How Do Entrepreneur Networks Lead to Innovation?

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Entrepreneurs can benefit a lot from a strong and supportive network; whether in terms of social capital, financial capital, legitimacy, or emotional support, company founders have a lot to gain from connections.

But being part of a network and being well positioned to benefit from all these resources is far from the same thing. The degree to which an entrepreneur is close to others in their network, and assumes a central role, is an important determinant; as are contacts to other networks outside of one’s own. (We will call these external ties bridges for the sake of simplicity.)

About ten years ago, two scholars from the University of Amsterdam published a seminal paper on the role of networks in determining the success of new firms, and here is what they found.

Founding teams in a central position in their networks pursue more innovative strategies.

They can do so because they are well positioned to quickly identify and mobilize resources. This gives them a competitive advantage over other new firms, because capital and good strategic advice is typically in short supply for most new firms.

Company founders with bridging ties outside of their industries benefit from a broader perspective. 

This allows them to detect new trends because they are exposed to diverse approaches and ideas. This is really only true for top performers, however, because they develop new routines as a response to this exposure. Lower-performing ventures may lose track or pivot too much as a result of this enhanced exposure to outside trends.

Companies with bridges to other industries perform best if they are also centrally positioned within their main network.

These companies, with both types of connections, assume unique “brokering” positions. In other words, they are well positioned to recognize market asymmetries that others might not; they might also put together seemingly unrelated information to create something new, and therefore, to become industry leaders.

An often overlooked lesson from this research is that the weight of a single network can also be overwhelming. It is a type of bubble effect: founders that are extremely well connected in one network but are not connected in any others may end up with misleading information and design erroneous growth strategies as a result.

The research also found that, in emerging markets, assuming a central position required some altruism. Central players in newly emerging networks had to make lots of investment in growing the network through sharing knowledge and capital.

Given the recent growth among entrepreneurship communities is countries outside Europe and North America, this is one finding that might be worth revisiting. The last decade has seen entrepreneurial networks pop up and grow all around the world, from Istanbul to Lagos. Have the entrepreneurs driving this growth managed to offset the costs of sharing their social capital in the end? If so, how much time did it take?

You can read the original paper by Wouter Stam and Tom Elfring here.

Contributed by Lili Torok for Endeavor Insight.