is presented in this thesis aims at exploring this phenomenon by the use of a case study. In the following sub-sections some preliminary questions with regard to this research are dealt with first, in order to ultimately present the main objective of this research, along with both theoretical and practical research questions. Finally, a virtual road map of the remainder of this thesis is presented.

1.1.1 Relevance of researching entrepreneurial exit

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energy, and psychological effort they put into it. Thus, by better understanding the profound impact of an entrepreneurial exit decision, the likes of entrepreneurs, investors, and policy makers may deal with it in a more justifiable and emotionally more stable way. This may also positively attract potential entrepreneurs to engage in entrepreneurship, instead of being discouraged from it (Lim & Hahn, 2004; Lee et al., 2011). Finally, entrepreneurial exit exercises a certain influence on the economy. One example can be found in the concept of entrepreneurial recycling (DeTienne, 2012), in which the wealth and/or entrepreneurial experience that is acquired as a net result after an entrepreneurial exit decision is performed, is invested back into the economy. This may enhance regional and national economic development as it can positively stimulate other entrepreneurs, for example due to financial investments and/or human capital expertise. Another example relates to the aging development of certain populations, such as The Netherlands. In the coming years, it can be expected that the number of entrepreneurial exits will increase because of this development. On the one hand, this may lower entrepreneurial activity. On the other hand, it can be a chance to enhance entrepreneurial recycling. Hence, researching the concept of entrepreneurial exit may provide valuable insights with regard to an economy.

The research that is presented in this thesis aims at contributing to knowledge with regard to the relevance of researching entrepreneurial exit especially with regard to its influence on an economy. Before elaborating on this in detail, a brief overview of the recent relevant literature on entrepreneurial exit needs to be provided first.

1.1.2 Recent literature on entrepreneurial exit

Even though the body of knowledge on entrepreneurial exit is small, it is actually growing in both quantity and quality. Three recent publications endorse this development.

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DeTienne (2010) built further on this study and theoretically developed the concept of entrepreneurial exit in more detail by distinguishing between entrepreneurial exit and the concept of business exit in general. She provides different reasons, options, and the likeliness of the development of an exit strategy within different stages of the entrepreneurial process.

Wennberg et al. (2010), finally, examined divergent exit routes by developing a matrix along the dimensions firm performance (high/low), and the exit path taken (sale/liquidation).

In summary, these publications managed to drew attention on the role of entrepreneurial exit within the entrepreneurial process, after which it was in-depth theoretically developed and particular divergent exit routes were identified. However, there are still some gaps to fill with regard to understanding the concept of entrepreneurial exit in more detail. The literature gap that this research aims to fill is elaborated on in the next sub-section.

1.1.3 Literature gap and main research objective

After analyzing the current literature on entrepreneurial exit, two literature gaps were found. Taken together, these two literature gaps form the main objective of the research that is presented in this thesis. Before stating the main objective the two literature gaps will briefly be explained.

First, the publications of Cardon et al. (2005) and DeTienne (2010) are built upon a stages approach, and therefore assume that an entrepreneur is growth oriented and also will actually achieve it. However, as Levie and Lichtenstein (2010) argue, the difficulty with a stages approach towards the entrepreneurial process precisely is this assumption (i.e. that a firm over time follows a certain sequence of steps towards growth). They explain that this does not hold for entrepreneurial ventures that are underperforming (in this study a venture is labeled underperforming when it operates beneath its own reference point of desired performance). Indeed, underperforming ventures might never reach a growth phase, but instead struggle to survive. Thus, the current literature on entrepreneurial exit is less applicable on entrepreneurs that are labeled underperforming, leaving a first literature gap.

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The true relevance of these two literature gaps becomes visible when these two literature gaps are taken together. In DeTienne (2008) it is explained that underperforming firms have a significant negative influence on the economy, industry, and organizational stakeholders by squandering resources and occupying market positions without producing adequate levels of return. In addition, underperforming firms may instigate uncertainty among investors, employees, customers, suppliers, and other organizational stakeholders such as entrepreneurs themselves. On the other hand, Wong et al. (2005) found that gazelles (ventures that are expected to have a very high potential) are the only real contributors towards economic growth. These so called gazelles however may very well experience start-up problems, and hence might be underperforming in their start-up phase. For policy makers, it seems that a trade-off needs to be made regarding to which ventures are stimulated to be ‘kept alive’ although underperforming, and which ventures not. A main factor that is expected to have a significant influence on whether entrepreneurs tend towards or refrain from an exit decision is the individual perception of the entrepreneur itself. This research therefore aims at exploring this individual perception from an entrepreneur, and henceforth provides insight into the factors that influence both the emergence of and refraining from an entrepreneurial exit decision.

In summary, these two literature gaps together form the basis for the research that is presented in this thesis. By means of a case study, the main research objective that is stated below will be explored:

From the individual perception of an underperforming entrepreneur: How can the emergence of and refraining from an entrepreneurial exit decision be explained?

In addition, the outcome of this exploration can be used as input for building and developing theory in an inductive manner. Section 1.1.4 elaborates on the research questions that are regarded necessary in answering the main research objective.

1.1.4 Research questions and research set-up

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First, what does the theoretical concept of entrepreneurial exit contain? This question will serve to examine the position of entrepreneurial exit within both the field of entrepreneurship as a whole and the entrepreneurial process. In addition, it will provide its definition, and elaborate on the possible contents of an entrepreneurial exit decision and different exit routes. Henceforth, it logically is expected that the content of an entrepreneurial exit decision possesses a strong link with the emergence of an entrepreneurial exit decision, and that the content of an entrepreneurial exit decision may be of influence on whether an entrepreneur refrains from an entrepreneurial exit decision.

Second, what explanations are there available for explaining why entrepreneurs are

motivated to behave in a persistent manner even though they are underperforming? It can be argued that when an entrepreneur tends towards an exit decision, it is not persistent enough to stay with its venture. It also can be argued that when an entrepreneur refrains from an exit decision, it has become persistent again. Thus, the literature, for example Kuratko (1997) and DeTienne et al. (2008), on entrepreneurial persistence may provide valuable insights.

