Forgiving Business Models for New Ventures

Fiet, James O., Patel, Pankaj C., Entrepreneurship: Theory and Practice

We set forth the attributes of forgiving business models that entrepreneurs can use to minimize losses
while exploiting ideas to launch new ventures. Venture ideas possessing these attributes have greater
potential because they can shift risk to resource providers. Thus, the success of a venture partially
depends on the market conditions for others, which affects how an opportunity can be exploited. We
emphasize combinations of outside options for resource providers together with their market
interaction costs. Finally, we discuss the contributions of this research for entrepreneurs, its theoretical
implications, and future research possibilities.

**********

We put this page in the back of my book that said, "Introducing

absolute reference for Journal 123 users"... you send us $60 and

we'll send you this newsletter. You know, horrible, just did

everything possible wrong ... in terms of promoting a newsletter.

... Before the year was over, this book [was] published in October,

we'd sold 3,000 subscriptions. We had 3,000 of those things back

and $180,000. To this little company, I promise you, $180,000 was

... a lot of money. And so I said ... we need to do this. It is a

gold mine. People pay us in advance, we get the 180; we haven't

done anything yet ... I'm thinking when am I going to get this

first issue done? ... I've got $180,000 here, I better write one of

these things ... Talk about a forgiving business model!

This entrepreneur's experience is interesting, because he thinks he has found an opportunity with great
upside potential and very little risk of loss should it fail. How are such opportunities made possible?
What are the specific conditions under which they may be possible? Why would others bear
disproportionate risks to make them possible? Numerous scholars have explained either how
entrepreneurs bear risk (Bhide & Stevenson, 1992; Knight, 1921; Stevenson & Jarillo-Mossi, 1990), or
how they only bear very limited risk (Schumpeter, 1934). Stevenson and Jarillo-Mossi (1990) explain how
entrepreneurs can start ventures using other's resources. Although using other's resources may reduce
overall risk for entrepreneurs, it does not necessarily promise rents (Gimeno-Gascon, Folta, Cooper, &
Woo, 1997; Rumelt, 1987; Schumpeter, 1934).
One of the conditions for generating rents is to ensure that resource suppliers do not appropriate
everything of value in exchange for their cooperation (Busenitz, Moesel, Fiet, & Barney, 1997; Gompers
& Lerner, 1996). The strategic use of power plays an important role in established and predictable
markets (Pfeffer & Salancik, 1978; Scott, 1998; Stigler, 1961); however, scholars have not focused on
which conditions in uncertain markets could be used as vehicles for understanding how entrepreneurs
can increase their share of an exchange's value. For entrepreneurs, we define an exchange as the
transfer of property rights (value) from resource providers. (1)

We contend that entrepreneurs have an alternative to either bearing or not bearing risk under uncertain
conditions. Through exchange relationships with resource providers, they can reduce both their costs
and risks. By shifting risk to others, entrepreneurs can reduce many costs associated with venture
failure. If risk can be shifted disproportionately, an entrepreneur can earn rents from the shift itself, in
addition to the intrinsic value of an opportunity. Therefore, in the case of venture failure, risk shifting
can make failure more forgiving to entrepreneurs.

The purpose of this research is to examine the attributes of forgiving business models (FBMs), which we
define as ones in which risk is disproportionately borne by others while venture payoffs are shared
proportionately by an entrepreneur and/or investors. We say "models" because a particular opportunity
could be characterized by multiple sets of attributes (or models), each one capable of positioning an
exchange differently to reduce an entrepreneur's risk of loss.

In the following sections, we describe several mechanisms that could contribute to the operation of
FBMs. First, we explore the nature of FBMs. Second, we examine the primary drivers of FBMs, which we
view as being entrepreneurs and markets. Third, we analyze interactions between two dimensions of
risk-shifting exchanges--(1) market interaction costs for resource providers; and (2) outside options for
resource providers, including the components of these dimensions. From this treatment, we develop
propositions. Next, we discuss various combinations of FBM dimensions, some of which are more
forgiving than others. Finally, we discuss the implications of this research for entrepreneurs and theory
together with its limitations and suggestions for future work.

