Release and Catch: Hybrid Organizational Structures in Innovation Markets
Abstract: It is well known that large technology firms spawn startups founded by departing employees. Based on a unique dataset consisting of almost 700 startup acquisitions between 2006 and 2011, we present evidence on a previously unobserved phenomenon: large technology firms sometimes acquire start-ups founded by their former employees. Those transactions conform to an implicit two-step “release-and-catch” strategy that exploits the high-powered incentives of a small firm’s entrepreneurial environment and the scale economies of a large firm’s commercialization infrastructure, but at the risk of forfeiting the large firm’s R&D and human capital investment. In step one, a firm declines to develop a promising but unproven innovation proposed by an employee, thereby pushing the employee into an entrepreneurial environment that enhances the employee’s motivations, shifts risk to outside investors, and generates a market test of the innovation’s commercial value. In step two, if the startup elicits positive market interest, the parent firm can potentially exploit its informational advantage over other bidders to acquire the startup and earn a return on its investment through the commercialization process. The model, and the underlying tradeoff between entrepreneurial flexibility, scale economies and forfeiture risk, is extended to account for controlled forms of release-and-catch structures executed by leading technology firms.