Out of this theoretical exploration a research model will be developed, including a well-founded set of factors aimed at explaining the phenomenon of the emergence of and refraining from an entrepreneurial exit decision from the individual perception of an entrepreneur. This research model then will be leading in conducting the case study, by comparing the role and influence of the factors within the research model with a practical case. This practical case involves an entrepreneur who has experienced the emergence of and refraining from an entrepreneurial exit decision multiple times in its entrepreneurial career with the same venture. Note that this comparison is not about extracting universal generalizability, but that it is a theoretical sample aimed at theory building regarding this particular phenomenon. The following three case questions were developed for finding an answer on the main research objective:

First, how did the entrepreneurial exit event emerge? This research question is aimed at exploring how an exit decision emerged and which factors caused the emergence. In other words, how was the entrepreneur led towards an entrepreneurial exit decision?

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In addition, the bridge between emergence of and refraining from involves the content of an entrepreneurial exit decision. Although this research does not focus on the content of an entrepreneurial exit decision, this bridge is still regarded necessary because it provides the details of an entrepreneurial exit decision, for example in terms of options, considerations, urgency, and other details that composed the entrepreneurial exit decision, that might possibly influence both the emergence of and refraining from it. Therefore, a third research sub-question is developed:

What are the characteristics of the exit decision? 1.2 Set-up of this thesis

Now that both the main research objective and the research questions are known, a brief description of what follows next is provided. The next chapter provides a theoretical background that is aimed at answering the two theoretical research questions and their context, out of which a research model will be developed. Note that mirror symmetry is a special technique for obtaining a theoretical explanation that has been applied for explaining the emergence of an entrepreneurial exit decision. Chapter three provides the methods section, in which the rationale for doing a case study is elaborated upon, how data will be gathered, how data will be analyzed, and how conclusions will be drawn and verified. The chapters thereafter include the results, data analysis (discussion), and finally the conclusions. A virtual road map of how the thesis is constructed is shown in figure 1.

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2 THEORETICAL BACKGROUND

2.1 Introduction

This chapter aims at exploring and providing an answer on the two theoretical research questions that were proposed in the previous chapter. These answers then will serve as a foundation for the composition of a research model that will be leading in exploring and answering the three practical research questions. Before this chapter continues with exploring theory and answering the theoretical research questions, the author wants to point out that the literature search process is explained in appendix 1.

2.2 Exploring and answering the theoretical research questions

The phenomenon that an entrepreneur sometimes refrains from an entrepreneurial exit event has a somewhat insufficient knowledge base. This leaves a huge space for different interpretations regarding such an event and moreover, for guessing. Therefore, the state of guessing should be reduced by doing research and developing theory based on facts. As Nobel Prize winner Linus Pauling argued: “Facts are the air of scientists. Without them you can never fly.” Section 2.2.1 aims at elaborating on and answering the first theoretical research question. Section 2.2.2 then aims at elaborating on and answering the second theoretical research question. In section 2.3 the research model will be developed.

2.2.1 Introducing entrepreneurial exit

Entrepreneurial exit is a component of the entrepreneurial process. The entrepreneurial process is in its turn a component of the field of entrepreneurship. To gain an accurate understanding of the concept of entrepreneurial exit and its position within entrepreneurship, first entrepreneurship as a field of research and the entrepreneurial process will be briefly discussed.

2.2.1.1 Entrepreneurship

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deployment share of different economies in different regions, the importance of entrepreneurship becomes even more evident, ranging from 49% in the U.S. to 70% in Europe (Carter & Evans-Jones, 2006). Based on this information, it becomes clear that understanding entrepreneurship may very well spur an economy.

To date one generally accepted definition of entrepreneurship does not exist (Shane & Venkataraman, 2000). However, the definition that Shane and Venkataraman (2000) developed, “the scholarly examination of how, by whom, and with what effects opportunities to create future goods and services are discovered, evaluated and discovered” (p.218), has been adopted by many

authors over the past decade (Shane, 2012). To contribute to the development of coherence within the field of entrepreneurship, this definition will be used in this research as well.

Shane (2003) defines an entrepreneurial opportunity as “a situation in which a person can create a new means-ends framework for recombining resources that the entrepreneur believes will yield a profit” (p.18). Wickham (2006) emphasizes that entrepreneurship is about creating new value, in which an entrepreneur exists in a state of tension between ‘what is’ and ‘what might be’. The latter involves the concept of imagination, doing something that is new, different and better with respect to the current state of affairs. Another Nobel Prize winner, Albert Einstein, emphasized the role of imagination as more important than knowledge, because knowledge is limited, whereas imagination encircles the world. The moment a person perceives and conceives a situation of ‘what might be’, the entrepreneurial process begins.

2.2.1.2 The entrepreneurial process

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example, highlight that the entrepreneurial process is a contextual event, and the outcome of many influences, therefore making it a complex process, and Kodithuwakku and Rosa (2002) argue that it can only be fully understood in a wider socioeconomic environment, labeling it as a “complex ongoing evolutionary process” (p.431). This statement with regard to the joint influence is an approach towards researching entrepreneurship that is also adopted in the research that is presented in this thesis.

DeTienne (2010) describes the term entrepreneurial process as a variety of processes with regard to entrepreneurial practices. She emphasizes that it is however remarkable that the entrepreneurial process is mostly associated with the discovery of an entrepreneurial opportunity and the creation of a new venture, and rarely to entrepreneurial exit. Because, is it not entrepreneurial exit, rather than the creation of a new venture, that eventually concludes the entrepreneurial process? The following section elaborates on and discusses recent and relevant publications with regard to the concept of entrepreneurial exit, aiming at answering the first theoretical research question: What contains the concept of entrepreneurial exit?

