Towards a theory of entrepreneurial teams

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Journal of Business Venturing 23 (2008) 613 – 626

Towards a theory of entrepreneurial teams David A. Harper ⁎ Department of Economics, Faculty of Arts and Science, New York University, New York, NY 10003, USA

Abstract This article examines the role of entrepreneurial teams in processes of entrepreneurial discovery. It addresses two main questions. The first investigates the implications of economic theory for the possibility of team entrepreneurship. Because leading economic theories focus almost exclusively upon individual decision-makers, we propose a broader notion of entrepreneurship that includes enterprising teams as well as individuals. We define entrepreneurship as a profit-seeking problem-solving process that takes place under conditions of structural uncertainty. The second question examines the conditions that are conducive to joint entrepreneurial action and the formation of entrepreneurial teams. We suggest that bounded structural uncertainty and perceived strong interdependence arising from common interest can jointly “prime” team entrepreneurship. © 2008 Elsevier Inc. All rights reserved. Keywords: Entrepreneurial team; Economic theories of entrepreneurship

1. Executive summary What role do entrepreneurial teams play in the processes of discovery that drive competitive markets? How do entrepreneurial teams form? Does entrepreneurial alertness extend beyond the boundaries of skull and skin, or is it a propensity of individual minds only? Is there such a thing as a “team agent” over and above the actions of its members, or is everything reducible to the actions of individual entrepreneurs? These are the kinds of problems that need to be addressed by a comprehensive theory of entrepreneurial teams. As yet, however, there is no adequate theory, though there are economic theories of individual entrepreneurship and economic theories of non-entrepreneurial teams. This article intends to lay some groundwork for theoretical development in this area. It maps out a research strategy on three fronts. In the first place, it suggests that an adequate theory must adopt an appropriate conception of entrepreneurship, one that is agent-neutral in that it does not exclude the possibility of one or other locus of entrepreneurial decision-making (e.g. individuals or teams). We argue that entrepreneurship is best conceived as a dynamic problem-solving process in which entrepreneurs learn in the light of experience and feedback from the market. “The actual entrepreneurial act is inextricable from the trial and error process of testing out [the entrepreneurial] idea” (Vaughn, 1990: 22). This conception suggests that the discovery of a profit opportunity need not ⁎ Tel.: +1 212 998 8959. E-mail address: [email protected]. 0883-9026/$ - see front matter © 2008 Elsevier Inc. All rights reserved. doi:10.1016/j.jbusvent.2008.01.002

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be “all in the head” of an enterprising individual but could instead be a socially distributed process that involves joint action possibilities and team entrepreneurship. The second leg of the research strategy is to develop an appropriate conception of “entrepreneurial team”, one that is institution-neutral in that it does not presuppose a particular governance structure (such as a start-up firm) for bringing entrepreneurial transactions to fruition. Entrepreneurial teams could conceivably emerge within, across or outside firms. We define an entrepreneurial team as a group of entrepreneurs with a common goal that can only be achieved by appropriate combinations of individual entrepreneurial actions. We also present a taxonomy of teams that is grounded in economic theory. The third part of the research program is to elaborate the conditions that favor the formation of entrepreneurial teams. These conditions are best defined in terms of the dimensions of the problem situation that require team entrepreneurship. It is argued that bounded structural uncertainty and perceived strong interdependence arising from common interest are jointly conducive to the spontaneous formation of entrepreneurial teams. Perceived interdependence is linked to the salience of common interest and includes the notion of co-power – the idea that two or more agents have the causal capacity to bring about common target outcomes through joint action. Entrepreneurial discovery processes result from the dynamic interaction of opportunities and “entrepreneurial agents”. The upshot of this article is that a proper understanding of these processes requires us to expand our notion of opportunities to include scope for common not just personal gain, and to broaden our conception of entrepreneurial agency to include teams, not just enterprising individuals. 2. Introduction The entrepreneurial function need not be embodied in a physical person and in particular in a single physical person. Every social environment has its own ways of filling the entrepreneurial function. (Schumpeter, 1965: 51) Recent business research has paid increasing attention to team entrepreneurship (for a good summary, see Cooney, 2005). Entrepreneurial teams are identified as an “omnipresent phenomenon” in modern economies and touted to be “the superior entrepreneurial start-up concept” (Lechler, 2001: 263–4). They are regarded as the major catalyst of new venture creation. “Entrepreneurial teams are responsible for many (or perhaps most) of the major start-ups today” (Kamm et al., 1990: 7–8). Similarly, Cooper and Daily (1997: 144) suggest that “entrepreneurial teams are at the heart of any new venture”. In addition, several studies claim that firms founded by entrepreneurial teams are more likely to survive and to achieve faster growth than ventures started by individual entrepreneurs (Cooper and Bruno, 1977; Bird, 1989; Roberts, 1991; Eisenhardt and Schoonhoven, 1990). This emerging empirical evidence is at odds with the conceptual framework underlying most entrepreneurship research. This framework tends to locate entrepreneurial agency solely within single enterprising individuals. For example, Shane and Venkataraman (2000) define the field of entrepreneurship research to include the study of the individuals who discover, evaluate and exploit opportunities. According to their framework, an adequate explanation of entrepreneurial behavior must recognize the nexus of two phenomena: “the presence of lucrative opportunities and the presence of enterprising individuals” (2000: 218; emphasis added).1 The focus is upon individual differences in knowledge, alertness and creativity. The presumption is that these differences strongly influence the discovery and exploitation of profit opportunities (Venkataraman, 1997: 124). This individualistic emphasis is shared by the leading economic theories of entrepreneurship (Casson, 1982; Kirzner, 1973, 1979, 1992; Schumpeter, 1934). Indeed, these theories also provide the major economic foundations for the field of entrepreneurship research. Since team entrepreneurship is not part of their concern, all of these theories take the individual as the basic unit of analysis and presuppose that entrepreneurial agency is vested in individuals only. The individual entrepreneur is the personification or embodiment of a particular economic function. Schumpeter's original theory develops the notion of the entrepreneur as a “lone hero” with exceptional creative ability, who overcomes all barriers to innovation in order to bring discontinuous “new combinations” to

1 To be fair to Shane and Venkataraman (2000), they do concede in a footnote that entrepreneurship need not be undertaken by a single individual but can be performed by “a set of people who undertake the steps of the process collectively” (2000: 219; emphasis added). However, they do not integrate this insight into the rest of their analysis.

