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A Hubris Theory of Entrepreneurship

Article in Management Science February 2006

DOI: 10.1287/mnsc.1050.0483 Source: OAI

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Dean A. Shepherd Dale Wesley Griffin

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MANAGEMENT SCIENCE
Vol. 52, No. 2, February 2006, pp. ivv
issn 0025-1909
eissn 1526-5501
06
5202
00iv
Management Insights
A Hubris Theory of Entrepreneurship
Mathew L. A. Hayward, Dean A. Shepherd, Dale Grifn
Initiatives rely on executives condence in their abilities
and knowledge to make them successful. Our analysis
reveals that overcondent executives who launch these ini-
tiatives also risk becoming victims of their overcondence.
As entrepreneurs become overcondent, they exaggerate
the value of their ventures relative to capital providers,
and therefore raise less capital than their ventures need.
Overcondent entrepreneurs also tend to spend that capi-
tal more quickly and wastefully as they become more con-
vinced about the commercial potential of their opportuni-
ties. Our central nding is that an entrepreneurs level of
condence acts both as a driver of new venture formation
and as a potent cause of new venture failure. The impera-
tive for entrepreneurs, therefore, is to stay highly condent
and reap the socially bestowed benets, while simultane-
ously maintaining a cautious eye on nancial risk.
Overoptimism and the Performance of Entrepreneurial
Firms
Robert A. Lowe, Arvids A. Ziedonis
In this paper we examine the success rates of start-ups
and established rms in commercializing university-based
inventions. Universities are increasingly a key source for
new products, new technologies, new rms, and new
investment opportunities. Simultaneously, university tech-
nologies are often perceived to be among the riskiest invest-
ments. However, there have been few attempts prior to this
paper to understand the risks and rewards of investing in
university technologies as a start-up or established rm.
In addition to characterizing investments in university-
based technologies, our work provides insights into over-
optimism, which many people believe affects entrepreneurs
behavior.
The Personal Computer and Entrepreneurship
Robert W. Fairlie
The personal computer is one of the most important tech-
nological innovations in the second half of the 20th century.
Personal computers are clearly useful for most small busi-
nesses, and hence a large percentage of small businesses
and self-employed business owners report using personal
computers to run their businesses. But are personal comput-
ers useful for starting businesses? The analysis in this paper
provides evidence that personal computers increase the
likelihood of entrepreneurship. The mechanisms by which
personal computers can promote entrepreneurship are mul-
tiple. Personal computers may make it substantially eas-
ier for a potential entrepreneur to create an experimental
business plan, obtain information about tax codes and legal
regulations, learn about specic industries, and research
competition. Further, the skills acquired from owning a
home computer, such as familiarity with spreadsheets, word
iv
informs
doi 10.1287/mnsc.1060.0519
2006 INFORMS
processing, and database programs, may be valuable for
creating and managing a business, and specic computer
skills, such as programming, graphics design, and hardware
knowledge, may be especially valuable for creating rms in
high-tech industries. Finally, the personal computer, espe-
cially through use of the Internet, may substantially lower
marketing, investment, and operating costs.
Venture Capitalists and Cooperative Start-up Commercial-
ization Strategy
David H. Hsu
Cooperative commercial development (through strategic
alliances and/or technology licensing) is an increasingly
important means of bringing products to market. However,
entrepreneurs of new technology-based ventures may face
obstacles to such development due to high search costs for
appropriate partners and/or lack of an established reputa-
tion with potential collaborators. Venture capitalists (VCs)
may help by intermediating ties between start-ups and
cooperation partners/resource providers (e.g., investment
banks). Using a study design that separates cooperative
activity resulting from the passage of calendar time from
that due to association with VCs, we nd that start-ups
backed by VCs experience a substantial boost in coopera-
tive activity, get matched with higher-reputation investment
banks, and experience an increased likelihood of an initial
public offering. Moreover, since VCs differ in their reputa-
tion and start-up value-added potential, they confer differ-
ential performance benets to new ventures.
Multistage Selection and the Financing of New Ventures
Jonathan T. Eckhardt, Scott Shane, Frdric Delmar
This study has several implications for individuals who
are involved in the nancing of new ventures. First, our
work indicates that rm founders are more likely to be
awarded capital from external sources if they take steps
to generate objective indicators of venture performance.
Second, we nd that public policy programs that merely
make funding available to entrepreneurs through tradi-
tional gatekeeperssuch as banks and venture capitalists
are likely to fall short of expectations if the programs are not
accompanied by initiatives designed to educate founders
regarding the selection criteria of interest to investors. Last,
our results suggest that investors may benet by actively
seeking out potential investments, rather than merely wait-
ing for entrepreneurs to solicit funds from them.
Social Capital, Geography, and Survival: Gujarati Immi-
grant Entrepreneurs in the U.S. Lodging Industry
Arturs Kalnins, Wilbur Chung
In this paper we demonstrate the potential benets that
owners of service or retail outlets receive by belonging to a
social group. We nd that owners that are group members
are more likely to enjoy higher survival rates, especially if
Management Insights
Management Science 52(2), pp. ivv, 2006 INFORMS
