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Board of Directors & Excess Influencein de novo Technology Venturesin de novo Technology Ventures
Claudia Bird SchoonhovenMerage School Business, University of California, Irvine
9th International Entrepreneurship Forum:Technology & Entrepreneurship.
September 18, 2009
Outline� Research Questions & Theory
� Research Methods and Data
� Findings
� Theoretical & Practical Implications
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Overview� Address little understood role of Board of Directors in
de novo firms & influence on emergence of InitialAlliance Portfolio.� Alliance Portfolio = a firm’s collection of direct
inter-org relations with others to exchange or inter-org relations with others to exchange or share resources (Gulati, 1998; Lavie, 2007).
� Distinguish the 2 constructs: alliance portfolios & organizational performance (Lavie, 2007) not confound “high performance alliance portfolios”
� Then address impact of alliance portfolio emergence on attaining revenue milestones - performance.
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Alliances & Alliance Portfolios: what is known ?
� Inter-organizational ties are pervasive & significant for many kinds of organizations.
� Based on Resource Dependence Theory (Pfeffer & Salancik, 1978): inter-organizational tie formation enables firms to access & control environmental resources.�� 94% of firms named by Pfeffer &Salancik are large, public firms� Most subsequent alliance research on large public firms
� Ahuja (2000) studied leading (large, successful) chemical firms to insure availability of alliance and performance data.
� Same data Strategy: Gulati, 1995; Gulati & Garguilo, 1999.
� Existing, Large Public Firms characterized by:� Tie Repetition : form ties with same organization over time� Tie Transitivity : form ties with partners of partners (Gulati, 1995)
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Alliances & Alliance Portfolios: what is known? continued
� Prestige & Status play a role in existing, large public firms� Stuart (1998) studied alliance formation in existing firms whose
average age was 18.3 years & 80.9% were public� Firm Prestige , derived from highly cited patents, predicts which
firms form greatest number of alliances�� Podolny (1994):studied large, existing investment banking firms
� Partners were selected from those with similar status & past transaction partners (tie repetition )
� Alliance announcements create financial value for large, public firms.� Positive abnormal returns (Das et al., 1998 AMJ; (Koh &
Venkataraman, 1991 AMJ). � Das et al. sample = All Public Firms
� Mean # employees = 142,000l; Mean revenues = $21.8 billion
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Concerns with what is known:� Based on highly skewed organizational samples� Sampled on financial success, survival, and older age� Studies conditioned on having an IPO or Venture Capital
also not representative of vast majority of de novo firms (VentureExpert data; or IPO records)�� IPO’s & VC $ rare events & skew the data (i.e. Hallen, 2008;
Kitala, 2008)
� Not representative of US business organizations � In US 99.7% business firms are small (10-500 employees)
and have never met a Venture Capitalist
� We know that: de novos are not in a network at founding
� Therefore tie repetition & tie transitivity not characteristic of de novo firms, but prestige processes may be.
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Basic Arguments
� De Novo ventures are a void, a non-presence, in Inter-Organizational Networks at founding� But network presence essential for acquiring resources &
new venture legitimacy�� How is a network presence created?
� Founders (prime movers) and Board of Directors initial social actors in de novo firms� Prime movers bring expertise�Outside board members bring connections� Board embedded in outside network – hence their
network prestige
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Hypotheses� Conditions likely to increase alliance portfolio
emergence in de novo firms� H1 Prime Movers (1 or both) on Board of Directors� H2 Board outsiders represent specific organizations� H3 Board of Directors high in Prestige� H3 Board of Directors high in Prestige
� Conditions likely to decrease alliance portfolio emergence in de novo firms (excess influence)� H4 Board outsider’s firm multiple ties to new venture� H5 Prime Mover/Founder is Chair of Board� H6 Founders’ greater ownership percentage
� Controls: cohort isomorphism, fab %, board size
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Performance Hypothesis
� H7 The sooner a de novo organization forms its initial alliance portfolio, the faster it will attain significant revenue milestones.attain significant revenue milestones.
