Theory-Based Entrepreneurial Search

Abstract

How should Theory-based entrepreneurs search for strategies to implement their ideas? The theory-based view of strategy posits that decision makers hold key conjectures about their path to success and use theory to understand and test beliefs underlying those conjectures. This causal framework also has implications for entrepreneurial search: the process by which entrepreneurs uncover strategies to implement their ideas. In this paper, we develop a Bayesian model where entrepreneurs update their beliefs as they conduct entrepreneurial search. We find several optimal behaviors for Theory-based entrepreneurs such as reverting to a previous strategy after finding a relatively poor strategy and continuing to search after finding a relatively good strategy, which are missing when entrepreneurs lack such a theory-based approach. As our theoretical predictions align with examples of successful entrepreneurs, our findings both provide a method to empirically identify Theory-based entrepreneurs and demonstrate the usefulness of applying the theory-based view to entrepreneurial behavior more generally.