Int Entrep Manag J DOI 10.1007/s11365-007-0045-0 Exploring the differences between franchisee entrepreneurs and nascent entrepreneurs Marc Sardy & Ilan Alon # Springer Science + Business Media, LLC 2007 Abstract This paper is singular in its use of the PSED dataset for deriving a better understanding of the nature of nascent entrepreneurs as compared to franchisee entrepreneurs. We used previous studies on the differences between the two groups and developed variables divided into three dimensions: (1) prior experience, (2) growth objectives, and (3) motivation and risk. Jonckheere–Terpstra (J–T) tests, ChiSquare tests, F-tests and logistic regression models detected differences in all three dimensions. The conclusion is that franchisee entrepreneurs in the United States of America are distinctive in their characteristics. As compared to nascent entrepreneurs, franchisee entrepreneurs have less experience, less confidence in their skills, less capital, more aspirations for larger organizations, less confidence in their abilities to make the business a success, and more belief that their first-year incomes will be stable. Keywords Franchisees . Nascent entrepreneurs . PSED database . Startup survey This study makes a singular contribution to the literature by being the first to analyze the differences between nascent entrepreneurs and franchisees using the Panel Study of Entrepreneurial Dynamics (PSED) national database of the United States of America. The PSED, developed through the Entrepreneurship Research Consortium, was one of the most comprehensive studies ever completed on nascent entrepreneurs. Entrepreneurs and franchisees are often considered different in relationship to risky startup ventures. The popular culture image of an entrepreneur denotes a person who is willing to take large risks on uncertain ventures on the chance that he M. Sardy Department of International Business, Rollins College, 1000 Holt Ave, Winter Park, FL 32789, USA e-mail: msardy@rollins.edu I. Alon (*) Petters Chair of International Business, Rollins College, 1000 Holt Ave-2722, Winter Park, FL 32789, USA e-mail: ialon@rollins.edu Int Entrep Manag J or she will create something original and sustainable. Franchisees have a slightly different image of themselves since they become partners in an already established business model and attempt to develop it to sustainability through the institutional wisdom of the franchisor. Franchises are arrangements that let a person or team start a business using the name and standards of a parent corporation. Franchises combine the advantages of a large corporation with those of a sole proprietorship or partnership. Therefore, franchisees can be said to be the type of entrepreneur suggested by Hoy et al. (2000). There are multiple entrepreneurial types (Williams 1999). They range from solo, self-employed individuals to corporate entrepreneurs. Franchisees are positioned somewhere between these two extremes (Knight 1984). According to Kaufmann and Dant (1999), franchisees meet several of the definitional frameworks of entrepreneurship: Liebenstein’s (1968) framework through risk taking, leadership, motivation and ability to meet crises; Low and MacMillan’s (1988) and Gartner’s (1985) frameworks through creation of new enterprises; and Cole’s (1968) framework through initiation and development of profit-oriented businesses. Franchisees receive training in how to operate the business; they pay a fee and a percentage of income or profit to the parent corporation. Very few studies have examined the differences between nascent entrepreneurs and franchisees. Research in general at the intersection of franchising and entrepreneurship is rather limited but provides insights to the entrepreneurial processes of franchisees. For example, Hoy et al. (2000) examined franchising as an entrepreneurial act and using past studies rejected most popular notions that differentiate franchisees and entrepreneurs. According to the authors, two persistent questions that remain are whether franchisees are a permanent form or a stage in corporate development, and whether the franchisee is a quasi-employee or independent venture owner. To the first question they determine that at least in the United States there appears to be a lifecycle to franchising. To the second question they claimed that lines are not clear between franchisees and independents. Franchisees are autonomous in many ways. They may be controlled through franchise agreements but they still own the business, at least until the agreement runs out. Hoy et al. (2000) correctly argue that no form of enterprise is truly independent. Knight (1984) examined the differences between Canadian franchisees and independent entrepreneurs with respect to personal characteristics, management skills, financing required and support services, and found that differences exist, in part, because franchisees are less independent than other entrepreneurs are. Given the focus of his analysis, Knight’s study is a good anchor point for comparative purposes in our study. We examined many variables that enabled us to make comparisons between Knight’s (1984) study and (PSED) data. Three key differences should be pointed out between our two studies: questionnaires, time