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 kschoonh@uci.edu

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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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