Flying high or crashing down: Pre‐entry knowledge, post‐entry learning, and the distribution of startup performance
Founders entering outside their prior industry face higher uncertainty and exit risk but, if they survive, grow faster, because they only enter with higher-value ideas.
Summary
The authors argue that founders entering an industry from outside face more uncertainty in configuring their business model and higher adjustment costs when they have to pivot after learning. To offset these risks, outsiders enter only with technical ideas of higher value-creation potential. As a result, outsider start-ups exit more often, including through acquisition, but grow faster if they survive, which produces a wider spread of performance than for start-ups founded by industry insiders.
Editor's opinion
Founders from outside an industry take a riskier bet, but they only make it with stronger ideas, so their outcomes are more polarised: more failures and exits, and faster growth among the survivors. Investors and incumbents watching new entrants should expect outsiders to either disappear or scale quickly, rather than to look like average insiders.
Key concepts
pre-entry knowledge · post-entry learning · startup performance distribution · pivots