When to be a Nonconformist Entrepreneur? Organizational Responses to Vital Events*
Date: April 11, 2014
Time: 10:30 am - 12:00 pm
Location: Room 410
Salient successes and failures among organizations, such as spectacular venture capital investments or agonizing bankruptcies, affect consensus beliefs about the viability of particular markets. We argue that such vital events lead to over-reactions in the organizational entry process, with new firms flooding the market after salient successes and a staying clear after salient failures. Particularly notable are the implications of nonconformity under these conditions. An entrepreneur who bucks the consensus and enters a market after salient failures must endure considerable scrutiny, and so is likely have a strong fit to that market. Such a nonconformist will be spared from a passing fad, whereas an entrepreneur that follows trends is more likely to enter markets that are not a good fit for the organization. So we propose that in the wake of salient vital events nonconformity is a preferable approach. In an analysis of software firms, we found evidence that these companies and their venture capitalists chase hot markets: Entries into markets triggered more entries, and markets that saw companies fleeing went cold. Venture capital (VC) magnified this boom and bust cycle: firms were especially likely to enter markets that had recently attracted VC funding, and VCs themselves exhibited herding behavior. Meanwhile, organizations that entered when VC fundings were booming were then increasingly likely to exit, and those financed in a VC funding boom were unlikely to make it to an IPO. By contrast, those firms that entered markets during bad times were more likely to prevail.
*Thanks to Andy Rachleff, Hayagreeva Rao, Jesper Sørensen, and Olav Sorenson for useful ideas. We thank the Graduate Schools of Business at Stanford and the University of Chicago for support. This work is partially funded by the Charles E. Merrill fund at the University of Chicago.
For more information, please contact Rola Zoayter at: rola [dot] zoayter [at] mcgill [dot] ca.