Oming From Good Stock Career Histories And New Venture Formation

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This detailed elucidation pertaining to oming from good stock career histories and new venture formation.

Coming from Good Stock:
Career Histories and New Venture Formation

M. Diane Burton
Sloan School of Management
Massachusetts Institute of Technology
Cambridge, MA 02142
(617) 253-5539
[email protected]

Jesper B. Sørensen
Sloan School of Management
Massachusetts Institute of Technology
Cambridge, MA 02142
(617) 253-7945
[email protected]

Christine M. Beckman
Graduate School of Management
University of California, Irvine
Irvine, CA 92697
(949) 824-3983

Forthcoming, Research in the Sociology of Organizations

Coming from Good Stock: Career Histories and New Venture Formation
Abstract
We examine how the social structure of existing organizations influences
entrepreneurship and suggest that resources accrue to entrepreneurs based on the structural
position of their prior employers. We argue that information advantages allow individuals from
entrepreneurially prominent prior firms to identify new opportunities. Entrepreneurial
prominence also reduces the perceived uncertainty of a new venture. Using a sample of Silicon
Valley start-ups, we demonstrate that entrepreneurial prominence is associated with initial
strategy and the probability of attracting external financing. New ventures with high prominence
are more likely to be innovators; furthermore, innovators with high prominence are more likely
to obtain financing.
Coming from Good Stock: Career Histories and New Venture Formation
Introduction
It has often been noted that some of the most radically innovative products and
technologies are developed and commercialized not by existing companies, but rather by
entrepreneurial ventures (Schumpeter, 1934; Tushman and Anderson, 1986; Henderson and
Clark, 1990). This is a remarkable fact, given that creating a new organization requires the
mobilization of a substantial array of social and material resources (Stinchcombe, 1965). These
resource mobilization tasks are simplified when entrepreneurs choose to focus on proven,
established products and technologies. By contrast, organizations devoted to new products and
technologies face severe hurdles. The entrepreneur must not only come up with a new idea, but
also overcome the skepticism of resource providers, since the uncertainty and risk associated
with any new venture is particularly heightened when the underlying product or technology is
unproven (Aldrich and Fiol, 1994).
Where do innovative new ventures come from? The simple answer is that they emerge –
directly and indirectly -- from established firms (Freeman, 1986). Contrary to popular myths of
lone college drop-out entrepreneurs, most new ventures are founded by people with prior
employment experience (Cooper, 1985; Robinson and Sexton, 1994). In this sense,
entrepreneurs are organizational products: “Organizations create their own competition by
providing the skills and background that provide credibility for the entrepreneur. They provide
the knowledge of opportunity by placing that person in a position to know about unserved or
badly served markets” (Freeman, 1986: 39).
In this paper we argue that entrepreneurial opportunities and resources accrue to incipient
entrepreneurs as a function of the structural position of their prior employers. Much as

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Coming from Good Stock: Career Histories and New Venture Formation
geographical regions differ in their rates of entrepreneurial activity, established firms differ
markedly along this dimension. Some firms are entrepreneurial hotbeds, as perhaps most
famously exemplified by Fairchild Semiconductor, founded in 1957. Fairchild spawned ten new
ventures in its first eight years; moreover, most of the thirty-one semiconductor firms founded in
Silicon Valley in the 1960s could trace their lineage to Fairchild (Saxenian, 1994; Rogers and
Larsen, 1984). Examples of such “Fairchildren” include Intel, Advanced Microdevices and LSI
Logic. Other firms give rise to relatively few, if any, new ventures.
1

In this paper, we argue that one consequence of these differences in rates of
entrepreneurial activity among established firms is to influence the visibility of established firms
in the entrepreneurial community. We use the term entrepreneurial prominence to describe these
differences in visibility. We consider established firms that spawn a large number of new
ventures through employee departures to be more entrepreneurially prominent than those that do
not. Our core contention is that innovative new ventures are more likely to emerge from
established firms that are entrepreneurially prominent. We expect this for two reasons. First, we
believe that there are important informational and resource benefits to being affiliated with a
prominent firm. Second, we argue that there are substantial reputational benefits that accrue to
employees of prominent firms, and that these benefits play a crucial role in reducing the
perceived uncertainty surrounding a venture. We conceive of the entrepreneurial prominence of
established firms as a form of social capital that is transferred to employees as they leave the
firm and attempt to launch new ventures. We explore how differences in the entrepreneurial
prominence of established firms affects the characteristics of entrepreneurial behavior. Thus,

1
Note that we do not seek to explain why some firms generate more entrepreneurial offspring than others; rather, we
take this distribution as given. See Freeman (1986) and Brittain and Freeman (1986) for a discussion of these issues.

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Coming from Good Stock: Career Histories and New Venture Formation
while established firms may have difficulty innovating (Sørensen and Stuart, 2000) and
commercializing new innovations (Hiltzik, 1999), they play an important passive role in shaping
the emergence of entrepreneurial ventures.
Our paper is related to and draws on a number of streams of theory and research. First,
there is a long sociological interest in the emergence of new organizations. In fact, one of the
early propositions put forward by Stinchcombe is that “the probability that a man or group of
men will be motivated to start an organization is dependent on the social structure and the
position of men within it.” (1965:147). Furthermore, sociologists have argued for some time that
the dynamics of new venture formation depend critically on the distribution of opportunities and
resources through social structure (Light, 1972; Hannan and Freeman, 1977; Aldrich and
Zimmer, 1986). However, most efforts to examine organizational emergence come from the
ecological tradition where there is keen attention to the broad structural characteristics of firms,
but little attempt to link individuals to this social structure. At the same time, attempts to link
fixed individual attributes, such as psychological characteristics, to entrepreneurial activity have
met with limited success (Brockhaus and Horwitz, 1986; Herron and Robinson, 1993). Our
paper explicitly reconnects individuals and organizations with a distinctly sociological approach
that allows us to explore whether some individuals, by virtue of their location in the social
structure of existing organizations, are better able to form highly uncertain, innovative start-ups.
Second, there is a growing interest in the economic and sociological literature on
technological innovation in the operation of geographical “spillover” effects (Jaffe, Trajtenberg,
and Henderson, 1993; Saxenian, 1994; Stuart and Sorenson, in press). These studies examine
how horizontal differentiation along a geographic dimension affects the innovative activity of
established firms and the emergence of new ventures. For example, Jaffe et al. (1993) find that

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Coming from Good Stock: Career Histories and New Venture Formation
the patenting rates of established firms are positively influenced by the patenting activity of other
firms in the same metropolitan area. Saxenian (1994) argues that the distinctive organizational
arrangements and cultures in Silicon Valley are a source of the regions’ high levels of
entrepreneurial activity. Stuart and Sorenson (in press), studying the biotechnology industry,
argue that new firms are more likely to emerge in regions that have a high density of established
biotechnology activity. Similarly, there is a long-standing interest in understanding how
horizontal differentiation among industries leads to differential rates of entrepreneurship and
innovation (e.g., Cohen and Levin, 1989). Our approach differs from these literatures in that we
do not seek to understand regional or industrial differences in entrepreneurial activity; in fact, we
focus on a single region, Silicon Valley and a limited number of high-technology industries.
Instead, we investigate the consequences of vertical differentiation among firms in terms of
status, prominence, or visibility (Benjamin and Podolny, 1999; Podolny, 1993; Stuart, Hoang,
and Hybels, 1999).
Third, students of organizations have become increasingly interested in how the
movement of individuals between organizations shapes organizational behavior and industry
dynamics. Most studies of this phenomenon start from the notion that managerial outlooks and
predispositions are shaped by career histories (Gunz and Jalland, 1996), and that the movement
of managers across firm boundaries is an occasion for the diffusion of ideas and innovations
(Baty, Evan, and Rothermel, 1971; Pfeffer and Leblebici, 1973; Boeker, 1997; Sørensen, 1999).
Because managers in different firms have divergent experiences, the pattern of movement
between firms is an important determinant of industry dynamics. Past studies of this process
have focused on the movement of managers between existing organizations. By contrast, we
focus on those managers who leave their jobs to start new firms and thus shed light on the effects

