Abstract
Startups play a major role in establishing many new markets. This is theoretically puzzling because existing firms have more resources and relevant core and peripheral capabilities that should advantage them in diversifying into new markets. Here, we explore one mechanism that differentiates startups from existing firms due to the stronger link between startups’ past performance and resources available for future capability building. Using a simulation model, we show that this reinforcing loop leads entrepreneurial financial markets to quickly focus on more promising startups and, despite initial disadvantage, enable the most promising startups to take over projects in well-endowed diversifying entrants. We analyze how different markets and technological opportunities can affect these dynamics.
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