Professor David Hsu Profile Photo

David H. Hsu

Associate Professor of Management The Wharton School University of Pennsylvania
2028 Steinberg Hall – Dietrich Hall 3620 Locust Walk Philadelphia, PA 19104
Phone:
(215) 746–0125
Email:
dhsu@wharton.upenn.edu

Main Research Papers

When Does Start-up Innovation Spur the Gale of Creative Destruction? (with J. Gans and S. Stern) RAND Journal of Economics, 33: 571-586, Winter 2002.

This article studies the determinants of commercialization strategy for start-up innovators. We examine whether the returns on innovation are earned through product market competition or through cooperation with established firms (through licensing, alliances, or acquisition). Our hypotheses are that the relative returns to cooperation are increasing in (i) control over intellectual property rights, (ii) low transaction costs, and (iii) sunk costs associated with product market entry. Using a novel dataset of the commercialization strategies of start-up innovators, our results suggest that the procompetitive impact of start-up innovation—the gale of creative destruction— depends on imperfections in the market for ideas.

What Do Entrepreneurs Pay for Venture Capital Affiliation? Journal of Finance, 59: 1805-1844, August 2004.

This study empirically evaluates the certification and value-added roles of reputable venture capitalists (VCs). Using a novel sample of entrepreneurial start-ups with multiple financing offers, I analyze financing offers made by competing VCs at the first professional round of start-up funding, holding characteristics of the start-up fixed. Offers made by VCs with a high reputation are three times more likely to be accepted, and high-reputation VCs acquire start-up equity at a 10–14% discount. The evidence suggests that VCs’ “extra-financial” value may be more distinctive than their functionally equivalent financial capital. These extra-financial services can have financial consequences.

Organizing Venture Capital: The Rise and Demise of American Research and Development Corporation, 1946-1973 (with M. Kenney), Industrial and Corporate Change, 14: 579-616, August 2005.

While venture capital (VC) has become an important element of the twentieth- century US innovation system, few studies have systematically examined the origins and evolution of this financial institution. We take a step in this direction by analyzing the evolution of the early and influential VC firm, American Research & Development Corporation (ARD), in the period that it was independent from 1946 to 1973. We place the creation and subsequent evolution of ARD within its historical context and show how it was an innovation by Boston-area civic elites. Using new historical data, we examine the evolution of ARD’s practices over time. We argue that ARD’s funding model constrained its functioning as a venture capital firm and contributed to its demise. ARD was a pioneering organization whose business model ultimately failed as a newer organizational model, the limited partnership, was created and had a better fit with the business environment. Nevertheless, ARD has had a lasting imprint on the practice of modern venture capital.

Venture Capitalists and Cooperative Start-up Commercialization Strategy Management Science, 52: 204-219, February 2006.

This paper examines the possible impact of venture capital (VC) backing on the commercialization direction of technology-based start-ups by asking: To what extent (if at all) do VC-funded start-ups engage in cooperative commercialization strategies (strategic alliances or technology licensing, or both) relative to a comparable set of start-ups, and with what consequences? To address these questions, I assemble a novel data set that matches firms receiving a federal research and development subsidy through the U.S. Small Business Innovative Research program to VC-funded firms by observable characteristics in five technology-intensive industries. These data allow decoupling of cooperative activity resulting from start-up development via the passage of calendar time from that due to association with VCs. An analysis of the 696 start-ups in the sample (split by an external funding source) suggests substantial boosts in both cooperative activity associated with VC-backed firms and in the likelihood of an initial public offering.

Experienced Entrepreneurial Founders, Organizational Capital, and Venture Capital Funding Research Policy, 36: 722-741, June 2007.

This paper empirically investigates the sourcing and valuation of venture capital (VC) funding among entrepreneurs with varied levels of prior start-up founding experience, academic training, and social capital. Social ties with VCs have been identified as an important precursor to organizational resource attainment and performance, and so this study analyzes the correlates of heterogeneous social links with VCs. I also examine venture valuation, as it reflects enterprise quality and entrepreneurs’ cost of financial capital. Using data from a survey of 149 early stage technology-based start-up firms, I find several notable results. First, prior founding experience (especially financially successful experience) increases both the likelihood of VC funding via a direct tie and venture valuation. Second, founders’ ability to recruit executives via their own social network (as opposed to the VC’s network) is positively associated with venture valuation. Finally, in the emerging (at the time) Internet industry, founding teams with a doctoral degree holder are more likely to be funded via a direct VC tie and receive higher valuations, suggesting a signaling effect. The paper therefore underscores some important dimensions of heterogeneity among VC-backed entrepreneurs.

