The Problems and Promise of Entrepreneurial Partnerships: Decision-Making, Overconfidence, and Learning in Founding Teams

ABSTRACT

How should decision-making be organized in entrepreneurial teams when founders exhibit confidence biases? New ventures are commonly founded by teams of entrepreneurs, who must employ a decision-making structure that implicitly or explicitly defines how individual beliefs are aggregated into team decisions. We consider this issue through the lens of organizational economics, which focuses on decision-making governance. Using a computational model, we consider three archetypal decision-making structures partnership voting, a boss with employees, and a buyout option (partnership convertible to boss structure). We highlight the conditions under which partnership voting is an effective means of governing market entry and exit decisions when teams' decision-making is informed by efforts to learn about the merits of uncertain opportunities. The promise of partnership voting is realized when entrepreneurs are either unbiased or optimistic about their likelihood of success. Partnership voting is problematic when entrepreneurs differ in their biases or respond too rapidly to new information, in which case a buyout option is better. From a policy perspective, we show that confidence biases may be managed by selectively matching the decision-making structure to entrepreneurs' biases, and that doing so may substantially improve the performance of new ventures.