Before proceeding, we must specify a few important boundary conditions. First, markets consist of
buyers and sellers who engage in exchange, typically after searching through several possible
encounters. Encounters" are interactions that may be precursors to actual exchanges.

Second, because we are most interested in how entrepreneurs can shift risk to resource providers, we
only consider resource providers from the perspective of what is in the best interest of entrepreneurs.
Although varying combinations of exchange are possible between entrepreneurs and resource
providers, we assume that an entrepreneur's exchange requirements remain constant. For analytical
purposes, forgiving business models are static. This is a realistic assumption because entrepreneurs
initiate their searching with a given set of requirements. If they later change any conditions, they are in
effect initiating a new search.

Third, because we do not examine unforgiving business models in this analysis, we also do not examine
parameters that may constrain an entrepreneur's choices. We now examine FBMs.

Forgiving Business Models

In this section we explore FBMs to demonstrate what is distinctive about them. A business model
explains how a venture is expected to create a profit (Afuah & Tucci, 2000; Chesbrough, 2003; Hedman
& Kalling, 2003). Although the balance between revenues and costs is critical to profit making, reducing
risk is also important because reducing risk can enhance a venture' s profitability. Expenditures on
governance to protect against losses are part of total costs. Governance costs are associated with the
control and monitoring of risk. The parties to an exchange are willing to incur governance costs to insure
that an exchange occurs and that net revenues are protected. Otherwise, an exchange may not occur
because net revenues could be negative. The only question is who is going to pay the governance costs.
Because shifting risk to resource providers can reduce the need for entrepreneurs to pay for governance
costs, it can effectively increase profits for entrepreneurs. (2)

In a FBM, a resource provider may be induced to bear a disproportionate amount of risk in return for the
same or a reduced level of profitability. In other words, a resource provider accepts risks without being
compensated for them--unlike in efficient capital markets. The risk transfers may consist of such offsets
as (1) longer credit periods from suppliers, which would decrease the risk of late payment; or (2)
requiring that buyers finance the manufacture of a product, which would reduce the risk of
nonpayment. Because the level of risk to a venture may vary, it is essential to create dependencies so
that one can earn resource-based rents not only by virtue of the opportunity, but also by virtue of the
ability to transfer risk. As a result, the affected resource provider would have only limited options to
avoid bearing at least some of an entrepreneur's risk.

Resource providers entering into disadvantageous exchanges are not foolish or naive. They act in the
same way as shoppers who pay retail only because they do not know how to purchase the same item at
wholesale. Similarly, resource providers entering into less advantageous exchanges simply lack critical
information (Hayek, 1945). The task of a FBM is to point out resource dependencies that favor
entrepreneurs (Pfeffer & Salancik, 1978), which can form the basis of profitable cooperative
arrangements (Cable & Shane, 1997; Emerson, 1962). A FBM can facilitate the shifting of risk to a
resource provider without providing compensation for the assumption of that risk. This is the critical
difference between a FBM and a non-FBM venture. FBMs explain the incremental financial gains that
occur due to favorable resource dependencies. The resources, which are vital to launching a new
venture, possess their own intrinsic value, but that value may be enhanced or depreciated as a result of
buyers and sellers. The primary drivers of a FBM are entrepreneurs and markets, which we examine in
the next section.

Entrepreneurs and Markets

Entrepreneurs acquire and allocate resources for the exploitation of ventures with FBMs (cf. Shane &
Eckhardt, 2003). Besides entrepreneurs, markets are also essential for FBMs, because when they do not
exist, risk transfer is usually inhibited (Casson, 2003; Coase, 1937; Williamson, 1975, 1985). We define
markets as multi-actor interaction systems in which property rights to resources are transferred
between or among actors. Without markets, the generation of new wealth can be substantially reduced
because buyers and sellers must either be lucky to find someone with whom to conduct an exchange or
they must conduct a deliberate search for each other (Fiet, Piskounov, & Patel, 2005), which increases
search costs and risk, thus decreasing the profits that can be earned.

