When does advice impact startup performance?

Chatterji, A., Delecourt, S. M., Hasan, S., & Koning, R. (2018). Strategic Management Journal.

Topics: Entrepreneurship, Performance, Training

Year: 2018

Country: India

 

Can advise influence a startup’s performance? The authors of this study demonstrate that entrepreneurs who received advice in a formal approach to managing people (instituting regular meetings, setting goals consistently, and providing feedback to employees) grew larger and were less likely to fail. 

Key takeaway:  Receiving advice in a formal management training can improve startup outcomes

Summary

Research on entrepreneurial training programs proved that entrepreneurs can acquire the necessary management skills (people-management, strategy, marketing, finance) through training programs. But advice has been much less explored as a source of management knowledge. The present study examines whether receiving advice on employee management has an impact on the startup’s performance (firm size and survival). They argue that “an entrepreneur who receives advice from a peer with a formal management style will experience increased startup growth and survival”. 

Data

They conduct “a randomized field experiment in India with 100 high-growth technology firms whose founders received in-person advice from other entrepreneurs who varied their managerial style”, in a managerial retreat for Indian startups in January 2016. Founders were randomly paired and asked to give each other advice and feedback to create exogenous peer groups. The data come from the baseline survey completed before the retreat, a post-retreat survey, and data collected from secondary sources two years after the retreat. 

Methodology

They examine the impact of conducting people-management tasks, and having other sources of management knowledge, on firm size and firm survival, by adopting a differences-in-differences estimation strategy with “period fixed effects, random effects for each firm, firm controls, and pre-and post-retreat controls”. To analyse survival, they “run cross-sectional logistic regressions with two-year survival” as the dependent variable. 

Findings

They find that “entrepreneurs who received advice from peers with a formal approach to managing people – instituting regular meetings, setting goals consistently, and providing frequent feedback to employees – grew 28% larger and were 10 percentage points less likely to fail than those who got advice from peers with an informal approach to managing people”, two years after the intervention. The results suggest that formal management training can improve startup outcomes, and highlights the importance of business training and incubator/accelerator programs especially in the emerging markets. 

However, the study holds some limitations, since the sample size of the study is modest and does not allow to explore specific mechanisms behind the findings. Furthermore, advice is only one of different channels through which founders receive knowledge, and future research can explore how the current findings apply to other kinds of learning. 

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