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Cash-out or flame-out! Opportunity cost and entrepreneurial strategy: Theory, and evidence from the information security industry

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  • Ashish Arora
  • Anand Nandkumar

Abstract

We analyze how entrepreneurial opportunity cost conditions performance. We depart from the literature on entrepreneurship which identifies survival with performance. Instead, many entrepreneurs aim for a cash-out (IPO or acquisition), especially in innovation based industries. Striving for a cash-out makes mistakes more likely and increases the probability of failure. High opportunity cost entrepreneurs will attempt to cash-out (IPO or friendly acquisition) quickly, even if it implies a higher risk of failure. Entrepreneurs with fewer outside alternatives may tend to linger on longer. We formalize this intuition with a simple model. Using a novel dataset of information security startups we find that entrepreneurs with high opportunity costs are not only more likely to cash-out but they are also more likely to fail. As well, our results confirm the predicted role of venture quality in conditioning the relationship between entrepreneurial opportunity cost and entrepreneurial performance.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15532.

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Date of creation: Nov 2009
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Handle: RePEc:nbr:nberwo:15532

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Cited by:
  1. Braguinsky, Serguey & Honjo, Yuji & Nagaoka, Sadao & Nakamura, Kenta, 2010. "Science-Based Business : Knowledge Capital or Entrepreneurial Ability? : Theory and Evidence from a Survey of Biotechnology Start-ups," IIR Working Paper 10-05, Institute of Innovation Research, Hitotsubashi University.

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