Shaker Zahra

Entrepreneurial Research

Monday, April 1, 2013

The Holmes Center at the Carlson School serves as an important hub in creating and disseminating the latest research findings on new ventures, entrepreneurial activities, technology commercialization, and growing companies. It functions as an intellectual meeting place for faculty with diverse business audiences that have a strong focus on growing the state’s economy. The following represent some of the latest entrepreneurial research from our faculty.

Learning from Your Rivals

Professor Shaker A. Zahra is the chair of the Strategic Management and Entrepreneurship Department and holds the Robert E. Buuck Chair of Entrepreneurship. He is also the academic director of the Holmes Center. For nearly 15 years, he has conducted research on “corporate entrepreneurship,” in which the focus is on stimulating the creative and entrepreneurial energies of well-established companies. The research canvasses several thousand companies in more than 30 countries on the world’s six largest continents.

“A key theme in my work is how larger and sometimes sluggish companies can learn from their more dynamic, creative, and nimble rivals,” he says. “Of special interest is how larger companies learn and take this knowledge home and successfully exploit it for competitive advantage.”

His work on “absorptive capacity” addresses this fundamental issue. Absorptive capacity, the conduit between a company’s knowledge stock and the knowledge found elsewhere, refers to the ability of that company to recognize, acquire, assimilate, and exploit knowledge developed outside its boundaries.

“To develop this absorptive capacity, a company has to invest in its own R&D activities while making use of ‘open innovation,’ those innovations developed with or by other companies,” he says. “Companies that can effectively use open innovation are more likely to adapt to radical changes in their markets, change their capabilities, and offer radically new products.”

Accessing open innovation sources requires connections; knowledge developed by other companies is difficult to comprehend and connections make the translation easier. “Connections are useful in the sharing of experiences, potentially quickening the firm’s access and use of external knowledge,” Zahra says. “However, one of the recurring problems companies face is connecting with those companies that they know and are most similar to them. Radical changes in an industry often occur when newcomers enter, bringing in different ideas and practices. This is most likely to be the case when the newcomers are new companies formed to exploit opportunities overlooked by the industry’s established incumbents.”

Zahra’s recent research with Markku Maula of Aalto University (Finland) and Thomas Keil of the University of Zurich suggests that connections to these newcomers can make all the difference in established companies’ ability to learn about forthcoming technological changes that are likely to sweep and transform their markets. His recent research also suggests that connecting to new companies that have different missions, resource bases, and capabilities is more beneficial to induce learning about these radical changes than connecting to companies that are closest to the incumbent’s business.

“Interestingly, in a study of young Spanish companies, my colleagues and I found these connections are also important because they allow these companies to select the right set of competitive tools to transform their discoveries into profitable businesses,” Zahra says.

How Entrepreneurs' Pitch Can Affect Investors' Assessments

Harry Sapienza

Professor Harry Sapienza has spent considerable time in the last 25 years examining how investors and entrepreneurs collaborate in the development of high-potential new ventures. “This is a perfect setting for examining decision-making under conditions of extreme uncertainty,” he says. His work began in the context of professionally managed venture capital firms and has turned more recently to studying the role of individual, or angel, investors.

“I have become especially interested in how individual investors or ‘bands of angels’ operate,” he says. “Because formal venture capital has migrated to later-stage investments, angels are increasingly important to new innovative firm formation—and hence to the regional and national economy. Now, most early stage, high-risk ventures either go without substantial outside equity or rely on these private individuals to bankroll their startups.”

One of the early findings in his work was that venture capitalists appear to believe that it is better to invest in an A-level entrepreneurial team with a B-level idea, than in a B-level team with an A-level idea. Yet knowing an A-level team when you see it is not trivial. “I wondered how investors, armed with limited information about the true capability of a team and facing an unknowable future, could reach a judgment strong enough to justify wagering a lot of money,” Sapienza says. “Many investors had told me that ultimately they simply followed their ‘gut instinct.’ But I wanted to understand whether there were controllable factors influencing them.”

This topic ultimately became the dissertation (“How Entrepreneurial Storytelling Affects Evaluations”) of Jaume Villanueva, ’12 PhD, now at Esade Business School in Barcelona, Spain. Villanueva and Sapienza conducted a study with approximately 200 angel investors in the U.S.; it was a 2×2 experimental design in which investors were randomly assigned to one of four conditions. “We surmised that if entrepreneurs used a personal narrative to give their pitch, and if they used especially vivid language, investors would identify more with the entrepreneurs, would more positively evaluate them, and would more positively evaluate their business idea,” Sapienza says. “We were right that the investors identified more with the team. However, they evaluated some of their characteristics more positively (character) and some less positively (ability). Thus, these two seemed to cancel each other out, and the overall evaluation of the opportunity was not significantly affected by the language and the story.”