and place. Knight’s study uses a different questionnaire, is from the 1980s, and is conducted in another country, namely Canada (compared to our USA sample). Cultural and institutional frameworks of franchising and entrepreneurship differ across countries (Alon 2005; Welsh et al. 2006). Falbe and Welsh (1998) studied franchising in the North American Free Trade Area (NAFTA)—a free trade region consisting of the United States, Canada and Mexico. The authors found mixed results for the USA and Canada with respect to franchising success factors, but Int Entrep Manag J similar results for reasons for failure. If Knight’s study results and our study results agree, then we may conclude that these three differences do not account for the variations between franchisees and entrepreneurs. This article proceeds as follows: the first section will discuss the model, the variables used and the reasoning for using them. The second section will discuss the methodology in our comparison of Knight (1984) to the PSED Data. The third section will discuss the results of our comparison between the PSED and Knight (1984). In the fourth section we will analyze a logistical model that we have developed to differentiate nascent entrepreneurs from franchisees. We will conclude with the fifth section. The model Our model breaks the differences and similarities between entrepreneurs and franchisees into three functional areas: prior experience, growth objectives, motivation and risk. Prior experience plays a role in the differences between franchisees and nascent entrepreneurs as they may have different perceptions of previous experience and the skills and abilities that will be required for the success of their ventures. Growth objectives may also differ between nascent entrepreneurs and franchisees as the franchisee should have an established business model that requires a certain level of staffing for an effective approved business unit, while entrepreneurs are more likely to depend on their startup teams and may have different ideas about overall growth objectives. In our analysis, we also considered the startup size as well as the ultimate size objective of the functional firm, whether the goal was to create a small and manageable firm or to develop as large as business as possible. The final dimension had more to do with motivation and risk. We analyzed the level of risk that both groups considered, the effort they were willing to put into the venture and the level of confidence that they exhibited in the prospects of their future venture. While there may be other aspects of the “startup decision,” three dimensions of the attitudes and desires of the nascent businessperson seem to differentiate them: prior experience, objectives for growth, motivation and risk. These dimensions account for much of the variation among startups. The extant literature concurs with the importance of these variables. For example, Cliff et al. (2006) and McCarthy and Leavy (1998/1999) discuss the value of previous experience; Greenbank (2006) and Sage (2003) discuss motivation and risk as well; and Baum et al. (1998) and Stevenson and Jarrillo-Mossi (1986) discuss objectives as a driver for success in entrepreneurial firms. We accept Hunter’s (2005) notion that there is a life cycle to entrepreneurship, common to both nascent entrepreneurs and franchisees, while Price (1999) suggests that differences between nascent entrepreneurs and franchisees may be due to the audience that results from the way franchises are marketed. Prior experience We hypothesized that our two groups (nascent entrepreneurs and franchisees) based much of their decision making on the values they hold about experience, their position on skills and abilities and the value of education. There is little agreement in the literature on the value of prior experience, with Basu (1998) Int Entrep Manag J arguing the merit and Birley and Westhead (1993) arguing the opposite. Jo and Lee (1996) take the position that lack of education related to prior experience leads to the inconsequential merit associated with it. Wilkerson (1993) makes a case for the need for better training of franchisees. Previous comparisons of the prior experience of our two groups have been displayed in minute detail in the work of researchers such as Stoner and Frey (1982). However, there are limitations to using PSED data to mirror the original study. The PSED was created primarily to examine the attitudes and motivations of nascent entrepreneurs. In the course of the survey, data on franchisees were also collected. The nature and direction of the questions were somewhat different from Stoner and Frey’s (1982) original study. However, we have identified several survey questions that capture similar information. The PSED questionnaires also identified prior experience as the pragmatic skills and abilities the subjects believed that they already possessed at startup: there was a striking contrast between what they already believed they had to what skills they may actually need to succeed. These skills and abilities are also distinct from those achieved through formal education, defined operationally by the PSED as the specific elements of education and various types of training measured by length of time