Doctoral Dissertation

1. ENTREPRENEURIAL SUCCESS AS DETERMINED BY AN EVALUATION OF
PREMARKET ENTRY RISKS
by
J. Phillip Harris
A Dissertation Presented in Partial Fulfillment
of the Requirements for the Degree
Doctor of Business Administration
UNIVERSITY OF PHOENIX
April 2011

2. © 2011 by J. PHILLIP HARRIS
ALL RIGHTS RESERVED

3. ENTREPRENEURIAL SUCCESS AS DETERMINED BY AN EVALUATION OF
PREMARKET ENTRY RISKS
by
J. Phillip Harris
April 2011
Approved:
William Stokes, D.B.A., Mentor
Donald Bronsard, Ph.D., Committee Member
Timothy Clifton, Ph.D., Committee Member
Accepted and Signed:
William Stokes, Date
Accepted and Signed:
Donald Bronsard Date
Accepted and Signed:
Timothy Clifton Date
__________________
Jeremy Moreland, Ph.D. Date
Dean, School of Advanced Studies
University of Phoenix

4. ABSTRACT
The purpose of this quantitative study sought to use discriminant analysis to learn if
awareness of antecedent risks can improve success rates of entrepreneurs by early
development of risk management strategies. The basis for this idea comes from the belief
that public firms that go through underwriting have an improved chance of success.
Because underwriting forces those companies to plan for early stage risk, public firms
have a better chance to succeed. Discriminant analysis separates successful from
unsuccessful firms by using ratio analysis. The firms in the study’s sample showed when
each firm started to plan certain types of risks as noted in Securities and Exchange
Commission (SEC) Form S-1. The study’s results revealed surprising information. The
biggest surprise came from companies’ resistance to take part in the study because of
sensitivity about disclosing information about risks. Entrepreneurial firms do consider
planning for risk important, but plan for risk as needed when necessary. Other issues take
on greater importance such as the window for exploiting new opportunities. The results
benefit prospective entrepreneurs by offering some general guidelines for dealing with
specific types of early stage risks. Little evidence exists that underwriting improved the
success rates of the firms subjected to the process. This study revealed the surprising
implication that firms that go public are not necessarily any better-off than firms that stay
private. Holding off going public may contribute to creativity and growth conditions.
Entrepreneurs may find these results important in planning for financing and
development of their companies. Further study about these conditions may help confirm
the results. Another study may also develop more specific guidelines for dealing with
early stage risks.

5. v
DEDICATION
I would like to dedicate this work to my wife, Rebecca Hendrickson, and family
to express my sincere appreciation for allowing me to take part in completing this
research. I could not have carried out fulfilling this journey without them. I am grateful
for this opportunity and for the support I received in the process. I also want to thank my
Labrador retrievers, Nike and Abby, who walked me through the process.

6. vi
ACKNOWLEDGMENTS
I want to express my gratitude to my mentor, Dr. William Stokes, for guiding me
through the research process. I found Dr. Stokes always available when I needed
guidance. I want also to express my gratitude to the other members of my committee. I
want thank Dr. Donald Bronsard for his encouragement and guidance. I want to thank Dr.
Timothy Clifton for his support and advice. I could not have succeeded this project
without both my committee members. I also want to thank Dr. Michael Fellner at South
Dakota State University, who provided valuable guidance and advice with my survey
results and statistical analysis. I am grateful to all these people for their help.

7. vii
TABLE OF CONTENTS
LIST OF TABLES .................................................................................................... xi
LIST OF FIGURES ................................................................................................. xii
CHAPTER 1: INTRODUCTION .............................................................................. 1
Background of the Problem ....................................................................................... 1
Statement of the Problem ........................................................................................... 5
Purpose of the Study .................................................................................................. 6
Significance of the Problem ....................................................................................... 8
Significance of the Study .................................................................................... 8
Significance of the Study to Leadership ............................................................. 8
Nature of the Study .................................................................................................... 9
Overview of the Research Method ..................................................................... 9
Overview of the Design Appropriateness ........................................................... 9
Research Questions .................................................................................................. 10
Theoretical Framework ............................................................................................ 12
Broad Theoretical Area..................................................................................... 12
Theoretical Gap Filled by the Study ................................................................. 13
Definition of Terms.................................................................................................. 14
Entrepreneurial Terminology............................................................................ 14
Risk Terminology ............................................................................................. 15
Assumptions............................................................................................................. 15
Scope, Limitations, and Delimitations ..................................................................... 16
Plan of Study ............................................................................................................ 17

8. viii
Chapter 2, Literature Review ............................................................................ 17
Chapter 3, Research Methodology ................................................................... 21
Presentation and Analysis of Generated Data .................................................. 22
Summary .................................................................................................................. 23
CHAPTER 2: REVIEW OF THE LITERATURE .................................................. 25
Title Searches, Articles, Research Documents, and Journals .................................. 25
Literature Review..................................................................................................... 26
Historic Overview ............................................................................................. 26
Review of Current Results ................................................................................ 36
Defining and Extracting Risk from Uncertainty ............................................... 42
Dependent Variable: Determinants of Success................................................. 49
Independent Risk Variables: Determined from Form S-1 Filings .................... 51
Entrepreneurial Entry and Success in Green Energy Industry ......................... 52
Conclusions .............................................................................................................. 57
Summary .................................................................................................................. 58
CHAPTER 3: METHOD ......................................................................................... 59
Research Method and Design Appropriateness ....................................................... 60
Research Questions and Hypotheses ....................................................................... 67
Population, Sampling, and Data Collection Procedures .......................................... 68
Population ......................................................................................................... 68
Sampling Frame ................................................................................................ 68
Validity and Reliability ............................................................................................ 71
Internal Validity ................................................................................................ 71

9. ix
External Validity............................................................................................... 73
Reliability ......................................................................................................... 74
Data Analysis ........................................................................................................... 75
Summary .................................................................................................................. 78
CHAPTER 4: COLLECTION AND ANALYSIS OF DATA ................................ 79
Pilot Study................................................................................................................ 80
Limitations ............................................................................................................... 81
Factor Analysis ........................................................................................................ 83
Discriminant Analysis .............................................................................................. 86
Kruskal Wallis H Test .............................................................................................. 91
Summary of Results of Hypotheses Testing and Results ........................................ 91
Research Question and Hypotheses Tests ........................................................ 91
Limitations ........................................................................................................ 93
Summary .................................................................................................................. 93
CHAPTER 5: SUMMARY AND CONCLUSIONS ............................................... 95
Overview of the Results ........................................................................................... 95
Pilot Study ........................................................................................................ 95
Limitations ........................................................................................................ 96
Factor Analysis ................................................................................................. 97
Discriminant Analysis ...................................................................................... 98
Kruskal-Wallis H Test ...................................................................................... 99
Hypothesis Testing and Results ........................................................................ 99
Implications of the Results..................................................................................... 103

10. x
Recommendations for Future Study ...................................................................... 111
Summary ................................................................................................................ 112
REFERENCES ...................................................................................................... 114
APPENDIX A: SURVEY INSTRUMENT ........................................................... 139
APPENDIX B: INFORMED CONSENT FORM ................................................. 141
APPENDIX C: SURVEY INSTRUMENT USED ................................................ 142
APPENDIX D: TABLES ....................................................................................... 149

11. xi
LIST OF TABLES
Table 1 Structure Matrix…………………………………………………………….…88
Table 2 Standardized Canonical Discriminant Function Coefficients…………….……..88
Table 3 Tests of Equality of Group Means…………………………………………………...89
Table 4 Classification Results………………………………………………………….………90
Table D1 Calculation of Ratios……………………………………………………….149
Table D2 Risk Factors and Hypotheses Tests Using Z Test…………………………..150
Table D3 Eigenvalues………………………………………………………………....151
Table D4 Correlation Matrix………………………………………………………….152
Table D5 Altman z-scores……………………………………………………………..153
Table D6 Group Descriptive Statistics………………………………………….……..154
Table D7 Kruskal-Wallis H Test………………………………………………….…...155
Table D8 Hypothesis Testing………………………………………………………….156
Table D9 Risk Priorities Based on Mean Rank……………………….………………157

12. xii
LIST OF FIGURES
Figure 1. Scree Plot of Eigenvalues……………………………………………………………85
Figure 2. Scatterplot Covariance Matrices for Each Group…………………………….87

