How Experience Shapes the Financial Thinking of Entrepreneurs

Greenslade-Yeats, James Reuben
Corner, Patricia
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Master of Business
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Auckland University of Technology

The way entrepreneurs think about the financial implications of starting a new venture is a crucial aspect of the entrepreneurial process. Scholars describe two contrasting views of this thinking process. The more traditional view, 'causation,' holds that entrepreneurs think predictively about financial outcomes, engaging in financial forecasting and calculating a venture's expected returns. The more recent view, 'effectuation,' suggests founders think about financing in terms of what they can control. In practice this means they only invest what they can afford to lose in new ventures and seek partners to provide additional finance. Existing empirical research shows that novice entrepreneurs tend to follow a causation process, while experienced entrepreneurs are more likely to engage in effectuation. Although it is clear that the key characteristic leading to differences in financial thinking is experience level, no one has accounted for how experience leads to such differences. My research question was therefore: 'How does experience of multiple venture start-ups affect the way entrepreneurs think about the financial implications of founding subsequent ventures?' To address this question I implemented a qualitative, narrative inquiry research design. Such a design is ideal for surfacing and understanding participants' lived experience and is recommended for entrepreneurship research. I collected primary data through participant interviews with experienced entrepreneurs and applied inductive data analysis techniques to surface themes. My study produced two key findings. First, entrepreneurs changed their approach to financial thinking over time, generally from a predictive/causation approach to a control-based/effectuation approach. Second, findings surfaced a process mechanism that brought about these changes: negative/unexpected outcomes caused entrepreneurs to reflect upon and change their financial thinking about venture start-ups. I discuss implications of findings for the wider entrepreneurship literature, suggesting that future research investigate 'experience of negative/unexpected outcomes' as an antecedent to effectuation.

Entrepreneurs , Financial thinking , New Ventures , Affordable Loss
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