Entrepreneurial beacons: The Yale endowment, run‐ups, and the growth of venture capital

• Author: Benjamin L. Hallen,Rory McDonald,Emily C. Pahnke,Y. Sekou Bermiss
• DOI: http://doi.org/10.1002/smj.2508
• Published date: 01 March 2017
• Date: 01 March 2017

Strategic Management Journal

Strat. Mgmt. J.,38: 545–565 (2017)

Published online EarlyView 31 March 2016 in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2508

Received 9 June 2014;Final revisionreceived 21 October 2015

ENTREPRENEURIAL BEACONS: THE YALE

ENDOWMENT, RUN-UPS, AND THE GROWTH

OF VENTURE CAPITAL

Y. SEKOU BERMISS,1*†BENJAMIN L. HALLEN,2†RORY McDONALD,3†and

EMILY C. PAHNKE3†

1Department of Management, McCombs School of Business, University of Texas at

Austin, Austin, Texas, U.S.A.

2Department of Management and Organization, Foster School of Business,

University of Washington, Seattle, Washington, U.S.A.

3Harvard Business School, Technology and Operations Management, Boston,

Massachusetts, U.S.A.

Research summary: This article investigates the social context of entrepreneurship in organiza-

tional sectors. Prior research suggests that rm foundings are driven by collective patterns of

activity— such as patterns of prior foundings in a given sector. Building on research on social

salience and signals, we consider the inuence of singular sector-level triggers, which we call

entrepreneurial beacons. We argue that the actions or outcomes of single, salient organizations

attract and motivate entrepreneurs, thus increasing the rate of foundings. We test this logic by

examining the impact of the Yale University endowment’s investment choices and of venture-

capital-backed IPO run-ups on venture-capitalfoundings between 1984 and 2011. We nd support

for the existence and inuence of beacons and outline boundary conditions for their effects.

Managerial summary: What leads entrepreneurs to found new companies in nascent sectors? In

contrast to prior research, which emphasizes patterns of activity, we argue that entrepreneurial

activity can sometimes be driven by the actions of a singular trigger— what we call an

entrepreneurial beacon. We examine the inuence of two such beacons, Yale University’s endow-

ment investments and exceptional venture-capital-backed IPO run-ups, on the founding of new

venture-capital rms over a 28-year period. We nd that Yale’s increased allocations to the

venture-capital asset-class has a signicant inuence on the founding of new venture-capital

rms, while exceptional venture-capital-backedIPO run-ups only inuence venture-capital found-

ings under certain conditions. Overall, we offer an explanation for heretoforeanecdotal accounts

of certain organizations or events that appear to have an outsized inuence on entrepreneurial

activity. Copyright © 2016 John Wiley& Sons, Ltd.

INTRODUCTION

Organizations do not exist in isolation; they are

embedded in a social context (Anderson and

Tushman, 1990; Hiatt and Park, 2013; Pfeffer,

Keywords: entrepreneurship; organizational sectors; sig-

naling; venture capital

*Correspondence to: Y. Sekou Bermiss, 2110 Speedway, Stop

B6300, CBA 4.202, Austin, TX 78712, U.S.A. E-mail: sekou.

bermiss@mccombs.utexas.edu

†All authors contributed equally.

Copyright © 2016 John Wiley & Sons, Ltd.

1997; Scott and Davis, 2007). Researchers have

recently begun to examine the social context of

entrepreneurship and the decision to found a new

enterprise (Carnahan, Agarwal, and Campbell,

2012; Stuart and Sorenson, 2007). Such studies

have elucidated how a sector’s social environment

inuences entrepreneurial activity by shaping

aspiring entrepreneurs’ behaviors (Fern, Cardinal,

and O’Neill, 2012) by socially constructing and

labeling the concepts by means of which the sector

is understood (Rao, 1994), and by convincing

546 Y. S. Bermiss et al.

key audiences (customers, investors, and alliance

partners) to support entrepreneurship (Aldrich and

Fiol, 1994; Diestre and Rajagopalan, 2012; York

and Lenox, 2013). But which aspect of the social

environment matters most for the entrepreneurial

process?