13. 1
CHAPTER 1: INTRODUCTION
Entrepreneurial success rates falter because entrepreneurs overlook risks before market
entry (Proimos & Murray, 2006). Entrepreneurs might improve the chance of success by
identifying antecedent risks and devising strategies to mitigate such risks. Addressing the
essential causes of risk at an early stage improves a firm’s wherewithal to gain the financing
needed to continue. By balancing both the opportunities and the risks, the entrepreneur can direct
attention to the most fitting procedures critical to launching a new venture. In this research study,
the goal sought to examine the risks evaluated in underwriting by firms preparing to “go public”
and make a comparison with the premarket entry risks faced by entrepreneurial firms. The results
of this examination helps entrepreneurial firms develop risk management plans before entering
the market.
Background of the Problem
Social Concern
Classical characterizations of entrepreneurial business owners include responsibility for
accretion of capital, innovation, and a close alliance of a business owner’s skills with the firm’s
work. Although entrepreneurs encompass only seven to eight percent of the population in the
United States (U.S.), they account for roughly 30% of the top decile of wealth. Such individuals
introduce new products, contribute skills and ideas, and develop new business strategies through
risk-taking. Entrepreneurs pioneer innovation through business knowledge and directly manage
the firms created. Because entrepreneurs usually invest in a firm from personal wealth, the
founders take a more active role in management (De Nardi, Doctor, & Krane, 2007).
With the fiscal benefits of entrepreneurship in focus, the Global Entrepreneurship
Monitor for North America reported net business creation provides an excellent measure of

14. 2
entrepreneurism for firms with fewer than 10 employees (Bosma, Acs, Autio, Coduras, & Levie,
2008). For firms in the United States during 2002-2003, Nevada topped the list of states
producing the highest rate of net business creation with 5.21%, followed by Florida with 4.67%,
and Utah with 4.46%. Of total businesses, small businesses with 10 or fewer employees ranked
highest in Montana with 79.2%, followed by Quebec with 78.9%, and Newfoundland with
78.6% for the years 2003-2004. The list showed the next highest ranking U.S. states as Wyoming
with 78.4% and Florida with 77.6% (Godin, Clemens, & Veldhuis, 2008). In venture capital
invested for each person for 2005, Massachusetts ranked highest with $379.39 followed by
California with $295.50, Colorado with $134.99, Washington with $123.14, and Utah with
$102.06.
Despite the economic boost entrepreneurism provides, Sternberg and Wennekers (2005)
showed that entrepreneurism varies among countries in different stages of development.
Entrepreneurism unleashes a positive effect on the growth of developed countries, whereas
poorer countries benefit less from entrepreneurial pursuits because mostly nascent entrepreneurs
are present. In a more developed country, other entrepreneurs innovating new and existing
products are also part of the mix. Well-developed countries should promote business start-ups
because they stimulate fiscal growth (Sternberg & Wennekers, 2005). Wong, Ho, and Autio
(2005) noted that in particular, high-growth businesses and opportunity entrepreneurship
promote monetary growth. Gelderen, Thurik, and Bosma (2006) recognized that promotion of
entrepreneurial development contributes to innovation, economic growth, job creation, and
competition.

15. 3
Theoretical Interest
Although entrepreneurism promotes fiscal benefits, a disparity exists between
entrepreneurs and the venture capitalists that serve to fund them. Proimos and Murray (2006)
argued the disparity occurs because venture capitalists have a different idea of when a venture
proves “investor ready” (p. 23). Venture capitalists evaluate the management team, the market,
and technology to assess investor readiness. Venture capitalists rely on “intuition” in financing
ventures early in development, creating frustration for the entrepreneur. In assessing investor
readiness, venture capitalists have less tolerance for risk-taking than do entrepreneurs. Risk and
return play an integral role in the venture capitalists’ evaluations. Entrepreneurs can grow
disillusioned by this practice (Proimos & Murray, 2006).
Similar to venture capitalists, angel investors also provide risk capital to entrepreneurs,
but spoon-feed it in small amounts as a project progresses. Agency theory reflects diverging
interests between the investor and the investee. Angel investors manage such risk by adjusting
expected rates of return to compensate for added risks, by setting milestones to provide
continuing funding during the project. Angel investors specify contractual rights and duties, and
watch progress while working with investees on new projects (Kelly & Hay, 2003).
Because of the divergence in seeing risk between entrepreneurs and the investors serving
to fund new projects, entrepreneurs experience difficulty accurately assessing the risk and return
of new ventures. By viewing entrepreneurial ventures through a different lens, both investors and
investees can garner new insight in evaluating the likelihood of survival, assessing risk
management, and in forecasting realistic projections of expected returns. Through making
entrepreneurs aware of risk at an earlier stage, individuals can develop risk management
strategies to achieve more success in gaining financing and benefiting the United States

16. 4
economy. Stifling the innovation provided by entrepreneurism only serves to hold back fiscal
progress.
With these divergent views in mind, America continues to serve as one of the most
vibrant economies for entrepreneurs ("Seed capitalism," 2008). Easterly (2001) inferred that
those countries that have a larger middle class find such a group serves as the backbone of the
economy. Economies with a larger middle class grow more rapidly than economies without a
larger middle class, provided the constituent population is not too ethnically diverse. Max Weber
(2001) remarked that entrepreneurs rise from the middle class because of a tolerance for delayed
rewards. Entrepreneurs provide employment and growth in productivity for the entire society
(Banerjee & Duflo, 2008). With the outcome of entrepreneurism contributing to the financial
advancement of the United States, the goal of this study is to examine how addressing risk before
entering the market leads to improved entrepreneurial success.
Although entrepreneurs contribute heavily to well-developed economies, Parhankangas
and Hellstrom (2007) viewed several approaches entrepreneurs use to deal with risk in the
literature. Parhankangas and Hellstrom noted plans for managing such risk associated with
original entry to the market remains a mystery. Proimos and Murray (2006) found that a disparity
exists between entrepreneurs and those who serve to fund them because of a different view of
when a venture proves “investor ready.” Diverse views may account for entrepreneurs
unintentionally ignoring risk because overconfidence exceeds the distaste for risk (Busenitz,
1999; Gelderen, Thurik, & Bosma, 2006; Wu & Knott, 2006). Unlike those companies seeking
public financing, many entrepreneurs lack professional managers to plan for risk and deal with
misgivings. Resultantly, many entrepreneurs address risks only after exposure to them.

17. 5
Because of this inattentiveness to premarket entry risk, the entrepreneur faces high failure
rates (Singh, Corner, & Pavlovich, 2007). Further, entrepreneurs can grow disenchanted by any
suggestion that risk remains unnoticed and insist new ventures are not risky (Proimos & Murray,
2006). Coping with such blind risk creates a major challenge (Busenitz, 1999). Besides,
Busenitz’s observation suggests that by making entrepreneurs aware of risk, an opportunity
exists to engage in risk management to improve the likelihood of success.
Statement of the Problem
Although risk-taking is a prime characteristic of entrepreneurs, such firms fail more often
than those that “go public” because public firms are aware of the risks and prepare to deal with
risks earlier. By “going public,” a firm complies with underwriting procedure improving the
likelihood of success because it may cause a firm to identify and address early stage risks
(Corwin & Schultz, 2005; Hebb & MacKinnon, 2004). The problem is that entrepreneurs fail to
identify and plan for risk before entering the market (Gelderen, et al., 2006; Parhankangas &
Hellstrom, 2007). Despite the benefits offered by providing employment and invigorating
monetary growth, high failure rates hamper entrepreneurs because of the lack of attention to
early stage risks. Ill-prepared entrepreneurs fail to achieve satisfactory levels of financing
because of the inability to deal effectively with investors.
The goal in this quantitative study sought to compare risks identified through
underwriting of public firms with the awareness and risk management practices of more nascent
entrepreneurs. The objective of this comparison is to discover if unrecognized risks inhibit
entrepreneurial success rates. The study draws on a sample of alternative energy firms filing
Form S-1 with the Securities and Exchange Commission (SEC). The plan of this study is to use
this sample to decide if an association exists between risks identified by underwriting practices

18. 6
with the success of more nascent firms. Similarly, in the conduct of the study the objective is to
develop a survey to give to a sample of nascent alternative energy firms taken from the United
States Department of Energy website ("U. S. Department of Energy," 2008).
Purpose of the Study
The purpose of this quantitative study sought to use discriminant analysis to learn if
awareness of antecedent risks can improve success rates of entrepreneurs by early development
of risk management strategies. Classification of risks ranging from antecedent to the time of
funding influences the success or failure of entrepreneurs because the earlier the firm starts risk
management, the greater the chance of success. The population sought to include nascent
entrepreneurs in the alternative energy industry from a list on the Department of Energy website
("U. S. Department of Energy," 2008). Companies with headquarters in the United States as
identified on the website provide the sample for a survey to find how the identified risks
influence self-reported success rates.
To identify antecedent risks, the research included an examination of a sample of filings
of Form S-1 from the Securities and Exchange Commission website for 2009. The sample sought
to include alternative energy firms applying to “go public.” For example, some of the risks
identified are as follows:
1. The dependency on few suppliers of critical services or products may present a problem.
2. Environmental risks and rules may have an unfavorable effect on business.
3. Strong competition from competitors may create difficulty gaining enough of a share of
the market.
4. Local, legal, and political risk may hinder the firm’s ability to market products.

