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Business Administration QUESTION #9599
Question 1
An entrepreneur identifies a market gap but has limited capital. She uses 'bootstrapping' — funding growth entirely from customer revenues with no external investment. Which theory of entrepreneurship most closely describes her approach, and what is its primary limitation?
  • Schumpeter's creative destruction theory — she is disrupting an existing market; limitation is that creative destruction requires scale that bootstrapping cannot achieve
  • Effectuation theory (Sarasvathy) — she starts with available means (existing resources) and builds toward an emergent goal rather than planning backward from a fixed objective; the primary limitation is that growth speed is constrained by organic cash flow, potentially allowing better-funded competitors to pre-empt the market opportunity✔️
  • Opportunity recognition theory — she identified an information asymmetry; limitation is that without patents she cannot protect her first-mover advantage
  • Resource-based view of entrepreneurship — she is building unique resource combinations; limitation is that without human capital investment through hiring, capabilities remain founder-dependent
Correct Answer Explanation
Sarasvathy's effectuation theory describes entrepreneurs who start with what they have (means) and build possible futures from existing resources — contrasted with causation (planning backward from a pre-defined goal with optimal resource acquisition). Bootstrapping is the financial expression of effectuation. Its core limitation is growth velocity: organic revenue funding is slower than venture capital, creating a window of vulnerability where well-funded competitors can leapfrog the bootstrapper's market position.