of exposure and credentials acquired. Objectives for growth A second component of our model regards the specific goals that groups of nascent entrepreneurs and franchisees have for their growth objectives. We hypothesize that these goals are seen in a continuous period in which we can identify both startup and eventuality, with its essential ingredient of vision or futurity. According to Ottesen and Gronhaug (2005), the vision or futurity aspect is illusory and is a key element of innovation essential to new ventures. The goals of nascent entrepreneurs and franchisees were operationalized in our dataset by responses to questions in which nascent entrepreneurs envisioned the size of the startup team and its long-term growth possibilities. Kamm et al. (1990) discussed the team’s size objectives and the importance of defining the dimensions of the venture before expanding team membership. Specifically, the size of the team might be seen as continuously small and manageable in future operations, or it might be envisioned that the team would grow the venture into a very large organization. This projection of future goals may conflict with the analytical approach used by larger firms, such as searching for diminishing returns or increasing returns to scale or even one that utilizes a more realistic vision that considers competitors, financing or other more objective measures. Motivation and risk The third and final component of our model is motivation and risk. There is a rich and controversial literature on motivation and risk at startup. Recent publications by both Cressy (2006) and Kincaid (2005) point out that risk is a major determinant of startup decisions. However, research on projected failure rates for nascent entrepreneurs and franchisees are inconsistent. Castrogiovanni et al. (1993) argued that the failure rate for franchisees is lower than that for entrepreneurs, while Stanworth et al. (1998) argued there were no differences. Levesque and Minniti (2006) point out that age, wealth and risk aversion are critical to the startup Int Entrep Manag J Differences & Similarities between Entrepreneurs and Franchisees Prior Experience Values Toward Experience Skills and Abilities Growth Objectives Education Size of Team Small and Manageable Startup And Eventuality Motivation and Risk Risk Effort Confidence Large as Possible Fig. 1 Nascent entrepreneur vs. franchise components of differences and similarities decision. Michael (1996) argued that risk undermines the effective use of human capital, which is fundamental to motivation and risk. Norton and Moore (2006) made the case that it is information and not risk aversion that is fundamental to a venture’s growth. Williams (1999) suggested that the gains from trade that are available to entrepreneurs are not available to franchisees and, hence, increases franchisee risk. Our PSED assessment of motivation and risk used a number of subjectively based questions that were not analytical (i.e., risk vs. return measures such as Beta) and were extended to include effort and confidence as other elements of motivation and risk. Stewart et al. (2003) and Corman et al. (1988) identified entrepreneurial motivation and risk-taking behavior and a training program established at Glamorgan Business School focused on building student confidence and motivating through exposure to entrepreneurial risk.1 The concept of effort was defined globally as, “if I work hard enough it will be difficult to fail,” in contrast to a more specific appraisal of effort that would include hours of work, labor intensity, benefits, etc. Thus, confidence is seen as an element of motivation and risk. A high degree of confidence shapes and modifies this element. These three components of our model are considered to be hierarchical, with all at the same level, but with the elements considered as sub-states of the components. A flow chart of the model appears as Fig. 1. 1 Anonymous (2001), Preparing the small-firm entrepreneurs of tomorrow, Training Strategies for Tomorrow. Bradford: Jan/Feb 2001.Vol.15, no. 1; pg. 15–18. Int Entrep Manag J Methodology We used the PSED dataset to because of its comprehensiveness and the ability to compare it to other studies of nascent entrepreneurs and franchisees such as Knight (1984) and Stoner and Frey (1982). Although the PSED had also been conducted in several other countries in Europe, Australia and Latin America, much of that data remains unconsolidated with the data collected in the United States. Nevertheless, the PSED study remains the most comprehensive study of nascent entrepreneurs in existence today.2,3 The PSED initially screened 64,622 respondents and contacted 830 nascent entrepreneurs and 431 comparison group members. Among their nascent entrepreneurs were 52 franchisees. Once respondents had agreed to be part of the survey, they were sent mail surveys over a period of three years and were ultimately contacted to complete a phone survey. The combined surveys generated over 5,000 data items that followed respondents over a period of 3 years. For our study, we have focused mainly on the results in the first year of the PSED since they are most complete (For a more in-depth coverage, see Gartner et al. (2004)). We also compared results from the