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Entrepreneurial founder teams: factors associated with member entry and exit.

This exploratory study provides a review of the neglected area of entrepreneurial founder team turnover. A novel distinction is made between entrepreneurial founder team member entry and team member exit. Ninety owner-managed ventures were monitored between 1990 and 2000. Presented hypotheses relating to a team's human capital were explored using multivariate logistic regression analysis. Variables associated with entry were found not to be the same as those associated with exit. The size of the founding team was significantly negatively associated with subsequent team member entry. The link between team turnover and entrepreneurial team heterogeneity was mixed. Functional heterogeneity was weakly significantly positively associated with team member entry. Heterogeneity of prior entrepreneurial experience was significantly positively associated with team member exit. In addition, family firms were significantly negatively associated with team member exit. The average age of the team was not significantly associated with team member entry or exit. Additional insights in future research may be gathered if a broader definition of team turnover (i.e., considering team member entry and exit) is considered. Practitioner awareness of the different factors associated with team member entry and exit may encourage them to provide assistance, which facilitates the team building process over time in developing firms. Promising areas for additional research are highlighted.

Introduction

Gartner et al. (1994) argued that the "entrepreneur in entrepreneurship" is typically plural, not singular. Only recently has the entrepreneurial team phenomenon received explicit attention (Ensley, Carland, & Carland, 1998, 2000; Ensley et al., 1999). Entrepreneurial founder teams (EFTs) may provide a venture with access to an array of valuable financial, social, and human capital resources (Kor & Mahoney, 2000). Each team member adds to the diversity of views and skills, and can enable the completion of complex tasks. The presence of an EFT can play a pivotal role facilitating business development and superior business performance (Roure & Madique, 1986; Kamm & Shuman, 1990; Westhead, 1995). Subsequent changes in the EFTs have been noted (Cooper & Daily, 1997). Cooper and Bruno (1977) detected that 48% of surveyed high-technology firms reported that at least one founder had left the surveyed ventures. Boyd and Gumpert (1983) found that more than two-thirds of founders starting with partners eventually dissolved ties. Further, Timmons (1990) focusing upon high-potential ventures noted that almost every new firm had lost at least one founder over a five-year period.

Changes in senior managers have been explored in studies focusing upon top management team (TMT) turnover. These studies have focused on large established firms and have explored turnover with regard to organizational strategy and performance (Hambrick & Mason, 1984; O'Reilly, Cardwell, & Barnett, 1989; Jackson et al., 1991). TMT turnover can be viewed as a strategy of adaptation linked to changing external environmental conditions (Furtado & Karan, 1990; Wiersema & Bantel, 1992, 1993). Also, TMT turnover may encourage the successful turnaround of a business (Kesner & Dalton, 1994). For example, poor business performance can preempt TMT turnover in large corporations. In addition, the announcement of changes to a company's TMT can impact its share price (Furtado & Karan, 1990).

In sharp contrast to larger established firms, the issue of management turnover has been neglected in the context of independent private firms owned by EFTs. The relationships found with regard to TMTs in larger established firms may not necessarily hold for EFTs in independent private firms. Two features of EFTs suggest that their turnover will be distinctive. First, there are important differences in ownership and control between larger established firms and newer independent private firms. Fama and Jensen (1983) argue that classic entrepreneurial firms are associated with owners (i.e., principals) that combine residual risk bearing (i.e., ownership) and decision making (i.e., control). Indeed, Hawley (1927) argued that ownership rights are crucial for undertaking entrepreneurship, because they allow the entrepreneur to make decisions about the coordination of resources to gain entrepreneurial rents, in return for absorbing the uncertainty of owning those resources. The majority equity stake generally held by EFTs brings power that can imprint on the formulation and execution of strategy (Boeker, 1989). Studies focusing on entrepreneurial teams generally define team members as those who hold ownership and control positions (Kamm & Shuman, 1990; Gartner et al., 1994; Watson, Ponthieu, & Critelli, 1995; Cooney, & Bygrave, 1997; Chandler & Hanks, 1998a; Ensley, Carland & Carland, 2000). (1) In large complex organizations, there are benefits from separating decision-making functions (i.e., control) from residual risk bearing (i.e., ownership). Managers in most large organizations are unlikely to hold substantial amounts of equity. We can speculate that the link between adverse performance and team departures may be relatively weaker in the context of EFTs (Furtado & Karan, 1990). In contrast to TMTs in larger established organizations, EFTs do not have the external pressures to leave imposed by a board of directors, or the market for corporate control.

A second issue concerns the nature of team turnover itself. Team turnover may be attributed to the departure of existing team members (i.e., exit) and/or the introduction of members to the team (i.e., entry). Studies have tended to focus on team turnover either in terms of the extent to which members were no longer with the team after a specified period (i.e., exit) (Jackson et al., 1991; Walsh & Ellwood, 1991; Wiersema & Bantel, 1993; Krug & Hegarty, 1997), or the extent to which there were changes in the TMT over a specified period (Daily & Dalton, 1995; Krishnan, Miller, & Judge, 1997). The latter group of studies do not distinguish between entry and exit. These studies predominantly relate to large established firms, where arguably the necessary range of managerial skills are already present in the TMT so that team member entry is less of an issue. Team member entry is likely to be important for new private ventures, because venture owners need to fill skills gaps to facilitate the development and implementation of their strategies. As the firm develops beyond the start-up phase, the competencies and behaviors required are likely to change, necessitating augmentation and transition in the initial founding team (Gartner, Bird, & Starr, 1992). New team members will need to be equity holders in order to have the incentives and the power to enhance organizational performance. In contrast, exit from a team has been widely researched in large established firms, with under-performing managers being replaced due to conflicts and reduced cohesion (O'Reilly et al., 1989; Ensley et al., 2002).

