Academy of Management Proceedings
Colleen Cunningham
Department of Entrepreneurship & Strategy
Abstract
When does technological novelty offer new firms competitive advantage? While pioneering new technologies differentiates a startup, novelty also increases uncertainty about whether their idea will prove commercially viable. Added uncertainty can make it more difficult for startups to attract investors and other partners. This study examines how the novelty of a startup?s invention conditions its likelihood of venture capital (VC) financing. I argue that by increasing uncertainty about commercial viability, novelty requires that startups search more extensively to find willing VCs. Building from prior research, I further contend that prior startup experience will lower the cost of search, especially in clusters. Because novelty requires more search, and experience and cluster location make extensive search easier, I propose novel startups will disproportionately benefit from experience and cluster location. I test these ideas using a hand-collected dataset of 4,700 patenting US medical device startups, following them from ?birth? (first patent), to VC investment (if any), through to eventual success or failure. I find novelty has no impact on funding or success on average. However, medical device startups with prior experience that are located in industry clusters are more likely to be funded by VCs, especially when they have novel technologies. By contrast, location in clusters is less useful for firms pursuing novel technologies if the founders lack prior startup experience. Similarly, experienced founders are not especially advantaged if they are outside clusters. Advancing theories of innovation and entrepreneurship, this study highlights when, where, and for whom novelty pays.