seminal study by Knight (1984) with the results from the PSED. This allowed us to contrast Canadian data with the PSED data for the US. Our research differs in that the use of the results of our findings offers models that may prove useful in differentiating these nascent individuals. Until now, the PSED dataset has been used solely to explore the attitudes and motivation of nascent entrepreneurs. However, we found a great opportunity to also explore relationships and differences between nascent entrepreneurs and franchisees.4 The data set is quite robust and gathers information in several ways. For example, over 41 question/response modes address the topic of experience. Since the data range from categorical responses to continuous numerical data, a variety of statistical techniques were used. As much of the data we used is categorical, we used ‘Chi-square’ tests, presented in Appendix 1, to examine differences in expected and observed values. We did not wish to start with assumptions of normality, so the nonparametric Jonckheere–Terpstra comparison test (J–T) was used to compare our findings to those of Knight (1984). 2 Gartner, W.B., Shaver, K. G., Carter, N.M., Reynolds, P.D., editors (2004) Handbook Of Entrepreneurial Dynamics The Process of Business Creation, Sage Publications, Inc Thousand Oaks, CA. 3 There are several idiosyncrasies in the data as a result of over-samples included in the initial analysis used to answer some very specific research questions regarding gender and ethnicity. Any research on the data which involves examining the ethnicity or gender of respondents must include weightings to readjust the data set to more accurately reflect the universe of nascent entrepreneurs. See Gartner, et al. (2004). Since our study does not focus on gender or race there is no need to adjust for the over-sample. 4 There are several problems that are a result of not having direct input into the original questionnaires; questions were asked with a specific purpose in mind and we are using the data for a different analysis. While this might present some problems the dataset is quite robust and offers many different question items to address these issues. However our study is subject to any and all limitations of the PSED data both known and unknown. Int Entrep Manag J Results When we compared our findings with those of Knight (1984), we found directionally similar results, but PSED showed some significant differences. Table 1 shows the directional agreement between several of our model variables. In most cases, we observed similar results in both studies. However, when we did a statistical, comparative analysis between both studies, several of our comparison variables differed in the magnitude of their results: skills and abilities, preference for future firm size, the confidence in the level of effort and expected first-year firm income. Summaries of PSED variables are shown in Appendix 1. Both studies found that the entrepreneurial group put more weight on previous experience. The Knight (1984) study found that 64% of the independent (nascent entrepreneurs) group vs. 11% of franchisees weighted experience more heavily. We found that the PSED data showed 67% of nascent entrepreneurs vs. 37% of the franchisee group agreeing very strongly with the value of previous experience. Findings with regard to startup team size were also similar to those of Knight (1984): roughly the same number of sole-owner operated firms for both independent and franchise groups—35% independent vs. 33% franchisee. The PSED data showed similar results with nascent entrepreneurs: 47 vs. 52% of franchisees. Both Knight (1984) and the PSED data concluded that the entrepreneurial groups were more confident that they could put in the effort required to make the startup successful. Knight (1984) showed that there was a similar response by Independents and franchisees with a slight edge to independents (97 vs. 92%) regarding their willingness to work hard. When the PSED asked whether they were confident that they could put in the required effort, 49% of nascent entrepreneurs vs. 9.7% of franchisees completely agreed with this statement. There was some statistically significant differentiation in the level of confidence between the two groups. Finally, both Knight (1984) and the PSED data disclose that franchisees were the most common group to have less than one year of experience in the industry of their new business. Franchisees, according to Knight (1984), were 72% more likely to have no experience while PSED data showed that 65% of franchisees had less than one year Table 1 Comparison of PSED findings with Knight (1984) Highlighted findings PSED PSED terminology Knight Past experience is very valuable Skills and abilities are important Startup team size Confident I can put in effort Experience of 1 year or less Independentsb Previous management experience in same industry is very important Independents Management ability is very important a Nascent entrepreneursa Nascent entrepreneurs Similarc Nascent entrepreneurs Franchisees Similarc Independents Franchisee Label given to independent entrepreneurs by PSED Label given to independent entrepreneurs by Knight c Applies to both entrepreneurs and franchisees b Highlighted