1042-2587-92-171$1.

50
Copyright 1992 by
Baylor University

What Happened Before

the Organization?
A Model of
Organization Formation
Kevin E. Learned

This paper attempts to explain the observations that not all lndlvlduals have the potential to
found organizations, and that of those who do, not all try or succeed. Three dimensions to
organization formation are proposed: propensity to found, Intention to found, and sense
making. These three dimensions lead to a decision to found the venture, or to abandon the
attempt. Several propositions are derived from the model.

Not all individuals have the potential to form an organization. Of those that do, not
all will attempt a founding. Of those that attempt, not all will succeed in founding. This
paper proposes a model of the organization formation process that attempts to explain
these observations.
Its domain is the emerging organization (Hansen & Wortman, 1989; Katz & Gart-
ner, 1988; Van de Ven, Hudson, & Schroeder, 1984). Its unit of analysis is the founding
episode and its levels of analysis include the founding individual or individuals, net-
works of individuals, the new organization, and the environment. The new organization
may or may not be a "high performance" venture. The term "entrepreneur" refers to
the individual or individuals who may attempt or who are attempting to found a business,
and is used interchangeably with the term "founder." For convenience, this paper refers
to the individual, although I recognize multiple individuals are often involved as
founders.
A model suggests the metaphor of a maze whereby an entrepreneur need only choose
the right path in order to exit the maze with a new venture. Yet, we know that new
ventures are all different, and it is likely that no one complete explanation exists (Al-
drich, 1990; Johnson, 1990; Low & MacMillan, 1988; Sandberg & Hofer, 1987; Woo,
Cooper, & Dunkelberg, 1991; Wortman, 1986). Each founder will bring his or her own
particular combination of background, disposition, and situation to the intended orga-
nization; each will have different goals; each will have different resources; each will
operate under a different timetable; each will learn different things and make different
attributions. This challenges the model builder, for it suggests there are many different
routes to organization formation. The model presented in this paper attempts to allow for
this diversity, rather than specify a particular path.

MODEL OVERVIEW
Figure 1 presents an overview of the model.

Fall, 1992 39
Figure 1
A Model of Organization Formation

FOUND

ABANDON

SITUATION

ENVIRONMENT

Summary
The model suggests three dimensions to the founding process which culminate in a
decision to found or not to found.
1. Propensity to found. Some individuals have a combination of psychological traits
in interaction with background factors which make them more likely candidates
to attempt to found businesses.
2. Intention to found. Some of those individuals will encounter situations which, in
interaction with their traits and backgrounds, will cause intentionality.
3. Sense making. An intentional individual engages the environment while attempt-
ing to assemble resources and make his or her ideas real. The individual must
make sense of the information perceived during the attempt.
4. Decision. An intentional individual will ultimately make a decision to found,
or to abandon the attempt to found, depending upon the sense made of the
attempt.

Likelihood
The process can be depicted as the likelihood, at any point in time, that an individual
will found a business. Likelihood is a function of the complex interactions between the
background and traits of the individual, specific situations, and the external environ-
ment, and frequently changes as new situations are encountered. Several of the propo-
sitions that follow specify how and when the likelihood of founding changes.

40 ENTREPRENEURSHIP THEORY and PRACTICE

PERSON-LEVEL VARIABLES: ENTREPRENEURS ARE DIFFERENT,
AREN'T THEY?
Before organizations there are preorganizations (Hansen & Wortman, 1990; Katz &
Gartner, 1988; Van de Ven, Hudson, & Schroeder, 1984). Initially they exist only as
thoughts, as ideas, as dreams of an individual. Through the organizing process, the
founder's thoughts are sometimes (but not always) translated into a preorganization (an
attempt to found), and then sometimes (but not always), an organization (a successful
attempt to found).
Central to the process is the founding individual-the entrepreneur. While the lit-
erature has appropriately dispensed with the notion that traits alone can explain entre-
preneurship (e.g. Gartner, 1989), nevertheless, organizations are founded by individuals
and they are a key ingredient in the process. Much research has examined whether
entrepreneurs have psychological traits and backgrounds that differentiate them from
other populations. Most such research attempted to contrast "entrepreneurs" (with
various definitions) from managers (for a review, see Brockhaus & Horwitz, 1986). This
line of inquiry has had mixed results and generally has been unsatisfying (Begley &
Boyd, 1987; Brockhaus, 1982; Brockhaus & Horwitz, 1986; Carsrud, Olm, & Eddy,
1984; Gartner, 1989; Johnson, 1990; Sexton & Bowman, 1986; Sexton & Bowman-
Upton, 1990).

