Working Paper: NBER ID: w21278
Authors: Ramana Nanda; Matthew Rhodes-Kropf
Abstract: The fundamental uncertainty of new technologies at their earliest stages implies that it is virtually impossible to know the true potential of a venture without learning about its viability through a sequence of investments over time. We show how this process of experimentation can be particularly valuable in the context of entrepreneurship because most new ventures fail completely, and only a few become extremely successful. We also shed light on important costs to this process of experimentation, and demonstrate how these can fundamentally alter both the rate and direction of startup innovation across industries, regions and periods of time.
Keywords: entrepreneurship; innovation; venture capital
JEL Codes: G24; L26; O31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lower costs of experimentation (C91) | increased funding for riskier ventures (G24) |
| financing risks (G32) | less innovative startups being funded (M13) |
| state of financial markets (G10) | willingness of investors to fund novel technologies (O36) |
| lower costs of starting new firms (M13) | more audacious projects being pursued (O36) |
| experimentation (C90) | learning about the viability of ventures (M13) |
| ability to abandon investments when early information is negative (G31) | funding radical innovations (O36) |