Academic journal article Entrepreneurship: Theory and Practice

A Contingent Model of Network Utilization in Early Financing of Technology Ventures

Academic journal article Entrepreneurship: Theory and Practice

A Contingent Model of Network Utilization in Early Financing of Technology Ventures

Article excerpt

Most of the entrepreneurship literature has addressed the benefits and necessity of using social network ties as opposed to market methods in early venture finance, but it has largely understated the potential limitations and costs of doing so. Specifically, very sparse research has examined the factors that influence entrepreneurs' choice between using networks versus market methods. In this study, we propose a contingent model of network utilization when approaching initial investors, based on the dimensions of human capital of the entrepreneurs. We test this model with primary field survey data from 226 new high-tech ventures in Singapore and Beijing. The results show that high occupational status and relevant industrial work experience are positively associated with the entrepreneurs' propensity to utilize existing networks by enhancing the resourcefulness of their network ties (social capital); however, such influences are alleviated by entrepreneurs' marketing or managerial experience, which increases the entrepreneurs' ability to interact with strangers (an aspect of social competence).

Introduction

Scholars of entrepreneurship increasingly recognize that entrepreneurs embed their business formation and growth in social structures (Aldrich & Zimmer, 1986; Birley, 1985; Greve & Salaff, 2003). In particular, entrepreneurs' network ties are crucial in acquiring funds from initial investors (e.g., Batjargal & Liu, 2004; Shane & Cable, 2002; Starr & MacMillan, 1990). Entrepreneurs often approach prospective investors with whom they have prior relationships (i.e., direct ties) or to whom they are referred (i.e., indirect ties). These ties are particularly useful if the firms operate in high-tech industries and/or at the early stage of venture creation (Venkataraman, 1997).

However, entrepreneurs often face constraints in relying on preexisting network ties. For instance, strong and resourceful ties are often limited, and also using networks may incur costs outweighing the benefits, because this is often backed by an expectation of reciprocity (Gabbary & Leenders, 1999; Leana & Van Buren, 1999; Lin, 1999; Portes, 1998). Therefore, entrepreneurs may sometimes turn to alternative "market methods." We define market methods as the methods used in a scenario when entrepreneurs and investors do not know each other either directly or indirectly before initiating the potential business exchange. In practice in this scenario, entrepreneurs approach investors via advertisements or cold calls (e.g., telephone, e-mail, or face-to-face meetings).

An intriguing question then arises: What factors influence entrepreneurs' choice to utilize their existing network ties versus the market method to approach initial investors? The network-based research in entrepreneurship has largely ignored this question (Hoang & Antoncic, 2003). Although a few studies have investigated the development and evolution of networks over the venture-formation process (Hite & Hesterly, 2001; Larson & Starr, 1993), they did not focus specifically on how heterogeneity in the human capital of entrepreneurs affects their network-utilization decision. We therefore still need "more research on the differences across individuals in the extent to which network resources are leveraged" (Hoang & Antoncic, 2003, p. 179).

Focusing on entrepreneurs' human capital, we present a contingent model of network utilization. Essentially, we argue that "what you know" (human capital) influences "who you know" (social capital) and "how good you are at interacting with strangers" (an aspect of social competence) and ultimately determines "whom you choose" (network utilization). Understanding the factors that influence entrepreneurs' "network utilization decision" is important because it provides an understanding of the balance between embedded ties and market mechanisms, which is an underdeveloped research area in social network research (Hoang & Antoncic, 2003; Uzzi, 1999). …

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