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Table 1 Units of agency and their entrepreneurial content in economic theories Entrepreneurial character Unit of agency

Non-entrepreneurial

Entrepreneurial

Individual

Standard game theory Standard decision theory

Economic theories of entrepreneurship (Casson, 1982; Kirzner, 1973, 1979, 2000; Schumpeter 1934)

Team

Economic theories of teams (Marschak and Radner, 1972; Holmstrom, 1982)

?

fruition. The Schumpeterian entrepreneur is a solitary figure endowed with pioneering vision, imaginative foresight and extraordinary leadership skills.2 Moreover, Casson (1982: 23) goes even further in excluding entrepreneurial teams by explicitly requiring that the entrepreneur is someone, a person, not a team, a committee or an organization. The rationale given for this individualistic focus is that only individuals can take judgmental (i.e. entrepreneurial) decisions about the coordination of scarce resources. Individuals in committees can make strategic decisions, and these decisions can be entrepreneurial, but not the decision of the committee as a whole, which can only arrive at decisions by aggregating votes. Indeed, Casson urges us not to assume that membership of an entrepreneurial team is so cohesive that the team has a “will of its own”. From this perspective, “team entrepreneurship” is simply irrational, epiphenomenal or an impossibility. Though less explicit than Casson, Kirzner too suggests that entrepreneurial discovery tends to be an individualistic phenomenon. Entrepreneurs are the more alert individuals who are the first to spot what other people have missed: opportunities for gain that, like “ten dollar bills lying on the sidewalk”, are waiting to be snapped up. Although he does not deny the existence of teams in general, Kirzner maintains that social groups and teams do not make decisions or make entrepreneurial discoveries.3 Alertness is an individual's propensity to notice previously overlooked profit opportunities without deliberate search or a prior intention to acquire information. It is a state of mind associated with cognitive readiness. Because alertness is portrayed as a non-social, singular property of individual minds, the discovery of a profit opportunity is a singular (i.e. nonjoint or noncollective) act that occurs in the head of an individual entrepreneur.4 In the original formulation of Kirzner's theory (1973, 1979), the perception of a profit opportunity is a homogeneous event, “an instantaneous gestalt”, that cannot be broken down into parts. For any particular opportunity, there can be no social subdivision of entrepreneurial activities akin to the division of labor because discovery is entirely unplanned and spontaneous. Two people cannot each intend that they work together to discover one and the same arbitrage opportunity because to have such an intention presupposes that they already know what it is that they are setting out to discover so that their planned actions are superfluous. However, extensions of Kirzner's theory (e.g. Sautet, 2000; Harper, 2003) suggest that there is some scope for generalizing Kirzner's conception in order to examine the actions of interdependent members of entrepreneurial teams, and Section 5 of this article builds on these insights. In summary, the leading economic theories of entrepreneurship tend to locate the entrepreneurial function within a single person. They thus reflect the standard conception in economics of the decision-maker as an atomistic individual and the conventional view that group behavior must always be reduced to the preferences, beliefs and actions of rational individuals. Table 1 highlights the gap in existing theory.

2 In later years, Schumpeter (1947, 1950) departed from this view and claimed that the entrepreneurial function may in fact be performed collectively — for example, by departments of large corporate organizations which specialize in innovation: “With the development of the largestscale corporations … aptitudes that no single individual combines can thus be built into a corporate personality” (1965: 53). In particular, the entrepreneurial function is allocated between professional managers and teams of research technicians (Schumpeter, 1950: 132). 3 Personal communication with Israel Kirzner, April 24, 2006. 4 For alternative approaches to the mind that extend cognitive processes out into the environment beyond the individual, see Clark and Chalmers (1998), Harré and Gillett (1994) and Hutchins (1995).

