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Intellectual property + entrepreneurial experience in same industry vital to high-tech start-ups

Intellectual property. Prior experience. All good things for budding high-tech firms?

Not always, according to new research by Sonali Shah, an assistant professor of management at the University of Washington Foster School of Business.

Intellectual property (IP) protection enhances a high-tech start-up’s chances of survival only when combined with a certain type of founder experience, Shah finds. The optimal scenario is when a firm has both intellectual property and a founder who has previously started a firm in the same industry.

“The results suggest that it’s not the IP alone that matters, but the ability to use that IP effectively,” Shah says. “Knowledge of how to operate as a start-up in a particular industry is needed to derive the benefit from technological knowledge.”

Right kind of experience

For the study, Shah and co-author Sheryl Winston Smith examined nearly 700 high-tech firms founded in 2004, across a range of industries, and tracked their fortunes during the critical first five years of life, in this case from 2005 to 2010.

Existing studies show little evidence that intellectual property protection—patents and copyrights of proprietary technologies—by itself enhances a firm’s chances of survival. So Shah and Smith looked at the joint effects of intellectual property and a founder’s prior knowledge. They parsed “prior knowledge” into three distinct categories: entrepreneurial experience, industry experience and entrepreneurial experience in the same industry.

The findings are revealing:

Having intellectual property and prior entrepreneurial experience in a different industry does not enhance the chances of firm survival. Having intellectual property and prior employment experience in the same industry also does not enhance the chances of firm survival. But having intellectual property and prior entrepreneurial experience in the same industry dramatically enhances the likelihood of firm survival.

Investor’s choice

“Prior entrepreneurial experience in a different industry is not always an advantage, especially in high-tech firms that compete in rapidly changing industries and depend on intellectual property as a competitive advantage,” Shah says. “And founders who have just worked in the industry before—for a Microsoft, IBM or AT&T, perhaps—may understand the industry and the competition, but they might not know how a tiny start-up can integrate itself into that same industry. Competition is a much different game for start-ups than for established firms.”

She adds that investors and potential partners should pay attention not only to a firm’s technology and founding management team, but the founding team’s ability to leverage its technology and compete successfully—and ultimately transform itself into a successful industry player.

“The research suggests that you’d want to invest in or partner with firms whose founders have founded other firms in the same industry. They are likely to be the best investments or partners,” Shah says. “They’re more likely to know how to operate in the industry from day one.”

Shah’s and Smith’s paper, “Intellectual Property, Prior Knowledge and the Survival of New Firms,” has won the 2011 Kauffman Foundation Survey Promising Paper Award, honoring working papers with promising potential for impacting the understanding of entrepreneurship and innovation.