Cash-Out or Flame-Out! Opportunity Cost and Entrepreneurial Strategy: Theory, and Evidence from the Information Security Industry
Indian School of Business (ISB), Hyderabad
Duke University - Fuqua School of Business; National Bureau of Economics Research
April 25, 2011
Indian School of Business Working Paper
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 dataset of information security startups, 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.
Number of Pages in PDF File: 33
Keywords: opportunity cost, Performance, entrepreneurship, Information security market
JEL Classification: L250, L260Accepted Paper Series
Date posted: April 28, 2011 ; Last revised: August 8, 2011
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