Founder personality determines how start-ups weather crises
Migration experience, higher education and open-mindedness foster innovative responses to crises
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Whether start-ups survive a crisis does not depend solely on their financial situation or the sector they operate in. The personality traits of their founders also play a decisive role. A recent study by ZEW Mannheim and the Technical University of Munich finds: Risk-taking founders are more likely to focus on operational innovations in times of crisis, and risk-averse founders tend to focus on financial savings. Openness to new experiences, higher education and immigration experience are also positively correlated with innovative responses to crises. Founders with an agreeable personality are less innovative. The study is based on data from 1,408 start-ups in Germany.
“In a crisis, companies often need to make far-reaching decisions under intense time pressure and great uncertainty. Our findings suggest that firms react very differently to the same external shock and that these differences are also linked to the personality traits of their managers,” explains Professor Hanna Hottenrott, head of the ZEW Research Unit “Economics of Innovation and Industrial Dynamics” and professor at the Technical University of Munich.
“This means that one and the same policy support measure can have heterogeneous effects depending on the management’s adaptability and willingness to innovate. Policymakers should give more consideration to these differences when designing support measures,” adds Dr. Eline Schoonjans, a researcher in the same research unit.
Risk-taking fosters rapid innovation
Rather than reducing working hours or making other cutbacks, risk-taking founders adapt existing processes or products, change distribution channels or digitise workflows. Such measures are implemented quickly to respond to supply bottlenecks, slumps in demand or changing working conditions. Risk-averse entrepreneurs are more likely to make financial cutbacks. These strategies have a lasting impact on how companies adapt to crisis situations and on their capacity for innovation.
Migration experience and openness encourage strategic shifts
Founders who are open to new experiences more frequently rely on strategic innovations during a crisis. For example, they may adapt their innovation strategy, tap into other geographical markets or adjust their business objectives. Founders with a migration background, too, are more likely to pursue such fundamental changes – particularly when they start a business for entrepreneurial reasons, such as a specific business idea, a desire for self-determination or a higher income.
About the methodology
The study analysed data from the IAB/ZEW Start-up Panel on 1,408 companies founded in Germany between 2012 and 2019. The founders’ personality traits were assessed using the Big Five personality dimensions – openness, conscientiousness, extraversion, agreeableness and emotional stability – and risk tolerance. In May and October 2020, the companies were surveyed about their responses to the COVID-19 crisis. A distinction was made between five crisis strategies: retrenchment, perseverance, operational innovation, strategic innovation and exit from the business. A statistical model that allows for simultaneous crisis response strategies was used to investigate the role of founder personality and experience.
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