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Research Paper Title:
“When do spinouts benefit from market overlap with parent firms?”
Authors:
Background:
Research on employee entrepreneurship suggests that spin-outs “ stand-alone new firms founded by former employees of established firms “ perform better than other types of new entrants as they 'inherit' knowledge and resources from their founders' prior employers (also known as parent firms). A few recent studies, however, show that spin-outs may face the risk of retaliation and suffer from the hostile attitude of the parent firms, especially when they offer products or services similar to those of the parents. This study, therefore, addresses a fundamental strategic decision that employees turned founders need to make, that is, how close or distant they should stay from the market position of the parent firms.
Highlights:
Spin-outs are entrepreneurial ventures founded by former employees of incumbent firms (i.e., parent organizations)
We examine how market overlap with parent organizations impacts the survival of spin-outs
Market overlap is beneficial to spin-outs because it reduces uncertainty in the early stages of spin-outs' development
Substantial market overlap however may spark hostile actions by parent firms, thereby creating disruptive competition
The hierarchical position of founders in the parent organizations moderates the market overlap-performance relationship
Methodology:
Number of studies: 1
Sample description: European VC-backed biotech spin-outs
Sample size: 117
Hypothesis:
The relationship between market overlap with the parent organization and a spin-out’s survival will be inverse U- shaped. (supported)
The hierarchical position of a spinout founder within the parent firm moderates the curvilinear relation between market overlap with the parent and spinout’s survival, such that the inverted U-shaped curve becomes flatter for the spinouts founded by high-ranked employees of the parent firms. (supported)
Results:
Staying close to the parent firms is beneficial to spin-outs because it allows them to benefit from know-how and resources gained by founders through their prior experience. However, a high level of overlap with the market domains of the parent companies may spark some hostile actions, thereby creating disruptive competition that, in turn, may lower the spin-outs chances of survival. Taken together, the results suggest that the degree to which the operating market of spin-outs overlaps with parent firms has a positive, but diminishing effect on spin-outs survival. The relationship between market overlap with parent firms and spin-outs survival is moderated by the founder’s previous hierarchical position. On the upside, spin-outs launched by high-ranked employees benefit from a more substantial level of knowledge and resources inherited from the parent companies. Moreover, high-ranked employees possess greater bargaining power, which allows them to negotiate more favorable exit conditions at the time of departure. On the downside, these spin-outs may face a higher risk of falling into competency traps, which locks them into the old logic, thus hindering their ability to acquire new resources or develop new routines that are more suitable for their targeted markets.
Conclusion:
From the parent firms perspective, employees transition to entrepreneurship can be cause for serious concern. This is because, in addition to the loss of important human capital, spin-outs may pose a serious competitive threat. In order to protect their competitive position in the market, parent companies are likely to retaliate and adopt a hostile attitude toward spin-outs that attack their vital markets. The findings of this study suggest that by minimizing the degree of market commonality, spin-outs can obscure their visibility and mitigate their competitive threat in the eyes of the parent firms. This could play a big role in reducing the parent’s motivation to undertake aggressive action.