Prior Knowledge and the Discovery of

Entrepreneurial Opportunities
Scott Shane
R.H. Smith School of Business, University of Maryland, College Park, Maryland 20742
[email protected]

T echnological innovations are usually thought to create business opportunities that are unequivocal
and readily apparent to any knowledgeable observer. Drawing on Austrian economics, this article
portrays the recognition of such opportunities as distinctive cognitive feats whose accomplishment is
conditioned by an entrepreneur’s prior experience and education. In-depth case studies demonstrate the
multiple opportunities that can arise from a single innovation.
Alan Meyer

Abstract ways of organizing; and entrepreneurship is central to this

Before technological change leads to new processes, products, process (Schumpeter 1934, p. 66). However, before tech-
markets, or ways of organizing, entrepreneurs must discover nological change results in this process of entrepreneurial
opportunities in which to exploit the new technology. To date, exploitation, entrepreneurs must discover opportunities in
research has not explained adequately why entrepreneurs dis- which to use the new technologies. Because opportunities
cover these opportunities, which creates several conceptual do not appear in a prepackaged form (Venkataraman
problems in the entrepreneurship literature. Drawing on Aus- 1997), this process of opportunity identification is far
trian economics, I argue that opportunity discovery is a function from trivial. In any given new technology, entrepreneurs
of the distribution of information in society (Hayek 1945).
could fail to identify any opportunities, or could identify
Through in-depth case studies of eight sets of entrepreneurs
who exploit a single MIT invention, I show that entrepreneurs
the wrong opportunities, making an explanation for the
discover opportunities related to the information that they al- discovery of opportunities an important part of the do-
ready possess. I use these findings to draw several implications main of entrepreneurship research.
that differ from those prevailing in the entrepreneurship litera- Unfortunately, most research on entrepreneurship in-
ture, including: (1) entrepreneurs do not always select between vestigates the entrepreneurial process after opportunities
alternative market opportunities for new technologies; (2) the have been discovered (Fiet 1996). Researchers typically
source of entrepreneurship lies in differences in information adopt this approach because they draw on neoclassical
about opportunities; (3) the results of prior studies of entrepre- economic or psychological theories that assume people
neurial exploitation may suffer from bias; and (4) individual will discover the same opportunities in a given techno-
differences influence the opportunities that people discover,
logical change (Khilstrom and Laffont 1979), or discover
how their entrepreneurial efforts are organized, and how the
government can influence this process.
opportunities that are uncorrelated with the attributes of
(Entrepreneurship; Austrian Economics; Discovery) the discoverers (Evans and Jovanovic 1989). Austrian
economics challenges the validity of these assumptions,
arguing that different people will discover different op-
portunities in a given technological change because they
possess different prior knowledge (Venkataraman 1997).
Because the accuracy of these assumptions has important
implications for the development of entrepreneurship the-
Introduction ory, I explore them in this article.
Technological change provides the basis for the creation Through in-depth case studies of entrepreneurs who ex-
of new processes, new products, new markets, and new ploit a single MIT invention, I show results that challenge

1047-7039/00/1104/0448/$05.00 ORGANIZATION SCIENCE, 䉷 2000 INFORMS

1526-5455 electronic ISSN Vol. 11, No. 4, July–August 2000, pp. 448–469
SCOTT SHANE Prior Knowledge and the Discovery of Entrepreneurial Opportunities

the core assumptions of neoclassical economic and psy- librium theories assume that (1) everyone can recognize
chological approaches to entrepreneurship. In particular, all entrepreneurial opportunities, and (2) fundamental at-
I show that (1) any given technological change will gen- tributes of people, rather than information about oppor-
erate a range of entrepreneurial opportunities that are not tunities, determine who becomes an entrepreneur.
obvious to all potential entrepreneurs; (2) entrepreneurs
can and will discover these opportunities without search- Psychological Theories
ing for them; and (3) any given entrepreneur will discover Psychologists (e.g., Begley and Boyd 1987, McClelland
only those opportunities related to his or her prior knowl- 1961) have proposed theories in which entrepreneurship
edge (Venkatarman 1997). This evidence supports the is a function of stable characteristics possessed by some
Austrian argument that the discovery of entrepreneurial people and not others. According to this perspective, en-
opportunities depends, in part, on the distribution of in- during human attributes—such as need for achievement
formation in society (Kirzner 1973) and provides impor- (McClelland 1961), willingness to bear risk (Brockhaus
tant implications for the theory and practice of entrepre- and Horowitz 1986), self-efficacy (Chen et al. 1998) in-
neurship. ternal locus of control, and tolerance for ambiguity (Be-
This article is organized as follows. In the next section, gley and Boyd 1987)—lead some people and not others
I review extant perspectives on entrepreneurship and to choose entrepreneurship. The psychological frame-
identify important implications of the differences be- work generally focuses on the decision to exploit oppor-
tween them. In the third section, I develop specific prop- tunities rather than on their discovery (Venkataraman
ositions from Austrian economics about the discovery of 1997). However, when researchers from this perspective
entrepreneurial opportunities. In the fourth section, I de- explore opportunity discovery, they typically argue that
scribe the methodology used to examine these proposi- discovery depends on relative differences between people
tions. In the fifth section, I review the empirical support in their willingness and/or ability to search for and iden-
for these propositions. In the final section, I discuss the tify opportunities (Shane and Venkataraman, 2000). For
implications of these results for entrepreneurship research example, they argue that superior information processing
and practice.
ability, search techniques, or scanning behavior make
some people more able or willing to discover opportu-
nities (Shaver and Scott 1991). In short, psychological
Entrepreneurship Theories theories explicitly or implicitly assume that (1) funda-
Explaining the discovery of entrepreneurial opportunities mental attributes of people, rather than information about
requires assumptions about the nature of the entrepre- opportunities, determine who becomes an entrepreneur;
neurial process. To date, research on entrepreneurship and (2) this process depends on people’s ability and will-
falls into three schools of thought, each with different
ingness to take action.
assumptions about this process.

Neoclassical Equilibrium Theories Austrian Theories

Neoclassical economists (e.g., Khilstrom and Laffont Austrian economists believe that equilibrium approaches
1979) have proposed equilibrium theories of entrepre- fail to offer a satisfying theoretical framework for under-
neurship. Equilibrium theories assume that markets are standing market processes. They believe that a viable the-
composed of maximizing agents whose collective deci- ory of a market system cannot assume equilibrium but
sions about prices clear markets. In the equilibrium must explain how a market would achieve that equilib-
framework, no one can discover a misalignment that rium from nonequilibrium initial conditions (Kirzner
would generate an entrepreneurial profit because, at any 1997). The Austrians assume that markets are composed
point in time, all opportunities have been recognized and of people who possess different information (Hayek
all transactions perfectly coordinated. Because an equi- 1945). The possession of idiosyncratic information al-
librium framework does not allow people to recognize lows people to see particular opportunities that others
opportunities that others do not see, equilibrium theories cannot see, even if they are not actively searching for such
explain entrepreneurship by identifying individuals who opportunities. Differences in information lead people to
prefer to become entrepreneurs. For example, Khilstrom see different value in a given good or service and offer
and Laffont’s (1979) model proposes that people with a different prices to obtain it. By buying or selling goods
greater taste for uncertainty will choose to become entre- and services in response to the discovery of price mis-
preneurs, whereas people with a lesser taste for uncer- alignments, an individual can earn entrepreneurial profits
tainty will choose to become employees. In short, equi- or incur entrepreneurial losses. Collectively, this process

ORGANIZATION SCIENCE /Vol. 11, No. 4, July–August 2000 449

SCOTT SHANE Prior Knowledge and the Discovery of Entrepreneurial Opportunities

of decision making about prices moves an economy from tween entrepreneurs and other members of society that
disequilibrium to equilibrium. In short, Austrian theories are robust, consistent across different samples, or explain
assume that (1) people cannot recognize all entrepre- much variance (Busenitz and Barney 1997).1
neurial opportunities; (2) information about opportuni- Third, unlike both neoclassical economics and psy-
ties, rather than fundamental attributes of people, deter- chology, Austrian economics considers opportunity ex-
mine who becomes an entrepreneur; and (3) this process ploitation to be endogenous to opportunity discovery.
depends on factors other than people’s ability and will- Much of the existing empirical evidence on opportunity
ingness to take action. exploitation has assumed that the attributes of people who
discover opportunities are uncorrelated with the attributes
The Implications of the Differences of the opportunities that they discover (Evans and
Empirical investigation of the Austrian perspective on en- Jovanovic 1989). Researchers making this assumption
trepreneurship is important because the Austrian frame- have studied how individual differences affect the way
work provides different explanations for the discovery, people exploit opportunities while ignoring attributes of
exploitation, and organization of entrepreneurial oppor- the opportunities themselves. However, if human attrib-
tunities from those provided by neoclassical economic utes are correlated with the opportunities that people dis-
and psychological frameworks. First, unlike neoclassical cover, then these researchers have confounded attributes
economic theory, Austrian economics does not view the of entrepreneurs and opportunities in empirical tests of
process of opportunity discovery as mechanical. Neo- who is an entrepreneur (Venkataraman 1997). For in-
classical economics’ assumption of public knowledge stance, studies comparing entrepreneurs to managers that
about opportunities means that all opportunities must be do not consider whether individual differences influence
equally ‘‘obvious’’ to everyone. Because any given en- the opportunities discovered (e.g., Kaish and Gilad 1991,
trepreneur can discover the complete set of opportunities Chen et al. 1998) cannot tell whether entrepreneurs differ
that occur in response to a given technological change, from managers because they possess different attributes
neoclassical economics argues that entrepreneurs select or because entrepreneurs are responding to valuable op-
between different opportunities through a process of max- portunities and managers are not.
imization (Khilstrom and Laffont 1979, Evans and Jov- Fourth, the Austrian explanation for entrepreneurship
anovic 1989). However, Kirzner (1973, p. 33) explains generates different implications from the other two
that once the assumption of complete information is re- frameworks for who becomes an entrepreneur, how en-
laxed, the discovery of opportunity cannot be understood trepreneurial efforts are organized in the economy, and
through ‘‘mechanical computation’’ because any given how the government can influence the entrepreneurial
individual cannot identify all possible opportunities. If process. For example, neoclassical economists have ar-
any given entrepreneur cannot necessarily discover more gued that general purpose technologies should be ex-
than one commercial application for any given techno- ploited by a single entrepreneur across different market
logical change, then entrepreneurs cannot actively select applications because such centralization minimizes du-
(let alone maximize) between alternative opportunities plication of effort and contracting costs, and increases
(Kirzner 1985). economies of scale and scope (Bresnahan and Trajtenberg
Second, unlike both neoclassical economics and psy- 1995). However, if people do not discover the same en-
chology, Austrian economics provides an explanation for trepreneurial opportunities in a given new technology,
the entrepreneurial process that does not depend on the then decentralized commercial exploitation of general
identification of people who are more likely than other purpose technologies is advantageous. Centralization of
people to become entrepreneurs. Because the Austrians new technology development will lead to under-
believe that the possession of information that is appro- identification of opportunities because no central agent
priate to a particular opportunity leads to opportunity dis- can identify all possible entrepreneurial opportunities for
covery, they do not believe that anyone is more likely a new technology (Nelson 1987).
than anyone else to become an entrepreneur across all Given the importance of explaining opportunity dis-
opportunities. This distinction is important because the covery to our understanding of the entrepreneurship pro-
episodic nature of entrepreneurship makes stable attrib- cess, empirical evidence that supports or refutes the Aus-
utes an unlikely explanation for people’s decision to be- trian perspective on the discovery process is important.
come entrepreneurs (Carroll and Mosakowski 1987). In the next section, I generate specific propositions from
Moreover, no individual-level attributes or behaviors the Austrian framework, which I then examine empiri-
have been found to generate significant differences be- cally.