To better understand the likelihood of a market-based exchange, we review exogenous and endogenous
factors. An exogenous factor affects a market from the outside and is largely beyond the influence of
entrepreneurs or resource providers. Thus, an increase in sales tax is an exogenous factor that can
influence the price of goods and services. Another example is that the utility of the newsletter depended
on readers not knowing how to use the journal software. Their ignorance was exogenous to the sale of
subscriptions. Search typically precedes exchange because entrepreneurial markets can be inefficient or
nonexistent, and may not bring buyers and sellers together without their searching through numerous
encounters. (3) Endogenous factors to an exchange are those that affect exchange from within a market
and may be subject to influence by entrepreneurs and resource providers. Thus, the price of products is
endogenously determined by supply and demand. Understanding the exogenous and endogenous
factors affecting resource exchange is critical to transferring risks.

The more inefficient a market, the higher is the cost of searching through encounters. In addition, a
resource provider may be confronted with a very small window of opportunity to act, which is an
exogenous factor co-determined by other factors outside of a market.

In ideal markets, endogenous factors can be influenced by market actors using price as the guiding
mechanism (Hayek, 1945). In entrepreneurial markets, the price mechanism may fail because markets
for future goods and services may not already exist (Arrow, 1989). In such cases, resource providers may
be unable to consummate an exchange, regardless of any push from exogenous factors. Mitigating
exogenous factors and inefficient or nonexistent endogenous market factors may further reduce the
value derived from exchange. It is this independent and joint interaction--mitigating exogenous factors
and inefficient or nonexistent endogenous exchange--that determines the nature of FBMs. Thus, even
though it may not be optimal to exchange quickly, windows of opportunity (exogenous factors) may
constrain a resource provider's other options. From the outside, it could appear that they were electing
suboptimal tactics when in fact their election was the best known and available choice.

It is essential to further differentiate between competitive resource markets and markets for
entrepreneurial resources, each of which may offer products or services. The former operate on the
basis of interaction rules and coordination mechanisms such as price, which reflect individual
preferences based on the action of market-level supply and demand. Uncertainty and ambiguity not
only limit the extent of participation in entrepreneurial resource markets, but they also preclude to a
large extent using standard coordination mechanisms, unlike in publicly traded equity markets.

Entrepreneurial resource markets lack coordination mechanisms. Therefore, resource providers in these
markets must rely on other means to coordinate values. When price information is unavailable,
entrepreneurs may search for other clues (Fiet, 1996, 2002). The question becomes what type of
information would help them to shift risk to others. We argue that the most useful type of information
for FBMs consists of two dimensions: (1) endogenous market interaction costs for resource providers;
and (2) exogenous outside options for resource providers. We discuss the informational components of
these dimensions in the following two sections.

Market Interaction Costs for Resource Providers

Markets provide settings for the exchange of goods and services. However, even the most efficient
markets impose costs on exchanges (Coase, 1937; Williamson, 1985). These costs are important,
because they affect the incentives available to entrepreneurs and other actors to move forward with an
exchange or to do nothing. Obviously, if resource providers are unwilling to consummate exchanges, this
disposition affects the ability of entrepreneurs to enter into risk-shifting exchanges to create FBMs for
their own ventures.

