Interorganizational Endorsements and the Performance of Entrepreneurial Ventures

• Published in: Administrative science quarterly Vol. 44; no. 2; pp. 315 - 349
• Main Authors: Stuart, Toby E., Hoang, Ha, Hybels, Ralph C.
• Format: Journal Article
• Language: English
• Published: Ithaca, N.Y Cornell University Samuel Curtis Johnson Graduate School of Management 01-06-1999; SAGE Publications; Sage Publications, Inc; Cornell University, Graduate School of Business and Public Administration; SAGE PUBLICATIONS, INC
• Subjects: Administrative science; Affiliated corporations; Alliances; Antibiotics; Biomedical technology; Biotechnology; Biotechnology industry; Business; Business structures; Corporate affiliates; Economic aspects; Effects; Endorsements; Entrepreneur; Entrepreneurs; Entrepreneurship; Equity stake; Finance; Funding; Going public; Going public (Securities); Initial public offerings; Investment banking; Investors; Joint ventures; Market value; Networks; Organization; Organizational structure; Regression analysis; Studies; United States > US
• ISSN: 0001-8392; 1930-3815
• DOI: 10.2307/2666998

This paper investigates how the interorganizational networks of young companies affect their ability to acquire the resources necessary for survival and growth. We propose that, faced with great uncertainty about the quality of young companies, third parties rely on the prominence of the affiliates of those companies to make judgments about their quality and that young companies "endorsed" by prominent exchange partners will perform better than otherwise comparable ventures that lack prominent associates. Results of an empirical examination of the rate of initial public offering (IPO) and the market capitalization at IPO of the members of a large sample of venture-capital-backed biotechnology firms show that privately held biotech firms with prominent strategic alliance partners and organizational equity investors go to IPO faster and earn greater valuations at IPO than firms that lack such connections. We also empirically demonstrate that much of the benefit of having prominent affiliates stems from the transfer of status that is an inherent byproduct of interorganizational associations.