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SCOTT SHANE Prior Knowledge and the Discovery of Entrepreneurial Opportunities

Conceptual Model and Propositions search when the benefit of the information outweighs the
cost of obtaining it (Stigler 1961). Several empirical en-
Information Asymmetry and the Nonobviousness of trepreneurship researchers have incorporated this ap-
Opportunity proach into their theories of entrepreneurship (see Baron,
Entrepreneurial opportunities are opportunities to bring forthcoming; Shaver and Scott 1991). They argue that
into existence new goods, services, raw materials, and people discover opportunities because their superior in-
organizing methods that allow outputs to be sold at more formation processing ability, search techniques, or scan-
than their cost of production (Casson 1982). These op- ning behavior make them more likely than other people
portunities exist because different people possess differ- to discover opportunities (Shaver and Scott 1991).
ent information (Kirzner 1997). Incomplete information Austrian economists have challenged this approach, ar-
means that in any market transaction, people must guess guing that people do not search for entrepreneurial op-
each other’s beliefs about many things (Kirzner 1973). portunities because ‘‘opportunity, by definition, is un-
Because these guesses can be incorrect, this process known until discovered’’; and one cannot search for
sometimes leads to errors that misallocate resources. The something that one does not know exists (Kaish and Gilad
entrepreneurial process occurs when someone, alert to 1991, p. 38). Kirzner (1997, p. 71–2) explains that
this misallocation, recognizes that resources are not being
put to their ‘‘best use,’’ obtains the resources, recombines An opportunity for pure profit cannot, by its nature be the object
them, and sells them at more than they cost to obtain and of systematic search. Systematic search can be undertaken for
recombine (Casson 1982).2 a piece of missing information but only because the searcher is
aware of what he does not know and is aware with greater or
People do not recognize the value of all opportunities,
lesser certainty of the way to find out the missing
thus allowing entrepreneurs to obtain resources at below information . . . . But it is in the nature of an overlooked profit
their equilibrium price (Venkataraman 1997). If resource opportunity that it has been utterly overlooked, i.e., that one is
owners recognized the same opportunities that entrepre- not aware at all that one has missed the grasping of any
neurs discovered, they would want to appropriate the en- profit . . . . What distinguishes discovery (relevant to hitherto
trepreneurial profit by selling (or renting) their resources unknown profit opportunities) from successful search (relevant
to the entrepreneur at the price that would leave the en- to the deliberate production of information which one knew one
trepreneur with just enough profit to act (Casson 1982). had lacked) is that the former (unlike the latter) involves the
Moreover, if all potential entrepreneurs recognized the surprise that accompanies the realization that one had over-
same opportunities, they would compete for the profit. looked something in fact readily available.
This competition would lower each entrepreneur’s share
The above argument suggests that people do not dis-
of the entrepreneurial profit to the point at which it did
cover entrepreneurial opportunities through search, but
not provide potential entrepreneurs with an incentive to
through recognition of the value of new information that
act (Fiet 1996).
they happen to receive through other means. The discov-
Given that information asymmetry is necessary for en-
ery of opportunities in the absence of search is an im-
trepreneurial opportunities to exist, everyone in society
portant part of the Austrian framework because it explains
must not be equally likely to recognize all opportunities.
why entrepreneurship is not solely a function of differ-
Rather, only a subset of the population is able to recog-
ences in human ability or willingness to take action (Kirz-
nize any particular opportunity at any particular point in
ner 1997). The above argument leads to the second prop-
time (Kirzner 1973). The above argument leads to the first
osition.
proposition.
PROPOSITION 1. All individuals are not equally likely PROPOSITION 2. People can and will discover entre-
to recognize a given entrepreneurial opportunity. preneurial opportunities without actively searching for
them.
The Discovery Process
Before an individual can earn an entrepreneurial profit Prior Knowledge and the Discovery Process
from an opportunity, he or she must discover that it has Why do people discover some entrepreneurial opportu-
value. Two alternative explanations exist for this discov- nities and not others? One answer is that people recognize
ery process: search and recognition. Several authors (e.g., those opportunities related to information that they al-
Stiglitz 1994) have argued that opportunity discovery de- ready possess (Venkataraman 1997). People have differ-
pends on relative differences in search costs among po- ent stocks of information because information is gener-
tential entrepreneurs. The search model assumes that peo- ated through people’s idiosyncratic life experiences.
ple know the outcomes for which they are searching and Moreover, because information is often distributed

ORGANIZATION SCIENCE /Vol. 11, No. 4, July–August 2000 451

SCOTT SHANE Prior Knowledge and the Discovery of Entrepreneurial Opportunities

through a stochastic process, some people possess infor- product or service. A new technology might change a
mation that others do not have through blind luck (Nelson production process, allow the creation of a new product,
and Winter 1982). As a result, at any given time only provide a new method of distribution, permit new mate-
some people, and not others, will know about particular rials to be used, generate new sources of supply, or make
customer problems, market characteristics, or the ways to possible new ways of organizing (Schumpeter 1934, p.
create particular products or services (Venkataraman 66). These different dimensions of opportunity necessi-
1997). tate different organizational and production decisions
Each person’s idiosyncratic prior knowledge creates a about how to serve a market (Von Hippel 1988).
‘‘knowledge corridor’’ that allows him/her to recognize Recognizing these alternatives is difficult absent some
certain opportunities, but not others (Venkataraman prior knowledge of how they relate. Therefore, Aldrich
1997). Prior information, whether developed from work and Wiedenmayer (1993) explain that the forms of new
experience, education, or other means, influences the en- organizations and the product or service lines that entre-
trepreneur’s ability to comprehend, extrapolate, interpret, preneurs establish are related to the organizational units
and apply new information in ways that those lacking that in which they previously worked. In addition, Boeker
prior information cannot replicate (Roberts 1991). There- (1988) explains that the functional background of semi-
fore, even if information about a technological change is conductor manufacturers influences the strategy that en-
disseminated broadly—particularly if it is disclosed in a trepreneurs adopt in their new firms. The above argument
patent, presented at a scientific conference, or known to suggests the following proposition.
several individuals who might work in the same labora-
tory—only some subset of the population will possess PROPOSITION 3b. People’s prior knowledge about
prior information that will trigger the discovery of a par- how to serve markets will influence their discovery of how
ticular entrepreneurial opportunity. Three major dimen- to use a new technology to serve a market.
sions of prior knowledge are important to the process of
New information about a technology might be comple-
entrepreneurial discovery: prior knowledge of markets,
mentary with prior information about a customer prob-
prior knowledge of ways to serve markets, and prior
lem, such that discovery of the entrepreneurial opportu-
knowledge of customer problems.
nity might require prior information about customer
New information about a technology might be comple-
needs. The locus of innovation often lies with the user of
mentary with prior information about how particular mar-
a new technology because users cannot articulate easily
kets operate, leading the discovery of the entrepreneurial
their needs for not-yet-developed solutions to problems
opportunity to require prior information about those mar-
(Von Hippel 1994). Unless the recipient of technical in-
kets. Important prior knowledge about markets might in-
formation already shares much of the same tacit knowl-
clude information about supplier relationships, sales tech-
edge as the transmitter, knowledge transmission is either
niques, or capital equipment requirements that differ
impossible or prohibitively costly (Cohen and Levinthal
across markets (Von Hippel 1988). For example, a person
1990). Individuals who lack familiarity with the cus-
who had previously worked in a market as a customer,
tomer’s problem find it difficult to recognize solutions to
manufacturer, or supplier might already possess infor-
those needs when the solutions come along (Roberts
mation that is not publicly available about how a new
1991). This process leads entrepreneurs to start new com-
technology might influence that market. This prior infor-
panies to solve customer problems that they learned from
mation enables him or her to discover an opportunity in
working with users in their previous employment (Von
which to use the new technology (Roberts 1991). The
Hippel 1988). The above argument suggests the follow-
above argument suggests the following proposition:
ing proposition.
PROPOSITION 3a. People’s prior knowledge about
markets will influence their discovery of which markets PROPOSITION 3c. People’s prior knowledge of cus-
to enter to exploit a new technology. tomer problems will influence their discovery of products
and services to exploit a new technology.
New information about a technology might be comple-
mentary with information about ways to serve markets, The conceptual model described above is summarized
leading the discovery of the entrepreneurial opportunity in Figure 1. The figure illustrates that prior knowledge
to require prior information about these processes. An moderates the relationship between the attributes of a
entrepreneur’s ability to recognize an opportunity in a technology and the recognition of entrepreneurial oppor-
new technology might be enhanced by prior knowledge tunities. It also illustrates that prior knowledge moderates
about how the new technology could be used to create a the relationship between the attributes of the opportunity

