Cash-Out or Flameout! Opportunity Cost and Entrepreneurial Strategy: Theory, and Evidence from the Information Security Industry

• Published in: Management science Vol. 57; no. 10; pp. 1844 - 1860
• Main Authors: Arora, Ashish, Nandkumar, Anand
• Format: Journal Article
• Language: English
• Published: Hanover, MD INFORMS 01.10.2011; Institute for Operations Research and the Management Sciences
• Subjects: Applied sciences; Business structures; Cash; Corporations; Costs; Decision making; Entrepreneurs; Entrepreneurship; Exact sciences and technology; Failure; Finance; Firm modelling; Flameout; High tech industries; Human capital; Information; Internet; Management; Management science; Methods; Operational research and scientific management; Operational research. Management science; Opportunity cost; Opportunity costs; Planning methods; Security; Small and medium sized enterprises; Start up firms; Startups; Strategic planning; Studies; Success; United States; Performance evaluation; Information industry; Costs; opportunity costs; performance; Entrepreneurship; Dempster Shafer theory; Failures; Modeling; Survival; Subjective probability
• ISSN: 0025-1909; 1526-5501
• DOI: 10.1287/mnsc.1110.1381

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 data set of information security start-ups, 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. This paper was accepted by David Hsu, entrepreneurship and innovation.