Sarath Balachandran, London Business School
Abstract: Startups are increasingly turning to the incumbent firms in their industries for venture capital. However, there remain significant gaps in our understanding of how these relationships influence the way they innovate. I highlight an important tension for startups in these relationships – on the one hand they provide valuable downstream expertise to help startups adapt their technologies to product environments, but on the other they expose startups to norms and mindsets that push them in less novel technological directions in their inventions. Crucially, I show that each of these effects can vary depending on which employees of the incumbent firm the startup has access to, and how those connections are made. Startups who interact with the incumbent firm’s corporate executives are pushed in more conservative technological directions than those who interact with the incumbent firm’s scientists/technologists. How effectively startups can navigate these relationships also depends on the backgrounds of the incumbent firm employees who are in charge of managing them. These individuals act as the interface between the two firms, and I find that their tenure in the incumbent organization prior to taking up these roles is a crucial determinant of their ability to effectively connect startups to valuable expertise within this firm. My findings illustrate how interfirm relationships can expose firms to their partners’ limitations in addition to their strengths, something that research in this domain has largely overlooked. Furthermore, a partnership between the same pair of firms could lead to quite different exchanges and outcomes depending on the nature of the interactions underlying it. Accounting for these, conceptually and empirically, can help us better understand how collaborative relationships shape firms’ innovation outcomes.