452 ORGANIZATION SCIENCE /Vol. 11, No. 4, July–August 2000

SCOTT SHANE Prior Knowledge and the Discovery of Entrepreneurial Opportunities

Figure 1 Conceptual Model field study of the eight entrepreneurial opportunities,

which involved a set of field interviews with the entre-
preneurs, their investors, and others involved in the eval-
uation or exploitation of the opportunities. The interviews
were unstructured and lasted from one-half hour to three
hours. The interviews typically began with an invitation
to describe how the entrepreneur learned of the 3DPTM
process. With many respondents, I conducted follow-up
interviews and phone calls to clarify issues. For each in-
terview, I tape-recorded the conversation and then
worked from the tape transcriptions. In total, I conducted
30 hours of interviews with 22 individuals.
In qualitative case study research, corroboration of in-
as recognized and how the entrepreneur chooses to ex- terviews through the use of archival records is important
ploit the opportunity. to validate information (Yin 1984). Therefore, the inter-
view data were supplemented with information from
other sources. I had access to MIT Technology Licensing
Research Design Office (TLO) files on the entrepreneurs, which included
This article reports the results of a detailed field study of copies of business plans, press releases, contracts, product
eight actual business opportunities to exploit a single MIT information, and correspondence. I conducted Diolog,
invention: the three-dimensional printing (3DPTM) pro-
Lexis-Nexis, and ABI Inform searches for articles about
cess.
the companies and entrepreneurs. I also obtained venture
The Technology3 capital and other financing records on the companies from
The three-dimensional printing (3DPTM) process is a pat- database providers. Finally, I conducted patent and article
ented manufacturing technology, invented in 1989 by citation searches on the companies and entrepreneurs.
four MIT faculty and doctoral students under the lead of An embedded case study design, in which the unit of
Professor Ely Sachs. According to the abstract of the pat- analysis was the entrepreneurial opportunity, was used to
ent, the 3DPTM process is ‘‘a process for making a com- analyze the data. Following Yin (1984), separate case
ponent by depositing a first layer of a fluent porous ma- studies on each of the eight opportunities were developed
terial, such as a powder, in a confined region and then from the interviews, database information, and archival
depositing a binder material to selected regions of the records. Reliability was established through the devel-
layer of powder material to produce a layer of bonded opment of a case study protocol and a case study database
powder material at the selected regions. Such steps are (Yin 1984). The case study protocol included the use of
repeated a selected number of times to produce successive ‘‘table shells’’ to record data (Miles and Huberman
layers of selected regions of bonded powder material so 1984). These outlines ensured that the data collection was
as to form the desired component. The unbonded powder focused on the process of opportunity discovery, verified
material is then removed. In some cases the component that the same information was being collected for all
may be further processed as, for example, by heating it cases, and aided in the data analysis. Construct validity
to further strengthen the bonding thereof.’’ was established by using multiple sources of evidence,
Procedure the creation of a chain of evidence, and by having key
I used a case study design to examine the eight new ven- informants review drafts of the case study report (Yin
ture opportunities to exploit the 3DPTM process. The case 1984).
study design allows investigation of how opportunity dis- Pieces of information from the cases were compared to
covery operates in a real-world environment in which de- the propositions to determine the degree to which they
cisions actually take place, provides evidence in a situa- were consistent, following the pattern matching logic rec-
tion in which all of the relevant behaviors cannot be ommended for case study design (Miles and Huberman
manipulated through experimental design, and allows the 1984). The pieces of information were also compared to
incorporation of a variety of different sources of evi- rival, mutually exclusive propositions to determine the
dence, including both archival documents and interviews degree to which they were inconsistent with alternative
(Yin 1984). explanations since case studies support a proposition if
In late 1997 and early 1998, I conducted an in-depth the pieces of evidence uncovered are consistent with the

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SCOTT SHANE Prior Knowledge and the Discovery of Entrepreneurial Opportunities

proposition but inconsistent with alternative mutually ex- cost of prototyping, accelerating the process, and allow-
clusive explanations (Yin 1984). ing for more design iterations.
Therics. Therics was founded by Walter Flamenbaum
Sample to manufacture drug delivery systems for the pharmaceu-
Like all MIT inventions, the 3DPTM process was available tical industry. The 3DPTM process allows one to control
for commercialization through license from the TLO. The the amount, time, and sequence of drug delivery. This
TLO grants three types of licenses: exclusive licenses to allows drugs to be delivered in a way that ensures opti-
use an invention in all fields of use, exclusive licenses to mum blood drug levels, increasing drug efficacy and re-
use an invention in a particular field of use, and nonex- ducing side effects as compared to alternative drug man-
clusive licenses to use the invention. The decision of ufacture processes.
which type of license to establish is made during the pro-
Specific Surface Corporation. Specific Surface was
cess of evaluation by potential licensees and is a function
founded by Andrew Jeffery and Mark Parish to manufac-
of several factors: the type of license requested, the types
ture ceramic filters for the power generation market di-
of licenses that have already been granted, the amount of
money the licensee is willing to pay, the licensing offi- rectly from computer drawings without tooling, dies, or
cer’s judgment about how the technology should be ex- molds. The 3DPTM process allows Specific Surface to
ploited, and any government or university policies that manufacture filters with geometries and performance not
would restrict the commercialization of the technology. possible with alternative processes. This allows them to
Licenses are typically granted after the entrepreneurs provide customers with filters that more efficiently re-
have conducted preliminary investigation of the technol- move particulates from dirty hot flue gas streams, and
ogy. During the preliminary investigation, the entrepre- thereby provides customers with greater power genera-
neurs are required to maintain confidentiality. For this tion efficiency.
reason, the TLO maintains excellent records on all entre- Soligen. Soligen was founded by Yehorem Uziel to
preneurs who have investigated MIT inventions, whether provide foundries with the ability to postpone the design
or not they ultimately license to them. and creativity of casting tooling until after the design is
The TLO licensed the rights to use the 3DPTM process proven thus eliminating the need to prototype tooling.
to four teams of entrepreneurs who have created new Soligen’s Direct Shell Production Casting (DSPC) is
companies to exploit this technology in different fields of based on the 3DPTM process and allows Soligen to make
use. The TLO also has records of four teams of entrepre- a ceramic mold directly from a CAD model, using a pow-
neurs who discovered and investigated entrepreneurial der and binder, without the need for wax forms or tooling.
opportunities to exploit the 3DPTM process, but who This technology allows Soligen to develop cast metal
failed to start companies. Because all eight sets of entre- parts with a much shorter lead time and at a lower in-
preneurs discovered entrepreneurial opportunities for the vestment cost than is the case with existing technology,
same invention, comparison of these opportunities allows allowing customers to speed product introduction.
me to explore the differences in business opportunities 3D Partners. Andrew Kelly proposed using the 3DPTM
discovered by different entrepreneurs in response to the
process to a create a service bureau to provide architec-
same new technology. Table 1 shows the eight ‘‘com-
tural models. Currently, architectural models are made by
panies,’’ the entrepreneurs, and the opportunities that
hand in a time intensive manner that requires significant
they discovered. Astute readers will note that none of the
four inventors of the 3DPTM process chose to exploit this craft experience. Using the 3DPTM process, this business
technology by starting a new company. would receive CAD drawings electronically and then
Z Corp. Z Corp was founded by Marina Hatsopoulos, send back finished architectural models faster and at a
Walter Bornhorst, Jim Bredt, and Tim Anderson to man- lower cost than existing alternatives.
ufacture a fast, inexpensive, office-compatible machine 3D Orthopedics. Stephen Campbell proposed using the
to make three-dimensional concept models for engineer- 3DPTM process to provide custom-fitted orthopedic de-
ing and architectural design. Design engineers and archi- vices for the medical and dental market. Currently, dis-
tects use concept models to review design changes early eased or injured bones must be replaced with cleaned ca-
in the design process and to present ideas to others who daver bones, bone harvested from another part of the
cannot read CAD designs, but who are involved in the body, or prefabricated artificial substitutes. The 3DPTM
design process. The Z Corp machine makes rapid proto- process allows three-dimensional forming of a biologi-
types 20 times faster than existing rapid prototyping pro- cally compatible replacement bone that could be printed
cesses and out of less expensive materials, reducing the out of any material and implanted.

454 ORGANIZATION SCIENCE /Vol. 11, No. 4, July–August 2000

SCOTT SHANE Prior Knowledge and the Discovery of Entrepreneurial Opportunities

Table 1 The Companies and Dimensions of the Opportunities

Forecast Forecast
Market Size Sales in Forecast
Company Entrepreneurs Opportunity in Year 5 Year 5 EBIT Current Status

Z Corp Marina Hatsopoulos Manufactures a fast, $100 million $10 million $2 million Private company
Walter Bornhorst inexpensive, office- funded by
Jim Bredt compatible machine to make founders
Tim Anderson concept models for industrial
and architectural design
Therics Walter Flamenbaum Manufactures pills with a $9 billion $2 million ⳮ$7.5 Private company
superior microstructure million funded by
through a fully integrated venture capital
manufacturing process
Specific Surface Mark Parrish Manufactures ceramic filters for $800 million $31.5 million $13 million Private company
Andrew Jeffrey the power generation market funded by
in a one-step manufacturing venture capital
process
Soligen Yehorem Uziel Manufactures machines to $20 billion $50 million $8.5 million Public company
make ceramic molds for
casting metal parts directly
from a CAD model without
wax forms or tooling
3D Partners Andrew Kelly Creates a service bureau to $10 million Never done Never done Abandoned when
(and others) produce architectural models market found too
from CAD drawings small
3D Orthopedics Stephen Campbell Provides a service to create Never done Never done Never done Abandoned when
artificial bone for weight not funded by
bearing indications for use in venture capital
surgery
3D Imaging Lau Christianson Provides a service to create Never done Never done Never done Abandoned when
Todd Jackson multicolor, three dimensional lost 50K business
surgical models plan competition
Conferences Michael Padnos Establishes a chain of stores to Never done Never done Never done Abandoned when
make sculptures from technology found
photographs inappropriate

3D Imaging. Lau Christianson and Todd Jackson pro- Results

posed using three-dimensional printing to provide a mod-
eling service for surgeons. Currently, surgeons must ab- All Individuals Are Not Equally Likely to Recognize
stract from two-dimensional CAT scans and MRI images a Given Opportunity: Examining Proposition 1
when planning for surgery. The 3DPTM process would Although many people were exposed to information
allow the creation of multicolor, three-dimensional mod- about the invention of the 3DPTM process, very few en-
els of the human brain for surgical planning that would trepreneurial opportunities to exploit the technology have
reduce error and malpractice exposure. been discovered. Since its invention in 1989, 3DPTM has
Conferences. Michael Padnos proposed using the been described in patent applications, conference presen-
3DPTM process to establish a chain of stores to make tations, publications, a website, MIT technology licensing
three-dimensional heads and busts of people. Currently, office mailings, and industry consortium meetings. Sev-
people purchase a large number of photographs of family eral trade and popular publications—including Fortune,
and friends. The 3DPTM process would create three- the Financial Times, and the Economist—have written
dimensional sculptures for consumers from these photo- stories about it. Yet only eight entrepreneurial opportu-
graphs. nities for the 3DPTM process have been discovered.

