Academic journal article Entrepreneurship: Theory and Practice

Path-Dependent Evolution versus Intentional Management of Investment Ties in Science-Based Entrepreneurial Firms

Academic journal article Entrepreneurship: Theory and Practice

Path-Dependent Evolution versus Intentional Management of Investment Ties in Science-Based Entrepreneurial Firms

Article excerpt

This paper studies the role of entrepreneurs in investment tie formation in science-based entrepreneurial firms. Specifically, we address why investment tie formation is path dependent for some firms but more amenable to intentional management for others. Using longitudinal case studies, our evidence suggests that early investment tie formation is path dependent because scientific entrepreneurs typically approach only one or a few prospective investors from within their institutional context. Differences in experience between early investors affect the professionalization of entrepreneurial teams (or lack thereof), which influences the extent to which subsequent investment tie formation becomes more amenable to intentional management or remains path dependent.

Introduction

Science-based entrepreneurial firms play a key role in our modern, knowledge-based economies (Knockaert, Ucbasaran, Wright, & Clarysse, 2011). These firms not only compete on the basis of the ideas they generate, but also on their ability to attract resources that allow them to develop and commercialize their ideas (Janney & Folta, 2003). Investment ties with venture capital (VC) investors are one of the earliest and most critical ties formed by science-based firms because they provide both financial resources and value-adding services (Sapienza, Manigart, & Vermeir, 1996). Extant research on investment tie formation often takes the perspective of VC investors and portrays entrepreneurs as more or less passive bystanders (Katila, Rosenberger, & Eisenhardt, 2008). Rather than taking the perspective of VC investors, we take the perspective of entrepreneurs and ask the following questions: (1) How do scientific entrepreneurs influence early tie formation with VC investors; and (2) how do these early investment tie decisions influence subsequent tie formation?

These questions are important for at least two reasons. First, research that puts entrepreneurs in the foreground and shows how they influence investment tie formation is just developing (Hallen & Eisenhardt, 2012; Zhang, Souitaris, Soh, & Wong, 2008; Zott &. Huy, 2007). Most of these studies highlight how entrepreneurs with relevant experience, business education, or prior working relationships may increase the pool of VC investors from which they can raise finance. Zhang et al. further show how industrial work experience increases the likelihood that entrepreneurs use their existing ties to search for start-up finance, while entrepreneurs without such experience search for VC finance through market mechanisms. Yet, the probability of raising VC finance through market mechanisms is low (Shane & Cable, 2002). Little is known on how entrepreneurs with limited business experience and few relevant ties successfully affiliate with VC investors. Nevertheless, many science-based firms are founded by scientists with little business experience or ties in the investment community (Ensley & Hmieleski, 2005) and for whom the value-adding services provided by VC investors are hence particularly valuable (Colombo & Grilli, 2010; Knockaert & Vanacker, 2013).

Second, few studies consider the impact of early VC investment partner decisions on future financial resource mobilization (Hsu, 2004). Opposing views exist with respect to the evolution of investment ties. One view suggests that entrepreneurs can manage the formation of ties as the resource requirements of their firms change, and this is irrespective of existing ties (Hite, 2005; Hite & Hesterly, 2001; Larson & Starr, 1993). Another view indicates that tie formation becomes increasingly path dependent and is heavily determined by the identity of early investors (Hallen, 2008). Recently, Zhang et al. (2008) showed heterogeneity in the extent to which initial investment tie formation is path dependent and relies on existing ties. In this study, we focus on the extent to which future tie formation becomes more path dependent versus more amenable to intentional management. …

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