Ideal team power structures for new ventures

Research Paper Title:

“Does new venture team power hierarchy enhance or impair new venture performance? A contingency perspective”

Authors:

Xiao-Yun Xie (School of Management, Zhejiang University)
Wen Feng (School of Management, Zhejiang University)
Qiongjing Hu (School of Management, Zhejiang University)

Background:

The constituents of an ideal new venture team (NVT) have been extensively discussed in the literature, but whether optimal new venture performance requires power to be concentrated in the lead entrepreneur or be equally shared among NVT members has not been established. The consequence of power hierarchy among NVT members is important because it largely influences the effectiveness of NVT interaction and thus is critical for new venture performance.

Methodology:

Sample: Five-year panel data of new internet firms listed on the National Equities Exchange and Quotations (NEEQ) in China
Sample Size: 285 new internet ventures (460 firm-year observations)
Analytical Approach: centralization of NVT members' ownership power to measure power hierarchy and the return on assets (ROA) in the next year to capture new venture performance and 16 follow-up semi-structured interviews with NVT members to support the results found in the quantitative study

Hypotheses:

1. Functional background homogeneity will moderate the effect of NVT power hierarchy on new venture performance, such that the effect will be positive (negative) when functional background homogeneity is low (high).

2. Shared team experience will moderate the effect of NVT power hierarchy on new venture performance such that the effect will be positive (negative) when shared team experience is low (high).

3. There is a three-way interaction effect of NVT power hierarchy, functional background homogeneity, and the powerholder's prior founding experience on new venture performance. When the functional background homogeneity is low (high), the positive (negative) effect of NVT power hierarchy on new venture performance will be stronger when the powerholder has more prior founding experience.

4. There is a three-way interaction effect of NVT power hierarchy, shared team experience, and the powerholder's prior founding experience on new venture performance. When the shared team experience is low (high), the positive (negative) effect of NVT power hierarchy on new venture performance will be stronger when the powerholder has more prior founding experience.

Results:

• The study’s findings show that whether the effect of NVT power hierarchy on new venture performance is positive or negative is contingent on NVT homogeneity (in terms of functional background homogeneity and shared team experience)

• When NVT homogeneity is low (i.e., functional background homogeneity or shared team experience is low), the team may be affected by dissimilar opinions, and the NVT power hierarchy can efficiently resolve disputes and enhance new venture performance.

• When NVT homogeneity is high, the team is threatened by a lack of diverse ideas, and the NVT power hierarchy fails to stimulate information sharing and thus impairs new venture performance

• The prior founding experience of the most powerful member in the NVT increases other NVT members' perceptions of his/her competence and strengthens the effect of power hierarchy under different conditions of NVT homogeneity. The positive (negative) effect of NVT power hierarchy on new venture performance is expected to be stronger when the powerholder has more prior founding experience in a heterogeneous (homogeneous) NVT.

Conclusion:

The findings provide insight into the contingency roles of NVT homogeneity and powerholder's prior founding experience in explaining whether NVT power hierarchy helps or hurts new venture performance. The researchers contribute to the discussion on NVT composition and new venture performance by exploring how NVT vertical inequality and horizontal variety interact to affect new venture performance. This study advances structural contingency theory by examining multiple contingencies of team composition and the person in charge, which interactively determine the effect of NVT power hierarchy on new venture performance. A centralized power structure can improve the efficiency of collective decision-making, but at the expense of integrating all members' diverse perspectives. To optimize performance, the structure should fit the contingencies of the NVT. When designing a vertical power distribution, founders should simultaneously consider the horizontal composition of the team and the lead entrepreneur's prior founding experience, to ensure the most appropriate power structure is implemented.