Interactions
However, the wrong questions may have been asked and the situation often ignored.
The question in the organization formation context is not ''are entrepreneurs different
from managers," but rather "are there person-level characteristics which, in certain
situations, lead to an intention to found, and further, are these characteristics, again in
certain s.it4ations, more likely to lead to a successful attempt to found?"
The psychology literature suggests that person-level variables may interact with
other, intervening variables ("person x situation") (Davis-Blake & Pfeffer, 1989;
Kenrick & Funder, 1988; Schneider, 1983; Weiss & Adler, 1984). This is similar to the
leadership literature, which conducted an unsuccessful search for leadership traits before
introducing contextual variables (Hunt, 1991). Some new venture performance literature
has investigated the effects of the individual in combination with other situational,
organizational, process, and/or strategic variables (Duchesneau & Gartner, 1990; Gart-
ner, Mitchell, & Vesper, 1989; Van de Ven, Hudson, & Schroeder, 1984). These
studies have generally found (although not always-see, for example, Sandberg &
Hofer, 1987) a relationship between the individual and the other variables investigated
and new venture performance. Further, the "wisdom of the venture capitalists" (it is
better to invest money on the right person than the right idea) (Sandberg & Hofer, 1987)
suggests that the individual is important.
The evidence, then, from the psychology, leadership, and new venture performance
literatures, as well as venture capital anecdotes, suggests that person-level variables, in
interaction with other variables, should not be ignored in the venture creation process.

Person-level Variables
Since past trait and background research has been correlational, descriptive, static
and/or retrospective (Gartner, 1989; Katz & Gartner, 1989; Low & MacMillan, 1988;
Wortman, 1986), we really do not know what variables might be important and will not
know until a priori theory-driven, longitudinal studies are conducted. However, those
variables that have correlated with new venture performance or seem to differentiate

Fall, 1992 41
founders and managers may be a useful beginning point. Among others, such variables
might include: need for achievement, risk taking propensity, tolerance for ambiguity
(Begley & Boyd, 1987), education (Brockhaus & Horwitz, 1986), role models
(Krueger, 1990), moderators of experience (Reuber, Dyke, & Fischer, 1990), energy
level, interpersonal affect, autonomy, harm avoidance, succorance (Sexton & Bowman,
1986), opportunity seeking (Stewart, 1989), experience (Stuart & Abetti, 1990), and
intelligence, creativity, innovation, and health (Timmons, 1990).

PROPENSITY TO FOUND
Some authors have suggested some individuals have a predisposition toward entre-
preneurial behavior (Cooper, 1971; Greenberger & Sexton, 1988; Martin, 1984; Mon-
tanari, Domicone, Oldenkamp, & Palich, 1990; Sexton & Bowman, 1984; Shapero,
1975). But the literature cited above suggests more than dispositions are involved.
Individuals have ever changing backgrounds and experiences which interact with traits.
For example, an individual who has previously started a successful business may have
a higher likelihood of founding another business (Ronstadt, 1988). This complex inter-
action of traits and backgrounds may result in the potential to establish a business, given
a suitable set of circumstances. I have conceptualized this potential as propensity to
found and suggest the following propositions:

Pl . Propensity to found is a function of background and dispositional factors, and

their interactions.

P2. The likelihood an individual will engage in founding behaviors varies with the
level of propensity to found.

INTENTION
Intention implies action (Heider, 1958; Shaver, 1975). In new venture formation,
intention is a conscious state of mind which directs attention toward the goal of estab-
lishing the new organization (Bird, 1988; Gartner, 1985). With an expression of inten-
tion ("I am going to try to start a business"), the entrepreneur begins the process of
founding a business (Bird, 1988; Bird & Jelinek, 1988; Hansen & Wortman, 1989; Katz
& Gartner, 1988). Individuals with intention have a higher likelihood of founding than
do individuals with only propensity, because they have committed themselves to at-
tempting to found.

Causes of Intentionality
Individuals may have the propensity to found (the necessary combination of traits
and background), but the actual decision to attempt to found arises from the interaction
of the potential with the situation (Greenberger & Sexton, 1988; Bird, 1988). Every-
one's situation differs. For some individuals, the situation may be a trigger event, a
stimulus that causes the individual to act upon his or her propensity. Little research has
been conducted on trigger events (e.g. inheritance, layoff, graduation) stimulating a
founding attempt, and outside of anecdotal knowledge little is known in this context.
However, the concept has been applied in other transition literatures; for example,
organization transition (Lundberg, 1984), punctuated equilibrium (Gersick, 1989,
1991), and human life cycles (Levinson, 1978). For others, it may be the cumulative

42 ENTREPRENEURSHIP THEORY and PRACTICE

effects of various situations over time. For example, in preliminary findings, Shaver,
Gatewood and Gartner (1991) have found the motivation for attempting to found is
frequently personal, such as the desire to work for oneself. Whether or not a specific
event triggers it, Brockhaus and Horwitz ( 1986) suggest a moment of decision arrives
when entrepreneurial activity is compared to the current situation and the entrepreneurial
way is chosen.

P3. Intentionality is a function of dispositional, background, and situational factors,

and their interactions.

A simplistic example is an individual who has grown up in an entrepreneurial family and

who has a high energy level becoming intentional as he/she approaches graduation from
college.

MAKING SENSE
With the commitment (at least to him/herself) to try to begin a business, the entre-
preneur begins to construct the organization. There is no organization yet, only an
emerging organization (Hansen & Wortman, 1989; Katz & Gartner, 1988; Van de Ven,
Hudson, & Schroeder, 1984). The emerging organization is where ideas and the envi-
ronment interact, where ideas are "real-ized" (Weick, l 977b), where the entrepreneur
attempts to turn his/her ideas into reality.

