The problems and issues in entrepreneurship are not confined to one academic area. This issue of Capital Ideas highlights the multidisciplinary aspect of entrepreneurship research at Chicago GSB. Two of the articles are at the intersection of finance and economics, one at the intersection of sociology and organizations, and one at the intersection of economics and organizations. Although these articles come from the perspectives of different disciplines, they share a common theme of striving to understand key determinants of value creation in entrepreneurial situations.

In “Bet on the Horse,” together with coauthors Per Strömberg and Berk A. Sensoy, I study how particular types of entrepreneurial firms evolve. In so doing, our findings shed light on the relative importance of a company’s product and market versus the company’s founders and management team. Among venture capitalists (VCs), this question is often characterized as whether VCs should bet on the jockey (management) or the horse (product/market) when selecting their investments.

We address this question by studying 49 companies financed by VCs that subsequently went public. We study how a company evolves in numerous dimensions, from early business plan to public company. The most striking and surprising result is the almost complete stability of firm business models. Only in one company did the core business change. Within the same core businesses, firm activities tended to stay the same or broaden over time. Though the human capital of the sample firms changed substantially, the uniqueness of the firm, nonpeople assets, customers, and competitors remained relatively constant. We interpret the results as favoring the product/market (horse) view of VC investing more than the best available management team (jockey) view.

In “How Smart is Smart Money?,” Morten Sørensen focuses his attention on the role of venture capitalists in entrepreneurial companies. VCs pride themselves on being able to choose good businesses to invest in and then being able to add value to those businesses. It has been open question as to whether and to what extent VCs actually do so.

Sørensen uses a clever research design to answer that question. By looking at how top-tier and second-tier VCs invest in different geographical markets, he is able to estimate the relative importance of choosing (or sorting) and adding value (or influencing). The estimates in the paper suggest that the most experienced and successful VC investors accomplish both, choosing better companies and adding more value. Choosing accounts for approximately 60 percent and adding value explains 40 percent of the increase in the rates of successful investments for the most experienced VCs in the market.

In “Generalists vs. Specialists,” Damon J. Phillips and coauthor Jesper B. Sørensen examine the relationship between the size of an entrepreneur’s prior employer and the success of the entrepreneur’s new venture. Prior research has shown that individuals working at small firms are more likely to become entrepreneurs, but do the skills acquired at a small firm also lead to more successful entrepreneurs?

Using a dataset of the entire Danish labor market, Phillips and Sørensen’s study is the first to systematically examine the relationship between the size of an entrepreneur’s prior employer and entrepreneurial success. They find that entrepreneurs coming from small firms have better initial performance than entrepreneurs coming from large firms.

Taken as a whole, the research highlighted in these first three articles broadens our understanding of the role of businesses, people, and venture capitalists in entrepreneurial success. The first study suggests that an entrepreneurial business must have a good business model in order to succeed—we do not find examples of successful businesses that were able to change their businesses. That result does not mean that good people do not matter, only that good people cannot fix a bad business. The next two studies suggest that having the right people and investors (presumably with a viable business) does matter to the likelihood that an entrepreneurial venture succeeds.

In “Why Mergers Fail: Beyond Culture Clashes,” Wouter Dessein, Luis Garicano, and Robert Gertner address a different aspect of value creation by studying the tradeoffs involved in achieving synergies in corporate mergers. Merging companies attempt to realize synergies by sharing resources in areas such as research and development, manufacturing, or sales.

If it were possible to keep all operations the same except for the area where there is overlap, such mergers always would be profitable. Organizational costs, however, limit the ability of two firms to capture synergies through the coordination of several previously independent units. To put it in the perspective of an analyst evaluating a merger, there exists an “organizational discount factor” that must be applied when estimating the efficiency gains of a merger. Dessein, Garicano, and Gertner study this organizational discount factor systematically. They develop a theory that predicts conditions under which synergies are likely to be easier to capture and those conditions under which the synergies will be difficult to capture.

Steven N. Kaplan
Neubauer Family Professor of Entrepreneurship and Finance; Faculty Director, Michael P. Polsky Center for Entrepreneurship at the University of Chicago Graduate School of Business