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Coming from Good Stock: Career Histories and New Venture Formation
of career trajectories on industry dynamics. Fourth, since we attach primary significance to the
career histories of entrepreneurs, our research is also related to work that examines how career
histories shape the entrepreneurial process (Brittain and Freeman, 1986; Boeker, 1988; Higgins
and Gulati, 1999; Shane and Khurana, 1999). Work histories are important determinants of the
resources available to entrepreneurs. Prior research on the effects of entrepreneur’s pre-
ownership experiences tends to focus on the types of work that entrepreneurs have performed in
the course of their careers (Shane, 2000; Jones-Evans, 1996; Cooper and Dunkelberg, 1986).
By contrast, we emphasize where entrepreneurs worked prior to founding the new venture; in
other words, we focus on the identity of previous employers. By doing so, we capitalize on the
notion that careers situate the entrepreneur in a social structure of existing firms that facilitates or
constrains the flow of opportunities and resources. We ask how the social structure of existing
firms influences the entrepreneurial process.
This paper makes a number of contributions. First, in contrast to the studies of the
relationship between managerial mobility and organizational behavior cited above, we draw
attention to the informational and reputational benefits that may come from being associated
with prominent employers. Second, by focusing on where founders worked, we ask how the
social structure of existing organizations influences the entrepreneurial process. Finally, by
differentiating new ventures according to their initial strategy, we offer a more nuanced
explanation of the entrepreneurial process.
In order to cast light on where innovative new ventures come from, we use a unique
sample of Silicon Valley startups and investigate the determinants of their initial strategies and
financing. We focus on explaining two characteristics of these ventures: 1) their founding
strategies, specifically whether or not they pursue an innovation strategy; and 2) the ability of the

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Coming from Good Stock: Career Histories and New Venture Formation
new ventures to attract external financing at founding. We use the career histories of the
founders, including the identities of past employers, to examine how differences in the
prominence of the established firms affects the strategy and financing of new ventures.
The remainder of this paper is organized as follows. In the next section, we outline a
series of arguments linking the entrepreneurial prominence of established firms to the
characteristics of new ventures. We then discuss the characteristics of our data and the methods
used to test our hypotheses. The presentation of results is followed by a discussion section.
Entrepreneurial Prominence and Firm Advantage
Students of the link between career histories and entrepreneurship have examined how
the accumulation of human capital through career histories influences the formation of new
ventures. In particular, scholars have emphasized how job experiences shape the technical and
managerial skills of (potential) entrepreneurs. For example, Jones-Evans (1996) examines how
the occupational backgrounds of technological entrepreneurs affect the skills they bring to their
ventures. He finds, for example, that entrepreneurs from academic research settings have strong
technical skills but low levels of managerial competence. In a similar vein, Chandler (1996)
examines how the past experiences of founders affect the success of new ventures. He finds that
new venture performance improves to the extent that there is similarity between the task
environment of the new venture and the task environment faced by the entrepreneur in his or her
previous job. Similarly, performance tends to improve to the extent that the skills required in the
new venture are similar to those previously developed (Chandler, 1996; see also Chandler and
Jansen, 1992; Cooper, Gimeno-Gascon and Woo, 1994). Finally, Shane (1999) demonstrates
how differences in the past experiences of a set of entrepreneurs shapes their conceptions of the

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Coming from Good Stock: Career Histories and New Venture Formation
opportunities associated with the same technological innovation.
As this brief review suggests, the main focus in past research on careers and
entrepreneurship has been on how careers shape the human capital available to entrepreneurs.
However, the effects of careers on social capital are neglected in existing research (Aldrich and
Zimmer, 1986). Entrepreneurial activity depends on access to ideas and resources, and such
access is differentially available to individuals occupying different positions in the social
structure (Burt, 1992). One of the key determinants of an individual’s position in social structure
is her career history, in particular her affiliation with different employers. Employers shape the
personal networks of their employees, expose them to new ideas, endow them with valuable
resources and confer implicit credentials upon them. At the same time, established firms are
differentiated from each other both horizontally – by virtue of being engaged in different
activities – and vertically – by virtue of being more or less visible in different arenas. The nature
of the resources available to employees therefore typically will differ according to the structural
position of the employer. Therefore, to understand how the social structure of established firms
affects entrepreneurial behavior, we must consider the consequences of such differentiation
among established firms.
We conceive of the social structure of existing firms as a set of positions hierarchically
ordered according to the prominence of their occupants. Network theorists suggest that an
actor’s prominence in a social network is a function of centrality – the extent to which the actor
is extensively involved in relations with other actors (Knoke and Burt, 1983). Prominence
garners both informational and reputational benefits for the actor. In recent years, organizational
sociologists have applied this notion of prominence to understanding organizational behavior and
industry dynamics (Podolny, 1993; Podolny, Stuart and Hannan, 1996; Stuart et al., 1999). In

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Coming from Good Stock: Career Histories and New Venture Formation
this paper we are particularly interested in the landscape of existing firms as it relates to the
generation of new firms; thus, we focus on the entrepreneurial prominence of firms in the
existing social structure. Established firms acquire entrepreneurial prominence by virtue of their
being tied to a relatively large number of new ventures. Unlike strategic alliances (Stuart et al.,
1999) and many other types of interorganizational ties, these ties generally are not created
intentionally by established firms; rather they are formed by virtue of employees leaving to
found new ventures.
Entrepreneurs must be adept at executing two roles: 1) scanning the environment for
opportunities and devising strategies to take advantage of them; and 2) ensuring and managing
the flow of resources — such as capital, supplier relationships and customers — to the venture
such that it may pursue its business strategies successfully. Prior employment experience shapes
the capabilities of entrepreneurs with respect to these two roles. Our argument is that
entrepreneurs benefit if they launch a venture from a prominent position in this social structure.
Employment by a prominent firm benefits the entrepreneur in two ways: 1) centrality in
entrepreneurial networks makes it easier to identify entrepreneurial opportunities and to act to
exploit the opportunities; and 2) the prominence of prior employers helps to reduce the perceived
uncertainty of a new venture for external constituents.
Entrepreneurial opportunities arise when a prospective entrepreneur receives new
information that, when combined with knowledge already possessed, can be translated into
something of value (Shane, 2000). As such, the potential that an opportunity will be discovered
is related to both the stock of knowledge an actor possesses and the flow of new information.
This implies that human capital differences can only partially explain the entrepreneurial
process. Structural differences in access to new information must also be considered.

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Coming from Good Stock: Career Histories and New Venture Formation
Network theorists have demonstrated that the quantity and quality of the information an
actor receives is a direct function of the actors social network (e.g., Granovetter, 1973; Burt,
1992). Entrepreneurially prominent firms, by virtue of their network centrality, will be exposed
to stronger flows of new information about technologies, emerging markets, and unmet customer
needs. High quality information will pass through prominent firms in high volume and at a fast
rate; thus, employees have a higher propensity to make the necessary information combinations
and recognize opportunities. But recognizing the opportunity is only the first step in creating a
new venture. Prospective entrepreneurs must take action to transform an opportunity into a
venture. Here, we believe that nascent entrepreneurs in entrepreneurially prominent firms
vicariously benefit from the experiences of those entrepreneurs who preceded them. As
employees exit to launch new ventures, they likely deposit knowledge about the appropriate
steps and methods for building an enterprise with former colleagues and coworkers. First,
coworkers rarely immediately sever ties when colleagues change employment. Second,
organizations have memories residing in long-tenured employees about the actions and activities
of former employees. Thus, tactical knowledge of entrepreneurship – which law firms to call,
which financiers to meet, where to locate offices – becomes part of the stock and flow of
information available to employees of entrepreneurially prominent firms.
Although the information benefits of working for a prominent employer can help people
to identify entrepreneurial opportunities and allow them to take appropriate steps towards
becoming an entrepreneur, prospective founders still face substantial obstacles to launching the
new venture. Entrepreneurs must successfully mobilize the resources of wealth, power and
legitimacy necessary to realize their vision (Stinchcombe, 1965; Aldrich and Zimmer, 1986).
Doing so requires overcoming information asymmetries that make it difficult for external

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Coming from Good Stock: Career Histories and New Venture Formation
resource providers to assess the quality of a new venture or its founders ex ante. These problems
are exacerbated to the extent that a venture wishes to pursue a new, unproven strategy. Under
these conditions, external actors are likely to arrive at an estimate of the quality of the venture by
considering more easily observable attributes that are thought to be associated with the quality of
the venture (Stuart et al., 1999; Podolny, 1993; Spence, 1974).
One source of information on the quality of the venture lies in the prior accomplishments
of the founding team members. Here, the career histories of entrepreneurs enter through a
consideration of the experiences and skills that have accumulated through the career. Studies
suggest, for example, that venture capitalists are particularly interested in the background
experiences and managerial capabilities of entrepreneurs (MacMillan, Siegel, and
SubbaNarishma, 1985; Goslin and Barge, 1986; but see Hall and Hofer, 1993). Indicators of
technological competence might include educational credentials and patents held.
A second class of information on the quality of new ventures is reputational, and focuses
on the identity of the entrepreneurs themselves. Sociologists have long maintained that
individual reputations are in part constructed from the identities of the parties with whom a
person associates (Blau, 1964). In particular, individual reputations benefit from association
with prominent actors (Goode, 1978). These reputational advantages in turn facilitate the
mobilization of resources and social action. Sociologists of science, for example, argue that
scientific careers are enhanced to the extent that young scholars are affiliated with prominent
individuals in the field (Merton, 1968). Latour (1987) suggests that the reception accorded to
new ideas depends on the prominence of the scientist’s associates. Podolny and Stuart (1995)
show that other actors are drawn to innovations that are advanced by actors whose prior
technological contributions are perceived as important.

