ENTREPRENEURIAL BEACONS: THE YALE ENDOWMENT, RUN-UPS, AND THE GROWTH OF VENTURE CAPITAL

Research summary: This article investigates the social context of entrepreneurship in organizational sectors. Prior research suggests that firm foundings are driven by collective patterns of activity—such as patterns of prior foundings in a given sector. Building on research on social salience and signals, we consider the influence of singular sector-level triggers, which we call entrepreneurial beacons. We argue that the actions or outcomes of single, salient organizations attract and motivate entrepreneurs, thus increasing the rate of foundings. We test this logic by examining the impact of the Yale University endowment's investment choices and of venturecapital-backed IPO run-ups on venture-capital foundings between 1984 and 2011. We find support for the existence and influence of beacons and outline boundary conditions for their effects. Managerial summary: What leads entrepreneurs to found new companies in nascent sectors? In contrast to prior research, which emphasizes patterns of activity, we argue that entrepreneurial activity can sometimes be driven by the actions of a singular trigger—what we call an entrepreneurial beacon. We examine the influence of two such beacons, Yale University's endowment investments and exceptional venture-capital-backed IPO run-ups, on the founding of new venture-capital firms over a 28-year period. We find that Yale's increased allocations to the venture-capital asset-class has a significant influence on the founding of new venture-capital firms, while exceptional venture-capital-backed IPO run-ups only influence venture-capital foundings under certain conditions. Overall, we offer an explanation for heretofore anecdotal accounts of certain organizations or events that appear to have an outsized influence on entrepreneurial activity.