Network Imprinting and the Variability of Venture Capital Firm Performance

• In Event: 413 - Section on Organizations, Occupations and Work Refereed Roundtable Session. Table 01. Culture and Organizations
  In Refereed Roundtable 100min: Table 09. Institutions and Organizational Forms

Abstract

This paper develops and tests a theory of firm entry and network imprinting. Sociological theory of networks indicates that firms positioned in the center of a market’s social network are more capable and have better access to resources. What results is a Matthew effect where the more central firms have access to better resources and can thus sustain outstanding performance for new firms entering a network. The closer to the center firms enter, the better they should perform. In this paper, I posit that new firms entering at the center of a pre-existing network are not necessarily better off, nor are the firms that enter at the periphery strictly worse off. Instead, firms that enter into the center are subject to both middle status conformity and learning myopia that leads to exploitation. On the other hand, firms that enter into the periphery develop an orientation toward external search that motivates them to be explorers. I test this theory using data on the co-investment networks of venture capital firms collected from 1981 to 2014. My results indicate that venture capital firms that enter into the center of the network experience are less likely to die, but also less likely to have extreme success. The converse is true for firms that enter into the periphery. I supplement my empirical analysis with qualitative interviews with venture capitalists to better understand the micro mechanisms at work.

Author

• Demetrius Lewis, Stanford Graduate School of Business