2.2.1.3 Entrepreneurial Exit

A first comment that has to be made is that entrepreneurial exit is distinct from other business exits. DeTienne (2010) mentions three characteristics that support this statement.

First, she points out that current research on business exit especially focuses on the firm or industry level, instead of the individual level. In other words, the focus of entrepreneurial exit is especially on the entrepreneur, including how, when, and why “founders of firms make decisions about entrepreneurial exit” (p.204), whereas literature on general business exit decisions has mostly been analyzed at the firm level. Thus, the main difference between these different levels is that the general business exit literature focuses on, for example, market share of a firm, industry growth rate, firm performance, etc., whereas entrepreneurial exit focuses on the motivation, intentions and perceptions of an entrepreneur.

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general has significant lesser equity ownership, and has to deal with a much higher degree of control that is imposed by a board of directors.

Third, the independent variables used in the extant literature on business exit are in particular the ‘rate of firm change’ and ‘firm performance’. Gimeno et al. (1997) however examined ‘threshold theory’, which contains that entrepreneurs have different perceptions and level of acceptations regarding the term ‘performance’. In other words, where one entrepreneur might consider a certain performance as high, another entrepreneur may consider the same performance as less high or low. Therefore, economic firm performance is not the only factor influencing an entrepreneur’s decision whether to exit or not. This implies that other factors play a significant role as well. For example, an entrepreneur, while performing poorly in an economic sense, may still possess the motivation to achieve its level of aspiration and therefore may stall its decision to exit its venture.

This calls for a clear definition of when an entrepreneur is underperforming. A highly useful publication in defining this is that of Gimeno et al. (1997). They argue that entrepreneurs have different thresholds of performance, which they define as “the level of performance below which the dominant organizational constituents will act to dissolve the organization” (p.750). Different thresholds of performance thus explain why for example entrepreneur A makes an entrepreneurial exit decision, whereas entrepreneur B, who has the same level of performance, does not. This argument is supported by DeTienne et al. (2008) who state that organizational survival and growth are not solely dependent on rational economic performance. Concerning the research that is presented in this thesis, the definition of Gimeno et al. (1997) will be adopted.

Now that it is made clear that entrepreneurial exit is a distinct entity from general business exit, and how an underperforming entrepreneur is defined, it is time to define the concept of entrepreneurial exit. In doing so, the definition as proposed by DeTienne (2010) will be leading in this research. In her article on the theoretical development of the concept of entrepreneurial exit, she defined it as “the process by which the founders of privately held firms

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that it has actually removed itself from the venture. Another important observation worth mentioning is that an entrepreneur may remove itself in varying degree from their venture. This logically implies that there exist different exit routes for exiting a firm.

The research that is presented in this thesis especially focuses on the process of the emergence of an entrepreneurial exit decision, the content of the decision itself, and on explaining why an entrepreneur might refrain from it. This particular occurrence is in this research referred to as an entrepreneurial exit event. In section 2.2.2 the content of an entrepreneurial exit decision will be dealt with. In section 2.2.3 the emergence of and refraining from an entrepreneurial exit decision will be dealt with.

2.2.2 The content of an exit decision

For this research, the content of an exit decision exists out of defined reasons of an underperforming entrepreneur to make an entrepreneurial exit decision, and the examination of which exit route to take. Respectively, these two components will be discussed.

The first component involves the following. Defined reasons of an entrepreneur for exiting its venture might be very diverse. Nevertheless how diverse these reasons might be, an entrepreneur, from its own perception, is expected to consider its exit decision thoroughly up to a point to which it has defined a justifiable rationale for exiting. This justifiable rationale embodies the defined reasons of an entrepreneur to exit its venture.

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Performance → Exit route ↓

High Low

Exit by sale Harvest sale Distress sale

Exit by liquidation Harvest liquidation Distress liquidation Table 1: Taxonomy of exit routes (Wennberg et al., 2010)

First, the harvest sale cell involves that the firm continues to exist, but the entrepreneur exits as a majority owner. This sale allows an entrepreneur to capture some of the wealth creation, while also allowing the venture to continue. Second, the harvest liquidation cell refers to a situation in which a firm is liquidated, and the values of its assets are distributed to its owner(s). Retirement and the inability to find a potential buyer are a good rationale for this exit route. Third, distress sale occurs when a venture is sold because of financial distress. One reason might be to avoid bankruptcy, whereas another reason might be to avoid accumulating further losses. Finally, distress liquidation occurs when a firm is liquidated because of financial distress. Entrepreneurs in this situation generally choose to voluntary liquidate their venture to avoid the negative stigma of bankruptcy.

Not only the content of an entrepreneurial exit decision is elaborated on and explained, the first theoretical research question has been answered as well. The concept of entrepreneurial exit and the role of it within entrepreneurship have been made clear now. Now it is time to deal with the two other very important components of an entrepreneurial exit event in section 2.2.3: Emergence and refraining.

2.2.3 Emergence of and refraining from an entrepreneurial exit decision

The previous section dealt with answering the first theoretical research question and consequential the content of an entrepreneurial exit event. This section elaborates on the second theoretical research question: What explanations are there available for explaining why

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an entrepreneur. Following prospect theory, an entrepreneur uses its aspiration level to code gains and losses with regard to their own performance. Therefore, entrepreneurs may act in a persistent manner for different reasons. Thus, persistence behavior can be regarded as very dynamic and dependent on an entrepreneur it perception of its environment. Section 2.2.3.1 will elaborate on different factors that influence an entrepreneur to behave in a persistent manner. Note that on these factors mirror symmetry will be applied to explain the emergence of an entrepreneurial exit decision. Therefore, although chronologically (time-wise) in reversed order, the factors that explain the refraining part from an entrepreneurial exit decision is treated prior to the factors that explain the emergence part of an entrepreneurial exit decision.

