Ability Matching and Survival of Start-Ups

Abstract

New firms are regarded to be of substantial importance for the development of an economy, especially for innovation, growth, and the creation of jobs. However, new firms also face a high risk of failure. Thus, there seem to be high try-out costs connected with the establishment of firms. In order to reduce these try-out costs, policy makers aim at providing general conditions which ensure a higher longevity of young firms. This paper focusses on the number and the composition of the persons involved in young firms as drivers for the probability of firm survival. As theoretical basis, the O-ring theory is used. This theory assumes that ability is positively and team size is negatively related to firm survival. Moreover, it can be inferred from this theory that a higher level of homogeneity with respect to ability and a higher level of heterogeneity with respect to the field of education leads to higher survival chances of new firms. Using a rich employer-employee data set on the whole population of Danish firms founded in 1998, I find that the average level of ability in a team and the team size have positive effects on a firms’ probability to survive the next year. Most important is founding in a team at all. In contrast, the homogeneity with respect to ability and the heterogeneity with respect to educations do not effect the probability of firm survival. Thus, young firms can be supported by making sure that several persons are involved and the ability of the persons is as high as possible. However, it is not important that the team members have different educations and the same level of ability.

Keywords: entrepreneurship, firm survival, O-ring theory, start-ups

JEL Classification: D23, L25, L26, M13