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In summary, the pre-firm can be modeled as a meta-problem that the entrepreneur has to solve in order to bring the firm into existence. The model presented here is not a mathematical model-it is merely a succinct picture of the entrepreneurial process.

Interconnected causal domains for entrepreneurial decisions


Select/create f a (x)

where x pertains to resources (material resources, money and information)
f pertains to the stakeholders (individuals and organizations)
and a pertains to the environment (competitive, strategic and economic)
s.t. Profit 0 (Resources domain)
Feasible separation of ownership and management (Stakeholders domain)
Market Share M (Environment domain) and at least two of the
three constraints are met.

The M is a pre-determined percentage of market share needed to ensure that the firm is a real player in its environment. For the most part, every industry has a rule-of-thumb for M. For example, while for most manufacturing industries, M is considered to be 20%, it could be as low as 5% in the case of an industry such as telecommunications or as high as 60% in the case of internet companies.

f a (x) is the combination of resources, stakeholders, and an environment that implements the idea and transforms it into a firm. The reason this is set up as a meta-problem and not merely an objective function is that the entrepreneurial process is a dynamic, iterative process that can go through several cycles of selection and creation before the meta-problem converges into a particular objective function which forms the stable combination of f, a, and x that is the firm.

The three constraints in the model are the operationalization of the three definitions of the firm developed from the existing theories of the firm in Section 2. The firm does not come into existence until at least two of the three constraints are satisfied.

Profit > 0 (Resources domain)
The first constraint simply stipulates financial break-even.

Feasible separation of ownership and management (Stakeholders domain )

The second constraint stipulates a feasible separation between ownership and management. It does not require the actual separation. This distinction is important because in the pre-firm, ownership (in the sense of residual claims) is inseparable from management. As the pre-firm develops into a firm, although it becomes feasible to separate the two, this separation may not actually occur-the entrepreneur might continue to both own and manage the firm.

Market Share > M (Environment domain)

The third constraint stipulates a minimum market presence. As mentioned in the note about M, what is a minimum market presence differs from industry to industry and is therefore left for specific future investigations into the pre-firm.


Three of the four entrepreneurial decision domains are tightly linked to the received theories of the firm as set out in Section 2. The fourth link, however, is unique to the pre-firm.

The entrepreneur is the person/s who undertakes the entrepreneurial process: i.e., the entrepreneur selects/creates the f a (x) that creates the firm. The entrepreneur in a pre-firm is faced with very different decision problems than a manager/owner in a firm-the decisions are different both in domain and constraints. For example, while the owner/manager inherits the benefits and burdens of the firm's history, the entrepreneur starts out with a clean slate, so to speak.

More importantly, the entrepreneur, if he/she so chooses (and there is evidence that most often does choose-Sarasvathy, Simon & Lave, 1996), can bring in personal values, goals and motivations to influence the shape of the firm in a way that the later manager/owner cannot easily hope to do. In fact, the same individual who starts out as the entrepreneur in the pre-firm and later becomes the owner/manager of the firm typically finds it very difficult to make the transition precisely because the decision environment of the firm is very different from that of the pre-firm. What exactly are the differences is left as a research problem for future investigations into the theory of the pre-firm.

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