Human capital, parent size, and the destination industry of spinouts

Abstract

Research Summary We study how spinout founders' human capital and parent size relate to founders' propensity to stay in the same industry as their parents or to go outside the industry. Individuals with high human capital face a higher performance penalty if they form spinouts outside the parent industry, but they also face greater deterrence from large parents if they stay in that industry. Using matched employer–employee data on spinout founders and their coworkers, we find that individuals with higher human capital are less likely to form spinouts in distant industries than in the parent's industry. Further, we find that as parent size increases, such individuals are less likely to form spinouts in the parent's industry and more likely to form spinouts in distant industries. Managerial Summary We examine how the ability of potential entrepreneurs affects whether they found a startup in the same industry as their employers (“parents”) or in a different industry, and how that choice relates to the size of the parents. We find that founders with high ability are more likely to form a startup in the parents' industry. However, as the parent size increases, they are more likely to form a startup in a different industry. These findings suggest that while high‐ability founders want to benefit from their industry expertise by forming a startup in the parents' industry, some of them are dissuaded from doing so either because large parents try to retain high‐ability founders or because such founders want to avoid potential competition with large parents.

Founder team prior work experience: An asset or a liability for startup growth?

“…Both measures capture the aggregate prior number of years that a focal startup's founder worked for the same firm where another founder has concurrently worked, provided that such joint work ended not longer than 1 year before establishing the startup. This definition is consistent with the current literature on spinouts (Andersson & Klepper, 2013; Beckman, 2006; Sakakibara & Balasubramanian, 2020). Importantly, we compute the “founder joint same firm–same industry” and “founder joint same firm–other industry” measures at the firm level as the total number of years in which a subgroup of founders have worked together for the same firm normalized by the number of founders in this subgroup.…”

“…The explicit consideration of the four types of combinations of these different types of founders' prior work experience (outlined in Figure 2), allows us to conduct a more fine‐grained analysis of the different effects of these experience types. Unlike past studies that have lumped same industry and same firm prior work experience (Agarwal et al, 2004; Agarwal & Shah, 2014; Chatterji, 2009), studies that focus on same industry experience (Cooper et al, 1994; Sapienza et al, 2004; Tanriverdi & Venkatraman, 2005), and studies that focus on same firm experience across industries (Sakakibara & Balasubramanian, 2020), we explicitly highlight how the different combinations of prior firm and industry work experience of founder vary in their effects on startups' growth both early and later on in their lives (see Figure 1). In that respect, our theory and findings suggest that the positive and dysfunctional effects of founder imprinting are the strongest when founders' prior experience is within the same context (same firm and same industry), whereas these imprinting effects are weaker when founders have not worked for the same firm and/or in the same industry prior to establishing their startup.…”

“…As it is likely that founders with higher human capital will have stronger effects on the startups they found, supplementing our analyses with such data can further enhance our understanding of the effects we study. Taking the quality of founders' human capital into account may also allow us to address concerns that our findings are driven by the fact that spinouts that are established in the same industry from which their founders originated perform better partly because founders with higher human capital are more likely to form spinouts in their own industries (Sakakibara & Balasubramanian, 2020). Likewise, our data does not allow us to empirically capture several underlying processes that we highlight as key drivers of our results, such as founder team coordination or their use of contextually aligned knowledge.…”

“…Given the relative ease of transferring this knowledge, the extant literature has predominantly emphasized the role of founders' prior same firm experience in facilitating startup growth, analyzing the effects of founder teams coming from the same “parent firm” on the startups they establish (Agarwal, Echambadi, Franco, & Sarkar, 2004; Agarwal & Shah, 2014; Chatterji, 2009). In so doing, this literature has oftentimes implicitly assumed that founders' prior same firm experience also captures prior experience in the same industry in which the startup operates (Agarwal et al, 2004; Agarwal & Shah, 2014; Chatterji, 2009), which is not necessarily the case (Sakakibara & Balasubramanian, 2020). The literature has also devoted little attention to the effects of founder prior same firm and same industry experience on the growth of startups later‐on, as they accumulate their own experience.…”

“…On the other hand, same firm prior work experience in a different industry (quadrant II in Figure 1) is likely to make the experience of founders less contextually aligned to that of their startup and hence less capable of leveraging their joint firm specific knowledge and combinative capabilities. For instance, while prior knowledge about marketing (Chatterji, 2009) or organizational routines and practices (Clarysse et al, 2011; Phillips, 2002) inherited by spinout founders, can be transferred to startups outside the parent industry, the relevance of such inherited knowledge to the performance of the spinout is likely be lower (Sakakibara & Balasubramanian, 2020). While both of these combinations are expected to more positively influence startup growth than founder prior work experience that is not in the same firm nor in the same industry in which the startup operates (quadrant IV in Figure 1), we hypothesize that:Hypothesis Early in startups' lives, founders' same firm but other industry prior work experience has a weaker positive effect on startup growth than founders' same firm and same industry prior work experience.Hypothesis Early in startups' lives, founders' same industry but other firm prior work experience has a weaker positive effect on startup growth than founders' same firm and same industry prior work experience.…”