Knowledge that Transforms

Research Summary Private equity (PE) investors invest in a portfolio of firms, setting new, ambitious performance aspirations and providing monitoring and value‐adding services to help management attain these aspirations. Integrating a behavioral theory of the firm and corporate governance perspective, this study investigates how portfolio firms respond to performance feedback, considering heterogeneity in PE investors' incentives and influence toward a given portfolio firm's strategic actions. Using unique data from a PE investor including direct aspirations measures, we find that (1) portfolio firms' performance relative to aspirations, and (2) the PE investor's relative investment amounts and experience of PE‐appointed board members, interact to affect the distinct growth strategies (i.e., internal capital investments or external acquisitions) its portfolio firms pursue. Managerial Summary A PE investor may guide its portfolio firms differently. Incentives to intervene should be larger in case of larger investments, and influence should be more extensive in case of more senior PE board representatives. In this study, we examine how a PE investor's varying incentives and influence affect how PE‐backed firms strategically react to underperformance and overperformance. We find that a PE investor pushes for capital investments but deters acquisitions as performance shortfalls increase in a portfolio firm, when they have made larger investments and appointed more senior board members. In case of overperformance, a PE investor pushes toward acquisitions (and against capital investments) when they have invested more. Surprisingly, the opposite holds in case of more senior board members.

Research Summary An initial public offering (IPO) expands a firm's access to funding and enables future‐oriented strategic investments. Though aggressive investments can open new opportunities and speed the construction of relative advantage, this aggression risks time compression diseconomies and maladaptive learning from rushed experiences. We propose a firm's investment tempo and industry velocity combine to affect the trajectory of a firm's post‐IPO performance. Agent‐based simulation modeling suggested that aggressive, up‐tempo investment sped the construction of relative advantage in low‐velocity industries. Empirical analyses of multiyear post‐IPO windows in real firms supported this. In contrast, simulations and analyses of real firms suggested up‐tempo investment was maladaptive in high‐velocity industries as the combination of fast investment and fast industry change was often more than boundedly rational agents could cognitively handle. Managerial Summary Congratulations! By taking your firm public, you can now finance strategic investments in R&D and CAPX that would have been impossible when your company was private. Rapid investment can open new opportunities, sharpen your firm's skills, and build competitive advantage. However, rapid investment is risky because you can waste time recovering from hastily made mistakes and learn bad habits when new experiences arrive too quickly for managers to assimilate. We found the relationship between investment speed and firm profitability depended on industry velocity. Counterintuitively, rapid investment was ill advised in high‐velocity industries because the combination of fast investment and fast industry change was often more than managers could cognitively handle. In contrast, rapid investment worked well in low‐velocity industries, which placed fewer strains on decision makers.

Research Summary Entrepreneurship researchers have made great strides toward understanding who discovers and/or creates opportunities, how they validate a business model, and how they attract resources, but far less is known about what happens next. Beyond gathering resources, how do entrepreneurs build a growing organization once customer enthusiasm has been demonstrated? What has been learned is fragmented across theoretical perspectives and activities related to growth. We describe a collection of articles that spotlight different theories and organize the articles according to key activities: (1) building internal resources and capabilities, (2) leveraging partnerships, (3) taking strategic actions, and (4) managing interactions among resources, partners, and actions. Juxtaposing these activities with theories from the collection, we offer a research agenda designed to spur research to fill gaps in understanding of how entrepreneurs successfully manage growth. Managerial Summary The period of an organization's development between the startup stage and becoming an established firm presents unique challenges. We spotlight a set of articles that have provided insights into how organizations can overcome these challenges. We then add our own perspective by providing research ideas that scholars can investigate in order to generate additional insights.

Research Summary How do job‐applicants with entrepreneurship experience—“post‐entrepreneurs”—fare in the wage labor job market? We propose an “entrepreneurship‐experience penalty” generally occurs yet varies in strength depending on the recruiters faced by post‐entrepreneurs in their job application process. In an experiment utilizing the selection‐decisions of 275 recruiters (experimental study participants) in reaction to objectively‐identical job‐applicants' resumes whose differences relate to whether their last‐held job was as a Founder or as an Executive , we found that: (a) resumes of Founders (compared to Executives) are about 23%–29% less likely to be picked as top‐choice for hire, (b) this entrepreneurship penalty is weaker for recruiters with (rather than without) entrepreneurial aspirations, and (c) this recruiter moderator‐effect is stronger for recruiters in smaller (rather than larger) firms.

