Knowledge that Transforms

Abstract Research Summary This article examines previously neglected tensions between causation and effectuation in the process of new venture creation. We studied 41 episodes of new venture creation by entrepreneurs in Finland and Denmark, who we followed applying the diary method. We reveal tense relations between the respective causation and effectuation principles at multiple levels, and identify the corresponding mechanisms for their resolution, which, in turn, lead to the synergy. This study enriches the effectuation research by offering a dynamic perspective on causation‐effectuation interplay and categorizing three modes of their interaction, that is, separation, hybrid synergy, and tensions. Managerial Summary Venture creation is a complex process that involves different decision‐making logics. While combining the goal‐driven logic of causation and non‐goal driven logic of effectuation is essential for the success of a start‐up, the road to their synergy can be paved with different tensions. Our study of 41 episodes of new venture creation by entrepreneurs in Finland and Denmark shows that these tensions can occur at the individual, organizational and inter‐organizational levels. We also show four different mechanisms of how entrepreneurs can overcome these tensions within their ventures and in relations with other stakeholders.

Abstract Research Summary Inevitable disclosure doctrine (IDD) refers to a legal doctrine where an employer can claim, without the need for proof or evidence, misappropriation of trade secrets to seek an injunction against an employee. Based on entrepreneurial spawning literature, for employees seeking to start their ventures, IDD rejection by state courts could therefore be a potential catalyst to entrepreneurial activity. In a sample of neighbor‐counties across state borders with and without IDD rejection, the two‐way fixed‐effects difference‐in‐differences estimates show positive effects for county‐level entrepreneurial outcomes. However, when applying more recently developed methods for testing staggered implementation, we find no support for county‐level entrepreneurial outcomes across multiple specifications and heterogeneities. The findings have implications for the limited efficacy of IDD rejection on regional entrepreneurial activity. Managerial Summary The value of protecting trade secrets is important for employers, and the role of laws in preventing employees from potentially disclosing their trade secrets is widely studied. One such legal doctrine is the inevitable disclosure doctrine (IDD) where an employer can claim, without the need for proof or evidence, misappropriation of trade secrets to seek an injunction against an employee. We find that IDD rejections by courts have a limited effect on the formation of startups in a county. The findings imply that investors are less encumbered by IDD rejections by courts and that policymakers may not find IDD rejections as a useful mechanism to prime local entrepreneurship.

Abstract Research Summary Although reward‐based crowdfunding is lauded for its promise to democratize funding for innovation, claiming innovation in campaign texts has an ambiguous link to crowdfunding performance. We draw from Expectancy Violations Theory (EVT) and, in a field study of 2,185 Kickstarter campaigns, find that innovation claims yield better fundraising performance for women than men, particularly in male‐stereotyped categories. An experiment did not identify the expected indirect effects of innovation claims on crowdfunding performance through ability trustworthiness. However, it revealed that women are perceived as more able when launching campaigns in male‐stereotyped categories, suggesting that EVT and ability perceptions may still play an important but unhypothesized role. We extend research on the role of gender in crowdfunding and strategic entrepreneurship and make several suggestions for future research. Managerial Summary The value of making innovation claims in reward‐based crowdfunding is ambiguous, creating an unclear picture of how entrepreneurs should present new products on these platforms. In a field study of 2,185 Kickstarter campaigns, we show that female entrepreneurs benefit more from making innovation claims than their male peers, especially in male‐dominated categories. While we suggested that these effects occur due to differences in backers' perceptions of the entrepreneur's ability, this mechanism was not supported in an experiment. However, we found that women are perceived as more able when launching crowdfunding campaigns in male‐dominated industry categories. Taken together, our research suggests that in reward‐based crowdfunding, women might benefit from violating gender expectations when backers view these violations as either positive or ambiguous.

Abstract Research summary We apply insights from research in social psychology and labor economics to the domain of entrepreneurial finance and investigate how founder chief executive officers' (founder CEOs') facial attractiveness influences firm valuation. Leveraging the novel context of initial coin offerings (ICOs), we document a pronounced founder CEO beauty premium, with a positive relationship between founder CEO attractiveness and firm valuation. We find only very limited evidence of stereotype‐based evaluations, through the association of founder CEO attractiveness with latent traits such as competence, intelligence, likeability, or trustworthiness. Rather, attractiveness seems to bear economic value per se, especially in a context in which investors base their decisions on a limited information set. Indeed, attractiveness has a sustainable effect on post‐ICO performance. Managerial summary ICOs allow ventures to collect funding from investors using blockchain technology. We leverage this novel funding context, in which information on the ventures and their future prospects is scarce, to empirically investigate whether the founder CEOs' physical attractiveness is associated with increased funding (i.e., amount raised) and post‐funding performance (i.e., buy‐and‐hold returns). We find that ventures with more attractive founder CEOs outperform ventures with less attractive CEOs in both dimensions. For ICO investors, this suggests that ICOs of firms with more attractive founder CEOs are more appealing investment targets. Our findings are also interesting for startups seeking external finance in uncertain contexts, such as ICOs. If startups can appoint attractive leaders, they may have better access to growth capital.