Entrepreneurs from Technology-based Universities: Evidence from MIT (with E. Roberts and C. Eesley), Research Policy, 36: 768-788, June 2007.

This paper analyzes major patterns and trends in entrepreneurship among technology-based university alumni since the 1930s by asking two related research questions: (1) Who enters entrepreneurship, and has this changed over time? (2) How does the rate of entrepreneurship vary with changes in the entrepreneurial business environment? We describe findings based on data from two linked datasets joining Massachusetts Institute of Technology (MIT) alumni and founder information. New company formation rates by MIT alumni have grown dramatically over seven decades, and the median age of first time entrepreneurs has gradually declined from about age 40 (1950s) to about age 30 (1990s). Women alumnae lag their male counterparts in the rate at which they become entrepreneurs, and alumni who are not U.S. citizens enter entrepreneurship at different (usually higher) rates relative to their American classmates. New venture foundings over time are correlated with measures of the changing external entrepreneurial and business environment, suggesting that future research in this domain may wish to more carefully examine such factors.

The Impact of Uncertain Intellectual Property Rights on the Market for Ideas: Evidence from Patent Grant Delays (with J. Gans and S. Stern), Management Science, 54: 982-997, May 2008. E-companion (electronic appendix) included.

This paper considers the impact of the intellectual property (IP) system on the timing of cooperation/licensing by start-up technology entrepreneurs. If the market for technology licenses is efficient, the timing of licensing is independent of whether IP has already been granted. In contrast, the need to disclose complementary (yet unprotected) knowledge, asymmetric information or search costs may retard efficient technology transfer. In these cases, reductions in uncertainty surrounding the scope and extent of IP rights may facilitate trade in the market for ideas. We employ a data set combining information about cooperative licensing and the timing of patent allowances (the administrative event when patent rights are clarified). Although preallowance licensing does occur, the hazard rate for achieving a cooperative licensing agreement significantly increases after patent allowance. Moreover, the impact of the patent system depends on the strategic and institutional environment in which firms operate. Patent allowance plays a particularly important role for technologies with longer technology life cycles or that lack alternative appropriation mechanisms such as copyright, reputation, or brokers. The findings suggest that imperfections in the market for ideas may be important, and that formal IP rights may facilitate gains from technological trade.

Modes of Cooperative R&D Commercialization by Start-ups (with V. Aggarwal), Strategic Management Journal, 30: 835-864, August 2009.

This study empirically examines the determinants of heterogeneous firm-level cooperative R&D commercialization strategies. While the volume of inter-firm collaboration has increased dramatically in recent decades, the determinants of firm-level choices among alternate modes of such cooperative activity remain relatively understudied. We develop a conceptual model of factors determining collaborative mode choice at the organizational portfolio level. These factors include the firm-level appropriation environment, in which deal-level choices have portfolio-level spillover implications, as well as governance capabilities developed by the firm over time. Using a random sample of innovating biotechnology start-ups, we assemble a firm-year panel dataset that aggregates transaction-level collaboration data to the firm-year level, allowing us to characterize firms’ portfolios of collaborative deals. We find broad empirical support for our model, suggesting that a firm’s appropriation environment and governance capabilities strongly influence portfolio-level collaboration mode choices. In addition, we explore the implications of governance capability development, finding that experience with particular modes, as well as deviations from existing capabilities, impact firm valuation.

The Antecedents and Innovation Consequences of Organizational Knowledge Brokering (with K. Lim), Management Department Working Paper (revised, June 2011).

We empirically examine the antecedents and innovation consequences of organizational knowledge brokering, the ability to effectively apply knowledge from one technical domain to innovate in another. We do so by tracking all the start-up biotechnology firms founded to commercialize the then-emergent recombinant DNA technology. We examine how firms’ interaction with their external environment helps shape their heterogeneous knowledge brokering capacity, which in turn is associated with uneven ex-post innovative performance. Our results suggest that (a) knowledge brokering capacity is achieved by hiring inventors with different technical backgrounds, more so than other boundary-spanning mechanisms typically available to start-ups; (b) knowledge brokering has an inverted U-shaped relationship with innovative performance; and (c) knowledge brokering is especially helpful for innovative performance in more complex technological environments. These results suggest that knowledge brokering is not an unmitigated good, thereby supporting boundary conditions to the concept.

How Do Venture Capital Partners Match with Startup Founders? (with O. Bengtsson), Management Department Working Paper (revised, August 2010).