Market interaction costs for resource providers are the total implicit costs leading to and supporting an
exchange within a market now or in the future. In effect, they are the search costs to find encounters
discussed previously that can lead to market exchanges. In the newsletter example, market interaction
costs for the subscribers would be identifying potential publishers of alternate information. These
interaction costs may constitute a one-time expense that is not related directly to the cost of an
exchange. We summarize the factors affecting market interaction costs as follows:

(1) Market Interaction Costs = f (Time, Search Costs, Risk Aversion, Asymmetric Information)

Because these market interaction costs are related to each other, they are endogenous and we can
bundle them in the foregoing equation. In this section, we discuss how each of them can increase for
resource providers the attractiveness of an exchange intended to shift risk to them. Such an exchange
would benefit entrepreneurs seeking to earn a profit by leveraging a discovery with a FBM.

Time

Ceteris paribus, the opportunities for resource providers to consummate exchanges with others besides
the entrepreneur decrease with the passage of time in which no satisfactory exchange alternatives have
been found. As time passes, resource providers also continue to incur operating costs, which cannot be
offset or recouped until an exchange is consummated. In this way, the passage of time increases an
entrepreneur's negotiating power, given that it limits the opportunity for resource providers to locate
alternative exchanges while operating costs continue to accrue. Time also imposes costs related to the
time value of money and opportunity costs.

The more time it takes to bargain, the greater are the market interaction costs for resource providers
(Bala & Goyal, 2000; Blume, 1993; Blume & Easley, 1995; Goyal, 1996). A less patient resource provider
would have an incentive to agree to accept a smaller share of the value from an exchange. Based on the
newsletter example, the passage of time can impose caps on the number of opportunities for
subscribers to accurately evaluate alternate services, which increase incentives to quickly consummate a
known exchange.

Search Costs

Entrepreneurs and resource providers are positioned in a particular way in time and space. In fact, they
cannot avoid positioning themselves. This positioning affects their cost of searching for and exploiting
exchanges (cf., Ries & Trout, 2000). If the potential cost of searching for a similar exchange is higher for
one actor than for another, the higher-cost actor would be willing to cede more of its share of profit
from an exchange (Fiet et al., 2005). (4) Hayek (1945) was the first to notice that this positioning makes
some information more valuable in the generation of new wealth, or, as we argue, when it comes to
shifting risk to others. In fact, already possessing specific knowledge about an exchange confers
economic value to an entrepreneur because it means that he or she does not need to bear the costs of a
new search. Although search is always an option, it is not costless, and so reducing the cost of searching
increases the value of an exchange. If subscribers to the newsletter were interested in evaluating the
offerings of other publishers, and it was not clear who they are or how to locate them, the cost of each
evaluation would increase, possibly making the search for alternatives prohibitively expensive.
Risk Aversion

Risk aversion limits the number of viable exchanges available to resource providers. When markets are
thin, there are costs associated with market interaction and no promise of better deals through
extended search. Thus, risk aversion to endogenous market factors may lead them to engage in an
exchange quickly to avoid the risk of not finding another deal. It is possible in the newsletter example
that subscribers might have found a lower price or more informative source if they had continued their
search. They might also have forgone the journal newsletter and actually contracted for a lower quality
source. It is important to note that one can always walk away from exchanges in entrepreneurial
markets, but such a retreat will not necessarily lower risk exposure.

Asymmetric Information

Entrepreneurial resource markets are informationally inefficient, which means that economic actors
typically possess different information. (5) When one actor possesses information relevant to an
exchange that is not possessed by another actor, the other actor faces an informational disadvantage.
Not knowing what to expect, it is natural to fear an economic loss and to purchase protection by
imposing a risk premium on the actual cost of such an exchange (Akerlof, 1970), typically referred to as a
"lemons problem."

In order to avoid having risk shifted to them, resource providers must presume to know the value of
their resources to other actors, despite the presence of asymmetric information or no information.
These values affect the likelihood that an exchange can be economically consummated. However,
discerning resource values can be a difficult task because other actors with relevant information may
prefer to be secretive. The greater the perception of asymmetric information, the more likely it is that
market interaction costs for resource providers will be higher because of needed due diligence to elicit
such information. In the newsletter example, the increased market interaction costs of verifying
information might have enticed subscribers (resource providers) to engage in an exchange that would
not have benefited them. Thus, the entrepreneur was able to present his company as being
knowledgeable whether true or not with regard to the journal software.