Abstract Research Summary We examine the effects of founder teams' firm‐ and industry prior work experience on startup growth in the context of high technology industries. We study these effects both on the early growth of startups and on their growth, after accumulating experiential knowledge. Integrating the literatures on human capital, imprinting and competency traps, we develop a typology of four combinations of founder prior experience: founder same firm and same industry experience, founder same industry but other firm experience, founder same firm but other‐industry experience, and founder other‐industry and other firm experience. Using data from 153 Israeli high technology startups, we find significant variations in the effects of these combinations on startup growth, which also vary between the early and later years of these startups. Managerial Summary Founders play a key role in the lives of their startups, applying their resources, knowledge and experience. Therefore, we ask: how does founder experience influence high technology startups' growth? To answer this question, we examine four combinations of founder prior experience: founder same firm and same industry experience, founder same industry but not same firm experience, founder same firm but other‐industry experience, and founder other‐industry and not same firm experience. Our analyses show significant differences in startup growth based on these combinations of founder prior experience and, importantly, the effect of these four combinations on startups' growth in their early years of existence differs significantly from later years, when these firms can increasingly draw on their own experiential learning.

Abstract Research Summary When evaluating Internet‐based loan project of small and medium size enterprises (SME), lenders can rely on easy‐to‐understand risk ratings or more sophisticated financial information. We investigate lenders decisions and its effect on loan funding success on the marketplace‐lending platform Zencap. The data set has been provided by the platform Zencap and includes 414 SME marketplace loans and 2,196 lenders. The data examined provide strong support for the importance of simple platform ratings in influencing investor behavior, while the effect of more detailed financial information is less pronounced, controlling for relevant variables. Higher interest rates appear more profitable to investors without any serious concern about non‐repayment. Managerial Summary Platform managers and potential borrowers are interested in how to encourage lenders to pledge their money on marketplace‐lending platforms. We investigate the influence of easy‐to‐understand risk ratings and more sophisticated financial information on investment decisions and their effect on loan funding success on the marketplace‐lending platform Zencap. We investigate 414 SME marketplace loans and 2,196 lenders. We find that for marketplace lending on Zencap the effect of more detailed financial information is less pronounced than easy‐to‐understand risk ratings. Platforms base risk ratings on information other than the entrepreneurs' financial information.

Abstract Research Summary Rural communities in developing countries often exhibit high poverty levels, lack of skilled labor, and limited infrastructure. Through an analysis of three social ventures serving rural low‐income markets in Latin America, we explore how social entrepreneurs create and grow their ventures. We advance a multilevel framework that incorporates three main levels within the creation and growth process of social ventures serving these markets. At the individual level, founders are continuously revising goals and acquiring new capabilities. At the community‐relations level, they engage in explicit efforts to ground business operations in the community. At the organizational level, they pursue innovative business models. These processes are dynamic and interdependent. This framework contributes to the research on social venture creation and growth in uncertain and resource‐constrained environments. Managerial Summary Philanthropy or base of the pyramid (BoP) initiatives by multinational corporations have sought to alleviate poverty in rural low‐income communities in developing countries. Social entrepreneurship constitutes an alternative mechanism to generate social impact by bringing products and services to this market segment in a financially sustainable way. However, the creation and growth of a social venture in this context pose multiple challenges given the socioeconomic conditions of its populations and the limited access to public infrastructure. Based on a comparative analysis of three Latin American enterprises, our research suggests the following takeaways for social entrepreneurs seeking to serve these communities: (a) be willing to change goals and acquire new capabilities (e.g., business training); (b) see the community not only as customers or beneficiaries but also as a source of useful resources to deploy in the venture's operation; and (c) innovate in business model components (e.g., distribution, marketing, human resource management) that, due to limiting conditions in these communities, require a different approach than in mainstream markets.