Information Processing
Intentionality is manifested by seeking information (Bird, 1988). While gathering
resources, the founder is seeking, receiving, and processing information. The informa-
tion-processing dimension of the model is based upon the work of Weick (1977a, 1977b,
1979) as suggested by Gartner (1985; see Figure 1). Weick's organizing consists of
engaging the external environment (enactment), selecting from equivocal information
thus gained based upon comparing the information with a schema (Lord & Foti, 1986)
or causal map (Bougon, 1986), and retaining in the schema that information that makes
sense. In a recent case study of a new venture formation attempt, Guth, Kumaraswamy,
and McErlean (1991) reported on a similar enactment process.
Weick's model is triggered by change. For the founder, the onset of intentionality
is the change that invokes Weick's organizing process. Intentionality begins the process,
and is affected by it. As sense is made of the environment, the likelihood of founding
is increased or decreased.

Entrepreneurial Tasks
During the sense making phase, the founder must complete a number of tasks (one
of which is to determine what tasks must be performed). While the specific tasks vary
for every founding, certainly a strategy and vision must be set (Boeker, 1989; Feeser &
Willard, 1990; McDougal & Robinson, 1987; Porter, 1980; Roure & Keeley, 1990;
Sandberg & Hofer, 1987; Stuart & Abetti, 1987; Vesper, 1990); boundaries set (Katz &
Gartner, 1988); and resources identified, mobilized and acquired (e.g. advisory teams
[Bird, 1989], social networks [Aldrich & Zimmer, 1986; Stewart, 1990], management
[Roure & Keeley, 1990], people [Timmons, 1990], physical resources [Vesper, 1990],
knowledge and competence [Winter, 1987]). There is a large literature on the tasks that

Fall, 1992 43
must be performed and therefore they are not addressed further here other than to note
that successes and failures in the process confirm and disconfirm the entrepreneur's
ideas.

The Environment
The evidence is strong that the environment plays a very significant enabling/
constraining role in new venture formations collectively (Hannan & Freemen, 1989,
1977; Reynolds & Maki, 1990). The environment may affect the situation(s) that stim-
ulates intentionality (e.g. a poor economy causes the potential founder to be dismissed),
and certainly affects the sense-making dimension (e.g. a healthy economy may improve
the potential for raising capital).

P4. The likelihood of founding changes as the intentional individual engages the
environment and processes confirming and disconfirming information.

THE DECISION
Just as the founder must decide to attempt to found a business, he or she must finally
decide whether to proceed or to abandon the attempt. The decision may be triggered by
a specific event, or simply by the accumulated weight of the confirming and discon-
firming information processed. As confirming information is selected (e.g. agreement to
invest by investors), the likelihood of founding is increased until finally a decision is
made to proceed with founding. Likewise, as disconfirming information is selected (e.g.
poor market research results), the likelihood of founding is decreased until finally a
decision is made to abandon the attempt to found. Of course, disconfirming evidence
may not be recognized or simply altered to fit the schema (Gioia, 1986; Hogarth, 1980).
However, since many preorganizations fail to found, some entrepreneurs process dis-
confirming evidence. Guth, Kumaraswamy, and McErlean (1991) suggest a "close-to-
failure" event is required before the entrepreneur will process disconfirming informa-
tion.

P5. The decision to found or to abandon the attempt to found is triggered by

the accumulation of confirming and disconfirming evidence as perceived by the
founder.

CONCLUSION
The model presented in this paper is a processual model which attempts to accom-
modate the diversity of individuals and new venture attempts while explaining why some
individuals form organizations while others do not. I made three observations about
organization formation at the beginning of the paper and suggested that a model of
organization formation should address each:
1. Not all individuals have the potential to form an organization. Psychological
traits in interaction with individual background and experience combine to pro-
vide the potential for an individual to found an organization.
2. Of those that have the potential, not all will attempt. Individual situations interact
with the person-level variables to cause attempts to be made to found.
3. Of those that attempt, not all will succeed. Those who are unable to identify and
assemble the necessary resources will abandon the attempt as their ideas seem
less and less probable to them.

44 ENTREPRENEURSHIP THEORY and PRACTICE

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Kevin E Learned is a doctoral candidate at Texas Tech University and a special lecturer at Boise State
University.

A number of people were generous with their time and comments as I was forming this paper. I want
to express my appreciation to the Northwest Texas and Idaho Small Business Development Centers whose
clients stimulated my interest and whose staffs listened to me discuss this model. John Bigelow, Kim Boal,
Jerry Hunt, Anne McCarthy, Bob Phillips, Don Sexton, Kelly Shaver, and Alex Stewart all provided
valuable input for which I am grateful. Of course, the responsibility for the final product is mine, partic-
ularly in light of the fact that I didn't always follow their advice.

48 ENTREPRENEURSHIP THEORY and PRACTICE