Thomas Klueter, Ph.D. Student in Management, The Wharton School
Abstract: The study explores how pursuing radical innovations shapes market values and hence performance expectations for young startup firms. It departs from the typical emphasis on the advantages of startups “attacking” established firms and considers a setting in which established firms maintain control of critical downstream complementary assets. By examining product innovation of the startup relative to established firms, we show that pursuing radical innovations may have adverse performance implications in the form of market valuations. We further demonstrate that the formation of commercialization partnerships by startups and failures in product development initiatives by established firms attenuate such market value penalties. The findings argue for considering closely the important role of established firms in providing legitimacy and resources for value creation by startup firms pursuing radical innovations.