Exposed: Venture Capital, Competitor Ties, and Entrepreneurial Innovation

Abstract

This paper investigates the impact of early relationships on innovation at entrepreneurial firms. Prior research has largely focused on the benefits of network ties, documenting the many advantages that accrue to firms embedded in a rich network of inter-organizational relationships. In contrast, we build on research emphasizing potential drawbacks to examine how competitive exposure, enabled by powerful intermediaries, can inhibit innovation. We develop the concept of competitive information leakage, which occurs when firms are indirectly tied to their competitors via shared intermediary organizations. To test our theory, we examine every relationship between entrepreneurial firms and their venture capital investors in the minimally-invasive surgical segment of the medical device industry over a 22-year period. We find that indirect ties to competitors impede innovation, and that this effect is moderated by several factors related to the intermediary's opportunities and motivation to leak important information. ABSTRACTThis study investigates the impact of early relationships on innovation at entrepreneurial firms. Prior research has largely focused on the benefits of network ties, documenting the many advantages that accrue to firms embedded in a rich network of inter-organizational relationships. In contrast, we build on research emphasizing potential drawbacks to examine how competitive exposure, enabled by powerful intermediaries, can inhibit innovation. We develop the concept of competitive information leakage, which occurs when firms are indirectly tied to their competitors via shared intermediary organizations. To test our theory, we examine every relationship between entrepreneurial firms and their venture capital investors in the minimally-invasive surgical segment of the medical device industry over a 22-year period. We find that indirect ties to competitors impede innovation, and that this effect is moderated by several factors related to the intermediary's opportunities and motivation to leak important information.

Geographic Co-location of Partners and Rivals: Implications for the Design of R&D Alliances

“…Other research from outside the alliance context has highlighted that firm knowledge may be exposed to rivals via other shared formal relationships that create indirect ties to rivals. For example, Pahnke et al (2015) investigated the situation where an entrepreneurial firm is indirectly connected to rival firms via common venture capitalists, showing that information leakage via these indirect ties to competitors negatively affected entrepreneurial firms' innovation activities. In addition, Hernandez et al (2015) examined the hazards of knowledge leakage to rivals via indirect ties formed by board interlock networks.…”

“…Our most immediate contribution to the alliance literature lies in building upon and extending the literature that investigates the competitive aspects of collaborations and the potential risks of partnering with rivals (Hamel et al, 1989;Khanna et al, 1998;Oxley & Sampson, 2004;Park & Russo, 1996). This literature has paid attention to dyadic competitive relationships with direct rivals while related research has just recently begun to consider the threats of knowledge leakage to rivals via indirect links such as through common suppliers, shared intermediary organizations, and board interlocks (Hernandez et al, 2015;Mesquita et al, 2008;Pahnke et al, 2015). We complement this emerging literature that has paid attention to shared formal ties among firms by suggesting that geographic co-location between a focal firm's partner and its rivals is an overlooked but important factor that can present risks of knowledge losses through other mechanisms (e.g., interpersonal interactions and mobility in a location and possible future interfirm transactions), and focal firms respond to the risks from partner-rival co-location through their alliance governance design choices.…”

“…For example, Pahnke, McDonald, Wang, and Hallen (2015) examined the negative effects of competitive exposure to rivals via shared intermediary organizations (i.e., venture capitalists).…”

Improving Corporate Venture Investment through Strategic Inter-Firms Knowledge Transfer: An Empirical Evaluation of Service Firms in Nigeria

“…Evidence that venture capitalists also transfer valuable non-patented knowledge is presented by Pahnke et al [8] based on interviews with entrepreneurs, venture capitalists and industry experts. There is, moreover, indirect evidence, highlighting the importance of knowledge transfer in other, similar settings.…”

A Pilot Study on the Perception of Innovation and Entrepreneurship

“…Clearly, change is a difficult situation in which resistance is apparent in all organizations. It is necessary to offer briefings on new management techniques and new concepts (Erdogan, 2012;Gumus & Gumus, 2015;Pahnke, McDonald, Rory, Wang & Benjamin, 2015). Starting from the belief that the change will start by knowing the concepts and defining them correctly, the preliminary study investigated how the concepts of "innovation" and "entrepreneurship" were defined by entrepreneurs, and as a more general purpose, how these definitions coincide with the knowledge in the literature.…”