Cash-Out or Flameout! Opportunity Cost and Entrepreneurial Strategy: Theory, and Evidence from the Information Security Industry
AbstractWe analyze how entrepreneurial opportunity cost conditions performance. Departing from the common practice of using survival as a measure of entrepreneurial performance, we model both failure and cash-out (liquidity event) as conditioned by the same underlying process. High-opportunity-cost entrepreneurs prefer a shorter time to success, even if this also implies failing more quickly, whereas entrepreneurs with fewer outside alternatives will choose less aggressive strategies and, consequently, linger on longer. We formalize this intuition with a simple model. Using a novel data set of information security start-ups, we find that entrepreneurs with high opportunity costs are not only more likely to cash out more quickly but are also more likely to fail faster. Not only is survival a poor indicator of performance, but its use as one obscures the relationship between entrepreneurial characteristics, entrepreneurial strategies, and outcomes. This paper was accepted by David Hsu, entrepreneurship and innovation.
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Bibliographic InfoArticle provided by INFORMS in its journal Management Science.
Volume (Year): 57 (2011)
Issue (Month): 10 (October)
entrepreneurship; opportunity costs; performance;
Other versions of this item:
- Ashish Arora & Anand Nandkumar, 2009. "Cash-out or flame-out! Opportunity cost and entrepreneurial strategy: Theory, and evidence from the information security industry," NBER Working Papers 15532, National Bureau of Economic Research, Inc.
- J4 - Labor and Demographic Economics - - Particular Labor Markets
- L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
- O3 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights
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