In summary, there are four aspects of an exchange that affect the level of a resource provider's market
interaction costs. First, the more time it takes to bargain, the greater the cost to resource providers
(Bala & Goyal, 2000; Blume, 1993; Blume & Easley, 1995; Goyal, 1996). Second, if the search costs
compared with the level of expected profit are high, a resource provider would be willing to accept
more risk or cede more of any financial gain to avoid search costs (Fiet et al., 2005). Third, risk-averse
resource providers would cede a portion of their share of profit owing to the risk of not finding a
comparable exchange (Bala & Goyal, 2000). Fourth, the greater a resource provider's disadvantage from
asymmetric information, the greater is the disadvantage from market interaction costs (Blume, 1993).
These arguments lead to the following proposition:

Proposition 1: There is a positive relationship between the cost of market interaction for a resource
provider and the opportunity for an entrepreneur to employ a FBM in the development of a venture.

Because they are exogenous and independent from market interaction costs, we now consider outside
options separately below.

Outside Options for Resource Providers

A resource provider's outside options also affect the likelihood that an entrepreneur can leverage a FBM
(Binmore, 1987; Binmore, Runbinstein, & Wolinsky, 1986; Binmore, Shaked, & Sutton, 1988; Muthoo,
1999). Here it should be noted that the key consideration is the relative number of options available to
resource providers and an entrepreneur. Furthermore, the relationship between the determinants of
outside options and an entrepreneur's position compared with that of suppliers will be, in general, the
inverse of an entrepreneur's position compared with that of buyers. What is true regardless of the
exchange partner being considered is that when resource providers have other options for exchanging
goods and services, they are less inclined to do business with any one entrepreneur, which reduces that
entrepreneur's bargaining power (Pfeffer & Salancik, 1978; Porter, 1980). As discussed previously, even
though outside options are exogenous to market interaction costs, they still affect the likelihood of
exchange. Outside options can also be represented as a function of their key components as follows:

(2) Outside Options = 1 / (Duplicability, Sustainability, Asset Specificity, Window of Opportunity)

Outside options are affected by duplicability, substitutability, asset specificity, and windows of
opportunity. Duplicate or substitute products or services increase supply relative to demand. Thus, the
outside options of a supplier compared with those of an entrepreneur are reduced when duplicates or
substitutes exist for a supplier's products or services. Conversely, a buyer's outside options become
relatively fewer when there are few or no duplicates or substitutes for the products or services the
entrepreneur intends to offer.

Asset specificity's influence on outside options works in the opposite manner. Asset specificity, relates
to the reduced utility of a good or service (resource) in a secondary application (Williamson, 1985).
Because a resource's asset specificity results in fewer useful secondary applications, the asset specificity
of a supplier's products or services will reduce a supplier's outside options relative to the options of an
entrepreneur. Thus, when a supplier's products or services have no secondary applications, an
entrepreneur has more bargaining power to shift risk to that resource provider. Limited in his or her
options by a specific asset, an entrepreneur may be a resource provider's best available alternative for
consummating an exchange. Under these conditions, a resource provider is subject to hold up by the
entrepreneur (Williamson, 1985). Again, the situation is reversed when considering the relationship
between an entrepreneur and a buyer.

Windows of opportunity represent the period during which one actor is motivated by factors external to
a market to complete an exchange (Muthoo, 1999, p. 273). Hence, when a resource provider has a
narrow window, he or she may be willing to cede more exchange-related profit. (6)

These arguments about exogenous outside options lead to the following proposition:

Proposition 2: There is a negative relationship between the number of outside options available to an
entrepreneur's resource providers and the opportunity for an entrepreneur to employ a FBM in the
development of a venture.

