Working Paper: NBER ID: w27296
Authors: Michael Ewens; Ramana Nanda; Christopher T. Stanton
Abstract: We show theoretically that a critical determinant of the attractiveness of VC-backed entrepreneurship for high-earning potential founders is the expected time to develop a startup's initial product. This is because founder-CEOs' cash compensation in- creases substantially after product development, alleviating the non-diversifiable risk that founders face at startup birth. Consistent with the model's predictions of where the supply of entrepreneurial talent is likely to be most constrained, we find that technological shocks differentially altering the expected time to product across industries can explain changes in both the rate of entry and characteristics of individuals selecting into VC-backed entrepreneurship.
Keywords: Venture Capital; Entrepreneurship; CEO Compensation; Product Development
JEL Codes: G24; G3; G32; J24; J3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| expected time to develop a startup's first product (L26) | attractiveness of venture capital-backed entrepreneurship (L26) |
| increases in cash compensation post-product development (J33) | non-diversifiable risk faced by founders (L26) |
| expected time to product decreases (C41) | attractiveness of entrepreneurship increases for high-earning individuals (L26) |
| technological shocks (cloud computing) (O33) | expected time to product across industries (D20) |
| expected time to product across industries (D20) | rate of entry of individuals into entrepreneurship (L26) |
| longer expected times to product development (O49) | missing supply of entrepreneurs (M13) |