Bocconi - Duke Seminar Nov 24 th , 2008

1. Bocconi - Duke SeminarNov 24th, 2008 Presenters: Duke – UNC at Chapel Hill Elena Vidal SongcuiHu

2. Proposition 1: Spinouts weaken innovation within large firms, since they represent values generated by the firm but not appropriated by it.

3. Definition • A distinctive class of entrepreneurial entrants that inherit knowledge from industry incumbents through their founders. • “Founded by former employees of an incumbent firm, these stand-alone entrepreneurial ventures compete in the same industry as the parent, but have no equity relationships with any incumbent.” • Agarwal et al.

4. Why weaken innovation? • Innovative people or experts leave. • Knowledge decreases and diffuses. • Exploitation of market opportunities that were inside the firm by now outsiders. • Potential lost.

5. Why innovative employees turnover? • Parent companies’ lack of technological and/or market pioneering know-how create frustration among their employees. • Employees’ confidence in venturing out • Contracting problems between employers and employees. • Change of leadership e.g. merged or acquired by other firms.

6. Innovative Employees • Spin-out founders have certain personality characteristics – they are more likely to produce innovations. • Tacit knowledge is gone with the team of employees that left with the spin-out. • “Losing” innovators will certainly hurt innovation in the firm.

7. Diffusion of Knowledge • Spin-out founders take their specific knowledge with them, thus the knowledge capital inside the firm reduces. • Private knowledge is gone. • Easier for spin-outs (assuming smaller firms) to benefit from spillovers from the parent company.

8. Exploitation of Opportunities • Non-commercialized technologies or unexploited market opportunities, particularly those that are substantial and path breaking, increase employees’ confidence in venturing out. (Eisenhardt, 1989). • Spinouts will exploit these opportunities to compete with parent companies.

9. Potential Lost • Firms lose control over assets that might be specific and highly valuable in the market. • Firms don’t exploit the opportunities that were seen by someone inside the firm. • Inertia will present. • Will others follow?

10. Direct Threats • Experience & Skills loss • Knowledge & Information loss Technological Knowhow: the ability to generate new scientific discoveries and technological breakthroughs. Market pioneering knowhow: the ability to commercialize the technological innovation ahead of competitors. Private knowledge: facilitate the diffusion of public knowledge Sticky knowledge • Rules, Routines & Procedures loss

11. Indirect Threats • Social Capital Loss Network: Employees of prominent firms , by virtue of their network centrality, will be exposed to stronger flows of new information about technologies, emerging markets, and unmet customer needs., and more likely to be known about them in the entrepreneurial community. Legitimacy: Prior employment with a marquee firm serves to transfer status and legitimize the new venture (Podolny, 1994).

12. Indirect Threats • Social Capital Loss Reputation: The experiences and accomplishments of prospective founders will be more widely recognized if they come from prominent employers. Financial support: Employees of knowledge-rich firms benefit from enhanced “entrepreneurial capital” , which facilitates mobilization of resources necessary to undertake an entrepreneurial venture (Burton et. al., 2002; Higgins &Gulati, 2003).

13. Conclusion Direct effect: “Steal” skills & knowledge + Moderating Structural position of parent companies Parents Companies Spinouts + Moderating Indirect effect: “Steal” social capital

14. Thanks!

15. Research Questions • Spinout rates—industry characteristics? high technology…. • Spinout rates—life cycle of industry? • Spinout rates—life cycle of product? • Spinout rates—firm characteristics? age, size, structure, innovative, diversifying….