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Articles - Kerr et al (2014)

7 important questions on Articles - Kerr et al (2014)

We assert in this paper that effective entrepreneurship—especially among high-growth ventures and for the economy as a whole—builds upon

a process of experimentation in deep and nuanced ways.

Entrepreneurship is fundamentally about experimentation because

the knowledge required to be successful cannot be known in advance or deduced from some set of first principles

In this environment of tremendous uncertainty, experimentation allows entrepreneurs and investors to

assess and commercialize projects without investing the full amount. Crucially, experimentation offers more than just a possibility of higher returns—it also allows entrepreneurs and investors to pursue projects that are not feasible in an all-or-nothing bet

The costs of running experiments play a big role in entrepreneurship. Technological change in the last decade has dramatically

dramatically lowered these costs, particularly in industries that have benefited from the emergence of the Internet, including trends like open-source software and cloud computing. Industry observers suggest that firms in these sectors that would have cost $5 million to set up a decade ago can be done for under $50,000 today.

Venture capital investors routinely refer to “financing risk” (similar to rollover risk) to describe

how otherwise sound projects may not obtain capital for the next experiment. One way to protect against financing risk is to go less frequently to the capital markets, by taking larger chunks of money at each stage. This, however, reduces the value of the abandonment options for venture capital firms.

How should policymakers interested in promoting entrepreneurship think about the role of experimentation?

In addition, taking the experimental perspective seriously suggests that it is a poor idea for government to seek to pick and promote individual firms. After all, even the most-experienced venture capital firms have substantial success in only one of every ten investments they pick, so we shouldn’t expect inexperienced and possibly not-very-objective politicians to do better.

Governments are more likely to facilitate effective entrepreneurship if they work to reduce the costs of experimentation in general.

Economists should bear in mind two very different forms of experimentation that are associated with entrepreneurship.

One form is the economic experimentation that takes place in market-based economies when several new ideas, products and technologies are continually tested and either displace existing technologies or more likely fail themselves. A second less-appreciated form of experimentation happens at the micro-level, before these ideas compete, and relates to the process of bringing new ideas to the market

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The Economics of Innovation An Introduction | 9781781007747 | G M P Swann

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Articles - Kerr et al (2014)

7 important questions on Articles - Kerr et al (2014)

We assert in this paper that effective entrepreneurship—especially among high-growth ventures and for the economy as a whole—builds upon

Entrepreneurship is fundamentally about experimentation because

In this environment of tremendous uncertainty, experimentation allows entrepreneurs and investors to

The costs of running experiments play a big role in entrepreneurship. Technological change in the last decade has dramatically

Venture capital investors routinely refer to “financing risk” (similar to rollover risk) to describe

How should policymakers interested in promoting entrepreneurship think about the role of experimentation?

Economists should bear in mind two very different forms of experimentation that are associated with entrepreneurship.

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