2.2.3.1 Factors that influence the decision to refrain from an entrepreneurial decision To explain the phenomenon of why an entrepreneur might refrain from an entrepreneurial exit decision, literature on entrepreneurial persistence will be used. A logical question would be why the literature on persistence decisions of entrepreneurs is of use in explaining why an entrepreneur might refrain from an entrepreneurial exit decision. An answer to this question might be that entrepreneurs regain their persistence when refraining from an earlier made exit decision. In principle, the starting point of an entrepreneurial exit event is that entrepreneurs lose their motivation to behave in a persistent manner while underperforming, which will lead an entrepreneur towards an entrepreneurial exit decision. Then, an entrepreneur might become motivated again to behave in a persistent manner. Therefore, literature on persistence behavior of entrepreneur might provide very valuable insights. The factors that influence persistence behavior of entrepreneurs are derived from both motivational goals of entrepreneurs and an entrepreneur its perception of its environment, and are explored next.

First, Kuratko et al. (1997) identified a four-factor structure of goal statements regarding (different types of) entrepreneurs that motivate them to behave in a persistent manner, including extrinsic motivation; autonomy; intrinsic rewards; and family security (see table 2 below).

Factor Extrinsic motivation Autonomy Intrinsic motivation Family security Goal

statements:

- Acquire personal wealth - Increase personal income - Increase income opportunities - Maintain personal freedom - Personal security - Self-employment - Being own boss

- Control own employment destiny

- Gain public recognition

- Meet the challenge - Enjoy excitement - Personal growth - Being able to do it

- Secure future for family members

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Table 2: Four-factor goal structure (Kuratko et al., 1997)

As shown in table 2, entrepreneurs may have very different motivations for behaving in a persistent manner. For example, when an entrepreneur is mainly motivated by autonomous goals, it will behave in a persistent manner to preserve these goals. In this research, the personal goal set of an entrepreneur that motivates it to stay an entrepreneur, is referred to as the level of

feasibility (LoF). The higher an entrepreneur perceives the level of feasibility concerning its personal goal sets, the more it is expected that an entrepreneur behaves in a persistent manner.

Second, another perspective of persistence decisions of entrepreneurs is provided by DeTienne et al. (2008). In their study, they found five factors that impact persistence decision of entrepreneurs. These five factors will be elaborated upon next.

Environmental munificence (EM) – Environmental munificence is explained as “the extent to which the environment can support sustained growth or the overall capacity of the environment” (p.533). In other words, environmental munificence involves the perceived (i.e. by an entrepreneur) growth potential of a current market. Thus, the higher the growth potential of a market as perceived by an entrepreneur, the higher the likeliness of an entrepreneur to persist.

Self-justification theory - Individuals tend to justify actions and decision. This is also referred to as ‘self-justification theory’. According to Staw (1981), in DeTienne et al. (2008), “individuals will bias their attitudes on a task in a positive direction so as to justify their previous behavior” (p.534). Two explanations of his behavior are internal self-justification (IS) and external self-justification (ES). Holland et al. (2002) explain that IS may involve an attitude change, trivialization of negative outcomes, or denial of negative outcomes; whereas ES may involve “that the negative consequences of a person’s actions are justified by referring to external sources that should solve the problems or diminish personal responsibility” (p. 1715). With regard to the model of DeTienne (2008) et al., entrepreneurs use self-justification theory through ‘personal investment’ (PI) and ‘personal options’ (PO).

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attractive options an entrepreneur perceives other than staying with its current venture, the less likely an entrepreneur is to persist.

Norms of consistency – Entrepreneurs tend to ignore that change is necessary, and are

looking for indications that consistency is the best policy. The reason why entrepreneurs may

look for these indications is because of, according to Caldini (1993) in DeTienne et al. (2008), “it is a preprogrammed and mindless method of responding, automatic consistency can supply a safe hiding place from troubling realizations” (p.535). There are two indicators for this type of behavior, including an organization its previous success (POS), and perceived collective efficacy (PCSE).

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shown by McGee et al. (2009), who state that “self-efficacy refers to an individual’s belief in their personal capability to accomplish a job or a specific set of tasks” (p.966).

By this in-depth elaboration on these significant publications (Kuratko et al., 1997; DeTienne et al., 2008) explaining entrepreneurial persistence, a clear insight is provided in why an entrepreneurs that is underperforming might behave in a persistent manner, and ultimately refrains from an entrepreneurial exit event. Moreover, this also concludes answering the second theoretical research question. However, one part of the puzzle seems to be missing, as the emergence of an entrepreneurial exit event has not been elaborated upon yet. No theory explaining this has been found in the literature, and therefore it is decided upon to apply mirror symmetry on the factors that influence entrepreneurial persistence. Mirror symmetry, and the development of a research model, will be elaborated upon in the next section.

2.3 Mirror symmetry and the research model

The idea of mirror symmetry finds it origins in physics and mathematics, in which two six dimensional manifolds, geometrically, are observed as differing, though are equivalent when employed in string theory as hidden dimensions. By using a mirror description a given situation can then be calculated, whereas otherwise this was not possible. A complete description and application of mirror symmetry is way outside the scope of this research, however the general idea is still very useful. Especially in the case of publications in which researchers have applied quantitative research methods, as those publications in general are generalizable to a larger extent then when non-quantitative research methods have been applied. Indeed, within the publications of Kuratko et al. (1997) and DeTienne et al. (2008) also quantitative research methods were used. In both publications relations between concepts were tested and significant statistical evidence was found for labeling these relations as positive or negative. By applying mirror symmetry, and thus by inverting these relationships, the ‘hidden dimensions’ can be revealed. In other words, by applying mirror symmetry it is plausible that a theoretical explanation can be provided of why an entrepreneur that is underperforming does not behave in a persistent manner (the ‘hidden dimension’), and thus can it be broadly explained how an entrepreneurial exit event emerges.

