Entrepreneurs who resist pressure to follow a consensus are most likely to stay in the market, receive funding and ultimately go public, says a study.
According to the study, published in the journal Administrative Science Quarterly, entrepreneurs who follow the prevailing beliefs in a market are less viable, while non-consensus entrepreneurs prosper.
“Startups and investors face constant pressure to follow the consensus and that pressure is hard to overcome,” said Associate Professor at the Chicago Booth School of Business in the US, Elizabeth G. Pontikes.
For the study, the researchers contained data from 4,566 organisations in 456 different market categories and assembled data on software organisations, their market categories, when they received venture capital funding and when they had an initial public offering.
They also interviewed investors, board members and executives in the software industry about the decision-making process for entering a new market.
The study found that both firms and venture capitalists engaged in herding behaviour by entering markets that received venture capital funding.
“Those firms and venture capitalists following the consensus suffered in the long term. They put too much emphasis on the viability of a hot market and overlooked whether their product had a good fit for the market,” Pontikes noted.
“Entrepreneurs who entered ‘untouchable’ markets — those tainted by bankruptcies — applied more scrutiny to product-market fit and, in turn, fared better,” Pontikes added.
The study has implications for entrepreneurs and investors across industries. Firms would do well to institute processes that force executives and decision makers to carefully examine whether their products are suited to compete in a market before entering.