| Abstract: |
We present a Schumpeterian growth model with new venture creation, under
uncertainty, which explains the tradeoff between speed-to-breakeven,
revenue-at-breakeven and relates this to the level of innovation. We then
explore the tradeoffs between these outcomes empirically in a unique sample of
331 information and communication technology (ICT) ventures using a
multi-input, multi-output stochastic frontier model. We estimate the
contribution of financial capital and labor input to the outcomes and the
tradeoffs between them, as well as address heterogeneity across ventures. We
find that more innovative (and therefore more uncertain) ventures have lower
speed-to-breakeven and/or lower revenue-at-breakeven. Moreover, for all
innovativeness levels, new ventures face a tradeoff between speed-to-breakeven
and revenue-at-breakeven. Our results suggest that it is the availability of
proprietary resources (founder equity and labor) that helps ventures overcome
bottlenecks in the innovation process, and we propose a line of research to
explain the (large) unexplained variation in venture creation efficiency.
Plain English Summary. This study examines how new businesses deal with
uncertainty, focusing on the tradeoff between how quickly they become
profitable (speed-to-breakeven) and how much revenue they generate when they
do. We analyze data from 331 ICT ventures to understand these tradeoffs
better, considering factors like financial resources and labor inputs. We find
that more innovative ventures, which tend to be more uncertain, often take
longer to reach profitability and may earn less when they do. Moreover,
regardless of their level of innovation, all new ventures face a tradeoff
between speed-to-breakeven and revenue. The study highlights that unique
resources, such as founder equity and founder labor, help businesses overcome
challenges in the innovation process. It also suggests further research to
understand why some ventures are more efficient than others in the early stage
of creating new businesses. |