Chapter 4: Measuring and Predicting Wealth Creation
4. Measuring and predicting wealth creation Key ideas One of the most overlooked topics in the study of entrepreneurship is how to measure and predict future wealth creation. It may be possible to describe what entrepreneurs do in the present without evaluating future wealth creation, but it certainly is not possible to conduct prescriptive research intended to improve performance without knowing how to measure this critical dependent variable. Cynics would say, there you go; you have made our case that prescriptive entrepreneurship is impossible because you cannot predict “the future.” However, I am not trying to predict the future per se, I am trying to understand and test the relationships among a limited number of independent variables that are relatively slow to change, and which are relatively simple to measure. This chapter reports on the testing of a theoretically-based approach for predicting the wealth creating potential of future ventures. Using hidden, but known historical cases, it successfully classiﬁed 31 out of 31 venture capital funded ventures into three levels of performance. Moreover, the results accounted for 74 per cent of the variance above the expected return on investment (ROI) to investors. DEVELOPING A THEORY OF WEALTH CREATION Entrepreneurs are vital to economic development because they often create new wealth from sources that did not exist previously (Schumpeter, 1971; Spence, 1974). In ways that are not completely understood, they combine existing or potentially available resources, sometimes in the absence of a market for their products and services, hoping to be...
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