The Importance of Networks

Professor Toby Stuart, recipient of the 2007 Ewing Marion Kauffman Prize Medal for Distinguished Research in Entrepreneurship, discusses his research into how the social and business networks in which would-be entrepreneurs and early-stage firms are immersed influence entrepreneurial processes and outcomes.

Toby Stuart, Ph.D.
Charles Edward Wilson Professor of Business Administration, Harvard Business School

Professor Toby Stuart is the recipient of the 2007 Ewing Marion Kauffman Prize Medal for Distinguished Research in Entrepreneurship.

For the past decade, my research has examined how the social and business networks in which would-be entrepreneurs and early-stage firms are immersed influence entrepreneurial processes and outcomes. My work has focused on high-technology or technology-enabling industry contexts. To date, I have studied the microelectronics and life sciences industries, as well as venture capital and university-affiliated entrepreneurship.

My research begins with one of the foundational assumptions in structural sociology: actors (e.g., firms or individuals) occupy differentiated positions in social structures, and opportunities for entrepreneurial behavior (and, by implication, the constraints that impede it) are systematically linked to these positions. This insight underlies and unifies my work. Evidence suggests that the information available to an actor, the attitudinal influences to which the actor is exposed, the actor's prestige, the quality of the actor's reputation, and the likelihood the actor will receive referrals from others are all influenced by the connections that embed the actor into multiple, crosscutting social networks.

In the contexts I study, this perspective has wide-ranging implications. For example, the chance that a would-be entrepreneur will identify an unexploited opportunity, convince others to invest in a risky undertaking, recruit talented partners, write contracts with favorable terms, and achieve many other core elements of the entrepreneurial process depend on the actor's position in a network. Similarly, the differential positions of firms in the social structure of their markets provide insight into the strategic opportunities available to organizational decision makers.

Given the supposition that positions in social structure determine the opportunities available to the actors that occupy them, one of the central tasks in my research has been to develop conceptions and measures of actors' positions in different networks in technology-based arenas. The types of networks I have examined have been wide ranging. A look at the semiconductor industry considers characteristics of the positions of firms in the network that can be constructed from patent citation data in the field, while analysis of the biotechnology industry has explored firms' positions in the sector's evolving, multi-industry strategic alliance network. A study in venture capital examines the role of firms' positions in the industrywide, interfirm coinvestment/syndicate network, while research of entrepreneurship in the academic life sciences examines faculty positions in the scientific community's coauthorship networks.

To take one example, I studied the effects of the partnership networks of young semiconductor and biotechnology companies on early life performance outcomes, such as the rate of growth and the likelihood of an initial public offering (IPO). Because the quality of a very young firm that lacks a track record is often difficult to determine, the decision of external resource holders to invest their time, capital, or other resources in a new organization is one that is made under considerable uncertainty regarding the embryonic enterprise's financial prospects. Given that unambiguous measures of quality cannot be observed, the partnerships (with investors, customers, and alliance partners) created by the firm always shape third-party perceptions of the quality of young companies. As a result, valuations of young firms are attributions influenced by the identities of their affiliates. Because strong relationships with prominent organizations convey the fact that young companies have earned a positive evaluation from experienced and influential actors, I argue that associations with high-status organizations elevate the reputations of new ventures. In one paper, I explore these ideas in an investigation of how the performance of young biotechnology firms is affected by such an “interorganizational endorsement” process that occurs as a byproduct of industry's extensive strategic alliance and equity ownership networks. The paper finds that the prominence of the business partners of young biotechnology companies significantly shapes their ability to go public, and that this effect sharply increases in measures of the level of uncertainty about an entrepreneurial firm's quality.

In closing, I'd like to stress the importance of continued research in the field of entrepreneurship. There is so much more to be learned. I'm encouraged by organizations like the Kauffman Foundation that recognize the need to know more about this field and are actively supporting scholars like me who have chosen to pursue this research path.

This essay is an excerpt from the Kauffman Thoughtbook 2007