Cash-out or flame-out: How does entrepreneurial opportunity cost influence entrepreneurial strategy? Empirical evidence from the information security industry

We empirically study how opportunity cost of entrepreneurship conditions entrepreneurial performance. We assume that entrepreneurs in high tech startups aim to “cash out”, by being acquired on favorable terms or through an IPO. Entrepreneurs with few alternative opportunities will tend to linger on as long as they can in the hopes of cashing out, whereas those with plentiful opportunities have a higher opportunity cost of staying on in the industry. These high opportunity cost entrepreneurs will attempt to cash out quickly or leave. We provide two simple models that formalize this intuition. Using a novel dataset of information security startups we find that entrepreneurs with high opportunity costs are not only more likely to succeed or cashout but they are also more likely to fail and leave the industry. JEL Code: L240, L250, L260 1 This paper is taken from a chapter of Anand Nandkumar’s 2008 PhD dissertation at The Heinz School, Carnegie Mellon University.