This study aims to make the following contributions to knowledge. First, the study explores the neglected area of team turnover in EFTs. In particular, we suggest that greater clarity is needed when discussing turnover with regard to team member entry as well as exit. Second, guided by the human capital perspective, we suggest that the variables associated with team member entry may not necessarily be the same as those associated with team member exit.

The article is structured as follows. In the following section, we discuss the conceptual framework underpinning the study. The second section develops the hypotheses and, in particular, explores in turn whether entrepreneurial team member entry and exit are associated with the initial amount and nature of human capital embodied in the team itself. In the third section, the sample and methodology utilized are discussed. The fourth section provides definitions of the selected dependent, independent, and control variables. Results are then presented in the fifth section. The final section discusses conclusions, limitations, and areas for further research.

Conceptual Framework

Venture development may be shaped by the ability of an entrepreneur to efficiently utilize accumulated tangible and intangible resource stocks (Bloodgood, Sapienza, & Almeida, 1996). A venture with an EFT will generally have a larger and a more diverse array of human capital than a venture associated with a solo entrepreneur. Becker (1975) argued that human capital resources consist of achieved attributes, which are linked to increased levels of productivity. The EFT may use the human capital of its members to leverage social (Adler & Kwan, 2002), financial, and other forms of capital. However, we acknowledge that some solo entrepreneurs may be able to access human capital from their pool of employees. Due to their ownership stake in the firm, EFT members may have a clearer incentive to leverage their human capital to enhance organizational performance. In this study, EFT members are individuals with an equity stake in the business, and who have a key role in the strategic decision making of the venture at the time of founding. The firm thus possesses a supply of human capital resources inextricably linked to the team members who founded the venture. These initial resources, may impact upon the strategic alternatives at the entrepreneurs' disposal, which in turn bear upon the capabilities developed in younger firms (Boeker, 1989). These resources are not necessarily fixed. Rather, team members can manage the resources at their disposal through the entry of new members, as well as the exit of team members.

The overall level of human capital in an EFT is a function of the quantity and quality of the human capital embodied in each member of the team. One proxy for the quantity of human capital is the size of the team. The larger the EFT, the greater the absolute level of human capital at its disposal. If the size of the team remains stable in the short to medium term, its level of human capital can only be increased through learning and training. A quicker means of increasing the absolute level of human capital may be through the introduction of new team members.

The size of a team does not necessarily equate with the quality of human capital accumulated. One means of assessing the quality of human capital of the team as a whole is to examine the extent to which the human capital of individual team members is complementary or not. The heterogeneity of human capital can be particularly important for new ventures, because as the venture evolves, certain human capital attributes may be more essential than others. EFTs associated with small firms, and confronting financial constraints, can draw upon the heterogeneous human capital of individual team members, and use their resources and legitimacy to enhance the survival chances of the firm (Zimmerman & Zeitz, 2002). Mismatches between the competencies required by the venture and those possessed by the team may emerge over time (Virany & Tushman, 1986; Birley & Stockley, 2000). Individuals with human capital not currently possessed by the EFT may be encouraged to join the team. It can be reasonably speculated that homogeneous EFTs will be more likely to introduce new team members.

The downside of expanding the EFT is the greater potential costs associated with coordination and integration of team members. Difficulties with the coordination and integration of team members can have serious implications for the cohesion of the team. The lower the level of cohesion, the higher will be the costs of coordination and integration of team members. If cohesion is not ensured, the stability of the team may be compromised, resulting in team member exit. Evidence suggests that cohesive teams with close social relationships (Ensley, Pearson, & Amason, 2002) exhibit higher levels of trust and affinity towards one another, as well as higher levels of satisfaction with the team as a whole (O'Reilly et al., 1989). Ensley et al. (2002) found that team cohesion increased cognitive conflict, which is considered desirable, while minimizing affective conflict, which is considered to be dysfunctional. They concluded that team cohesion may enhance firm performance, as well as reduce the incidence of team member exit (O'Reilly et al., 1989).

The cohesion of an EFT can be linked to the size of the team and the heterogeneity of the team's human capital. Higher levels of team member heterogeneity may be associated with higher costs of coordination and integration of team members. Heterogeneity of various aspects of human capital has been linked to conflict and strategic consensus (Knight et al., 1999; Pelled, Eisenhardt & Xin, 1999). These problems are presumed to be associated with team member exit.

Derivation of Hypotheses

Our argument, as outlined above, is that as the firm develops it typically requires an evolving set of human capital. Where the firm's stock of human capital is limited in terms of EFT size, or the quality of the human capital possessed by each team member, we would expect the firm to add members to the EFT. Some firms may be associated with homogeneity with regard to the stock of human capital, as well as a duplication of expertise. For the latter firms, we would expect that the EFT would seek to augment its array of human capital. In contrast, heterogeneous EFTs are likely to be associated with higher costs of coordination and integration of team members. The latter firms would be expected to be associated with EFT member exit. In the following sections, hypotheses are presented relating to team member entry and exit. Where possible we substantiate our conceptual arguments with existing studies of private founder-owned ventures (i.e., where there is limited separation of ownership and control). Due to the sparsity of research specifically focusing upon EFTs, we use evidence relating to TMTs to guide the formulation of hypotheses relating to team member entry and exit in private firms. Separate hypotheses relating to team member entry and exit are discussed below in relation to several team dimensions.