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2.1. Objectives of this article This article examines the role of teams in processes of entrepreneurial discovery. It investigates how realizing creative ideas can require joint entrepreneurial actions over time that transform resources into end-products. More specifically, it addresses two sets of questions related to the existence of entrepreneurial teams and their formation: 1. What are the implications of economic theory for the existence of entrepreneurial teams and the possibility of genuinely team-based entrepreneurship? Can two or more people acting as an entrepreneurial team discover profit opportunities jointly, and if so, what are the defining characteristics of such a team? Alternatively, are entrepreneurial opportunities only ever discovered by a single individual, with the exploitation of opportunities possibly delegated to managers, employees and other agents recruited by the lead entrepreneur? 2. If entrepreneurial teams do exist, how do they form? What conditions are conducive to joint entrepreneurial discovery and the emergence of teams? What is the relationship between the nature of profit opportunities and entrepreneurial teams? What differentiates the opportunities that engender team entrepreneurship? These questions are not only important in their own right. In particular, an analysis of entrepreneurial teams bears closely on the nature of entrepreneurship itself. It prompts us to generalize our conception of entrepreneurial discovery and to embrace a more dynamic notion of entrepreneurial knowledge and learning. It challenges the separation of the context of entrepreneurial discovery from the context of evaluation of new ideas. It also questions the assumption that opportunities exist fully formed, independent of the cognitive frames that people hold. The perspective in this article draws upon economic theories of entrepreneurship (Kirzner, 1973; Harper, 1996), game-theoretic ideas in the theory of “interactive team reasoning” (Bacharach, 2006) and the theory of joint action (Bratman, 1999). It presents some groundwork for an approach that allows entrepreneurial agency to be vested in entrepreneurial teams and not just enterprising individuals. It provides a starting point for analyzing why, when and how team-based modes of discovery, reasoning and action take place to spot and seize opportunities. The next section develops a generalized conception of entrepreneurial discovery as a dynamic problem-solving process. This notion of entrepreneurship applies equally well to operations that take place inside or outside the minds and bodies of individual persons. Section 4 grapples with the issue of what is an entrepreneurial team. It also considers the conditions that are conducive to the spontaneous formation of entrepreneurial teams. Section 5 presents a taxonomy of teams that puts entrepreneurial teams in a wider spectrum of economic groupings. 3. Generalized entrepreneurial discovery How we define entrepreneurship has a bearing upon the nature of the entity that performs the entrepreneurial function. We need a concept of entrepreneurship that is impartial with respect to alternative potential units of human agency (i.e. individuals and teams). We seek an agent-neutral definition of entrepreneurship. In particular, we should avoid defining entrepreneurship in a way that excludes the possibility of one or other locus of decision-making or that is heavily skewed in favor of individual or team entrepreneurship. We also need a definition of entrepreneurship (and of teams) that is institution-neutral in the sense that it does not presuppose that entrepreneurs set up a particular type of governance structure for organizing their transactions, such as a new firm.5 At the most basic level, entrepreneurship involves the discovery and creation of new ends-means frameworks rather than the allocation of given (and known) means in the pursuit of given (and known) ends. Entrepreneurship involves the discovery of which new ends to pursue and the discovery of which new means are available. It is the polar opposite of standard optimization within a presupposed ends-means framework, where the optimal solution is determined

5 In developing an “institution-neutral” conception of entrepreneurial teams, we must make it clear that we are not suggesting that team entrepreneurship is independent of its institutional context. Teams do not operate in an institutional vacuum. A concept of teams that is institutionalneutral is not institution-free. We are merely arguing for a broader conception of entrepreneurial teams that is not wedded to de novo start-ups as the sole organizational means for realizing entrepreneurial ends. We wish to acknowledge that entrepreneurial teams can realize their ambitions through a wide range of governance structures, including bilateral contracts and hybrid organizational forms. The set of governance structures in any period is to some extent determined by cultural values, social norms and the current state of organizational technology. I thank an anonymous reviewer for demanding clarity on this point.

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uniquely by objective situational characteristics. Entrepreneurial choice is not the automatic, routine application of standard rules; it is non-deterministic, non-algorithmic decision-making. Consequently, for our purposes, we will adopt a very broad conception of entrepreneurial discovery. We define entrepreneurial discovery as a profit-seeking problem-solving process that takes place in real time and under conditions of structural uncertainty. (By structural uncertainty, we mean that the entrepreneur is partially ignorant about possible alternatives and their consequences. See Section 4.1.1) Generalized entrepreneurial discovery involves the exercise of imagination and critical judgment in identifying problems (opportunities) and in generating and evaluating trial solutions (Harper, 1996). “Entrepreneurship must be understood as an active process of experimentation in time. It is an application of creative intelligence to the material world” (Vaughn, 1990: 25). According to this perspective, the unit of entrepreneurial agency that discovers profit opportunities does not have to be formed, structured or bounded in a particular given way. Entrepreneurial problem-solving is not confined to mental activities internal to a single individual. In particular, the relevant unit of agency could be a group of individuals in interaction with one another, so that the discovery of particular profit opportunities can be a socially distributed process. By forming groups, entrepreneurs can productively embed themselves in social structures in which they can jointly develop and test out new ideas. That is, entrepreneurial discovery can be the social result of joint conjecture and mutual evaluation by members of an entrepreneurial team. The boundaries of entrepreneurial agency may therefore extend beyond those of skin and skull. “The computational circuitry of human cognition flows both within and beyond the head, through the extended network in ways which radically transform the space of human thought and reason” (Clark, 2001: 134). By forming a team, entrepreneurs can create a socially extended cognitive nexus whose computational and problem-solving features are distinct from those of its members. Finally, the dominant approach in entrepreneurial studies typically equates entrepreneurship with the creation of new firms. In contrast, the more general perspective advocated here sees the firm as just one among several alternative governance structures for organizing economic transactions. The firm is just one institutional arrangement for coordinating entrepreneurial problem-solving. (In this sense, the generalized conception of entrepreneurial discovery is “institution-neutral” as defined above.) An entrepreneurial discovery may merely entail separate one-off arbitrage transactions that do not involve a de novo startup. Starting a firm is neither a necessary nor a sufficient condition for entrepreneurial problem-solving. Of course, entrepreneurship might include the creation of new business organizations (including the merger of existing firms), but this is not a defining or essential characteristic of this phenomenon. 4. The concept of an entrepreneurial team, and favoring conditions As discussed previously, the other building block in a theory of teams is to develop a broad definition of an entrepreneurial team and one that is consistent with our conception of entrepreneurship as a problem-solving process. There is a substantial diversity of opinion as to what constitutes an entrepreneurial team in the entrepreneurship literature (Cooney, 2005). For our purposes, and building upon Bacharach (2005), we define an entrepreneurial team as a group of entrepreneurs with a common goal which can only be achieved by appropriate combinations of individual entrepreneurial actions. For the moment we will leave open the question of what constitutes a common goal and what is an appropriate combination. This definition is very wide. It is institution-neutral. As the definition stands, it also does not preclude the possibility of ephemeral entrepreneurial teams that might form to discover and exploit one-off arbitrage opportunities. Our definition of entrepreneurial team is broader than those found in the business literature. The latter tend to impose several additional criteria above and beyond the possession of a common goal. For example, one of the most common definitions is that an entrepreneurial team is “two or more individuals who jointly establish a business in which they have an equity (financial) interest [and who] … are present during the pre start-up phase of the firm” (Kamm et al., 1990: 7). As does most of the business literature, Kamm et al. are assuming that team entrepreneurship – and entrepreneurship more generally – occurs through de novo startups. It is tied to new venture creation and hence was not intended to meet our criterion of institution-neutrality. 4.1. Conditions conducive to the formation of entrepreneurial teams In this section, we draw upon Bacharach (2006) and market-process theory in order to examine the conditions that are conducive to joint entrepreneurial action and the formation of entrepreneurial teams. These conditions are best