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SCOTT SHANE Prior Knowledge and the Discovery of Entrepreneurial Opportunities

The number of entrepreneurs who discovered entrepre- other entrepreneurs had disclosed them. As Marina Hat-
neurial opportunities in the 3DPTM process was limited sopoulos (Z Corp) explains:
because opportunities are not obvious from information I absolutely could not have seen the business concepts that the
about the 3DPTM process alone. As Table 2 shows, in other licensees were doing . . . . I knew nothing about
none of the eight cases did the respondents indicate that casting . . . . Also, you could not make metal parts using the
the opportunities were obvious from simple observation 3DPTM process the way we use it . . . . You would have to think
of the 3DPTM process. For example, Walter Flamenbaum of a different way to use the machine. What Specific Surface is
doing would never have occurred to me. And I don’t think that
(Therics) explains that MIT’s 3DPTM process was far
it would have ever have occurred to me in a thousand years that
from medically acceptable and not based on good manu- you could print pills . . . like Therics does.
facturing principles:
Consequently, none of the eight sets of entrepreneurs
All of the 3DP lab’s work was in one ceramic powder and one discovered more than one opportunity in which to use the
fluid, and medical applications require multiple fluids and mul- 3DPTM process, despite differences in the market size,
tiple powders, specifically polymers. You couldn’t just look at potential returns, or resulting outcomes of those oppor-
the 3DPTM process and know that you could use it for medical tunities. They also did not weigh the relative advantages
purposes. To make use of 3DPTM process for drug delivery, you and disadvantages of using the technology to pursue dif-
had to know something about what drugs and drug delivery ferent opportunities.
systems are made from and how drug manufacture operates. It is important to note that the evidence presented in
Table 2 and in the text above does not preclude the dis-
Moreover, none of the entrepreneurs examined any of semination of new knowledge about inventions from in-
the other opportunities to use the 3DPTM process before fluencing the discovery of opportunity. People who learn

Table 2 The Nonobviousness of Opportunity

Company Examples of the Respondents’ Descriptions of the Obviousness of the Opportunity, Not Quoted in the Text

Z Corp ‘‘I certainly never would have thought that someone would make pills with the 3DPTM process.’’ —Walter Bornhorst

Specific Surface ‘‘All Ely Sachs had was a small machine putting out something maybe every two days. This was not something that you
would think, we can use this for manufacturing. It wasn’t clear that the binder MIT was using was compatible with
chemical binder systems to make ceramic filters, but we didn’t think that the binder was limited to MIT’s binder. Also,
to make filters you have to have to be able to produce something of very high quality. It has to have high building
integrity, cannot have any holes, and must hold together in a very hot environment. The MIT process did not worry
about any of those things. In addition, the MIT researchers were not focusing on the creation of a finished product,
they were focusing on the creation of molds and prototypes that were intermediate steps. Moreover, they were
emphasizing accuracy and precision, which were not the exact areas of emphasis for our needs.’’—Andrew Jeffrey

Soligen ‘‘They had a single jet printing machine, and the printer jet was something that MIT made from a syringe . . . . There
was no way to make a commercial machine with a single jet. To develop DSPC, one actually had to use a different
and a substantially faster printing technology. The only thing that we used is the concept of printing liquid on to
sequential layers of powder.’’—Yehorem Uziel

3D Partners “The insight came from familiarity with architectural study models. It wasn’t even obvious to the rest of us.”—Andrew
Kelly

3D Orthopedics ‘‘To know that the 3DPTM process can be used to create artificial bone, one has to have a sense of the materials to
combine in the creation of the composition and the biology of the human system. Moreover, one has to know the
microstructural aspects of bone, artificial bone replacements as well as the emerging field of 3D imaging.’’—Stephen
Campbell

3D Imaging ‘‘We just looked at . . . what can you do with multiple materials and we saw something different from the other
entrepreneurs. We had no idea that you could use three dimensional printing for orthopedic applications, ceramic
casting, or to make filters. Neither of us knows anything about ceramic filters or investment casting . . . . I did not
have the background to understand mechanical uses . . . .’’—Lau Christianson

Conferences ‘‘You had to know something about why people take photographs to see the opportunity to use this technology to
convert photographs to sculptures.’’—Mike Padnos

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SCOTT SHANE Prior Knowledge and the Discovery of Entrepreneurial Opportunities

about new knowledge before others may be more likely they simply recognized the opportunity, almost by acci-
to discover opportunities to make use of that new knowl- dent, as if they were surprised by the discovery. For ex-
edge. In the interest of space, however, this paper held ample, Walter Flamenbaum (Therics) explains:
the dissemination of new knowledge constant and ex- If Bob Cohn, who has been responsible for drug delivery sys-
plored only the influence of the distribution of prior tems and product development at J&J had looked at it, it would
knowledge on the ability to recognize it. Therefore, this have been different . . . . [H]e would have turned around and
study draws no conclusions about the effect of the dis- said, ‘holy cow!’ This is a platform that’s wonderful for drug
semination of information on the discovery process. delivery systems. If you had showed to someone who does tis-
sue engineering, they would have said, ‘holy cow!’ This is won-
The Process of Discovery: Examining Proposition 2 derful for tissue healing matrices for our biological development
As Table 3 shows, the eight entrepreneurs also described of tissues and organs. It’s a matter of mind set and background.
a discovery process which involved recognition, rather
The results also provide evidence that is inconsistent
than a search for information. In none of the cases did an
with the argument that these entrepreneurs discovered op-
entrepreneur indicate that he or she was searching for the
portunities because they are better than others at search-
opportunity prior to its discovery. For example, Mike Par-
ing for and discovering opportunities in general. If this
rish (Specific Surface) explains, ‘‘When Mike Cima
were the case, then the eight sets of entrepreneurs de-
showed me MIT’s 3DP machine, I just thought that this
scribed here should have been more likely than other peo-
would make great filters . . . . The point is, we never
ple but equally likely to each other to discover all the
searched for this opportunity.’’
opportunities. The empirical observation that each of
Moreover, none of the entrepreneurs had contacted the
them was inferior at opportunity discovery for seven out
TLO about a previous technology. Rather, each of the
of the eight opportunities suggests that superiority at the
entrepreneurs heard about the technology from someone
discovery process alone is not sufficient to explain the
directly involved in its development, and recognized the
discovery of opportunity. Rather, it suggests that such
opportunity immediately upon hearing about it. For ex-
superiority is situation-specific.
ample, Yehorem Uziel (SOLIGEN) explains, ‘‘When Ely
Sachs showed me MIT’s 3DPTM process, I just saw im- The Influence of Prior Knowledge on the Discovery
mediately that there was an opportunity to make func- of the Market: Examining Proposition 3
tional metal parts directly from a computer.’’ Table 4 summarizes the relationship between different
When asked why they were able to discover opportu- dimensions of the entrepreneurs’ prior knowledge and
nities when they were not searching for them, the re- their entrepreneurial efforts. As Table 4 indicates, all
spondents offered answers consistent with Austrian eco- eight sets of entrepreneurs used the 3DPTM process in
nomics. In all eight cases, the respondents indicated that different markets, served the market in different ways,

Table 3 The Process of Discovery

Company Examples of Respondents’ Descriptions of the Discovery Process, Not Quoted in the Text

Z Corp ‘‘The value it had just made sense to me when I saw the MIT machine. It was instinctive, just like if you showed
someone who uses a typewriter this invention called a word processor. I saw the opportunity before I did any market
research and learned that yes, indeed, people would buy this product.’’—Marina Hatsopoulos

Therics ‘‘We sat around a room and talked about the process. For whatever reason—and I think you need to go to your friends
who do cognitive theory to find an answer—I just intuitively saw the opportunity in chronopharmacology. I certainly
wasn’t searching for the opportunity.’’—Walter Flamenbaum

3D Partners ‘‘He was just working in the lab and saw these little rocker arms we make and the idea came to him.’’—Andrew Kelly

3D Orthopedics ‘‘Mike Cima showed me the 3DPTM process one day and my idea to make orthopedics just clicked.’’—Stephen
Campbell

3D Imaging ‘‘When we started talking about what we could do with the 3DPTM process, I immediately thought of my research and
how I could combine what I knew with it.’’—Todd Jackson

Conferences ‘‘I just looked at the machine and thought about what could be done with it on a consumer level. My idea came to me
immediately.’’—Mike Padnos

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SCOTT SHANE Prior Knowledge and the Discovery of Entrepreneurial Opportunities

Table 4 The Relationship Between the Dimensions of the Opportunities and Prior Knowledge

Prior Knowledge Prior Knowledge

Prior Knowledge of Means Solution to of Solution
Company Market of Market Means to Serve to Serve Problem to Problem

