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Unicorns, Cheshire cats, and the new dilemmas of entrepreneurial finance


This essay examines the implications of the evolving environment for the formation and financing of new firms in the United States. After the crash of 2000, there was a regime change in new firm formation and the number of firms that exited through an initial public stock offering. This change was made possible by the decreased cost, increased speed, and ease of market entry due to availability of open source software, digital platforms, and cloud computing. This facilitated a proliferation of startups seeking to disrupt incumbent firms in a wide variety of business sectors. The contemporaneous growth in the number and size of private funding sources has resulted in a situation within which new firms can afford to run massive losses for long periods in an effort to dislodge incumbents or attempt to triumph over other lavishly funded startups. This has triggered remarkable turmoil in many formerly stable industrial sectors, as the new entrants fueled by capital investments undercut incumbents on price and service. The ultimate result is that new entrants with access to massive amounts of capital can survive losses for a sufficiently long period to displace existing firms and, thereby, transform earlier industrial ecosystems.

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