Cash-out or flameout! Opportunity cost and entrepreneurial strategy: Theory, and evidence from the information security industry

Journal Article (Journal Article)

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 cashout (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. © 2011 INFORMS.

Full Text

Duke Authors

Cited Authors

  • Arora, A; Nandkumar, A

Published Date

  • October 1, 2011

Published In

Volume / Issue

  • 57 / 10

Start / End Page

  • 1844 - 1860

Electronic International Standard Serial Number (EISSN)

  • 1526-5501

International Standard Serial Number (ISSN)

  • 0025-1909

Digital Object Identifier (DOI)

  • 10.1287/mnsc.1110.1381

Citation Source

  • Scopus