When do spin-outs benefit from market overlap with parent firms
Examining how market overlap with parent organisations affects the performance of start-ups founded by former employees.
Spin-outs are independent start-ups founded by former employees of a firm, which often operate in the same industry as that firm, and benefit from knowledge and resources acquired there.
When they leave to form their entrepreneurial ventures, employees take with them considerable technical expertise and market-related knowledge. They may also bring colleagues, ties to customers and suppliers, and management practices developed by their previous employers. The overlap is beneficial to spin-outs because it reduces uncertainty during the early stages of new venture development. Therefore, given their initial resource endowment, spin-outs are found to perform better than many other market entrants.
Some recent studies, however, identify potential drawbacks of knowledge legacy for the performance of spin-outs. They suggest that spin-outs may find their parent firms willl adopt a hostile stance towards them, especially when they offer similar products or services. Substantial market overlap may even spark hostile retaliation.
The study When do spinouts benefit from market overlap with parent firms? explores whether there is an optimal distance from the parent firm’s knowledge domains that allows a spin-out to benefit from knowledge legacy, while maintaining a degree of differentiation to mitigate risk of hostile action by the parent firm.
The research proposes that the degree to which a spin-out’s operating market overlaps with its parent organisation has a curvi-linear relationship with its likelihood of survival. By choosing a limited overlap, a spin-out relinquishes the opportunity to benefit from a legacy of knowledge that might otherwise be leveraged at the time of entry into the market. However, a high level of overlap with the parent firm’s market domains increases the risk of direct confrontation with the parent firm, which in turn can lower the spin-out’s likelihood of survival.
Furthermore, the researchers hypothesise that the nature of the market overlap–performance relationship is contingent on the founders’ previous rank in the parent firm. The basis of this argument is that the volume of resources and knowledge transferred to spin-outs is a function of their founders’ hierarchical position in the parent organisations. Market knowledge is often tacit and embodied in individuals who have been involved in the development and use of that knowledge, which is the case for employees occupying a high-ranking position in the parent organisations.The curve is significantly flattened for spin-outs launched by such individuals.
The researchers tested their theories using data from the European biotech industry, where a high rate of start-ups exists, many founded by the former employees of incumbent firms. They also conducted interviews with founders of spin-outs in the sample to validate the theoretical arguments, and to gain a deeper understanding of the knowledge inheritance process, as well as the nature of interactions between spin-outs and their parent firms.
The study When do spinouts benefit from market overlap with parent firms? Is available for download at City Research Online. It has been published in Journal of Business Venturing.