19. 7
5. Limited financing may hamper the firm’s ability to preserve the expense to uphold
regulatory needs.
6. The power may not exist for the company to achieve market acceptance for products.
7. Difficulty attracting key management and board members may hinder the ability to carry
out business plans and manage growth.
8. Technological changes could make products and services obsolete.
9. Safety and product liability could result in unforeseen damages.
10. The company may find gaining necessary licenses for products difficult.
Gilmore, Carson, and O’Donnell (2004) found that major determinants of risk arose from cash
flow, company size, entry into new markets, and entrusting staff. Each of the risks can fall into
one of these categories.
With an idea of the risk involved, this study sought to conduct a survey by querying a
sample of alternative energy firms to decide if any firms took steps to manage risks before start-
up or within the first year. Alternative energy firms are those companies dealing in
unconventional energy sources not attributed to fossil fuels. The study incorporated a factor
analysis to decide which identified risks bear the greatest influence on success rates. Creswell
(2005) asserted that a quantitative method presents an opportunity for descriptive research and
analysis. A quantitative study using multiple discriminant analysis provided a proper research
method to perform the stated objective. This method is proper because discriminate analysis
studies simplify describing early stage risk and aid in deciding the influence of risks on
entrepreneurial success rates.

20. 8
Significance of the Problem
Significance of the Study
Because entrepreneurs neglect risk mitigation in the early stages of firm development,
high failure rates hinder overconfident entrepreneurs (Wu & Knott, 2006). Opportunistic
entrepreneurs miss a chance to mitigate risks before entering the market. Proimos and Murray
(2006) asserted that early mitigation of risk prepares entrepreneurs for discovering new
opportunities for financing by making them “investor ready.”
Taking risk readiness into consideration, investors are more likely to invest in a firm that
has identified potential risks and has developed plans to address them. Identifying potential risks
and developing plans for risk management helps the investor build confidence in the talents of
the entrepreneur. Conversely, potential investors view entrepreneurs who have neglected risk
planning as too risky and may select other investment alternatives.
Significance of the Study to Leadership
Leaders take the lead in developing a vision by learning to transform a mission through
new business enterprises laden with risk (Becherer, Mendhall, & Eickhoff, 2008; Kotter, 1996).
Leaders surface among individuals with a high tolerance for the risk-taking (Becherer, et al.,
2008; Kets de Vries, 1997). Schumpeter (1951b) credited early stage risks to “a phenomenon that
comes under the wider aspect of leadership” (p. 259). People without a high tolerance for risk
rarely rise to a leadership position.
To develop a reasonable open-mindedness about risk, the nascent entrepreneur must have
many leadership qualities. The qualities include vision, creativity, achievement, tenacity, self-
confidence, assertiveness, risk taking, and an inclination for power and control (Becherer, et al.,
2008). Thus the objective of the study is to prepare the nascent entrepreneur for leadership

21. 9
challenges. Without such qualities, a new entrepreneur has a difficult time taking the venture
from birth to an enduring existence.
Nature of the Study
Overview of the Research Method
Apart from the leadership significance of examining premarket risks, a suitable method is
important to detect the relationships among the independent and dependent variables. Neuman
(2003) asserted that “correlation” research often relies on surveys as a rigorous test for cause and
effect and providing alternative explanations. Using surveys involves six distinct steps. The first
step involves designing an instrument to address research questions and theories and the medium
used to give the survey. Methods can include personal interviews, direct mail, telephone
interviews, e-mail invitations, or web-based surveys. The next step involves deciding how to
record and test the results. Next, the research protocol entails extracting a sample from a
sampling frame of the entire target population.
Once sample selection is complete, the next step entails finding respondents, conducting
interviews, and recording data. After entering the data into computer software such as SPSS, the
data is ready for statistical analysis. Finally, the cleaning procedure allows a discussion of the
methods and results of the statistical analysis. In essence, a quantitative analysis gives a
researcher the opportunity to test a theory by using statistical inference (Neuman, 2003).
Overview of the Design Appropriateness
In this quantitative analysis, the testing procedure affords a method to assess if a strong
association exists between identified risks and the success or failure rates. The 10 risks
indentified earlier came from SEC Form S-1. The SEC uses this form for firms to disclose
important information about their intent to “go public.” In designing the study, these risks

22. 10
appeared most often with comments expressing a concern. To perform an assessment, the plan of
the study sought to examine success and failure rates of nascent entrepreneurial ventures within
the alternative energy industry. Further, a Pearson correlation coefficient statistical analysis
helped to uncover the relationships of each independent variable to the dependents variable and
to each of the other independent variables (Neuman, 2003)
As an alternative to qualitative analysis that explores a broad theoretical problem area
and converges on a central phenomenon, quantitative analysis provides a deeper analysis by
focusing on more specific relationships among variables (Creswell, 2005). Because the literature
already identified broad theoretical research, the purpose of this research sought to achieve a
more specific focus about the influence of risk on improving entrepreneurial success. The
objective of the study is to contribute to existing research by extending the literature on risk to
focus on ways in which early stage risks affects the success of entrepreneurs. Discriminant
analysis offered a research method useful in separating entrepreneurs into successful and
unsuccessful groups through analysis of the variables (StatSoft, 2007b).
Research Questions
Although entrepreneurs provide many positive benefits to the economic environment,
overconfidence and undisciplined preparation are an enigma to their success. Larger firms have
the opportunity to identify and mitigate risk before entering the market because of the
underwriting process. For example, larger firms that decide to go public and identify premarket
entry risks through underwriting procedures develop plans for risk management, and improve the
firm’s chances of long-term success (Corwin & Schultz, 2005; Hebb & MacKinnon, 2004). In a
quantitative study, the objective is to address the obvious disparity by looking at the relationship

23. 11
of risk to the success and failure of divergent firms in the United States’ alternative energy
industry.
The disparity between success and failure rates for such groups leads to the following
question:
Q. How does the timing of gaining awareness of risk affect entrepreneurial success rates in the
alternative energy industry?
Hypotheses
Such questions imply a cause and effect association exists between the timing of risk
awareness and risk management with entrepreneurial success rates. The research questions
suggest the following theories are possible (Creswell, 2005):
Set One: Directional
Ho1. No difference exists between entrepreneurs gaining an awareness of risks before and after
entry to the market resulting in a significant improvement in their success rates within the United
States’ alternative energy industry.
Ha1. A difference exists between entrepreneurs gaining an awareness of risks before market
entry and after entry to the market resulting in a significant improvement in their success rates
within the United States’ alternative energy industry.
Set Two: Nondirectional
Ho2. No difference exists between entrepreneurs gaining an awareness of risks before and after
entry to the market resulting in a significant improvement in their success rates within the United
States’ alternative energy industry.

24. 12
Ha2. A difference exists between entrepreneurs gaining an awareness of risks before and after
entry to the market resulting in a significant improvement in their success rates within the United
States’ alternative energy industry.
Theoretical Framework
Broad Theoretical Area
Adam Smith distinguished the capitalist from the entrepreneur by noting the sole role of
the capitalist is to provide capital and bear the risk of loss (Schumpeter, 1951). By contrast, an
entrepreneur does not always supply capital or bear the risk of loss. Although often such
conditions do exist for the entrepreneur, the true defining characteristic of an entrepreneur stems
from uncertain conditions. Montanye (2006) defined entrepreneurs as talented individuals
confronted with doubt and scarcity with a goal to capture monetary returns beyond those
provided by perfect competition. Through such efforts entrepreneurs are able achieve a superior
lifestyle (Montanye, 2006).
Although Schumpeter (1951) singled out uncertain conditions as a defining characteristic
of entrepreneurs, others credit entrepreneurs for risk management responsibilities. Bernstein
(1996) described how the French mathematician, Jules Henri Poincare, explained risk by cause
and effect as a way to protect against sizable losses. Poincare argued a firm can allay risk
through insurance to cover significant losses, but must pay a small loss in the form of a premium
to do so. A firm should take measures to reduce the doubt involved by addressing the source of
the risk. Such actions decrease the small loss incurred in the form of insurance premiums to
lessen the payment for a potential large loss (Bernstein, 1996; Knight, 1921). Risk-aligning
behavior works to lower risk exposure and moderate the cost of a disastrous loss.

