ENTREPRENEURSHIP

Chloe Xu
Class 1- June 28 2022

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Today’s Agenda
• 1- Course overview :
 Learning objectives
 Teaching style
 Exam
 Teaching plan

• 2- Define entrepreneurship and entrepreneurs

 Different ways of defining entrepreneurs
 Different ways of defining entrepreneurship
 Should you become an entrepreneur?
 What is the difference between productive, unproductive and
destructive entrepreneurship? 22
 Course learning objectives

• Identify and apply the major theoretical frameworks used in discovering, evaluating and
exploiting opportunities for new ventures.
• Form a comprehensive understanding of various types of entrepreneurship and develop the
ability to compare and contrast entrepreneurial processes and outcomes of different forms of
entrepreneurship.
• Understand the process of new venture creation, including aspects such as financing the new
venture, creating a founding team, pursuing sustainable growth, learning from past successes
and failures, locating the new venture in a favorable environment, and developing exiting
strategies.
• Demonstrate critical reasoning skills in assessing how opportunities are identified and
exploited, entrepreneurial team assembly, growth strategies, financing options, location
choices, exiting plans and other aspects of entrepreneurial venture creation.
• Present, communicate, and write in a professional, concise and clear manner.

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Teaching style
• Interactive two-way communicative sessions
– Lecture

– Group discussions and presentations

– Videos and cases

– Guest speakers presentations.

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Exam

 Examination form: take home written exam- max 15 pages

 Individual or group exam: Individual
 Assignment content: Short answer questions and case
analysis (equal weights)
 Grading scale: 7-step scale
 Exam due date: 12 noon Danish time on Aug 5th, 2022

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Exam website

https://eksamen.cbs.dk/

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Grading scale

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Teaching plan
TOPIC
Class 1 Who Are Entrepreneurs? Definition of
Entrepreneurship
Class 2 Opportunity Identification
Class 3 Guest Lecture on Social Entrepreneurship
Class 4 Entrepreneurial Finance
Class 5 Entrepreneurial Teams
Class 6 New Venture Creation and Growth
Class 7 Entrepreneurial Learning
Class 8 Location Choices
Class 9 Intrapreneurship
Class 10 Guest Lecture on Special Topics in
Entrepreneurship
Class 11 Entrepreneurial Exiting Strategies

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A little bit about me

Chloe Xu
Post doc at Department of Strategy and Innovation

Research areas:
• Habitual Entrepreneurs
• Early entrepreneurial process
• Institutional factors and entrepreneurship
• Female entrepreneurship
• Management of new and established businesses, hiring in particular
• Top management characteristics and firm strategy

Education: PhD in Entrepreneurship, Ivey Business School, Canada.

MA in Economic Policy, McMaster University, Canada.

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Who are you?

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 Groups for in-class discussions
Group 1: Ibrahim Almas; Liv Junge Taudal Andersen; Mathilde Bjørn Andersen; Luna
Nørgaard Blicher; Jesper Roland Bückner; Niklas Walther; Eskil Volberg; Teeratarn
Vipattipumiprathet; Frederikke Vestergaard, Noureddine Manad
Group 2: Mikkel Emil Marstrander Biong; Rasmus Andersen; Magnus Lundsteen Ditlevsen;
Jonas Dahlqvist; Sara Dehn Gerding; Caroline Hvidberg Uttrup; Esben Poulsen Ulvbjerg;
Nuttanit Tanchareon; Sadjad Hassani
Group 3: Simon Gustav Nymann Andersen; August Norrbohm Byrnard; Douglas Barros
Carneiro; Christian Dahl; Joakim Engelbrecht; Deniz Ucar; Anne Sofie Bøttcher Thyssen; Anna
Fogh Gransøe; Jacob Tanderup Stenstrup
Group 4: Andreas Kastrup Sørensen; Christian Bjørn Sieverts; Andreas Elmo Halsteen; Ole
Thomas Sekkenes Hamre; Rune Steffen Hansen; Laura Andrea Bangsbo van Hauen; Buster
Gottlieb Siercke; Anders Schultz; Julie Nowak
Group 5: Nilas Kærgaard Hansen; Magnus Asbjørn Kjeld Jelsdorf Henriksen; Ulrik Gliese
Hjemsted; Magnus Bo Jensen; Anton Mathias Støttrup Lindeberg; Leonard Benedikt Kruschel;
Rasmus Lars Lindeberg; Leonard Benedikt Kruschel; Helin Kart
Group 6: Katrine Burich Holck; Wajahat Hussain; Louise Hedmann Jacobsen; Sebastian
Fynboe Jense; Simone Hesselberg Norfas; Mads Næss; Philip Heitmann Madsen; Frederik
Kloppenborg; Frede Lindgren Jørgensen 11

