Success comes in many forms.

For a movie, it could be box office numbers or critical acclaim. In academia, maybe it’s publishing research or helping students land dream jobs after graduation. New research from the ÁńÁ«ÊÓÆ” shows there are also multiple ways for startup companies to be successful. Early investors often predict which route they will take.

“In the entrepreneurship world, we hear a lot about ‘exits’ for firms because that’s when the founders and investors make money,” said co-author , an associate professor of management and organization at the ÁńÁ«ÊÓÆ” Foster School of Business.

“In most industries, both acquisitions and initial public offerings, or IPOs, are great exits. But what it takes to get to them is different. Our research shows that different patterns of collaboration between venture capitalists lead to different types of exits for the firms they invest in.”

When a venture capital firm, or VC, invests in a startup, it often does so with other VCs as part of a syndicate. VC syndicates share knowledge and resources as they work to guide their startup toward a successful exit strategy — either an acquisition or an IPO.

The study, recently published in the , found that firms whose  VCs invested with other VCs they had worked with in the past were more likely to exit through acquisition.

Acquisitions can be a form of fast exit where a venture is sold to a larger one. By contrast, less prior collaboration among VCs in a syndicate leads to the increased likelihood of a venture going public. Surprisingly, researchers found the same patterns of collaboration that increase the odds of an IPO also increase the likelihood that a firm will go bankrupt.

Using Crunchbase, a database of startups and investors, the authors looked at U.S.-based startup companies that were backed by VCs. They found that prior collaboration between venture capitalists could help predict a startup’s future outcome.

The researchers analyzed the initial funding and outcomes of more than 11,000 ventures that launched between 1982 and 2014. They supplemented the Crunchbase data with hand-collected outside sources, identifying 71,624 rounds of funding involving and 20,142 investors.

In the paper, the authors offered two examples to illustrate how prior collaboration affects exit type. Gridiron Systems and Carbonite were both VC-backed companies that provided digital data storage. Gridiron’s VCs had co-invested in at least two prior companies. Conversely, none of Carbonite’s VCs had previously co-invested. Gridiron Services was acquired in 2013 and continues to specialize in storage technology. Carbonite went public in 2011 and has now extended its services to other markets.

In an acquisition, a startup is purchased outright by another company that assumes a controlling ownership stake. While the shares of the founders and investors become fully liquid, control of the company is also handed over.

“To help with an acquisition, investors need industry specific knowledge,” Pahnke said. “They need to be able to agree on certain outcomes more quickly and move faster. Finding a good suitable acquirer requires industry ties. If you’ve worked with a set of investors in the past, you’re far less likely to have conflict that slows you down, and you’re far more likely to agree on your desired outcomes and have those industry ties.”

In an IPO, a venture’s shares are offered for sale to the broad market of stock investors. The management team often remains in place, and founders and investors typically obtain partial liquidity.

“When you don’t know each other, when you haven’t worked together, you’re far more likely to have conflict that slows you down,” Pahnke said. “You’re also more likely to consider a much broader variety of information and alternatives. Although it takes longer, you’re likely to get those kinds of complex outcomes, like an IPO, where you don’t need to appeal to a specific buyer.”

Pahnke said IPOs are riskier than acquisitions. In an acquisition, the founders and early investors know the exact amount of money they’ll receive and when the transition will happen. But when a company goes public, founders and early employees typically can’t sell their shares for a period. If the share prices decrease, founders and investors might not earn any money.

“With acquisitions, founders typically only remain with the acquiring company for for a limited amount of time,” Pahnke said. “Founders can move on and do something else. With an IPO, the management team is likely to stick around for a while.”

Pahnke said she hopes this paper will help broaden the definition of success.

“There are tradeoffs between working with people you know and people you don’t that lead to different kinds of successes,” she said. “It’s not that one is bad or good. They’re just qualitatively and quantitatively different.

“As researchers, we provide unexpected insights that are only visible when you map a large set of collaborations over time. For both entrepreneurs and investors our research suggests thinking carefully about who you work with — and who they have worked with in the past — may help you achieve different kinds of successes.”

