Parental endowments versus business acumen: Assessing the fate of low‐tech, service‐sector spinouts

• Author: Richard A. Hunt,David M. Townsend,Daniel A. Lerner
• Date: 01 December 2019
• Published date: 01 December 2019
• DOI: http://doi.org/10.1002/sej.1317

RESEARCH ARTICLE

Parental endowments versus business acumen:

Assessing the fate of low-tech, service-sector

spinouts

Richard A. Hunt

1

| Daniel A. Lerner

2,3,4

| David M. Townsend

1

1

Department of Management, Pamplin

College of Business, Virginia Polytechnic

Institute & State University, Blacksburg,

Virginia

2

Deusto Business School, Bilbao, Spain

3

Universidad del Desarrollo, Chile

4

IE Business School, Madrid, Spain

Correspondence

Richard A. Hunt, Department of Management,

Pamplin College of Business, Virginia

Polytechnic Institute & State University,

Blacksburg, VA 24061.

Email: rickhunt@vt.edu

Abstract

Research Summary:In recent years, scholarship on intra-

industry entrepreneurial spinouts has coalesced around a

heredity-focused perspective, propounding the notion that

spinouts from high-quality parent-firms outperform those

emanating from low-quality parent-firms. This view has

found strong support in high-tech sectors, but it is unclear

whether parental lineage is a determinant of performance

and survival in sectors exhibiting low-technological dyna-

mism, especially when the locus of value creation stems

from generalist rather than technical-specialist knowledge.

Applying the knowledge spillover theory of entrepreneur-

ship and jack-of-all-trades framework, we assess the fate of

a complete population of 678 service-sector firms for the

entire 32-year history of an industry. Our study offers

explanatory mechanisms that more fully account for the

non-hereditary success factors driving performance hetero-

geneity among entrepreneurial spinouts.

Managerial Summary:In many industries, half or more of

the firms are founded by former employees of existing com-

panies (i.e., “entrepreneurial spinouts”). In high-tech sectors,

these “spinouts”often appear to perform better than

entrants without prior industry experience. Moreover, spin-

outs spawned by high-performing parent-firms tend to out-

perform spinouts from low-performing parents, suggesting

that spinouts benefit from advantageous parental knowl-

edge and capabilities. However, this does not seem to be

Received: 20 March 2017 Revised: 16 March 2019 Accepted: 27 March 2019 Published on: 13 May 2019

DOI: 10.1002/sej.1317

© 2019 Strategic Management Society

478 wileyonlinelibrary.com/journal/sej Strategic Entrepreneurship Journal. 2019;13:478–506.

the case among spinouts in industries characterized by low-

technological dynamism. Our findings indicate that when

technological dynamism is low, general business acumen

eclipses parental lineage in determining spinout perfor-

mance. In these cases, spinout founders with primarily tech-

nical experience would be well-served by partnering with

individuals possessing experience in marketing, sales, and

day-to-day business management.

KEYWORDS

entrepreneurship, knowledge spillovers, market entry, service

sector, spinouts

1|INTRODUCTION

In 1996, 31 new firms entered the Colorado asbestos abatement industry, a sector devoted to the controlled

removal and disposal of asbestos-containing material from existing structures slated for renovation or demotion. Six

of these firms were de novo entrants, newly created firms without any prior experience in the asbestos industry. The

remaining 25 entrants that year were spawned entities, comprised of intraindustry entrepreneurial spinouts founded

by ex-employees of incumbent abatement firms. By 1999, only seven firms from the 1996 cohort were still opera-

tional, including four of the six de novo firms and just three of the 25 spinouts. Attrition for the spinouts approached

90 % in the first 1,000 days.

New ventures are often spawned from existing organizations, (Klepper, 2009; Stinchcombe, 1965) and entrepre-

neurial market entrants of all sorts frequently fail, often in large numbers (Shane, 2008). Still, the failure rate illus-

trated by the 1996 cohort prompts several questions: How do we explain such a high attrition rate, especially among

the spinouts; firms that are definitionally founded and operated by industry veterans? Was the wave of failures a

rarified occurrence, or is it indicative of generalizable challenges confronting service sector spinouts?

Prevailing theories of organizational knowledge transfer (Agarwal, Audretsch, & Sarkar, 2010; Connor & Prahalad,

1996; Franco & Filson, 2006; Kogut & Zander, 1992) and extensive empirical evidence (Agarwal, Echambadi,

Franco, & Sarkar, 2004; Chatterji, 2008; Dick, Hussinger, Blumberg, & Hagedoorn, 2013; Dyck, 1997; Eriksson &

Kuhn, 2006; Franco & Filson, 2006; Gompers, Lerner, & Scharfstein, 2005; Klepper, 2007, 2009; Klepper & Sleeper,

2005) support the notion that spinout founders benefit from parent-firm endowments, consisting of advantageous

knowledge that confers improved prospects of survival for the spawned entity. Moreover, good parenting appears

to be important. “Better-performing firms have better-performing intra-industry spinouts,”noted Klepper and

Thompson (2010, p. 5).

Given the tightly linked conception of inter-generational coupling in the existing literature (e.g., Agarwal et al.,

2004; Klepper, 2009), the dismal performance of the illustrative 1996 cohort raises important questions for extant

theory. In this industry context, spawned entities dramatically under-performed even the de novo entrants, firms that

definitionally had no parental endowments nor any prior industry experience. The question is: Why did so many

experienced industry insiders fail to survive? Is it possible that heredity is less relevant to entrepreneurial survival in

some sectors than it is in others? If so, why?

Using novel data from the complete population of all 678 firms ever to enter the Colorado asbestos abatement

industry, we develop and test a new framework for the consideration of intervening factors that appear to impact

HUNT ET AL.479