Wednesday, April 18, 2012

Resource Congestion and the Impact of Incumbent Affiliations on New Ventures
INSEAD Working Paper 2012/48/EFE

This paper examines the impact of incumbent affiliations on the performance of new start-up ventures, focusing specifically on the configuration of the start-up’s incumbent partners’alliance portfolios. While start-ups often engage in alliance relationships with established firms in order to access resources and capabilities necessary to navigate the early stages of development, there is mixed evidence on whether such relationships are ultimately beneficial for the start-up. I suggest that focusing on the incumbent partners’ overall portfolio of relationships can highlight a key mechanism underlying this variance: namely, congestion of the incumbents’ resources as a consequence of multiple similar relationships, which can decrease the benefits accruing to the focal start-up from its incumbent firm affiliations. Using a panel dataset of venture capital-backed start-ups founded between 1990 and 2000, I find that greater overlap in functional activity between a focal start-up’s alliances and those of its incumbent partners can negatively affect start-up performance. I explore the circumstances under which the expected effects of resource congestion would be more or less salient, finding variation across industry-activity combinations as well as across alternate measures of firm performance.