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theoretical explanations were discovered about the emergence of an entrepreneurial exit event (by applying mirror symmetry), the content of an entrepreneurial exit decision, and why an entrepreneur may refrain from an entrepreneurial exit decision. In the introduction chapter it was mentioned that subsequent to the theoretical exploration a research model would be developed. This research model is shown in figure 3a and will be compared with a real-life practical situation by conducting a case study. The main outcome of this comparison is to provide an answer on the main research objective and consequential contribute to building theory concerning the emergence of and refraining from an entrepreneurial exit decision from the individual perception of an underperforming entrepreneur.

The main outline and philosophy behind the research model is that A) the independent variables shown most left are the cause that lead an entrepreneur towards an entrepreneurial exit decision (these are based on mirror symmetry); B) the entrepreneurial exit decision exists out of clear defined reasons for exit and options/type for/of exit; C) because of a change in (one of) the independent variables an underperforming entrepreneur becomes persistent again to ‘not let go’ of its venture; and D) that the change(s) mentioned at C is/are the cause that an entrepreneur refrains from an entrepreneurial exit decision. A legend of the research model is provided in table 3b. The next chapter will elaborate on the research methods that will be applied for conducting this study.

Independe nt variable (1) Relatio n Dependent variable Entrepreneuri al exit event Change in independe nt variable Relatio n Dependent variable Refrai n from exit event Low LF + Emergence of exit decision - Clear defined reasons for exit - Options/type for/of exit

High LF + Refrain from

exit decision - _R ea so n s to re fr ai n fr o m an en tr ep re n eu ria l e x it d ec is io n Low EM + Emergence of exit decision

High EM + Refrain from exit decision

Low PI + Emergence of

exit decision

High PI + Refrain from exit decision

High PO + Emergence of

exit decision

Low PO + Refrain from

exit decision

Low POS + Emergence of

exit decision

High POS + Refrain from exit decision Low PSCE + Emergence of

exit decision

High PSCE + Refrain from exit decision Time span

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Legend that belongs to figure 3a

LF Level of feasibility

EM Environmental munificence

PI Personal investment

PO Personal options

POS Previous organizational success

PSCE Perceived self-efficacy

Figure 3b: Legend

3 METHODOLOGY

This section will provide a detailed explanation of the methodological choices made in the research that is presented in this thesis, and ultimately make it possible to grasp these methodological choices. To achieve this, this chapter is built upon 3 sections, including a description of the research setting, the research method that is being used and how data is gathered, and finally a section which explains how the data is analyzed and how the conclusions are drawn and verified.

3.1 Research setting

This research setting provides a description of the empirical setting of the research: The Soil Company (TSC). This description of the research setting is composed out of personal communication with the owner of TSC, including yearly compiled business plans (from 2001 till 2010) and cooperation of the owner to preliminary studies regarding its venture that was initiated and documented by the University of Groningen.

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farmers to undergo major changes in their way of thinking and behavior (Benner & Tushman, 2003; Zhou et al., 2005), especially with regard to the conservative agricultural sector. Even though it seemed that there were solid grounds for bringing this innovation to the market, the market did not accept the service in an amount that was large enough to make TSC financially viable. Nowadays, the owner has experienced three exit events, respectively in 2007, 2008, and 2010, of which it refrained as many times. However, TSC still is not profitable yet, although the owner has good hopes to turn things around despite the crises he had to manage so far and the exit events he was involved with. As this entrepreneur thus is underperforming (i.e. is performing below its own reference point of performance) and has experienced three exit events, it is regarded most appropriate to serve as the foundation of a case study.

3.2 Research method

The research method that is being used for this research is a case study. A case study is the best research method for this research because it meets the following three criteria. First, the form of the research question is a ‘why’ question, and aimed at understanding a process. Second, the research does not control behavioral events. Third, there is a focus on contemporary events. In table 3 an overview of these criteria is provided along with how these criteria are met within this research. Based on Yin (2009), a brief explanation of these criteria follows next.

Criteria How it is achieved

Research question (why/how)

The main research objective of this research is to explain from the individual perception of an entrepreneur why (i.e. understand the process of) an entrepreneurial exit decision emerges and why it is refrained from

No behavioral control

There does not exist behavioral control over the entrepreneur in question; this research studies a contemporary set of events, including parts of these events, over which the researcher has no control

Focus on contemporary events

There exists a direct observation on the entrepreneurial exit events, and the persons being involved in the events can be interviewed

Table 3: Criteria for conducting a case study (Yin, 2009)

Research question – A how and why question is more explanatory, and such questions deal with operational links, that might prove causal, and need to be traced over time (rather than frequencies or incidents). The main research question satisfies this criterion.

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‘experiments’. The main difference between the ‘historical method’ and the case method is that the former focuses mainly on the ‘dead’ past (i.e. a timeframe that is not closely connected to the current timeframe anymore), in which consequential there is no focus on contemporary events (the contemporary event in this study contains the emergence of an entrepreneurial exit event, and an entrepreneur refraining from it). The main difference between the experimental method and the case study method is that the former method requires control of behavioral events, such as in a laboratory where variables can be isolated. Obviously in a complex, rich and dynamic environment, such as the current research setting, variables obviously cannot be isolated.

3.2.1 Specific characteristics of the case study design

Now that it is explained why a case study is an appropriate research method for this study, some specific case study methods and design issues need attention to clarify methodological choices.

3.2.1.1 Nature of the case study

The current case study is of an explorative nature. Following De Graaf and Huberts (2008), an exploratory case study method is suitable when there is little knowledge regarding the phenomenon being studied. Indeed, a statement that is applicable to the central notion of this research. Furthermore, explorative research is suitable for developing theory. This complements the work of Eisenhardt and Graebner (2007), who state that the central notion of a case study is that it needs to be used as a basis for developing theory in an inductive manner. As theory regarding the emergence and refraining of an exit event from the perception of an entrepreneur is minimal, there exists a well-founded rationale for an explorative approach.

3.2.1.2 Specific case study design

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units of analysis, relative to the main unit of analysis, with regard to data analysis and conclusion drawing, and thus ‘forgets’ to return to the larger unit of analysis, a systematic approach towards data collection, and the structure of the findings section, discussion section, and the conclusion section was adopted. The appendices of this research provide evidence for this approach.