Z Corp Industrial Design (a) Education and Manufacture ma- Knowledge of ma- Cheap, fast on-site (a) Work experi-
and Architec- work experience chine to make chine design and production of ence with canni-
ture in industrial de- concept models manufacture from concept models balized comput-
sign (b) work ex- education ers showed value
perience in archi- of ink-jet print
tecture head; (b) Materi-
als education
showed the value
of low cost
starches

Therics Pharmaceuticals Work experience in Manufacture of (a) Work experi- (a) Drug micro (a) Research on hy-
pharmaceutical drugs with spe- ence with drug structures that pertension
industry cial microstruc- materials; (b) control amount showed “wet
ture through work experience and timing of mass” drug re-
creation of FDA- with FDA ap- drug release; (b) lease problem;
approved ma- proval and scale- Easier govern- (b) Work experi-
chine up in pharmaceu- ment approval of ence in drug ap-
ticals scale-up proval showed
scale-up ap-
proval problem

Specific Sur- Power Generation Work experience Manufacture fin- (a) Education and Efficient ceramic fil- (a) Work experi-
face supplying filters ished ceramic work experience ters with better ence and educa-
for power plants product on modi- in ceramics; (b) geometries that tion showed how
fied Soligen ma- Work experience withstand high 3DP process
chine with minimizing stress and hot would solve prob-
the manufactur- temperatures lems with filter
ing process; (c) geometry; (b)
Lack of experi- Work experience
ence and educa- and education
tion in machine showed how to
manufacture make uniform po-
rosity ceramics

Soligen Metal casting Work experience Manufacture ma- Knowledge of ma- Manufacture of Knowledge of ster-
supplying proto- chine to make chine design and functional metal eolithography
typing machines ceramic molds manufacture from parts without ex- showed problems
to users of metal for metal casting work experience pensive tooling in using plastics
parts for mockups and
production

3D Partners Architecture Work experience in Service bureau for (a) No knowledge Speed up and Prior experience
architecture architecture mod- of manufacture of lower cost of cre- making architec-
els using Z Corp machines; (b) ating concept tural models
machine Work experience models showed problems
in architecture with craft ap-
concept model proach
creation

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SCOTT SHANE Prior Knowledge and the Discovery of Entrepreneurial Opportunities

Table 4 (continued) The Relationship Between the Dimensions of the Opportunities and Prior Knowledge

Prior Knowledge Prior Knowledge

Prior Knowledge of Means Solution to of Solution
Company Market of Market Means to Serve to Serve Problem to Problem

3D Orthope- Orthopedics Education and work Service to provide (a) Education and Artificial bone for Research on 3-D
dics experience in custom artificial work experience weight bearing models of bones,
prosthodontics bone from MRI in prosthodontics; indications education in ce-
images (b) Research with ramics, and work
imaging technol- experience in
ogies; (c) Work surgery showed
experience as problem of re-
surgeon placing bone

3D Imaging Surgical Models Work experience in Service to provide (a) Work experi- Multicolor 3D mod- Research on CAD
health care con- surgical models ence in health els interface showed
sulting care consulting; problems making
(b) Research on three dimensional
CAD interface objects in multi-
with 3DP ple colors

Conferences Retail consumer (a) Work experi- Retail stores in (a) No knowledge Sculptures from Prior personal ex-
goods ence as art malls to make of machine man- photos perience showed
dealer; (b) Per- sculptures ufacture, or in- people go to
sonal experience dustrial products; malls to buy pho-
as art collector (b) Experience in tos
retail

and used the 3DPTM process to provide solutions to dif- as mechanical engineers and had studied industrial de-
ferent customer problems. In each case, the selection of sign, which enabled them to see the industrial design mar-
the market, the way to serve the market, and the solutions ket for the 3DPTM process.
to the customer problems were influenced by the entre- Marina and Walter’s previous experience in the archi-
preneur’s prior knowledge. tectural market also led them to see the applications of
While the eight cases show that prior knowledge influ- the 3DPTM process in that market. Prior to founding Z
ences the discovery of opportunity, they also show that Corp, both Walter and Marina had undertaken major real
many types of prior information influence this process. estate rehabilitations, in which they participated in the
As Venkataraman (1997) argued, the sources of the prior architectural layout and interior and exterior design. Be-
knowledge that lead to opportunity discovery are idio- cause of their experience in both the industrial design and
syncratic, resulting from work experience, personal architecture markets, Z Corp’s entrepreneurs discovered
events, and education. Moreover, this prior knowledge a $100 million market for the 3DPTM process.
can be developed through a variety of roles, including In contrast, the limited prior knowledge of the entre-
experience as a supplier, user, and manufacturer, and edu- preneurs who founded 3D Partners led them to recognize
cation on a variety of dimensions, such as production pro- only the architectural market in which to use the 3DPTM
cesses, inputs, and user needs. process. Andrew Kelly (3D Partners) explains:
Identification of the Market. As Table 5 shows, all [The person who discovered the opportunity] was an
eight sets of entrepreneurs discovered markets about architect . . . . We focused on . . . the architectural market be-
which they had prior knowledge. For example, Z Corp’s cause it was the only market we knew anything about . . . . We
entrepreneurs discovered the industrial design and archi- did not know anything about any other markets . . . . [But] the
architectural model making industry nationwide is only $10 mil-
tectural markets because Marina Hatsopoulos (Z Corp)
lion, that’s too small to build a company.
and Walter Bornhorst (Z Corp) had developed prior
knowledge of these markets through education and work Yehorem Uziel’s (Soligen) prior work experience also
experience. Both Marina and Walter were trained at MIT led him to recognize the usefulness of the 3DPTM process

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SCOTT SHANE Prior Knowledge and the Discovery of Entrepreneurial Opportunities

Table 5 The Selection of the Market

Company Examples of Respondents’ Descriptions of the Selection of the Market, Not Quoted in the Text

Z Corp ‘‘The value of the 3DPTM process to rapid prototyping inherently made sense to me because I’ve done design on a
computer screen and I know how difficult it is to visualize a three-dimensional model. For my thesis at MIT, I had to
do a very simple design. Even so, it was really a challenge doing all the drawings. It would have been easier to see
what the device would look like before I went ahead and actually built it. I also took this composites class and we
had to design a chair using composite materials. I thought it would be really neat to see what it would look like. So I
actually built a model out of foam core and string so I could understand my own design. I had this burning desire to
have that 3D model as I was doing the design . . . . It was natural to think of the architectural market because of my
personal experience. I’ve done a lot of architectural design. We’ve done renovations of buildings and in all those
cases there are certain views that get really tricky to visualize from a two-dimensional diagram. Architects are
designing very much in three dimensions and so for them, three-dimensional models are useful. Even more
importantly, architects are interacting with lay people who want to build a golf course or a house or whatever and
cannot read a CAD drawing at all.’’—Marina Hatsopoulos

‘‘I immediately recognized how valuable it would be to have an object in front of me when I’m trying to sort out a three-
dimensional problem . . . because I have struggled with trying to visualize three-dimensional things when I’m trying to
design something myself.’’—Walter Bornhorst

Therics ‘‘I had enough commercial experience in the pharmaceutical industry that I know what the markets are. I know about
drug delivery systems and thought about the percentage of that market that were for drugs that would benefit from
chronopharmacologic drug delivery. I knew that there were some huge markets like hypertension and angina that
you could clearly capture.’’—Walter Flamenbaum

Specific Surface ‘‘The market was always filters for power plants . . . . I was working in gas filtration when I saw the 3DPTM
process . . . and I knew that large companies were looking for ways to improve the efficiency of ceramic filters. I
knew that people at ABB and Westinghouse were working on this issue.’’—Andrew Jeffrey

Soligen ‘‘I was first introduced to the 3DPTM process when I was . . . at 3D Systems and was working on rapid prototyping
machines for Ford . . . . Work with the automakers made me aware of the benefit of a machine that can make
functional metal parts . . . . For example, if you are Ford or GM and you are developing a new engine and [you have]
a lot of iterations at the beginning of the process . . . you gain by avoiding . . . temporary tooling to do the
casting . . . . If you can delay the creation of expensive artwork until after you know that there are no changes so you
can get the production tooling right the first time, that’s a big thing . . . . So I was looking at undertaking a revolution
in the metal casting industry way before I even heard of Ely Sachs and Mike Cima.’’—Yehorem Uziel

3D Orthopedics ‘‘I knew from the outset that there was a market to use the 3DPTM process to replace bones and teeth. My specialty is
prosthodontics, which means replacement of body parts with artificial substitutes. I was treating patients and running
an advanced education program at The Harvard School of Dental Medicine in this area at the time I learned about
the 3DPTM process. Before that I went to dental school at Virginia and then did a specialty training program in
prosthodontics at Harvard, with advanced materials training at MIT.’’—Stephen Campbell

3D Imaging ‘‘I have done a fair bit of work in health care economics and exploring different health care products. I was familiar with
health care markets and could speak about what goes on there. I knew that MRI and CAT scan came out in three-
dimensional form. I also knew about health care trends and that there was a market for things to improve surgery.
Finally, I knew that neurosurgeons are very technology friendly and would be interested in anything that could
possibly make their lives easier and make the surgery go more smoothly.’’—Lau Christianson

Conferences ‘‘I have no knowledge of any industrial markets . . . but an understanding of consumer markets. So, when I looked at
the 3DPTM process, I saw the consumer applications.’’—Mike Padnos

to a particular market. However, unlike Z Corp’s foun- ness of the 3DPTM process to the investment casting in-
ders, he developed this knowledge from his experience dustry. As a supplier to Ford, General Motors, and
as a supplier rather than as a user. Because he served as Chrysler, he learned that users of metal parts make hun-
vice president of engineering at 3D Systems, a rapid pro- dreds of thousands of models and prototypes per year,
totyping manufacturer, Yehorem recognized the useful- that they spend double the time on design tooling as they