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defined in terms of the dimensions of the problem situation that require team entrepreneurship. It is argued that bounded structural uncertainty and perceived common interest giving rise to strong interdependence are jointly necessary for the spontaneous formation of entrepreneurial teams. 4.1.1. Bounded structural uncertainty In all joint entrepreneurial action, as in all discovery processes, there is structural uncertainty (Langlois, 1984; Shackle, 1955). When two or more entrepreneurs decide to commit resources to a joint problem-solving endeavor, they cannot know for certain what will be the market exchange value of the output (i.e. the joint end-product of their joint actions) at the future time period when it will be available for sale. The common and individual gains (profits) that entrepreneurs expect to capture by acting with others are hypothetical only. Their knowledge of profit opportunities is at best tentative and open to refutation. Entrepreneurs can never know precisely and for certain the structure of future events. They can only ever have theories of what consumer preferences are, together with conjectures about what new uses for an input are possible and what new technologies might achieve (Harper, 1996). Consequently, entrepreneurs acting as a team may make mistakes and losses. However, the structural uncertainty that entrepreneurs face must also be bounded. Informal social norms, systems of property rights and contracts and other institutional factors impose constraints upon the range and variety of economic events that can take place. The result is that uncertainty must be enclosed between the two extremes of pure randomness (i.e. perfect chance) and perfect determinism (Loasby, 1976; Shackle, 1969). There is thus a “window” of structural uncertainty that is conducive to entrepreneurship. Above a certain threshold, markets events would be so random that entrepreneurial choice would be purposeless and ineffectual. Below a certain threshold, agents would know the structure of the future in advance, so that decision-making would be empty and illusory. Their “initiative” would be limited to calculating the expected value (i.e. probability weighted-average) of each choice in a stable population of actions. An environment characterized by such calculable risks offers no scope for entrepreneurial discovery of new opportunities, and by implication, no scope for team entrepreneurship. The distinction between risk and structural uncertainty has been treated extensively in the entrepreneurship literature and need not be elaborated further here (see, for example, Knight, 1964). 4.1.2. Degree of game harmony The next set of conditions conducive to team entrepreneurship relates to the features of interactive decision situations (i.e. games). We hypothesize that the endogenous (i.e. spontaneous) formation of entrepreneurial teams will depend on the particular structure of the game that individual entrepreneurs perceive themselves to face. Among other things, endogenous team formation will depend on the perceived degree of “game harmony” — how harmonious or conflictual are the interests of players, as embodied in their payoffs of the game (Zizzo and Tan, 2003). For example, in a zero-sum game, epitomized by Chess or Matching Pennies,6 the gain of one player means the equivalent loss by the other, so there is a perfect disharmony of interests. The players have exactly opposed preferences over strategy-pairs. There is zero degree of common interest, and game harmony is at its minimum value. Hence, in a zero-sum game, there is no scope for common gain and no scope for team entrepreneurship — they cannot act as a team because there is nothing for them to cooperate about. However, for many games with certain features, entrepreneurs will tend spontaneously to frame the decision situation in a way that involves re-identifying themselves as members of a team. This framing will then have significant effects on entrepreneurial discovery, reasoning and action and the extent of entrepreneurial cooperation in problemsolving. 4.1.3. Common interest Following Bacharach (2006: 81–86), we start by defining common interest and outline the situations in which it arises. Two entrepreneurs, A and B, have a common interest in one possible state of affairs, s⁎, over another state, s, if they each see that they each prefer s⁎ to s. It should be noted that A and B can have a common interest even if they also have some conflicting interests, as in all “mixed-motive” games. If the entrepreneurs have a common interest in s⁎ over

In a game of Matching Pennies, two players simultaneously and independently choose “Heads” or “Tails” by each tossing a penny. If their strategies match, then player 2 must give his penny to the other, otherwise player 1 gives his penny to player 2. 6

