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

Arora, A and Nandkumar, A (2009) Cash-Out or Flame-Out! Opportunity Cost and Entrepreneurial Strategy: Theory, and Evidence from the Information Security Industry. Working Paper. NBER Working Paper. (Unpublished)

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Abstract

We analyze how entrepreneurial opportunity cost conditions performance. We depart from the literature on entrepreneurship which identifies survival with performance. Instead, many entrepreneurs aim for a cash-out (IPO or acquisition), especially in innovation based industries. Striving for a cash-out makes mistakes more likely and increases the probability of failure. High opportunity cost entrepreneurs will attempt to cash-out (IPO or friendly acquisition) quickly, even if it implies a higher risk of failure. Entrepreneurs with fewer outside alternatives may tend to linger on longer. We formalize this intuition with a simple model. Using a novel dataset of information security startups we find that entrepreneurs with high opportunity costs are not only more likely to cash-out but they are also more likely to fail. As well, our results confirm the predicted role of venture quality in conditioning the relationship between entrepreneurial opportunity cost and entrepreneurial performance.

Affiliation: Indian School of Business
ISB Creators:
ISB CreatorsORCiD
Nandkumar, AUNSPECIFIED
Item Type: Monograph (Working Paper)
Uncontrolled Keywords: Information security, Entrepreneurial strategy
Subjects: Entrepreneurship
Information Systems
Business Strategy
Depositing User: Ilayaraja M
Date Deposited: 04 Jul 2019 16:50
Last Modified: 04 Jul 2019 16:50
URI: http://eprints.exchange.isb.edu/id/eprint/1241
Publisher URL: https://ssrn.com/abstract=1510522
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