Entrepreneurship and the Process of Obtaining Resource Commitments

By Thomas Hellmann
2000| Working Paper No. 1704

Most theories of the firm ignore the entrepreneurial process of how the various resources of the firm are combined in the first place. This paper examines the process of how an entrepreneur obtains commitments from multiple resource providers to create a new venture. Resource providers may be reluctant to commit to an unproven concept, and the commitment of one gives external validation for the others. The entrepreneur has to decide in what order to approach potential providers. The optimal sequence is shown to depend on the entrepreneur’s own credibility. When no resource provider wants to be the first to commit, the entrepreneur may shuttle between resource providers for a long time and the opportunity may evaporate before the venture ever gets started. Finally, the resource combination of a firm may differ from its first-best combination, either if the entrepreneur wants to retain a larger fraction of a smaller pie, or if inefficient resource providers are more willing to be the first to commit.