Intuition–Driven Prospection and Uncertainty Misalignment: Sources of Entrepreneurial Agency Problems in Ventures

ABSTRACT Start‐up CEOs are usually more aligned with the interests of the venture board compared to CEOs in legacy firms, and therefore it is usual to conclude that the traditional agency problem is lower in ventures. In this article, it is argued that this is only half of the story, and that the agency problem is reversed in early ventures such that the CEO acts as the principal and the board as the agent. It is further suggested that the balance of power between the CEO and the board affects the severity of misalignments in interests and goals. The reversal of the agency cost perspective is here named the entrepreneurial agency perspective. The main purpose of this conceptual article is to propose two fundamental tensions between the CEO and the board in ventures, which together form the basis of the entrepreneurial agency perspective. The first tension arises because the CEO and the board systematically differ in their interpretation and understanding of the venture's uncertainty, resulting in the board adopting a shorter‐term view of the venture's development compared to the CEO. The second tension arises because venture CEOs often have less large‐company industry experience than the board, which allows them to demonstrate greater flexibility and creativity in envisioning fundamentally uncertain futures—futures for which analytical (a priori) or empirical (statistical) probabilities are difficult, if not impossible, to determine. Building on the pervasive role of intuition in prospection, and on neuroscientific findings that prospection involves the recombination of past memories, it is suggested that venture CEOs effectively act as the principal in driving the venture's envisioning forward. Two propositions are suggested based on these two tensions, with underpinnings from the management, psychology, and neuroscience fields.