findings Knight’s terminology Startup team size of one Willingness to work hard is very important No previous experience Int Entrep Manag J of experience in their current industry. On the entrepreneurial side, only 18% of the independents and 27% of the nascent entrepreneurs had little experience. One possible explanation for this contrast is that franchisees depend more heavily on the institutional expertise of the franchiser. In Table 2, we point out the differences in the interpretations expressed in Knight (1984) and the current PSED study. In the 1984 study, independent experience by nascent entrepreneurs was a prerequisite to success while the franchisee needed to have little experience. When we tested the null hypotheses comparing Knight’s data with the current study, the Jonckheere– Terpstra (J–T) statistic rejected the null at the 0.001 level of significance. Past experience Data from the PSED show that 40% of franchisees start a business with less than one year of experience in an industry. This stands in stark contrast with entrepreneurs, where fewer than 10% of entrepreneurs will start a business with less than one year’s experience. In fact, 90% of franchisees will have less than 5 years of industry experience before starting a franchise. Among the nascent entrepreneurs, only 20% would have started a business with less than 5 years of industry-specific experience. One possible explanation for this contrast is that franchisees depend more heavily on the institutional expertise of the franchiser. In the 1984 study, independent experience by nascent entrepreneurs was a prerequisite to success while the franchisee needed to have little experience. When we tested the null hypotheses comparing Knight’s data with the current study, the Jonckheere– Terpstra (J–T) statistic rejected the null at the 0.001 level of significance. Skills and abilities Both groups were asked whether their skills and abilities would help them with their startup. The nascent entrepreneurs strongly agreed that their skills and abilities would be critical 90% of the time. Franchisees only responded this way 70% of the time and were more likely to disagree that their skills and abilities were critical to success of their venture. This may be interpreted a number of different ways. Considering the position of the nascent entrepreneurs, the uniqueness of their business model may require some level of expertise prior to the launch of their business. Franchisees may be relying on the institutional expertise of the franchisor. The franchisee’s initial upfront investment is not just financing a Table 2 Summary of findings Findings summary Jonckheere–Terpstra test Std. J–T statistic Two tailed p-values Value of tangible assets of owners Past experience very valuable Skills and abilities will help Education Team size Preference for future firm size Confident I can put in effort Expected first year firm income −0.420 −3.371 −3.590 0.182 −1.337 −3.001 −1.901 −2.540 0.674 0.001 0.001> 0.856 0.181 0.003 0.057 0.011 The null hypothesis is that there is no statistically significant difference between the results obtained in the PSED survey and the Knight findings Int Entrep Manag J location and equipment, but includes financing know-how. Here again, when we tested the null hypotheses, no difference was found when comparing Knight’s data with the current study. The Jonckheere–Terpstra (J–T) statistic rejected the null at the 0.001 level of significance. Preference for future firm size When we examined the vision of the future for the enterprises, some interesting differences emerged between nascent entrepreneurs and franchisees. Franchisees, as a group, envision that their firms will grow to be as large as possible. Nascent entrepreneurs see themselves in enterprises they will selfmanage, containing growth. Given the nascent entrepreneurs’ objectives for a management team of between four and eight, these would be relatively small firms. There is a statistically significant difference between the two groups, with Chisquare significant at p<0.003. Not only do these differences show themselves to be significant, but very few entrepreneurs see themselves as managing firms that are as “large as possible.” This is also consistent with the findings of Ucbasaran et al. (2003), who found that the size of the founding team was significantly negatively associated with subsequent team-member entry. There is a negative relationship with increasing the size of entrepreneurial startup from the size of the existing management team. It would appear that nascent entrepreneurs seek to exercise personal control over many of the details and decisions of the firms they start up. While the findings of the current study corroborate Knight’s findings, they disagree on the magnitude at the p>0.003 level of significance. Confidence in the level of effort This element was measured by the question “I am confident that I can put in the effort.” The statement in the questionnaire indicates that effort is regarded as important to the success of the enterprise. The differences between nascent entrepreneurs and franchisees are statistically significant at p< 0.001. In new startups, it is common for business owners to assert that by effort alone they can make the