3.2.1.3 Quality criteria of a case research

Beverland and Lindgreen (2009) describe four tests that can be used to judge the quality of a research design: Construct validity; internal validity; external validity; and reliability. Internal validity however is not an appropriate criterion with regard to an explorative case research (Yin, 2009), although in this explorative case research a research model is developed that might prove a causal relation between the independent variables and the main concepts of this study. However, before such a relation is proven causal, it will need testing on a quantitative scale first. Therefore, for this research internal validity is not that appropriate as a criterion. The other three tests however are relevant, and in the following way.

First, construct validity involves the identification of correct operational measures for the concepts being studied. The main concepts being studied in this research are the emergence of an exit decision, the content of an exit decision, and refraining from an exit decision, including the independent variables that influence these concepts. First, the factors that are regarded to influence the decision to refrain from an exit decision, and its operationalization, are adopted from Kuratko et al. (1997) and DeTienne et al. (2008). Second, recalling how mirror symmetry was applied to entrepreneurial persistence for providing a theoretical explanation for the emergence of an exit decision, the same method, but now on the measures of entrepreneurial persistence, was adopted. Third, the content of an entrepreneurial exit decision was derived from clear statements of the owner of TSC made in the interviews that were being held, and in preliminary research that is documented by the University of Groningen.

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generalizability, but aimed at explaining a particular phenomenon and theory building regarding this phenomenon. After the case study is conducted, this case study then can be replicated by other researchers to determine the extent to which the theory holds across similar cases. When it does, the first steps towards a wider generalizability are made and the theory then perhaps can be tested on a larger quantitative scale.

Third, following up on the external validity test, the reliability test aims at demonstrating whether the operations of a study can be replicated. To make clear, another researcher should be able to perform the same case all over again, and come up with the same findings and conclusions. The general aim of this particular test is to minimize errors and biases. With regard to this research this was accomplished by documenting the procedures that were followed, such as the research methods that were applied. Therefore, it is believed that the reliability of this research has been increased and errors and biases were minimized.

3.2.1.4 Data gathering

Both primary and secondary data were gathered with regard to each exit event. This data triangulation adds value to this research because “multiple data collection methods provide stronger substantiation of constructs (p.538)” (Eisenhardt, 1989). Out of the secondary data a sketch of the history of TSC from 2001 till 2012 was composed. In a preliminary interview with the owner of TSC this sketch was verified, adapted, and expanded. This interview resulted in the identification of three entrepreneurial exit events. Then, the secondary data, in combination with the preliminary interview, was used to construct a comprehensive insight of each exit event. A second interview with the owner of TSC then was performed to gain a more in-depth insight concerning the exit events, especially with regard to the individual perception of the owner of TSC towards the exit events. A more detailed description of how the primary and secondary data was gathered follows next.

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were prepared by developing an interview guide in which the framework of Emans (2004) was leading, and are presented in appendix 2. The framework of Emans (2004) was extended by following Maxwell (2005), who emphasizes that developing good interview questions requires more than a “mechanical conversion of the research questions into an interview guide” (p.92). Mechanical interview questions often draw on a limited set of beliefs, which may restrict data gathering. To overcome this problem, the interview questions that are used for this research are carefully verified and discussed with the research supervisors, to see how the questions designed actually work in practice. Another measure that has been taken to verify the interview questions was by conducting a pilot interview with a fellow student. Also, the interview questions being asked were sometimes refined after an interview, when this was regarded necessary to gain more or better data. Finally, because the interviews were of a semi-structured nature, both the interviewee and the interviewer were allowed to step away from the regular path and elaborate on emerging thoughts as well.

Secondary data included business plans of the years 2001, 2002, 2003, 2004, 2005, 2006, 2007, 2008, 2009, 2010, and 2011. Also an acquisition plan of the year 2007, a feasibility study of the firm of 2011, and a specific future plan for the years 2003-2005 were used. All these documents were written by the current owner and founder of TSC. Finally, an earlier recorded audio interview with the entrepreneur owning TSC from December 2010 was used.

3.3 Data analysis and conclusion drawing 3.3.1 Introduction

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3.3.2 Decisions concerning data analysis and conclusion drawing

Miles and Huberman (1994) define qualitative analysis as “consisting of three concurrent flows, including data reduction, data display, and conclusion drawing/verification” (p.10). First, data reduction involves the process in which data is selected, simplified, focused upon, abstracted, and transformed. Data reduction has occurred throughout the larger part of this research, from developing research questions and a research model to the final completion of this thesis. Second, data display is “an organized, compressed assembly of information that permits conclusion drawing and action (p.11)”. Yin (2009) refers to this stage as “one of the least developed and most difficult aspects of doing case studies (p.127)”. As will be discussed later, several data display methods are used in the research that is presented in this thesis. Third, the concluding stream of analysis activity involves conclusion drawing and verification of it. In this part it becomes especially important ‘what things mean’. With regard to this research it was wise to consider the conclusions ‘lightly’ at first, and keep some skepticism before the final conclusions were drawn. Besides conclusion drawing, another aspect of this analysis flow was the verification of the conclusions. Verification is important to test the validity of the conclusions that are drawn. This was achieved by ‘second thoughts’ during the writing of conclusions, as well as by reviewing the conclusions with the research supervisors and fellow students.

Another publication that has significantly contributed towards the procedures regarding the analysis of qualitative data is of Langley (1999), who developed seven strategies for sense making of qualitative data. Each strategy has its anchor point that is helpful in structuring the data, however therefore each strategy also has points that receive less attention, and therefore the strategy used has a considerable influence on the theory that is being developed and thus may bias results. To overcome this issue, multiple data analysis strategies were used in combination with each other. An overview of the seven different strategies is given next, along with an explanation whether a particular strategy was useful with regard to this research.

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from it. As this is the main objective of this research, the narrative strategy is regarded as highly useful in analyzing qualitative data.