Discussion

Thus far, we have reviewed how there are two primary model dimensions or approaches for creating
FBMs: (1) increase a resource provider's market interaction costs; and (2) reduce a resource provider's
relative outside options. In this section, we examine how each of the four possible combinations of
these dimensions can further amplify the effects generated by only one of them. Identifying these
combinations is important because of their implications for an entrepreneur's use of FBMs. Finally, we
discuss the implications of FBMs for theory, their limitations, and finally, their research possibilities.

Many Outside Options and Low Market Interaction Costs

Many outside options for resource providers and low market interaction costs increase their bargaining
power with entrepreneurs. They create low asset specificity, few substitutes, and low market interaction
costs, which reduce the cost of searching. Lower search cost is fortunate, because resource providers
are risk averse. They can accommodate their risk aversion by minimizing information asymmetry and by
using longer windows of opportunity.

Under these conditions, no risk transfer can occur, which results in unforgiving business models for
entrepreneurs. Thus, entrepreneurs would do well to avoid consummating such an exchange. Resource
providers possess too much bargaining power and will refuse to accept risk for less than a corresponding
level of compensation.

Few Outside Options and High Market Interaction Costs

A different business model exists when there are few outside options for resource providers and high
market interaction costs. A resource provider must develop specific resources and subsequently be
forced to exchange them with few market actors, probably at less favorable terms, due to a lack of
outside options. High market interaction costs increase the required time for search, which also
increases the probability of missed opportunities.

High market interaction costs and few outside options for resource providers combine to provide
entrepreneurs with the greatest potential for transferring risk. Resource providers lack the power to
avoid bearing risk. This combination of exchange dimensions is the most forgiving for entrepreneurs.

Many Outside Options and High Market Interaction Costs

Many outside exchange options for resource providers increase their bargaining power; however, high
interaction costs limit their capacity to explore them. Thus, resource providers face pressure to accept
risk from entrepreneurs, which will occur depending on their bargaining skills and level of trust in the
entrepreneur.

It is possible that an entrepreneur can negotiate to transfer risk, but it is not as promising as when a
resource provider faces few outside options and high market interaction costs. An entrepreneur may be
able to utilize his or her social skills to negotiate a way of shifting risk even when conditions for doing so
do not appear to be favorable (Emerson, 1962). The objective of using social skills would be to improve
an entrepreneur's trust-based relationship with a resource provider.

Few Outside Options and Low Market Interaction Costs

These conditions are exactly the opposite of those just discussed. Few outside options for resource
providers increase an entrepreneur's bargaining power. However, low market interaction costs for
resource providers increase their bargaining power. Again, depending on an entrepreneur's social skills
and the level of trust, there is a possibility that risk transfer could occur. If a transfer occurred, it would
be based on social relations rather than on favorable market characteristics.

Implications for Entrepreneurs

One implication for entrepreneurs is that assessing a resource provider's outside options often depends
on prior knowledge or market learning. However, assessing intangible investments, such as those in
specialized training, can depend on the willingness of others to divulge information related to these
forms of asset specificity. The same could be said about the voluntary disclosure of market interaction
costs. Such information could be inadvertently divulged by a trusting or careless resource provider,
which would be lucky for an entrepreneur. Alternatively, an aspiring entrepreneur could be trained to
negotiate for both types of information, but this raises ethical questions, which we do not explore here.

Another implication of this research seems undeniable--most venture ideas will not possess FBMs. We
are not suggesting that they do not have the potential to generate new wealth. The generation of new
wealth is a separate question. We are only cautioning that if they do not possess FBMs, they could
dissipate wealth.