The venture capital market is characterized by personal interactions between VC firms and the startups they finance. Yet we have little systematic evidence of how startup founders get matched with partners at VC firms. By assembling data at the individual partner and founder level, we compare personal similarity-based rationale with resource complementarity-based reasons explaining the likelihood of an investment match in a sample of factual and counterfactual (but plausible) matches. We find that a match is more likely if the two parties share a common ethnicity or have both attended a top ranked university, and particularly so when information problems are more severe. With such similarities, the VC's investment also represents a larger fraction of her total investments. We interpret personal similarity as reducing transactions costs in VC matching rather than proxying quality-based matching. Matching based on VC partner's professional expertise appears to be less determined by their complementarity with the founder's background and more by the current lifecycle stage of the startup. In particular, VC partners with finance or operational capabilities are more likely to match with mature ventures. Our findings shed new light on how personal characteristics and professional expertise can be important in financing situations where informational frictions are severe and investors are actively involved with their borrowers.

Bringing Entrepreneurial Ideas to Life (with C. Eesley and E. Roberts), Management Department Working Paper (October 2011).

Organizational design in the context of new venture development is particularly challenging due to initially severe resource constraints. Deepening our understanding of differential productivity in the startup resource assembly process is therefore important. We address the question of when initial venture idea assets versus founder contracting experience are more important for venture performance. One view of new venture performance emphasizes the importance of innovative ideas, while others argue that founders with knowledge of how to structure the venture’s assets is key to performance. Using unique survey data, we advance an integrated perspective by showing that new ventures perform better when they both identify innovative ideas and also assemble human assets with expertise in structuring organizational arrangements to commercialize those ideas. An important implication is that organizational resources have a range of potential values, and that realizing the upper range of value capture involves the additional ability to structure organizational relationships.

Organizational Routines Development and New Venture Performance (with A. Marino), Management Department Working Paper (June 2010).

To better understand how entrepreneurial ventures vary as they evolve, we introduce and develop the concept of an organizational routine in a prototypical state, a protoroutine. Protoroutines allow experienced new ventures (but not inexperienced start-ups) to economize on decision-making and execution time in problem solving by drawing from an inventory of prior solutions to challenges. Protoroutines are not, however, tailored to the challenge at hand. We embed protoroutines into a simulation-based model featuring agents with differing decision-making speeds and abilities of exploring more distant solutions, two parameters influenced by founding team characteristics. Search speed and distance are typically traded off against each other at the team design level. Protoroutines may therefore be particularly helpful in organizational contexts in which it is optimal to have both search speed and distance. We characterize the organizational contextual configurations along the dimensions of environmental turbulence and decision complexity in which protoroutines, search speed, and search distance are associated with elevated (and dampened) organizational performance. One important conclusion is that decision-making speed can be a valuable organizational resource across organizational environments. Overall, our agent-based model and simulation results deepen our understanding of how and with what performance consequence new ventures develop.

Resource Benefits and Learning Costs in Strategic Alliances (with S. Wakeman), Management Department Working Paper (March 2011).

Due to resource constraints, startup innovators often struggle to assemble complementary assets for successful product commercialization. Alliances are an important avenue for startups to access resources and learn commercialization skills. However, an alliance structure that enables startup learning imposes costs on the alliance partner. Moreover, alliance partner quality is likely co-determined with complementary-asset learning potential in shaping alliance product performance. Using data from biotechnology alliances, we separately estimate the importance of partner quality and learning effects in explaining the drug approval hazard. We find that higher quality partners have a positive impact on product development success while alliance structures enabling startup downstream commercialization capability development have a negative effect. Innovators with cumulated learning experience are more likely to self-commercialize in future product development.

Strategic Factor Markets and the Financing of Technology Startups: When do Patents Matter More as Signaling Devices? (with R. Ziedonis), Management Department Working Paper (June 2011).

Prior studies assert that technology startups reduce information gaps with capital suppliers by signaling quality through patents. Empirical evidence nonetheless remains elusive, due in part to the simultaneous role patents play as legal safeguards in product markets. We de-couple these distinctive roles and investigate conditions that affect the signaling value of patents in factor markets for entrepreneurial capital. Consistent with predictions from signaling and resource-based theories, we find that patents “matter more” as signaling devices in earlier rounds of venture financing and for firms otherwise disadvantaged in conveying quality to outside investors. Evidence is based on 370 venture-backed semiconductor startups in both IPO and pre-IPO environments, where information asymmetry problems loom largest.

