THE THEORY OF ENTREPRENEURSHIP This page intentionally left blank THE THEORY OF ENTREPRENEURSHIP CREATING AND SUSTAINING ENTREPRENEURIAL VALUE Chandra S. Mishra and Ramona K. Zachary THE THEORY OF ENTREPRENEURSHIP Copyright © Chandra S. Mishra and Ramona K. Zachary, 2014. Softcover reprint of the hardcover 1st edition 2014 978-1-137-37642-8 All rights reserved. First published in 2014 by PALGRAVE MACMILLAN® in the United States— a division of St. Martin’s Press LLC, 175 Fifth Avenue, New York, NY 10010. Where this book is distributed in the UK, Europe and the rest of the world, this is by Palgrave Macmillan, a division of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS. Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world. Palgrave® and Macmillan® are registered trademarks in the United States, the United Kingdom, Europe and other countries. ISBN 978-1-349-47769-2 ISBN 978-1-137-37146-1 (eBook) DOI 10.1057/9781137371461 Library of Congress Cataloging-in-Publication Data Mishra, Chandra Sekhar, 1970– The theory of entrepreneurship : creating and sustaining entrepreneurial value / by Chandra S. Mishra and Ramona K. Zachary. pages cm Includes bibliographical references and index. 1. Entrepreneurship. I. Zachary, Ramona K. II. Title. HB615.M575 2014 658.4(cid:25)2101—dc23 2014024026 A catalogue record of the book is available from the British Library. Design by Newgen Knowledge Works (P) Ltd., Chennai, India. First edition: December 2014 10 9 8 7 6 5 4 3 2 1 The Ode to the Entrepreneur Written by Ramona Kay Zachary, December 9, 2013 Coming from within The entrepreneur begins. From the start she thinks of value anew Mixed with creditable, clever creativity too! Splendid is this brewing, bursting blend in each case With intention, opportunity, and resources all in place, But at the very core Is this notion of Sustainable Value Creation galore! Entrepreneurial opportunities come along all around But few hear the sound With fewer yet with the resources due And motivation, desire and intention true. Most will not succeed, Though try as they might with their consuming deeds. Yet out of the crowd, some come along Each with her vibrant, variable song. What are the lessons learned herein? As we begin To tell the tales of the entrepreneur everywhere Who risks all to gain entrepreneurial reward and to dare. Sustainable value to create cannot wait But comes to fruition with a fiery fate. And all around the entrepreneur is linked to Her family, investors, and emerging business anew. Nestled within near environments strong Where communities, networks, and alliances cheer her along. The one who sees a radical change for our world And such a never ending swirl Of inventions and new products and services unknown today But in markets and venues for future play. The entrepreneurial heart beats on, never done and on the run, Creating the rarest and invaluable phenomenon under the sun! This page intentionally left blank CONTENTS List of Figures ix Executive Summary xi Acknowledgments xiii Part I Starting Up: Introduction 1. The Imperative and Missing Crux of Entrepreneurship Research 3 Part II From External Intention and Opportunity to Entrepreneurial Competence 2. The Theory of Entrepreneurial Intentionality 21 3. Entrepreneurial Opportunity and Cognition 49 4. Entrepreneurial Capital Resources 75 5. The Theory of Entrepreneurial Competence 115 Part III From Entrepreneurial Competence to Entrepreneurial Reward 6. Venture Financing, Adverse Selection, and Risk and Return 143 7. Moral Hazard, Entrepreneurial Incentives, and Risk Mitigation 171 8. Venture Investment and Dynamic Complementary Capabilities 199 9. Business Model Theory 227 viii CONTENTS Part IV Summing Up: The Theory of Entrepreneurship 10. The Entrepreneurial Value Creation Theory 253 Index 293 FIGURES 2.1 Entrepreneurial intentionality and adaptability 39 3.1 Entrepreneurial opportunity and cognition 64 4.1 Entrepreneurial capital resources 103 5.1 T he entrepreneurial value creation theory: Venture formulation 116 6.1 Risk and reward 162 6.2 Venture delta 163 6.3 The venture capital asset pricing model (VCAPM) 166 7.1 Entrepreneurial incentives 185 7.2 Moral hazard and risk mitigation 189 8.1 Complementary capabilities 212 8.2 Venture cash flow 216 9.1 Business model construct elements: Pearson correlations 233 9.2 The entrepreneurial value creation theory: Venture monetization 239 10.1 T he entrepreneurial value creation theory: Venture formulation and monetization 254