Flying High or Crashing Down? Pre-Entry Knowledge and the Distribution of Startup Performance

37 Pages Posted: 3 Aug 2020

See all articles by Rajshree Agarwal

Rajshree Agarwal

University of Maryland - Robert H. Smith School of Business

Benjamin A. Campbell

The Ohio State University - Fisher College of Business

Seth Carnahan

Washington University in St. Louis

Joonkyu Choi

Board of Governors of the Federal Reserve System

Date Written: July 1, 2020

Abstract

We examine variation in high-technology startups’ performance based on whether their founders are industry insiders or industry outsiders. We develop a formal theory to explicate differences in performance between startups founded by industry insiders versus outsiders. These differences are shaped by outsiders experiencing higher uncertainty in assembling complementary resources, and thus also having a higher selection threshold for the value creation potential of the technical ideas, relative to insiders. The model predicts that although industry outsiders are more likely to fail, conditional on survival, they outperform ventures founded by industry insiders and are also relatively more likely to be acquired. We test the propositions of the formal model using confidential employee-employer linked microdata from the United States and find strong and robust support for the model propositions.

Keywords: Entrepreneurship, business strategy, firm dynamics

Suggested Citation

Agarwal, Rajshree and Campbell, Benjamin A. and Carnahan, Seth and Choi, Joonkyu, Flying High or Crashing Down? Pre-Entry Knowledge and the Distribution of Startup Performance (July 1, 2020). Available at SSRN: https://ssrn.com/abstract=3644518 or http://dx.doi.org/10.2139/ssrn.3644518

Rajshree Agarwal

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States

Benjamin A. Campbell

The Ohio State University - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

Seth Carnahan (Contact Author)

Washington University in St. Louis ( email )

One Brookings Drive
Campus Box 1208
Saint Louis, MO MO 63130-4899
United States

Joonkyu Choi

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
+1 (202) 973-6884 (Phone)

HOME PAGE: http://sites.google.com/site/jooonkyuc/

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