Focus or Diversify? Aligning Founding Teams with Strategy and Environment (with C. Eesley and E. Roberts), Management Department Working Paper, (October 2011).

We examine how innovation strategy and commercialization environment impact the performance of varying configurations of founding teams. While prior work on the characteristics of top management teams has typically found that diverse teams are more highly performing, we advance a view of founding team alignment with new venture strategy and environment. Using unique data from a novel survey of 2,067 firms founded over five decades, we show the conditions within which technology-focused versus diverse founding teams outperform. Our contribution is identifying the performance implications of founding team alignment with concrete strategies – i.e., innovation v. imitation, and competition v. cooperation. Strategy and environment significantly influence optimal founding team composition. These results cast doubt on predictions of the life-cycle perspective that ventures can professionalize over time to fit their strategy.

Technology Commercialization Strategy Dynamics and Entrepreneurial Performance: Evidence from the Speech Recognition Industry (with M. Marx), Management Department Working Paper, (January 2012).

How do technology entrepreneurs formulate a commercialization strategy, and how do those choices impact performance? We present evidence from all entrants into the speech recognition industry,where a "greenfield" commercialization environment affords wide lattitude in strategic choice. While the initial choice of commercialization strategy does not predict performance, subsequently "pivoting" to another strategy strongly increases the hazard of a liquidity event. Intra-industry spinoffs are particularly likely to pivot. Results are confirmed when we instrument for pivoting with the unanticipated 2001 demise of the industry's largest technology licensor following an accounting scandal. Our results extend the literature on commercialization strategies, both by examining the dynamics of strategy-making and their impact on ultimate outcomes. They also suggest a novel mechanism underlying the success of spinoffs and indicate a possible role for dynamic capabilities in small firms.

Entrepreneurial Exits and Innovation (with V. Aggarwal), Management Department Working Paper, (January 2012).

We examine how IPOs and M&As affect entrepreneurial innovation as measured by forward patent citations and product development. We construct a panel dataset of all venture capital-backed biotechnology firms founded between 1980 and 2000, tracked yearly through 2006. We address the possibility of unobserved self-selection into exit mode in two ways: (1) we assemble data on firms that filed for an IPO or announced a merger but did not complete the transaction for reasons unrelated to innovation, and (2) we use an instrumental variables approach based on relative financing channel liquidity at the industry level. We find evidence of a short-run positive IPO effect on innovation but a zero or negative effect over a longer time window. Patent generality increases but patent originality decreases after an IPO. Innovation outcomes improve and are sustained for the acquisition exit channel. We conclude by presenting inventor-level analyses to better understand the firm-level patterns.

Other Research Material

Managing the University Technology Licensing Process: Findings from Case Studies (with T. Bernstein), Journal of the Association of University Technology Managers, 9: 1-33, 1997.

University technology licensing offices ('TLOs') face a dynamic environment in which the number of technology disclosures is rapidly increasing while the available resources for licensing technologies do not keep pace. Adopting new, strategic plans for licensing is therefore vital. This paper develops an analytical framework for the licensing process. It then presents evidence from 14 case studies and numerous interviews. We conclude that while TLOs have vastly improved since 1980, they have an opportunity to generate significant additional public value. Drawing on the analytic framework and case studies, the paper concludes with recommendations to help TLOs continue to improve their licensing strategies in this challenging environment.

Technology-Based Entrepreneurship A chapter from S. Shane, ed., Handbook of Technology and Innovation Management, Wiley, UK (2008).

This chapter addresses the field of technology-based entrepreneurship (TBE). My goal is to provoke discussion and hopefully spur research in a few directions rather than attempt an exhaustive treatment of the subject. Technology entrepreneurship is a field that draws from two research areas: the study of technical innovation on the one hand, and the study of entrepreneurship on the other. Like these research areas, rather than being oriented around any particular academic discipline, the field tends to be organized around a phenomenon. In my discussion throughout this chapter, I will therefore be drawing on multiple academic disciplines that contribute to our understanding of TBE, though my bias is on management issues associated with the phenomenon. In addition, although I use a framing of new ventures developed to commercialize innovation, most of the discussion will also be of relevance to entrepreneurial efforts within the setting of established firms.

Patents as Quality Signals for Entrepreneurial Ventures (with R. Ziedonis), Best Paper Proceedings of the Academy of Management (2008).

To what extent do venture capital (VC) investors use information from patents to assess the quality of new ventures? Using a sample of 370 U.S. semiconductor start-ups, we examine when patents improve the terms by which new firms access venture capital.