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Coming from Good Stock: Career Histories and New Venture Formation
In a study of entrepreneurial ventures in biotechnology, Stuart et al. (1999) demonstrate
that the prominence of a venture’s alliance partners is positively associated with its performance.
In their model, new ventures with prominent affiliates benefit from an implicit transfer of status
from the affiliates. In the eyes of third parties, association with high-status partners functions as
a guarantee as to the quality of the venture. Affiliation with prominent partners therefore gives
firms an advantage in the competition for customers, suppliers and employees.
We argue that the prominence of prior employers plays a similar role in reducing the
perceived uncertainty of a new venture. External actors use information on previous employers
to make inferences about the likelihood that the founders will build a successful venture. Third
parties suffer from an information asymmetry that makes it difficult to assess the true abilities of
potential entrepreneurs ex ante; this asymmetry is analogous to the one faced by employers when
making employment decisions. In this setting, founders who come from employers that are
established incubators for entrepreneurial talent benefit from this association. In other words, the
prominence of previous employers may function as an indicator of the quality of the prospective
founder (Spence, 1974). This supposition -- that employees of prominent firms are, on average,
of higher quality -- may indeed be correct. If more prominent firms are also more successful, for
example, they can devote greater resources to attracting and retaining skilled personnel, and they
may invest more in training. Furthermore, highly skilled individuals can be expected to prefer
employment with prominent employers, improving the pool of candidates for employment at
such firms. (Note that we are careful here not to argue that employers explicitly seek to certify
their employees; nor, that they have a reputational incentive to ensure that they hire only highly
qualified employees. Unlike alliance partners, who may put their reputations at risk when
associating with a new venture (Stuart et al., 1999), we do not see the reputations of prior

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Coming from Good Stock: Career Histories and New Venture Formation
employers as being at risk in the entrepreneurial ventures of their employees.)
Finally, employees of entrepreneurially prominent firms are advantaged because more is
likely to be known about them in the entrepreneurial community. Just as centrality in
information networks may help founders gain access to information and resources, it also helps
diffuse information about founders and their new ventures. The experiences and
accomplishments of prospective founders will be more widely recognized if they come from
prominent employers. In this respect, affiliation with prominent employers may reduce the
information asymmetries faced by a new venture directly.
For each of these reasons, then, third parties may infer that founders from more
prominent employers possess, on average, greater skills and have a higher probability of success
in their new ventures. Because of this, we suspect that startup proposals from employees of
prominent firms will a priori seem more promising and hence receive more attention from
external actors. Thus, external actors will have a greater level of confidence in the ability of
such founders to have success in the new venture. Employment by prominent firms, in short,
should reduce the perceived uncertainty of a new venture. This idea is consistent with early
statements by Stinchcombe (1965:146-7) regarding entrepreneurship, where “…the patterns of
trust and of mobility of resources which determines whether resources can be moved to
innovators are socially patterned.” In this paper we propose a specific source of theses social
patterns – past employers.
Hypotheses
Our arguments suggest that potential entrepreneurs secure informational and reputational
benefits by virtue of having once been employed by a prominent firm. Furthermore, these

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Coming from Good Stock: Career Histories and New Venture Formation
benefits will be amplified in the face of uncertainty. In order to test these assertions, we first
examine the level of uncertainty involved in the kinds of ventures entrepreneurs start. We
distinguish between ventures that pursue innovation strategies and those that pursue other
strategies. Most of the organizational strategy typologies employed by empirical scholars allow
for this distinction (e.g. Miles and Snow, 1978; Porter, 1980; Miller, 1986). One theme across
all of the typologies is the importance of differentiating firms that are exploiting an existing
market from those that are creating a new market. Following Maidique and Patch (1982), we
believe that this is an especially salient distinction for technology-based firms. In our definition,
firms pursuing an innovation strategy are seeking to win a technology race in a new niche.
These firms are attempting to gain competitive advantages by being the first to develop and
exploit new, hitherto unproven technologies. By contrast, incrementalist startups build upon
existing products and technologies, and seek to gain competitive advantage through technical
enhancements, superior marketing and customer service, and/or cost advantages. A critical
difference between innovative and incrementalist startups lies in the degree of uncertainty
associated with a new venture of each type. High levels of uncertainty characterize innovative
startups, as the core products and technologies around which they are built are of unknown
value. The level of uncertainty for incremental ventures is correspondingly lower, since external
actors can more readily judge a venture’s promise by reference to existing firms. The
information asymmetries involved in assessing a venture’s quality are exacerbated for innovative
ventures, and founders of innovative ventures must therefore overcome a greater degree of
perceived uncertainty regarding their firm’s prospects.
Identifying opportunities for innovative ventures requires a good understanding of the
future path of technological progress and a wealth of information about technological

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Coming from Good Stock: Career Histories and New Venture Formation
alternatives. Entrepreneurs from prominent firms should be at an advantage in both respects.
The reputational benefits of being affiliated with a prominent employer should make
entrepreneurs more successful at reducing the perceived uncertainty of their ventures. As a
result, the informational and reputational benefits of working for a prominent firm should
translate into a superior ability to identify opportunities for innovation. Thus we hypothesize
that
Hypothesis 1: The prominence of prior employers will be positively related to whether a
firm pursues an innovative strategy.
Our second hypothesis concerns the ability of entrepreneurs to secure external financing
at the time of firm founding. In particular, we are interested in whether entrepreneurs from
prominent firms are better able to acquire resources from third parties. We suspect that the
willingness of third parties to invest in a highly uncertain venture during its infancy, before it has
any track record by which to be assessed, depends on the perceived quality of the new venture.
There are three ways in which a brand new venture can have higher perceived quality: 1) its
founders have high levels of human capital; 2) it has a product which can be independently
evaluated; and 3) it has ties to prominent firms that serve as endorsements. While in our
analyses, we will attend to all three mechanisms, we are primarily interested in the third, thus we
hypothesize that
Hypothesis 2: The prominence of founding team’s prior employers will have a positive
effect on the probability of a new venture obtaining external financing at the time of
founding.

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Coming from Good Stock: Career Histories and New Venture Formation
Data and Methods
Data on new ventures
The data for this study are from the Stanford Project on Emerging Companies (SPEC).
SPEC is a stratified random sample of 173 young high-technology firms in Silicon Valley.
2
The
sample is drawn from the population of firms listed in Rich’s Everyday Sales Prospecting Guide
(1994) and The Technology Resource Guide to Greater Silicon Valley (1993/1994) and
supplemented with firms from the Silicon Valley business press that were too young to appear in
published directories. SPEC is a longitudinal study of organizational evolution with emphasis on
formal systems and practices. In order to minimize recall bias and to guarantee that the entities
under consideration could potentially have the need for formalized structures and systems, age
and size criteria were used to define the population. Firms included in the study were no older
than 10 years and had at least 10 employees at the time of sampling. At the time of sampling, the
average firm was 7.3 years old and had 89 employees. The sample included firms that ranged in
age from 2 to 12 years and in size from 9 to 2042 employees. The SPEC research team
conducted interviews with founders, CEOs, and senior managers responsible for human
resources, gathered survey and archival data, and compiled detailed organizational histories for
each of the firms in the study.

2
For details on the data collection and coding methods, see Burton (1995); Baron, Burton, and Hannan (1996);
Hannan, Burton, and Baron (1996). These publications describe the original sample of 100 firms for which data was
gathered in the summer of 1994. The sampling and data collection strategies were replicated in the summer of 1995
to supplement the sample with an additional 72 firms (See Baron, Hannan and Burton 1999, 2000 for more
information).