Group 7: Marcus Rasmussen; Oktay Pakirci; Jacob Nørgård Pagh; Malou Nelly Lentz Schmidt;
Mads Brokholm Nielsen; Cecilia Thuy Tien Nguyen; Tabil Iqbal; Alexandra Amalie
Discussion

Why do we care about entrepreneurship?

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 Entrepreneurs: agents of change
• Entrepreneurship is an engine of job and wealth creation
• Substantial impact of entrepreneurship on competitiveness
of utilities, services, lifestyle and economy
• Entrepreneurship has expanded from a simple arbitrage to
one involving a complex process of:
• invention,
• product development,
• commercialisation
• Innovators who are also entrepreneurs are a relatively
unstudied subset;
• Most focus on the technology and market opportunities, rather than the entrepreneur’s
journey

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Source: George and Bock , Inventing Entrepreneurs: Technology Innovators and their Entrepreneurial Journey.
Who are entrepreneurs?

Names that come to mind?

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 Young entrepreneurs

Sergey Brin & Larry Page (Google) 16

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Young entrepreneurs

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14
Example of entrepreneurs

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Who is an entrepreneur?
Formal definitions
• “A person who organizes and manages any enterprise, especially a
business, usually with considerable initiative and risk”.
Origin:
1875-1880; < French: literally, one who undertakes (some
task), equivalent to entrepren ( dre ) to undertake .
• Dictionary.com

 “A decision maker whose entire role arises out of his alertness to

unnoticed opportunities”
• Kirzner, “Competition and Entrepreneurship”

 Promoters of creative destruction

• Schumpeter, “Capitalism, Socialism and Democracy”
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Function of Entrepreneurs
• Risk taker
• Supplier of financial capital
• Innovator
• Decision maker
• Industrial leader
• Manager
• Coordinator of resources
• Owner of an enterprise
• Employer of factors of production
• Contractor
• Arbitrageur
• Allocator of resources among alternative uses
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Hebert and Link, 1988
Static vs Dynamic views

• Risk taker
• Supplier of financial capital
• Innovator
• Decision maker
• Industrial leader
• Manager
• Coordinator of resources
• Owner of an enterprise
• Employer of factors of production
• Contractor
• Arbitrageur
• Allocator of resources among alternative uses 21
Discussion

Which are the most defining functions of entrepreneurs?

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 Cantillon’s (1755) entrepreneurs
• Arbitrageur, who conducts all exchanges and bears risks
as a result of buying at a certain price and selling at
uncertain prices
• Asset ownership is a key feature
• The economy relies on entrepreneurs as they help
reduce the negative impact uncertainty has on the
economy and make transactions happen
• Not innovators, and do not change supply or demand

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Kirzner’s (1973) entrepreneurs
• Also see entrepreneurs as arbitrageurs, who are alert
to profitable opportunities
• Individuals have different levels of access to
information, and perceptions of opportunities, which
is why some people become entrepreneurs while
others do not
• Following this line of thoughts, Gifford (1998) further
delineated where alertness comes from by looking at
cognitive differences of people

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Knightian entrepreneurs (1921)
• Highlights uncertainty and risk
• Entrepreneurs have limited information about the
availability of resources, technologies and prices.
• Entrepreneurs need self-confidence (or judgement, in
later research (Foss et al., 2007)), foresight, and luck.
• These characteristics are not tradable in the market,
and are complementary to the other assets they own.
Therefore, entrepreneurs would choose to own these
assets rather than leasing them from the market (Foss
et al., 2007)

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Knightian entrepreneurs (1921)
• Explains why some people become entrepreneurs by
looking at risk-adjusted relatvie rewards of
entrepreneurship vs paid employment.
• Individuals are not born entrepreneurs or non-
entrepeneurs, but opportunists who become
entrepeneurs when the risk-adjusted returns are
higher.