Opposed to the narrative strategy is the quantification strategy. This strategy involves in-depth process data which then is reduced to quantitative time series. Hence, these time series then are analyzed by using statistical methods. The main reason why this strategy cannot be used in the current research is that it needs a lot of similar events to make statistical analysis reliable, which was due to time constraints not possible.

A third strategy is the alternate templates strategy. This strategy involves “several alternative interpretations of the same events based on different but internally coherent set of priori theoretical premises” (p.698). The researcher then performs an assessment which interpretation is the most satisfactory. Following Croonen (2005), a flaw in this strategy is that it does not take into account the possibility of combining these alternative interpretations which is necessary for explaining phenomena. In the research model of this research, several interpretations already have been taken into account in an attempt to explain why an entrepreneur refrains from an entrepreneurial exit decision. Thus out of several templates, a single template is developed. This single template is thus shown in the research model.

Grounded theory involves a series of highly structured steps. Langley (1999) states that “it involves the systematic comparison of small units of data and the gradual construction of a system of categories that describe the phenomena being observed” (p.700). The rationale why this strategy cannot be used in the current research is because the case being studied does not contain ‘a large number of incidents’, which are regarded necessary for using this strategy.

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these processes are revealed in a clear analytic manner, which is bound to help developing theory on the emergence of and refraining from an entrepreneurial exit decision from the individual perception of an entrepreneur.

The sixth strategy is that of temporal bracketing. Temporal bracketing refers to decomposing processes into successive periods. These successive periods do not have a significant theoretical meaning, but is simply a way of structuring events and its description. The reason why this strategy does not add a lot of value with regard to this current research with respect to analyzing the data is that it does not presume any progressive developmental logic.

The last strategy that is described by Langley (1999) is the synthetic strategy. This strategy “takes the process as a whole as a unit of analysis and attempts to construct global measures from the detailed event data to describe it” (p.704). Then, a researcher compares different processes by using these measures. By doing so, regularities can be identified which in turn will be the basis of a predictive theory. This approach seems useful in the current study, as it is expected that several exit events have taken place. These processes around the exit events can then be compared to each other, which may have a chance of producing even more valuable insights with regard to the decision to refrain from an entrepreneurial exit decision.

Overall, the narrative strategy, alternate templates strategy, visual mapping strategy, and the synthetic strategy were regarded useful in analyzing the data as these strategies are applicable towards this research. As pointed out earlier in this section, these strategies have different anchor points in terms of accuracy, simplicity, and generalizability. Table 4 shows the difference between these different sense making strategies for qualitative data analysis, and the differences between them with respect to different anchor points.

Strategy Accuracy Simplicity Generality

Narrative High Low Low

Alternate Templates Modest High High

Visual Mapping Modest Modest Modest

Synthetic Modest High Modest

Table 4: Appropriate strategies with respect to different anchor points

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sequence. Note that each singular exit event within TSC was analyzed. Then with the fourth step the different exit events were compared to each other. The plan consisted out of the following steps and is summarized in figure 4.

1) Alternate Templates Strategy

First, the alternate templates strategy was applied by combining the publications of Kuratko et al. (1997) and DeTienne et al. (2008) on entrepreneurial persistence (this resulted in the research model that is shown in figure 3a) . Therefore, although it seems that one would apply a narrative strategy before an alternate templates strategy, in this research the order is reversed. Consequential, the alternate templates strategy will be and has been performed before the narrative strategy.

2) Narrative Strategy

Narrative research is any study that analyzes narrative materials (Lieblich et al., 1998; Gartner, 2007). According to Fletcher (2007) a main advantage of a narrative analysis approach is that it can lead to an understanding “of how entrepreneurial practices are coordinated (p.657)” in a relational sense. This relational sense involves how people come to be and know the world. Translated to this research, this has mainly to do with the perception of an entrepreneur how they perceive the world around them, and how the world influences them. The perception of an entrepreneur is in this research a very important perspective with regard to explaining the emergence of and ultimately refraining from an entrepreneurial exit event. To engage with narrative data in a reliable manner, a specific framework for doing so concerning entrepreneurship research by Larty and Hamilton (2011) was applied. The framework consisted out of three stages, including a structuralist approach, the research context, and an in-depth analysis of emerging themes. A brief explanation follows next.

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in the research model were of a decisive influence for EL concerning the emergence of and refraining from an entrepreneurial exit decision, EL was asked to value his level of feasibility (consisting out of motivational goal sets) on a scale of 1 to 7 (obviously, no statistical tests have been performed with these values). In addition, EL was asked to confirm whether the factors ‘personal opportunities’, ‘perceived self-efficacy’, ‘previous organizational success’, ‘environmental munificence’, and ‘personal investment’ were of a decisive influence in the emergence of and refraining from an entrepreneurial exit decision. After respectively the values and presence were determined, it was examined how exactly it influenced both the emergence of and refrain from an entrepreneurial exit decision, and whether it was of a decisive influence.

The second stage complements the structuralist approach by countering on its main disadvantage, which involves that it disregards the context in which the narrative took place (Shankar et al., 2001). The importance of the research context is also emphasized upon by Blumberg et al. (2008), by stating that considering the context provides a better way of understanding processes. Thus, the narrative data needed to be contextualized for this research, as proposed by Larty and Hamilton (2011). Regarding the current research, culture aspects, type of market, type of product(s), stakeholders, and the Dutch economy were taken into account.

The third and final stage involved an in-depth analysis of themes that emerged from the first two stages. This in-depth analysis linked then back to the original key concepts of the research, after which conclusions were drawn.

3) Visual Mapping Strategy

The visual mapping strategy was mainly used to construct a time-line which was regarded necessary to provide an understanding of the flow of different exit events, especially, following Miles and Huberman (1994), to guard “against false chronologies (p.111)”. It also provided an insight of how certain proceedings led to other certain proceedings. There exist different ways of displaying a time ordered analysis of which the time-ordered matrix (Miles and Huberman, 1994) is used in this research, because it was regarded especially appropriate to identify when particular processes, and changes in processes (the emergence of and refraining from an entrepreneurial exit event), occurred.

