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Coming From Good Stock

Where Do Innovative Ventures Come From?

Research by Jesper B. Sørensen

Some of the most radically innovative products and technologies today are developed and commercialized not by existing companies, but by entrepreneurial ventures. This is remarkable given the fact that creating a new organization requires mobilizing a substantial array of social and material resources. Innovative entrepreneurs must not only overcome the skepticism that greets new, unproven ideas, but must also conquer the reluctance of resource providers to invest in ventures that have no track records. Understanding the factors that shape the emergence of innovative ventures has important policy implications. Where do innovative new ventures come from?

One answer to this question can be found in Silicon Valley lore, which is filled with stories of young kids with bright ideas who become mega-entrepreneurs. Steve Jobs and Steve Wozniak founded Apple Computers in the garage of Jobs' parents' home. Bill Gates dropped out of college to found a software company. Michael Dell launched a computer company out of his dorm room in college. Inspiring as these stories are, however, they obscure the fact that most start-ups today are not founded by college drop-outs, but by people in the middle of their careers, often mid-level managers, salesmen and engineers, who have spent many years working for established firms.

Intel Corporation was launched, not by a group of inexperienced techies, but by a band of experienced engineers disaffected by their work at Fairchild Semiconductor. Tivoli Systems, which develops software, was founded by two former IBM engineers. Donna Dubinsky capitalized on her successful career with Apple Computer and Claris Software to co-found Palm Computing, parent of the first broadly successful handheld computer, the Palm Pilot. And Kim Polese built on her career at Sun Microsystems to become CEO of Marimba, one of the most talked-about start-ups in Silicon Valley.

Recent research from the University of Chicago Graduate School of Business suggests that the characteristics of established firms have important implications for the dynamics of entrepreneurial activity. In "Coming From Good Stock: Career Histories and New Venture Formation," professor Jesper B. Sørensen, together with co-authors M. Diane Burton of Harvard Business School and Christine Beckman of the University of California-Irvine, argue that the experiences, information and credentials that entrepreneurs accumulate while working for established firms play a critical role in shaping the entrepreneurial process. Specifically, the authors argue that entrepreneurs receive crucial informational and reputational benefits from having worked for employers that occupy prominent positions in entrepreneurial networks.

Entrepreneurial Hotbeds

An important fact about established firms is that they differ in the extent to which a firm is visible to those engaged in entrepreneurial activity. One simple determinant of a firm's visibility in an entrepreneurial context is the extent to which it is a source of entrepreneurial ventures. Much as geographical regions differ in their rates of entrepreneurial activity, established firms differ markedly along this dimension. Some firms are entrepreneurial hotbeds, as perhaps most famously exemplified by Fairchild Semiconductor, founded in 1957. Fairchild spawned ten new ventures in its first eight years; moreover, most of the 31 semiconductor firms founded in Silicon Valley in the 1960s could trace their lineage to Fairchild. Examples of such "Fairchildren" include Intel, Advanced Microdevices and LSI Logic. Other firms give rise to relatively few, if any, new ventures. Today in Silicon Valley, new ventures are particularly likely to trace their roots to firms like IBM, Apple, Hewlett-Packard, Intel and National Semiconductor.

Sørensen and his collaborators argue that innovative new ventures are more likely to emerge from established firms that are entrepreneurially prominent. In part, this is due to differences in the types of employees they attract. However, the authors found that employer prominence affects entrepreneurial behavior even after these differences are taken into account. They offer two primary reasons.

First, there are important informational and resource benefits to being affiliated with a prominent firm. A central and prominent position in an entrepreneurial network makes it easier for a potential entrepreneur to scan the environment, identify novel ideas, and explore new market possibilities. By virtue of working for a firm that generates many start-ups, employees of prominent firms are also more likely to have personal contacts with members of the entrepreneurial community. This helps facilitate access to ideas and resources.

Second, Sørensen and his co-authors argue that substantial reputational benefits accrue to employees of prominent firms. Because the potential of innovative ventures is so highly uncertain and difficult to assess, resource providers -- such as venture capitalists -- look to more easily observable attributes that are thought to be associated with the quality of the venture, including the work histories of the founders. Knowing that an entrepreneur has worked for a firm that in the past has produced successful ventures may help reduce the perceived uncertainty surrounding a venture. In this respect, potential entrepreneurs at established firms benefit from the success of those who preceded them.

The authors use a sample of Silicon Valley startups to investigate the determinants of their initial strategies and financing. They focus on explaining two characteristics of these new ventures: 1) their founding strategies, specifically whether or not they pursue an "innovation strategy" (firms pursuing an innovation strategy are seeking to win a technology race in a new niche); and 2) their ability to attract external financing at the time of founding. The authors supplement this data with career histories of the founders of these ventures, including the identities of past employers. In this way, they are able to examine how differences in the prominence of established firms affect the strategy and financing of new ventures.

In their analyses, Sørensen and his co-authors found that entrepreneurs setting out from prominent employers have both informational and reputational advantages over those starting out from less prominent firms. Entrepreneurs from prominent firms are more likely overcome the obstacles associated with innovative and risky ventures, such as founding a firm dedicated to establishing a new product or market. Furthermore, the authors found that employees of prominent firms are more likely to secure external financing for their innovative ventures at the time of founding. This is particularly remarkable, since it suggests that resource providers are willing to commit funds to employees of prominent firms even in the absence of any track record for the product or the firm.

Coming from Good Stock

The research by Sørensen and his colleagues is part of a growing interest among organizational researchers in understanding how managerial careers shape organizational behavior and industry dynamics. Past studies have focused on what type of work entrepreneurs have performed in their careers and how this type of work affects their managerial and technical skills. But the authors are the first group to emphasize where entrepreneurs have worked prior to founding their new ventures. The identity of a person's employers assumes primary significance because inferences about the talents and abilities of individuals are constructed from their histories of affiliation with employers. Organizational reputations transfer to individual reputations. This parallels other studies that have documented that the prestige of the university a person attended has a positive effect on the prestige of his or her first job. The authors' results suggest that the effects of institutional or organizational prestige extend beyond the signals associated with educational credentials and encompass the firms and other organizations that people move through in the course of their careers.

Moreover, the effects of institutional prestige extend beyond their impact on individual life courses. The authors' results demonstrate that the social structure of existing organizations shapes the emergence of the innovative ventures that fuel industrial change. Thus, while established firms often have difficulty developing and commercializing new innovations, they play an important passive role in the emergence of entrepreneurial ventures.

Jesper B. Sørensen is an assistant professor of strategy at the University of Chicago Graduate School of Business. The research described here was funded in part by a grant from the Kauffman Center for Entrepreneurial Leadership to the University of Chicago Graduate School of Business.

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