Finance - Bottazzi Lecture 3

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Information about Finance - Bottazzi Lecture 3
Education

Published on May 11, 2008

Author: untellectualism

Source: authorstream.com

Entrepreneurial spawning: public corporations and the genesis of new ventures, 1986-1999 : 8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Entrepreneurial spawning: public corporations and the genesis of new ventures, 1986-1999 Paul Gompers Josh Lerner David Scharfstein Two alternative view of the spawning process : 8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Two alternative view of the spawning process Employees of established firms are trained and conditioned to be entrepreneurs by being exposed to the entrepreneurial process and by working in a network of entrepreneurs and venture capitalists. Example: Fairchild Semiconductors Individuals become entrepreneurs because the large beaurocratic companies for which they work are reluctant to fund their entrepreneurial ideas. The most prominent example of this is Xerox. Two alternative view of the spawning process : 8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Two alternative view of the spawning process There are at least three reasons that large, established firms might be more prone to spawn entrepreneurial ventures (“Xerox View) It may be that firms are incapable of responding to radical technological changes that upset the established ways of organizing their business High level managers at these firms are incapable of evaluating these entrepreneurial opportunities because they fall outside the company’s core line of business It is also possible that the level of entrepreneurial spawning would be high among these firms not because of any sort of inefficiency at these firms, but because they wisely choose to focus on their core business or “core competence” Methodology and data : 8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Methodology and data Assemble a database of employees who leave public companies to start venture capital backed firms during the period 1986-1999. From these data, they are able to calculate the spawning levels of public companies. They then relate these spawning levels to firm charachteristics in a cross sectional analysis and examine how these spawning levels change over time for particular firms DataSummary : 8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION DataSummary Data Summary : 8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Data Summary Estimation : 8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Estimation Slide 8: 8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Slide 9: 8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Slide 10: 8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Estimation(II) Slide 11: 8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Slide 12: 8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Main results - static : 8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Main results - static Controlling for firm size, patent portfolio, and industry, they find that the most prolific spawning firms from 1986 to 1999 were public companies located in Silicon Valley and Massachusetts that were one venture capital backed themselves. Being located in Silicon Valley increases the spawning level by almost 38%; companies in Massachusetts have a 23% higher spawning level; and companies that were once venture capital backed have a 23% higher spawning level. Main results - static : 8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Main results - static Diversified firms appear to spawn less, not more. The findings appear to be more consistent with the notion that diversified firms are less entrepreneurial and thus less prone to have the sorts of people who would have the inclination, ability or skills to start new venture capital backed firms. Main results - dynamic : 8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Main results - dynamic Firm spawning levels are lower when a firm’s past sales are growth is high relative to the firm’s mean level of growth. When firms are growing rapidly, employees choose to stay at their firms, when growth slows employees are more prone to seek entrepreneurial opportunities outside the firm Firms located in Silicon Valley and Massachusetts with prior venture capital backing spawn less related businesses Estimating related spawning : 8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Estimating related spawning Results : 8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Results The results do not appear to be consistent with Xerox-type spawning, because we would expect less related spawning from large, established firms, due to their inability to evaluate technologies outside their core business or the commitment on part of these firms to focus on their core business. Instead, the findings appear to be more consistent with the view that these firms are unable or unwiling to take advantage of entrepreneurial opportunities in their core business (perhaps because of fear of cannibalization) Conclusions : 8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Conclusions Entrepreneurial activity in a given region has increasing returns. Stimulating entrepreneurship in a region with few existing entrepreneurial firms is difficult. The network of suppliers and customers may not be strong enough to support a new venture Conclusions : 8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Conclusions Policies that have sought to foster entrepreneurial and venture capital activity by providing capital or investment incentives may not be enough. Instead, regions may need to attract firms with existing pools of workers who have the “training and conditioning” to become entrepreneurs. The ultimate success (in terms of scale) of individual venture capital backed firms may be bounded. The analysis shows that when growth slows, employees are likely to leave their firms to start new ones. Thus, there may be limits to how big a venture capital backed firm can get while maintaining their most entrepeneurial employees.

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