Flying High or Crashing Down? Pre-Entry Knowledge and the Distribution of Startup Performance

We examine variation in high-technology startups’ performance based on whether their founders are industry insiders or industry outsiders. We develop a formal theory to explicate differences in performance between startups founded by industry insiders versus outsiders. These differences are shaped by outsiders experiencing higher uncertainty in assembling complementary resources, and thus also having a higher selection threshold for the value creation potential of the technical ideas, relative to insiders. The model predicts that although industry outsiders are more likely to fail, conditional on survival, they outperform ventures founded by industry insiders and are also relatively more likely to be acquired. We test the propositions of the formal model using confidential employee-employer linked microdata from the United States and find strong and robust support for the model propositions.