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
Situational value
What it’s made of
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 strong or 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
Who is the higher quality
entrepreneur?
Second risk of specialized knowledge:
market for lemons
• If resource providers cannot differentiate between high
quality and low quality entrepreneurs (and their startup 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
The way forward!