Jewels in the crown: Exploring the motivations and team building processes of employee entrepreneurs

• Date: 01 September 2019
• Author: Rajshree Agarwal,Raj Echambadi,Sonali K. Shah
• DOI: http://doi.org/10.1002/smj.3027
• Published date: 01 September 2019

RESEARCH ARTICLE

Jewels in the crown: Exploring the motivations and

team building processes of employee entrepreneurs

Sonali K. Shah

1

| Rajshree Agarwal

2

| Raj Echambadi

3

1

Department of Business Administration,

Geis School of Business, University of

Illinois, Champaign, Illinois

2

Management and Organizations, Smith

School of Business, University of

Maryland, College Park, Maryland

3

D'Amore-McKim School of Business,

Northeastern University, Boston,

Massachusetts

Correspondence

Rajshree Agarwal, Management and

Organizations, Smith School of Business,

University of Maryland, 4562 Van

Munching Hall, 7699 Mowatt Lane,

College Park, MD 20742.

Email: rajshree@umd.edu

Funding information

Ewing Marion Kauffman Foundation

Abstract

Research Summary:This study examines motivations

and team building processes of employee entrepreneurs in

the disk-drive industry. Our inductive, grounded theory

building approach uncovers that ringleaders—founders

who spearhead spinout creation—are driven by a

nonpecuniary desire to create in a fertile environment,

when they encounter frictions within the parent firm.

Cofounders share the desire to create, but ensure departure

on good terms to retain the option of returning to paid

employment as a safeguard against entrepreneurial risk.

We uncover an endogenous team building process in

which more successful founding teams engage in “work-

place instrumentality”—creating workplaces through

deliberate selection of cofounders who have complemen-

tary functional knowledge, but are similar in that they pos-

sess superior problem-solving abilities, best-in-class

talent, and common workplace values.

Managerial Summary:The paper examines the motiva-

tions and founding team building processes of individuals

who leave existing firms to create new ventures. In con-

trast to conventional wisdom that suggests preformed

teams working on innovation projects leave together, we

find founding teams are created when a “ringleader”

chooses to venture out and subsequently seeks out

cofounders. Ringleaders and cofounders alike are moti-

vated by a desire to create given fertile opportunities and

care deeply about equity, but ringleaders additionally

experience at least one organizational push factor. Almost

Received: 24 September 2016 Revised: 13 December 2018 Accepted: 31 December 2018 Published on: 3 May 2019

DOI: 10.1002/smj.3027

Strat Mgmt J. 2019;40:1417–1452. wileyonlinelibrary.com/journal/smj © 2019 John Wiley & Sons, Ltd. 1417

all founding teams are created to ensure the presence of

complementary, functional knowledge. However, more

successful spinouts also select cofounders who are hands

on problem-solvers, best-in-class talent, and who share

common workplace values.

KEYWORDS

employee entrepreneurship, founder motivations, founding team

formation, knowledge spillovers, strategic human capital

1|INTRODUCTION

So that's how [focal spinout] had started: the negative push from [parent firm] and the

positive attraction of opportunity (Ringleader, 16).

I took from [name of parent firm] the best engineers there (Ringleader, 12).

What I do not want to be is somebody who goes in and does the same thing everyday,

plods around. What I want to have is a lot of challenge, a lot of commitment and a lot

of excitement (Cofounder, 19).

Spinouts—ventures created by ex-employees of industry incumbents—are important drivers of

industrial and regional evolution (Dahl & Klepper, 2015). Utilizing firm-level quantitative data,

scholars have documented capability transfer from established firms to these new ventures, leading

to their superior performance outcomes relative to other entrants (c.f. reviews in Agarwal, Gam-

bardella, & Olson, 2014; Agarwal & Shah, 2014). However, the interrelated questions of why and

how these teams form have received less empirical attention. Few studies empirically examine the

motives of employees who become founders (Klepper & Thompson, 2010). And, we know little

about the spinout team building process, although the size and composition of teams are important

drivers of performance (Eisenhardt & Schoonhoven, 1990; Phillips, 2002; Wezel, Cattani, & Pen-

nings, 2006). Therefore, we examine the following research questions: What motivates employee

entrepreneurs? What is the process by which spinout founding teams are assembled?

Nearly all theories of spinout generation center on employees exploiting innovative projects devel-

oped within parent firms. Agency theories focus on pecuniary rewards and potential opportunism as

motives (Anton & Yao, 1995; Hellmann, 2007). Knowledge spillover theories argue employees are

motivated to exploit their inventions when established firms have differences in priorities across pro-

jects or strategies (Agarwal, Echambadi, Franco, & Sarkar,2004; Cassiman & Ueda, 2006; Christensen,

1997; Klepper & Thompson, 2010). These theories do not always accord with empirical or anecdotal

evidence. For example, Klepper (2002) noted a lack of evidence for agency explanations, and Lepore

(2014) identified inaccuracies regarding Christensen’s (1997) theory of spinout-incumbent dynamics.

