Human Capital, Parent Size and the Destination Industry of Spinouts

Research Summary We study how spinout founders' human capital and parent size relate to founders' propensity to stay in the same industry as their parents or to go outside the industry. Individuals with high human capital face a higher performance penalty if they form spinouts outside the parent industry, but they also face greater deterrence from large parents if they stay in that industry. Using matched employer-employee data on spinout founders and their coworkers, we find that individuals with higher human capital are less likely to form spinouts in distant industries than in the parent's industry. Further, we find that as parent size increases, such individuals are less likely to form spinouts in the parent's industry and more likely to form spinouts in distant industries. Managerial Summary We examine how the ability of potential entrepreneurs affects whether they found a startup in the same industry as their employers ("parents") or in a different industry, and how that choice relates to the size of the parents. We find that founders with high ability are more likely to form a startup in the parents' industry. However, as the parent size increases, they are more likely to form a startup in a different industry. These findings suggest that while high-ability founders want to benefit from their industry expertise by forming a startup in the parents' industry, some of them are dissuaded from doing so either because large parents try to retain high-ability founders or because such founders want to avoid potential competition with large parents.