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

39 Pages Posted: 24 Nov 2009 Last revised: 11 Jun 2023

See all articles by Ashish Arora

Ashish Arora

Duke University - Fuqua School of Business; National Bureau of Economics Research; Duke Innovation & Entrepreneurship Initiative

Anand Nandkumar

Indian School of Business (ISB), Hyderabad

Multiple version iconThere are 2 versions of this paper

Date Written: November 2009

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.

Suggested Citation

Arora, Ashish and Nandkumar, Anand, Cash-Out or Flame-Out! Opportunity Cost and Entrepreneurial Strategy: Theory, and Evidence from the Information Security Industry (November 2009). NBER Working Paper No. w15532, Available at SSRN: https://ssrn.com/abstract=1510522

Ashish Arora (Contact Author)

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States

National Bureau of Economics Research

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Duke Innovation & Entrepreneurship Initiative ( email )

215 Morris St., Suite 300
Durham, NC 27701
United States

Anand Nandkumar

Indian School of Business (ISB), Hyderabad ( email )

Hyderabad, Gachibowli 500 019
India

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
32
Abstract Views
1,250
PlumX Metrics