Research Summary We document that since 1997, the rate of startup formation has precipitously declined for firms operated by US PhD recipients in science and engineering. We explore how increasing knowledge complexity can be associated with fewer science‐based startups. The decline in startup formation is accompanied by an earnings decline, increasing work complexity in R&D, and more administrative work for science‐based founders. Founding a startup appears to have become increasingly harder over the past 20 years, while established firms are becoming more attractive workplaces for PhDs. Managerial Summary The increase in knowledge complexity has changed the balance of incentives between starting own business versus working for an incumbent firm in favor of the latter for PhDs. If maintaining a steady flow of new businesses in the high‐tech sector is important to keep the flow of commercialization of new ideas coming, managerial practitioners and policy makers may need to find ways to make the job of the founder more attractive. The findings in this article point to the importance of secularly increasing value of complementary assets in work practices, especially for founders and employees that are high value generators. Alternatively, the increasing dominance of a few very large tech firms that the increasing burden of knowledge is fueling could be just fine, and startups need not play an important role in economic development.

Research Summary Gaucher, Friesen, and Kay (2011: “GFK” hereafter) found that women perceive jobs to be less appealing when job adverts use masculine wording—a result they attributed to women's lower evaluations of “belongingness.” As masculine wording is used more often in male‐dominated jobs, GFK concluded that gendered wording in job adverts may deter women from entering such jobs. In light of growing general interest in joining new ventures (“start‐ups”), we replicate and extend GFK's study to compare start‐ups and established firms. Interestingly, we find that GFK's original findings are replicated in the context of start‐ups, but not in established firms. We propose and adduce evidence that the unique context of start‐ups may prime women to respond especially sensitively to gendered wording, via positive expectancy violation. Managerial Summary This article builds on a previous study that found masculine wording in job adverts deters women from entering male‐dominated jobs. Our purpose is to try to replicate these findings using a more recent sample of data and distinguishing new ventures (“start‐ups”) from established firms. Interestingly, we show that the prior finding is only replicated in the context of start‐ups and not established firms. Hence, women's responsiveness to gendered wording in job adverts appears to depend on the context. Implications are that incorporating feminine wording in job adverts is likely to be more effective in contexts where women anticipate greater challenges in becoming integrated into the workplace culture. Entrepreneurs' recruitment strategies designed to assemble a diverse workforce should therefore differ from those of established firms.

Research Summary Prior research suggests that the founders of new ventures leverage their existing networks, such as close ties to service intermediaries, as a source of entrepreneurial improvisation. We draw attention to the trade‐off between the benefits (trust and access to information and resources) and the costs (dependence and a constrained growth opportunity), and identify two contingency conditions for using close ties to improvise: a shorter time horizon for failure and less turbulent market. Analysis based on an original survey of founding teams in China in the period 2015–2016 provides empirical support for our argument. Our study contributes to research on entrepreneurial improvisation by exposing the tension involved in working with close contacts and enriches the literature on the role of service intermediaries. Managerial Summary We consider the trade‐off involved in relying on close ties to service intermediaries and identify conditions under which founders of new ventures are more likely to rely on such intermediaries to improvise. Although close ties can foster trust and facilitate access to a wide range of information and resources, they may also foster a dependency that could constrain future growth. A survey of founding teams in China from 2015 to 2016 reveals that founding teams leveraged such ties when given a shorter time horizon within which to succeed or fail, and when the market was less turbulent. Our findings can help entrepreneurs decide when to resort to close‐tied intermediaries as an aid to improvisation, that is, when the benefits of doing so outweigh the costs.