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s, they will face one of four types of situation which differ in the degree to which they can severally or jointly influence the state of the world: 1. Common fate: neither A nor B has any influence at all over the state. There are no actions relevant to their common interest so that the entrepreneurs do not face a decision situation. They have no capacity to cause the preferred state s⁎. They will either both make profits or both make losses, but whatever happens is beyond their control. 2. Each entrepreneur can bring about s⁎ or s independently of how the other acts. There is no strategic interaction (no game of strategy). They can act without any thought to what the other is doing. They can behave as if the other's actions were given (i.e. parameterized). This case does not induce the entrepreneurs to identify themselves as members of an entrepreneurial team. 3. Only one of the two entrepreneurs can bring about s⁎. As in Case 2, there is no priming of team identification. 4. A and B can jointly bring about s⁎ but only by an appropriate combination of actions – by each acting in a particular way. The common target outcome can only be achieved together. 4.1.4. Strong interdependence Case 4 is the type of decision situation that may spontaneously generate an entrepreneurial team. In this situation, both entrepreneurs perceive that they are strongly interdependent. According to Bacharach, strong interdependence has two elements: “co-power” and a lack of assurance that individualistic decision-making will deliver s⁎. The two entrepreneurs in Case 4 have co-power for s⁎ over s. Bacharach does not elaborate on what he means by co-power. We define it as the power to cause particular events through joint action. Having co-power means that each player perceives that together, through an appropriate combination of actions, they can bring about the common target outcome (i.e. the preferred state s⁎). Co-power for s⁎ presupposes (i) that s⁎ is contingent upon a particular joint action of A and B and (ii) that the team members together are able to produce that very joint action (and their relevant part of it). The second element of strong interdependence means that both players perceive that they will do well only if the other chooses an action that does not seem guaranteed by individualistic rational decision-making. Strong interdependence is a feature of a game if entrepreneurs thinking as rational individuals might fail to realize a common interest. Rational choices of individuals may generate an outcome (Nash equilibrium) that is “Pareto-dominated” by the outcome of some other feasible strategy profile.7 That is, there is another outcome in which all could do better, and no one would be worse off. 4.1.5. Some predictions We are now in a position to state Bacharach's interdependence hypothesis: Other things being equal, if entrepreneurs perceive that their decision situation exhibits strong interdependence (which includes co-power and presupposes common interest), they will be primed to identify themselves as team members (to “team-identify”) and to adopt a “we-frame” in entrepreneurial problem-solving. Thus, how entrepreneurs perceive their decision situations is crucial to team identification and the spontaneous formation of teams: “Something in the situation prompts the parties to see that they have action possibilities which provide joint agency possibilities which have possible outcomes of common interest…. Some actions only get conceived if one gets the idea of certain possible outcomes, and conversely” (Bacharach, 2006: 165–166). In particular, following Bacharach's logic, we predict that the opportunities for team entrepreneurship are likely to be most salient in decision situations that share features with Hi-Lo games (or Pareto coordination games). These opportunities (i.e. scope for common gain) are likely to be less salient in Stag Hunt games and still less in Prisoners' Dilemma games.8 The greater the Pareto-optimal payoff in a common-interest game, the more salient will be the scope for common gain, and the more likely it is that entrepreneurs will recognize the opportunity for joint action. Some profit opportunities can only be discovered and exploited if entrepreneurs combine with others in the pursuit of common goals. This is what differentiates opportunities for team entrepreneurship from other sorts of opportunities. Bacharach (2006: 85) gives this hypothesis explicit game-theoretic form. A game G exhibits interdependence if: for some sets of states, S, S⁎, the players have common interest in, and co-power for, S⁎ over S, and the outcomes in S are contained in the solution set of G in standard game theory. 8 The defining features of these games are explained in any elementary game-theory text. See, for example, Watson (2002). 7

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In contrast to conventional game theory, we reject the prediction that rational entrepreneurs facing Prisoner's Dilemma situations will always choose the strategy “Defect” (i.e. decide not to cooperate). Rather, because a Prisoner's Dilemma game can be framed in alternative ways, “players might see only, or most powerfully, the feature of common interest and reciprocal dependence which lie in the payoffs on the main diagonal [of the payoff matrix]” (Bacharach, 2006: 86). In such cases, two entrepreneurs, E1 and E2, might frame the game as a problem “for us” as a team (i.e. T = {E1, E2}) and might conclude that “the profile of actions that is best for us is not in fact bDefect, DefectN”. Indeed, if there is a sufficiently high likelihood that any enterprising person who confronts the relevant structure of opportunities (as implied by disequilibrium prices) will come to frame the situation as an opportunity “for us” (i.e. will adopt the “weframe”), then the two entrepreneurs might conclude that the best pair of actions for them as a two-player group will be bCooperate, CooperateN (Bacharach, 2006: 171). This result is broadly consistent with a wide-ranging analysis of 35 years of empirical evidence which suggests that just under half (47.4%) of the players in one-off, anonymous Prisoner's Dilemma experiments with monetary stakes will actually choose the strategy “Cooperate” (Sally, 1995). It should be noted that although the perception of strong interdependence in a strategic interaction can prompt entrepreneurs to team-identify, we are not claiming that games with this property always cause entrepreneurs to identify themselves as members of a team. Other perceptions of the entrepreneurs might diminish the stimulus to team identification. In addition, the formation of entrepreneurial teams does not have to be endogenously caused by the features of the decision situation. Entrepreneurs' group-identities and the unit of entrepreneurial agency could in fact be quite exogenous to the decision situation entrepreneurs are in (Bacharach, 2006: 150). In particular, co-membership of an existing cultural group may cause entrepreneurs to team-identify and set up a team. For example, Harper (2003) argues that the dominant notion of selfhood in a culture determines the definition, structure and boundaries of the entities that discover profit opportunities in that culture. In an individualist culture, the most common locus of alertness is the independent, autonomous entrepreneur. In contrast, the primary units of alertness in a group-oriented culture are interdependent members of an entrepreneurial team (in-group). In sum, we argue that scope for team entrepreneurship is promoted by bounded structural uncertainty and common interest arising from strong interdependence. Within a given window of structural uncertainty, the greater the degree of interdependence perceived, the more likely it is that agents will team-identify and spontaneously form teams. 5. A taxonomy of teams Entrepreneurial teams can differ in terms of their size, how the team members are arranged within the team (e.g. degree of hierarchy), how authority to make judgmental decisions on the coordination of scarce resources is distributed within the team, and in terms of their communication pathways (i.e. who communicates what with whom and when). In the following, we consider the basic architectures of some simple types of teams, beginning with teams that are not entrepreneurial. We indicate how different teams handle problems of knowledge coordination and cognitive coherence. To simplify the analysis, we focus upon “entrepreneurial dyads” that involve only a pair of participating agents rather than complex economic institutions (such as companies, formal legal partnerships). Another limitation is that we focus solely upon voluntary teams. We start by distinguishing an entrepreneurial team from teams which are absolutely lacking in entrepreneurial qualities. 5.1. Robbinsian (or economizing) teams Robbinsian (purely economizing) teams are the polar opposite of entrepreneurial teams. The team members are limited to economizing in the allocation of given means to achieve a set of given ends. The set of agents, T, is {R1, R2}, where R1 and R2 refer to Robbinsian economizers. The decisions of team members do not involve any entrepreneurial element whatsoever. Their members do not exhibit one iota of entrepreneurial imagination or alertness. The endsmeans framework is given to each team member and is known with certainty. Team members' actions are purely routine, and the environment is stationary. Team members possess true and perfect knowledge of the relevant features of their problem situation. They do not encounter structural uncertainty because the situations that they encounter exclude all elements of surprise and novelty. The problem situation is automatically known by or given to the team members, so that the problem does not need to be discovered, structured or defined by them. The ends between which the team members can select and the criteria of selection are given, and the means to achieve each end are also known.

