Academic journal article Journal of Small Business Management

The Two Sides of the Story: Network Investments and New Venture Creation

Academic journal article Journal of Small Business Management

The Two Sides of the Story: Network Investments and New Venture Creation

Article excerpt

It is widely recognized that networks provide access to resources necessary for founding a new venture. However, they also come along with opportunity costs of time. We therefore argue that maintaining a set of network relationships is an investment that may not always pay off More specifically, we develop detailed hypotheses on why the relationship between investing time in developing and maintaining a larger network and more intense network relationships and success in new venture creation may be best described by an inverted U. Testing our hypotheses on longitudinal data of 137 nascent entrepreneurs, we find broad support for our propositions.

Introduction

Over the past decade, entrepreneurship research has made a considerable effort to understand the factors influencing success in new venture creation and development. Representing one factor that figures prominently in this stream of research is the social network of entrepreneurs, which is defined as the set of individuals and organizations to which the entrepreneur is linked (Hoang and Antoncic 2003; Lechner, Dowling, and Welpe 2006; Street and Cameron 2007). The rationale given for the relevance of social networks in founding and developing a new venture is a rather simple one: entrepreneurs are seen as gaining valuable and necessary resources, such as financial capital, emotional support, and knowledge, through their networks (Batjargal 2003; Liao and Welsch 2005).

Consequently, it has been argued for some time that extensive networks and intense network relationships should enhance entrepreneurs' performance (Aldrich, Rosen, and Woodward 1987; Davidsson and Honig 2003; Hansen 1995; Renzulli, Aldrich, and Moody 2000), and several empirical studies provide considerable evidence in support of this argument (Hansen 1995; Lee and Tsang 2001; Powell, Koput, and Smith-Doerr 1996; Raz and Gloor 2007). However, there are other results showing that holding a larger network with more intense relationships has no positive effect on entrepreneurs' performance (Aldrich and Reese 1993; Johannisson 1996). Finally, most recent research indicates that the relationship between these network variables and entrepreneurial success might be nonlinear. One study directly focused on nascent entrepreneurs' resource access via network contacts, for example, indicates that the resource returns in terms of access to financial, informational, emotional, and contact support that result from enlarging a network and intensifying network relationships are diminishing (Semrau and Werner 2009). Additionally, Watson (2007) showed, based on longitudinal data, that the frequency with which small and medium-sized enterprise owners seek advice from different network sources has a positive effect on performance only to some extent and may afterward even hinder survival and growth. He explained his results by arguing that very high levels of network involvement may even be counterproductive because of the time and costs involved.

Based on these diverse findings, we consider it fruitful to shed more light on the relationship between network costs and benefits and argue that dedicating time to maintain a larger network and to intensify the quality of relationship within the network is an investment that does not always pay off.

Based on this general reasoning, the paper at hand tries to expand on the insights generated by Watson (2007). To do so, we do not focus on "seeking advice" as a specific aspect of networking behavior but rather try to more completely capture the network investments of entrepreneurs by addressing two explanatory variables that together largely determine the opportunity costs that come with developing and maintaining network relationships. In theoretically deriving and empirically analyzing the effects of these two variables, we additionally shed light on the reasons for an inverted U-shaped relationship between network investments and success. …

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