� Controls:� Market Stage (emergent, growth; mature omitted)
� Firm Size time varying� Firm Age time varying� IPO: 0/1 event time varying
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Research Methods & Data� Longitudinal design - time varying � De novo dedicated semiconductor firms
� population US firms founded 1978-1986� tracked from birth through 2002� n = 105 firms (97% had alliances)
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� n = 105 firms (97% had alliances) � n = 778 strategic alliances
� Original proprietary data� confidential structured interviews on site with CEOs &
founders� confidential accounting, finance, & headcount data
� Supplemented by� SIA & Dataquest data on semiconductor industry & mkts
�Findings for Pooled Cross Section GEE Analysis of Alliance Portfolio EmergenceEmergence
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Table 1. Descriptive Statistics for GEE Models
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Findings Summary: Likelihood of Alliance Portfolio Emergence *
Construct Founders Board Full model
Prime Mover on Bd. + *** + ***Prime & Techie on Bd. + *** + ***Founder Chair Board - * - n.s.
Founders’ Ownership % - *** - ***Bd. Outsider Connections + *** + ***
Bd. Network Prestige + *** + ***Board Tie Intensity - *** - ***
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Controls: Bd Size n.s. Cohort Isomorphism & Fab % - *** * Number Observations = 3508 GEE Generalized Estimation Equation
�Findings for Cox Event History Analysis Predicting Time to Revenue Milestones ($10, $20, $50 Revenue Milestones ($10, $20, $50 mm)
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Summary: Alliance Portfolio Emergence and Time to Revenue Milestones * Construct Baseline
ModelTime to $10M
Time to $20M
Time to $50 M
H7 Alliance Portfolio Emergence
+ *** + *** + ***
Controls________________ ________ _________ ________ _________________ _________ ________ _________
Growth MarketEmergent Market
- n.s. - n.s.
- n.s. - n.s.
- n.s. - n.s.
- n.s. - n.s.
Firm Size + ** + ** + ** + **
Firm Age + *** + *** + *** + ***
IPO_______________ ___+ n.s. ____+ n.s. ___+ n.s. + *____
================Observations p *Cox Semiparametric Hazard models
=======397
0.00**
========397
0.00**
=======408
0.00**
=========415
0.00**
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Implications for Theory� We have learned that both Boards of Directors as we ll as
Founders play a significant role in emergence of th e initial alliance portfolios of de novo firms.� Founder's expertise increases emergence� Outside Board members’ connections increase emergence�
� Outside Board members’ connections increase emergence� Board network prestige increases emergence
but excessive influence decreases emergence� Founder’s with Dual Roles (chair & TMT) decrease� Founders with greater ownership percentage decrease� Outside board members with multiple ties decrease
� De novo firms can leverage board prestige to attain resources & venture legitimacy
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Implications for Theory continued
� We have learned that initial alliance portfolio eme rgence speeds attainment of major Revenue Milestones: $10, $20, & $50mm.� Prior research has not addressed speed of initial alliance
portfolio formation. Simple creation of alliance portfolio is not portfolio formation. Simple creation of alliance portfolio is not sufficient; but rather how quickly after founding the venture is able to partner with others.
� Adds to growing literature that stresses Speed in f irms competing in high velocity environments (Eisenhar dt, AMJ, 1989; Schoonhoven, Eisenhardt & Lyman, ASQ, 1990)
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Implications for Practice� Important for Board of Director outsiders to have an
organizational affiliation� to enhance connections to other organizations� Angel Investors, retired former CEO’s, and wealthy individuals
without high currency organizational networks less valuable in portfolio formation processportfolio formation process
� Having Prime Mover founders on board of directors add expertise & they’re valuable in portfolio formation process
� Founders with high ownership % integrated into venture’s needs when sit on board.
� Board members with multiple connections to new venture may suffer conflicts of interest & excessively influence board
� Dual Role Founders (Board Chair & Top Management) have negative effect on portfolio formation
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Limitations� All U.S. organizational data & No America based theorizing :
� Parochial Dinosaur? (Boyacigiller & Adler, AMR, 1991)� “..dominance of No. Amer. cultural values undermines claims of
universal applicability”
� Walsh, Meyer & Schoonhoven, (OS, 2006)� Walsh, Meyer & Schoonhoven, (OS, 2006)� “turned a blind eye to organizations beyond North America.”� “our theories are culture bound, biased toward stability, and
contextually restricted.” � Our work is relevant to a dwindling fraction of the world’s
organizations and contexts.
� Welcome references from non-North American journals� please send [email protected]
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Thank you and Questions?
Claudia Bird SchoonhovenChristine Beckman
© C.B. Schoonhoven, 2008 23
Christine BeckmanRenee Rottner
The Paul Merage School of BusinessUniversity of California, Irvine
9th IEF September, 2009 Istanbul, Turkey
Blank
Back up Slides to follow
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Table 1. Descriptive Statistics for GEE Models
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