Coming from Good Stock: Where Do Innovative Ventures Come From?
Research by Jesper B. Sorensen
Capital Ideas
Vol. 2, No. 2 Fall 1999
University of Chicago Graduate School of Business
Some of the most radically innovative products and technologies
today are developed and commercialized not by existing companies,
but by entrepreneurial ventures. This is remarkable given the fact
that creating a new organization requires mobilizing a substantial
array of social and material resources. Innovative entrepreneurs
must not only overcome the skepticism that greets new, unproven
ideas, but must also conquer the reluctance of resource providers to
invest in ventures that have no track records. Understanding the
factors that shape the emergence of innovative ventures has
important policy implications. Where do innovative new ventures come
from?
One answer to this question can be found in Silicon Valley lore,
which is filled with stories of young kids with bright ideas who
become mega-entrepreneurs. Steve Jobs and Steve Wozniak founded
Apple Computers in the garage of Jobs' parents' home. Bill Gates
dropped outof college to found a software company. Michael Dell
launched a computer company out of his dorm room in
college. Inspiring as these stories are,however, they obscure the
fact that most start-ups today are not foundedby college drop-outs,
but by people in the middle of their careers, often mid-level
managers, salesmen and engineers, who have spent many years working
for established firms.
Intel Corporation was launched, not by a group of inexperienced
techies,but by a band of experienced engineers disaffected by
their work at Fairchild Semiconductor. Tivoli Systems, which
develops software, was founded bytwo former IBM engineers. Donna
Dubinsky capitalized on her successfulcareer with Apple Computer
and Claris Software to co-found Palm Computing,parent of the
first broadly successful handheld computer, the Palm Pilot.And
Kim Polese built on her career at Sun Microsystems to become CEO
ofMarimba, one of the most talked-about start-ups in Silicon
Valley.
Recent researchfrom the University of Chicago Graduate School of
Business suggests thatthe characteristics of established firms
have important implications forthe dynamics of entrepreneurial
activity. In "Coming From Good Stock:Career Histories and New
Venture Formation," professor Jesper B. Sorensen,together with
co-authors M. Diane Burton of Harvard Business School and
Christine Beckman of the University of California-Irvine, argue
that the experiences, information and credentials that
entrepreneurs accumulatewhile working for established firms play
a critical role in shaping the entrepreneurial
process. Specifically, the authors argue that entrepreneurs
receive crucial informational and reputational benefits from
having worked for employers that occupy prominent positions in
entrepreneurial networks.
Entrepreneurial Hotbeds
An important fact about established firms is that they differ in
the extent to which a firm is visible to those engaged in
entrepreneurial activity. One simple determinant of a firm's
visibility in an entrepreneurial context is the extent to which
it is a source of entrepreneurial ventures.Much as geographical
regions differ in their rates of entrepreneurial activity,
established firms differ markedly along this
dimension. Somefirms are entrepreneurial hotbeds, as perhaps
most famously exemplifiedby Fairchild Semiconductor, founded in
1957. Fairchild spawned ten new ventures in its first eight
years; moreover, most of the 31 semiconductor firms founded in
Silicon Valley in the 1960s could trace their lineage to
Fairchild. Examples of such "Fairchildren" include Intel,
Advanced Microdevices and LSI Logic. Other firms give rise to
relatively few, if any, new ventures. Today in Silicon Valley,
new ventures are particularly likely to trace their roots to
firms like IBM, Apple, Hewlett-Packard, Intel and National
Semiconductor.
Sorensen and his collaborators argue that innovative new
ventures are more likely to emerge from established firms that
are entrepreneurially prominent. In part, this is due to
differences in the types of employees they attract. However, the
authors found that employer prominence affects entrepreneurial
behavior even after these differences are taken into account.
They offer two primary reasons.
First, there are important informational and resource benefits
to being affiliated with a prominent firm. A central and
prominent position in an entrepreneurial network makes it
easier for a potential entrepreneur to scan the environment,
identify novel ideas, and explore new market possibilities. By
virtue of working for a firm that generates many start-ups,
employees of prominent firms are also more likely to have
personal contacts with members of the entrepreneurial
community. This helps facilitate access to ideas and resources.
Second, Sorensen and his co-authors argue that substantial
reputational benefits accrue to employees of prominent
firms. Because the potential of innovative ventures is so highly
uncertain and difficult to assess, resource providers -- such as
venture capitalists -- look to more easily observable attributes
that are thought to be associated with the quality of the
venture, including the work histories of the founders. Knowing
that an entrepreneur has worked for a firm that in the past has
produced successful ventures may help reduce the perceived
uncertainty surrounding a venture. In this respect, potential
entrepreneurs at established firms benefit from the success of
those who preceded them.
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