How life’s big moments can challenge startups

Life-changing events like the birth of a child, the purchase of a new home, or a lottery win could threaten the survival of a new business venture, research from Edith Cowan University (ECU) has found. The work is published in the International Entrepreneurship and Management Journal.

A recent study led by ECU’s Professor of Entrepreneurship and Innovation Pi-Shen Seet with Associate Professor Wee-Liang Tan from the Singapore Management University found that positive family events had a comparatively greater influence, albeit negatively, on the survival of a new venture, compared with negative events.

“A positive family event, like the birth of a child, often has an emotional spin-on effect for an entrepreneur and could lead to greater confidence. This ego boost could result in an entrepreneur being overconfident and making poor business decisions.

“On the other hand, entrepreneurs that are impacted by divorce or financial difficulty, or even a death in the family, tend to put more consideration into business ventures and may make more considered and better business decisions,” said Professor Seet.

While good fortune often translates into entrepreneurs becoming more passionate, alert to new opportunities and more creative, this was in no way an indicator of future business success.

“Just because overconfident entrepreneurs are better at exploiting opportunities does not mean they will succeed. The tendency to exaggerate personal qualities and capabilities and underestimate the competition and difficulty of tasks often leads entrepreneurs to make fatal errors in judgment and decision-making.

“In short, there is a negative association shown in research between entrepreneur overconfidence and new venture survival,” said Professor Seet.

When family events come about during the venture creation process, they potentially act on entrepreneurs’ overconfidence—spontaneously and automatically fine-tuning how opportunities versus risks are evaluated and decisions are made for the venture.

“Positive family events would induce a more global thinking style focusing on abstract, high-level features of the problem and picking the first acceptable alternative solution that comes to mind. This may prove useful for entrepreneurs to make necessary decisions quickly and efficiently under tight time and resource pressures.

“However, if the positive family events lead to overconfidence, which our research has shown, entrepreneurs may believe that their talents and skills alone were enough to compensate for any lack of information and overcome real difficulties in the venture creation process and this will reinforce such errors in judgment and inferior decision-making. The net result is an increased vulnerability for making mistakes that can cause serious harm to the new venture,” Professor Seet said.

The research also noted that a changing family dynamic could further impact a new venture.

“Entrepreneurs are not alone in the venture creation process—the entire family is drawn along on the journey—and they are all involved in the feelings, emotions, and stresses that go along with the ups and downs of an entrepreneurial business, and vice versa.

“Changes within the family, events such as birth, marriage and death interrupt the family system and encroach on the entrepreneur. They change the structure and alter roles played by family members; they modify their interactions.”