In line with the scholarly endeavors within the EDM literature (Barbosa et al.,
2019; Sarasvathy & Berglund,
2010), in this conceptual article, we attempt to propose a behavioral framework regarding the birth and evolution of start-ups, with a focus on Unicorns. In our three-stage framework (Fig.
1), the establishment and subsequent legitimization of a Unicorn are conceived as the potential, combined product of
make-happy,
sketchy-attribute, and
psycho-physic biases (Zhang & Cueto,
2017), with the first typology constituting a possible antecedent of the others.
A main determinant of the entire process is the intertwined, evolving affective state of investors and founders. Specifically, at the birth stage in our framework, investors can be emotionally pushed towards the (make-happy) recall of the vivid memories of successful Unicorns. During the juxtaposition process, they use these positive memories as a benchmark to find similarities (sketchy-attribute) with the promising start-up under evaluation; if these similarities are found, investors anchor on them (sketchy-attribute), classifying the promising start-up as a potential Unicorn that forms the investment choice.
At the
transition stage, again through juxtaposition, founders search for confirming evidence (
sketchy-attribute) that is able to support the initial positive affective state of the investors towards the selected Unicorn. The result of this search is, eventually, the establishment of the Unicorn; the search can happen because, also in EDM processes, people usually tend to look for similarities that can confirm prior (or lead to) positive affective states (Cristofaro,
2020).
Theoretical contribution
As its main theoretical contribution, our framework provides support and improvement of the
behavioral theory of the entrepreneurial firm (Dew et al.,
2008). This theory, as known, proposes that entrepreneurs: “act to fabricate their own environments (however locally) and futures (however short term) through self-selected stakeholder commitments that are embodied in new organisational goals and new market segments” (p. 55).
On this basis, new-born firms are seen as
loci of interaction, where boundaries between internal and external stakeholders are blurred and change over time. Thanks to these dynamics, entrepreneurial firms can tentatively produce different answers according to environmental change (Pellegrini & Ciappei,
2015; Scafarto et al.,
2019). In this regard, as per our
first contribution, we assume that founders and investors are inter-twined agents, at least from a cognitive perspective (Bellavitis et al.,
2020; Dew et al.,
2009). Indeed, the different biases that emerge from one party influence the perception of the other, and vice versa, according to a co-evolutionary logic (e.g., Adinolfi,
2021; Almudi & Fatas-Villafranca,
2021). As a result of this conceptualization, the birth and evolution of entrepreneurial firms, in this case Unicorns, are conjectured as the product of inter-related biases of founders and investors. This conjecture also provides a tentative answer to the call, by Zhang and Cueto (
2017), to identify the implications of biases in entrepreneurship.
Second, to our knowledge, our study also constitutes one of the first, potential answers to Zhang and Cueto’s (
2017) call to investigate the interaction among biases in the entrepreneurial context. In particular, regarding our conjecture above,
make-happy biases seem to have a primary role in the causation of other biases. This appears in line with the
affect-as-information model (Schwarz & Clore,
2003) and the
appraisal/emotion theory (Niedenthal et al.,
1999); they both advance the driving function of feelings in interpreting information and underline the intrinsic attachment of affective states to the lived experience, as also postulated by sensemaking studies (Pham et al.,
2021). Moreover, this also appears in line with recent progress in the managerial decision-making literature (Bazerman & Moore,
2013; Gino,
2013), which also advances the causal role of the
affect heuristic regarding other biases (e.g., Abatecola et al.,
2018; Cristofaro,
2020). In other terms, the positive affective states seemingly lead to the collection of confirming evidence, self-reinforcing processes and, ultimately, the making of risky decisions. In the case of Unicorns, this means, for example, escalating the commitment, although in the absence of positive economic outcomes.
Implications for research and practice
The conceptual framework developed, of course, also opens the door to a number of further implications both for scholars and practitioners, which are outlined below.
First, we generally believe that the EDM research movement, including the
behavioral theory of the entrepreneurial firm, can further strengthen the conceptual and explanatory underpinnings about the relationship between EDM and the outcome of the start-up endeavor if embracing some core evolutionary (Hodgson,
2004; Nelson & Winter,
1982) and co-evolutionary (Abatecola et al.,
2020; Lewin & Volberda,
1999) logics in their theoretical constructs. Based on nested levels of evolution (e.g., Johansson & Kask,
2013; Paniccia & Leoni,
2019), this research perspective links dynamics and competition at the system level (e.g., industry and society) with actors’ path-dependent dispositions, instincts, and decision patterns at the individual and organizational levels (e.g., entrepreneurs and firms).
