Research Papers

The Practical Intelligence of High Potential Entrepreneurs:

Antecedents and Links to New Venture Growth

J. Robert Baum, Barbara J. Bird and Sheetal Singh -- University of Maryland

February 2008

While the importance of Practical intelligence (PI) has been established in the literature on theoretical grounds, researchers have called for greater empirical evidence. In response, we provide evidence of the importance of PI for success (new venture growth) in the high potential entrepreneurship setting.  We draw upon cognitive psychology, social cognition, and social cognitive theories to develop a model of practical intelligence, its antecedents, and its role in the exploitation phase of entrepreneurship.  The model was tested through interviews with 22 printing industry CEOs and responses from 143 founders of early stage high potential printing and graphics businesses.  This is one of the first empirical studies of entrepreneurs' intelligence.

All our hypotheses are supported, thus supporting our theory that situationally specific venture as well as industry experience contributes to development of entrepreneur’s PI. Related venture and industry experience and two learning orientations interacted to predict practical intelligence.  While several learning orientations have been identified in the literature, existing theory on entrepreneurial behavior leads us to believe in the value of concrete experience and active experimentation for developing PI. We present evidence in support of this argument. This finding extends our knowledge about the development of PI beyond the role of experience and extends the literature on how experience gets translated into PI.   Additionally, PI predicted higher venture growth across four years. 

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Are Angels Preferred Venture Investors?

Brent Goldfarb, Gerard Hoberg, David Kirsch, Alexander Triantis -- University of Maryland

October 2007

We examine the impact of business angels on 182 Series A financings and subsequent company outcomes. Our studied rounds have a varied mix of business angel and formal venture capital investors (VCs). We find that when only angels participate in a financing round and VCs are absent, control rights are more entrepreneur-friendly, legal expenses are lower and investors are more geographically proximate to the company. Such angel-backed companies are less likely to fail and are more likely to have a successful liquidity event. We find that companies are financed exclusively by VC investors also perform well, particularly when deals are large. Companies financed by both angels and VCs experience inferior outcomes.

Our results suggest that entrepreneurs consider business angels to be preferred investors and VCs investing in small deals face adverse selection. For larger deals, where deeper-pocket VC participation is required, these roles reverse and angels face adverse selection when investing alongside powerful VC syndicates.

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Do Business Ethics Matter?
Why a Code of Conduct Is Important for the Entrepreneur
Michael D. Pfarrer -- University of Maryland
August 15, 2005

Ethics can be a messy business. Scholars and practitioners alike have often argued over a definition of ethical behavior, as well as the necessity for a code of ethics in organizations. Indeed, there appears to be no clear moral compass to guide organizations (McNamara, 2005). But, if one operates under the assumption that business has a moral responsibility to act ethically (to which some would disagree [cf. Locke & Noel, 2004]), then a code of ethics is a logical next step to help codify proper behavior in organizations.

As an early stage entrepreneurial company it is never too early to start thinking about and implementing a code of conduct to ensure ethical standards are ingrained into the corporate DNA. This ensures that all the process and procedures for a well-managed, investor-owned company are robust and developed. Implementing a code of conduct is an important first step.

An effective code of ethics...

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 Was There a Dot Com Bubble?  Distinguishing Between
Technological and Market Phenomena
David Kirsch, Brent Goldfarb -- University of Maryland
December 17, 2004

The late 1990s saw a 10-fold increase and subsequent decline in U.S. venture capital funding peaking at $30 billion per quarter in early 2000, a boom and bust by any measure (Venture Economics, 2003).  This project examines the nature and character of entrepreneurial action during this period.  First, our preliminary findings suggest a significant under-counting of investment in new venture creation during the so-called Dot Com era as data sources under-report the amount of private, informal capital secured by nascent internet technology startups by up to 50%.  This finding tempts one to conclude that the internet bust was more severe and pronounced than publicly reported.  Yet, framed within the theoretical setting of Schumpeterian business cycles in which entrepreneurial opportunities are driven by secular technological change, we develop and test two competing explanations of the “boom” and “bust”.  To test these theories we introduce a novel dataset dataset consisting of more than 1,000 internet era business plans that were submitted to a leading venture capitalist during the years of the internet bubble.

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How Entrepreneurial Firms Overcome their Resource Deficit: Network Status,
Knowledge Transfer, and Isolating Mechanisms
By Deepak Somaya

While entrepreneurial firms may possess unique advantages in their agility and ability to address hitherto unmet needs, they also lack the considerable internal capabilities that large firms have easy access to. In fact, they are extremely constrained in firm-specific resources, and typically do not have either the time or financing to build them up quickly. We argue that entrepreneurial firms compensate for this "resource deficit" through a number of different mechanisms. First, they build networks to gain access to critical resources, and consciously seek alliances with high-status players in order to enhance their own attractiveness as network partners. Second, they source knowledge from their environment in ways that are consistent with their own weak knowledge base or limited "absorptive capacity"; favoring knowledge transfer through incentivized contracts over internal firm learning. Third, entrepreneurial firms are especially dependent on isolating mechanisms barriers to imitation that will enable them to appropriate returns and build a unique market position. Lacking the complementary assets to compete head-to-head with larger firms, entrepreneurial firms will seek opportunities and relationships where the protection provided by strategic barriers like patents is high. We test our hypotheses in a unique empirical setting university technology licensing in which we can compare the behavior of start-ups and large firms without the biases introduced when licensing partners (universities in this case) can commercialize the technology on their own.

Evolution of Software Ecosystem Alliances Between Entrepreneurial ISVs and Large Middleware Platform Companies
By Anil K. Gupta

This project is aimed at understanding the formation and evolution of “ecosystem alliances” between independent software companies (also called “independent software vendors” or ISVs) and large middleware platform companies such as IBM.

The key research questions driving this study are: (a) Which young companies are likely to join the ecosystem of a particular established company? In other words, how do young companies choose whose ecosystem to join? (b) What factors determine the effectiveness of the dyadic relationships in the ecosystem? (c) What factors determine the evolutionary path of the alliance in the ecosystem over time? And (d) What are the consequences of such alliances for each of the parties (direct/indirect, short-term/long-term, positive/negative)?

I have already obtained sponsorship from IBM to get access to relevant people for the collection of primary data. The overall data collection plan is as follows: Phase 1 - Interview one person from each side (IBM and ISV) for about 20-24 alliances. Phase 2 - Conduct questionnaire survey of one key person from each side in 150-200 alliances.

Entrepreneurs' Start-up Cognitions and Behaviors:
Dreams, Surprises, Shortages, and Fast Zigzags

J. Robert Baum, assistant professor of entrepreneurship at the University of Maryland's Robert H. Smith School of Business won the distinguished Babson Entrepreneurship Research Conference (BKERC) Best Paper Award for a research paper that identifies the key ingredients for achieving success as an entrepreneur.

In the winning paper, "Entrepreneurs' Start-up Cognitions and Behaviors: Dreams, Surprises, Shortages, and Fast Zigzags," Baum tested theories he had formed as an entrepreneur himself. He studied the psychological profile, knowledge and actions that an individual needs to convert a promising concept into a successful new venture. The three-year research study involved repeated interviews of more than 100 would-be entrepreneurs as they progressed (or failed) along their path to business formation.

Baum's research revealed that those who are successful rarely have the luxury of following a straight line to their goal. Rather, they must have the ability to "zigzag around the obstacles that confront new enterprises."

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