Friday, October 29, 2021

Networking for Success: Is It Only for the Successful?

Those who do research on social networks, and most of those who are in occupations where contacts with others give ideas, opportunities, and deals, know what a network engineered for success looks like. They are brokers at the center of a web that reaches far, where many of the people they know do not know each other. In such a network, the person at the center can combine knowledge, connect opportunities, and make deals.

So how can one get such a network? The answer is simple – by being successful. Those who have proven success become attractive to others, so they can pick and choose among those who want to connect with them. But of course, here lies the problem for those who want to build a network for success because they don’t have success yet. Can it be done? This is the question answered by Yonghoon G. Lee and Martin Gargiulo in a paper published in Administrative Science Quarterly. In addition to solving a very practical problem, this research is done in a context that we all know, directly or indirectly: songwriting in the Korean pop (K-pop) industry. Yes, this is research with BTS, not BS.

The problem for people early in their careers, or even later in their careers with no proven success yet, is that it is very difficult to get the spider-web network that combines knowledge. If they cannot benefit from such a network because they are not prominent enough yet, instead they should have a close-knit network of friends who help each other, right? And naturally, these friends will also be unsuccessful – otherwise they would have formed the looser brokerage network. That means having a network of helpful people who cannot offer much help. How can they make the transition into a better network?

The songwriters in this research were more likely to improve their networks in two circumstances: if they had peers who became successful or if they were stuck in a rut of writing unsuccessful songs that were quite similar to each other. Seeing your network contacts achieve success in collaborations not involving you is a signal that you are—or your network is—not good enough. Imagine how it feels to collaborate with someone, maybe even multiple times, without writing a successful song. But then suddenly this collaborator has another project not involving you, and it becomes a success. Feels like a failure? Absolutely – and Lee and Gargiulo show that songwriters exposed to the success of peers would reach out to new distant collaborators. Getting stuck doing the same thing over and over again with no success is also a clear signal that you are—or your network is—not good enough. Songwriters in this research who kept writing songs in the same style with no success would reach out to new distant collaborators as well.

The transition to a larger network with brokerage occurred faster for songwriters who eventually became successful than for those who never succeeded. Songwriters who get these signals that either they or their networks are not good enough—and who more quickly conclude that it is their networks’ fault—seem to have a better chance to make it. It is not easy to become successful in the music industry, and many songwriters fail even after reaching out to new collaborators. But hope springs eternal, and adding a good network seems to help. 

Lee, Yonghoon G. and Martin Gargiulo. 2021. Escaping the Survival Trap: Network Transition among Early-Career Freelance Songwriters. Administrative Science Quarterly, forthcoming.

Thursday, October 28, 2021

Risk Taking in Venture Capital: Chasing Performance, using Networks, or Something Else?

Venture capital is all about risk. The firms find young ventures, or more often select from many ventures seeking funding. These ventures have in common that they are at such an early stage that their market and offerings are unproven, and they cannot succeed unless they receive the funding, and often also advice and instructions. In other words, they are all risky.

There are still ways of adjusting the risk. Some ventures are more risky than others, and even the same venture has different risk levels depending on whether the venture capital firm participates in the first round of funding or a later round of funding. But if venture capital is essentially about risk, and they need to take this risk to gain the high returns they want, what determines the risk level they take at each funding opportunity? This is what Songcui Hu, Qian (Cecilia) Gu, and Jun Xiac studied in research just published in Organization Science. The answer, or should I say answers, are very informative.

The first part is that venture capitalists chase performance: if their performance has been disappointing, they will take greater risk than if it has been good. This is not just how venture capitalists act – firms make more changes when their executives fall behind their goals, and often these changes are risky. Indeed, the most special thing about venture capitalists is that they control the risk very easily by choosing more first-stage investments when their performance is disappointing. Other firms also try to control risk, but sometimes their risk taking is unplanned.