25. 13
Beyond protecting against a disastrous loss by addressing the source of risk and moving
more from the uncertain to the certain, identifying risks should also improve the chance of
success. Knight suggested one should distinguish risk from the uncertain conditions because an
entrepreneur can appease risk through insurance, hedging, and diversification. Conversely,
uncertain conditions stem from ignorance or acting on opinion rather than knowledge (Knight,
1921). Max Weber described the motivation inspiring the capitalist as the pursuit of profit
through rational restraint and supported such an attitude over the pursuit of profits for greed
(Mises, 1944; Weber, 2001).
Compatible with the need to balance risk management with optimism, entrepreneurial
lifestyles benefit the economy by fostering innovation and creativity, providing growth in
productivity, and employment for the entire society (Banerjee & Duflo, 2008). Sternberg and
Wennekers (2005) agreed that promotion of business start-ups stimulates fiscal growth. By
aligning entrepreneurial optimism with suitable risk management improves success rates
contributing to improved monetary conditions for society.
Theoretical Gap Filled by the Study
Because risk-taking and opportunism characterizes the entrepreneur, improving the
chances of success by early risk management initiatives benefits society. The objective is to
identify early stage risks to relieve potential losses and improve entrepreneurs’ abilities to see
such risks. Geldren et al. (2006) noted only limited literature exists about risk management plans
for people with ambitions to launch new business ventures, and the literature would benefit from
more research. Parahankangas and Hellstrom (2007) noted, “interrelations between the
antecedents of risk taking, investment decisions and risk reduction strategies still remain a
largely unexplored territory” (p. 184). Ottesen and Gronhaug (2006) asserted that exploiting

26. 14
opportunities with an uncertain future remains a difficult task, but surprisingly little literature
exists on why some firms succeed in the search to exploit opportunities, while the majority fail.
The insights gained by exploring the problem can lead to improved success rates.
In response to the gap in the literature, the goal of the study sought to address antecedent
risk. Addressing early stage risks depends on ways to improve entrepreneurial success rates by
identifying risks at an earlier stage and starting risk management sooner. An inference exists in
the study that entrepreneurs who balance an opportunistic vision with attendant early stage risks
stand a better chance of surviving. Displaying this ability allows entrepreneurs to earn enough
financing to propel new ventures through start-up. Such research only addresses a small part of
the total population of entrepreneurs as the study limits the results to alternative energy
companies. Companies in other industries may find the risks in such industries are different from
the alternative energy industry. The results in this study only address a small part of new
ventures by the entire population of entrepreneurs. This research may justify further expansion to
gain insight into other parts of the population.
Definition of Terms
Certain terms are particular to the study of entrepreneurs and risk management. Such
terms warrant further definition. Other terms vary in meaning, depending on the author. For the
sake of clarity, this section defines terms for use here. To define such terms helps impel clarity
and consistency.
Entrepreneurial Terminology
Bootstrapping. The term refers to an effort to conserve cash when a firm cannot raise
capital through conventional sources such as issuing stock or bonds. Entrepreneurs use

27. 15
bootstrapping by bartering and sharing supplies to aid survival when conventional financing is
unavailable (Ebben, 2009; Ekanem, 2007; Winborg & Landström, 2001).
Nascent. Nascent is a term often found in the literature used to mark the emergence or
birth of an organization.(Diochon, Menzies, & Gasse, 2007; Gelderen, et al., 2006) Nascent
refers to emergent organizations in an embryonic stage of development. Entrepreneurs launch
embryonic organizations and lead new firms during the beginning stage.
Risk Terminology
Risk. According to Knight (1971) risk is anything resulting in a known hazard that can
result in a loss if insurance is not present. Risk is any danger or condition subject to an insurance
policy. Without such a policy, loss is a more likely result.
Uncertainty. The term uncertainty arises from a lack of knowledge resulting in
suspicion, doubt, skepticism, or mistrust. Uncertainty means a condition in which risk is
unknown or has gone undetected because of a lack of knowledge. Unlike risk, uncertainty is
uninsurable (Knight, 1971).
Assumptions
In this research study, the assumption is that entrepreneurs wish to improve success rates
and are open to balancing the pursuit of opportunities with the attendant risks. Such an
assumption suggests that an awareness of premarket entry risks leads entrepreneurs to risk
management. Entrepreneurs may still believe in beating the competition by taking a first-mover
position despite the risks.
Besides the possibility of entrepreneurs taking such a position, the central question of the
study suggests the entrepreneur is expert with planning to address risk cutting. Some

28. 16
entrepreneurs may not have the proper experience and may not have any idea how to find help.
Further, the entrepreneur may not have the financial ability to deal with such problems.
Scope, Limitations, and Delimitations
Although entrepreneurial ventures in the alternative energy industry limit the scope of the
results, other industries face similar risks by “going public.” This study also only extends to
companies within the United States and does not include foreign entrepreneurs engaged in
alternative energy ventures. Ventures in other locations may present other risks besides those in
the domestic domain. Because the study includes only domestic ventures, risk present in the
global domain remains unexamined. On the other hand, some of the companies listed on the U.S.
Department of Energy website used to decide the sampling frame are either divisions of global
companies or domestic subsidiaries ("U. S. Department of Energy," 2008). The study here
excludes risks present in business outside the United States.
Because the study only extends to companies that have either gained renewable energy
certificates or applied for such certificates, the study excludes other companies that have not yet
reached that point. The results in the study rest on the assumption that a firm without renewable
energy certificates would not have yet reached a stage in which it can reach profitability in the
alternative energy market. Similarly, the results rely on the assumption that a firm must find
ways to raise or produce enough capital before reaching profitability. Because the alternative
energy industry is new, the results presume the industry can achieve profitability by providing a
supplement or replacement for conventional fossil fuels. Most important, the major underlying
assumption for the companies in the industry rests in the ability to convert such energy into
electrical power. Transmitting this energy depends on the ability to carry the power by an energy
grid with enough capacity (Walter, 2009).

29. 17
Despite the industry’s embryonic existence, the study excludes firms solely engaged in
exploration as the growth of the industry depends on the products drawn from exploration
already successful. Thus the study only considers firms able to convert existing sources into
electric power.
Plan of Study
Chapter 2, Literature Review
Although some scholars argue that self-employment via entrepreneurship may not offer
the benefits the self-employed expect, such a notion depends on the location, the entrepreneur’s
motivations, and the specific need. Besides, many people working as employees of others want
to work for themselves, but one of the most significant obstacles facing the entrepreneur comes
from the lack of capital. Another significant result is that self-employment increases with age
(Blanchflower, 2004).
Because “baby boomers” are overabundant and depressed economic conditions exist,
entrepreneurism offers an opportunity that otherwise is unavailable. Self-employment in the
United States is highest among men, Whites with larger families, and people with a higher
education. For example, Organization for Economic Cooperation and Development (OECD) data
shows that people with no education have almost no chance of reaching self-employment. People
who finish eighth grade have a probability of 0.0141 of achieving self-employment. Conversely,
people who earn a bachelor’s degree have a probability of 0.1959, and people who earn a
doctorate degree have a probability of 0.4195 of achieving self-employment (Blanchflower,
2004).
As a further illustration, according to the 2008 Global Competitiveness report a study of
43 countries classified the countries by stage of economic development as factor-driven,

30. 18
efficiency-driven, and innovation-driven. This study used12 pillars to rank the countries. The
least developed nations fall into the factor-driven classification, while the most sophisticated
countries fall into the innovation-driven group as determined by the rankings within each pillar.
The pillars characterizing the factor-driven group include an institutional environment,
communications networks, macroeconomic endeavors, health, and primary education. Besides
these pillars, efficiency-driven economies complement these features with higher education,
market efficiency for goods, labor market efficiency, a sophistication of financial markets, a
technologically ready environment, and a large market size. The innovation-driven group
complements these fundamentals with innovation and business sophistication (Bosma, et al.,
2008; Porter & Schawb, 2008).
Considering these rankings, Bosma et al. (2008) determined the rate of the adult-aged
population most actively engaged in nascent entrepreneurism arises from the factor-driven group
followed by the efficiency-driven group. For example, in the 25-34 age group 23% of the
population engage in nascent entrepreneurial occupations, whereas in the efficiency-driven
group only 14% take on such occupations followed by the innovation group with only 10%
participation. Concurrently, between 2001 and 2008 a slightly upward-to-static trend supports
these rates (Bosma, et al., 2008). In all classifications the self-employed category is significant to
the other parts of the population working for others. The central question of the study proposes
that improving success rates through early knowledge of risk management eventually contributes
to more efficient conditions for the community.
Participation in nascent entrepreneurial pursuits is lower in innovation-driven economies
because monopolistic disincentives such as patent protection discourage nascent
entrepreneurism. Monopolies with patent protection wish not to compete with nascent

31. 19
entrepreneurs who have innovative ideas. As a result, the genuinely novel entrepreneur finds it
difficult to compete with firms engaged in temporary monopolies. The more sophisticated the
economy, the less likely the small creative entrepreneur is to compete (Baumol, Litan, &
Schramm, 2007 ). Baran (2009) argued the efficient planning and managing of practices
improves conditions for entrepreneurial decision-makers and reduces misgivings enabling the
entrepreneur to aid the existence of the firm.
Similarly, if entrepreneurial faculty rates are a sign of the need for training, the
percentages of both primary and secondary advertised faculty positions steadily rose from 1989
through 2005. For example, primary positions have risen from roughly 5% to 95% of advertised
positions and secondary positions have grown from about 12% to 64% over the same time frame
(Finkle, 2007). Finkle commented the demand for entrepreneurial faculty has outstripped the
supply.
Because of such gaps in entrepreneurial support, self-employment continues to decline in
the United States. In 1997, the United States had a self-employment rate of 8.2%, which has
fallen to 7.2% in 2007, far below the OECD total in such years of 16.8% and 15.5%, respectively
("OECD in Figures 2009," 2009). Baumol et al. (2007) recommended tearing down barriers
standing in the way of promoting entrepreneurial innovation. For example, Baumol et al.
suggested bankruptcy reform, lowering the cost of start-up, improved protection of property and
contract rights, and minimizing overzealous taxation. Baumol et al. also recommended keeping a
balance of rules and deregulation, providing rewards for university innovations, providing
incentives for imitation, and disincentives for unproductive entrepreneurs (Baumol, et al., 2007).
In line with heightened demand for entrepreneurial education, Collins, Smith, and
Hannon (2006) asserted that entrepreneurs need certain “pre-programme” capacities to engage

