Yale a “Beacon” That Drives Entrepreneurial Activity

Newswise — AUSTIN, Texas — New research from the McCombs School of Business at The University of Texas at Austin finds that motivation to launch a company often comes from a singular, notable event or person. This finding is contrary to previous research that showed entrepreneurs are guided by the collective influence of institutional investors, legislators, and industry activists.

Assistant Professor Sekou Bermiss and co-authors from Harvard Business School and the University of Washington suspected that it’s often a “beacon” shining a light on an industry that causes everyone, especially entrepreneurs, to shift their focus.

Bermiss and his co-authors looked at two types of beacons: “endorsing” and “demonstrating.” Demonstrating beacons are people or companies that have achieved success in an emerging industry, and that success inspires entrepreneurs to launch new companies in the same sector. Netscape’s 1995 IPO, which kicked off the dot-com boom, is one example.

Endorsing beacons are individuals like Berkshire Hathaway’s Warren Buffet or Yale University’s Chief Investment Officer David Swensen who observe and monitor several sectors closely and actively support a select few of them. They are perceived as having exceptional insight, the researchers explain.

To determine which type of beacon has the most influence, Bermiss and his co-authors analyzed 1,283 U.S. venture capital firms founded between 1980 and 2011. They compared the frequency of VC foundings in the quarters that followed both IPO run-ups and the annual release of Yale University’s endowment report, which details its investment allocations, including those in venture capital funds.

“We were surprised that we did not find a strong correlation between IPO run-ups and new VC startups,” said Bermiss. “We thought someone going public and making a ton of money would be a stronger driver for more people to get into that business, but it’s not the case.”

Instead, they found that an unexpected driver of both new VC firm growth — and decline — was Yale University’s endowment: a 2.67 percent increase in Yale’s VC allocation led to a nearly 60 percent increase in new VC companies the following year. Similarly, when Yale reduced its VC investments, the researchers saw industry retrenchment.

“If I see a beacon that’s starting to support a new industry or sector, I should expect a lot of attention there. That could be good or bad, but it means there will be a lot of people who are going to join us,” said Bermiss.

To read the full study click, here.

For more information, contact: Samantha Harris, Red McCombs School of Business, [email protected] or 512-471-6746