Hence, the evolutionary perspective can offer a way to balance to what degree change in an industry and within a firm comes from individual agency and culture (Schlaile et al.,
2021), and to what degree actors’ decisions and dispositions are determined and selected by the industry or market (McCarthy et al.,
2010; Stoelhorst,
2008). In other words, the evolutionary logic is neither completely deterministic nor just voluntaristic, but embraces an inter-directional duality (e.g., Cafferata,
2016; Paniccia & Baiocco,
2021). In this regard, for example, Dobson and Breslin (
2013) map social network structures of entrepreneurship and creativity. The authors use an evolutionary approach to explain how routinized decision-making dispositions (e.g., group habits), and the consequential behavioral patterns of a workforce, evolve over time from the interaction between various actors, and in the workforce’s interaction with its environment.
Second, we have positioned our work in that EDM research stream aimed at interpreting what cognitive mechanisms potentially occur between founders and investors of Unicorns when their generation and development are considered. While our proposed relationships among irrational behaviors can advance research on entrepreneurial biases, we believe that, in the future, adopting the
biases in finance lens (e.g., Adomdza et al.,
2016) can also result as an approach that is useful to complement the investigation of the phenomenon. Because it can focus on investors more than on entrepreneurs, this lens may highlight the presence of other inter-related biases, which are not the primary object of focus in this work. This, of course, could also open new implications for the field of entrepreneurial finance.
Third, in terms of (related) implications for practice, our proposed framework implicitly suggests that the sum of biases of investors and founders in identifying similarities (e.g., business history and/or business model features) between promising start-ups and prior successful Unicorns, let the former have greater chances of being selected and legitimized as Unicorns themselves. Again, we need to highlight that the intensive growth of these firms requires continuous and massive support from investors and founders. In fact, Lehmann et al. (
2019) verify that the continuous provision of financial resources, based on equity, is pivotal to realizing and sustaining the highlighted fast growth of Unicorns. This is because: “the logic of Unicorns lies within the speed of scaling their business model” (Lehmann et al.,
2019: 11), and the network effect at the basis of the firm’s value spreads only through mass communication – which requires large investments in platform technology (Cavallo et al.,
2019).
However, we argue, it is not just the need for continuous funding that can increase the risks for creating and sustaining Unicorns. Indeed, it can also be the reciprocal opportunism of founders and investors that can lead to financial measures being overlooked in favor of other business metrics. As Cowden et al. (
2020) explain, founders of Unicorns, and their investors, implicitly agree upon opportunism. Because the venture moves fast and makes many quick decisions in its disruptive path, investors push the venture to take higher than normal risk with their money, even though they may not be up-to-date with all the market actions of the venture and its related risks. This can create the high risk of forming business bubbles potentially having a dramatic impact on the ecosystems in which both Unicorns and investors are embedded.
Indeed, without reverting to established business measures (e.g., profitability), it is likely that a Unicorn can be a victim of a bubble similar to others that occurred under the venture capital domain (e.g., dot-com companies in the late 1990s) and the broader economic environment (e.g., real estate mortgage-backed securities before the crisis in 2008). Thus, to reduce this risk, we do believe that nascent Unicorns and their investors should, in no way, discard any traditional financial measures of business performance. From the beginning, in parallel, they should carefully craft their prospective monetization mechanisms.
Limitations and conclusions
We conjecture this article to provide a contribution to all those scholars and practitioners interested in the lively debate of how biases can affect EDM (e.g., Arend,
2020). In particular, we have outlined a tentative behavioral-based framework, consisting of three sequential stages and associated propositions, for EDM research on Unicorns. In this regard, we are conscious that, from a strictly
methodological point of view, from the beginning, our attempt is designed as a conceptual start, hopefully soliciting further discussion and specific empirical analyses (Lee,
2020). Specifically, we are aware that, in the future, qualitative analyses based on inductive theory building (Pizzi et al.,
2021), and on in-depth interviews with the key figures in a case (Cassell & Bishop,
2019), may also help deepen the key cognitive issues emerging from our framework. Relatedly, and which represents another challenging research avenue per se, these kinds of analysis may help to understand:
i) what cognitive strategies are guided by
intuition,
rationality, or
reframing, respectively (Luoma & Martela,
2020);
ii) how much
perceptions, conceptualized as a pre-stage (Vlačić et al.,
2021) of Fellow’s (
2004) options, affect these strategies;
iii) and, eventually, whether the decisions regarding these strategies are also impacted by
noise (Kahneman et al.,
2016).
Furthermore, another limitation of this work may be considered as
embedded in its own value added, that is dealing with Unicorns. In fact, despite that Unicorns have been treated as an entrepreneurial species per se and some features exist detailing their uniqueness (Erdogan et al.,
2016; Govindarajan et al.,
2016), one could argue that it is still difficult to conceive them as a new organizational type. Thus, further studies could focus on identifying similarities among Unicorns in order to conceptualize them as a distinct business entity. This, we believe, could in turn be useful to strengthen the reliability of those studies exploring what behavioral dynamics conduct to their birth, survival, and success (Thomas & Ritala,
2021).
In conclusion, it seems to us that understanding major cognitive mechanisms is the key to appropriately interpreting selection regimes in the Unicorn Club. Therefore, although aware of its limitations, we hope that what we propose in this article can contribute to advancing knowledge in this EDM area.