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The NBER's Working Group on Entrepreneurship met in Cambridge on March 11. The Group's Director Josh Lerner of NBER and Harvard University Organized this program:

Manju Puri, NBER and Duke University, and David T. Robinson, Duke University, "Optimism, Work/Life Choices, and Entrepreneurship" Discussant: Dirk Jenter, MIT

Francisco J. Buera, Northwestern University, "A Dynamic Model of Entrepreneurship with Borrowing Constraints: Theory and Evidence" Discussant: Boyan Jovanovic, NBER and New York University Yael Hochberg, Cornell University, and Alexander Ljungqvist and Yang Lu, New York University, "Who You Know Matters: Venture Capital Networks and Investment Performance" Discussant: Jesper Sorensen, MIT

Steven N. Kaplan, NBER and University of Chicago; Berk A. Sensoy, University of Chicago; and Per Stromberg, SIFR, "What are Firms? Evolution from Birth to Public Companies" Discussant: Thomas Hellmann, University of British Columbia

Paul Gompers, Josh Lerner, and David Scharfstein, NBER and Harvard University; and Anna Kovner, Harvard University; "Venture Capital Investment Cycles: The Role of Experience and Specialization" Discussant: Robert Gibbons, NBER and MIT

Panel Discussion: "Inside the 'Black Box' of the Entrepreneurial Firm: Key Questions" Amar Bhide, Columbia University; Desh Deshpande, Chairman and Co-Founder, Sycamore Networks; and Bengt Holmstrom, NBER and MIT

Puri and Robinson present some of the first large-scale survey evidence linking optimism to significant work/life choices. Using the Survey of Consumer Finance, they create a novel measure of optimism based on life expectancy biases. They find that entrepreneurs are more optimistic than nonentrepreneurs. Further, more optimistic people in general work harder, and anticipate longer age-adjusted work careers. Optimism correlates not just to work related choices but also to other significant fife choices, such as remarriage and stock market participation. Optimistic people are more likely to remarry, and are more likely to own stock. The authors also relate optimism to risk preferences. They find that entrepreneurs are more risk loving than non-entrepreneurs. However, the correlation between risk taking and optimism is low, suggesting that attitudes toward risk and optimism explain different aspects of decisionmaking.

Buera studies the interaction between individuals' savings and the decision to become an entrepreneur. His model has one simple threshold property: able individuals who start with wealth above a certain amount purposely save to become entrepreneurs, while those who start below this threshold fall into a "poverty trap" and remain wage earners forever. The model also generates a well-defined transition of individuals from wage earners to entrepreneurs--a major focus of recent empirical work. Although the probability of becoming an entrepreneur as a function of wealth is increasing for low wealth levels--as predicted by standard static models--it is decreasing for higher wealth levels. Buera uses the model to address two quantitative questions: are poverty traps of quantitative importance in models where agents can overcome them by savings? And, how costly are borrowing constraints for small businesses in the United States? Provided there are not strong decreasing returns to scale, poverty traps remain substantial. To answer the second question, Buera estimates the dynamic model using U.S. data. Welfare costs are significant, around 6 percent of lifetime consumption, but poverty traps turn out to be unimportant for the U.S. economy.

Many financial markets are characterized by strong relationships and networks, rather than arm's-length, spotmarket transactions. Hochberg, Jungqvist, and Lu examine the performance consequences of this organizational choice in the context of relationships established when Venture Capitalists (VCs) syndicate portfolio company investments. Using a comprehensive sample of U.S.-based VCs over the period 1980 to 2003, the authors find that VC funds whose parent firms enjoy more influential network positions have significantly better performance, as measured by the proportion of portfolio company investments that are successfully exited through an initial public offering or a sale to another company. Similarly, the portfolio companies of better networked VC firms are significantly more likely to survive to subsequent rounds of financing and to eventual exit. The magnitude of these effects is economically large, and is robust to a wide range of specifications. This suggests that the benefits of being associated with a well-connected VC are more pronounced in later funding rounds. Once the authors control for network effects in their model of fund and portfolio company performance, the importance of how much investment experience a VC has is reduced, and in some specifications, eliminated.

Kaplan, Sensoy, and Stromberg study how firm characteristics evolve from early business plan to initial public offering to public company for 49 venture capital financed companies. The average time elapsed is almost six years. The authors describe the financial performance, business idea, point(s) of differentiation, non-human capital assets, growth strategy, customers, competitors, alliances, top management, ownership structure, and the board of directors. Their analysis focuses on the nature and stability of those firm attributes. Firm business lines remain remarkably stable from business plan through public company. Within those business lines, nonhuman capital aspects of the businesses appear more stable than the human capital aspects.

Gompers, Kovner, Lerner, and Scharfstein examine how organizational structure affects behavior and performance among different types of venture capital organizations. Consistent with the view that industry-specific experience and human capital enable organizations to react to investment opportunities, they find that venture capitalists with the most industry experience increase their investments the most when industry investment activity accelerates. Those venture capitalists react to an increase more than do venture capital organizations with relatively little industry experience, and those with considerable experience but in other industries. The increase in investment rates does not adversely affect the success of these transactions to a significant extent. This is consistent with the view that when firms are diversified in other sectors, it is difficult to redeploy human and financial capital from those other sectors. The evidence conflicts with the efficient internal capital market perspective, as well as the view that entrants are critical to explaining the expansion of venture capital within in an industry.
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Title Annotation:Bureau News
Publication:NBER Reporter
Geographic Code:1USA
Date:Mar 22, 2005
Previous Article:Development of the American Economy.
Next Article:Urban economics.

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