Interorganizational Endorsements and the Performance of Entrepreneurial Ventures

Abstract

1999 by Cornell University. 0001-8392/99/4402-031 5/$1 .00.We thank Ron Burt, Rob Gertner, Steve Kaplan, Jesper Sorensen, and Olav Sorensen for many helpful suggestions. We also thank Satomi Degami and Mark Edwards of Recombinant Capital for supplying us with information on private biotechnology firms, and Joshua Lerner for providing us with the equity index used in our analysis and for his extensive comments on this paper. Seminar participants at the Sloan School of Management, Harvard Business School, Haas School of Business, and Columbia University offered many valuable suggestions for improving this paper. This paper investigates how the interorganizational networks of young companies affect their ability to acquire the resources necessary for survival and growth. We propose that, faced with great uncertainty about the quality of young companies, third parties rely on the prominence of the affiliates of those companies to make judgments about their quality and that young companies "endorsed" by prominent exchange partners will perform better than otherwise comparable ventures that lack prominent associates. Results of an empirical examination of the rate of initial public offering (IPO) and the market capitalization at lP0 of the members of a large sample of venture-capital-backed biotechnology firms show that privately held biotech firms with prominent strategic alliance partners and organizational equity investors go to lP0 faster and earn greater valuations at lP0 than firms that lack such connections. We also empirically demonstrate that much of the benefit of having prominent affiliates stems from the transfer of status that is an inherent byproduct of interorganizational associations.' Mobilizing resources to build a new organization is an undertaking laden with uncertainty and unforeseeable hazards (Stinchcombe, 1965; Aldrich and Auster, 1986; Freeman, 1997). It is also inherently a social process, because entrepreneurs must access financial and social capital and other types of resources via business relationships with parties outside of the boundaries of their organizations. Because the quality of a new venture is always a matter of some debate, however, the decision of external resource holders to invest their time, capital, or other resources in a new organization is one that must be made under considerable uncertainty about the embryonic enterprise's life chanrces and its financial prospects. This paper investigates how interorganizational relationships, by shaping potential investors' assessments of the quality of young companies, affect those firms' ability to obtain the resources to survive.Interorganizational exchange relationships can act as endorsements that influence perceptions of the quality of young organizations when unambiguous measures of quality do not exist or cannot be observed. As a result, the valuations of young firms are at times attributions influenced by the characteristics of the affiliates of the companies under scrutiny. Because strong relationships with prominent organiza...

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