Team Member Entry

EFT member entry may be associated with a team that does not have the necessary human capital to carry out its productive activities. In this section, three aspects of the level of human capital are explored in relation to a firm's propensity to add EFT members: the size of the team, the average age of the team, and whether or not the firm is a family firm. In addition, we discuss the implications of the heterogeneity of human capital in the team for member entry.

The Level of Human Capital in a Team

The overall level of human capital in an EFT can be linked to the quantity and quality of human capital embodied in each member of the team. Many owner-managed ventures are established by relatively small entrepreneurial teams with limited resource pools (Kor & Mahoney, 2000). EFT members seeking venture development may subsequently seek and recruit new team members to cover the broadening scope of managerial resource requirements. This discussion suggests the following hypothesis:

H1: The size of the founding team is negatively associated with subsequent team member entry.

As intimated above, the total human capital available to the firm may be associated with the quality and quantity of its EFT members. The average age of a team can be taken as a proxy for the accumulated human capital of the team. Teams composed, on average, of younger individuals may possess fewer experience-related human capital resources, provoking a need to bring in new team members who can fill such gaps. This discussion leads to the following hypothesis:

H2: The average age of founding team members is negatively associated with subsequent team member entry.

An overriding concern for the owners of family firms is to provide employment (i.e., managerial) opportunities for family members (Westhead, 1997). Owners of family firms seeking to ensure family ownership and control of their ventures are generally reluctant to employ "outsiders" (i.e., non-family members). The EFT in family firms can be expanded in two ways. First, if available, additional family members may be added to the EFT. Family members may have already accumulated idiosyncratic knowledge relating to their family venture (Bjuggren & Sund, 2002). The costs of adding new family members associated with ex-ante informational uncertainty may be less than the costs of adding non-family members, because the EFT already knows the new team members. Second, non-family members may be promoted to key managerial positions, or "outsiders" with managerial or specific expertise may be recruited. Several studies have suggested that family firms should recruit more "outsiders" on to their boards to obtain more varied and objective advice (Hoy & Verser, 1994; Fiegener et al., 2000; Westhead, Cowling, & Howorth, 2001). This discussion leads to the following hypothesis:

H3: Family firm teams will be positively associated with subsequent team member entry.

Team Heterogeneity

Heterogeneity may be indicative of a broad range of human capital within the team, facilitating the gathering of information from a variety of sources, and inducing alternative interpretations and perspectives (Smith et al., 1994; Hambrick, Cho, & Chen, 1996; Ensley et al., 2000). Higher levels of heterogeneity within a team are expected to be associated with less duplication of specific skills and human capital. Studies exploring heterogeneity have generally tended to focus on demographic heterogeneity as a proxy for cognitive characteristics (Hambrick & Mason, 1984; Wiersema & Bantel, 1992). There is, however, some debate surrounding the extent to which demographic characteristics (e.g., ethnicity and gender) are representative of underlying cognitive processes (Kilduff, Angelmar, & Mehra, 2000). Studies focusing upon TMTs in larger organizations (Eisenhardt & Schoonhoven, 1990; Pelled et al., 1999; Ensley et al., 2000) have generally focused upon demographic measures. The functional background of team members can be viewed as a more appropriate surrogate indicator of the heterogeneity of the human capital necessary for venture development. Owners of private firms with a small pool and array of resources may, therefore, seek to increase the human capital of the firm to ensure business development.

Resource-based theorists suggest that developing firms require an increasingly diverse range of human capital (Kor & Mahoney, 2000). A firm associated with the liabilities of "newness" and "small size" may have limited access to a broad array of resources. EFTs associated with low functional heterogeneity may be associated with skill shortages. Also, an EFT characterized by a low degree of functional heterogeneity may have a duplication of functions skills within the team. This discussion suggests the following hypothesis:

H4: The functional heterogeneity of a founding team is negatively associated with subsequent team member entry.

Team Member Exit

In this section we relate the likelihood of exit to the alternatives faced by team members, their emotional attachment to the team, and conflicts between team members. The more attractive the perceived alternatives, the lower the emotional attachment to a team, and the higher the levels of conflict within a team, the greater the likely incidence of team member exit. In this section, three aspects of the level of human capital are explored in relation to the exit of EFT members: the size of the team, the average age of the team, and whether or not the firm is a family firm. In addition, we examine the implications of the heterogeneity of human capital in the EFT for member exit.

The Level of Human Capital in a Team

Firms with larger and more heterogeneous EFTs have to deal with coordination issues, which can be linked to the subsequently higher probability of team member exit. EFTs with numerous members may meet less frequently, which may lead to problems in decision making and implementation (Hambrick et al., 1996). Also, larger teams may be associated with higher levels of dysfunctional affective (emotional) conflict (Amason & Sapienza, 1997), which may lead to team member exit. Smaller teams that are closely knit may be less likely to experience team member departure because members will have to consider both the economic and psychic costs associated with leaving the team (Francis & Sandberg, 2000). This discussion suggests the following hypothesis:

H5: The size of a founding team is positively associated with subsequent team member exit.

The probability of EFT member exit from a business may be negatively related to the psychic income derived from business ownership, and the costs of switching to alternative occupations (Gimeno et al., 1997). Flexibility may decline and rigidity and resistance to change increase as people age (Wiersema & Bantel, 1993). Older team members may be more risk averse in their behavior, more emotionally attached to the business, and reluctant to transfer their human capital by quitting the venture in order to move to an alternative organization (Morin & Suarez, 1983; Palsson, 1996; Levesque, Shepherd, & Douglas, 2002). This discussion leads to the following hypothesis:

H6: The average age of team members is negatively associated with subsequent team member exit.