4) Synthetic Strategy (comparative analysis)

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there is only one case (the entrepreneur). Thus, by applying the synthetic strategy, the different units of analysis were compared to each other. The main aim of this analysis was to deepen the understanding of why an entrepreneur refrains from an entrepreneurial exit decision, and provide a more powerful explanation suitable to build ultimately a theory with. This is in line with statements of Miles and Huberman (1994). By analyzing each singular unit of analysis in depth, cross-cutting variables between each singular unit of analysis emerged. Together, they were placed in a matrix and compared to each other in more detail, in which there was a strong emphasis on finding similarities that could provide a more powerful explanation of the emergence of and ultimately refraining from an entrepreneurial exit decision from the perception of an entrepreneur.

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4 FINDINGS

In this chapter the main findings out of the primary and the secondary data are presented, both with regard to the context in which TSC operated and the individual perception of the CEO and major shareholder of TSC, EL, towards the different parts of an entrepreneurial exit event (i.e. emergence of and refraining from) that took place in the context. The chapter contains five sections, in which a chronological approach in time has been followed. Section 4.1 starts with the initial business plan of TSC that was written in the year 2001. The presence of the factors as shown in the research model is here identified for the first time. This business plan then will serve as a point of reference with regard to the three different entrepreneurial exit events over the years 2007, 2008, and 2010. This point of reference contains the individual perception of EL concerning the emergence of and refraining from an entrepreneurial exit decision. These individual perceptions of EL form the foundation in answering the central research question, that is how the emergence of and refraining from an entrepreneurial exit event can be explained from the individual perspective of an entrepreneur. The entrepreneurial exit events are described respectively in the sections 4.2, 4.3, and 4.4. Each exit event starts with describing the emergence of the exit decision, followed by the content of the exit decision, and concludes with why EL ultimately refrained from it. In addition, every time a visual display is provided that includes a summary of every emergence part and every refraining part by means of a table. The structure of the tables is derived from the research model (see figure 3a), and includes the relation between decisive independent variables and the dependent variable. When a factor was regarded as not decisive with regard to the dependent variable, the relation was marked as not applicable (N/A). To conclude, after each exit event another visual display by means of a figure followed, that summarizes the development of the respective entrepreneurial exit event. In addition, in section 4.5 a visual display is provided in which all the three entrepreneurial exit events are summarized and in which the synthetic analysis is performed. In the discussion and conclusion section this analysis is interpreted and speculated on.

4.1 Nascent TSC

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EL operated, is given in section 4.1.1. The personal perception of EL with regard to this context is given in section 4.1.2.

4.1.1 Context of 2001

The Soil Company (TSC) was to be found in 2001 by several shareholders. Out of the representative shareholders a board of directors was to be formed, in which EL would become CEO. As emphasized within the methodology section, the context of a research is an integral part of performing narrative research. Therefore, a brief and concise description of the 2001 business plan is given next.

Product idea – The product, called ‘Pandora’, of TSC is a high tech detection system for in situ soil mapping and analysis. It exists out of a detector (including GPS, data storage, and data reader), software for managing the data, mapping and analysis, and access to the website of TSC. This product is developed for the agricultural market and provides practical agronomic advice at low costs. It is believed that by analyzing and mapping soil, the agricultural market will gain knowledge that leads to opportunities for improving agricultural production and profitability. EL explains the convenience and value of Pandora as follows: “The data collected by Pandora reflects the variety of the composition of the land and the development of the soil in time. The detector can be easily attached to a tractor and driven over the land by the farmer himself. The measured counts are real time computed and directly available in the data storage tool. When the measurement is done, the data can be transferred to a personal computer.” The Pandora system was offered to customers in two ways. The first way included buying the whole Pandora system for a price of €40.840. The second way included a subscription on Pandora that cost €1.634, and in addition an hourly rate of €136. It was expected that the first option would generate the main turnover, whereas the second option was merely intended to build a loyal customer base. The latter however was expected to be sold prior to the former, and would be used as a promotion tool to reach the target market well.

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Marketing – The customer profile of TSC were large precision farmers in industrialized countries (Europe, North-America, Australia, and South-Africa). The main benefit of Pandora is that is shows variability in soil properties, as opposed to more traditional soil sampling. The main advantage for large precision farmers who use Pandora is that a better understanding of the soil properties provides them with an opportunity to improve the management system of plant growth, from sowing till harvesting. As TSC offers a high tech product, it focused especially on large precision farmers labeled as early adopters (those who embrace a particular new technology before most other agrarians do), and possessing large amounts of farming-land. The target market for TSC was the agricultural-, viniculture-, and horticultural market (including growth of potatoes, flowers, cereals, etc.), in which TSC was aiming for a market share of 5%. An overview of the target market is shown in figure 6. Competition was labeled limited by EL, whereas the availability of traditional soil mapping was not regarded as a serious substitute for the use of Pandora. The distribution of Pandora would occur through a, although not yet identified, global distribution network that supplies local dealers. Access to such a distribution network however was stated to be of great importance concerning a fast implementation of Pandora and the growth of TSC.

Knowledge aspects → M an ag em en t M ar k et L o g is ti cs M ar k et in g IC T P h y si cs A g ro n o m y S ta ti st ic s/ M at h Management team member ↓ EL X X X Physicist X X X Biologist X X X

To exit or not to exit?

To exit or not to exit?

By

Jorrit H. Pot

To exit or not to exit?

By

Jorrit H. Pot

University of Groningen

Faculty Economics and Business

Master Business Administration

Small Business & Entrepreneurship

ABSTRACT

PREFACE

TABLE OF CONTENTS

1

INTRODUCTION

2

THEORETICAL BACKGROUND

3

METHODOLOGY

4

FINDINGS