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Coming from Good Stock: Career Histories and New Venture Formation
Bhide (1999) reports that 60% of start-ups fail within the first six years and that even
those that survive remain small. Based on these statistics, the SPEC sample is likely biased
towards successful start-ups. The nature of the sampling frame means that the firms under
investigation have achieved some minimum scale and longevity. However, it is important to
note that attempts were made to include younger firms, precisely to minimize survivor bias.
Furthermore, despite this data limitation – which plagues virtually all survey or interview-based
organizational research – the SPEC sample has some noteworthy advantages for our purposes.
First and foremost, it includes firms pursuing different strategies, with different sources of
capital. Second, it is geographically constrained, which increases the probability that multiple
founders will have held positions in a given employer and thus generate variation in our measure
of prominence. For these reasons, we believe the sample is appropriate for testing our ideas.
The first dependent variable of interest in this paper is whether or not the firm was
founded to pursue a technological innovation strategy. Trained MBA and doctoral students
conducted semi-structured interviews with a founder of each of the firms asking him or her to
describe the core competence of the firm at founding. The open-ended response (supplemented
in some cases by early press reports, product announcements, business plans and prospectuses)
comprised the raw data that was used to categorize each of the firms into one of four strategic
archetypes: Innovators, Enhancers, Marketers and Low-Cost Producers (see Hannan, Burton and
Baron, 1996). Innovators are firms that seek to gain first-mover advantages by winning a
technology race. Enhancer firms seek to produce a product similar to other companies, but
employ a general modification or enhancement to gain competitive advantage. Marketers seek
competitive advantage through superior sales, marketing or customer service. Finally, Low Cost
Producers are firms that seek cost advantages through cost efficient production techniques,

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Coming from Good Stock: Career Histories and New Venture Formation
relationships with low cost suppliers, or economies of scale. The three latter strategies all
revolve around extending existing products or services. For the analyses presented here, we
collapse the latter three categories into one category, thereby focusing on the distinction between
innovators and incrementalists. In light of suggestions that entrepreneurs may selectively recall
their company’s history (Bhide, 1999), the use of a retrospective measure of strategy may seem
problematic. However, we feel confident that our measure captures the difference between
innovators and incrementalists with a high degree of accuracy. In particular, respondents were
not asked to classify their strategies themselves; rather researchers coded strategies based on
business plans, prospectuses, and articles from the business press describing the industry.
Furthermore, Hellman and Puri (1999) perform a number of post-hoc analyses of the same data,
including linking patenting activity to strategy and finding that innovators accumulate larger
patent portfolios, which increase our confidence in the measure.
The second dependent variable is whether the firm received external financing at the time
of founding. New ventures have a variety of alternative sources of capital. Some entrepreneurs
self-finance the early start-up phase by using their own personal assets. Other entrepreneurs
have a source of revenue or cash flow, such as a licensing agreement or a consulting contract,
that finances the venture. Still others are able to mobilize the resources of friends and family to
support the early stages of a new enterprise. Many must seek capital from external third parties
such as venture capitalists, private investors (so-called “angels”), corporate investors,
commercial or investment banks, other financial institutions such as pension funds or insurance
companies, or the government. These alternative funding sources vary in the extent to which
they are willing to associate with risky ventures and in the price at which they provide capital.
Venture capitalists and private investors anchor the end of the continuum that finances the most

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Coming from Good Stock: Career Histories and New Venture Formation
uncertain enterprises at the highest price (see Roberts and Stevenson (1991) for an overview of
start-up financing). Not surprisingly, most of the start-up firms that received external funds at
inception obtained the funds from these high price sources. Thus, the task of attracting external
financing was one of persuading investors who were in the business of evaluating risky ventures.
Information on the financing history of each of the SPEC firms was collected via a
combination of public and proprietary databases, SEC filings and annual reports, internal
company documents and a survey instrument that was sent to the most senior finance executive
at each of the firms.
3
In this paper we focus on whether or not an entrepreneurial venture
received funds from any outside investor at inception. We do not distinguish types of investors,
nor do we differentiate so-called “seed money” from first or second round financing, nor do we
account for differences in the amount of financing. Instead our variable is simply a measure of
whether the founding team had any amount of money from any third party at the earliest
moments of the firm’s existence. Of course it is interesting to note that the vast majority of
external investors in the SPEC sample were venture capitalists (71%) with some angels (13%)
and corporate investors (13%). Only one of the SPEC firms borrowed start-up funds from a
commercial bank. The invested amount for all stages of investment (for the subset of firms for

3
The financing history data collection effort was led by Professors Thomas Hellmann and Manju Puri of the
Stanford Graduate School of Business (Hellmann and Puri, 1999). Sixty-six firms (38%) responded to a finance
history survey that was addressed to the senior executive responsible for finance. Data for a large number of the
sample firms was available from commercially available databases that track the venture capital industry. 107
(62%) of the SPEC sample firms had records in the Venture One database (see Gompers and Lerner (2000) for a
discussion of this database); 95 (55%) had records in the Venture Economics database (see Lerner (1995) for a
discussion of this database). Additional information was gleaned from the founder interview transcripts as well as
archival research in the business press.

18
Coming from Good Stock: Career Histories and New Venture Formation
which we have the data) ranged from $10,000 to $30,000,000 with one firm receiving
$100,000,000 in cash and stock as part of a merger agreement. Excluding this outlier firm, the
average investment size is just under $2.5 million, and the amounts of initial investments are one
the small end of the distribution.
We are interested in whether a founding team can persuade third parties that their venture
is promising before they have begun significant operations and have a tangible organizational
track record that can be evaluated. Having an external third party provide financial capital is
evidence that the team was successful. Ideally, we want to capture those firms that have external
funds at inception. In practice, this is difficult to operationalize. There are ambiguities and
inaccuracies inherent in both the founding dates and the financing dates. Most scholars define
the birth of a firm as the date that it was legally incorporated. However, in constructing
organizational life histories for very young firms we discovered that many had substantial lives –
ones that involved full-time employees and/or revenues from sales – well before the founders
ever approached a lawyer to incorporate them. For this reason we define the founding date as the
earliest possible date that there is any indication that a new organization exists, including legal
incorporation, having a full-time employee, or selling a product. This sets the start-up clock to
begin at the earliest possible moment. Similarly, financing dates recorded in commercial
databases and on our surveys were often recorded in terms of annual “quarters.” Even in cases
where a precise date was given, we understood this to be the date a financing deal closed, rather
than the moment when negotiations commenced or even when a “handshake” or verbal
agreement was reached. Thus, in order to accommodate these recording inaccuracies, we coded

19
Coming from Good Stock: Career Histories and New Venture Formation
a firm as having external financing at founding if it was received within three months of the
founding date.
4

Data on Founders’ Careers
We have further augmented the SPEC data with information on the career histories of
each of the founding team members of the SPEC companies. As part of the data collection
process, the SPEC research team interviewed and surveyed a founder of each of the firms. This
informant was asked to identify, by name, the other members of the founding team. This list of
founding team members was then verified through archival research of public documents as well
as internal company records available to the research team. Among the 173 SPEC firms,
founding team size ranged from 1 to 12 (with an average team size of 3). For each founding
team member, SPEC research assistants searched a number of archival sources, including SEC
filings, company documents, newspaper articles and profiles, electronic databases such as
Lexis/Nexis, and internet archives in order to reconstruct each founder’s job history prior to
launching the new venture. For each of the 527 founders, we attempted to collect information on
all jobs held prior to the start of the new venture including the position held and the name of the
employer. We contacted the human resources department for 20% of the firms and confirmed
the founders prior place of employment. The career history data collection process generated a
list of 1252 positions in 438 distinct prior employers. In our data, the number of prior jobs held
by a given founder ranges from 0 to 9. Of the 527 founders we identified at least one prior

4
We tested alternative intervals. The results when we more strictly define the date of financing are weaker, since
there are fewer positive outcomes, but in the same direction. We obtain statistically significant findings that are
substantially equivalent to those reported when we expand the financing interval to be within the first six months of
founding. We chose to report the analyses from the slightly more conservative three-month interval.

