Abstract
The market for acquisitions has been a blind spot in exploration-exploitation research in the new venture context. The introduction of the acquisition exit outcome as a performance dimension for new ventures, especially among high-tech ventures, shifts the traditional temporal logic of exploration-exploitation theory by introducing previously unacknowledged short-term benefits of exploration. We bring the acquisition outcome into the picture and investigate the relationship between the exploration-exploitation continuum and profitability, survival, and acquisition likelihood simultaneously. Using the Kauffman Firm Survey data, we provide evidence for a link between exploration and the likelihood of acquisition (defined as the business being sold to or merged with another business), although industry technology level poses a boundary condition such that the association is not observed in low- and medium-technology firms. An inverse U-shaped relationship that is monotone negative for most of the data range was found between exploration and the profitability of low- and medium-tech firms, and a negatively linear relationship was found for exploration and the profitability of high-tech firms. Our findings lend some support to the viability of “born to flip” strategies involving comparatively higher exploration levels in high-tech start-ups and sacrifice of short-term profitability.
Plain English Summary Built-to-flip strategy really does work, but only for some startups. There has been a debate on whether start-ups should be managed specifically with the aim of short-term exit through M&As (built to flip) or if they should always focus on long-term viability (built to last). We tap into the Kauffman Firm Survey data to provide evidence-based insights on this issue. Our results support the viability of “built-to-flip” strategies among some new firms at least when it comes to the balance of exploration and exploitation, measured as relative allocation of employees to R&D vs. sales. High-tech ventures that exited through M&A had higher exploration levels compared to all other sub-groups including high-tech ventures that closed or did not exit, and all low- and medium-tech ventures. Among high-tech ventures, increased exploration does—to a point—lead to a higher likelihood of acquisition, but it comes at the price of reduced profitability. After this peak point, further increase in exploration reduces both acquisition likelihood and profitability.
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Notes
In this study, we measure “merger or acquisition” as a single outcome variable, given the conceptual similarity of the two outcomes (both involving the acquisition of shares in the firm by another organization), and the rare-event nature of the two outcomes (making it impractical to study them separately in our data). The term “acquisition” broadly defined as the acquisition of shares, refers specifically to the Kauffman Firm Survey question where respondents indicated that their business was “sold to another business” or “merged with another business.” In the KFS, these questions were asked without providing exact definitions of “sold” or “merged” to survey respondents.
Female ownership was calculated based on stratification, indicated by D&B and defined as majority ownership by a woman. In all other instances “owner” refers to owner-operator, defined as an individual who owns shares in the firm and also “provided regular assistance or advice within the day-to-day operations of the business” according to survey respondents.
The difference-over-sum formula is a well-known method of normalization (also known as scaling or nondimensionalization) in other fields (e.g., Schmickler 2015). Cases of zero employees in both R&D and sales were treated as zeros, but results are robust to dropping all such cases.
The Cox proportional hazards model produces qualitatively similar results.
We thank an anonymous reviewer for pointing this out.
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Acknowledgments
The paper has benefited greatly from comments from Geoff Kistruck, Joel Marcus, and Maria Minniti, an anonymous reviewer as part of the Kauffman Foundation’s Promising Paper Award, and reviewers and participants at the Babson College Entrepreneurship Research Conference, and the Academy of Management Annual Meeting.
Funding
This research has been supported by a grant from the Social Science and Humanities Research Council of Canada (file number 430-2015-00627).
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Keyhani, M., Deutsch, Y., Madhok, A. et al. Exploration-exploitation and acquisition likelihood in new ventures. Small Bus Econ 58, 1475–1496 (2022). https://doi.org/10.1007/s11187-021-00452-1
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DOI: https://doi.org/10.1007/s11187-021-00452-1
Keywords
- Exploration
- Exploitation
- Acquisitions
- New ventures
- Performance trade-offs
- Ambidexterity
- Survival
- High-tech ventures
- Research and development