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Entrepreneurship as Experimentation

Author: William R. Kerr, Ramana Nanda, Matthew Rhodes-Kropf; Harvard Business School - Entrepreneurial Management Unit; National Bureau of Economic Research (NBER)
Date: July 2014

Entrepreneurship research is on the rise but many questions about its fundamental nature still exist. We argue that entrepreneurship is about experimentation: the probabilities of success are low, extremely skewed and unknowable until an investment is made. At a macro level experimentation by new firms underlies the Schumpeterian notion of creative destruction. However, at a micro level investment and continuation decisions are not always made in a competitive Darwinian contest. Instead, a few investors make decisions that are impacted by incentive, agency and coordination problems, often before a new idea even has a chance to compete in a market. We contend that costs and constraints on the ability to experiment alter the type of organizational form surrounding innovation and influence when innovation is more likely to occur. These factors not only govern how much experimentation is undertaken in the economy, but also the trajectory of experimentation, with potentially very deep economic consequences.

Geography: North America

Type of study: Academic working paper

Relevant for: LP, Venture Capital, Fund of funds, Associate

Source: Journal of Economic Perspectives (Forthcoming), Harvard Business School Entrepreneurial Management Working Paper No. 15-005