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Schumpeter’s (1934)
entrepreneurs
• Entrepreneurship entails innovation
• Entrepreneurs do not operate within conventional
production, instead, they develop new technologies or
products that shift the entire existing paradigm. Thus,
they introduce creative destructions.
• These innovations could include:
 Opening of a new market
 Creation of a new product
 New method of production
 New source of supply
 New organization of industry
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Schumpeter’s (1934)
entrepreneurs
• Sees entrepreneurship as the driver of economic
devleopment. Creative destructions are the reason
why old products and production processes are
replaced by new ones.
• As the new products/processes hit the economy, new
competitors will try to rapidly imitate, ultimately
stability is reached (new equilibrium in the economy)
• He does not view entrepreneurs as risk-bearers, the
capitalists are the risk-bearers

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Defining entrepreneurs and entrepreneurship

 Shane & Venkataraman (2000)

• Entrepreneurial opportunities exist, but are not known to
everyone.
• People have different perceptions on the value (financial or
non-financial) of an opportunity.
• Some people will choose to pursue these opportunities.
• Acting on these opportunities will result in differing
outcomes, both profitable and unprofitable.

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Shane & Venkataraman (2000)
• Unlike models that predict that entrepreneurs possess
certain traits, eg. Khilstrom and Laffont (1979) see
entrepreneurs as individuals who prefer uncertainty,
Shane & Venkataraman (2000) view entrepreneurship
as the tendency of certain people responding to the
situational cues of opportunities, rather than a stable
characteristic that differentiates people across all
situations
• New venture creation is not a necessary condition for
entrepreneurship

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 Remember this?
• According to Stevenson, entrepreneurship is the pursuit of
opportunity beyond resources controlled.
• “Pursuit” implies a singular, relentless focus. Entrepreneurs
often perceive a short window of opportunity.
• “Opportunity” implies an offering that is novel in one or
more of four ways. The opportunity may entail: 1) pioneering
a truly innovative product; 2) devising a new business model;
3) creating a better or cheaper version of an existing product;
or 4) targeting an existing product to new sets of customers.
• “Beyond resources controlled” implies resource constraints.
At a new venture’s outset, its founders control only their own
human, social, and financial capital.
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Discussion

How is the definition of entrepreneurship from the

preliminary assignment different from Shane and
Venkataraman’s (2000)?

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Diverging points
• Resource constraint
• The way opportunities are conceptualized
• Missing entrepreneurs in the definition of
entrepreneurship?

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What else may be missing?

Some good points from you:

• Creativity
• Dedication
• Passion
• Leadership qualities
• Innovativeness
• Diligence/perseverence/resilience/persistence
• Adaptability
• Talent/competence/having a vision
• Risk tolerence
• Curiosity/knowledge seeking
• Necessity entrepreneurs
• Long-term orientation/Goal-orientation 34

• Support system
Why is it difficult to define
entrepreneurship?

• New venture creation vs nascent entrepreneurs

• Small firms?
• Self-employment vs firm ownership

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New venture creation
• Standard practice now is to equate e-ship as
identification of opportunities and new venture
creation
• But, we should not ignore nascent entrepreneurs, who
are in the idea generation stage and do not have firm
ownership yet.
• Studying NE is ideal for studying the entry process,
not subject to survival bias
• Also avoids “hindsight bias”, which occurs when the
entrepeneur misreports events during founding stage,
due to memory loss etc.
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E-ship= small firms?

Pros of defining e-ship as small firms:

• Easy to measure; most national stats agencies already
have firm size information
• In USA, a firm with less than 500 employees are
small businesses; in EU, it’s 250 employees
Cons:
• Firm size definitions are arbitrary and industry-
specific
• Not all entrepreneurial firms are small (think about
high-growth firms such as Google, Uber etc.); Not all
small firms are entrepreneurial
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Entrepreneurship as self-
employment
Pros:
• Recognizes that entrepreneurship is a risk-taking
activity
• Inclusivity
• Data available from household surveys
Cons:
• Includes individuals who are unlikely to be seen as
entrepreneurs using other criteria.
• Fails to capture nascent entrepreneurs—about 80% of
nascent entrepreneurs have a current job or managing
another business while they work on devleoping their
new business (Global Entrepreneurship Monitor 38

database)
Why do people become
entrepreneurs?

What are some of the potential benefits of being an

entrepreneur?

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The possible benefits and
motivations

• Create your own destiny.

• Make a difference.
• Reach your full potential.
• Reap impressive profits.
• Contribute to society and to be recognized for
your efforts.
• Do what you enjoy and to have fun at it.
Source: Scarborough , M and Cornwal , J. ,Essentials of Entrepreneurship and Small
Business Management .
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But….