20
Coming from Good Stock: Career Histories and New Venture Formation
employer for 420.
5
Our key independent variable, employer prominence, requires that we have
data on at least one prior employer for at least one member of the founding team. We were
unable to collect any career history or educational background information for any of the
founders at 9 of the 173 SPEC companies; thus our sample is reduced to 164 firms.
Measuring the Prominence of Past Employers
The central predictor of interest is the prominence of each founder’s past employers. Our
measure of prominence should capture the extent to which an existing firm is visible to those
engaged in entrepreneurial activity (cf. Knoke and Burt, 1983). Given the diversity of industries
represented by our firms, it is difficult to think of a single dimension along which all of the firms
can be unambiguously ranked. Asset- or revenue-based size measures may have some
applicability to for-profit organizations, but are difficult to apply to universities, for example.
Measures of technological prominence based on patents (Stuart et al., 1999) may also be a
plausible basis for ranking firms. Again, however, difficulties arise with respect to cross-
industry comparisons and with respect to the best way to characterize the prominence of firms

5
We confirmed that there were at least 38 additional founders who began working at the SPEC firm directly from
school and thus their number of prior employment ties was truly 0. For the remaining 69 it is difficult to ascertain
whether missing data arises because the founder had no prior jobs, or whether the experience was simply not
reported in our sources. We suspect that there is some bias toward large, established firms being mentioned in press
accounts about the individuals in our sample; employers that are less important in the eyes of the media may not be
mentioned in newspaper stories and press releases. We attempt to account for this problem in our analyses by
replicating the models using different numbers of prior jobs. At a minimum, it is important to note that since we
were unable to administer job history interviews to the founders, these data are imperfect records of the career
histories of the SPEC entrepreneurs.

21
Coming from Good Stock: Career Histories and New Venture Formation
operating in multiple industries. More importantly, it is unclear what criteria third parties in an
entrepreneurial context use to assign prominence to existing firms, and whether these criteria are
consistent across industries. Ideally, we would want an independent reputation survey of all
existing firms completed for each of the years from 1982 to 1992 when sample ventures were
founded. Unfortunately, we know of no such survey.
For these reasons, we choose to arrive at the prominence of past employers inductively,
based on the observed pattern of entrepreneurial activity in our sample. We measure a firm’s
prominence by the extent to which it has been a source of entrepreneurial ventures. Firms that
generate a lot of new ventures should be more visible to other actors in the entrepreneurial
community. In order to construct this measure, we start with a binary matrix of ties between the
164 new ventures in the SPEC sample that have some prior career data for the founders and the
438 past employers of all of the founders. A “tie” is formed if any member of the founding team
had worked for the past employer. Thus entries in the cells i,j of this matrix are 0 if there is no
founding member at start-up i who worked for the past employer j, and 1 if there is at least one
founder who worked for the past employer j. Summing across the rows generates a count, for
each start-up, of the number of prior employers represented on the founding team.
a x
i i
j
=
j
?

Summing down the columns of this matrix generates a count, for each past employer, of
the number of startups in the SPEC sample that have emanated from that employer.
b x
j ij
i
= ?
?
1
We subtract 1 from b
j
to exclude the focal start-up; if a past employer has only generated
one start-up (each has generated at least one), it will have a prominence score of zero. For each

22
Coming from Good Stock: Career Histories and New Venture Formation
venture in the SPEC sample, we then generate a measure of the prominence of all of the past
employers by summing the b
j
across each of the past employers represented on the founding
team.
6

Using the observed entrepreneurial activity in our sample to measure the prominence of
past employers may strike some as tautological, given that we are seeking to explain
entrepreneurial activity. There are two reasons why we believe this is not so. First, we do not
use this measure to predict the rate of entrepreneurial activity, but rather as a predictor of the
characteristics of the entrepreneurial activity. We do not see a necessary connection between our
measure of prominence and whether entrepreneurs pursue innovation strategies, much less
whether they are able to secure external financing at start-up. Second, we conceive of the SPEC
sample of start-ups as generating a sample of past employers of start-up founders, where the past
employers are represented proportional to the entrepreneurial activity that they generate. Our
strategy thus parallels the National Organizations Survey, which generated a sample of
organizations by asking randomly selected individuals to name their employers (Kalleberg,
Knoke, Marsden, and Spaeth, 1996; see also McPherson, 1982). This sampling procedure –
termed probability proportional to size sampling – is statistically optimal for populations where
the elements vary widely in size (Sudman, 1976). We believe that replications of this procedure
for new high-technology ventures in Silicon Valley would generate similar lists of past
employers.
The career history data collection process generated a list of 1252 positions in 438
distinct prior employers. If people were described as being in self-employment (such as doctors

6
This measure of prominence will increase on average with the number of prior employers recorded for a founding
team. In order to account for this, we control for the number of past employers in the models.

23
Coming from Good Stock: Career Histories and New Venture Formation
or independent consultants), or for some other reason the firm was not identified, the “prior firm”
was coded as missing. Missing prior firms account for 87 of the 1252 positions (6.9%). The
remaining positions are in firms that range from familiar high-technology employers in Silicon
Valley – such as Hewlett-Packard, Intel and Apple – through academic institutions – such as
Stanford and Harvard – to the military and less well-known firms. Despite the diversity of firms,
there is a surprising degree of concentration in entrepreneurial activity (see Table 1).
TABLE 1 ABOUT HERE
For example, 6 prior employers dominate the list (IBM, Hewlett-Packard, Stanford
University, Apple Computer, Intel, and National Semiconductor) and 69 SPEC firms (46% of the
sample) have at least one founder who worked at one of these six firms. It is also worth noting
that, while this list captures many large Silicon Valley employers, it is not collinear with size.
One of the largest employers, Lockheed, with over 21,000 employees in 1990, does not appear
on the list of prominent firms. Furthermore, for firms such as Apple Computer (5,700
employees) and Sun Microsystems (7,700 employees) the prominence measure appears unrelated
to size. Apple’s prominence score is double that of Sun’s (12 compared to 6).
7

Control Variables
In addition to the prominence of past employers, we control for a number of other
characteristics of the SPEC companies and their founders (since we are studying the firms at
their inception, there are few organizational characteristics to measure). In the external financing

7
Numbers of employees by firm is based on data from September 1990 and was reported in a San Jose Mercury
News article, “Largest Employers” printed Monday, January 14, 1991 on page 2C.

24
Coming from Good Stock: Career Histories and New Venture Formation
models, we control for how far along each company is in the entrepreneurial process by
including an indicator as to whether or not they had a completed product ready for shipment
within six months of founding. Having a working product, or even a product prototype, is one
way that a firm can reduce the perceived uncertainty for external stakeholders. We believe that
this approach to reducing uncertainty will be particularly effective for firms pursuing an
innovation strategy; thus, we include an interaction term. We also control for industry for
several reasons. We want to capture differences in the need for capital (medical devices
companies on average should require more initial capital than software companies) and the
attractiveness of an industry in the capital market. We also need to account for different baseline
levels of innovativeness across industries. Finally, industries are not equally represented in the
sample. In the analyses presented in this paper we include dummy variables for three broad
industries: medical-related (including medical devices and biotechnology), networking and
telecommunications, and semiconductors. The omitted category consists primarily of computer
hardware and software companies, electronic component manufacturing companies, and contract
research and development firms.
Past research suggests that career experiences shape the propensity and ability of
individuals to launch entrepreneurial ventures. We control for a number of such experience-
related characteristics in our models. First, we control for the number of founders with prior
entrepreneurial experiences. Second, we include measures of the number of founders with prior
senior management experience. Some evidence indicates that venture capitalists take into
account the management experience of entrepreneurs (MacMillam et al., 1985). We also control
for the number of founders with experience in sales/marketing or finance in order to control for
the possibility that the perceived quality of a team may be related to the presence of functional

25
Coming from Good Stock: Career Histories and New Venture Formation
diversity.
Finally, we control for the general human capital of the founders by including education
level in our analyses.
8
Specifically, we measure the proportion of the founding team that has
advanced degrees (i.e., more than a B.A.) We also consider the possibility that third parties
might look to tangible measures of accomplishment as an indicator of the quality of the founding
team; thus, we collected information on all of the patents granted to each of the founders in our
sample prior to the launch of the new venture.
9
We interpret this as a measure of the
technological or innovative competence of the founding team members.
10

Table 2 presents descriptive statistics for all variables in the models. Bivariate
correlations are presented in Appendix A.
TABLE 2 ABOUT HERE
As is apparent from Table 2, almost half of the ventures in our sample pursue an
innovation strategy. Slightly over a third of the SPEC companies have external financing at the
time of founding, while approximately one-sixth have a product within the first six months. On
average, 3.4 different employers are represented on each founding team, which is slightly more

8
The models that we report in this paper include only the education control variables. The findings are equivalent
when we include age as a proxy for experience; however our sample size is dramatically reduced due to the
difficulty in locating reliable birthdates for the founders.
9
Patent data for each individual was collected through the U.S. Patent Office’s web sitehttp://www.uspto.gov
10
We also collected information on the number of citations to each founder’s portfolio of patents; however, this had
no effect in our models.