business succeed. It is also consistent with desire for small firm size, since the franchisee or entrepreneur must be able to work on his or her own if the firm size is to remain small. In each category of response to the aforementioned question, franchisees “agree more strongly” than nascent entrepreneurs. However, in the last category, which indicates “total agreement” with the statement, the entrepreneurial and franchisees groups reverse: franchisees seem to be in less-than-complete agreement with the statement, while nascent entrepreneurs report the highest level of agreement with the statement. It stands to reason that those putting more assets at risk would do so only if they believed they were committed to the project. Here again, there seem to be differences, since between PSED and Knight (1984) our J–T results were significantly different at the p>0.057 level. Expected first-year firm income A key aspect of motivation is confidence of success. We measured confidence with a question in the PSED instrument related to their levels of confidence by asking about expected income in the first year. The mean income expected by nascent entrepreneurs (more than $358k) was compared to that of franchisees (more than $386k). These means were not significantly different. While the mean expected incomes were relatively similar, their spread was quite different. The dispersion of expected incomes for franchisees was much smaller than Int Entrep Manag J that of nascent entrepreneurs. An “F” test indicated that the differences in the dispersion of the two groups were statistically significant at p<0.001. This could mean that entrepreneurs have more uncertainty about the timing and size of early year income but very high expectations. Franchisees may consider that the investment will pay off quickly, but that the average payout will be lower and more consistent than those expected by nascent entrepreneurs. Logistic model The differences between the two studies raise some interesting issues. Some may be attributed to the passage of time since Knight’s (1984) original study, and others may be explained by the difference in countries (US or Canada). A more fundamental question arises, however: what are the significant differences between franchisees and entrepreneurs? For further analysis, we used a logistic model that would examine differences based on the dimensions we raised in our earlier model. Table 3 displays the results of a logistic comparison made between franchisees and nascent entrepreneurs. In this analysis, a stepwise, binary logistic regression was run for franchisees and then another logistic regression was run for nascent entrepreneurs. Since we had earlier established the relevance of these variables as part of our initial model, which was also consistent with Knight (1984), the rationale for using these variables is strong. In Table 3 the logistic beta coefficients associated with each variable are displayed above their significance levels, which are, in turn, displayed above the exponentiated beta, a proxy for the odds ratio. What is most interesting is the lack of overlap between the two groups, and, in the one variable where there is overlap, the maximum size of the business has directionally different betas. Ultimately, two logistic models can be derived from these results: For nascent entrepreneurs (E) the logistic model takes the form: Lnð E Þ ¼ a þ b1 X1 b3 X3 þ b4 X4 ð1Þ Where the odds of the respondent being a nascent entrepreneur may be evaluated through: E ¼ eaþb1X 1þb3X 3þb4X 4 ð2Þ For franchisees (F) the logistic model takes the form: Lnð F Þ ¼ a þ b1 X1 þ b2 X2 þ b5 X5 ð3Þ Where the odds of the respondent being a franchisee may be evaluated through: F ¼ eaþb1X 1þb2X 2þb5X 5 ð4Þ In the case of the nascent entrepreneur, our results in Table 3 show that nascent entrepreneurs are 1.39 times more likely to believe in their skills and abilities (p> 0.056) and are confident (p>0.044) regarding their success. This is consistent with earlier empirical findings. It seems they are also 2.31 times more likely to want to grow their businesses into much larger businesses (p>0.009). This is consistent with Int Entrep Manag J Table 3 Logistic results for nascent entrepreneurs and franchisee Logistic regression results of attitudinal differences Franchisee Maximum size of the business (Q322) b1 B coefficient Sig Exp(B) B coefficient Sig Exp(B) B coefficient Sig Exp(B) B coefficient Sig Exp(B) B coefficient Sig Exp(B) B coefficient Sig Exp(B) Dollar amount of expected Income (Q317) b2 If I work hard, I can successfully start a business (Q1KA) b3 Overall my skills and abilities will help me start a business (Q1KD) b4 My past experience will be very valuable in starting a business (Q1KE) b5 Constant a Nascent entrepreneur −1.364 (0.002) 0.256 0.000a (0.145) 1.00 – – – – – – −0.622 (0.001) 5.37 2.578 (0.013) 13.169 0.848 (0.009) 2.335 – – – 0.286 (0.044) 1.331 0.322 (0.056) 1.394 – – – −2.228 (0.033) 0.108 a The beta (b2) coefficient for the dollar amount of expected income for franchisees was not significantly different from zero. Hence, the term would be dropped from Eqs. 3 and 4 the limits-to-growth that may be part of the contractual obligation of a franchisee versus the unlimited growth potential