Working Paper: NBER ID: w15532
Authors: 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.
Keywords: No keywords provided
JEL Codes: J4; L26; O3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high opportunity costs (D61) | aggressive cashout pursuit (G51) |
| aggressive cashout pursuit (G51) | increased probability of failure (G33) |
| high opportunity costs (D61) | increased probability of failure (G33) |
| fewer outside alternatives (Q42) | lingering longer in ventures (D25) |
| lingering longer in ventures (D25) | mitigate likelihood of cashout (G50) |
| venture quality (L15) | relationship between opportunity cost and performance (D29) |