The other co-authors are , associate professor of business at Columbia Business School and , associate professor of business at Harvard Business School.

For more information, contact Pahnke at eacox@uw.edu.

But connections with the wrong investors can inhibit a firm’s ability to innovate, according to new research by and , assistant professors of management at the ÁńÁ«ÊÓÆ” Foster School of Business.

Their paper, “,” is in the October issue of the Academy of Management Journal.

In their study of medical device makers, Pahnke, Hallen and their co-authors document a siphoning of valuable information that can occur when firms are indirectly tied to a direct competitor via a shared venture capital investor.

Most vulnerable to this innovation-hindering leakage are firms whose investors are:

• geographically distant from them, because venture capitalists take a more active advising interest in nearby firms;
• less financially committed to them, because venture capitalists are more likely to share information with competitor firms in which they are more invested or reinvested; or
• new to their industry, because a venture capital firm is most likely to learn from its first investment and share it with subsequent investments in the same industry.

“Lacking power, status and resources,” Pahnke says, “entrepreneurial firms wield little sway over the relationships that their investors form with other firms and may have little control over what information gets shared.”

To understand the effect of entangled venture capital alliances on innovation, Pahnke and Hallen collaborated with Rory McDonald of Harvard Business School and Dan Wang of Columbia University to study 22 years of activity in the minimally invasive medical device industry. Integrating 30 distinct data sources, they compiled a full picture of the companies and their investors, and identified the instances in which venture capitalists invested in two firms in the same sub-segment of the industry.

This is not uncommon. Among venture capitalists in the medical device industry, the study revealed that 20 percent were invested in direct competitors at the same time.

These competing interests give rise to what the authors term “competitive information leakage.” This leakage impedes the firm’s ability to produce innovative products, as measured by FDA approval — a rigorous process that requires a device to improve upon existing devices in terms of patient outcomes. Just as good isn’t good enough.

“If someone gets a device approved ahead of you, it delays your own approval because you’re going to have to invent around them,” Pahnke says.

She adds that the sharing of information by investors from one firm to another is rarely done intentionally, or even consciously.

A venture capitalist’s first investment in an industry may encounter problems they’ve never seen before — a regulatory hitch or engineering problem, for instance,” Pahnke says. “So when another of their investments encounters a similar problem, they can offer advice on the solution. It’s not that they are deliberately leaking secrets. They may not even consciously realize that the solution came from an interaction with another one of their investments.”

So what is an entrepreneur to do? The study identifies instances in which a venture capitalist-funded firm is more or less vulnerable to competitive information leakage.

Less vulnerable are firms that are located near their shared investor, that are not their investor’s first in a given industry, and that have seen sustained interest from that same venture capitalist.

More vulnerable are firms that are their shared investor’s first in an industry and that are geographically distant from their investor.

High-status venture capitalists, who have more connections, tend to have a greater sharing problem. “Later investees glean wisdom from earlier ones,” Pahnke notes. “You want an investor who knows your market, but you don’t necessarily want them to learn the market from you.”

The message to entrepreneurs: Be cautious.

“If you were forming a direct relationship with a competitor — some kind of alliance — you’d be very careful about what you told them,” says Pahnke. “But when you’re forming a relationship with a venture capitalist, you have to be very open about everything. You don’t have control of what goes to your competitor and how.”

Still, capable entrepreneurs with marketable businesses should be able to navigate the pitfalls of competitive information leakage.

“The hope with this paper is not to make entrepreneurs view their relationships with venture capitalists as adversarial, but rather urge them to consider the risks as well as the benefits,” Pahnke says.

“Raising venture capital is hard, and entrepreneurs rightly get really excited about it. But good entrepreneurs have multiple options for investors and should be very thoughtful about which investors they take on.”

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For more information, contact Pahnke at 206-616-7725 or eacox@uw.edu; or Hallen at 360-830-8137 or bhallen@uw.edu.