The dissipation of wealth may be acceptable to entrepreneurs who have already invested in good deals
and won their bets, thereby providing them with the slack resources to absorb transaction costs.
However, a novice entrepreneur, or one who has been previously unlucky, who lacks the capacity to
absorb such costs, could be more successful by identifying ideas with FBMs. Focusing on learning about
FBMs may be particularly useful to aspiring entrepreneurs who are studying the fundamentals of
entrepreneurship and who cannot afford a failure in their first entrepreneurial foray.

Theoretical Implications

We will first explore how this research applies to conventional theories of risk shifting, which will be
followed by a brief exploration of the use of FBMs.

Conventional Theories of Risk Shifting. Conventional approaches to bargaining and risk shifting, such as
transaction cost economics (Coase, 1937; Williamson, 1975) and resource dependence theory (Pfeffer &
Salancik, 1978), assume asymmetric information and power, respectively. Even Porter (1980), exploring
industry level trade-offs between power and efficiency, implies that firms can strategically erect barriers
to entry so that incumbents can be protected for the purpose of exercising collusive power. We can
assume from Porter's (1980) analysis that efficiency is the enemy of incumbent firms.

Surprisingly, Williamson (1985) largely rejects the use of power in organizing hierarchies.

He even rejects power in the face of what he calls market failure (Williamson 1975), which results in
information asymmetry or a complete lack of information. He also rejects the use of hierarchies as a
means of exerting power to economize on transaction costs by arguing that historically the exercise of
power would have had to have been selectively utilized, which power advocates fail to explain. FBMs
explain the selective use of power. Power to implement FBMs is increased when resource providers
have fewer outside options than the entrepreneurs. When resource providers also face high market
interaction costs, entrepreneurs can effectively use their power to shift risk to resource providers. Not
only do FBMs provide an explanation of this selectivity, but they also provide additional insight about
how exchanges can be conducted under conditions of uncertainty, which are common in
entrepreneurial settings.

Moreover, it is the relative number of outside options available to entrepreneurs versus those available
to resource providers that is germane to power versus efficiency arguments. The potential for FBMs
could be limited if both entrepreneurs and resource providers possessed few outside options. The
essence of FBMs is that they either provide value in the form of benefits, increased profits or savings to
buyers or suppliers by enabling them to avoid market interaction costs (the provision of which is costless
to the entrepreneur and permits them to transfer risk or otherwise profit), or allow the entrepreneur to
extract value using their market power over resource providers who have fewer outside options.

FBMs also add to our understanding of exchange when actors possess different information or no
information at all. Cable and Shane (1997) suggest that an efficient solution to such unknown
expectations may be cooperative arrangements in which entrepreneurs share gains and losses with
others.

In such cooperative arrangements, FBMs explain how entrepreneurs can identify sources of structural
power to improve their exchange positions, particularly when they are trying to establish cooperative
arrangements to compensate for a market's informational inefficiency. Power derives from the nature of
the cooperation that will unfold, which can favor an entrepreneur if he or she can identify any of the
endogenous and exogenous characteristics, which have been explored in this research (Emerson, 1962).
The identification of structural restrictions on resource providers through the use of FBMs has two
advantages: (1) it can transfer the cost of venture development to others while allowing entrepreneurs
to appropriate any financial gains; and (2) it can guide entrepreneurs to develop structural power, which
derives from the nature of the cooperative arrangement.

The Use of Forgiving Business Models. A business model is most forgiving when it allows entrepreneurs
to notice that resource providers have high market interaction costs and few outside options for
negotiating a better deal with others. As noted, these exchange dimensions allow entrepreneurs to
negotiate deals that shift their risk to resource providers. These dimensions are a function of a resource
provider's situation, which has been previously established by prior actions.

It may be possible for an entrepreneur to influence the establishment of these two exchange
dimensions, but we did not explore how this could be done. Nevertheless, one of the inferences from
this research is that it may be possible through training to recognize exchanges ex ante that because of
their favorable dimensions can leverage a natural monopoly in time and space, as suggested by Hayek
(1945).

