Credit: William Fortunato from Pexels
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Credit: William Fortunato from Pexels
Entrepreneurs are the lifeblood of any innovative economy.
We know that new business creation has a significant positive impact on economic growth, innovation and job creation. But it’s not easy, and most new businesses fail.
When someone starts a business, they don’t usually do it alone; the whole family becomes part of the journey. The whole family gets to experience the rollercoaster of emotions that come with starting a business.
This obviously applies in the other direction as well: founders’ personal lives also have major ups and downs.
Big positive changes in the family, such as a promotion, marriage, the birth of a baby, or sadly negative changes, such as someone passing away, can come as a big shock to someone starting a business.
However, only a few studies have investigated the extent of these effects on new venture creation.
A recently published study looked at how big family events affect the success of new ventures.
Surprisingly, our findings reveal that certain positive family relationship events may have a greater detrimental effect on new venture survival than negative events by making entrepreneurs overconfident.
Emotions have complex effects
We used data from the Household, Income and Labour Dynamics Survey of Australia (HILDA) to analyse the emotions triggered by major family events experienced by entrepreneurs.
In our study, we found that many of these family events have the expected impacts based on both intuition and past research: positive events are typically helpful, and negative events are typically detrimental to new venture survival.
However, existing research may oversimplify this relationship: family structure – the relationships, emotions, and goals between family members – may have complex effects on entrepreneurs’ mental states and decisions.
The impact on founders’ confidence levels is particularly significant: confidence is necessary to start a business, but it can be problematic when entrepreneurs overestimate their abilities.
In particular, some positive events can lead to overconfidence, which can take the form of being overly optimistic about the extent of one’s abilities or overestimating the accuracy of one’s beliefs.
And, perhaps counterintuitively, we found that overconfidence resulting from positive family events had a negative effect on new venture survival – an effect that was significantly larger than the effect of negative events.
Why does this happen?
Two important theories in psychology may help explain why overconfidence can ultimately be harmful.
First, the “emotions as information theory” suggests that our emotions act as a kind of compass, helping us understand whether a situation is beneficial or harmful.
Entrepreneurs may fall back on existing knowledge and rules of thumb when they are feeling good about something good happening in their family, like marrying a childhood friend.
Second, entrepreneurs may succumb to “emotional priming,” which suggests that emotions influence decision-making by automatically evoking relevant ideas or memories.
This priming can affect not just what we think but how we think: If entrepreneurs are in a good mood, for example, their minds will present memories associated with positive emotions, whether relevant or not, to help them make decisions.
These theories suggest that major family events can affect entrepreneurs’ confidence by subtly and automatically adjusting how they evaluate opportunities and risks in decision-making.
On the one hand, positive family events may lead to a more holistic thinking style and faster decision-making, which is beneficial for entrepreneurs who need to make fast and efficient decisions under time and resource constraints.
However, if an entrepreneur is overconfident and believes that their own abilities alone can compensate for their information gap, then a positive event in the family may further strengthen that overconfidence.
Like other people, when entrepreneurs think they are better at things than they actually are, they can begin to believe a task is easier than it actually is.
This can lead to errors in judgment and seriously damage your new business.
How can this research help entrepreneurs?
Our study highlights the involvement of family members in the entrepreneurial process.
Entrepreneurs need to be aware that they need to carefully manage their emotional state, especially their level of confidence.
Entrepreneurship development and support programmes are often focused solely on business strategies to get new ventures off the ground. The research suggests it’s important to also incorporate elements such as maintaining mental health, managing big family events and accessing support.