32. 20
effectively in nascent entrepreneurial activity (p. 188). Collins et al. argued that action-oriented
entrepreneurs rely on adaptive learning or learning by doing. Entrepreneurs not only represent
the owners but all stakeholders and participants, and manage change and uncertain conditions in
an environment laden with risks (Collins, et al., 2006). The programmed approach involves using
nascent entrepreneurs, existing entrepreneurs, and trainers to teach different entrepreneurial skills
(Collins, et al., 2006). An evaluation of premarket entry risks ties into the capacity-building
approach and benefits many stakeholders. Thus beneficiaries of this training consist of diverse
stakeholder groups including employees, venture capitalists, angel investors, finance companies,
banks, suppliers, and customers.
As noted, different groups of investors represent a major category of stakeholders who
have employed various risk-reducing strategies. Such strategies include forming investment
syndicates, closely watching projects while releasing small infusions of capital, and asking for
preferred stock to ensure satisfactory compensation for investments (Parhankangas & Hellstrom,
2007; Proimos & Murray, 2006). Venture capitalists finance fewer than 5% of entrepreneurs who
approach such firms because the entrepreneurs are not “investor ready” (Berlin, 1998; Proimos &
Murray, 2006). Sweeney (2006) reported that an emerging trend is to hire well-connected
investment banking firms to round up a group of angel investors compatible with the
entrepreneur. Another strategy stems from more nascent entrepreneurs using bootstrapping to
make it through the early stage of development. Bootstrapping approaches emerge when
conventional equity and debt financing is unavailable, too costly, or dilutes ownership control of
the firm. Bootstrapping includes bartering, sharing supplies, and other methods to conserve cash
flow (Ebben, 2009; Ekanem, 2007; Winborg & Landström, 2001).

33. 21
Although such methods have varying degrees of success, the presumption underlying the
study proposes that addressing risk management early may improve effectiveness and result in
improved success rates. Some scholars have studied the problem of risk perception through the
eyes of potential funding sources (Busenitz, Fiet, & Moesel, 2004; Fiet, 1995; Parhankangas &
Hellstrom, 2006; Yoshikawa, Phan, & Linton, 2004). Other scholars have looked at the
association between risk preferences and risk perceptions (Sitkin & Pablo, 1992).
Chapter 3, Research Methodology
The research plan included running a survey of alternative energy firms drawn from a list
on the United States Department of Energy website ("U. S. Department of Energy," 2008). The
survey listed risks gathered from Form S-1 of the Securities and Exchange Commission (SEC).
The survey asked respondents to provide data necessary to calculate the ratio of earnings to fixed
charges as described in §229-503 of the instructions for preparing a prospectus under the SEC
registration statement. The self-reported data served as a proxy for discovering the likelihood of
success of surveyed respondents. Similarly, the procedure called for respondents to say if such
firms by filing Form S-1 have sought or filed for public financing. The survey asked respondents
to rank the risks by noting when awareness and planning for risk management started by using a
seven-point, Likert-scale. Discriminant analysis decided which respondents fell into successful
and unsuccessful groups of entrepreneurs.
After finding which respondents belong to such groups, the next step entailed analyzing
how these risks affect the self-reported success rates for each group. The procedure included
recording the data for each respondent and coding the data for those respondents by when
awareness of the risks and planning effort began. Thus the procedure called for entering the
results for all respondents into SPSS and running descriptive statistics for each group.

34. 22
Concurrently, the procedure called for an analysis of the results to detect if a difference exists in
success rates between the groups. The analysis employed multiple discriminant analysis to test
the proposed theories (Leech, Barrett, & Morgan, 2007). Multiple discriminant analysis is a
technique that classifies observations into groupings by looking at individual characteristics on
which the groups depend (Altman, 1968). Altman used ratio analysis to classify new ventures
into firms likely to go bankrupt and firms likely to continue. Similarly, the SEC uses the ratio of
earnings to fixed charges on Form S-1 to analyze the riskiness of investments in new ventures by
assessing the firm’s chance of surviving. Multiple discriminate analysis provided a linear
characterization of reasons that best discriminate between groups (Altman, 1968). In this study
of successful and unsuccessful entrepreneurs, the two groups needed such an analysis.
Presentation and Analysis of Generated Data
Once the analysis is complete, a comparison of the groups with the risks helps decide if
the group seeking public financing fares better than the group not seeking public financing. From
the analysis, the expectation is for the group seeking public financing to have higher success
rates because underwriting brings attention to risk identification and management. Similarly, the
analysis helps decide if any of the risks have more of an effect than others and whether the risks
influence one another. The analysis uses the identified risks and the self-reported statistics to test
the following theories:
Set One: Directional
Ho1. No difference exists between entrepreneurs gaining an awareness of risks (IV) before and
after entry to the market resulting in a significant improvement in their success rates (DV) within
the United States’ alternative energy industry.

35. 23
Ha1. A difference exists between entrepreneurs gaining an awareness of risks (IV) before market
entry and after entry to the market resulting in a greater significant improvement in their success
rates (DV) within the United States’ alternative energy industry.
Set Two: Nondirectional
Ho2. No difference exists between entrepreneurs gaining an awareness of risks (IV) before and
after entry to the market resulting in a significant improvement in their success rates (DV) within
the United States’ alternative energy industry.
Ha2. A difference exists between entrepreneurs gaining an awareness of risks (IV) before and
after entry to the market resulting in a significant improvement in their success rates (DV) within
the United States’ alternative energy industry.
The analysis helps decide the priority in which to plan for the identified risks to help improve
success rates.
With the results of the analysis in mind, entrepreneurs from other industries may not
agree with the results for alternative energy. A researcher may find other risks more relevant in
other industries, and such risks can bring different results. Thus a researcher should have an
awareness that some of the same risks may apply, while others do not.
Summary
In summary, the analysis of the study aims to concentrate on making the risks associated
with the launch of a new venture more visible to the nascent entrepreneur so the founder can
begin risk management sooner rather than later. Usually, opportunism and enthusiasm clouds the
entrepreneur’s vision so opportunity overshadows the related risks involved in such ventures
(Busenitz, 1999; Gelderen, et al., 2006; Wu & Knott, 2006). Because entrepreneurs represent
only seven to eight percent of the United States population but account for roughly 30% of the

36. 24
top decile of wealth, an expansion of entrepreneurism is worthwhile. As a result, the growth of
entrepreneurism provides society employment and stimulates fiscal growth (De Nardi, et al.,
2007; Sternberg & Wennekers, 2005). By balancing opportunities and risks, heightened
entrepreneurism provides an important first step in filling this void.

37. 25
CHAPTER 2: REVIEW OF THE LITERATURE
In the review of the literature, the objective is to query the literature about the history and
development of risk management. The review of the literature also queries the role of the
entrepreneur, developing the study of risk, and alternatives improving risk management. Several
strands have developed in the literature about risk management. These strands include
distinguishing between risky and uncertain events, and the lack of ability to detect early stage
risk because opportunism overshadows the sight of risk. Similarly, other risk management
methods have developed such as alternative funding mechanisms provided by angel investors
and venture capitalists, and the use of prediction and control.
Although the literature has developed distinct threads of research about risk management
for the entrepreneurial venture, researchers have yet to develop much about risk management
before market entry. This study helps to fill the void in the literature about the effects of risk
management before entering the market. This study evaluates early risk management rather than
waiting until after the entrepreneur launches a venture. The intent is to continue to develop the
literature to improve entrepreneurial success rates.
Title Searches, Articles, Research Documents, and Journals
To fill such a void, the objective of the review of the literature is to scan current literature
about the history of entrepreneurism and risk management. The chapter provides an analysis of
the recent strands of risk management literature. These strand include types of risk faced by
founders of firms whether seen or not, and characteristics marking a successful launch of a
venture. The historic development of entrepreneurism and risk management serves as a
foundation to understand the need for more research about improvement of entrepreneurial

