Shared and shared alike? Founders' prior shared experience and performance of newly founded banks

• DOI: http://doi.org/10.1002/smj.2467
• Date: 01 December 2016
• Author: Mary Zellmer‐Bruhn,Yanfeng Zheng,Michael L. Devaughn
• Published date: 01 December 2016

Strategic Management Journal

Strat. Mgmt. J.,37: 2503–2520 (2016)

Published online EarlyView 5 January 2016 in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2467

Received 18 December 2013;Final revision received24 August 2015

SHARED AND SHARED ALIKE? FOUNDERS’ PRIOR

SHARED EXPERIENCE AND PERFORMANCE

OF NEWLY FOUNDED BANKS

YANFENG ZHENG,1*MICHAEL L. DEVAUGHN,2and MARY

ZELLMER-BRUHN3

1Faculty of Business and Economics, School of Business, University of Hong Kong,

Pokfulam, Hong Kong

2Management Department, University of St. Thomas, Minneapolis, Minnesota,

U.S.A.

3Department of Work and Organizations, Carlson School of Management, University

of Minnesota, Minneapolis, Minnesota, U.S.A.

Research summary: Pre-entry industry experience is a central construct in the founding team

literature. Research on prior shared experience (PSE) emphasizes that founding teams face

challenges integratingand acting on independent experiences, so PSE should be benecial for new

venture performance. Existing studies, however, typically study PSE in blunt terms, expecting that

moreis better. Instrumental variable analyses of a unique sample of 344 commercial banks founded

in four U.S. states between 1996 and 2006 showed that industry-specic PSE may be more or

less benecial, depending on several founding team characteristics. Our ndings provide nuance

and caution to the narrative that PSE is always benecial. Under some circumstances, rms with

founding team PSE may be no better off than those without founding team PSE, suggesting more

researchis necessary to understand when and why founding team experience matters to new rms.

Managerial summary: Pre-entry experience of founding teams affects new rm performance,but

is hard for founders to leverage separately gained experience. Knowledge moves more readily

if sets of managers leave together to start a new rm. But, it may be simplistic to conclude that

prior shared experience (PSE) is always good, or better than the sum of independent experiences.

In a set of banks founded in four U.S. states between 1996 and 2006, we nd that PSE is not

necessarily a direct pathway to better bank performance. Characteristics of the PSE, such as the

part of industry the former and new banks operate in, can lower its benet. We also found that

the benets of PSE erode as the entire founding team develops shared history after startup. Our

ndings have implications for entrepreneurs, investors, and policy-makers. Copyright © 2015

John Wiley & Sons, Ltd.

INTRODUCTION

Founding teams greatly inuence new rms’

initial strategies, structures, actions, and ultimately,

performance (Beckman, 2006; Eisenhardt and

Keywords: founding team; pre-founding experience; new

venture performance; new banks; team mental model

*Correspondence to: Yanfeng Zheng, 1325 KK Leung

Building, University of Hong Kong, Hong Kong. E-mail:

yzheng@business.hku.hk

Copyright © 2015 John Wiley & Sons, Ltd.

Schoonhoven, 1990; Roure and Keeley, 1990).

As such, researchers have become increasingly

interested in founding team characteristics to better

understand why new rms perform differently

(Delmar and Shane, 2006). One characteristic

affecting new rm success is knowledge inherited

via founding team members’ prior industry expe-

rience (Agarwal et al., 2004; Bamford, Dean, and

McDougall, 2000; Beckman and Burton, 2008;

Cooper, Gimeno-Gascon, and Woo, 1994; Klepper

2504 Y. Zheng, M. L. DeVaughn, and M. Zellmer-Bruhn

and Sleeper, 2005). For new ventures that have

limited resources, prefounding industry experience

is a source of human capital (Helfat and Lieber-

man, 2002), and is a key criterion stakeholders

consider before funding (Delmar and Shane, 2006;

Shepherd, 1999).