What about the negative aspects of being an

entrepreneur?

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The Drawbacks

• Uncertainty of income
• Risk of losing your entire investment
• Long hours and hard work
• Lower quality of life until the business gets established
• High levels of stress.

Source: Scarborough , M and Cornwal , J. ,Essentials of Entrepreneurship and Small Business

Management .

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 Most Startups Fail
(Example: Web 2.0 startups, 2006-2009)

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A natural part of the creative process is failure.

Who is an entrepreneur? Some
empirical evidence
What is the average age of an (successful) entrepreneur?

• The average age of entrepreneurs at the time they

founded their companies is 42.
• The average age of high-tech founders falls in the
early forties.
• In software startups, the average age is 40. In oil and
gas or biotechnology, the average age is closer to 47.
• The successful entrepreneurs are on average 45 years
old.
(Source: https://hbr.org/2018/07/research-the-average-age-of-a-successful-startup-founder-is-45)

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Some facts
• One percent of nascent startup firms in Sweden have an
ambition to grow to more than 20 employees (GEM 2012).
• The vast majority of people are founding wage-substitution
businesses not high growth companies.
• Firm productivity increases with firm age (Haltiwanger,
Lane, and Speltzer 1999).
• The correlations between rates of new firm formation and
economic growth is negative (Shane, 2008).
• The median entrepreneur earns less than a salaried
counterpart (Borjas and Bronars 1989; Evans and Leighton
1989; Hamilton 2000; Moskowitz and Vissing-Jørgensen
2002).
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Career dilemmas
• 1- Should I become an entrepreneur ?

• 2- If yes, when?

• What is the right time ?

• Early in the career or after getting some experience?

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Reasons for becoming an entrepreneur vs.
organizationally employed

 To take advantage of your creative needs

 Not taking too much responsibility
 Freedom
 To have an interesting job
 To follow work-tasks from a to z
 To have leisure
 Have authority
 To have fixed working hours
 Job security
 Have opportunity for career progress
 Be able to chose your own work tasks
 To be your own boss
 Avoid commitment
 Avoid responsibility
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Reasons for becoming an entrepreneur vs.
organizationally employed

• To have a challenging job

• Promotion
• To create something
• Self realization
• Have power to make decisions
• Job stability
• Participate in a social environment
• Not having to work long hours
• To have a motivating job
• To have an exciting job
• To keep a large proportion of the result
• Independence
• Realize one's dreams
• To participate in the whole process
• To receive compensation based on merit 31
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Entrepreneurship/Self-employment & Returns

Hamilton, 2000
- Mean returns in SE are much lower than mean wages
- Regardless of the measure used for SE earnings!

Why become an entrepreneur then?

- Non-pecuniary benefits of self-employment/e-ship
- e.g., autonomy, job satisfaction, being “your own boss”
- Previous theories had always assumed that workers are “wealth
maximizers”; but satisfaction does not depend only on money.

Source: Hamilton, 2000.

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Autonomy
• Can be defined as the extent to which an individual
can structure and control how and when they perform
their job tasks (Hackman and Oldham, 1976; Spector,
1986)
• Higher job satisfaction among the self-employed has
been consistently found in European countries (
Blanchflower and Oswald, 1998, Blanchflower, 2000
, Benz and Frey, 2008), in the United States (
Kawaguchi, 2002, Hundley, 2001) and Canada (
Finnie et al., 2003).

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Autonomy
• Based on data collected from 23 countries, Benz and
Frey (2008) found that more interesting work of self-
employed persons and their greater autonomy are
largely responsible for their higher job satisfaction
• Interesting work and autonomy are valued beyond
material outcomes (wage etc.)
• “Doing what you like to do” seems to provide non-
pecuniary benefits from work

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Risk aversion

Kihlstrom and Laffont’s (1979) formal model

• Individuals differ in terms of their risk attitudes
• More risk-averse individuals become employees—
because they’re willing to pay a premium to “insure”
themselves against risks
• More risk-averse individuals run smaller firms
• A general increase in indivdiual risk aversion reduces
the equilibrium wage

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What happens to earnings AFTER e-ship?

E-ship can be used as an “experimentation” stage!