The extent to which EFT members know each other may be associated with team member exit. Further, the degree of prior joint experience between members of a team may impact upon the team's knowledge of the skills and abilities at its disposal (Birley & Stockley, 2000). Prior joint experience might be associated with more efficient decision making (Eisenhardt & Schoonhoven, 1990). Most notably, team members can show more awareness of each other, and do not have to deploy efforts toward team building and eradicating emotional conflict. A team comprising family members may resemble the characteristics of a team with prior joint experience. When considering exit from the team, a member is likely to consider the costs and benefits associated with this decision (Francis & Sandberg, 2000). In closely knit teams, the costs of departure may include the psychic costs of leaving friends and family, as well as the economic costs and considerations of personal risk. By imposing additional costs on departure, family ties may reduce exit-related turnover among EFTs. This discussion suggests the following hypothesis:

H7: Family firm teams will be negatively associated with subsequent team member exit.

Team Heterogeneity

EFT heterogeneity may be associated with less duplication of human capital and improved decision making (Bantel & Jackson, 1989; Murray, 1989). However, heterogeneity creates the potential for increased conflict within the team. Functional heterogeneity, which we believe is a more appropriate indicator of human capital than demographic factors, may create the potential for increased conflict. Greater potential for disagreement may encourage the exit of team members (Amason, 1996; Jehn, 1997). This discussion leads to the following hypothesis:

H8: The functional heterogeneity of a founding team will be positively associated with subsequent team member exit.

EFT members may differ according to their prior levels of entrepreneurial experience. As with functional heterogeneity, prior entrepreneurial experience may be associated with assets as well as liabilities (Starr, Bygrave, & Tercanli, 1993; Wright, Robbie, & Ennew, 1997). On the asset side, entrepreneurial experience may considerably enhance an EFT member's human capital (Gimeno et al., 1997; Chandler & Hanks, 1998b; Ucbasaran, Wright, & Westhead, 2003), and the overall human capital of the team. Conversely, EFT members associated with the liabilities of prior entrepreneurial experience may exhibit "irrational," or sub-optimal behavior. Heterogeneity of prior entrepreneurial experience may create conflict between non-experienced and experienced team members, particularly, if the latter have a dominating role. As a result, cohesion may be undermined and team members may exit. This discussion suggests the following hypothesis:

H9: The entrepreneurial experience heterogeneity of a founding team will be positively associated with subsequent team member exit.

Methods

The Sample

This study draws upon a longitudinal data set of small and medium-sized private enterprises. Principal founders of independent businesses located in 12 environments in Great Britain were originally surveyed in 1990/91 (Birley & Westhead, 1992). In total, the study in 1990/91 yielded a sample of 744 valid responses, 621 of which represented businesses between the age of 1 and 50 years. In 1997, attempts were made to contact the 621 independent firms interviewed in 1990/91. Data were collected over a two-month period using structured telephone interviews. After detailed and extensive searching, we noted that 138 businesses (22.2%) had survived in 1997 at the original 1990/91 address, and a further 75 businesses had survived at a new address (12.1%). Thirteen businesses had survived but had been taken over by another business (2.1%). Forty-seven businesses were confirmed as having closed (7.6%), whilst a further 348 businesses (56.0%) did not appear to be trading in any identifiable form. Following previous studies (Garnsey & Cannon-Brookes, 1993; Westhead, 1995), businesses that could not be traced through this process were regarded as business closures.

Over the period July 2000 and August 2000, attempts were made to contact the 213 confirmed surviving businesses in 1997. In order to ascertain their status in 2000, and to update the addresses of these businesses, a four-stage process was used. First, a search on the UK Info Disk 2000 CD-Rom service was conducted. Second, a search on the BT (British Telecom) On-Line service was conducted. Third, the value-added tax (VAT) de-registration directory was searched. Fourth, Kompass and Kelly's Trade Directors were searched. This process revealed that 29 firms were confirmed to have closed by 2000. One firm was confirmed to have been taken over. In total, 183 surviving firms were identified.

Attempts were made to contact the owners of the 183 surviving firms by telephone. Ninety-eight firms agreed to be interviewed; though six were eliminated due to our inability to speak with the principal owner. An effective response rate of 50% was achieved. Mann-Whitney "U" tests were conducted to test for response bias. These tests revealed no statistically significant differences (at the 0.01% level) between respondents (92 firms) and non-respondents (91 firms) in terms of the age of the business, the employment size of the business, industry and sales turnover with regard to data collected in 1997. This evidence does not eliminate the concern relating to non-response bias, but it does indicate some representativeness. Due to the inevitable problem of sample attrition, the follow-on sample cannot be regarded as a representative sample of the total private business population in the U.K. Responses relate to private firms that have been able to address business survival and development obstacles.

Of the 92 private firms in the follow-on sample, 58 (63%) respondents indicated the firm had been established as a team start, and the remaining 34 (37%) respondents reported solo entrepreneur start-ups. This finding is consistent with the notion that entrepreneurial teams form a sizeable proportion of new ventures. In 39 out of the 58 team founder cases (67%), there were two members in the team, while in 13 cases (22.4%) the team consisted of three members, and in the remaining 6 cases (10.4%) between three and six members were involved in the team.

