New venture creation: Innovativeness, speed-to-breakeven and revenue tradeoffs

Saul Estrin, Andrea Herrmann, Moren Levesque, Tomasz Mickiewicz and Mark Sanders

CEP Discussion Papers from Centre for Economic Performance, LSE

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.

Keywords: entrepreneurship; innovation; new venture creation; proprietary resources; stochastic frontier analysis; Schumpeterian growth model (search for similar items in EconPapers)
Date: 2024-11-15
New Economics Papers: this item is included in nep-cfn, nep-cse, nep-eff, nep-ent, nep-ict, nep-ino, nep-sbm and nep-tid
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Citations: View citations in EconPapers (2)

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