Lowering the Bar? External Conditions, Opportunity Costs, and High-Tech Startup Outcomes
64 Pages Posted: 7 Jan 2019 Last revised: 17 Jul 2020
Date Written: December 19, 2018
We assess the heterogeneous impact of economic downturns on individuals’ decisions to bring high-technology ideas to the market in the form of new ventures. We thereby examine how worsening labor market conditions influence individuals’ opportunity costs of starting new ventures, the resulting composition of the entrepreneurial pool, and startup performance outcomes. Using a rich dataset of startup founders in the biotechnology and medical device sectors, we find that an increase in the unemployment rate is associated with a substantial rise in the share of entrepreneurs who are most sensitive to worsening labor market conditions. Additionally, we find that startups founded by these entrepreneurs display lower financial and innovative performance than startups founded by entrepreneurs who are relatively insensitive to business cycles. Finally, we provide suggestive evidence that individuals’ heterogeneous response to worsening labor market conditions is a relevant factor in explaining the negative relationship between unemployment and startup performance outcomes.
Previously circulated as: When Push Comes to Shove: External Conditions, Opportunity Costs, and Startup Outcomes
Keywords: Startups, Necessity Entrepreneurship, Economic Conditions, Recessions, Startup Performance
JEL Classification: G24, J11, J18, J21, J24, J64, M13, O30
Suggested Citation: Suggested Citation