Research Summary This study examines whether different entrepreneurship subsidies signal initial public offering (IPO) firms' quality to external investors. We employ a quasi‐natural experiment by exploiting the exogenous, staggered introduction of “Eight‐Point Code” inspections to Chinese provinces, which anticorruption campaign impacts how subsidies match firm quality. Based on a difference‐in‐differences analysis of 584 IPOs, we find that research and development (R&D) subsidies match highly innovative firms regardless of government corruption, but investors interpret R&D subsidies as a quality signal only when government corruption is low. High‐growth subsidies match high‐growth firms only when government corruption is low; however, investors do not interpret high‐growth subsidies as a quality signal regardless of government corruption. Our study contributes by examining subsidy–firm matching and investors' interpretations to isolate the signaling effect of entrepreneurship subsidies. Managerial Summary Do initial public offering (IPO) investors interpret different entrepreneurship subsidies as signals of entrepreneurial firms' quality? We find that when government corruption is high, research and development (R&D) subsidies are matched to high‐quality firms, but high‐growth (HG) subsidies are not; nevertheless, because of dubious subsidy–firm matching under high corruption, neither R&D nor HG subsidies signal firm quality to IPO investors. When government corruption is low, both R&D and HG subsidies are matched to high‐quality firms; however, because of the distinct nature of innovation and growth, IPO investors interpret only R&D subsidies as a signal of quality, ignoring HG subsidies. Our findings suggest that investors' interpretations of entrepreneurship subsidies depend on subsidy type as well as subsidy–firm matching under different anticorruption regulations.

Research Summary With over a billion people inhabiting informal settlements worldwide, micro‐entrepreneurs are vital to local economies. Complementary currencies have emerged as tools to sustain these entrepreneurs, providing alternative trading and payment options. This study explores the daily strategies of micro‐entrepreneurs in Kenyan informal settlements using the digital complementary currency Sarafu. Our findings reveal that complementary currencies act as external enablers, transforming the local economies by enhancing payment systems, influencing supply and demand, and altering pricing structures. Significantly, when integrated with savings groups, they provide financial inclusion and collective purpose, strengthening local business networks. This research enriches our understanding of the mechanisms micro‐entrepreneurs deploy to leverage complementary currencies for growth, emphasizing the need for further exploration into the role of complementary currencies in supporting entrepreneurship. Managerial Summary This study explores how a complementary currency called Sarafu benefits micro‐entrepreneurs in Kenyan informal settlements. Sarafu acts as catalysts for entrepreneurship by boosting local markets and empowering community cooperation. Our findings reveal that micro‐entrepreneurs use Sarafu to adapt to the unique challenges of informal economies. They employ smart strategies like flexible pricing and inventory management to keep Sarafu flowing smoothly. Sarafu serves a dual purpose: a means of immediate spending and a tool for saving and growing capital. It also strengthens local business networks and creates a sense of collective purpose. For practitioners, this study suggests using complementary currencies to support local business networks, promote collective savings, and align the issuance of complementary currencies with local assets to foster sustainable entrepreneurship in informal economies.

Research Summary Integrating research on the persistence of founding conditions and the effects of environmental change, we explore how a venture's performance outcomes following environmental change depend on the venture's environmental conditions at founding. Using a unique sample of 1,060 new ventures from a comprehensive survey of university alumni, our analysis indicates that the interaction of high environmental dynamism at founding and a functionally diverse founding team is beneficial to venture survival when environmental dynamism increases over time. However, the same founding conditions result in a decreased likelihood of positive exit when environmental dynamism decreases. Managerial Summary This study examines the interplay between environmental change and internal team composition, revealing how best to benefit from the potential created by environmental change. We find that (relative to functionally homogenous teams) founders that assemble more functionally diverse teams survive longer when facing increasing environmental dynamism. In contrast, a more functionally homogenous team is better able to capture opportunities when environmental dynamism decreases after founding. While predicting the course of environmental change is difficult, entrepreneurs who can synchronize their predictions of change with their decisions regarding team composition can enable better venture performance. This study also highlights the importance of developing capabilities to enable flexibility in decision‐making processes, which are often inflexible, limiting the ability to take advantage of unique opportunities provided by environmental change.