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This description accords with the problem situation of agents in Marschak and Radner's (1972) economic theory of teams. Each member of a Marschak–Radner team has perfect probabilistic knowledge of the environment, and they are each equipped with efficient decision rules that enable them to respond optimally to every possible observation that they may make. As a result, team members do not face problems in deciding what to do (i.e. the choice of ends) and how to do it (i.e. the choice of means). They are able to react to their situations instantaneously, and their responses are immune from the hazards of error. In addition, because team members have identical beliefs and common interests (so there is a single utility function for the whole team), there is no incentive problem. Individual team members do not require any special incentives to induce them to implement the decisions prescribed by the optimal team decision rules. 5.2. Singleton entrepreneurial teams The set T of agents contains one element and that element is a lone entrepreneur (E1) who acts independently in discovering profit opportunities. Hence, T = {E1}. The entrepreneur identifies with the one-person group that contains only himself. The entrepreneur reasons as an individual and makes his discoveries independently. He may act without any consideration of what others are doing or choose his actions in strategic awareness of how others' actions might interact with his own. Although T contains only one member E1, E1 may also be a set of more elementary components. As an extension of theories of dynamic choice (i.e. sequential decision-making over time) and the theory of team reasoning, we could portray the lone entrepreneur as a team of distinct transient agents (see Ainslie, 1992; Bacharach, 2006: 88–89, 191– 196). Each transient agent exists in a different time period and controls the lone entrepreneur's decision variables in that period. Hence, E1 = {e1, e2, e3, e4 …} where et is the transient agent in period t (i.e. the lone entrepreneur at time t). Each transient agent (dated subperson) bases its decisions on different prior knowledge and information. Each transient agent in the sequence conceives itself as a member of the team that is the temporally extended lone entrepreneur. The actions which transient agents take in different periods are components of larger plans that extend over time. The transient agent at time t must be alert to see that its actions mesh with those of other temporary agents at other times if the entrepreneur's overall plan is to succeed. Klein (1999) also applies the idea of a multiplicity of agents within an individual entrepreneur. He argues that there is a shallower agent that calls itself “I” and other agents at the “deep level of mind” who make entrepreneurial “epiphanies” which they convey to the shallower agent. “Entrepreneurial insight is essentially a conveyance of knowledge between two internal agents [inside the mind] that are like teammates” (p.64). 5.3. Hybrid entrepreneurial-economizing teams The set of agents contains at least one entrepreneur and at least one Robbinsian economizer (e.g. manager, resource owner). Hence, T = {E1, R1}. The entrepreneur discovers the ends-means framework within which the nonentrepreneurial Robbinsian agent economizes. The Robbinsian agent may be a manager — an agent who supervises the ongoing efficiency of the processes of production and exchange that are initiated by the entrepreneur. The standard neoclassical theory of the firm adequately describes the managerial function and the optimizing decisions that a manager makes. The manager is the individual who equates marginal costs to marginal benefits in a routine (though not necessarily static) manner. The Robbinsian agent may also be a resource supplier (capital owner, an employee). The nature of hybrid teams has been well analyzed by Witt (1987). The hybrid team and employment contracts form the contractual basis for simple firms. The entrepreneur creates a “framing market transaction” leading to a long-term employment relation. The entrepreneur E1 hires an agent R1 who agrees to supply his labor services. R1 surrenders his freedom of interaction (regarding his labor services) with other agents for the duration of the employment contract. “Usually there is an agent who, because of his creativity and innovativeness, or his access to funds, pays more than other agents would earn after paying him. That agent is able to pay the other agents to renounce their own innovativeness” (p.191). Differences in innovativeness determine who is the entrepreneur and who is the employee in the employment relation. The entrepreneurs are those who can successfully inspire others to follow their business conceptions while the non-entrepreneurial employees are those who become inspired to follow others. The concept of the hybrid team can also be extended to the dynamic case where the Robbinsian agent is the entrepreneur at a different point in time acting in a different capacity (e.g. as a capitalist or supplier of labor services to himself). The real-world entrepreneur is a single temporally extended person who is often also a manager, leader,

