Business Partners: Complementary Assets, Financing, and Invention Commercialization

• Date: 01 June 2015
• Author: Carlos J. Serrano,Thomas Åstebro
• DOI: http://doi.org/10.1111/jems.12095
• Published date: 01 June 2015

Business Partners: Complementary Assets,

Financing, and Invention Commercialization

THOMAS ˚

ASTEBRO

HEC Paris,

78351 Jouy en Josas, France

astebro@hec.fr

CARLOS J. SERRANO

Universitat Pompeu Fabra, Barcelona GSE and Banco de Espa˜

na,

Ramon TriasFargas, 25-27, 08005 Barcelona, Spain

carlos.serrano@upf.edu

This paper assesses the relative importance of the complementary assets and financial capital that

business partners may add to the original inventor-entrepreneur. Projects run by partnerships

were five times as likely to reach commercialization as those without business partners, and

they had mean revenues approximately 10 times as great as projects run by solo entrepreneurs.

These gross differences may be due both to partners impacting business success that is, who the

particular partners were, and to selection of the type of project or of whom to select as a partner.

After controlling for selection effects and observed/unobserved heterogeneity,the smallest estimate

of partners’ complementary assets approximately doubles the probability of commercialization

and increases expected revenues by 29% at the sample mean. Our findings suggest that a critical

policy option to increase commercialization rates and revenues for early-stage businesses is to

support the market for finding skilled partners.

1. Introduction

The individual entrepreneur has traditionally been an important force for technological

change, job creation, and economic growth. Several studies and popular accounts, how-

ever, have reported a recent shift from the individual-based model of entrepreneurship

to a team model, especially for invention-based ventures (e.g., Klotz et al., 2014). Indeed,

the number of U.S. businesses that are partnerships has increased by 75% over theperiod

1995–2005 (U.S. Small Business Administration [USSBA], 2009).

A major question in the study of entrepreneurship is whether entrepreneurs can

compete successfully with incumbents. Incumbents may have competitive advantages

over entrants due to access to complementary assets. Teece (1986, 2006) identifies

various complementary assets of incumbents including competitive manufacturing,

complementary technology, marketing, and distribution. However, Spulber (2014)

suggests that entrepreneurs may prefer to establish firms to develop their own inven-

tions because of the transaction costs of transferring technology to incumbents. In this

We have benefited from comments by Victor Aguirregabiria, Serguey Braguinsky, Alberto Galasso, Bart

Hamilton, Octavian Harare, Ig Horstmann, Alexander Kritikos, Illoong Kwon, Evgeny Lyandres, Tomasz

Obloj, Robert Petrunia, Aloysius Siow, Sheryl Winston Smith, Scott Stern, Peter Thompson, Tereza Tykvova,

and seminar participants at several conferences. We thank Xuesong Geng for excellent research assistance.

Astebro acknowledges financial support from the HEC Foundation and the HEC Leadership Center.Serrano

acknowledges financial support from the Marie Curie FP7-PEOPLE-2012-COFUND Action. Grant agreement

no: 600387.

C2015 Wiley Periodicals, Inc.

Journal of Economics & Management Strategy, Volume24, Number 2, Summer 2015, 228–252

Business Partners: Complementary Assets, Financing, and Invention Commercialization 229

paper, we suggest that independent inventors may overcome some of the competitive

advantages of incumbents by obtaining business partners who provide some of the

necessary complementary assets in the form of skills and contacts. Business partners

thus provide complementary assets that help inventors commercialize inventions.

Founding the firm together with business partners may be important for the

entrepreneur for several reasons. The partners may provide complementary assets in

the form of skills that are often associated with deep knowledge of the target industry

held by specific individuals with prior experience in the industry (see, e.g., Shane, 2000;

Klepper and Sleeper, 2005). Partners may also have crucial contacts with suppliers of

complementary assets and with distributors and customers (Audia and Rider, 2005;

Beckman, 2006; Spulber, 2014.) A third reason to find a partner is to finance the cost of

starting up. Bank lending may be difficult to obtain if the inventor does not have any

hard assets, and venture capital (VC) financing is only available for a small number of

ventures. Individual inventors may therefore, for various reasons, and to an increasing

degree, team up with other individuals to add appropriate complementary assets as

well as financing in order to more strongly compete as start-ups.1

But the drive of entrepreneurs to form partnerships may come at the expense of lim-

ited improvements in the venture’s performance, and it might not compensate enough

for the potential loss of aggregate invention commercialization following a reduction in

the number of projects undertaken as proportionally more teams are formed. Improve-

ments may be limited for teams because it is costly to find partners with the appropriate

complementary assets (Shimer and Smith, 2000; Mason, 2009; Harrison et al., 2010),

and seeking partners can increase the risk of idea expropriation (Arrow, 1962; Gans and

Stern, 2003). Moreover, teamwork can suffer from moral hazard (Alchian and Demsetz,

1972; Holmstrom, 1982) and coordination losses (Argote and McGrath, 1993). The key to

assessing the economic implications of the shift in the entrepreneurial model is to quan-

tify the overall impact of team formation on economic activity, in terms of the impact

on both the distribution of project productivity and number of projects conducted.

In this paper, we assess one of these two aspects: we document and estimate

the economic benefits of having partners with complementary assets join an inventor

and the specific economic drivers of these benefits. In particular, we inquire whether

it is the addition of complementary assets in the form of skills and contacts, or the

addition of financial capital that drives the benefits of forming a team. If these benefits

are significant, they might offset concerns that the reduction in number of projects

conducted reduces aggregate innovation.

Despite the importance of the issue, there is little empirical work substantiating

the link between entrepreneurial teams and venture performance. First, the size of the

founding team in the past has been found to be of only marginal significance and not

robustly related to start-ups’ sales growth and general firm performance (e.g., Eisen-

hardt and Schoonhoven, 1990; Haleblian and Finkelstein, 1993). Second, a review of the

literature reveals no documentation of the causal effect of how team formation impacts

venture performance. In previous work, the size and formation of the entrepreneurial

team, as well as the type of inventions ultimately commercialized by teams, have been

presumed to be exogenous to business outcomes. Our paper, to our knowledge, is the

1. Complementary assets are important also for other firm decisions than the one we study.For example, a

firm’s R&D investments (Helfat, 1997), the proclivity to enter new markets (Scott-Morton, 1999), the licensing

and trading of patent rights (Arora et al., 2001; Serrano, 2010; Galasso et al., 2013), the make-or-buy decision

in R&D (Ceccagnoli et al., 2014).