Entrepreneur’s Knowledge, Firm Survival, and the Normalized Burn Rate

Ron Berman, Marketing, The Wharton School, and Pablo Hernandez-Lagos, NYU | Abu Dhabi

Abstract: We study the association of spending per employee with startup firm survival. Our theory model posits that entrepreneur’s knowledge defines the complex decision process of combining human and non-human inputs to increase firm value. Spending per employee is the outcome of such complex process. The model prescribes a U-shaped relationship between spending per employee and firm failure. It also predicts that most firms spend too little per employee and that education and work experience (proxies for knowledge) lead entrepreneurs to spend closer to the optimum. These hypotheses are borne out by a seven-year representative panel dataset of U.S. businesses founded in 2004. Our results suggest that variation in spending per employee captures important differences in strategic decisions across firms.

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