Why an entrepreneur’s psychology affects young businesses more than established ones

In many ways, it’s never been easier to become an entrepreneur. Technology and easy access to information have lowered the barriers to entry. The problem is, not all businesses survive - in fact, half are gone within five years. And many of the ones that do survive merely hobble along...

Given this, it makes a lot of sense to search for predictors of success.

There are many factors that predict business success, some organizational, some ecological. But of utmost significance to business survival are the individual differences in entrepreneurs’ psychology.

As early as the 1930s, economists such as Irving Fisher and John Maynard Keynes stressed the impact of psychological factors on economic behavior. Studies suggest that entrepreneurs can be susceptible to biases and errors, such as over-optimism, hyper-core self-evaluation (extremely positive self-assessment), or illusion of control. These behaviors and biases can make or break new ventures.

Taking a uniquely psychological approach to understanding entrepreneurial performance, Gallup has created an assessment that identifies 10 talents exhibited by the most successful entrepreneurs. Talents are a composite of our basic personality traits and intellectual abilities; they facilitate accelerated learning and performance in a particular domain - and determine how successful an entrepreneur is likely to be building a business.

Looking at a nationally representative sample of 2,657 business owners in the U.S., Gallup found that talent is an important determinant of business success at all stages of business - from start-up (age zero years) to established (age four years or more). But the relationship between talent and business performance is especially strong in start-up environments.

Gallup research indicates that the younger the business, the stronger the role of talent in predicting performance.

The relationship between Gallup’s talent measure and business performance (a composite of profitability, sales, intent to grow, and intent to hire) is .459. For the one to three year old businesses, the validity of talent predicting performance drops to .237. And it further drops to .216 for businesses older than four years (all coefficients are significant at .01 level). However, even for the established businesses, the validity is high enough to provide for substantial improvement in business outcomes if entrepreneurial talent is identified and nurtured.

New businesses are rife with ambiguity and more day-to-day challenges.

It makes sense that the talent of the entrepreneur has a direct, as well as the strongest, relationship with business success when the business is new and small. New businesses are rife with ambiguity and day-to-day challenges. A lack of formal rules, protocols, and hierarchies makes the environment volatile and unpredictable. The entrepreneur is involved in every aspect of running the business and decision-making tends to be in the hands of the entrepreneur and her behaviors and actions directly influence a wide range of business outcomes. Fear, self-doubt, confidence, over-optimism, entrepreneurial myopia (where the entrepreneur falls in love with their creation), risk propensity, and overestimation of one’s ability all can exert a profound impact on performance.

However, as the company grows older, and bigger, the relationship between entrepreneurial talent and business success, though still substantial, becomes less direct, and there’s a shift in the decision-making process. Growing companies acquire protracted organizational hierarchies, specialized work forces, and formal and well-established rules and protocols, thus creating a distance between the business owner - who’s now in the more strategic role of CEO - and the front-line employees.

Direct communication is replaced with a chain-of-command structure. As a result, the direct link between talent and business performance, as seen in the early stages, is replaced by a more indirect, though still relevant, relationship between the individual owner’s personality and company performance.

The fact that an entrepreneur’s talent can predict the success or failure of a business, especially a new firm, makes it imperative for entrepreneurs to assess and understand their inherent talent. The biggest challenge an entrepreneur faces is her own self-limiting or self-inflated view of her capabilities. Our advice to all current entrepreneurs, as well as those planning to start a business for the first time, is to identify your strengths and watch out for inherent biases and blind spots in your personality that can affect your venture’s performance and ultimate success.

This is a guest blog and may not represent the views of Virgin.com. Please see virgin.com/terms for more details. Thumbnail from gettyimages.

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