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capitalist and organizer. (Kirzner too believes it justifiable to consider an individual who performs both entrepreneurship and another economic function to be two separate decision-makers.) If, as a result of earlier entrepreneurial decisions, an entrepreneur becomes a resource-owner, the entrepreneur can be conceived as purchasing these inputs from himself. 5.4. Nested entrepreneurial teams The set of agents contains at least two entrepreneurs, a lead entrepreneur (E1) and at least one subentrepreneur (S1). Hence, T = {E1, S1}. The lead entrepreneur is the key person who is the “spark plug of the team and who makes it function effectively” (Waite, 1982: 122). The lead entrepreneur is the person in whose mind all of the major elements of the opportunity come together (Shaver and Scott, 1991: 39). The entrepreneur may also recruit the subentrepreneur.9 The existence of a lead entrepreneur is supported in several empirical studies (Ensley et al., 1999; Ensley et al., 2000; Timmons, 1994). The nested entrepreneurial team applies hierarchical principles of direction and subordination. It reflects the view that entrepreneurial problem-solving can be subject to specialization. The lead entrepreneur creates and propagates an overarching business conception or vision for the team. He communicates and imposes a new overarching ends-means framework that serves to fix the parameters within which the subentrepreneur discovers and exploits localized opportunities. The subentrepreneur may apply differential prior knowledge and specialized problem-solving skills not shared by others. The lead entrepreneur does not necessarily possess superior market knowledge or business skills. What the lead entrepreneur possesses is rather a keener sense for discovering what is around the corner (Kirzner, 1984: 3). The lead entrepreneur displays superior creative intelligence and a stronger strategic vision than do other members of the team. His superior ability to see what is not there – to imagine how to change the environment to create profit opportunities – is what sets him apart (Ensley et al., 2000). It is also possible that the subentrepreneur could not discover the localized opportunities in the absence of the lead entrepreneur's overarching vision, so that the discovery processes of the former are strongly dependent upon those of the latter. Analyses of economic hierarchies typically emphasize the internal structure of formal communications — who communicates what with whom (Sah and Stiglitz, 1986). However, informal communication processes within nested entrepreneurial teams are equally if not more important. In a nested team, the lead entrepreneur's business conception is always exposed to displacement by competing cognitive frames. In order to foster and maintain cognitive coherence among the subentrepreneurs, the lead entrepreneur must shape informal communications and interactions within the entrepreneurial team so as to promote the propagation of his overarching business conception. This requires a capacity for “cognitive leadership” — the ability to shape “cognitive commonalities” within the team. It is the ability to mold other team members' perceptions of ends-means frameworks in such a way that the lead entrepreneur's vision becomes a common goal in team decision-making and a collective framework for interpreting market events (Witt, 1998: 175). Cognitive leadership requires proficiency in rhetoric, persuasiveness, determination and credibility. Two final points should be considered. The first is that the nested entrepreneurial team forms the institutional basis for what Sautet (2000) calls the “complex firm”. Second, the nested team can also be extended to include the dynamic case where an entrepreneur in one period develops a general vision to pursue an opportunity and then acts as his own subentrepreneur in subsequent periods. The subentrepreneurs fill out the concrete details of the general vision with specific action plans as the venture unfolds. 5.5. Emergent entrepreneurial teams As discussed above, nested entrepreneurial teams entail a subdivision of entrepreneurship that by design resembles Chinese boxes: the subconceptions and localized discoveries of subentrepreneurs fit neatly into the larger business conception that the lead entrepreneur is propagating. In contrast, in emergent entrepreneurial teams, the set of agents contains at least two entrepreneurs but they see themselves as team members on a par with each other, so that no 9 “The alertness of the entrepreneur is the abstract, very general and rarefied kind of knowledge which we must ultimately credit with discovering and exploiting the opportunities specifically unearthed by those whom [the entrepreneur] has been wise enough to hire, directly and indirectly” (Kirzner, 1973: 69).