26
Coming from Good Stock: Career Histories and New Venture Formation
than the mean founding team size (2.95).
11
The vast majority of prior employers (338 of 438)
have a prominence score of 0. The maximum prominence score for a prior employer is 21.
Aggregating across all prior employers for a team yields a prominence score range from 0 to 52
with the average SPEC firm earning 9.6 points.
Results
We argue that firms pursuing innovative strategies face higher levels of uncertainty.
Evidence of the higher level of uncertainty surrounding innovation strategists can be found in
Table 3, which cross-classifies the initial strategy of the ventures in our sample by whether or not
the firm had external financing at founding.
TABLE 3 ABOUT HERE
While almost half of the incrementalist firms had external funding at the outset, only 28%
of those firms pursuing an innovation obtained such funds. This difference is statistically
significant. By construction, incrementalist firms are operating in known market niches where
there are already established entities. There is both an identifiable market opportunity and a
means to assess – and benchmark – the quality of the product or service being offered by the new

11
It is possible that our data collection strategy misses firms that are prominent in an entrepreneurial context but that
do not garner media attention. For these reasons, we conducted the analyses using only the immediately prior job
for each founder, using three prior jobs per founder, and using all available data. The results conform to our
hypothesized expectations; however, the prominence distribution is greatly constrained in the first case and
dramatically skewed in the latter. We report the intermediate choice, allowing up to three prior jobs for each
founder, in this paper.

27
Coming from Good Stock: Career Histories and New Venture Formation
venture. Neither is possible for innovative firms. Thus, we interpret this table to support our
claims that third parties, such as venture capitalists, are less willing to provide initial funding to
new ventures that pursue high-risk and uncertain innovation strategies.
In Table 4, we present logistic regression estimates of the determinants of a new
venture’s strategy at the time of founding. We focus our discussion on the fourth column of
results. The parameter estimates suggest that the past career experiences of founders have an
impact on their choice of strategy. Teams with a lot of experience in sales or finance are, as
might be expected, less likely to pursue innovation strategies. Graduate education also has a
positive impact on the decision to pursue an innovation strategy.
TABLE 4 ABOUT HERE
As predicted by Hypothesis 1, the prominence of past employers has a positive impact on
the propensity to pursue risky strategies. A one-standard deviation increase from average
prominence of the founding team’s past employers increase the odds of pursuing an innovation
strategy by a factor of 1.65. This result is consistent with our claim that entrepreneurs benefit
from being associated with prominent employers. Our measure of the prominence of past
employers captures the extent to which firms are at the center of entrepreneurial activity. This
centrality in entrepreneurial networks can have both informational and reputational benefits
which make it more likely that employees of prominent firms will pursue innovation strategies.
It is difficult to differentiate the information and reputation accounts as explanations of
the prominence effect. The information story suggests that employees of prominent firms take
advantage of ideas and innovations that they are exposed to in the course of their work. Their

28
Coming from Good Stock: Career Histories and New Venture Formation
employer may not be aware of these ideas, or may not be interested in pursuing them. In order to
explore the role that such exposure may play, we turned to the explanations given by founders in
response to the question, “What was the catalyst or impetus for founding the company?” Out of
these open-ended responses, we coded whether the founder indicated that the idea that formed
the basis of the new venture had come from work being done at a prior employer. Of the firms
for which we have such interviews (N=131), 23% mentioned that projects they had undertaken in
the context of a prior employment setting as the catalyst for starting the venture. In separate
models, we included a dummy variable indicating whether such a project with a prior employer
was the impetus for the new venture. This variable had no effect on the probability of pursuing
an innovative strategy, and had a negligible effect on the relationship between the prominence of
past employers and venture strategy.
We also experimented with a different measure of employer prominence, in part because
of our lingering concern over whether our effects are driven by differences in the size of prior
employers. Size may be relevant since it has been shown to affect organizational innovation
processes (Cohen and Levin, 1989). We do not have direct measures of employer size. Instead,
we created a dummy variable indicating whether the prior employer was listed in the Silicon
Valley 100, an annual listing of the largest firms in Silicon Valley produced by the San Jose
Mercury News. In separate analyses (available from the authors), we experimented with various
ways of including information on the number of prior employers listed in the Silicon Valley 100.
None of these affected the propensity of firms to pursue an innovation strategy, and the effects of
entrepreneurial prominence were robust throughout the different specifications.
In Table 5 we turn our attention to the determinants of external financing at founding.
These estimates are from logistic regression models of whether or not a venture had external

29
Coming from Good Stock: Career Histories and New Venture Formation
financing within three months of founding.
TABLE 5 ABOUT HERE
As the cross-classification in Table 3 suggested, firms pursuing an innovation strategy are
less likely to secure external financing at start-up. In the second model, we introduce an
interaction effect between the firm’s strategy and whether or not they had a product at founding.
We see that these two variables have a complex effect on the likelihood of external financing at
founding. The main effect of the product variable indicates that firms pursuing an incrementalist
strategy are less likely to secure external financing at founding. This may seem counterintuitive.
However, it is important to note that our dependent variable primarily captures infusions of
venture capital, which comes at a higher cost than traditional sources of capital (such as bank
loans). Since incrementalists are operating in established markets, those with a product in hand
have the least need for this more expensive type of financing. In fact, they may be able to
generate sufficient revenue from sales to mitigate the need for any external financing. Turning to
innovation strategists, the interaction effects suggests that these firms, having a product makes it
more likely that the firm will receive external financing at founding. Unlike incrementalist
firms, however, innovative startups are more in need of venture capital due to the uncertainty
surrounding the market for their products.
In the next two models, we include measures of the experiences and achievements of the
founding team. First, we see that prior founding experience has no effect on the odds that a new
venture will receive external financing at founding. This may be due to the fact that our
measures captures only whether or not a founder had been involved with a prior start-up, but

30
Coming from Good Stock: Career Histories and New Venture Formation
nothing about the outcome. If the prior founding experiences have had negative outcomes, third
parties may be hesitant to invest in another venture. Alternatively, if the prior founding
experience had been successful, and the entrepreneur has “cashed out,” his or her own personal
wealth may obviate the need for external financing in the early stages of the firm. It is also
worth noting that prior founding experience is significantly correlated with senior management
experience – which has a positive effect on the odds of attracting external stakeholders.
Founding teams whose members include at least one with prior senior management experience
are more likely to secure external financing at founding. This is consistent with studies showing
that venture capitalists value the management experiences of entrepreneurs when evaluating
proposals (MacMillan et al., 1985). Neither the innovative ability of the founders, as measured
by the number of patents held, nor graduate credentials have a significant effect.
12

We see in the fifth model in Table 5 that the prominence of past employers initially has
no significant effect on the odds of securing external financing at startup, suggesting no support
for Hyothesis 2. However, this model does not take into account the different levels of
uncertainty associated with innovation strategies and incrementalists. We expect entrepreneurial
prominence to be especially beneficial when the perceived uncertainty of the venture is high,
such as when a firm pursues an innovative strategy. In the final model (model 6) in Table 5, the
effect of employer prominence differs for the two types of firms. Among firms pursuing an
innovation strategy, employer prominence has the expected positive and statistically significant
effect on the odds of securing external financing at startup. For innovative ventures, where the
quality of the venture team is arguably of greatest importance, employer prominence has a

12
We tested for an interaction effect with the strategy of the firm; it was not significant.

31
Coming from Good Stock: Career Histories and New Venture Formation
significant effect on the ability of the founders to secure resources from external providers.
13

(Separate analyses (not shown) using the Silicon Valley 100 measures discussed above had no
influence on the pattern of results.) This supports our claim that the reputational benefits of
employer prominence reduces the perceived uncertainty of new ventures and facilitates
entrepreneurial activity.
Discussion and Conclusion
The analyses presented in this paper provide evidence supporting the claim that career
histories shape the entrepreneurial process. First, functional and educational backgrounds
influence initial strategic choices, and management experience is important to external
stakeholders. Entrepreneurs with advanced degrees establish firms with innovation strategies, but
entrepreneurs with sales or finance experience are less likely to pursue an innovation strategy.
Entrepreneurs with senior management experience have more legitimacy with external
constituents and are more likely to obtain external financing. These findings are consistent with
work on human capital and the importance of career histories on the formation of new ventures.
Our work moves beyond these findings, however, to address the importance of social capital for
entrepreneurs. Entrepreneurs setting out from prominent employers have both information and
reputation advantages over those who emanate from less prominent firms. It is important to note
not only what experiences and background entrepreneurs have but also where these experiences

13
Arguably, the firms with the greatest uncertainty surrounding their quality are innovation strategists without a
product at the time of founding. This suggests a three-way interaction between strategy, product at founding and
employer prominence. We tested for this interaction in a separate model, not shown here. Employer prominence
has no significant effect for innovators with a product, but does have a significant effect for innovators without a
product. This is consistent with our argument.