38. 26
success rates by starting early to plan for applicable risks. Such research helps frame the research
problem about risk and uncertain conditions by distinguishing between the two.
After reviewing the literature, a classification of alternative types of risks forms the basis
for deciding applicable features that affect the successful launch of the business. A look at recent
literature helped discover applicable risks. With this review, a view of the underwriting for firms
seeking to “go public” provided an improved backdrop for analyzing the timing of such risks.
Thus in the conduct of the research, a scan of the Securities and Exchange Commission (SEC)
Form S-1 for firms applying to “go public” helped decide on risks revealed in the underwriting
procedure. Both an awareness of such risks and a plan to deal with the risks are critical outcomes
of such analysis. The analysis helped isolate proper risks serving as independent variables for the
study.
Similar to indentifying suitable risks, the objective of the analysis is to identify risk
characteristics believed proper to settle on the causes of a successful business launch. Such a
course of action helped identify characteristics from the literature and from the SEC
requirements for firms seeking to “go public.” Thus the research analysis looked at the needs of
SEC §229.503 of Regulation C to discover proper measures for deciding success to supplement
the measures found in the literature. The combined measures formed the basis for deciding
success and failure rates, the dependent variables for the study.
Literature Review
Historic Overview
Risk management. Modern risk-taking theory has roots in the Hindu-Arabic numbering
that emerged in the Western world in the 1200 to1300s (Bernstein, 1996, p. 218). Two prominent
French mathematicians, Blaise Pascal and Pierre de Fermat engaged in a new game of chance in

39. 27
the summer of 1654 discovering the modern theory of probability. The “unfinished game”
sometimes known as “the problem of points” resulted in the first try to quantify how to manage
risk (Bell, 1998; O'Rourke, 2008). Pascal and Fermat used chance to forecast the likelihood of
future events. Before this time, probability analysis had no place in risk management (Bernstein,
1996).
Quantifying such a game of chance prompted Chevalier de Mere, a gambler, and
challenged Pascal and de Fermat. This revelation could not have happened without the discovery
of the Hindu-Arabic numbering. In 1202, the Italian mathematician, Leonardo Pisano, also
known as Fibonacci, visited the Algerian city of Bugia in which his father served as Pisan
consul. An Arab mathematician introduced the Hindu-Arabic numbering to Fibonacci, which
Fibonacci later published in Liber Abaci or the Book of Abacus (Bernstein, 1996; Danesi, 2005).
The numbering has its roots in India where the Hindus developed the technique and the Arabs
became familiar with the method during India’s invasion (Bernstein, 1996).
Quantifying risk through probability analysis further developed through the efforts of
Girolamo Cardano, a gambling scholar and prominent doctor. Cardano provided one of the first
definitions of probability before Pascal and de Fermat’s time in the 1550s. Cardano did not have
the work published until after death. Cardano defined probability as the result found by dividing
the number of favorable outcomes by the number of possible cases (Bernstein, 1996; Ekert,
2008). Shortly after Pascal and Fermat, other notable individuals began applying probability to
different applications. John Graunt, a merchant, used probability to estimate the population and
applied the idea to demographic information. William Petty, a doctor, aided Graunt with studies
of population statistics (Bernstein, 1996; Kreager, 1988). Edmund Halley, an astronomer, used

40. 28
probability to predict when comets would appear and to calculate the value of annuities based on
life expectancies (Bernstein, 1996; Ciecka, 2008).
Further development of the use of probability analysis came from the Bernoulli family. In
1703, Jacob Bernoulli became the first to build on the theory from sample data (Bernstein, 1996).
Jacob introduced epistemic probability and used the idea of guessing about the future by looking
at data from the past (Hon, 2008). By watching what happened in the past, a reasonable
expectation exists for the same to happen in the future. Bernoulli also developed utility theory
that relies on a person’s power to measure utility. Utility theory enables one to decide on rational
alternatives to avoid uncertain conditions and conquer risks (Bernstein, 1996). For example, one
could decide to either lease or buy a piece of equipment. Leasing preserves cash and reduces the
chance of running out of cash.
Similar to the work on probability analysis, Jacob’s nephew, Nicholas continued Jacob’s
work and invited the French mathematician, Abraham de Moivre to help. De Moivre developed
the normal distribution or bell-shaped curve from such work by using a sample. This innovation
helped discover the degree of dispersion about the mean and the related standard deviation
(Bernstein, 1996). Pierre Remond de Montmort claimed credit for the same innovation and de
Moivre and de Montmort both complained of plagiarism. Both men worked with Bernoulli and
eventually began working collegially (Bellhouse, 2008). In the early 1800s, a prominent
mathematician, Carl Friedrich Gauss, named the bell-shaped curve. Gauss used the bell-shaped
curve to study the curvature of the earth and taking measurements forming a distribution of the
recorded measures (Bernstein, 1996). Today research uses the bell-shaped curve and normal
distributions extensively in scientific inquiry for hypothesis testing.

41. 29
In line with such analysis, risk-taking theory further developed with another innovation
widely credited to Sir Francis Galton in the late 1800s (Bernstein, 1996). Such innovation
originated from the law of regression or return to the mean published in 1885 (Bernstein, 1996;
Bulmer, 1998; Sandall, 2008). Such an idea motivates most forecasting involved in managing
risk-taking (Bernstein, 1996). In, 1901, Karl Pearson worked as a student of Galton and
developed the chi-square or goodness-of-fit technique to improve accuracy of predictions
(Magnello, 1998). For instance, business today relies on such techniques to help predict many
issues such as market demand, defect rates in products, warranty claims, and many other
applications.
To frame the history of risk management, Bernstein (1996) decided the fundamental
nature of risk management rests in increasing the areas in which a person has control (risks). At
the same time, Bernstein settled on lessening such areas in which a person has no control
(uncertainties) or in which envisaging cause and effect is difficult. Bernstein’s revelation
provides a foundation for the study on how timing affects risk management by identifying risks
early and minimizing uncertain conditions by culling out and controlling risks. For example, a
firm might wish to exert control over its supply chain or its procurement and distribution tasks.
By vertically integrating, the firm can bring such applications under its control.
The role of the entrepreneur. In framing the context of risk management, capitalism
emerged to underpin modern entrepreneurism. In 1732, Cantillon, an Irish-banker working in
France, introduced classical entrepreneurship. Cantillon argued entrepreneurship emanates from
supply and demand differences (arbitrage) by setting up equilibrium models between buying and
selling prices leading to a more stable economic environment. Cantillon’s forethought using such
models helped deal with uncertain conditions and risk (Minniti & Lévesque, 2008; Murphy,

42. 30
Liao, & Welsch, 2006; Sobel, 2008). In 1848, John Stuart Mill in his book, Principles of the
Political Economy, expanded on the role of the entrepreneur to include management of the firm
(Sobel, 2008). Although both Cantillon and Mill helped develop the place of the entrepreneur in
the fiscal environment, the literature widely recognizes Adam Smith as the father of capitalism
(Bassiry & Jones, 1993; Renesch, 2008).
Apart from Cantillon’s equilibrium models, Smith launched capitalism from a utilitarian
perspective. This perspective intended to avoid the Marxist economic model largely present at
the time as opposed to the state-based capitalistic model that exists today (Bassiry & Jones,
1993). Smith rooted the capitalistic model based on John Locke’s notion of human liberty. Thus
Smith condemned the authoritarian economic models in favor of a model highlighting the rights
of the people (Wren, 2005). For example, supply and demand equilibrium models aid in
regulating the transfer of wealth to the people rather than the state arbitrarily granting wealth to
monopolies. Concentrating power in monopolies shielded by the state Smith feared most about
the capitalistic model. The Western world viewed capitalism as a more efficient economic model
to provide for the needs of the average citizen (Bassiry & Jones, 1993; Renesch, 2008).
Consistent with such a view of capitalism, both Weber and Mises explained the capitalist
motivation as coming from the pursuit of profit through rational restraint. Weber and Mises
favored the approach over the pursuit of profits for greed (Mises, 1944; Weber, 2001).
With such a foundation in mind, Smith distinguished the entrepreneur from the capitalist
by noting the sole role of the capitalist is to make capital available to the firm and bear the risk of
loss (Schumpeter, 1951a). Montanye (2006) described entrepreneurship as a person facing
scarcity and uncertain conditions. An entrepreneur successfully produces and seizes “economic
rents” to achieve economic rewards surpassing the rents existing from perfect competition in

43. 31
which the forces of equilibrium are in balance. Under such conditions, the gifted entrepreneur
reaps the rewards of a higher standard of living (Montanye, 2006). Thus the ability to compete
successfully in the market offers motivation to the entrepreneur to achieve such rewards.
Recognizing this definition, the entrepreneur differs from the capitalist because the
entrepreneur competes by managing scarce supplies and uncertain conditions fraught with risks.
The entrepreneur’s role emanates from managing risky conditions in such a way to earn a return
on the capital invested in the firm. Knight (1971) asserted that an entrepreneur should distinguish
risk from uncertain conditions as a person can mitigate risk through insurance, hedging, and
diversification. Conversely, uncertain conditions stems from ignorance or acting on opinion
rather than knowledge (Knight, 1971). By identifying risks and removing risks from the
unknown to the known, the presumption is the entrepreneur can improve the likelihood of
starting successful ventures through risk management. Mises (1944) confirmed the thinking the
success or failure of a venture depends on how good an entrepreneur anticipates uncertain
outcomes.
Although Knight expressed the entrepreneur’s role by separating risk from uncertain
conditions, Coase (1937) argued that entrepreneurs are unnecessary. Coase believed this
argument because a firm can substitute for such a role within the firm, which makes the firm
more competitive. Coase in his theory on transaction costs viewed the market pricing apparatuses
as the outlet for controlling scarce supplies and managing risk. Kirzner (1999) argued the pricing
apparatuses are imperfect and stresses “mutually gainful exchanges” instead of the false resting
equilibrium prices inferred by Mises (p. 218). Mises (1944), similar to Knight, credited the
entrepreneurs with responsibility for dealing with uncertain conditions and argued managerial
work represented only part of the entrepreneur’s role.