other group members are geographically close and possess
the resources to help. Although our conclusions are made
in the context of an immigrant entrepreneur group, similar
benets of social membership are likely to apply to profes-
sional, religious, and community groups as wellas long
as the group members feel sincere kinship with each other,
and as long as the members care greatly about their rep-
utation within the group. Our work also has implications
for entrepreneurs considering entry into a service or retail
industry in which a group is dominant: If the entrepreneur
is not a part of a group, then they need to have compen-
sating strengths to make up for their status as an outsider.
Otherwise, they may wish to forgo the opportunity to enter
that industry.
Continual Corporate Entrepreneurial Search for Long-
Term Growth
Gaurab Bhardwaj, John C. Camillus, David A. Hounshell
We use a eld study of DuPont spanning 20 years and
the recently developed moving, anchored search (MAS)
framework to offer insights on the continual entrepreneurial
search process of discovering and creating possibilities for
long-term corporate growth. Our analysis shows that sub-
stantial changes in the direction of a companys strategy
involving moves into new domains for long-term growth
are infrequent. When made, they are generally responses
to events that lead corporate entrepreneurs to believe that
there will be signicant improvements or reductions in their
companys future performance. Such events usually require
a quick response, but changing the direction of long-term
growth quickly by moving into new domains is difcult and
fraught with risk and uncertainty. Corporate entrepreneurs
often make such moves mistakenly based on their assumed
understanding of markets and perceptions of their com-
panys current capabilities. Over time, these understand-
ings and capabilities emerge to be inadequate. Moves into
new domains require the concurrent development of new
capabilities and knowledge, but their development is often
delayed. Improved decision making in the pursuit of long-
term growth opportunities can be aided by the MAS frame-
work and the insights of this paper.
Optimal Project Rejection and New Firm Start-ups
Bruno Cassiman, Masako Ueda
Start-up companies are often the result of rejection of an
idea by an established corporation. For example, Wal-Mart
came about when the management of Ben Franklin declined
Sam Waltons idea to locate discount stores in small towns
in the southwestern United States. Similarly, when General
Electric declined the idea from one its engineers to cre-
ate a B2B marketplace for suppliers, the engineer founded
FreeMarkets in his basement. While analyzing the case his-
tories of various new ventures, we noted that many success-
ful entrepreneurs rst shared their innovative ideas with
their employer. Only once the employer had rejected the
idea did they go out on their own. This raises the ques-
tion of why established rms sometimes forego innova-
tive, good projects that are later successfully launched by
v
start-up rms. Contrary to the widespread belief that good
projects slip away because of poor management or weak
protection of property rights, we argue that established and
start-up companies simply adopt different types of projects
due to an optimal project allocation mechanism. Hence,
established rms tend to wait for projects that complement
their existing assets, while start-up rms benet from more
innovative, radical projects that fall outside the scope of
an established rms likely portfolio. However, established
rms can substantially improve the performance of their
innovation process by consciously managing the efcient
allocation of internally generated new ideas between inter-
nal innovation projects and start-up rms.
Proactive and Reactive Product Line Strategies: Asymme-
tries Between Market Leaders and Followers
Venkatesh Shankar
A rms product line strategy is a potent competitive
weapon, but to be effective it must be coordinated with pric-
ing, distribution, marketing, and other business strategies.
In this paper we present a modeling framework and use it
to analyze product line strategies of rms in the computer
printer market, including market leader Hewlett Packard
(HP) and followers Epson, Canon, and Lexmark. Our results
show that while the market leader generally uses a product-
proliferation strategy and rarely ghts on price, market fol-
lowers tend to adopt price-ghting strategies. We also nd
that rms, particularly, market leaders, are more likely to
engage in product-proliferation or product-pruning strate-
gies when competitors have changed their product lines in
the past, when the rm is large, and when its price is high.
Finally, our model provides a means for estimating reaction,
anticipation, and demand elasticities of the different rms
in their markets. Managers of market leaders (followers) can
use this model to formulate better product line strategies
based on the likely proactive and reactive actions of market
followers (leaders).
Patent Protection, Complementary Assets, and Firms
Incentives for Technology Licensing
Ashish Arora, Marco Ceccagnoli
In this paper we explore the connection between patent
protection and the payoff from licensing. In general, an
innovator should only license a technology if the expected
revenues from doing so are greater than those from self-
commercialization. We examine empirical data on indus-
trial R&D and conclude that the relative effect of patent
protection on licensing revenues and potential for self-
development depends on how innovation is organized in
the rm. Specically, we provide systematic evidence that
stronger patent protection has a smaller impact on the
expected licensing payoff in rms where R&D and man-
ufacturing are integrated than in less integrated rms. In
managerial terms, our results suggest that when patent pro-
tection is strong, rms lacking the specialized complemen-
tary assets required to commercialize innovation should
license more than rms that have specialized complemen-
tary assets.