Overoptimism and the Performance of Entrepreneurial Firms

Abstract:     
Compares the performance of startups with that ofestablished firms in order to investigate whether overoptimism plays a criticalrole in the entrepreneur’s decision to found a firm. Three aspects ofperformance are considered: the likelihood of achieving commercial sales, thelikelihood of terminating a development effort, and university licensingrevenues generated by a developed invention. Following a discussion of recentstudies of university technology licensing to entrepreneurial firms and theliterature on managerial cognitive bias, it is hypothesized thatentrepreneurial startups are less likely than established firms to terminatedevelopment efforts and to commercialize inventions successfully. The lasthypothesis proposes that inventions licensed by startups generate lowereconomic returns than do inventions licensed by established firms. Data on 734 inventions disclosed to the University of California from 1981to 1999 and licensed exclusively to a firm are used to test the hypotheses. Thedata indicate that startups actually generate greater levels of licensingrevenues for similar technologies than do established firms. However,entrepreneurs appear to hold on longer to technologies that do not achievecommercial success. The latter finding suggests entrepreneurs may be in denialabout the unpromising futures of these inventions. As a whole, the resultsoffer little support for the idea that excessive optimism is a driving force inthe decision to found a firm. (SAA)

Keywords: Cognitive bias, Inventions, Commercialization, University-firm relations, Individual traits, Perceptions, Attitudes, Cognition, Management decisions, Optimism, Technology licenses, Startups, Firm performance

Accepted Paper Series