44. 32
In line with Knight’s perspective, Mises separated entrepreneurism from promotion by
noting how entrepreneurs set up the reasons for production. Such a view is consistent with Jean
Babtiste Say’s classical view of the entrepreneur’s role in directing and spreading goods’
creation from unproductive domains to more productive ones (Murphy, et al., 2006; Sobel,
2008). Mises believed consumer sovereignty caused a controlled economic model because
consumer preferences decide production and entrepreneurs serve as agents of the consumers
(Kirzner, 1999). Alternatively, Kirzner (1999) believed pure profit based on “the best current
information” served to motivate the entrepreneur and government intervention is unnecessary (p.
226). For example, today supply side economics avoids consumer sovereignty as the consumer
lacks satisfactory information to make more educated choices. As a result, business controls
information, and gains comparative advantage over consumers. For example, until recently
business has found it could withhold country of origin information on various foods and drugs.
In contrast to the notion the entrepreneur serves as an agent to support consumer
sovereignty, Coase (1937) denigrated the entrepreneur to a mere marketer, while both Knight
and Mises assigned the entrepreneur’s role to other unique purposes. Knight argued the lifeblood
of the entrepreneur emanates from facing uncertain conditions (Knight, 1971; Mises, 1966;
Montanye, 2006). Schumpeter (1975), on the other hand, noted risk-bearing belonged to the
capitalist rather than the entrepreneur because the entrepreneur does not necessarily have to risk
capital. However, Schumpeter assigned responsibility for “creative destruction” and innovation
to the entrepreneur. Such advances come through improvement of goods and services,
production variations, unique organizational structures, expanded markets, and unique supply
sources. In other words, the entrepreneur disrupts the economic environment by creating
innovative replacements for existing goods, services, processes, and structures. In contrast to the

45. 33
Schumpeterian notion of “creative destruction,” Kirzner believed the entrepreneur’s prime
motivation is exploitation of undiscovered opportunities. Such opportunities serve to bring the
market into equilibrium as opposed to disrupting the equilibrium as suggested by Schumpeter
(Sobel, 2008). A recent example of exploiting such opportunities comes from the financial
service industry selling risky subprime mortgage products. Schumpeterian thought would put the
risk on the financial institutions by allowing them to fail. The Kiznarian notion promotes
exploiting the consumer without the risk and by proclaiming these institutions “too big to fail.”
In line with such ideas, Schumpeter recognized separating ownership and control is
important and suggested that eventually institutions would reform the roles of the entrepreneur as
internal tasks. To strip such roles from the entrepreneur removes the threat resulting from
“creative destruction” (Montanye, 2006, p. 553). In his work, Entrepreneurship, management,
and the structure of payoffs, Baumol shed suspicion on the rent-seeking opportunities of
entrepreneurs. Baumol also viewed how some corporate managers destroyed value of
entrepreneurial firms by churning out bad takeovers or overpaying for other ventures that had
little chance of succeeding (Caves, 1995). Baumol’s revelation suggested a place still exists for
the entrepreneur because, unlike the corporate manager, the entrepreneur cannot find protection
by hiding under the corporate veil. The association between risk and return rests squarely on the
entrepreneur’s shoulders.
Consistent with the idea that a place exists for the entrepreneur, Baumol (1993)
characterized the entrepreneur as a participant in the economy. Baumol argued the entrepreneur
uses boldness, imagination, ingenuity, leadership, determination, and persistence to chase profits,
power, and wealth. Baumol believed that both the Schumpeterian view of innovation and
Kirznerian notion of arbitrage transactions offered prospects for entrepreneurs seeking pure

46. 34
economic profit opportunities (Baumol, 1990; Sobel, 2008). Besides, Baumol (1990) made no
mention in the historic case study of the “rational restraint” proposed by Mises and Smith to
prevent unproductive entrepreneurism leading to “creative destruction” (Mises, 1944;
Schumpeter, 1975; Smith, 1904). Baumol did note that rent-seeking entrepreneurs could pose a
barrier to competition (Baumol, 1990). As Mehlum, Moene, and Torvik (2003) proposed,
“Entrepreneurs must find it profitable to create rather than to destroy” (p. 3).
By showing a place exists for the entrepreneur, Leibenstein supported Baumol’s claim
the entrepreneur takes up nonroutine tasks in developing the “X-efficiency” theory. Leibenstein
noted that within a firm incentives are necessary to motivate an employee to take on the tasks
usually taken on by the entrepreneur (Leibenstein, 1983; Montanye, 2006). If extra incentives are
necessary to do these tasks within the firm, Coase’s (1937) transaction cost theory is irrelevant.
This condition exists because the firm does not remove the cost to the firm by erasing the
entrepreneur. Instead, the firm simply replaces the cost internally. Mises also noted that
consumer sovereignty only neglects achieving a harmony between owners and consumers under
monopolistic conditions. In such case, consumers must appeal to politicians (Kirzner, 1999;
Mises, 1966).
Although Kirzner (1999) argued for pure profits and the absence of government
intervention, Adam Smith’s vision of mercantilism stressed heightening the power of the nation-
state in pursuit of self-sufficiency. Smith argued the nation-state should “maximize exports and
minimize imports” (Bassiry & Jones, 1993, p. 622). Smith feared monopolistic conditions and
stressed democratic government to foster self-sufficiency and serve as a watchdog against
monopolistic conditions. Smith argued monopolistic conditions shielded the entrepreneur from
the need to compete (Bassiry & Jones, 1993).

47. 35
Because of these opposing views of the entrepreneur, one can argue replacing the
flexibility and creativity of the entrepreneur with the politics and bureaucracy does not offer a
better solution. Creating an environment conducive to innovating new ideas and stimulating
heightened productive methods is unique to the entrepreneur. Conversely, the corporate world
presents an environment more apt to stymie and frustrate the traditional role of the entrepreneur.
Casson (2005) asserted the routine of the manager cannot serve to replace entrepreneurial
improvisation. Improving conditions for entrepreneurs should afford a better strategy for
developing innovations and improved productive methods than absorbing this role in the
corporate environment. The motivation for corporate interest in the entrepreneurial role emanates
more from control and fear of competition than from removing transaction costs.
In line with improving the competitive environment, Baumol, Litan, and Schramm (2007)
recommended several ideas to tear down some of the barriers imposed on entrepreneurs. Such
recommendations included start-up cost cuts, encouraging imitation through incentives, and
improving protection of property and contract rights. Similarly, the recommendations included
bankruptcy reform, lessening obsessive taxation, preserving a balance between law and
deregulation, providing inducements for university innovations, and disincentives for
wastefulness (Baumol et al., 2007). Baumol’s major contribution arose from distinguishing
innovative productive entrepreneurship that provides economic growth, jobs, and wealth creation
from unproductive political behavior emanating from lobbying and lawsuits (Sobel, 2008).
Baumol (1990) charged today’s lack of economic growth and prosperity to the rules of the game
not favoring the entrepreneur because of unproductive rent-seeking, political, and legal actions.
Thus Baumol suggested reforms that support changing the rules of the game to improve
productive entrepreneurship and entrepreneurial success rates.