of an entrepreneurial venture. The franchisees were, by contrast, much more pragmatic. There were two significant variables: one was related to the size of the firm (p>0.002). The other was related to past experience; however, the negative coefficient for experience suggests that franchisees place much less value on previous experience: the franchisee group placed 5.37 times less significance on the value of previous experience (p>0.001). These variables are a result of the known income potential associated with a franchise. Interestingly, experience seems to be significant for the franchisees, but it agrees directionally with the empirical evidence that franchisees have less experience in the industry they are entering. Discussion and conclusion The purpose of this paper was to use the PSED dataset for deriving a better understanding of the nature of entrepreneurs and, more specifically, to explore the nature of the differences between nascent entrepreneurs and franchisees. The three dimensions of our exploration showed differences. There are a number of conclusions we can draw: 1. 2. 3. 4. Franchisees have less industry experience, one year compared to 4 years; Franchisees are less confident that their skills are critical to success; Education is comparable, although franchisees education seemed skewed higher; Franchisees do not seem to value their previous experience as much as nascent entrepreneurs. Int Entrep Manag J 5. Reputation capital (via experience) is less important to franchisees; 6. No significant difference in team size at startup, but nascent entrepreneurs show twice the propensity to have a team size of 3–5 members; 7. Franchisees have a vision of a larger future organization; 8. Franchisees had fewer net assets and are less well capitalized. 9. Franchisees expect first year income to be less variable than do nascent entrepreneurs; 10. Franchisees are less confident that they can make the business a success. The first five conclusions highlight the difference in value that franchisees place on experience when compared to nascent entrepreneurs. The PSED showed franchisees were often less experienced and slightly less skilled in the industry in which they were planning to operate. As we mentioned earlier, the differences may result from the expected institutional knowledge which the franchisor will provide to the franchisee. Franchisees on average had slightly more education. This may be consistent with the more structured institutional arrangement associated with a franchise. In other words, if we use higher education as a proxy, franchisees might be more comfortable working within pre-established complex frameworks than their nascent entrepreneurial counterparts. The fifth point, regarding reputation capital, is consistent with the franchisees’ lack of experience. Since the franchisee has begun a business with little experience there is little reputation capital at stake. Conversely, the nascent entrepreneur is often creating the framework as he or she develops a business model. Entrepreneurial reputation and experience are critical as they raise money to fund their operations. So, it is consistent that the nascent entrepreneur will have more confidence and put more emphasis on experience and reputation. When we consider the sixth point, team size, there is no significant difference between nascent entrepreneurs and franchisees. The results suggest on average that team sizes for that startup or franchise will be small. However, if we look at the results more closely we see that nascent entrepreneurs are more likely to have a larger startup team than franchisees. As we had mentioned earlier, franchisees may not be as likely to depend on the expertise of their startup team; instead, they are more likely to depend on the expertise of the franchisor. Nascent entrepreneurs are more likely to depend on the skills and expertise of their startup teams. However, as we see in the seventh point, the envisioned size of the organization after it has been developed is often much larger in the eyes of franchisees than it is in the eyes of nascent entrepreneurs. It is quite conceivable that the franchisee already knows the typical size of a model organization after it is up and running. Many franchises have standardized employee rosters in order to make the organizations more successful. In other words, the franchisor—as part of the franchise agreement—may already establish how many employees would be ideal, how many shifts each employee should work and how many days the franchise should operate. Since nascent entrepreneurs are considering the organization in its early stages, they may not be able to accurately predict the business’ ultimate configuration. One can imagine that if Bill Gates had been asked in 1980 how large he expected Microsoft would eventually grow, even he would have grossly underestimated the size and impact his organization would eventually have on his industry. Int Entrep Manag J Another interesting finding is that franchisees in the PSED data had fewer net assets than nascent entrepreneurs. In point eight we state our findings that franchisees have fewer net assets during the developmental phase of their startups than do their nascent entrepreneurial counterparts. This