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SCOTT SHANE Prior Knowledge and the Discovery of Entrepreneurial Opportunities

do on production tooling, and that they spend weeks on Identification of How to Serve the Market. As Table
making prototypes that the 3D process can make in a 6 shows, in all eight cases, the founders’ prior knowledge
matter of days. also influenced the choice of how to serve the markets.
Like Yehorem Uziel, the founders of Specific Surface Because Yehorem Uziel (Soligen) had previously
Corporation selected their market because of prior work founded a manufacturer of capital equipment and had ex-
experience as a supplier to a market. Andrew Jeffery’s tensive experience in machine design and manufacture at
prior experience in product development as a supplier of 3D Systems, he recognized the opportunity to embody
filtration media for coal burning power stations led him the 3DPTM process in a machine rather than to provide a
to recognize the usefulness of the 3DPTM process to the service.
power generation market. Because his previous job re- Z Corp also discovered an opportunity to serve markets
quired him to identify new market opportunities for in- by selling a machine because of the prior knowledge of
dustrial filtration, Andrew became aware that ABB and the entrepreneurs. Marina Hatsopoulos’ (Z Corp) me-
Westinghouse were searching for more durable and more chanical engineering background allowed her to recog-
efficient ceramic filters to remove hot flue gas of partic- nize the opportunity for a tangible electromechanical
ulates in response to recent environmental regulation. physical product rather than a service; and Jim Bredt’s (Z
Like the previous sets of entrepreneurs, Walter Fla- Corp) experience in machine design allowed the Z Corp
menbaum’s (Therics) selection of a market was influ- team to recognize how to build low cost, office compat-
enced by his prior work experience. However, in Walter’s ible machines that would serve the market in a better way
case, the prior knowledge was developed not as a user or than an alternative service bureau business model. Marina
supplier, but as a manufacturer. Walter selected the phar- Hatsopoulos (Z Corp) explains:
maceutical industry in which to use the 3DPTM process We envision the system as being placed right next to the de-
because 25 years of experience in product development signer in his office. The biggest advantage of using the 3DPTM
and regulatory approval in that industry led him to see process for concept models is the speed and you lose that ad-
the usefulness of the 3DPTM process to that market. vantage if you have to wait to get a file from a customer, give
Stephen Campbell (3D Orthopedics) recognized the them a quote, get the file, do the backlog, print it out and send
usefulness of the 3DPTM process to a specific market be- it out . . . . You know that if the big advantage is that you can
cause of his prior work experience and education. He print our part in an hour instead of ten hours, but you are going
attributes his discovery of the market to his advanced ma- to take 24 hours to get them the part, then what’s the point?
terials training at MIT and his work experience in pros- In contrast to the founders of Z Corp, the founders of
thodontics. He explains: 3D Partners were unable to recognize a way to manufac-
I knew about the new imaging technologies that were devel- ture machines because of their lack of knowledge in the
oping, as well as the materials and the idea of providing these area of machine design and manufacture. Andrew Kelly
replacement bones just clicked. I saw that my little world of (3D Partners) explains:
dental restorations was opening up to CAD/CAM. When the We could only discover the service market for architectural
3DPTM process came along the whole idea of a service to pro- models. To think of how to make machines that do concept
vide replacement parts just clicked. models, one would need a Ph.D. with expertise like Jim Bredt
(Z Corp) . . . . I was a second year master’s student in Mechan-
Lau Christianson and Todd Jackson (3D Imaging) also ical Engineering at MIT and had a Bachelor’s Degree in Me-
selected the market in which to apply the 3DPTM process chanical Engineering from NC State. I could run a Z Corp ma-
because of their prior knowledge of the market. However, chine, but I couldn’t create one. To make machines, you would
in their case, the prior knowledge of the market appeared need to be familiar with things like infiltration kinetics. You
far shallower than was the case with the other entrepre- would need to know what you are doing with materials, what’s
neurs. Lau Christianson was a Sloan student who had going on with powder and stuff like that. You would need to
worked in pharmo-economic and health care consulting know these things in grand detail. I mean down to the details
prior to attending Sloan. of how to capture droplets in space and infiltration time. The
Mike Padnos’ (Conferences) selection of a market also list goes on and on, down to surface chemistry and fluid han-
was influenced by prior knowledge of a market—in this dling, delivery systems, general machine design, and a long list
of things that it takes to design a machine. These were not things
case consumer retail goods. However, Mike’s knowledge
I knew.
was developed from work and personal experience. Mike
is in the art business and is a collector of sculpture. His Consequently, the entrepreneurs who founded 3D Part-
house is full of folk art, primarily sculptures of human ners recognized an opportunity which they later believed
heads. to be inferior to the opportunity discovered by Z Corp.

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SCOTT SHANE Prior Knowledge and the Discovery of Entrepreneurial Opportunities

Table 6 The Selection of How to Serve the Market

Company Examples of Respondents’ Descriptions of How to Serve the Market, Not Quoted in the Text

Therics ‘‘MIT was working with one binder solution and one powder and neither was a polymer nor a polyester. Drugs require
you to work with more than a single solution as well as with things like polymers and polyesters. My prior experience
in pharmaceuticals made it clear to me that they could do the same thing with these materials. Also MIT had a
bubble jet printer. I knew we had to change that. A bubble jet printer works by taking a liquid and making a bubble
by heating it and spitting it out the other end. You can’t go to the Food and Drug Administration and convince them
that the liquid that went in is the same as the liquid that came out even though it went through a vapor phase. In
addition, if it’s a liquid that is heat labile, you’re screwed.’’—Walter Flamenbaum

Specific Surface ‘‘It would have been impossible for us to engineer machines for the 3DPTM process. We are not mechanical engineers
like the people at Soligen. When we started Specific Surface Corporation we did not know how to make machines for
the 3DPTM process.’’—Mark Parrish

‘‘The 3DPTM process seemed to answer a lot of the questions about what I was trying to do with other methods. I knew
a fair bit about rapid prototyping because I’d been exposed to it where I used to work . . . . The 3DPTM process offers
the possibility to eliminate a lot of manufacturing steps, down to really a handful of steps from design to finished
product. With this process, I can tip ceramic material into a machine, download a design, and make a ceramic filter
without any particular skill whatsoever. And that was what I saw as a really big advantage in making a functional
product.’’—Andrew Jeffrey

Soligen ‘‘There are very few people who can develop new equipment . . . [or] who are capable of combining so many
engineering disciplines and ending up with a machine.’’—Yehorem Uziel

‘‘Their choice of this approach to serve the market was colored by their experience. They came from the manufacturing
side of the business. They knew how to make machines.’’—Martin Omansky, a venture capitalist who evaluated
Soligen.

3D Imaging ‘‘[We] do not have any experience in the manufacturing of the machines themselves . . . . Someone else would have to
make machines because we do not know how to do it . . . . ‘‘[One] reason to head in the direction of a service is
because the piece of three-dimensional printing that Todd has been working on is the CAD interface program.’’—Lau
Christianson

‘‘I understand how a machine to do this would work, but I could not sit down and build it . . . . [My research focuses on
how] to represent smoothly varying compositions within the computer by assigning different materials or colors to the
computer commands. Since this is very memory intensive you would want to make something that would create
more value from this complexity. Information from medical file data is one example of that.’’—Todd Jackson

Conferences ‘‘I’m a lawyer, but I know consumer businesses. I have no more technology affinity than I have the ability to walk on the
moon . . . . I can’t do science or math at all. I could only see how this could come together with consumer stuff in an
nontechnology way. I didn’t want to sell a computer or something where I had to know where a C drive was.’’—Mike
Padnos

Like founders of 3D Partners, the founders of 3D Im- ence of their prior knowledge on their discovery of how
aging also discovered a service to exploit the 3DPTM pro- to serve the market. Andrew Jeffery explains that their
cess because they could not manufacture machines. How- lack of knowledge about machine design led them not to
ever, unlike 3D Partners, 3D Imaging’s entrepreneurs discover an opportunity to manufacture machines, but to
also had prior of knowledge of technology that would make filters using a modified Soligen machine.
generate greater value in the form of a service than in the Specific Surface’s discovery of how to serve the market
form of a machine. By exploiting a piece of complex was also influenced by another dimension of prior knowl-
computer software, 3D Imaging could make direct use of edge not present with any of the other entrepreneurs. Spe-
Todd’s Ph.D. dissertation research on the processing of cific Surface Corporation uses the 3DPTM process to man-
composition information into machine instructions. ufacture a final product through a one-stop manufacturing
Andrew Jeffery and Mark Parrish (Specific Surface) process. Andrew saw the 3DPTM process as ‘‘a true manu-
were similar to the founders of 3D Imaging in the influ- facturing process right from the start’’ because he had

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SCOTT SHANE Prior Knowledge and the Discovery of Entrepreneurial Opportunities