Limitations

The discussion of forgiving models involves forecasting prospective behavior, which is complicated by
the fact that entrepreneurs will most often possess incomplete information about markets and market
actors. Moreover, the usefulness of forgiving business models is based on entrepreneurs and resource
providers acting in their rational self-interest, which may not eventuate. Nevertheless, we are reluctant
to develop models based on an expectation of irrational behavior. Thus, assuming rationality, often in
the face of uncertainty, is an accepted economic assumption. In our view, altruistic behavior is more
likely to limit the power of FBM models than irrational behavior. An altruistic entrepreneur could
voluntarily divulge information about his or her own market interaction costs and outside options, but
this would not be required by a FBM.

Future Research

There are many research issues that could be addressed about FBMs. First, to what extent do repeatedly
successful entrepreneurs rely on FBMs? Certainly, FBMs could provide one possible explanation for their
success. Second, to what extent do entrepreneurs behave opportunistically to create FBMs? Also, what
are the ethical implications of FBMs if they provide entrepreneurs with a tool to be opportunistic? In
addition, to what extent do entrepreneurs forego the use of FBMs because they could disadvantage a
resource provider? A third area is training: are there protocols that could improve the identification of
FBMs? In addition, does an entrepreneur's prior knowledge, specific or general, condition him or her to
use forgiving business models? Further, under what conditions, if any, do social skills and social capital
enhance the potential of an exchange, regardless of the business model selected? Finally, can the
constraints on entrepreneurial choices that limit the ability to select FBMs be identified? Such
discoveries would lead to a more comprehensive understanding of venture failure.

We look forward to the time when we know enough to equip entrepreneurs with the most effective
tools to reduce the costs of venture failure. We are hopeful that this effort and the future study of
forgiving business models can improve our understanding of how entrepreneurs can succeed more
often.

The authors contributed equally to this article and are listed alphabetically. The authors acknowledge
the substantial assistance of the editor, James Chrisman, and two anonymous reviewers in refining the
contribution of this article. An earlier version was presented at the 2006 annual meeting of the
entrepreneurship division of the Academy of Management.

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Please send correspondence to: James O. Fiet, tel.: (502) 852-4793; e-mail: fiet@louisville.edu.

(1.) We sometimes refer to both resource suppliers and buyers as resource providers, although there are
differences. In the case of resource suppliers, an exchange's value consists of increased profits for
entrepreneurs, whereas in the case of buyers, the value may consist of entrepreneurs being less
obligated to provide amenities to induce an exchange.

(2.) Resource providers are not irrational in their acceptance of more risk. They simply lack information
or possess different information than the entrepreneur. This will be discussed further in a section about
asymmetric information.

(3.) An inefficient market could create asymmetric information between buyers and sellers. A
nonexistent market would create a lack of information for all parties to an exchange. In both instances,
entrepreneurs could attempt to reduce uncertainty through searching for more information, which also
could be found through consummating exchanges.

(4.) It can be difficult to estimate future search costs, especially in uncertain entrepreneurial markets.
However, whether an entrepreneur's assumptions are true about the future or not, we assume that he
or she will act on them.

(5.) Alternatively, when markets do not exist, they may possess no information. The effect of asymmetric
information or lack of information is the same--resource providers are uninformed. For analytical
purposes, we treat both of these conditions in the same way.

(6.) A window of opportunity is different from time. The former is exogenous whereas the latter is
endogenous. However, both may incentivize a resource provider to consummate an exchange.

James O. Fiet is the Brown Forman Chair in Entrepreneurship at the Univeristy of Louisville.
Pankaj C. Patel is a doctoral candidate of the University of Louisville.

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Publication information: Article title: Forgiving Business Models for New Ventures. Contributors: Fiet,
James O. - Author, Patel, Pankaj C. - Author. Journal title: Entrepreneurship: Theory and Practice.
Volume: 32. Issue: 4 Publication date: July 2008. Page number: 749+. © 2007 Baylor University.
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