The Best Part of Entrepreneurship? Giving Up and Getting a Job

Using longitudinal data for the US (5000+ individuals followed for ≈30y):
a) entrepreneurial spells are short (1-2 years);
b) the probability of abandoning e-ship is higher after bad performance;
c) failed entrepreneurs are not punished when they return to WE, while successful
entrepreneurs earn significantly more than wage workers with similar characteristics

Source: Manso, 2016, featured in Frick (2016), HBR article

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 Earning paths: SE vs. comparable employees
SE spells lasting < 2 years SE spells lasting 2+ years
No earnings penalty Earning premium (≈10%)

Similar
earning
trends
before

Source: Manso, 2016,

featured in Frick (2016), H
article

The value of experimenting with new ideas, having the option to quit and return to WE.

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Discussion

1. What kind of skills are needed for entrepreneurship?

2. What kind of skills are needed for wage
employment?
3. Compare and contrast?

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Balanced Skills and E-ship: JAT Theory

Lazear (2005) What distinguishes entrepreneurs from others in the skills

dimension? Why?
•Entrepreneurs must be Jacks-of-All-Trades (JATs) who do not excel in just one
skill, but are competent in many: Balanced Skill Set
•Theory tested with data on 5000 Stanford Alumni: Entrepreneurship is
positively related to the number of different roles in a career & to the generality of
the curriculum at school.

Key take-away:
• Individuals who become entrepreneurs should have a more balanced human capital
investment strategy on average than those who become specialists (and thus paid
employees).

Source: Lazear, 2005

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Balanced Skills and E-ship: JAT Theory

Non-
All entrepreneur Entrepreneurs
s
# Prior Roles 3.26 3.10 5.55

Curriculum 2.49 2.51 2.36

specialization

Proportion of entrepreneurs by # Prior Roles

# Prior Roles ≤3 3-16 > 16

% Entrepreneurs 0.03 0.10 0.29

Source: Lazear, 2005

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Connecting the dots:

 Positive link between varied experience/training and e-ship (Lazear, 2005)

 E-ship might yield lower returns, but also non-pecuniary benefits (Hamilton,
2000)

 … though experimenting quickly might not hurt … (Frick, 2016)

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Entrepreneurs: Are they JATs or Hobos?

- Positive link between balanced skills (i.e., varied experience/training) and

e-ship
- … but how do balanced skills relate to earnings?

JAT Theory: Taste for Variety Theory:

• Income is higher for
entrepreneurs with more
balanced skills
• Balanced skills do not add
much for specialists
• Negative association between
balanced skills and income (for
both groups)
• Yet, entrepreneurs take some
non-pecuniary benefits from
variety Source: Åstebro and Thompson, 2010

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Entrepreneurs: Are they JATs or Hobos?

Again: occupational variety significantly predicts e-ship!

Source: Åstebro and Thompson, 2010

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 Entrepreneurs: Are they JATs or Hobos?

Returns to Variety (Income differentials)

Preferences
Occupational fields Occupational fields Worked in 4 or 5 Industries worked ≥
0.7
2-5* ≥ 6* industries** 6**
5
0.6
0
0.5
-5
0.4
-10
0.3
-15

0.2 -20

0.1 -25

0 -30
Risk Aversion Adversity Resilience
All Never Self-employed Self-employed
Self-employed Never self-employed
*compared to 1 occupational field; ** compared to less than 4 industries

Occupational variety penalizes earnings, so Source: Åstebro and

Thompson, 2010

entrepreneurs are hobos and enjoy variety!

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When to found

• Relevant work experience,

mental models
• Broad/deep work experience;
balanced skills
• Low opportunity costs
• Weak/no “Career handcuffs”

Source: Wasserman (2012), ”Founders’ Dilemmas”, ch2.

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When to found

• Entrepreneurial motivations
• “Cash cushion”
• Positive role models
• Supportive family situation/release
of “family handcuffs”
• Possible “family handcuffs”: children
and/or spouse financially dependent

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When to found

• Big market opportunity/idea

• Favorable context & stage of
the industry
• Customer willingness to
pay/size of the market
• Ticking clock

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Founding early versus (too) late
Found early in career…
• before family and career
“handcuffs” get too strong
• before becoming reliant
on employer resources/too
high opportunity cost
• before becoming too
specialized (Lazear’s Jack-of-
All-Trades theory)
Wait to found until…
• build more human capital
• build more social capital
• build more financial
capital
• develop relevant
experience and
blueprints/mental models
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