Protecting intellectual property Adapted from Janney & Dess, Journal of Business Venturing, 2006
Specialized knowledge • Critical for understanding how opportunities are identified and implemented by entrepreneurs • Paradox! specialized knowledge is typically an entrepreneur’s most valuable resource, and it’s also the most difficult to value • And therefore Is relatively more difficult to transact or securitize • Also – it is most likely to be more idiosyncratic in composition, further reducing its value to others. application What it’s made of Situational value
How entrepreneurs get access to specialized knowledge • entrepreneurs gather their specialized knowledge through real options reasoning and social capital
Real options reasoning • To conserve cash, entrepreneurs slowly venture into the unknown. • They search for new knowledge by “tiptoeing” into the market, making incremental decisions, and continuing only if the information revealed is favorable. • This new information creates valuable learning. • Entrepreneurs not only learn more about a given venture, but they also learn how to do similar new ventures in the future. • This learning adds to an entrepreneur's resource stocks of “combinative capability” (Kogut and Zander, 1992). • Since this new knowledge is frequently unobserved outside the firm, the value of the learning is overlooked when assessing the cost and risk of venturing into an unknown area.
Social capital • The extent to which entrepreneurs are embedded inside networks of relationships may offset the risk of entering into new ventures. • Network members not only gain privileged access to information and opportunities but also derive social status or reputation from network membership
Types of network ties • Network ties can be either strongor weak– with relative advantages to each • Strong ties are typically formed by socially similar people who tend to possess the same information and have similar opinions – these people are motivated to share information to reduce uncertainty and promote vicarious learning • Weak ties are considered to be heterogeneous and transient ties – this provides access to a much broader base of information and resources.
First risk with specialized knowledge: appropriation and competition • Worse still, many specialized knowledge resources lose value as they are revealed to others • Or.. As information about the opportunity is revealed, the external resource providers may choose to exploit the opportunity themselves or share it with others, causing unwelcome competition
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Second risk of specialized knowledge: market for lemons • If resource providers cannot differentiate between high quality and low quality entrepreneurs (and their start-up ventures), they will only provide resources commensurate with low quality entrepreneurs (e.g., on less favorable terms) • High quality entrepreneurs will have trouble attracting resources on favorable terms unless the entrepreneurs can differentiate themselves from similarly appearing peers. • This problem gets worse as the level of information asymmetry increases
What does the market for lemons mean for entrepreneurs? • New ventures relying on relatively higher levels of knowledge-intensity are more susceptible to concerns from information asymmetry. • Compared to managers of existing firms, entrepreneurs must rely more heavily on external resource providers, so this problem is greater for entrepreneurs • As a result, entrepreneurs must compete in two races: on the quality of their ideas as well as on their ability to attract the requisite resources to exploit their ideas
What should entrepreneurs with specialized knowledge do? • Self-finance as much as possible • Seek formal means (provisional patents, etc.) to protect the idea • Use non-disclosure agreements • Disclose specialized knowledge only to those whom you trust • Speak in vaguer terms about what you’re doing with others