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Cash-Out or Flameout! Opportunity Cost and Entrepreneurial Strategy: Theory, and Evidence from the Information Security Industry

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  • Ashish Arora

    () (Fuqua School of Business, Duke University, Durham, North Carolina 27708; and National Bureau of Economic Research, Cambridge, Massachusetts 02138)

  • Anand Nandkumar

    () (Indian School of Business, Gachibowli, Hyderabad 500032, India)

Abstract

We 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.

Suggested Citation

  • Ashish Arora & Anand Nandkumar, 2011. "Cash-Out or Flameout! Opportunity Cost and Entrepreneurial Strategy: Theory, and Evidence from the Information Security Industry," Management Science, INFORMS, vol. 57(10), pages 1844-1860, October.
  • Handle: RePEc:inm:ormnsc:v:57:y:2011:i:10:p:1844-1860
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    File URL: http://dx.doi.org/10.1287/mnsc.1110.1381
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    1. repec:spr:busres:v:10:y:2017:i:1:d:10.1007_s40685-016-0041-8 is not listed on IDEAS
    2. 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.
    3. Ashish Arora & Michelle Gittelman & Sarah Kaplan & John Lynch & Will Mitchell & Nicolaj Siggelkow & Deepa Mani & Anand Nandkumar, 2016. "The differential impacts of markets for technology on the value of technological resources: An application of group-based trajectory models," Strategic Management Journal, Wiley Blackwell, vol. 37(1), pages 192-205, January.
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    6. Zunino, Diego & van Praag, Mirjam C. & Dushnitsky, Gary, 2017. "Badge of Honor or Scarlet Letter? Unpacking Investors' Judgment of Entrepreneurs' Past Failure," IZA Discussion Papers 11017, Institute for the Study of Labor (IZA).
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    13. repec:bla:stratm:v:38:y:2017:i:3:p:566-587 is not listed on IDEAS
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    More about this item

    Keywords

    entrepreneurship; opportunity costs; performance;

    JEL classification:

    • J4 - Labor and Demographic Economics - - Particular Labor Markets
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights

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