I am currently researching for my DBA at Sheffield Hallam University. As an entrepreneur running several businesses, I am interested in finding out about the mindset of entrepreneurs and its effect on business success or failure.
During my research I have come across an interesting dilemma, that of over-optimism and business failure. Within the small business growth agenda, this may be an interesting avenue to explore to ascertain if over confidence and optimism of entrepreneurs is creating a barrier to business success.
For the purpose of this brief article there is no scope to define success which seems to be an individualistic, changing and arbitrary term depending on what you are reading or who you are speaking to. Much of the literature which looks at optimism in entrepreneurs, in particular journal articles by Cassar (2009) and Hmieleski and Baron (2009), appears to advocate broadly the same conclusions; that entrepreneurs with very high levels of optimism often hold unrealistic expectations of their new and existing ventures.
Both studies stated that there was evidence to suggest that the over optimistic and over confident entrepreneur was prone to discount negative information when assessing business ideas and would even go ahead with an idea or concept that others had proven to fail. According to Cassar (2009), individuals enter businesses with an expectation of operational success.
However, these individuals may be open to potential overly optimistic influences that bias their expectations. His study of nascent entrepreneurs’ over optimism examines the influence of plans and projections used by the entrepreneur. He argues that even lack of information for the forthcoming business does not dampen the over optimistic tendencies of the nascent entrepreneur, moreover it is exacerbated by their adoption of an “inside view” to generate forecasts. This inside view has a tendency to cause individuals to believe that they can succeed even where others have failed.
The study was carried out by telephone interview of 386 respondents, chosen through screening, to assess that they were nascent entrepreneurs entering into a venture of their own for themselves and not for an employer or third party, in order to reflect the respondent’s characteristics and expectations. The criteria being examined was the likelihood of the start-up becoming an operating business, future sales and the number of future employees at the end of the first full year. The degree of over optimism was determined as the difference between expectation and reality of the business state at given times over a five year period of questioning.
His findings over the five year period of the study found that 33.2% of nascent entrepreneurs overestimated the likelihood of new venture success. Hmieleski and Baron (2009) also state that entrepreneurs have a high disposition to optimism and expect positive outcomes even when such outcomes are not rationally justified. They suggest that entrepreneurs overestimate and over generalise from a few characteristics or observations far more than, for example, a manager would. They suggest that high levels of optimism can have a negative effect on strategic decision making and the performance of new entrepreneurial ventures.
This high optimism encourages the individual to approach challenges with confidence, enthusiasm and persistence. However, these high levels of optimism have also been linked with the individual holding unrealistic expectations sometimes discounting negative information. In addition there is the possibility that positive expectations can lead some (serial) entrepreneurs to goal conflict, as they see opportunity all around and may follow more opportunities than it is possible to properly pursue, therefore becoming over extended as they seek to explore all avenues. This could interfere with the entrepreneur’s ability to build sustainable growth in one specific area.
Entrepreneurs who are extremely optimistic set unrealistically high goals, focusing on positive information supporting their belief in venture success, Hmieleski and Baron (2009).
So what can academics and entrepreneurs learn from this research?
Confidence, which is often seen as a pre-requisite for the entrepreneur, could be damaging the growth of the business if this is seen as over optimistic. The dilemma here is that in order to grow their businesses entrepreneurs have to be confident in their future business success, especially if they are seeking funding to implement that success. Banks and financial institutions want to see positive projections, staffing increases and predicted growth. Entrepreneurs provide this through their business plans but if we are to believe the studies outlined then one third of entrepreneurs may be over-estimating the success of their ventures through unrealistic optimism.
The reality seems to be, if we are to engage with the studies of Cassar and Hmieleski and Baron, that entrepreneurs have high levels of confidence and optimism but that this same level of optimism serves to damage the very business it seeks to build.
How can we bridge the gap between research and practice for entrepreneurs?
There could be a message here from academia for business owners and entrepreneurs. The two worlds of academia and entrepreneurship rarely collide and when they do it is for research, understanding and learning from the academic side rather than for the entrepreneur to learn from the research.
However there is much that can be learned from these two studies, amongst others. As an entrepreneur reading through this literature I found that much of what was being said resonated with me and perhaps would resonate with other entrepreneurs who have reached a plateau in their existing businesses or are about to embark on a business venture. I am not suggesting that the academic world seeks to dampen the entrepreneurial spirit but if there was some way to inform entrepreneurs that their (in some cases) overly optimistic nature could be damaging their future growth then this would be a start. This would call for the academic world to engage with entrepreneurs at a practical level ensuring understanding.
A message to Entrepreneurs
Given the information in this brief article, it is clear that we can learn from the studies of the academic world. If business growth is what you require (and I am fully aware that this is not the route that we all want to take) then perhaps there should be some forum to find out how research and studies of entrepreneurs can benefit us on a practical level. The lessons we could learn from these two particular studies may be that we need awareness of our levels of optimism. As a proud optimistic entrepreneur I want to protect myself and my business ventures against my own over-optimism. Maybe a robust checklist or an external eye (from another trusted entrepreneur or mentor) on our projections and plans coupled with our awareness of over-optimism may save one or two of us from falling into the over-optimistic trap.
Terri Bourne Superkids and Researcher Sheffield Hallam University – See more at: http://www.isbe.org.uk/Does-Optimism-and-Expectation-reflect-negatively-on-small-business-growth#sthash.JmtBDMYd.dpuf
Yvonne Witter MA FCMI SFEDI
Founder and Director
ENTERPRISE4WOMEN