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entrepreneur qualifies as taking the “lead”, and by implication, no one in the team is a subentrepreneur. Hence, T = {E1, E2}. Team members are on an equal footing in the joint enterprise. The founders of the Google internet search engine, Sergey Brin and Larry Page, exemplify this kind of entrepreneurial team. The notion of the emergent entrepreneurial team captures the idea that entrepreneurs can act jointly to make single discoveries of a particular opportunity. They collaborate in joint acts of discovery. The members of emergent teams jointly discover and exploit opportunities that could not be unearthed by each operating alone in an independent venture. The emergent entrepreneurial team is a social group with an internal subdivision of entrepreneurial problemsolving that fosters a common goal (namely the shared business conception) which the entrepreneurs cannot realize by themselves. Team members depend on one another for having the capacity to identify and solve a range of entrepreneurial problems. This type of team epitomizes entrepreneurial discovery as an integrated, socially distributed process. It illustrates how entrepreneurial discovery can be the social result of joint conjecture and mutual evaluation of creative ideas. An emergent entrepreneurial team is not just a mereological sum of individuals — it amounts to something over and above its individual members. Emergent entrepreneurial teams may vary along a number of dimensions. They may be very short-lived products of economic circumstances, coming together spontaneously for a one-off arbitrage transaction in a single time period, or these teams may persist over long stretches of time. The members of emergent teams may coordinate their actions without communicating with one another by working out privately their part in the best team plan (like partners in a game of bridge), or their joint actions may involve thick and detailed patterns of communication between team members. Members of emergent teams may act with a high degree of awareness of their strategic interdependence or, in the limit, emergent teams might conceivably arise from agents acting without any conscious intention to cooperate. Emergent entrepreneurial teams that maintain interactions over time have special properties that distinguish them from “pre-packaged” forms of cooperation in which roles are fully and perfectly determined ahead of time. In particular, a well-functioning emergent team that endures over time requires a high degree of improvised coordination and mutual responsiveness if unanticipated problems arise. From Bratman's (1999) perspective, the members of the team each intend to play their part in the joint act of discovery because they each believe that the other intends to play his part, and this is common knowledge between them. Like a jazz musician, each entrepreneur attempts to adjust his actions so that they mesh with the other's, believing that the other is attempting to do the same, and each responds to another's initiatives with rapid revisions of his own part of the joint action (cf. Schelling, 1960: 84–85). Team members co-tune their conceptualizations so that they have a common understanding of the world. In a small team of entrepreneurial peers, the more frequently, extensively and openly team members communicate and interact with one another, the more likely will team members spontaneously come to share a common entrepreneurial vision which guides their problem-solving. In order to coordinate their problem solving, the team members do not need to have complete knowledge of each other's subplans in all their unique details. Pattern coordination at a general level is sufficient (O'Driscoll and Rizzo, 1996). As well as being mutually responsive, the members of emergent teams provide mutual practical support to one another in the joint accomplishment of their common goal (Lechler, 2001). Entrepreneurial joint action can be sustained over time only if participants think of themselves as members of a team and refrain from constantly assessing whether every joint initiative is in accord with their own individual preferences. This is not inconsistent with rationality (Pettit and Schweikard, 2006: 26). If we suppose that individual entrepreneurs can each capture significant net benefits from acting together, and if these net benefits can only be obtained by temporarily suspending case-by-case calculation of personal returns from joint action, then it is rational for the individual entrepreneur to form and maintain those joint actions without constant surveillance of the personal gains. However, it is still rational for entrepreneurs to be on the alert for any warning signs that the joint action might be hurting their own interests. They will also be on the look out for defection by unreliable or incompetent team members who stop playing their part in the join action and fail to fulfill their obligations. Bacharach's (2006) notion of “circumspect team reasoning” takes into account the possibility that other players might be maintaining a first-person singular focus (i.e. an “I-frame”) rather than thinking of themselves as team members (i.e. a “we-frame”). 6. General insights and conclusions Some time ago, Gartner et al. (1994: 6) reported that “‘the entrepreneur’ in entrepreneurship is more likely to be plural, rather than singular. The locus of entrepreneurial activity often resides not in one person, but in many”.

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Although there has been ongoing empirical work over the years, it is surprising that so little progress has been made in developing a comprehensive theory of entrepreneurial teams. This article has attempted a modest synthesis of economic ideas in the pursuit of a better understanding of how entrepreneurial teams contribute to the discovery, evaluation and exploitation of profit opportunities. To this end, it recommends adopting: a broader conception of entrepreneurial discovery that emphasizes problem-solving over time; a more general definition of entrepreneurial teams that is not tied solely to new venture creation; and a conception of entrepreneurial opportunity that recognizes scope for common gains and joint action possibilities. The generalized entrepreneurial perspective offered in this article lays the foundations for explaining how teambased modes of discovery operate to spot and exploit profit opportunities. In the first instance, it provides us with a more fine-grained classification scheme for describing observable groups in the business world and for distinguishing entrepreneurial from non-entrepreneurial teams. It also directs our attention to empirical parameters that distinguish different types of entrepreneurial teams in terms of their basic architecture, degree of hierarchy and mechanisms for coordinating knowledge and specialist judgmental decisions. In line with this classification scheme, we differentiate between singleton entrepreneurial teams, hybrid teams, nested entrepreneurial teams and emergent entrepreneurial teams. Two major insights of the generalized discovery perspective are that (i) the unit of entrepreneurial agency is not structured or bounded in a particular fixed way, and that (ii) some profit opportunities can only be discovered and exploited if entrepreneurs combine with others in the pursuit of common goals. In contrast to previous approaches (e.g. Harper, 2003; Landa, 1991), we predict that the formation of entrepreneurial teams can be endogenously caused by the features of the strategic situation so that entrepreneurial teams are not necessarily exogenously determined by some extraneous factor, such as co-membership of an existing cultural or ethnic group. In particular, when entrepreneurs recognize that other players have common interests that can only be achieved by joint action, they tend to be primed to identify with that potential team of players (though group identification is never guaranteed). Opportunities for mutual gain thereby tend to induce entrepreneurs to mutually adjust the way that they frame situations of interaction (even in circumstances in which they have conflicting interests in other respects), and this re-framing can have the effect of transforming the unit of entrepreneurial agency (along the lines described by Bacharach, 2006). The implication is that an adequate explanation of entrepreneurial behavior will require more than examining the nexus of opportunities and exogenously given enterprising individuals. These general insights provide a basis for making preliminary predictions about the conditions that favor the emergence of entrepreneurial teams. This article predicts that the combination of bounded structural uncertainty and perceived common interest giving rise to strong interdependence is conducive to the endogenous formation of entrepreneurial teams. (Drawing upon Bacharach's game-theoretic approach, we give precise definition to what we mean by entrepreneurs perceiving a common interest and exhibiting strong interdependence.) Moreover, we predict that, within given bounds of structural uncertainty, the greater the degree of interdependence that two potential entrepreneurs perceive in their situation, the more likely it is that they will adopt a “we-frame” and spontaneously form a team. 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