EFT members were defined as individuals who owned at least 10% of the equity in the venture. They also hold a key role in the strategic decision making of the venture at the time of its founding. In order to analyze changes in team member entry and exit, three data points were selected: number of EFT members at founding, number of team members in 1990, and the number of team members in 2000. These three points in time enabled the research team to explore whether the increase (or decrease) in the number of team members between founding and 2000 cancelled each other out. Some respondents reported the same number of team members at founding and 2000. Additional analysis revealed that some of these respondents had actually recorded changes in team member composition over this period. The "hidden" dynamics of team member entry and exit were, therefore, monitored over the selected time periods. If team member entry or exit was recorded in either, or both of these two periods, the dependent variables were allocated a value of one, whilst no change was allocated a value of zero (see discussion on definition of the dependent variables in next section).

The team member entry analysis focused upon the full sample of 92 firms relating to firms where new human capital was introduced. Further, the sub-sample of firms that began with a founding team was explored with regard to team member exit. Ninety of the firms in the full sample provided data on entry, of which 38 firms reported that they had experienced new team member entry. Twenty-two of these firms introduced one new member, 11 firms introduced two new members, and 5 firms introduced three or more new members. Only 5 out of the 38 firms reporting team member entry also reported team member exit. Of the 56 valid team founder firms providing data, 22 firms reported team member exit. Fourteen of the firms experienced the exit of one member, five firms experienced the exit of two members, and three firms experienced the exit of three or more members. Only one out of the 22 firms reporting team member exit indicated that they had introduced a new team member.

This study focuses on information provided by one of the individuals meeting our criteria for a team member. Reliance on one respondent is not expected to be a problem in relation to the variables explored. It is not uncommon for studies of teams to rely on the information provided by key respondents, such as the chief executive officer (CEO) (Eisenhardt & Schoonhoven, 1990; Knight et al., 1999). Given that most of the teams examined in this study are associated with two or three individuals (mean size was 2.49), we would expect team members to know each other well enough to provide some basic background information.

Definition and Measurement of Variables

Dependent Variables

The team member entry and exit dependent variables were defined as follows:

Team Member Entry: Three points in time (i.e., founding, 1990/91 and 2000) were used to determine whether a firm reported EFT member entry between founding and 1990/91 and/or between 1990/91 and 2000. If a respondent reported that the firm had introduced at least one new team member over either of the two periods, the firm was allocated a value of one. Conversely, if no team member had been introduced over either of the two periods, the firm was allocated a value of zero.

Team Member Exit: Three points in time (i.e., founding, 1990/91 and 2000) were used to determine whether a firm reported EFT member exit between founding and 1990/91 and/or between 1990/91 and 2000. If a respondent reported that the firm had experienced the departure of at least one team member over either of the two periods, the firm was allocated a value of one. Conversely, if no team member had left the team over either of the two periods, the firm was allocated a value of zero.

Independent Variables

The level of human capital in a team was measured with regard to the size of the team, average age of the team, and whether or not the venture was a family firm. These independent variables are discussed, in turn, below.

Entrepreneurial Team Size: Team size was measured in 1990/91 in terms of the number of members in the founding team (i.e., founders who owned at least 10% equity in the venture, and they played a key role in the strategic decision-making of the venture at founding).

Average age of the team: In 2000, we ascertained the average age of the team at time of founding. The average age of the team variable was based on the following categories: 16-24 years (1); 25-34 years (2); 35-44 years (3); 45-54 years (4); and over 55 years (5).

Family Firm: In 2000, we ascertained whether the firm was perceived to be a family firm. Respondents perceiving a family firm were allocated a value of one, whilst those perceiving a non-family firm were allocated a value of zero.

Functional and Entrepreneurial Heterogeneity: The telephone interviews conducted in 2000 gathered demographic and functional background data for each member of the initial team. In the case of categorical variables, Teachman's (1980) heterogeneity scale was used to measure heterogeneity (H) = -[SIGMA] [P.sub.i] (ln [P.sub.i]). This index takes into account how team members are distributed among the possible categories of a variable. The total number of categories of a variable equals n, and [P.sub.i] is the fraction of team members falling into each category of the variable (Pelled et al., 1999). For functional heterogeneity, the following categories were used: general management (1); sales/marketing (2); production (3); and finance (4). For heterogeneity of entrepreneurial experience, yes (1) and no (0) categories were used.

Control Variables

Organizational characteristics were considered by Jackson et al. (1991) as control variables in their study of TMTs. In this study, four control variables were selected and are discussed below.

Venture Firm Size and Age: The skills required by a team may vary between younger and older ventures (Hambrick & Mason, 1984). Firm size and age were ascertained relating to data collected in 1990/91. The total number of employees employed in the business when it received its first order was log transformed. Further, the age of the firm was calculated with regard to the number of years since the business received its first order, and was log transformed.

Industry: The propensity to introduce (and remove) team members may be associated with a firm's industrial activities (Wiersema & Bantel, 1993). In 1990/91, the main industrial activity of each firm was ascertained. Manufacturing firms were coded with a value of one, while service-based firms were coded with a value of zero. All firms in the sample were either manufacturing or services firms.

The External Environment: Respondents were asked to indicate in 1990/91 the extent to which they agreed with five statements relating to their perception of the firm's external environmental conditions when the businesses were founded. A five point scoring system was employed, where a value of 1 suggested "strongly disagree," a value of 3 suggested "neutral," whilst a value of 5 suggested "strongly agree." These statements were derived from the original Society for Associated Research on International Entrepreneurship (SARIE) questionnaire (Birley & Westhead, 1993). Environmental hostility was measured with regard to the following statements: there was a large number of businesses in the area that I live; there was a large number of businesses in my industry; there was a large number of business failures in the area that I live; there was a large number of business failures in my industry; and there was political uncertainty in the country. With reference to these statements, a summated average scale was calculated (Cronbach's Alpha = 0.81).

