When do investors prefer copycats? Conditions influencing the evaluation of innovative and imitative ventures

• DOI: http://doi.org/10.1002/sej.1338
• Published date: 01 December 2019
• Author: Yingzhu Fu,Matthias A. Tietz
• Date: 01 December 2019

RESEARCH ARTICLE

When do investors prefer copycats? Conditions

influencing the evaluation of innovative and

imitative ventures

Yingzhu Fu

1

| Matthias A. Tietz

2

1

Nanyang Business School, Singapore, Singapore

2

IE Business School, Madrid, Spain

Correspondence

Yingzhu Fu, Nanyang Business School,

50 Nanyang Avenue, Block S3, Singapore

639798, Singapore.

Email: yingzhu.fu@ntu.edu.sg

Abstract

Research Summary: This article investigates the conditions

under which investors preferentially evaluate fast follower

business model copycats (BMCs)—less novel, imitative

ventures—over novel ventures. Employing a conjoint experi-

ment, we find that venture investors prefer fast follower

BMCs when the venture team has major capability advan-

tages in exploitation (compared to exploration). Further, we

find that investors' experience reduces their preference for

fast follower BMCs when the team's capability advantage is

in exploitation, and reduces their preference for novel ven-

tures when the team is strong in exploration. These findings

provide important theoretical and managerial implications.

Managerial Summary: Business model copycats represent a

popular phenomenon in the global market. Fast follower

BMCs are especially influential as many of them received

millions of dollars of investment, and achieved billions of

dollars in evaluations, both resulting in worldwide recogni-

tion. But although fast follower BMCs have the potential to

conquer any market, they are not always highly valued by

investors when initiating their businesses. We investigate

when this is the case and find that team exploration–

exploitation capabilities influence investors' evaluation pref-

erence toward novel ventures and fast follower BMCs. If

entrepreneurs are skilled in exploitation, creating a fast

Received: 26 July 2018 Revised: 25 July 2019 Accepted: 2 August 2019 Published on: 3 October 2019

DOI: 10.1002/sej.1338

© 2019 Strategic Management Society

Strategic Entrepreneurship Journal. 2019;13:529–551. wileyonlinelibrary.com/journal/sej 529

follower BMC venture might be a great pitch to secure

investment. Yet, if entrepreneurs are mostly competitive in

exploration, creating fast follower BMCs does not attract

investment easily.

KEYWORDS

business model copycat, conjoint experiment, exploration and

exploitation, investor evaluation, novelty and uncertainty

1|INTRODUCTION

Venture investors play a significant role in entrepreneurial ecosystems. Hence, entrepreneurship scholars show con-

tinuous interest in understanding venture investors' decision making, particularly in their evaluation of new ventures

(Shepherd, 1999a; Warnick, Murnieks, McMullen, & Brooks, 2018). Studies suggest venture investors place high

emphasis on assessing the characteristics of both the venture team (Franke, Gruber, Harhoff, & Henkel, 2008) and

the business model (BM; Petty & Gruber, 2011), which refers to the architecture describing what businesses do

(e.g., products and services) and how they do it (e.g., organizational designs, processes, and activities; George & Bock,

2011; Zott, Amit, & Massa, 2011). One of the repeated key findings in the literature is that investors consistently

seem to prefer ventures with innovative and pioneering BMs (Kollmann & Kuckertz, 2010; Shepherd, 1999b; Shep-

herd, Ettenson, & Crouch, 2000). Consequently, investors seek teams with high quality in characteristics such as

technical education and new venture experience (Franke et al., 2008), which are likely to facilitate the introduction

of new innovations and development of new markets.

However, the emerging phenomenon of business model copycats (BMCs)—ventures trying to pursue business

opportunities by purposefully imitating leading BMs—raises new questions regarding the contingencies of investors'

preference for more innovative ventures. Fast follower BMCs are especially influential. Fast imitation of innovations

pioneered by leading firms allows for reducing uncertainty and learning from innovators' mistakes and can result in

highly competitive rivals in the same markets (Boeker, 1989; Lieberman & Asaba, 2006; Lieberman & Montgomery,

1998). Fast follower BMCs increasingly represent a global phenomenon, as thousands of ventures aim to share or

even conquer the market through imitation rather than innovation (Amit & Zott, 2015; Zott & Amit, 2007). Recent,

well-known examples of fast follower BMCs include Lyft (follower of Uber in the United States), Mobike (follower of

Ofo in China), and GrabFood (follower of Foodpanda in Singapore; Carson, 2017; Wei, 2018; Yang, 2018; Zaleski,

2017). These fast follower BMCs have successfully achieved millions of dollars of investment, billions of dollars in

evaluations, and worldwide recognition. Entire startup accelerators, like Rocket Internet, now specialize in fast fol-

lower BMC development. Not surprisingly, well-funded fast follower BMCs have emerged alongside, and in some

cases have even overtaken, initial first movers (Carson, 2017; Yang, 2018; Zaleski, 2017). In this research, we focus

on investors' decision making regarding fast follower BMCs in comparison with novel ventures.

Venture investors typically receive a large number of business plans at once and must carefully evaluate and

compare them before making their investment decision (Petty & Gruber, 2011). Most ventures do not pass the initial

screening (Kollmann & Kuckertz, 2010). Fast follower BMCs increasingly attract investors, but the conditions under

which investors prefer them over truly novel ventures are not well understood, representing an important theoretical

limitation in the literature.

Moreover, fast follower BMCs do not fall neatly into existing theoretical frameworks. Thus, we lack a sufficient

understanding of investors' considered high-level tradeoffs between higher novelty and lower uncertainty—specifi-

cally, the perceived aggregate environmental uncertainty in technology and market demand. The literature on

530 FU AND TIETZ