Experimental Learning in Early-Stage Ventures
Posted: 15 Jan 2021
Date Written: November 9, 2020
This paper proposes a theory of experimental learning in early-stage ventures. I develop a stylized formal model to illustrate three channels through which experimentation drives performance: information, adaptation, and appropriability. The model represents a nascent venture seeking to develop and commercialize a product based on an initial idea. Through this process, the venture chooses one of two strategies: direct entry or experimental entry. Following direct entry, it develops the initial idea with no additional information and commercializes the product. Following experimental entry, it gathers market feedback through experimentation, incorporates that information into the development process, and commercializes the product. The analysis suggests that experimental learning is optimal only when signal precision is high, market uncertainty is high, adaptation costs are low, and appropriability is strong.
Keywords: Entrepreneurship, Experimentation, Lean Startup
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