Results

Descriptive statistics and Pearson correlation coefficients relating to the selected control and independent variables are reported in Table 1. As expected, the size of the team was significantly positively (p < .01) associated with whether or not the team was a family firm (r = .269), functional heterogeneity (r = .686), and entrepreneurial experience heterogeneity (r = .535). Family firms were significantly positively (p < .01) associated with functional heterogeneity (r = .324). In addition, heterogeneity of entrepreneurial experience was significantly positively (p < .05) associated with functional heterogeneity (r = .232), but significantly negatively (p < .05) associated with manufacturing firms (r = -.262). The Variance Inflation Factor (VIF) scores were all low apart for the measures relating to team size and functional heterogeneity. Results from the regression models may be distorted by the problem of multicollinearity, particularly, the links between team size and the measures for heterogeneity. This issue needs to be considered when interpreting the results from the presented regression models.

Logistic regression analysis is an appropriate technique to explore the combination of variables associated with a binary dependent variable. This technique does not have limiting assumptions surrounding data normality. The combination of control and independent variables associated with the entry of new members to the founding team are summarized in Table 2, whilst variables associated with the exit of members from the founding team are reported in Table 3. With regard to each dependent variable two models are presented. The first model focuses upon all the control and independent variables excluding the variable(s) relating to heterogeneity. However, the second model includes control and independent variables as well as the variable(s) relating to heterogeneity. Following the precedent of previous exploratory studies, we sought to avoid Type II errors (i.e., accepting the null hypothesis when it should be rejected). The 0.1 level of significance was, therefore, selected to discuss significant relationships highlighted by significant models.

Team Member Entry

Both models in Table 2 are significant at the 0.05 level. Model 1 relates to team member entry and excludes the functional heterogeneity independent variable. Two variables are individually significantly associated with the dependent variable. Subsequent team member entry is significantly positively associated with the average age of the team (p < .01), and weakly negatively associated with the size of the founding team (p < .10).

Model 2 relates to team member entry and includes the functional heterogeneity independent variable. This latter model is associated with a higher level of "explanation" than Model 1 (see Cox & Snell R square, Nagelkerke R square, and R square logit). Three variables are individually significantly associated with the dependent variable. As found in Model 1, subsequent team member entry is positively associated with the age of the team (p < .001), and negatively associated with the size of the founding team (p < .01). Contrary to expectation, the level of functional heterogeneity in a founding team is weakly positively (rather than negatively) associated with member entry (p < .10). In part, this detected relationship may be due to the problem of multicollinearity highlighted above. We can infer from the evidence presented in Models 1 and 2 that firms with smaller EFTs are more likely to add new team members. H1 is, therefore, supported. In contrast, H2, H3 and H4 are not supported.

Team Member Exit

Models relating to the exit of members from the founding team are presented in Table 3. Model 3, which excludes the variables relating to functional and entrepreneurial heterogeneity, is not significant at the 0.1 level of significance. Consequently, this model is not discussed further. In contrast, Model 4, which includes the variables relating to functional and entrepreneurial heterogeneity, is significant at the 0.001 level of significance. None of the control variables is significantly associated with the dependent variable. However, two independent variables are significantly associated with the exit of members from the founding team. As hypothesized, family firms are negatively associated with the dependent variable (p < .01). Also, as hypothesized, the entrepreneurial experience heterogeneity of a founding team was strongly positively associated with subsequent team member exit (p < .001). Evidence reported in Model 4 supports H7 and H9, but fails to support H5, H6 and H8.

Conclusion

Limited research has been conducted surrounding the dynamics of team development in new and developing independent private firms. Studies focusing on TMTs in larger and established firms have failed to explore whether the factors associated with team member entry are the same as those associated with team member exit. Variables associated with new team member introductions, for example, have received limited attention in TMT studies. The novel contribution of this study has been the exploration of team member entry as well as team member exit reported by independent private firms. A unique comparative static longitudinal database of independent private firms was utilized to ascertain the entry and exit of team members at three points in time (i.e., founding, 1990/91 and 2000). A conceptual framework has been presented that emphasizes the importance of both human capital and team cohesion in private owner-managed firms. Linked to the conceptual framework, hypotheses have been presented. Several independent (and control variables) were identified and presumed to be associated with the two selected binary dependent variables. Multivariate logistic regression analysis was utilized to identify the combination of control and independent variables associated with EFT entry, or exit. Two models were presented with regard to each dependent variable. The first model included all the control and independent variables excluding the measure(s) relating to heterogeneity. The second model included control and independent variables as well as the variable(s) relating to heterogeneity.

A summary of the key findings from the multivariate regression models is presented in Table 4. Three out of the nine presented hypotheses were supported. One hypothesis relating to team member entry, and a further two hypotheses relating to team member exit were supported.

Supporting H1, we detected that private firms with smaller EFTs were more likely to report the entry of new team members. An important motive for the need to bring in new team members is to add to the total amount of human capital within a team. We can infer here that EFTs in private firms may be constrained by the amount of human capital at their disposal. This constraint can be overcome be recruiting appropriate additional team members.

In line with expectations (H7), family firm teams concerned with maintaining cohesion (i.e., protecting the interests of the family members that own the majority of ordinary voting shares in the business) are less likely to be associated with the exit of members from the EFT. When considering whether to leave the family firm, team members may reflect upon the potential non-pecuniary costs associated with affecting the family relationship. Although not in a statistically significant direction, we detected that family firms were positively associated with new member entry (Models 1 and 2 in Table 2), either from other family members or from outside, consistent with the need to augment human capital.