From a theoretical standpoint, existing work

has been surprisingly consistent about linking

entrepreneurial activity to collective patterns of

activity in the environment. One set of collective

patterns, patterns of foundings and density, has

generated the argument that prior foundings in a

sector encourage subsequent foundings (Agarwal

and Tripsas, 2008; Carroll and Hannan, 2000).

According to organizational ecology,the accumula-

tion of enterprises (an increase in density) provides

aspiring entrepreneurs a template that helps them

explain the organizational form’s function and

importance to employees and potential customers

(Barron, 1999). Accumulation also indicates that a

sector is legitimate and offers a “fertile niche” for

further activity (Baum and Singh, 1994; Singh and

Lumsden, 1990), making it easier to assemble the

resources to found a rm (Carroll and Khessina,

2005).

A parallel body of research argues that found-

ings are encouraged by patterns of support from

inuential stakeholders in related sectors. When

institutional investors and legislators support a

particular sector, the entire sector becomes more

legitimate and conducive to entrepreneurial activity

(Audia, Freeman, and Reynolds, 2006; Bruton

et al., 2010; Moore et al., 2012). For example,

Greve, Pozner, and Rao (2006) found that in

U.S. counties with many inuential nonprot

organizations, new LPFM radio stations (a related

noncommercial sector) proliferated. Similarly,

Hiatt, Sine, and Tolbert (2009) showed that found-

ings of nonalcoholic soft-drink producers were

higher in states with numerous members of the

Woman’s Christian Temperance Union and the

American Medical Association; these inuential

actors created a social environment hostile to

alcohol and welcoming to soft-drink producers.

Also consistent with these arguments,

researchers studying patterns of institutional

activism have described how the activities of

pioneers and activists within a sector encourage

entrepreneurial activity. Collectively, these groups

establish the social artifacts, beliefs, identities,

and infrastructures that make a sector amenable

to entrepreneurship (Navis and Glynn, 2010;

Raffaelli, 2015; Sine and Lee, 2009; Wry, Louns-

bury, and Glynn, 2011; Wry, Lounsbury, and

Jennings, 2014). For example, Weber, Heinze,

and DeSoucey (2008) showed that shared cultural

codes articulated by a coalition of activists in the

grass-fed-meat-and-dairy industry helped convey

the sector’s importance and stimulate entry by new

producers.

Overall, these studies offer a compelling and

consistent explanation of how a sector’s social

environment makes it conducive to entrepreneurial

foundings. They argue that a sector’s collective

pattern of vigorous activity (prior foundings, inu-

ential support, or activism) promotes awareness

of the possibility of further foundings and persua-

sively establishes the legitimacy of entrepreneurial

activity (Aldrich and Fiol, 1994). In other words,

these various forms of collective patterns serve as

signals (Spence, 1974) that inuence the behavior

of entrepreneurs and their supporters.

Despite the elegance of this characterization,

anecdotal accounts indicate that entrepreneurs are

often inuenced less by collective patterns than

by singular triggers. For example, few Internet

companies existed before Netscape’s IPO in 1995,

but many new Internet ventures formed rapidly

thereafter (Goldfarb, Kirsch, and Miller, 2007).

Similarly, given Sequoia Capital’s reputation for

supporting “niches that blossom” (Southwick,

2001: 73), entrepreneurs and their backers pay

close attention when this storied venture-capital

rm makes a bet in a new technology sector.In both

cases, entrepreneurs appear to be inuenced more

by singular triggers than by collective patterns.

This article offers an alternative conceptu-

alization of how a sector’s social environment

inuences new foundings. Drawing on research on

signaling and social salience, we argue that singular

triggers attract entrepreneurs and their supporters

to specic sectors. We call these salient triggers

entrepreneurial beacons, and identify two distinct

types. An endorsing beacon is a singular organi-

zation that observes and monitors several sectors

closely, actively supports a carefully selected

subset, and is perceived as having exceptional

insight into opportunities within sectors. Due to its

unique standing, when it provides greater support to

entrepreneurial rms, its actions raise awareness of

the entire sector, not just the supported rm, and sig-

nals the sector’s viability to others. A demonstrating

beacon, by contrast, is an organization within a

Copyright © 2016 John Wiley & Sons, Ltd. Strat. Mgmt. J.,38: 545–565 (2017)

DOI: 10.1002/smj