48. 36
Although corporate control fails to provide an environment conducive for the
entrepreneur to succeed, a lesson from corporate risk management offers entrepreneurs an
opportunity to improve. In “going public,” underwriting compels companies to become more
aware and begin to plan to manage risks. Instead, entrepreneurs neglect this important step
because of the inability to extract risks from existing unknown conditions. This inability to find
risks drives the entrepreneur to deal with more uncertain conditions and reduces the likelihood of
success (Ugur, 2005). Mohan-Neill (2008) provided evidence that takeover by a public company
served as a source of funding for firms in the biotechnology industry. However, investee firms
need an improved state of readiness to achieve financing through this source of capital.
Review of Current Results
Risk perception, risk-taking propensity, and entrepreneurial opportunism. In
harmony with entrepreneurs overlooking risks during early stages in a firm’s development,
venture capitalists shy away from investing in such ventures despite holding a reputation as
daring risk-takers (Parhankangas & Hellstrom, 2007). Casson (2005) asserted the view of the
entrepreneur taking undue risk emanates from inaccurate opinions. These opinions arise because
the entrepreneur may hold information that if known to the investor and outsiders may counter
the view of extravagant risk-taking. Thus the optimism of the entrepreneur may arise from
holding “privileged information” (Casson, 2005, p. 330). For example, in the airline industry
pricing fares is not common knowledge to the public. Once again, this example shows supply
side economics resulting in a comparative advantage. Similarly, Janney and Dess (2006) argued
that risk perceptions of entrepreneurs stem not only from the risk of loss, but from the risk of a
lost opportunity. Obviously, the positive nature of opportunism may temper the negativity of

49. 37
risk. Janney and Dess play down risk as a variance through statistical and ratio analysis such as
required returns expected by investors or by raising funds through a public offering.
Although entrepreneurs’ view of opportunity is often unclear, Ottesen and Gronhaug
(2006) reduced such opportunities to the following formula: “P(S/A) > P(S/ Ā) where P =
probability, S = success, A = action, and Ā = no action” (p. 102). Thus entrepreneurs see
opportunities positively as circumstances in which an opportunity for gain exists and result from
applying some action to an observation that results in a gain. However, the entrepreneur’s views
of opportunities typically are overoptimistic, which poses a threat in predicting a sensed outcome
(Ottesen & Gronhaug, 2006).
To explain the influence of opportunism on pursuit of opportunities, Ottesen and
Gronhaug (2006) studied how one successful firm in the fishing industry achieved success when
other firms found difficulty in surviving. The successful firm restricted investment while others
in the industry saw a chance to beat the competition and tried to capitalize on the opportunity
before the sensed conditions happened. The general manager of the successful firm explained the
rationale is not to invest money when the future looks bright, but to hold capital to support at
least three years when experiencing difficult times. This explanation implies timing influences
risk taking. How a person views an opportunity may not result in the most fitting time to invest
in a new venture. The entrepreneur may find improved chances for success in times when others
find conditions difficult to invest in an opportunity. Preservation of capital provides a valuable
lesson to the excessively enthusiastic entrepreneur (Ottesen & Gronhaug, 2006).
With such a lesson in mind, in a study of risk-taking behavior at start-up point, Grichnik
(2008) studied 252 entrepreneurs and entrepreneurial students. Grichnik found the higher the
overconfidence, the lower the risk awareness and the higher the risk selected. Similarly, Grichnik

50. 38
found the risk-taking inclination plays a minor role with a 95% chance of no change in the risk
level. In other words, making the entrepreneur aware of risk is of prime importance to improving
entrepreneurial success rates. The entrepreneur’s appetite for risk-taking has little effect. These
results infer that making the entrepreneur more aware of antecedent risk should improve the
success rate of entrepreneurs launching new ventures.
Although Grichnik (2008) found that risk-taking inclination plays a small part in
entrepreneurial risk taking, the literature on risk-taking propensity offers conflicting evidence.
For example, Gilmore, Carson, and O’Donnell (2004) determined that several articles found no
difference between the general population and entrepreneurs about risk-taking inclination
(Brockhaus, 1980; Caliendo, Fossen, & Kritikos, 2009). Other articles did find differences
existed (Begley & Boyd, 1987; Hull, Bosley, & Udell, 1980). In another study, Gilmore et al.
(2004) noticed how valuable tools emerged from managerial competence and networking in
managing risk to improve the risk-taking inclination of entrepreneurs.
Despite society and educational sources playing down individualism and stressing
teamwork and community, Alstete (2008) determined in a study of 159 entrepreneurs self-
employment is the prime motivation (44% of the people surveyed). The attraction to self-
employment arose from the desire for individual independence. Besides, the survey found the
ability to control one’s own destiny important to another 19% of the people surveyed. One of the
benefits of the reliance on individual efforts emanated from the capacity to benefit the
community. Only 13% of entrepreneurs surveyed suggested risk acted as a major deterrent. Of
the people surveyed, 21% advised aspiring entrepreneurs to engage in a thorough planning effort
before starting a new business (Alstete, 2008).

51. 39
In line with balancing entrepreneurial opportunism with risk perception, Bishop and
Nixon (2006) asserted that evaluating opportunities with antecedent goals would help to predict
the likelihood of entrepreneurial success. Bishop and Nixon noted the literature lacks
information about prenascent venture evaluation. For example, venture capitalists rely on
information contained in business plans and market research to evaluate such ventures. Analysis
of strength, weaknesses, opportunities, and threats (SWOT) helps the venture capitalist decide on
plans. The literature lacks evidence of planning by the entrepreneur in performing such
evaluations. Not enough attention to the addressing what venture capitalists consider critical
success factors may contribute to the high failure rates of entrepreneurs (Bishop & Nixon, 2006;
Proimos & Murray, 2006).
Related to needed venture planning by nascent entrepreneurs, Gelderen, Thurik, &
Bosma (2006) determined that nascent entrepreneurs with limited experience benefit from
starting small. Gelderen et al. noted people with experience understood how seeking guidance
and knowledge is important. Similarly, Geldren et al. also found that employing a plan
contributes to a firm’s future success. This study included a sample of 517 nascent entrepreneurs
over a three-year period. Gelderen et al. used logistic regression analysis to test whether a
venture is successful or unsuccessful using four variables. The variables included the presence of
a business plan, perception of market risk, part-time or full-time start-up, and a team versus solo
effort. The study divided the results between people with high and low ambition. The researchers
determined that start-up capital and market risk provided the highest contribution to success or
failure (Gelderen, et al., 2006).
Although the study confirmed the need for venture planning as applied to risk
management, the study did not deal with the cause of the risk perception. Neither did the study

52. 40
settle on the influence of the timing of risk awareness nor management influence on success
rates. The researchers did recognize that risk management strategies should lead to lower
perception of risk (Gelderen, et al., 2006). Similarly, Gelderen et al. showed further that risk
management improves the potential for earning more start-up capital from sources other than
conventional lenders. Geldren et al. noted that such results run counter to Delmar and Shane
(2004) in which the planning efforts mainly contribute to legitimizing efforts rather than
predicting success. Gelderen et al. finished by noting that a need exists for more research in the
prestart-up phase about the use of predictors to evaluate performance.
In harmony with Gelderen’s assertion, Wiltbank, Read, Dew, and Sarasvathy (2009)
found investors who focused on opportunities at an earlier stage realized fewer negative exits. In
uncertain settings, prediction and control of risk take on a greater role in planning for success.
Investors who stress prediction invest greater amounts; whereas investors who focus on control
have fewer negative exits. The study implies investors do not all have the same appetites for risk
and return. Some investors focus on high-risk, high-return ventures, and others focus on
achieving a greater number of lower-risk, lower-return successes. Investors focusing on
prediction invest higher amounts, and those who concentrate on lower risk-return investments
stress control (Wiltbank, et al., 2009).
In contrast to the view risk management is more a matter of strictly risk perception,
traditional economic literature views risk as either stand-alone risk that a firm can manage or the
systematic risk credited to market conditions. A firm has little control over market risk because
an individual firm cannot control market volatility (Brigham & Houston, 2001; Ross,
Westerfield, & Jaffe, 2005). Casson (2005) asserted that competition spurs volatility of market
demand and that demand shocks caused by competition provides a source of risk to the

53. 41
entrepreneur. Casson suggested that such shocks cause a “flow of information” problem for the
entrepreneur to watch to assess demand volatility. Janney and Dess (2006) described this
information flow as “idiosyncratic knowledge and opportunities” or specialized knowledge
without value to others (p. 391). One can find in economic literature that a firm should expect
such shocks. A firm’s stock price builds in the influence of demand volatility (Brigham &
Houston, 2001). Without public financing the entrepreneur bears the risk of such demand
influences.
With the influence of uncertain demand, Wu and Knott (2006) studied nascent
entrepreneurs in the banking industry by using the Federal Deposit Insurance Corporation
(FDIC) data for newly chartered banks (170,859 observations). Wu and Knott tested the theory
that entrepreneurs are risk averse about uncertain demand, but overconfident or risk-seeking in
managing cost and realizing a profit stream. The results of the study showed that entry to the
industry increased with uncertain cost, but decreased with uncertain demand (Wu & Knott,
2006). The study explained that although uncertain demand represents systematic market risk
(diversifiable), the entrepreneur senses such risk as necessary to deal with demand influences and
tempers market entry decisions if the risk is too high. Wu and Knott’s results make obvious the
notion that an early awareness of the uncertain demand provides an exit alternative for the risk-
averse entrepreneur to lower the likelihood of failure. Similarly, such results revealed how
entrepreneurs are overconfident of the founder’s own abilities. Such results are consistent with
Janney and Dess (2006) and Grichnik (2008) in how overconfidence influences risk perception.
Not only are entrepreneurs overconfident about self-abilities and pursuit of opportunities,
but firm founders overlook the effect of waiting to detect threats from risks the founder fails to
envisage. Although a high-level of commitment characterizes entrepreneurs, neglecting the