Tuesday, October 9, 2012

Zynga’s Falling Shares, and the Fall of Entrepreneurship as Internet Firms Grow (Old)

We have just been treated to news on how many publicly listed Internet firms that gave stock or stock options to their employees have seen major declines in the value of their stock. Famous firms like Zynga and Facebook have been hit, as well as some less well-known ones. The immediate concern for these firms is that they are losing some of their employees, who have seen the big stock payoffs they anticipated (and briefly had) disappear. In fact, this has not happened yet, at least on a large scale, but executives worry that employees might leave once the job market gives them better outside options.

The successful Internet firms were built on entrepreneurship and have thrived on quick adaptation and exploitation of business opportunities, and these may be necessities rather than just virtues in such a fast-moving industry. The longer term worry is that it is not clear that this entrepreneurial spirit can be maintained as these firms grow and age. First, the most entrepreneurial employees may find that they prefer to start their own business, or even join another startup, rather than to work in a growing and increasingly bureaucratic firm. As star employees they have probably been given larger managerial responsibilities, but not every entrepreneur wants to become a manager. Second, even if they stay, they may find that it is harder to drive through new initiatives in a larger organization with more complex procedures and more boxes to tick before anything new can happen. They may stay, and may try to find and exploit new opportunities, but they are wrapped inside a structure that makes it harder to be timely to the market.

All this sounds very reasonable, but actually the fall of entrepreneurship is not as inevitable in larger and older firms as it seems. Aleksandra Kacperczyk recently published an article in Administrative Science Quarterly on development of new business opportunities inside firms, or intrapreneurship, finding that while employees of large and old firms were less likely to leave in order to start a new business, they were more likely to create business opportunities inside their own firm. This may sound surprising from the description of large and old firms as more bureaucratic, and to some extent it is. But larger firms also have more resources to put behind new business generation (would you rather have your business be backed by Google or someone else?). Many older firms have become pretty experienced at what they are doing, and good at it. So the conventional wisdom that not much entrepreneurship happens inside the larger and older firms needs a second look. There is evidence that seems to disagree.

Ovide, Shira and Scott Thurm. 2012. Silicon Valley’s Stock Funk. Wall Street Journal, October 5, 2012.