Supporting H9, firms exhibiting heterogeneity with regard to a team's entrepreneurial experience were more likely to be associated with the exit of team members. This suggests that where one or more entrepreneurs have prior entrepreneurial experience, these individuals may try to dominate those who are inexperienced entrepreneurially, thus reducing cohesion and creating conflict-induced team turnover. We can infer here that teams introducing members who have had prior entrepreneurial experience should be aware of both the assets and potential liabilities associated with this experience. The fact that one or more team members have been through the process before does not necessarily mean they can replicate previous contributions (and strategies) with the same success in the future.

Results from this study will interest practitioners (both entrepreneurs and venture capitalists). Most notably, we detected that EFTs in private firms do not remain static over time. For example, an EFT considered to be well balanced at the initiation of the venture may not be regarded as well balanced as the venture develops over time. If practitioners become more aware of the dynamic nature of entrepreneurial teams, they may be better able to provide assistance that facilitates the more appropriate management of the process of team member entry, as well as the process of team member exit. This more appropriate assistance may enhance the performance of assisted private firms. Practitioners should also assess the nature of human capital brought by individual members to the team. This study suggests diversity, in terms of entrepreneurial experience, which may increase the incidence of team member exit due to the problems associated with cohesion.

This study is associated with two main limitations. First, the sample size is relatively small, restricting the nature of multivariate statistical analysis, and the generalizability of the findings. Second, the study was unable to distinguish between voluntary and involuntary departure, and hence motives for bringing in new team members or motives for departure.

Table 4 highlights that the variables associated with team member entry are not the same as those associated with team member exit. Future studies focusing upon private firms need to consider, and distinguish between, team member entry as well as exit. Studies conducted in a variety of industrial, locational, and cultural settings, need to be conducted to ascertain whether the findings reported in this study can be generalized to other contexts.

Additional research is warranted relating to several issues. First, studies need to explore the processes leading to EFT turnover. For example, how does conflict (affective and functional) between team members impact on EFT turnover? To what extent do different levels of power of different equityholders affect their ability to enforce exit of partners? Second, the cognitive behavior of team members needs to be monitored to highlight the issue of diversity within teams. For example, does cognitive diversity within a team inhibit comprehensive examination of current opportunities and threats, as well as extensive long-range planning (Miller, Burke, & Glick, 1998)? Also, can a team member's mindset (e.g., managerial versus entrepreneurial) impact on EFT turnover? Third, studies need to explore the differing motives for team member entry and departure. For example, to what extent is bringing in new team members proactive and an indication that the team is aware of its limitations? To what extent is the team simply bringing in new members to replace those who have exited, or in the case of family firms, bringing in other family members for non-profit motives? How does the presence, or absence, of a formal board of directors affect the composition of an EFT over time? Fourth, how do these aspects of team turnover vary between different types of ventures, such as family versus nonfamily firms; start-up teams versus teams in entrepreneurial established businesses (e.g., some management buyouts and buy-ins); and start-up teams versus teams in established organizations? Fifth, there is potential for exploring definitional issues, and potentially distinguishing between a venture's management team and entrepreneurial team. Though there may be some overlap between a venture's management and entrepreneurial team, there is scope for exploring the extent to which all team members contribute to the key entrepreneurial functions of opportunity identification and exploitation, as opposed to only managerial functions. The distinction between the managerial and entrepreneurial team may, in addition, be pertinent in relation to individuals who are only promised equity at a later stage. In this study, such individuals were viewed as not being part of the entrepreneurial team on the grounds that they did not fulfil the joint ownership and control criterion. The latter individuals are viewed as agents rather than principals. Consequently, they are not in a position to decide on the entrepreneurial coordination of resources until such time as they become residual risk-bearing equity holders. The changing team behavior of managers as they move from having been promised equity to obtaining equity is an area that requires further exploration. Finally, additional studies might usefully involve data collection covering the perspectives of different team members in order to extend the examination of the rationale for team turnover.
Table 1
Pearson Correlation Matrix and Descriptive Statistics of Control and
Independent Variables

                        Mean   S.D.   VIF (a)    1.      2.      3.

1. Age (1)              2.71   0.34    1.320   1.000
2. Size (2)             0.47   0.82    1.057   -.025   1.000
3. Manufacturing (3)    0.37   0.49    1.118   -.094    .072   1.000
4. Team Size (4,5)      1.95   1.00    3.035    .081   -.109   -.183
5. Family (6)           0.33   0.47    1.336    .172    .104    .044
6. Hostility (7)        2.59   0.75    1.293    .132    .052   -.153
7. Founder(s) age (8)   3.29   0.91    1.137   -.186    .016    .032
8. Hfunc (9)            0.33   0.37    2.487   -.075   -.036   -.013
9. Hentexp (10)         0.01   0.23    1.669   -.086   -.128   -.262
                                                                  *

                          4.      5.      6.      7.      8.      9.

1. Age (1)
2. Size (2)
3. Manufacturing (3)
4. Team Size (4,5)      1.000
5. Family (6)            .269   1.000
                          **
6. Hostility (7)         .012   -.188   1.000
7. Founder(s) age (8)    .045    .082    .140   1.000
8. Hfunc (9)             .686    .324    .124    .015   1.000
                          **      **
9. Hentexp (10)          .535    .028    .095   -0.01    .232   1.000
                          **                              *

* Correlation is significant at 0.05 level (2-tailed); ** Correlation
is significant at 0.01 level (2-tailed).

(a) Variance Inflation Factor.

(1) Age = Natural log of age of firm in 2000 (years).

