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Spawned with a Silver Spoon

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1 Spawned with a Silver Spoon?1 Entrepreneurial Performance and Innovation in the Medical Device Industry Aaron K. Chatterji Duke University Fuqua School of Business [email protected] January 2007 Abstract Entrepreneurs in high technology industries often have prior experience at incumbent firms, but we know little about how knowledge obtained at the prior employer impacts entrepreneurial performance. Drawing on previous work from management, economics, and organizational sociology, I assess the impact of prior industry experience on entrepreneurial performance and innovation in medical device start-ups. I find that spawns (ventures started by former employees of incumbent firms) perform better than other new entrants. Interestingly, my findings suggest that this superior performance is not driven by technological spillovers from parent to spawn. Instead, I find that most spawned entrepreneurs do not inherit technical knowledge from the parent firm, contradicting much of the previous literature. To account for the superior performance of spawned ventures, I discuss the different types of non-technical knowledge that are inherited by spawns and explain how these types of knowledge impact new venture performance. These results build on the emerging literature on entrepreneurial spawning and contribute to our understanding of knowledge inheritance between firms. I utilize data from VentureSource, Venture Economics, the NBER patent database, and semi-structured interviews. 1. Introduction Entrepreneurship in high technology industries often occurs through “spawning” (Gompers et al. 2005, Klepper, 2001, Brittain and Freeman, 1986). This is the process by which former employees of incumbent firms found entrepreneurial ventures in the same industry.2 Employment at an incumbent firm (the parent) frequently provides a springboard for the incipient entrepreneur to launch a new venture (the spawn). Prospective entrepreneurs can use their experience at an incumbent firm to acquire financial resources, accumulate social capital, augment their technical skills, and identify entrepreneurial opportunities. Once these nascent entrepreneurs found a new venture, their progress may be heavily influenced by the characteristics of their former employer, as they raise capital, establish organizational routines, develop and manage intellectual property, and choose the appropriate business strategy.3 1 I am grateful to Waverly Ding, John Freeman, Bronwyn Hall, Steven Klepper, David Levine, David Mowery, David Teece, Catherine Wolfram, and the students at the Business and Public Policy Student Seminar and the Innovation Workshop at the Haas School of Business, UC-Berkeley. This research is supported by the Ewing Marion Kauffman Foundation. I also wish to thank Evan Anderson, Kirsten Armstrong, and many other medical device entrepreneurs, venture capitalists, and engineers who have contributed to my understanding of this industry. All mistakes are my own. 2 Agarwal et al; 2005 refer to these firms as spin-outs. I use the terms interchangeably in this paper. 3 Of course, individual characteristics matter greatly as well, and there is a significant literature exploring which individual characteristics relate positively to entrepreneurship2 Despite the considerable influence of prior employment on entrepreneurship, few studies have explicitly related attributes of the parent firm to the strategy and performance of the spawned entrepreneurial venture. How then does prior employment impact the entrepreneurial process? Specifically, how does knowledge gained at the parent firm impact the performance and innovative activities of the spawned venture? In this paper, I will investigate whether entrepreneurial spawns perform better than their competitors and assess to what extent spawns incorporate knowledge from the parent firm. A key issue in this literature concerns the type of knowledge that the spawn gains from the parent, and I present some preliminary results on this point as well. In the next section, I will discuss the relevant literature from management, economics, and organizational sociology. I use this prior work to develop 4 testable hypotheses, which I propose in Section 3. Section 4 provides a brief overview of the medical device industry and explains why it is well suited for this study. Section 5 describes the dataset and how it was constructed. Section 6 presents the major results on performance and knowledge inheritance. I offer my conclusions and outline the major caveats to this analysis in Section 7. 2. Literature Review and Theoretical Background I draw on recent work from management, economics, and organizational sociology on entrepreneurship, and in particular entrepreneurial spawning and spin-offs to develop 4 testable hypotheses. The key findings of prior work suggest that 1) Organizations differ in their propensity to spawn entrepreneurial ventures; 2) Spawns incorporate technical and other types of knowledge from the parent firm, but also differentiate themselves in their business strategies; and 3) The knowledge inherited from the parent firm, along with other characteristics of the parent firm, will impact the performance of spawns. 2.1. Prior Employment and Entrepreneurial Opportunities While the romantic (and popular) notions of entrepreneurship conjure up images of a college drop-out working out of his parents’ garage on the next big thing, most entrepreneurs have significant prior employment experience (Cooper, 1985; Robinson and Sexton, 1994), and many prospective entrepreneurs first identify entrepreneurial opportunities at their previous job (Cooper et al. 1990). In fact, Bhide (1994) found that 71 percent of the founders he studied exploited ideas they came across at their previous employer. Once an employee invents a new technology or identifies a new entrepreneurial opportunity, he may choose to disclose it to his employer or not. Anton and Yao (1995) model this decision, and also theorize about when the innovation is developed at the parent firm or when a spin-off results. In their view, spin-offs occur because of contracting problems between firm and employee, and these new ventures will target niche markets with significant innovations. Thus, how the parent firm designs its internal incentive structure, as modeled by Hellmann (2002), will influence the employee’s decision to become an entrepreneur. 2.2. Entrepreneurial Spawning There is also


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