32
Coming from Good Stock: Career Histories and New Venture Formation
come from. The information and reputation advantages that accrue from social capital allow
entrepreneurs from prominent firms to pursue more risky ventures, such as founding a firm
dedicated to establishing a new product or market. The reputational capital derived from being
affiliated with a prominent employer also allows entrepreneurs to reduce the perceived
uncertainty of their venture, thereby facilitating the acquisition of resources from third parties.
Risky ventures (those pursuing an innovation strategy) that emerge from prominent employers
are more likely to obtain external financing.
While we believe our analyses are persuasive, they are limited in certain respects. First,
our data do not allow us to distinguish between a desire to launch a new venture pursuing an
innovation strategy, and the ability to do so. This makes it difficult to specify clearly the
mechanism by which employer prominence influences the choice of initial strategy.
Specifically, we cannot confidently determine whether individuals from prominent employers
are more likely to launch innovative ventures because they are privy to superior information, or
because they benefit from the prominence of their employers in convincing third parties to
support the venture. Distinguishing between these accounts would require a more detailed study
of proposed entrepreneurial ventures and the process by which they move from initial concepts
to nascent firms. Despite this limitation, what we do know is important: entrepreneurs from
prominent employers launch more innovative ventures, and those ventures are more likely to
obtain external financing.
Second, while our interpretation of these results emphasizes the benefits of prominent
structural locations, we are sensitive to alternative explanations that point to the possible effects
of unobserved heterogeneity among founders. It is possible that the observed effects of
entrepreneurial prominence are due to unobserved characteristics of established firms and the

33
Coming from Good Stock: Career Histories and New Venture Formation
employees they attract. For example, entrepreneurially prominent firms may attract employees
whose personal characteristics make them particularly likely both to pursue innovative ventures
and to win the confidence of external investors. As with any such claim, we cannot rule out with
certainty that the findings can be attributed to unobserved heterogeneity. However, we feel
confident that we have measured and controlled for several of the most important individual-
level characteristics that can most plausibly be thought to affect the outcomes we examine. Our
models include measures of the patenting activities of the founders, their educational
backgrounds, their prior work experiences and their past entrepreneurial activity. Moreover, we
have no a priori reasons to expect that the firms identified as entrepreneurially prominent in this
sample should differ systematically in their recruitment behavior. At the same time, we believe
that an important and promising line of future research would be to explain why firms differ in
the rate at which they generate new ventures through employee departures. The limited amount
of work that has been done in this area suggests that such variations can be traced to differences
in internal promotion chances, reward levels, technological emphases and managerial practices
(Freeman, 1986; Brittain and Freeman, 1986). A full understanding of how established firms
shape entrepreneurial behavior must attend to both the cause and the consequences of
entrepreneurial prominence.
Finally, the diversity of firms in the SPEC data set, although useful for understanding a
broad set of organizations, has certain shortcomings. Ideally, in addition to our employer
prominence measure, we would have an exogenous measure of the prominence of past
employers. The broad set of industries represented in the sample make such a measure difficult
to generate. For studies of new ventures within a single industry, measures of technological or
innovative prominence may be appropriate. Stuart et al. (1999), for example, measure the

34
Coming from Good Stock: Career Histories and New Venture Formation
prominence of alliance partners using counts of citations to a firm’s patent portfolio. The
development of exogenous measures of prominence requires confidence about the criteria by
which members of the entrepreneurial community rank existing firms. To our knowledge, this
topic is unexplored in the existing literature. Furthermore, an exogenous measurement of
prominence has its own problems. No clear dimension exists on which we could compare the
prominence of a biotechnology firm with the prominence of a hardware firm. As such, single
industry studies may be more appropriate places to develop exogenous measures of prominence.
We began this paper by arguing that the landscape of existing firms shapes the
entrepreneurial process. We believe our results demonstrate that patterns of entrepreneurial
activity are shaped by the social structure of existing organizations (Stinchcombe, 1965; Aldrich
and Zimmer, 1986). Our work is, therefore, an important complement to studies showing how
the general scarcity of resources affects the formation of new firms (Hannan and Freeman,
1989). In particular, these findings stress the importance of hierarchical differentiation in the
social structure of organizational populations (Podolny, 1993; Podolny et al., 1996; Stuart et al.,
1999). We know from this existing work that prominence dictates future patterns of affiliation,
firm survival, and performance. We find additional benefits accruing from prominence: firms
emanating from prominent firms are more innovative.
For network theorists, our work further confirms the importance of network position.
Entrepreneurs with prominent past employers occupy a privileged place in the social structure,
and their position garners important advantages with respect to access to resources and
information. What we add to the network literature is an examination of how the network of
existing organizations impacts the new venture, and by extension the new venture network. The
new ventures that spawn from prominent employers may occupy a more prominent position in

35
Coming from Good Stock: Career Histories and New Venture Formation
their own network. The access to external funding immediately connects these innovative new
ventures into an exclusive network of organizations. The innovative strategies of these firms
may lead them to higher visibility in their own industries. And the fact that they emerge from
prominent others may imprint them with positional advantage from the very beginning
(Stinchcombe, 1965). Prominence may not only be fairly stable over time, it may transfer from
one organization to the other through entrepreneurs. Furthermore, the impact of the new
venture’s lineage may have implications far beyond founding. These possibilities offer
intriguing directions for future research.
We noted earlier that organizational researchers have grown increasingly interested in the
role managerial careers play in shaping organizational behavior and industry dynamics. Most
research in this tradition focuses on how career histories shape individual experiences and
abilities (Boeker, 1997; Sørensen, 1999). Our research emphasizes that careers have important
reputational consequences as well. In this respect, the identity of a person’s employers (and
perhaps other institutional affiliations) assumes primary significance. Organizational reputations
transfer to individual reputations. Inferences about the talents and abilities of individuals are
constructed from their histories of affiliation with employers. This parallels studies of scientific
careers, which have documented that the prestige of the university a person attended has a
positive effect on the prestige of the first job (Hurlbert and Rosenfeld, 1992). Our results
suggest, however, that the effects of institutional or organizational prestige extend beyond the
signals associated with educational credentials and encompass the firms and other organizations
that people move through in the course of their careers. Moreover, the effects of institutional
prestige extend beyond their impact on individual life courses. The role that hierarchical
differentiation among organizations plays in both individual career dynamics and organizational

36
Coming from Good Stock: Career Histories and New Venture Formation
populations, and the interconnections between the two levels of analysis, is an important arena
for future research.
Future research should examine other benefits of entrepreneurial prominence. We find a
link between prominence and innovative strategies and external funding, but prominent past
employers may continue to impact internal organizational decisions through means like the
recruitment of personnel from prominent firms. Ventures spawned from prominent employers
may be more likely to go public successfully, or they may be more likely to be acquired by a
larger, more established firm attempting to increase their own prominence. These various
research possibilities point out how disentangling where imprinting ends and path dependence
begins offers a challenge to future research.
Our research contributes to a greater understanding of what differentiates new ventures.
In order to understand the emergence of innovative new ventures, we need to know where they
come from in the network of existing organizations. Past employer prominence offers firms a
significant advantage in the struggle for survival and success. We tie new ventures into the
existing social structure and point out that a new venture is more than a compilation of skills and
experiences, but it emerges from other organizations with positions in the social structure.
Without incorporating the existing social structure into our understanding of new ventures, we
cannot hope to understand why one venture survives and another fails, much less why the
occasional venture succeeds beyond all expectations. Despite the rapid rate of new venture
formation, the ever changing technology, and the considerable hurdles new ventures face, the
underlying stability of the social structure offers a means to understand and keep up with the
changing organizational landscape.

