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New venture creation: Innovativeness, speed-to-breakeven and revenue tradeoffs

Author

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  • Saul Estrin
  • Andrea Herrmann
  • Moren Levesque
  • Tomasz Mickiewicz
  • Mark Sanders

Abstract

We present a Schumpeterian growth model with new venture creation, under uncertainty, which explains the tradeoff between speed-to-breakeven, revenue-at-breakeven and relates this to the level of innovation. We then explore the tradeoffs between these outcomes empirically in a unique sample of 331 information and communication technology (ICT) ventures using a multi-input, multi-output stochastic frontier model. We estimate the contribution of financial capital and labor input to the outcomes and the tradeoffs between them, as well as address heterogeneity across ventures. We find that more innovative (and therefore more uncertain) ventures have lower speed-to-breakeven and/or lower revenue-at-breakeven. Moreover, for all innovativeness levels, new ventures face a tradeoff between speed-to-breakeven and revenue-at-breakeven. Our results suggest that it is the availability of proprietary resources (founder equity and labor) that helps ventures overcome bottlenecks in the innovation process, and we propose a line of research to explain the (large) unexplained variation in venture creation efficiency. Plain English Summary. This study examines how new businesses deal with uncertainty, focusing on the tradeoff between how quickly they become profitable (speed-to-breakeven) and how much revenue they generate when they do. We analyze data from 331 ICT ventures to understand these tradeoffs better, considering factors like financial resources and labor inputs. We find that more innovative ventures, which tend to be more uncertain, often take longer to reach profitability and may earn less when they do. Moreover, regardless of their level of innovation, all new ventures face a tradeoff between speed-to-breakeven and revenue. The study highlights that unique resources, such as founder equity and founder labor, help businesses overcome challenges in the innovation process. It also suggests further research to understand why some ventures are more efficient than others in the early stage of creating new businesses.

Suggested Citation

  • Saul Estrin & Andrea Herrmann & Moren Levesque & Tomasz Mickiewicz & Mark Sanders, 2024. "New venture creation: Innovativeness, speed-to-breakeven and revenue tradeoffs," CEP Discussion Papers dp2054, Centre for Economic Performance, LSE.
    • Handle: RePEc:cep:cepdps:dp2054
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    References listed on IDEAS

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    1. Mikael Samuelsson & Per Davidsson, 2009. "Does venture opportunity variation matter? Investigating systematic process differences between innovative and imitative new ventures," Small Business Economics, Springer, vol. 33(2), pages 229-255, August.
    2. Segerstrom, Paul S & Anant, T C A & Dinopoulos, Elias, 1990. "A Schumpeterian Model of the Product Life Cycle," American Economic Review, American Economic Association, vol. 80(5), pages 1077-1091, December.
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    Cited by:

    1. Henrekson, Magnus & Johansson, Dan, 2024. "Neo-Schumpeterian Growth Theory: Missing Entrepreneurs Results in Incomplete Policy Advice," IZA Discussion Papers 17577, Institute of Labor Economics (IZA).
    2. Henrekson, Magnus & Johansson, Dan, 2025. "Neo-Schumpeterian Growth Theory: Missing Entrepreneurs Results in Incomplete Policy Advice," Working Paper Series 1514, Research Institute of Industrial Economics.

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    Keywords

    entrepreneurship; innovation; new venture creation; proprietary resources; stochastic frontier analysis; Schumpeterian growth model;
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