From unemployed to business owner: Improving the returns from firm creation through experimentation

Abstract

Recent research in entrepreneurship has started to emphasize the view of entrepreneurship as experimentation, broadly understood as taking deliberate actions to reduce uncertainties concerning the viability of an idea. Building on this work, this paper develops a more multifaceted approach to the study of experimentation by discussing how the process of experimentation shapes venture outcomes. We observe entrepreneurial processes in an institutional context that offers protection against early failure and makes entrepreneurs more inclined to experiment after they found a venture. We employ unique, nationally representative data that allows me to observe both the process and the outcomes of experimentation and to link them theoretically and empirically. We document that entrepreneurs who transition into self-employment from unemployment engage in a greater number of experimentation steps. We also observe that, while the previously unemployed have lower financial performance initially, they bridge the venture performance gap overtime. The study contributes to the literature by highlighting the importance of the experimentation process as a linking thread between entrepreneurial entry and subsequent venture performance and by drawing attention to a large but often neglected group of entrepreneurs—those that transition into entrepreneurship from unemployment.