The second part is that venture capital firms form networks with each other through participating in funding syndicates. These syndicates divide up investments and spread risk, but they also produce collaboration, information exchange, and friendship. They result in networks that look different for each venture capital firm. Some place themselves in the center of spider-web networks that spread out widely. Others find positions between different groups of venture capitalists, becoming brokers of information. And here is the main finding from their research. These networks not only determine the information available; they also influence how venture capitalists think about opportunities available. So, what is the result?

Broker venture capitalists see more investment opportunities, and greater variety of opportunities, giving them practice assessing and experimenting with risk. As a result, they can make big adjustments of risk taking according to performance. Spider-web venture capitalists also get many offers, but they are more similar to each other, and this compromises their ability to adjust risk. The result is clear: All venture capital firms try to adjust risk to reach their performance goals, but the firms that are brokers in their networks are much more able to do so.

So, risk taking is a result of chasing performance goals, and of having the right kind of networks. Some decision makers are half aware of these adjustments, but many do not know that these factors influence risk. If they were, would they more carefully consider how goals are constructed? Would they pay closer attention to how their networks are built? I think the answer to both questions is yes. Gaining and spreading this knowledge is why we do research and teach the results.

Hu S, Gu Q, Xia J. 2021. Problemistic Search of the Embedded Firm: The Joint Effects of Performance Feedback and Network Positions on Venture Capital Firms’ Risk Taking. Organization Science forthcoming.

Tuesday, October 5, 2021

How Conservative is the CEO? Two Answers with Different Implications

Researchers have spent some time documenting that political ideology creeps into CEO thinking, and through that, influences firm decision making. This is especially true for decisions that are political to begin with, such as whether to counter economic problems with downsizing or whether to retain staffing and instead let investors take more losses. But we also know that a wide range of decisions are influenced by CEO political ideology, even those that do not look so political.

What we have not known until now is that political ideologies are more complex than the liberal versus conservative spectrum that defines US politics. A paper by M.K. Chin, Stephen X. Zhang, Asghar Afshar Jahanshahi, and Sucheta Nadkarni published in Academy of Management Journal has now given a vivid demonstration of how this complexity influecnes firms. In most other nations, conservative can mean either economically conservative, as in the type of person who values competition as a source of economic strength, or socially conservative, as in the type of person who values traditional judgment and intuition over analytical thinking. And, the same person can be either economically or socially conservative, or both, or none of them.

What does this mean for the decision making? The authors looked at corporate entrepreneurship, which is a strategically important decision that is difficult to justify analytically because the uncertainty is so high. After all, corporate entrepreneurship means diverting resources from the main business of the firm in order to enter a less familiar form of business. Corporate entrepreneurship is sometimes successful, and spectacularly so, but often it leads to losses. So how do firms decide when to engage in corporate entrepreneurship?

This is where CEO ideology comes into play. The economically conservative CEO wants to see analysis that justifies corporate entrepreneurship and wants the corporate entrepreneurship sponsors to win resources through competition with the rest of the firm. But how can they? The rest of the firm already delivers results; they just have ideas and hopes. This swings decision making away from corporate entrepreneurship.

The socially conservative CEO relies more on intuition, including the intuition of other decision-makers in the leadership team, and will be less driven by numbers and unaffected by ideas of resource competition. This is exactly the winning formula for a firm to take the risk of entering the uncertain world of corporate entrepreneurship.

These propositions make sense when considering economic and social conservativism separately, and the only problem has been to realize that these are different forms of conservative (versus liberal) ideologies. Both exist, and they have independent effects. Indeed, the research spurred by these ideas found solid support for these effects when examining how firms in Iran made their decisions on corporate entrepreneurship. Using data from Iran, which is rarely studied, is another merit of this research, but it seems fair to guess that many other nations will show exactly this division between different types of political ideology.

Chin MK, Zhang SX, Jahanshahi AA, Nadkarni S. 2021. Unpacking Political Ideology: CEO Social and Economic Ideologies, Strategic Decision-Making Processes, and Corporate Entrepreneurship. Academy of Management Journal 64(4): 1213-1235.