been looking at rapid prototyping as a way to reduce the neering design with computer simulation. Moreover, rapid pro-
number of steps in the labor intensive process of making totyping uses exotic fabrication processes that will never be-
filters in his previous product development job. come production methods. For example, there is no way that
Similar to the other sets of entrepreneurs, Walter anyone will be able to drive a laser as fast as needed to create
something that will compete with the injection mold piece. So
Flamenbaum’s (Therics) prior knowledge influenced how
rapid prototyping can never yield functional parts. Even if you
Therics would serve the market. Unlike the cases of the solidify a liquid which is exactly nylon, this is not the same
other entrepreneurs, however, the important prior knowl- properties of nylon which is injection molding. The only way
edge in Walter’s case was an understanding of how one to really address the concept of building parts from CAD is to
serves a market that depends on government approval. do something intermediary like make an expendable mold.
Because of his pharmaceutical experience, Walter rec- [Moreover,] plastic patterns are not durable enough and have
ognized what materials could be substituted to make long-term dimensional instability (they may warp or distort as
drugs in place of the powders MIT was using and how to time goes by and internal stresses are relieved.) For investment
change the MIT machine into one that would get FDA casting, plastic patterns do not dissolve easily and may crack
approval. the shells, and wax patterns made by laser sintering—which
Like the other entrepreneurs, Stephen Campbell (3D involves joining wax powder particles into a wax object using
a laser beam—do not have the required accuracy and surface
Orthopedics) recognized a way to serve the market be-
finish. (Uziel, 1993: 3)
cause of his prior work experience. However, unlike the
other entrepreneurs, Stephen recognized how to make Andrew Jeffrey’s (Specific Surface) prior knowledge
custom-fitted replacement bones from information in product development at a filter manufacturer allowed
scanned from an MRI because his prior work experience Specific Surface to recognize trends toward hot filtering
allowed him bring together the 3DPTM process and other and smaller sized filters in power plants. In addition,
new technologies to which he was exposed. Mark Parrish’s (Specific Surface) Ph.D. and extensive
Finally, Conference’s discovery of how to serve the work experience in ceramic engineering allowed him to
market was also influenced by Mike Padnos’ (Confer- recognize the usefulness of the 3DPTM process in solving
ences) prior knowledge. Mike explained that Conferences a customer problem in different ceramics from those with
would establish retail establishments in malls because his which MIT researchers had been working.
prior background in service businesses and personal ex- Like the other entrepreneurs, Walter Flamenbaum’s
perience led him to understand how to serve retail cus- (Therics) prior knowledge led him to recognize the value
tomers. of the 3DPTM process to solving a customer’s problem.
Identifying a Solution to the Customer’s Prob- Because Walter had 25 years of experience in clinical
lem. Table 7 shows that, in all eight cases, prior knowl- pharmacology and a research interest in cronopharma-
edge led the entrepreneurs to see the usefulness of the cology, he recognized how the 3DPTM process would
3DPTM process in solving different customer problems. solve a problem with the treatment of hypertension.
The prior work experience of Z Corp’s entrepreneurs al- Brad Vale, a venture capitalist at Johnson and Johnson
lowed them to see the 3DPTM process as a solution to the Development Corporation that funded Therics, explained
customer problems of speed and cost. Because Jim why Walter Flamenbaum’s background led to the discov-
Bredt’s (Z Corp) research often led him to use cannibal- ery of different solutions to customer problems than those
ized computers and printers scavenged from junk piles, discovered by other entrepreneurs. He explains:
he recognized the value of modifying a standard ink jet People always have a handful of unsolved medical industry
print head to lower costs. Similarly, his education in ma- problems floating in the back of their heads. One of them is
terials science at MIT led him to notice that one could artificial bone. People coming from that background went down
use inexpensive starches as the powder for the system in a particular path. On the other hand, people from a drug back-
place of more expensive materials. ground start thinking what is the huge value added. That would
In contrast, Yehorem Uziel’s (Soligen) prior experi- be complex drug delivery. They have the problem of drug de-
ence as an inventor of a rival technology led him to rec- livery that matches up with daily cycles in the back of their
ognize the usefulness of the 3DPTM Process to solving a minds. This sends them down a different path from the medical
set of customer problems that could not be solved by the device people.
alternative of stereolithography. He explains: Unlike the other entrepreneurs, Stephen Campbell’s
In the future there will be no need for prototypes or mock-ups (3D Orthopedics) recognition of a solution to a customer
because everything will be done in cyberspace . . . . One day problem came from a combination of research, experi-
you’ll be able to supplant most of the trial and error in engi- ence as a user, and prior education. At the time he learned

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SCOTT SHANE Prior Knowledge and the Discovery of Entrepreneurial Opportunities

Table 7 The Solution to the Customer’s Problem

Company Example of Respondents’ Descriptions of the Solution to the Customer’s Problem, Not Quoted in the Text

Z Corp ‘‘Most of the people who looked at the technology were coming to it with a pretty specific need that was not quick and
dirty printing. Most of them wanted extreme accuracy and looked at three-dimensional printing from that point of
view. We saw . . . a quick and dirty way, almost a sloppy way to do what MIT was trying to do.’’—Walter Bornhorst

Therics ‘‘There was a lot of evidence indicating that we were not appropriately treating high blood pressure because we
weren’t appropriately taking into consideration the variations in blood pressure during the course of the day . . . .
Even when we give people drugs, there continues to be arterial sclerotic cardiovascular disease . . . because we
don’t hit a morning rapid change in the rate of rise in blood pressure. If you can control the amount and time of drug
release to changes in blood pressure over a person’s daily cycle, you can solve [these] problems . . . . If you are a
clinical pharmacologist . . . you look at something that you can control with microarchitecture and materials. I had
this ‘chronopharmacological logic,’ and intuitively looked at the technology and thought we could use it to
compartmentalize the release of drugs . . . . If you know this, seeing three-dimensional printing as a way to make
time release drugs is quite reasonable, intuitive reasoning.’’—Walter Flamenbaum

Specific Surface ‘‘. . . the 3DPTM process can make uniform porosity ceramics, which is an incredibly difficult thing to do . . . . I knew
about materials that were different than those that Ely and his people were using in the lab [and that] made it
possible to see how to make ceramic filters.’’—Mark Parrish

‘‘There were two things that were happening. One, people didn’t want to cool down gasses to filter them, everyone
wanted to filter hot at the source. Two, people want more compact filters . . . . To do that, you have to get more
surface area in the same volume or the same surface area in a smaller volume of filter. A trend was
emerging . . . with the rise of cartridge filter people getting into the industrial area. The same thing had started to
happen in hot gas filtration and . . . I saw [that] the real benefit . . . was being able to get a lot of surface into a
smaller filter.’’—Andrew Jeffrey
3D Partners ‘‘From experience, he knew that the architectural model making industry . . . hasn’t changed a lot from exacto knives,
mylar, and foam. It is very time-intensive and takes a lot of crafts experience. By . . . setting up a service bureau to
use 3DPTM, you could get around that problem.’’—Andrew Kelly.

3D Orthopedics ‘‘As a medical professional I was also aware of the shortcomings of existing surgical techniques. They’re using cadaver
bones . . . or they’re using pre-formed things that are either plastic or ceramic. The surgeon is literally hand grinding
a big block of material during surgery . . . . They don’t fit well and controlling and restoring normal form and contours
is difficult, if not impossible . . . . The 3DPTM process would allow you to provide an anatomically accurate form that
fit the defect so that it restored the area to normal contours. This avoids problems that affect patients aesthetically
and even functionally . . . . There were a few start-up companies involved in laser lithography. This allowed three-
dimensional forming of some polymer-based materials. This was very limiting because if you are going to make
replacement body parts, you have to be able to use all materials . . . . One thing that the 3DPTM process did is to
allow you to use the whole world of materials . . . . I was doing a lot of research in ceramics and I have an advanced
degree in materials science. I also do work on replacement teeth and bones. I know that there are certain
microstructures that are conducive to being replaced by bone. Biological applications require that you control the
microstructure and macrostructural aspects, and the 3DPTM process lets you do that . . . . I thought that the 3DPTM
process would allow us to make a scaffold matrix which would allow for the in growth and replacements with the
patient’s own bone . . . .’’—Stephen Campbell

3D Imaging ‘‘I knew that the 3DPTM process could solve this problem and that stereolithography could not because of my technical
background. It was clear from that work that sterolithography could only print in two colors, but the 3DPTM process
could print in many.’’—Todd Jackson

Conferences ‘‘I knew that people like images of themselves and their families, but they would prefer them in three dimensions. They
would like little busts of themselves and their families, rather than just photos of them.’’

of the 3DPTM process, Stephen was working on a program bones. His prior education in materials science allowed
at Brigham and Women’s hospital to reconstruct images him to understand how the 3DPTM process would solve
from MRIs and CAT scans to construct 3-D models of the problem of creating artificial body parts in multiple

464 ORGANIZATION SCIENCE /Vol. 11, No. 4, July–August 2000

SCOTT SHANE Prior Knowledge and the Discovery of Entrepreneurial Opportunities

materials; whereas his surgical experience led him to rec- bution of knowledge in society influences who discovers
ognize how the 3DPTM process would make surgery to these opportunities.
replace body parts easier and more effective.
Prior knowledge also influenced Lau Christianson (3D Limitations
Imaging) and Todd Jackson’s (3D Imaging) discovery of This article is not without limitations. First, although the
a solution to particular customer problems. However, un- study provides direct evidence that individuals will dis-
like many of the entrepreneurs, Lau and Todd recognized cover opportunities related to their prior knowledge, it
this solution because of prior knowledge about technol- provides only indirect evidence about the ability of some
ogy. Todd Jackson knew how to use three-dimensional people and not others to discover opportunities. Second,
printing to make objects out of multiple materials and in the sample is composed of highly educated people who
multiple colors because he is pursuing a Ph.D. at MIT, might have been trained to discover opportunities. Con-
where he is designing a CAD interface program that ‘‘will sequently, the results might not generalize to the overall
take the image as constructed on the computer and allow population. Third, the respondents provided self-reported
the 3D printer to put different materials next to each other. data, based on introspection and retrospection. They
This is the equivalent of color printing. You can go ahead might have rationalized a process that had either favor-
able or unfavorable outcomes for them. Fourth, the study
and put multiple materials together or two different colors
examined only entrepreneurs. Therefore, the results might
together.’’ He explains that the customer problem that 3D
be subject to selection effects that would not be present
Imaging would solve is exactly the problem that he was
if nonentrepreneurs had been included. Nevertheless, the
trying to solve in his thesis.
strength of the results and their importance to entrepre-
Mike Padnos’ (Conferences) solution to a customer
neurship theory suggests that future researchers consider
problem also was influenced by his prior knowledge. the role of prior knowledge in the discovery of opportu-
However, unlike the other entrepreneurs, who developed nity.
this solution through prior work experience or education,
Mike developed his prior knowledge as a consumer. He Contribution to Research
recognized that people go to malls to buy photographs of The results have several important implications for entre-
themselves and their families so he decided to start a busi- preneurship theory. Prior research makes several assump-
ness in which he would make three-dimensional sculp- tions that are inconsistent with the empirical results found
tures from photographs. here. Technological change does not generate obvious en-
In contrast, 3D Partners recognized how to use the trepreneurial opportunities, which allow anyone to dis-
3DPTM process to solve a customer problem because of cover any given entrepreneurial opportunity which results
the founders’ prior knowledge as users. 3DP Partners from that change. Cognitive limits and the specialization
would solve the problems of speed and cost in architec- of knowledge preclude entrepreneurs from identifying the
tural model making by allowing less experienced and less complete set of entrepreneurial opportunities in a given
costly employees to produce models in one-tenth of the technology and comparing between alternatives to select
time that they currently take. The team recognized the the best one in which to invest (Aldrich and Zimmer
solution to the customer problem of speed and cost be- 1986). Moreover, the results show that the process of dis-
cause the architect on the team knew from prior experi- covery can be driven by recognition of knowledge al-
ence how time consuming and skill-intensive the craft of ready possessed rather than by search for knowledge
producing concept models was. needed (Kirzner 1997). Consequently, individuals who
have developed particular knowledge through education
and work experience will be more likely than other people
Discussion to discover particular entrepreneurial opportunities in re-
Existing explanations for entrepreneurship are incom- sponse to a given technological change (Venkataraman
plete because they do not explain adequately the process 1997).
of opportunity discovery, an important part of the entre- The results also provide evidence that individual dif-
preneurship process (Kirzner 1997). This study proposed ferences influence the discovery of opportunities in a dif-
that all people are not equally likely to recognize the same ferent way than that generally described in the literature.
entrepreneurial opportunities which result from techno- This study suggests that entrepreneurs discover opportu-
logical change. It also proposed the entrepreneurs can and nities, not because they have special attributes (e.g., un-
will discover opportunities through recognition rather usual perceptive ability) that make them better able to
than search. Moreover, it proposed that the prior distri- recognize opportunities (Schumpeter 1934, p. 79; Shackle

