Editor’s note: This post was republished with permission from the Ewing Marion Kauffman Foundation’s Growthology blog.
Starting a business is risky, but entrepreneurs can boost their odds of success when they heed the warning of a Yoruba proverb: “A river that forgets its source will surely dry up.” My Kauffman Foundation-funded research, conducted with Sonali Shah (now at University of Illinois), shows that firm founders’ experiences arise from three main sources. Understanding which one forms the primary tributary of knowledge matters when selecting a winning strategy for a startup.
Some entrepreneurs start as employees of existing firms. This was Intel’s model in 1968, when two Silicon Valley researchers left Fairchild Semiconductor and launched a rival firm.
Other entrepreneurs grow up in academia. This was Google’s model in 1996, when two PhD students left Stanford and became business leaders instead of professors.
Entrepreneurs in a third category originate as product users. Driven by their dissatisfaction with existing offerings, they tinker in their garages or basement laboratories looking for something better. This was Apple’s model in 1976, when two hobbyists introduced their hand-built personal computer kits to the world.
Each knowledge context comes with its own set of challenges and opportunities. Entrepreneurs who understand their origins can anticipate where they might run into trouble, what alliances they may need to form, and whether their best bet for a payoff is through an acquisition, a licensing agreement, or product commercialization.
Intel, Google, and Apple provide insights, but we reviewed hundreds of scholarly studies of startups to identify additional patterns. Here are five suggestions from our research, which entrepreneurs from any knowledge context can use to guide their path to profit.
1. Know your sweet spot
Each scenario has advantages. When employee entrepreneurs spin out on their own, they have knowledge of existing products and operational processes, and also know people in the industry, which gives them an edge when it comes to poaching talent. Academic entrepreneurs start with technical and scientific knowledge that can drive product innovation. User entrepreneurs understand customers’ unmet needs.
2. Innovate your way
Knowledge context predicts the type of innovation a firm is most likely to pull off. Industry experience gives employee entrepreneurs two viable avenues to pursue: products and processes. Academic and user entrepreneurs are better off focusing on products.
3. Time your entry
Academic entrepreneurs have an edge early in the life cycle of an industry, especially before the first products reach market, which is when companies are scrambling to solve technical and scientific challenges. As industries mature, product innovation gives way to process innovation. This is when employee entrepreneurs can provide the greatest value. User entrepreneurs can also thrive in mature industries when they focus on niche or underserved markets.
4. Compete, complement, or ignore
Knowledge context also shapes the way startups interact with established firms. Employee entrepreneurs must usually go head-to-head with the giants because of overlapping capabilities, but academic entrepreneurs can succeed through collaboration. Established firms often welcome these alliances, which create exploration opportunities. User entrepreneurs typically follow a third scenario: working in the fringes with niche or underserved customers, they often have little overlap with established firms.
5. Set your exit strategy
Survival is the usual measurement of entrepreneurial success, but different exit strategies work to repay investors and turn a profit. While employee-founded firms have the best odds to commercialize a product, academic- and user-founded firms most often cash in through alliances and acquisitions. Google and Apple are exceptions in this regard.
A river that forgets is source often dries up, and a similar principle applies in business. Entrepreneurs have the best chances for success when they recognize their knowledge context and adjust their strategies to optimize performance.
Rajshree Agarwal is the director of the Ed Snider Center for Enterprise and Markets at the University of Maryland’s Robert H. Smith School of Business and a Cato adjunct scholar.