Using data on software start-ups from 1990 to 2002, researchers unveiled that collective sense-making in starting a company to pursue a trend can result in consensus behavior among entrepreneurs and venture capitalists.
Market search is a critical part of the entrepreneurial process, as entrepreneurs enter new markets to find high-growth areas.
When spectacular financing results in a collective overstatement of the attractiveness of a market, a consensus emerges that the market is rich, and the path is cleared for many entries, including those that do not have a clear fit.
When failures render a market unpopular, only the most viable entrants will overcome exaggerated skepticism and enter, taking the non-consensus route. Venture capitalists likewise exhibit herding behavior, following other VCs into hot markets. The consensus entrants are less viable, while non-consensus entrants are more likely to prosper.
Non-consensus entrepreneurs who follow, then unfollow the trends, are most likely to stay in the market, receive funding, and ultimately go public.
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