makes sense, as a franchise often has predefined franchise fees and moderately well defined startup costs. The main uncertainties for a franchise startup are the location-dependent real-estate costs. This is also supported in point nine as the franchisees have a better notion of their expected annual income. We conclude that franchisees have chosen a less ambiguous course than their nascent entrepreneurial counterparts. For nascent entrepreneurs, the list of uncertainties with regard to costs is considerably longer. Entrepreneurial startups often have uncertainty at many levels from operating expenses, to personnel, to unexpected overheads, to product delays, etc. This might explain why nascent entrepreneurs may have more net assets prior to the startup: the entrepreneur may need to be better prepared for unexpected contingencies. Perhaps entrepreneurial startups require a certain level of financial security before an individual will consider it, or perhaps the entrepreneur is comfortable with a high level of risk. It is also possible that the nascent entrepreneur is already counting the valuation of his or her portion of the entrepreneurial startup. Entrepreneurs may have also prepared for a longer period with little or no income. We have drawn this inference from the higher degree of uncertainty in first-year income expressed by nascent entrepreneurs. Finally, we consider the level of confidence of the franchisee and nascent entrepreneur and find the franchisee to be less confident. The level of confidence expressed by both groups was very high. However, some franchisees were more likely to be uncertain of success, while most were somewhat confident. Nascent entrepreneurs were more likely to be extremely confident and virtually none expressed reservations with regard to their future performance. This is consistent with the first five points: franchisees begin their startups with less experience in the industry, expertise, and confidence in the value of that expertise. This lack of experience may temper their outlook on the future success of their startups. The nascent entrepreneur’s confidence in his or her own ability is consistent with the self-reliance that is reflected in the ten points outlined above. Many of these ten points are also presented in Table 2 and Appendix 1, where they are compared with Knight’s (1984) study. Our study’s results agree with Knight’s with respect to directionality, but differ in terms of magnitude. Our study shows that the franchisees have less experience, fewer skills and abilities, greater desire for larger operations, more confidence, and higher expected income as compared to independent/nascent entrepreneurs. Knight’s sample, methodology, conceptualization, country of origin and year of analysis are different from ours. Despite these differences, our study confirms many of the characteristics of franchisees identified by Knight. More research is needed to further examine these variables to be able to better profile nascent/independent entrepreneurs and franchisees. Such efforts will help policy makers interested in developing their franchising sector, franchisors in need of identifying qualified franchisees, and entrepreneurs wishing to know if franchising is right for them. Int Entrep Manag J Acknowledgements The authors would like to thank Kelly Shavers, John Clarkin, Paul Taylor and the PSED Research Consortium the anonymous referees and C. Mcinnis-Bowers. All errors and omissions are the responsibility of the authors. Appendix 1 Summary of results of critical variables Table 4 Table 4 Summary of results of critical variables Number of years of previous experience <=1 1<Y<=2 2<Y<=3 3<Y<=4 Y>4 ChiChisquare square (Sig) Nascent 0.151 0.05 0.035 0.047 0.717 Entrepreneurs Franchisees 0.517 0.103 0.069 0.069 0.241 34.5 Current team size 1 2 3+ Nascent 0.48 0.38 0.14 entrepreneurs Franchisees 0.54 0.44 0.02 0.052 Confident that I can put in the effort Completely Generally Neutral Generally Completely disagree disagree agree agree Nascent 0.003 0.022 0.068 0.416 0.492 entrepreneurs Franchisees 0.032 0.129 0.194 0.548 0.097 32.462 Goals for future size of business As Large as Size to possible manage by self Nascent 21.10% 78.90% entrepreneurs Franchisees 39.20% 60.80% 9.005 My industry experience was important in starting this business Yes N/A Nascent 56.30% 43.70% entrepreneurs Franchisees 21.10% 78.90% 17.606 Value of tangible assets Expected income in first year Dollars ($) Nascent Franchisees Dollars Nascent Franchisees entrepreneurs ($) entrepreneurs <0 0.40% 0.00% 0 1.50% 0.00% 500 1.90% 4.30% 1,000 4.60% 0.00% 1,000 2.10% 4.30% 5,000 6.60% 13.60% 5,000 5.70% 10.90% 10,000 11.20% 6.80% 10,000 10.60% 10.90% 50,000 47.90% 47.70% 50,000 41.10% 54.30% 100,000 16.30% 22.70% 100,000 17.10% 6.50% 500,000 10.90% 9.10% 500,000 16.50% 8.70% 0.001 0.974 0.001 0.003 0.001 Int Entrep Manag J Table 4 (continued) Number of years of previous experience 1,000,000 >1,000,000 Mean SD N 2.10% 0.50% 81,115.39 1,383,678 608 F-value Sig 0.00% 0.00% 47,818.18 196,305.1 44 49.68 0.001 1,000,000 5,000,000 Mean SD N 1.50% 1.50% 358,354.3 2,209,565 581 F-value Sig 0.00% 0.00% 38,682.59 1,231,356 46 3.231 0.001 References Alon, I. 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