The results are important because they demonstrate that how entrepreneurs deliver their message has a significant impact on the resulting impression. It has potential to also influence investment decisions. Given the need that entrepreneurs have to fuel their early venture development, understanding how they form impressions is critical. Villanueva believes that the reason opportunity evaluation was not positively influenced may have been because of the nature of the entrepreneur’s story. “The results showed that we need to do further work to understand how the content of the message and the language characteristics of its delivery jointly influence the formation of judgments,” Sapienza says.

Sapienza, along with two other professors, is now engaged in another study of angel investors. This study is examining how investors make sense of limited and/or contradictory evidence of entrepreneurs’ skills and integrity.

How Knowledge Complexity Affects Employee Entrepreneurship

Martin Ganco

Most of Assistant Professor Martin Ganco’s research focuses on how working in existing organizations affects an entrepreneurial-minded employee’s decision to start a new firm and how prior work experience affects post-entry performance. “Focusing on the types of problems that people solve in their workplace fits into my broader research on these ‘contextual’ foundations of entrepreneurship,” he says.

According to Ganco, focusing on context is important for two reasons. First, it highlights that entrepreneurs are not born, and that anyone could be a successful entrepreneur. Second, what seems to really matter for entrepreneurial success is the knowledge and experience that people acquire through education and prior employment.

In “Cutting the Gordian Knot: The Effect of Knowledge Complexity on Employee Mobility and Entrepreneurship” (Strategic Management Journal, forthcoming), Ganco studied the U.S. semiconductor industry to examine the effect of the complexity of employee-inventors’ prior patenting activities on their decisions to join a rival firm or found a start-up company. This research sheds new light on how technology shapes patterns of employee entrepreneurship.

“I find that people working on more complicated technological problems within existing firms are more likely to discover valuable opportunities that their employer is not interested in pursuing,” Ganco says. This, of course, leads employees to look elsewhere to implement their ideas. Conversely, Ganco found that moves to rival firms decrease in line with the complexity of the work.

“Solving complicated problems may help you discover ideas that will be useful when you start your own firm,” he explains. “Working on these problems may make you less attractive to other established firms. It is often easier to design your firm to exploit an innovative idea than to implement it in another existing firm.”

The implication for entrepreneurial-minded individuals is that it would be useful to first find employment in an existing company that works in the same industry in which they want to start their firm and work there on solving complicated problems.

Entrepreneurs No Longer Have to Stumble in the Dark

Dan Forbes Headshot

Associate Professor Daniel Forbes’ research focuses on how people gather information and make decisions while they’re creating and managing new ventures. “In big companies, there tend to be rules and established routines in place to guide decisions,” he says. “But in small new ventures people really have to turn to what they know as individuals, and what they can learn.”  This overarching interest has sparked one of his recent research contributions, a forthcoming chapter in the Handbook of Entrepreneurial Cognition in which he documents the recent emergence of something he calls a “worldwide infrastructure of entrepreneurial learning.”

The infrastructure Forbes refers to is an “evolving bundle of people, ideas, and resources,” he explains. It includes three key components: 1) formal educational programs, such as the entrepreneurship courses offered by the Carlson School and other colleges and universities; 2) informal learning communities, such as the “Startup Weekend” gatherings sponsored by the Kauffman Foundation, and the online learning tools made available at Stanford’s “eCorner” website, and 3) research conversations, such as those that take place among entrepreneurship scholars around the world through journals and conferences.

All of these components are being collaboratively produced by a wide range of people, he observes, including current, former, and aspiring entrepreneurs, as well as professors, journalists, and others. In addition, the information available has grown exponentially over the last several decades. “I started to think about this when Steve Jobs died [in October 2011],” Forbes explains, “when it occurred to me how much more information is available to entrepreneurs today versus when Apple was founded in 1976.”

What is most important about this infrastructure, Forbes contends, is that it can provide entrepreneurs with current, sophisticated information they can use to make better decisions in the course of their work.  “The quality and quantity of the innovation we will get as a society,” Forbes says, “depends on the extent to which people are able to make good decisions about whether, when, and how to start new businesses.”  As a result, he says, people interested in entrepreneurship should look for ways to contribute to and draw from this learning infrastructure, while also finding ways to improve the accuracy and accessibility of the information it contains.