Failing firms and successful entrepreneurs: serial entrepreneurship as a temporal portfolio

Abstract

Entrepreneurial performance is almost always confounded with firm performance. In this paper we argue for an instrumental view of the firm by formally showing that entrepreneurs can amplify their expected success rates by designing their careers as temporal portfolios that exploit contagion processes embedded in serial entrepreneurship. The advantages to holding concurrent portfolios that exploit heterogeneity are well known. The same advantages may be achieved in the serial context through contagion. Our model exploits an observation due to William Feller on the near equivalence of the two, statistically speaking. It also leads to empirically plausible implications about the size distribution of firms in the economy and illustrates the relevance of considering firms and entrepreneurs as distinct loci of analysis.

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Notes

  1. 1.

    Quoted in Sarasvathy (2000, p.14).

  2. 2.

    We abuse notation slightly in that we do not explicitly indicate the dependence of the p.m.f on the firm success probability. Also, there are a great many different equivalent formulae for the negative binomial; for a survey of the mess, see (Ross and Preece 1985). The above formulation may be found in (Feller 1968, section VI.8).

  3. 3.

    Typically, processes such as the Yule process, Polya urn processes, epidemic processes, etc. are pointed to, or specific distributions such as the Pareto, power law, negative binomial, Zipf’s law, etc. are held up as exemplars (Feller 1943; Greenwood and Udny 1920; Xekalaki 1983). The study of contagion originated in the classic analysis of industrial accidents by Greenwood and Yule (1920). Not only has much of the work on contagion remained confined to this literature, but contagion has usually been studied in the context of counting processes. While it is natural to think of contagion as an increase in the number of something or the other, it is also limiting in that it forces a frequentist flavor onto events that may be best described otherwise (for example, belief contagion). Growth is not to be confused with contagion. In the Polya urn, the number of marbles of either color is a non-decreasing function of time, but what makes the process contagious is the conditional increase in numbers.

  4. 4.

    The events, \( E(0),E(1), \ldots \) etc. are considered as the same event occurring at different time instants.

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Acknowledgments

We would like to thank Professor James G. March for taking the time to give us detailed comments on feedback on an earlier version of this paper and the Darden School Foundation and Batten Institute for funding.

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Sarasvathy, S.D., Menon, A.R. & Kuechle, G. Failing firms and successful entrepreneurs: serial entrepreneurship as a temporal portfolio. Small Bus Econ 40, 417–434 (2013). https://doi.org/10.1007/s11187-011-9412-x

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Keywords

  • Serial entrepreneurship
  • Firm performance
  • Industrial organization
  • Population ecology
  • Labor economics
  • Financial economics

JEL Classifications

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  • G24
  • J24
  • L25
  • L26