(2) Size = Natural log of number of employees in the business at time
of founding (full-time employees = 1; part-time employees = 0.5; and
casual employees = 0.25).

(3) Manufacturing = Whether the firm was engaged in manufacturing
(1 = yes; 0 = no) (alternative category represents services
activities).

(4) Team Size = Number of team members who had a least 10% equity and
were involved in the strategic decision-making at the founding stages
of the business.

(5) The average team size was 2.48 (standard deviation of 0.88) for the
team only sample.

(6) Family = Whether the firm was a family firm (1 = yes; 0 = no).

(7) Hostility = Environmental hostility.

(8) Founder(s) Age = Average age of the entrepreneurial founder team
members, or age of founder (years).

(9) Hfunc = Heterogeneity of functional background.

(10) Hentexp = Heterogeneity of prior entrepreneurial experience.

Table 2
Logistic Regression Models of Variables Associated
with the Entry of New Members to the Founding
Team (a)

                                      Dependent    Dependent
                                      Variable:    Variable:
                                        MEMBER       MEMBER
                                        ENTRY        ENTRY
Control and            Hypothesized    (Yes/No)     (Yes/No)
Independent            Direction of     Model 1     Model 2R
Variables              Association       [beta]      [beta]

CONTROLS
Age                                       2.406       2.869
                                            **          ***
Size                                      -.134      -1.49
Manufacturing                              .475        .416
Environmental                             -.161      -0.410
Hostility
TEAM LEVEL
Team Size                    -            -.473       -.868
                                      ([dagger])        **
Average Team Age             -            -.066        .041
Family                       +             .956        .614
Hfunc                        -                        1.764
                                                   ([dagger])
Model [chi square]                       15.583      18.512
Model [chi square]                         .029        .018
  significance
-2 log likelihood                        95.951      93.021
Overall predictive                       63.5%       72.9%
  accuracy
Cox & Snell R square                       .168        .196
Nagelkerke R square                        .229        .268
R square logit                             .146        .172
Number of businesses                     85          85

([dagger]) p <.10

* p <.05

** p < .01

*** p < .001

(a) When the model was run including only those businesses that started
as a team, the same variables were found to be significant except for
the age of the business variable.

Table 3
Logistic Regression Models of Variables Associated
with the Exit of Members from the Founding Team

                                      Dependent   Dependent
                                      Variable:   Variable:
                                        MEMBER      MEMBER
                                         EXIT        EXIT
Control and            Hypothesized    (Yes/No)    (Yes/No)
Independent            Direction of     Model 3     Model 4
Variables              Association      [beta]       [beta]

CONTROLS
Age                                     -1.780       -.856
Size                                      .057        .273
Manufacturing                            -.720       -.104
Environmental                           -0.065       -.297
  Hostility
TEAM LEVEL
Team Size                  +              .486       -.410
Average Team Age           -             1.059       1.355
Family                     -            -2.346      -2.756
                                           *           **
Hfunc                      +                         -.040
Hentexp                    +                         5.780
                                                       ***
Model [chi square]                      11.941      22.853
Model [chi square]                        .103        .007
  significance
-2 log likelihood                       49.850      38.939
Overall predictive                      74.5%         .824
accuracy
Cox & Snell R                             .209        .361
square
Nagelkerke R                              .297        .514
square
R square logit                            .216        .387
Number of businesses                    51          51

([dagger]) p <.10

* p <.05

** P <.01

*** p <.001

Table 4
Summary of Results

Team Member Entry Dependent Variable
H1: The size of the founding team is negatively          Supported
     associated with subsequent team member entry.
H2: The average age of founding team members is          Not Supported
    negatively associated with subsequent team member
    entry.
H3: Family firm teams will be positively associated      Not Supported
    with subsequent team member entry.
H4: The functional heterogeneity of a founding team is   Not Supported
    negatively associated with subsequent team member
    entry.

Team Member Exit Dependent Variable
H5: The size of a founding team is positively            Not Supported
    associated with subsequent team member exit.
H6: The average of team members is negatively            Not Supported
    associated with subsequent teats member exit.
H7: Family firm teams will be negatively associated      Supported
    with subsequent team member exit.
H8: The functional heterogeneity of a founding team      Not Supported
    will he positively associated subsequent with team
    member exit.
H9: The entrepreneurial experience heterogeneity of a    Supported
    founding team will he positively associated with
    subsequent team member exit.


Acknowledgments: We thank the participants at the Global Entrepreneurship Conference, 2001, Lyon, France, and the Babson-Kauffman Entrepreneurship Research Conference, 2001, Jonkoping, Sweden, for their valuable comments. The 1990/91 SARIE database was collected in association with Sue Birley. We would also like to thank Ada Karman Lei for her assistance in collecting the data in 2000. The insightful comments of Ray Bagby and two anonymous reviewers are appreciated. Opinions (and the potential errors) expressed in this articles are, of course, the authors' alone.

(1.) Having previously focused on control as the key element, Ensley and colleagues in their latest work now focus upon the requirement for both ownership and control.

Please send all correspondence to: Deniz Ucbasaran at the Nottingham University Business School, Jubilee Campus. Her e-mail address is deniz.ucbasaran@nottingham.ac.uk.

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Deniz Ucbasaran is lecturer in Economics of Enterprise, Nottingham University Business School, UK.

Andy Lockett is lecturer in strategy, Nottingham University Business School, UK.

Mike Wright is professor of financial studies and director of the Centre for Management Buyout Research at Nottingham University Business School. He is also a visiting professor at Erasmus University and INSEAD, and an editor of the Journal of Management Studies.
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