While some researchers argue that individuals

can readily transfer knowledge gained from prior

experience to new rms (Burton, Sorensen, and

Beckman, 2002; Cooper et al., 1994), others ques-

tion that possibility (Ganco, 2013; Wezel, Cat-

tani, and Pennings, 2006), perhaps because extant

studies typically examine the presence or absence

of such experience, or simply look at additive

amounts of such experience. The emphasis is on

the possession of experience, not the congura-

tion of the experience among team members, and

thus, ignores whether experience is relevant and

exploitable (Ganco, 2013).

A contrasting approach focuses on whether prior

experience is shared. Prior shared experience (PSE)

means that some or all of the founding team mem-

bers worked together before they founded their new

venture. Shared experience may be distinct from

independent experience in that groups of employ-

ees that move together may be better able to transfer

knowledge and routines to new rms (Wezel et al.,

2006). Joint work history has been associated with

more rapid delivery of products to markets (Beck-

man, 2006) and higher performance (Eisenhardt

and Schoonhoven, 1990). This stream of research,

though valuable, has implicitly assumed that PSE is

always benecial, the more the better, despite mixed

ndings or indications of no relationship in some

studies (Roure and Keeley, 1990).

More research is needed to develop a better

conceptualization of founding team characteristics

and to offer insights to stakeholders interested in

predicting new venture outcomes. Specically,

research must clarify when PSE improves per-

formance and when it does not by answering

several questions. For instance, do the number

of team members having shared history, or how

long they have shared experience, matter? Do

new rms benet equally from short-duration or

long-duration PSE? Likewise, could differences

between the context of the prior experience and

the new organization affect the utility of the shared

experience (Rousseau and Fried, 2001)? Finally,

does PSE ever fail to provide advantages over

independently acquired experience? To answer

these questions, we examine founding team PSE

and explore whether PSE characteristics modify

performance benets.

We develop hypotheses regarding PSE qualities

and associated benets (Cannon-Bowers, Salas,

and Converse, 1993; Goodman and Shah, 1992;

Mohammed, Ferzandi, and Hamilton, 2010; Ren

and Argote, 2011). PSE provides founding teams

with common routines and an organized under-

standing of task and team member knowledge that

aids team members’ information interpretation

and interaction with their environment (Klimoski

and Mohammed, 1994; Walsh, 1995). Drawing

on work in team cognition, we contend that PSE

characteristics reect the similarity and accuracy

of knowledge held by founding team members

(McIntyre and Foti, 2013), altering the relative

benets of PSE for new rm performance. We

focus on prior shared industry-specic experience

because it is considered one of the most important

resources for founding teams (Delmar and Shane,

2006; Shane and Stuart, 2002).

Our study contributes to the literature on

founding team characteristics and new venture

performance (Beckman, 2006; Cooper et al., 1994;

Eisenhardt and Schoonhoven, 1990) by providing

a rened view on how knowledge inheritance from

past organizations provides new rms with critical

competitive advantages. We identify boundary

conditions for PSE benets, and thus, expand

the scope of the observed PSE effects and our

ability to predict PSE-related phenomena. Our

study also speaks to the entrepreneurial spin-off

literature that emphasizes knowledge inherited

from prefounding industry experience (Agarwal

et al., 2004; Campbell et al., 2012; Klepper and

Sleeper, 2005). Specically, we add to a growing

view challenging the general assumption that

knowledge inherited from prefounding experience

is readily transferred to new rms. Our theory and

results are consistent with the view that a team

conguration perspective is best for considering

inherited knowledge, and that individuals may be

constrained in their ability to independently transfer

knowledge across organizations (Ganco, 2013).

THEORY AND HYPOTHESES

Managers become familiar with, and develop

knowledge structures about, causal relationships in

their task environment through experience (Walsh,

1995). This experience shapes their thinking about

Copyright © 2015 John Wiley & Sons, Ltd. Strat. Mgmt. J.,37: 2503–2520 (2016)

DOI: 10.1002/smj