Principal Topic

Entrepreneurs begin their venturing process by exploring a newly “theorized” opportunity in a highly uncertain situation. After a certain period of exploration, entrepreneurs will try to gain profits from the experimented opportunities. Research from population ecology seems to support this conception of venturing process by supporting the existence of a honeymoon period where mortality risk is very low and entrepreneurs and stakeholders gather information on the validity of new venture idea. An important yet insufficiently addressed question on the successful venturing process includes: how long is the appropriate duration of exploration and when is the best timing for the exploitation of the investment in order to achieve overall high performance including both the future profitability and survival of the new venture? In other words, many entrepreneurship scholars argued that entrepreneurial rent (i.e., the difference between a venture’s ex post value and the ex ante cost of the resources combined to form the venture) is the result of ex ante uncertainty. How much ex ante uncertainty does the entrepreneur need to cope with for high overall performance? To address this research question, we develop a theoretical framework. We characterize entrepreneurial process as an uncertainty reduction process through exploration and knowledge creation activities. In this entrepreneurial process towards establishment and growth, entrepreneurs face a dilemma between the two competing decision loops (potential profit and mortality risk) influencing overall performance of the venture. We suggest several hypotheses about entrepreneurs’ decision making and the system’s behavior.

Method

We analyze the system’s behavior and entrepreneurs’ decision making by using the computer simulation approach of system dynamics. System dynamics approach has been increasingly used in management fields and proven as a useful tool particularly in analyzing dynamic decision making issues. Also, it is challenging to use computer simulation methods in entrepreneurship research.

Implications

This research, we expect, can provide interesting implications both for research and practice. We can extend previous research on entrepreneurial process by proposing that it evolves through exploration and exploitation and by delineating the role of uncertainty and other important variables (e.g., opportunity cost) in the process. Practical implications that guide entrepreneurs to manage the highly uncertain venturing process also will be discussed. That is, entrepreneurs may have implications from this research on how long they need to explore the “theorized” opportunity, when they should move to exploitation to maximize overall profit, why it is important to have low (or high) opportunity cost, what happens if they fail to protect diffusion of their knowledge, and how initial resources impact their timing of exploitation.