When do spinouts benefit from market overlap with parent firms?

Abstract

We examine how market overlap with parent organizations impacts the performance of startups founded by the former employees of these incumbent firms. Building on knowledge inheritance and competitive dynamics theories, we propose that the degree to which the operating markets of spinouts overlap with their parent organizations has a curvilinear relationship with their likelihood of survival. Market overlap is beneficial to spinouts because it reduces uncertainty during the early stages of new venture development. However, substantial market overlap may spark hostile actions by the parent organizations, thereby creating disruptive competition that may lower the likelihood of spinouts' survival. Furthermore, we hypothesize that the previous hierarchical position of founders in parent organizations moderates the overlap–performance relationship. Using a sample of European biotech spinouts and their parent firms, we find support for our hypotheses.