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Katila et al. (2008) "Swimming with sharks: Technology ventures, defense mechanisms and corporate relationships

34 important questions on Katila et al. (2008) "Swimming with sharks: Technology ventures, defense mechanisms and corporate relationships

What is the sharks dilemma?

When do entrepreneurs choose partners with high potential for misappropriation over less risky partners?

What is the fundamental tension entrepreneurs face when considering forming relationships?

On the one hand, they are pushed towards forming relationships by their dependence on others for needed resources
On the other hand, they are pushed away from relationships by concerns about possibly damaging misappropriation of their own resources by their partners

What is the principal approach for explaining when firms form inter-organizational relationships and social network theory

Resource dependence theory

In which way does social network theory complement resource dependence theory?

By indicating with whom to form ties

Which two research streams does this paper follow?

Venture capital
Corporation as an investor

Why do ventures enter relationships with VCs? (VC)

To obtain new business partners, gain introductions to possible executive team members, and obtain help in formulating strategy

What is the advantage for firm to form investment relationships with VCs?

They grow faster
Have better reputations
Gain more introductions to potential alliance partners
Are more likely to attain an initial public offering (IPO)

Where do VCs typically contribute to?

Financial resources
Legitimacy
Advice
Referrals for executive hires
Industry connections

Why is misappropriating the resources of new firms reasonably low?

Because VCs seek a financial return that is related to the venture's success

What happens because the corporation is the dominant partner in the relationship?

It has the choice whether, how much, and in whom to invest

When are established firms more likely to enter an investment relationship with a new firm and benefit from it?

When they can easily absorb technology because the venture's technology is related to their own
The patent regime of the venture's industry is weak
When the venture's technology is novel and significant

Why are corporate investors not as powerful as might be anticipated?

They sometimes fail to get their first-choice investment and cannot make the acquisitions they prefer

What about complementary resources?

New firms rarely own all of the resources necessary for the development and commercialization of their products and firms that need complementary resources can potentially use funding relationships to harness such resources from investing corporations

What about resource hierarchy?

Corporate investors are likely to be interested in relationships that involve complementary resources, because having excess operational resources can be a rationale for an established firm to be interested in an investment relationship

What may complementary resources enable the corporate partner to?

To gain access to the new firm's resources or influence its technology development becasue of the coordination demands of using these resources

Why are complementary resources especially for manufacturing more likely to propel relationship formation than needs for financial resources?

Simply providing financial resources may be less appealing to the established firms because they offer little opportunity to gain insight into the new firm's resources, especially intellectual property

What are the defense mechanisms?

Patent defense
Secrecy defense
Timing defense
Defense hierarchy

What happens when misappropriation of a firms' resources is successful?

It allows established firms to gain some control over the focal firm’s resources, ultimately lessening their dependence and diminishing the focal firm’s power.

Why are new firms at a particular risk of losing their technology resources?

Because the established firm's primary motivation for the relationship is typically a strategic interst in the new firm's technology

What about patent defense?

Because of the strength of patent protection varies across industries, new firms should prefer corporate investment relationships when the patent regime in the venture's industry is strong (rather than when it is weak) because it increases their ability to defend against the competitive aspects of the relationship

What about secrecy defense?

Trade secrets offer an exclusive source of protection to a diverse range of intellectual property, from know-how to recipes to customer lists, as long as the firm keeps them secret

Why should new firms be better able to protect their technological inventions and be more likley to enter into corporate investment relationships when the trade secret regime in their industry is strong?

Because the strength of trade secret protection varies across industries

What about timing defense?

Later timing is likely to make it more difficult for a partner to appropriate intellectual property because it is easier to protect a more mature technology that is more fully embodied in a product from possible appropriation.

Why are new firms therefore more likley to pursue corporate investment relationships in later funding rounds?

When the firm's technologies, products, and strategic agendas are more mature and so more defensible

Why is timing also an effective defense mechanism?

Because better aligned investors such as VCs typically are present from prior rounds to help thwart competitive actions by corporate investors

What about defense hierarchy?

Although patent protection may be in the interests of the new firm, it may discourage potential corporate partners

Why may corporations be less deterred by trade secrets?

Because they are a weaker protection mechanism than patents

Both parties may prefer timing as a defense mechanism.. Why?

Established firm may prefer to form relationships in later financing rounds, when the quality of the venture and its resources are clearer, and there is less uncertainty

Why may new firms prefer timing as a defense mechanism?

Because it has few (if any) legal costs and is more broadly applicable than legal defense mechanisms that focus on specific inventions

What do the authors propose regarding integrating needs and defense mechanisms?

That new firms are more likely to enter corporate relationships when the preferences of the two firms are reinforcing, such that there are mutually desirable resources and mutually desirable defenses

When do firms enter into corporate investment relationships from a cooperative perspective?

When they can obtain out-sized financial and manufacturing resources

When do firms enter into corporate investment relationships from a competitive perspective?

When new firms enter these relationships they can defend against potential resource misappropriation withthe distinctive defense mechanisms of trade secrets and timing

When do new firms swim with sharks?

When they need unique resources that sharks possess and can protect themselves with tailored defense mechanisms that maintain their power within the relationship

What are the three key points?

Executives anticipate the uncertainty of maintaining the dependence of their partners and their own power created by the potential for misappropriation
They form ties when defense mechanisms are available to lower this uncertainty
Defense mechanisms are a focal weapon by which firms sustain their power in relationships

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