Moreover, the experiences of many entrepreneurs are inconsistent with these theories. For instance,

American icon Walt Disney did not leave prior employer Pesmen Rubin Art Studio to exploit an exis-

ting project. Rather, upon being laid off, Disney convinced his former colleague and friend Ub Iwerks

to cofound their first entrepreneurial venture, Iwerks-Disney (Gabler, 2006).

1

Iwerks, a master animator

1

Ub Iwerks' full name is Ubbe Iwerks. Disney chose a reverse alphabetical naming of their first venture as “Iwerks-Disney”to

avoid potential misconception about their business being in optometry—Disney “Eyeworks”(Gabler, 2005).

1418 SHAH ET AL.

was a “perfect complement for Walt Disney...While Iwerks, who was diligent, meticulous and extremely

facile with the brush, stayed at the drawing board, Walt could talk up customers and hustle business”

(Gabler, 2006, p. 47). Scholars have also suggested explanations revolving around nonpecuniary

motives (Carnahan, Agarwal, & Campbell, 2012; Franco & Filson, 2006) and managerial frictions

(Klepper & Thompson, 2010; Moore & Davis, 2004).

Research on how spinout teams form is limited, and more generally, little research examines the

endogenous processes through which individuals self-select into teams of any kind and in any con-

text (Bell & Kozlowski, 2012). In the spinout literature, scholars, consistent with the agency and

knowledge spillover models discussed above, tend to assume that new ventures are formed when

team members working on a specific innovation project depart together (Agarwal, Campbell,

Franco, & Ganco, 2016; Eisenhardt & Schoonhoven, 1990; Ganco, 2013). These assumptions are

not backed by empirical evidence or consistent with anecdotal examples. For example, Walt Disney

and Ub Iwerks had not worked with each other directly at Pesmen Rubin; their decision to cofound

their first venture occurred well after each had left the firm. Looking beyond the spinout literature,

we see conflicting theories for team formation that emphasize either differences/complementarities

(Mindruta, Bercovitz, Feldman, & Mares, 2016; Wasserman, 2012) or similarity/homophily (Chen &

Rider, 2015; Ruef, Aldrich, & Carter, 2003).

To address the practical and theoretical need for answers to the above research questions, we col-

lect rich, first-hand data from entrepreneurs who founded spinouts in the disk-drive industry between

1977 and 1997, capturing 30 founding narratives. We supplement and triangulate these narratives

with archival data when possible. We analyze these data using an inductive methodological

approach. We chose the disk-drive industry because of its extensive use in spinout studies (Agarwal

et al., 2004; Chesbrough, 2003; Christensen, 1997; Franco & Filson, 2006). This enables us to con-

textualize our findings and interpret them in light of received wisdom about the industry.

We uncover several key findings. First, there is a clear delineation in roles among founders: ring-

leaders are the originators and champions of new spinouts, and cofounders are recruited by ring-

leaders through a deliberate search process. Second, while ringleaders and cofounders alike have

similar “pull”motives—a desire to create in the presence of fertile opportunities––ringleaders are

also triggered by organizational “push”factors (e.g., bureaucracy, interpersonal/ethical frictions).

Cofounders do not exhibit push motives, rather, they view returning to corporate life as insurance

against the risk of failure in entrepreneurship. Third, the complete team formation process relies

heavily on ringleaders' ability to identify and attract human capital within their networks with selec-

tion along three dimensions: complementary knowledge and skills, hands-on problem-solving ability

and talent, and aligned values guiding how they will work together. Thus, spinouts are created

through a process we refer to as “workplace instrumentality”where founders pay deliberate attention

to the need to build a solid resource base for the spinout and create a workplace based on aligned

values. Fourth, spinouts built through selection along all three dimensions outperformed other spin-

outs. Taken together, our findings highlight how endogenous selection of better founding team mem-

bers leads to the endogenous creation of superior opportunities and more successful spinouts.

Our findings result in several contributions. In contrast to received literature, we show that exis-

ting innovation projects are not at the root of spinouts, founding teams are not composed of team

members who worked jointly on projects at the parent firm, and the motives predicted by agency the-

ory are notably absent. Instead, individuals' nonpecuniary aspirations are critical drivers for entrepre-

neurial venturing, thereby underscoring a need to focus on the people who found, rather than the

possibility that they appropriate a parent firm's technology. This refocusing is not only consistent

with insights from the psychology of entrepreneurship literature (Baum, Frese, & Baron, 2014;

SHAH ET AL.1419