37
Coming from Good Stock: Career Histories and New Venture Formation
Acknowledgements
This research was supported by the MIT Sloan School of Management, the Division of
Research of Harvard Business School, the Stanford Graduate School of Business, the University
of Chicago Graduate School of Business, the Alfred P. Sloan Foundation, and the Kauffman
Center for Entrepreneurial Leadership. Early versions of this paper were presented at the
Academy of Management, San Diego, CA, August 1998 and at the annual meeting of the
American Sociological Association, Chicago, IL, August 1999. We would like to thank Howard
Aldrich, Roberto Fernandez, Rakesh Khurana, Josh Lerner, Nitin Nohria, Damon Phillips, Julio
Rotemberg, Bill Sahlman, Scott Shane, Olav Sorenson, Toby Stuart, and Mike Tushman for
helpful ideas and comments on early drafts. We are indebted to Mike Hannan and Jim Baron for
their role in the Stanford Project on Emerging Companies. Stephanie Woerner provided
assistance of many types. Finally, we thank Thomas Hellmann and Manju Puri for sharing their
financing data.

38
Coming from Good Stock: Career Histories and New Venture Formation
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Coming from Good Stock: Career Histories and New Venture Formation
Table 1. Top 24 Entrepreneurially Prominent Firms in SPEC Sample
Firm # of SPEC Firms
IBM 21
Hewlett-Packard 16
Stanford Univ. 15
Apple 12
Intel 11
National Semiconductor 10
ROLM Corporation 9
AT&T 8
Sun Microsystems 6
UC Berkeley 5
Silicon Graphics 5
Ungermann Bass 5
AMD 4
Digital Equipment Corp 4
MIPS Computer Systems 4
NASA AMES 4
NIH 4
Xerox Corp. 4
Bridge Communications, Inc. 3
Chips and Technologies 3
Control Data Corporation 3
Texas Instruments Incorporated 3
U.S Navy and Naval Reserve 3
Harvard University 3
Note: SPEC firms can have multiple parents. For example, a SPEC firm may have one founder
who worked at IBM, HP, and GE and a second founder who worked at HP and Honeywell. The
career backgrounds are aggregated at the firm level; thus this SPEC firm has prior ties to four
firms (IBM, HP, GE, and Honeywell) and would be listed in this table as coming from both IBM
and HP.
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Coming from Good Stock: Career Histories and New Venture Formation
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Table 2. Descriptive Statistics
Variable Mean SD Min Max N
Innovation Strategist

0.491 0.501 0 1 159
External Financing within 3 mos.

0.370 0.484 0 1 138
Product within 6 mos.

0.185 0.389 0 1 168
Medical-related Industry

0.143 0.351 0 1 168
Networking & Telecom. Industry

0.202 0.403 0 1 168
Semiconductor Industry

0.107 0.310 0 1 168
Prior Founding Experience

0.560 0.860 0 5 168
Senior Management Experience

0.935 1.079 0 5 168
Finance or Sales Experience

1.185 1.434 0 9 168
Log Number of Patents

0.698 0.967 0 3.85 166
Advanced Degrees

0.784 0.355 0 1 151
Number of Past Employers

3.440 2.107 0 11 168
Ties to Prominent Firms

9.595 10.860 0 52 168

Coming from Good Stock: Career Histories and New Venture Formation
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Table 3. Relationship between Strategy and External Financing

External Financing at Founding

Strategy: No Yes
Incremental 31 29 60
52% 48%
Innovation 51 20 71
72% 28%
Total 82 49 131
?
2
= 5.65 (1 d.f.), p< 0.02

Coming from Good Stock: Career Histories and New Venture Formation
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Table 4. Logistic Regression Estimates of the Determinants of Founding Innovation Strategy
(N=159)
Variable (1) (2) (3) (4)
Medical-related Industry 1.745** 1.255 1.132 1.399

(0.591) (0.641) (0.670) (0.709)
Networking and -0.420 -0.522 -0.621 -0.881
Telecom. Industry

(0.419) (0.448) (0.480) (0.523)
Semiconductor Industry 0.187 -0.215 -0.343 -0.328

(0.545) (0.632) (0.682) (0.746)
Log Number of Patents 0.418 0.453 0.372

(0.217) (0.234) (0.243)
Graduate Degrees 1.429* 1.525** 1.384*

(0.553) (0.569) (0.619)
Prior Founding Experience 0.185 0.183

(0.234) (0.248)
Senior Management 0.026 -0.135
Experience

(0.201) (0.226)
Sales or Finance -0.444** -0.556**
Experience

(0.165) (0.175)
Number of Past Employers 0.164

(0.136)
Employer Prominence 0.046*

(0.023)
Constant

N 159 144 144 144
Log-Likelihood -103.03 -86.586 -81.537 -75.453
Pseudo R-squared .065 .131 .182 .243

Coming from Good Stock: Career Histories and New Venture Formation
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Table 5. Logistic Regression Estimates of the Determinants of External Financing at Start-up
(N=128)
Variable (1) (2) (3) (4) (5) (6)
Medical-related -0.568 -0.572 -0.197 -0.309 -0.236 -0.066
Industry

(0.586) (0.591) (0.628) (0.654) (0.701) (0.720)
Networking and 0.581 0.404 0.525 0.373 0.587 0.300
Telecom. Industry

(0.461) (0.476) (0.498) (0.515) (0.538) (0.568)
Semiconductor -0.268 -0.235 0.289 0.125 -0.062 -0.209
Industry

(0.663) (0.674) (0.730) (0.755) (0.784) (0.811)
Innovation -0.469 -1.097 -1.488* -1.568* -1.697* -2.009*
Strategist

(0.527) (0.670) (0.746) (0.767) (0.789) (0.816)
Product -0.705 -0.993* -1.018* -1.079* -0.940 -2.286**

(0.399) (0.436) (0.479) (0.517) (0.533) (0.780)
Product * Innovation 1.891 2.252 2.695* 3.025* 3.201*
Strategy

(1.129) (1.182) (1.231) (1.284) (1.306)
Graduate Degrees 0.240 0.262 0.261 0.455

(0.629) (0.636) (0.655) (0.695)
Log Number of -0.403 -0.363 -0.338 -0.318
Patents

(0.242) (0.245) (0.249) (0.256)
Prior Founding -0.058 -0.023 -0.242
Experience

(0.285) (0.289) (0.314)
Senior Management 0.350 0.513* 0.545*
Experience

(0.214) (0.235) (0.247)
Sales or Finance -0.072 -0.009 0.025
Experience

(0.157) (0.161) (0.176)
Number of Past -0.235 -0.226
Employers

(0.144) (0.149)
Employer Prominence 0.006 -0.072

(0.022) (0.042)
Innovation Strategy 0.115*
* Prominence

(0.048)
Constant -0.145 0.068 -0.282 -0.116 -0.155 0.432

(0.357) (0.375) (0.454) (0.474) (0.521) (0.596)
N 129 129 121 121 121 121
Log-Likelihood -80.408 -79.022 -71.417 -69.964 -68.350 -64.817
Pseudo R-squared .056 .072 .1 .118 .138 .183
* p < 0.05 ** p < 0.01 (two-sided tests)
Coming from Good Stock: Career Histories and New Venture Formation
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Appendix A: Bivariate Correlations
1 2 3 4 5 6 7 8 9 10 11 12 13
1 Innovation Strategist

1.00
2 External Financing within 3 mos.

-0.19* 1.00

3 Product within 6 mos.

-0.25* -0.05 1.00
4 Medical-related Industry

0.28* -0.11 -0.11 1.00
5 Networking & Telecom. Industry

-0.14 0.18* -0.01 -0.21* 1.00
6 Semiconductor Industry

0.01 -0.03 -0.07 -0.14 -0.17* 1.00
7 Log Number of Patents

0.24* -0.14 -0.19* 0.32* -0.11 0.19* 1.00
8 Graduate Degrees

0.27* -0.04 -0.18* 0.09 -0.08 0.13 0.18* 1.00
9 Prior Founding Experience

0.06 -0.01 -0.10 0.11 0.05 0.00 0.05 0.05 1.00
10 Senior Management Experience

-0.03 0.15 -0.11 0.02 0.18* 0.00 -0.04 0.01 0.39* 1.00
11 Finance or Sales Experience

-0.18* 0.03 -0.05 -0.05 0.04 -0.02 -0.01 0.00 0.19* 0.39* 1.00
12 Number of Employers

0.21* -0.07 -0.15 0.11 0.25* 0.01 0.14 0.08 0.31* 0.48* 0.36* 1.00
13 Employer Prominence

0.24* -0.05 -0.01 -0.14 0.11 0.10 0.07 0.15 0.04 0.14 0.17* 0.52* 1.00

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