ORGANIZATION SCIENCE /Vol. 11, No. 4, July–August 2000 465

SCOTT SHANE Prior Knowledge and the Discovery of Entrepreneurial Opportunities

1982), but because idiosyncratic prior knowledge makes fluences opportunity discovery outside of the context of
people better able to discover certain opportunities than high technology. For example, would two potential en-
others (Venkatarman 1997, Fiet 1996). This finding is trepreneurs, one with a restaurant background and the
important for two reasons. First, it provides a role for other with an apparel background, look at the same vacant
individual-level attributes that may be more likely to gen- storefront and see restaurant and clothing store opportu-
erate large, statistically significant, robust, and consistent nities, respectively? While the results of this study would
differences across samples than do explanations that de- suggest an affirmative answer, prior knowledge might in-
pend on the superiority of entrepreneurs on some dimen- teract with the complexity of discovering the opportunity.
sion. Therefore, investigation of how prior knowledge influ-
Second, the results reiterate the importance of individ- ences the discovery of opportunities across different busi-
ual differences to the entrepreneurship process, and dem- ness settings would be valuable. Possible approaches to
onstrate that entrepreneurship can not be explained solely researching this question include field studies of entre-
by reference to factors external to individuals, like com- preneurs who rent the same retail space, experimental
petition or prior firm foundings (e.g., Singh and Lumsden studies designed to manipulate the information about op-
1990). In fact, the results suggest that individual differ- portunities, or longitudinal observation of particular retail
ences may imprint the development of new organizations locations.
even before they are founded. This is important because In addition, the results suggest that future research on
previous research has shown only that new organizations the exploitation of opportunities should control for vari-
are programmed during firm infancy not before birth ation in the attributes of the opportunities that different
(Stinchombe 1965). entrepreneurs discover. Previous research has drawn con-
The findings also have important implications for the- clusions about the effect of individual differences on the
ories of economic growth. While Rosenberg (1994) and decision to exploit entrepreneurial opportunity based on
others have provided numerous historical examples in the assumption of a zero correlation between individual
which inventors failed to recognize the commercial value differences and opportunity discovery (Khilstrom and
of their inventions, ranging from the telephone to the la- Laffont 1979, Evans and Jovanovic 1989). Because in-
ser, theories of economic growth typically ignore the dividual differences influence the discovery of opportu-
question of opportunity discovery in the process of tech- nity and the decision to exploit opportunity (Schumpeter
nological change. These theories generally assume that 1934, p. 79), this assumption has led to results that over-
the development of new technology leads to an immedi- state the effects of individual differences. The lack of con-
ate increase in economic output because entrepreneurs trols for the value of opportunities has led researchers to
immediately grasp the entrepreneurial opportunities that falsely attribute the variance belonging to the opportunity
result from technological change (Kirzner 1985). This to the individuals. To accurately explain the role of in-
study shows that before technological change can influ- dividual differences in the tendency to exploit opportu-
ence output, an individual must perceive an entrepre- nities, researchers must examine the variance in the in-
neurial opportunity. Because not all entrepreneurs will dividuals net of the variance in the opportunities that they
perceive the same opportunities, some desirable entrepre- discover. This could be done several ways. Cross-
neurial opportunities may go unnoticed and unexploited. sectional studies could include measures of the attributes
Moreover, a small amount of technological change of the entrepreneurial opportunity as control variables in
might generate a large amount of economic output be- a regression equation. Alternatively, longitudinal studies
cause entrepreneurs discover a large number of opportu- could measure multiple opportunities for the same indi-
nities in which to exploit the technology. Conversely, a vidual to partial out the portion of the decision influenced
large amount of technological change might generate a by the opportunity.
small amount of economic output because it generates
a small number of entrepreneurial opportunities. Further- Normative Implications
more, ‘‘at any given point in time output may be less than The finding that the discovery of entrepreneurial oppor-
is possible and desired, because of opportunities that have tunities depends on prior knowledge has several impli-
remained unnoticed’’ (Kirzner 1985, p. 74–75). cations for individuals seeking to become entrepreneurs.
People will be more likely to discover opportunities in
Future Directions sectors that they know well than in sectors that are ‘‘hot,’’
This study also suggests several avenues for future re- because the investment in the information necessary to
search. Scholars could examine how prior knowledge in- recognize opportunities is likely to occur long before a

466 ORGANIZATION SCIENCE /Vol. 11, No. 4, July–August 2000

SCOTT SHANE Prior Knowledge and the Discovery of Entrepreneurial Opportunities

particular sector is popular. Therefore, potential entrepre- to become entrepreneurs not because they lack the re-
neurs should look to discover opportunities in what they sources to do so but because they lack the prior knowl-
know rather than in what is popular with other entrepre- edge necessary to discover valuable opportunities. Con-
neurs. sequently, a public policy solution to lack of
In addition, opportunity evaluation involves a compar- entrepreneurship among certain groups may be to invest
ison between the discovered opportunity and other alter- in the development of knowledge in these disadvantaged
natives to entrepreneurship that the entrepreneur faces, groups.
rather than between the value of the discovered oppor- In addition, the findings suggest that unrecognized
tunity and other entrepreneurial opportunities that the en- costs to society are incurred where patent holders grant
trepreneur is unlikely to identify. Consequently, evalua- world-wide exclusive licenses to their discoveries. By
tion of opportunity involves comparing opportunities to granting an exclusive license, a patent holder precludes
one’s own opportunity cost and liquidity and uncertainty the possibility that a future entrepreneur will exploit a
premiums, not comparing one’s own opportunity to those more valuable use for the technology than the one pro-
of other entrepreneurs. posed by the exclusive licensee. While this cost of exclu-
Furthermore, the effect of prior knowledge on oppor- sive licensing might prove smaller than the benefits that
tunity discovery also creates interesting wrinkles in the exclusivity provides, to date public policy has treated this
relationship between entrepreneurs and investors. To cost as nonexistent. Future research would greatly inform
raise money, entrepreneurs have to disclose their oppor- public policy if it weighed the costs and benefits of world-
tunities to potential investors. If investors are approached wide exclusivity to technical discoveries.
by multiple entrepreneurs who have identified different Finally, the results show that efforts to centralize op-
opportunities to exploit a given technology, the investors portunity discovery will meet with difficulty. Some re-
may learn about the existence of more opportunities than searchers have argued that a decentralized economy will
any given entrepreneur recognizes. They may choose not have difficulty in fully exploiting the growth returns of
to fund an entrepreneur’s opportunity because other en- general purpose technologies. Exploitation by multiple
trepreneurs proposed better ways to exploit the same tech- entrepreneurs in different fields creates duplication of ef-
nology. This structural difference in information suggests fort, reduces the economies of scale and scope from co-
that entrepreneurs should obtain control over the rights to ordination, and creates contracting problems (Bresnahan
and Trajtenberg 1995). However, decentralization has
exploit new technology to improve their probability of
offsetting advantages in the discovery of opportunities.
receiving funding. The patent system allows an entrepre-
Nelson (1987) argues that uncertainty combined with dif-
neur to prevent future entrepreneurs from exploiting a
ferences in knowledge among experts makes the efforts
given technology even if the future entrepreneur discov-
to plan and coordinate the development of new technol-
ers a more valuable use for the technology than the first
ogy ineffective. Central agents, such as university tech-
entrepreneur.
nology licensing officers or government officials will be
The field evidence provides at least one example of this unable to identify all of the entrepreneurial opportunities
process. Subsequent to Walter Flamenbaum’s discovery to exploit a given new technology because they have prior
of the opportunity to use the 3DPTM process to make knowledge about some markets and technical fields, but
drugs, Lau Christianson and Todd Jackson discovered the not others. Consequently, as Hayek (1945) argued, gov-
opportunity to use the 3DPTM process to make surgical ernments and organizations cannot successfully central-
models. Even if Lau and Todd’s opportunity were more ize the process of opportunity exploitation.
valuable than Walter’s, Therics had already obtained
from MIT the rights to all medical applications for the
3DPTM process. Therefore, Therics was protected against
investor preference for Lau and Todd’s application for Conclusion
the 3DPTM process. This paper showed that differences in prior information
The results also provide several implications for public influence who discovers entrepreneurial opportunities to
policy. Government policies to promote entrepreneurship exploit new technology. This finding generates several
generally provide disproportionate funding to disadvan- important implications for development of theory, public
taged groups to enhance the probability that people in policy, and the practice of entrepreneurship. Hopefully,
these groups will become entrepreneurs. However, if the future researchers will use the concepts of limited infor-
discovery of entrepreneurial opportunities is dependent mation and entrepreneurial discovery presented here to
upon prior knowledge, disadvantaged groups might fail generate a robust explanation for entrepreneurship.

ORGANIZATION SCIENCE /Vol. 11, No. 4, July–August 2000 467

SCOTT SHANE Prior Knowledge and the Discovery of Entrepreneurial Opportunities

Acknowledgments distinguish entrepreneurs from managers? J. Bus. Venturing 13(4)

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Accepted by Alan Meyer; received July 1998. This paper has been with the author for two revisions.

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