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Networks in entrepreneurship: the case of high-technology firms
Elfring, T.; Hulsink, W.
published in
Small Business Economics
2003
DOI (link to publisher)
10.1023/A:1026180418357
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citation for published version (APA)
Elfring, T., & Hulsink, W. (2003). Networks in entrepreneurship: the case of high-technology firms. Small
Business Economics, 21(4), 409-422. https://doi.org/10.1023/A:1026180418357
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Download date: 09. Aug. 2022
Networks in Entrepreneurship:
Tom Elfring
The Case of High-technology Firms Willem Hulsink
Small Business Economics
21: 409–422, 2003.
2003 Kluwer Academic Publishers. Printed in the Netherlands.
ABSTRACT. The value of networks as an integral part of
the explanation of entrepreneurial success is widely acknowl-
edged. However, the network perspective does not specify the
role of networks in the emergence and early growth of a
venture. We have distinguished three entrepreneurial processes
in new venture development, i.e. discovery of opportunities,
securing resources, and obtaining legitimacy, which are of
importance for survival and performance. This paper examines
how these processes are influenced by strong and/or weak ties
and whether the degree of innovation (incremental versus
radical) acts as a contingency factor in the way network ties
support entrepreneurial processes. In this explorative study
three cases on high technology firms in The Netherlands
provide empirical material enabling us to develop a number
of propositions on the network effect, in particular the mix of
strong and weak ties, on the three entrepreneurial processes.
1. Introduction
In the 1980s and early 1990s, some researchers
shifted the emphasis from the heroic and “atom-
istic” entrepreneur to someone with a personal
history embedded in a network. They addressed
the distinctive role played by personal and
business networks in the start-up and (early)
growth of technology-based firms (Birley, 1985;
Aldrich and Zimmer, 1986; Johannisson, 1987).
As they see it, a network is one of the most
powerful assets that anybody can possess: it
provides access to power, information, knowledge
and capital as well as other networks. The overall
notion is that a more developed network, in terms
of the number of ties and the quality of the ties,
is more beneficial to a start-up than a less devel-
oped network (Larson and Starr, 1993).
Although the value of networks as an integral
part of the explanation of entrepreneurial success
is widely acknowledged, there is considerable
confusion and disagreement as to the role partic-
ular network characteristics play in the perfor-
mance of emerging firms (Johannisson, 2000; Hite
and Hesterly, 2001; Rowley et al., 2000). It is not
fully clear what the various dimensions of a
network are, nor what their impact is on the early
development of a venture (Bloodgood et al., 1995;
Steier and Greenwood, 2000). There are, for
example, conflicting results: “Both strong and
weak ties are argued to be positively related to
performance” (Rowley et al., 2000, p. 369) and
in some cases strong ties are considered a disad-
vantage rather than a benefit (Gargiulo and
Benassi, 1999). Efforts have been made to
reconcile these opposing views. For example, Burt
(2000) argues that they are not necessarily con-
flicting, but they play different roles, which are
valuable for different populations or purposes.
However, the mechanisms and processes by which
particular ties play a role in the development of an
emerging firm remain unclear. It is our aim to shed
light on the way the different ties benefit emerging
ventures. In particular, we identify three processes
that link the network ties with performance. The
proposed “process” model accentuates various
entrepreneurial activities, and helps to account for
the different contributions of strong and weak ties
to the performance of ventures.
Our overall aim in our proposed model is to
improve the understanding of the causal mecha-
Final version accepted on January 23, 2002
Tom Elfring
Free University Amsterdam
De Boelelaan 1081c
1081 HV Amsterdam
The Netherlands
E-mail: t.elfring@scw.vu.nl
Also affiliated at Wageningen University
Willem Hulsink
Erasmus University Rotterdam
P.O. Box 1738
3000 DR Rotterdam
The Netherlands
E-mail: w.hulsink@fbk.eur.nl
nisms between the network structure and perfor-
mance. There are three aspects to the proposed
model. First of all, we focus on the mix of weak
and strong ties, each of them contributing in a
particular way to the entrepreneurial process.
Strong ties are associated with the exchange of
fine-grained information and tacit knowledge,
trust-based governance, and resource cooptation
(Krackhardt, 1992; Starr and MacMillan, 1993;
Rowley et al., 2000). Their advantages are dif-
ferent from the benefits generated by weak ties.
Weak ties are beneficial as they provide access to
novel information as they offer linkages to diver-
gent regimes of the network (Granovetter, 1973,
1982; Burt, 1992). We focus on the mix between
strong and weak ties since each has qualities that
are advantageous for different purposes. Thereby
we build on the work of Uzzi (1996, 1997), Hite
and Hesterly (2001) and Rowley et al. (2000) who
conclude that a key issue in the determination of
network benefits is the search for the optimal mix
of strong and weak ties.
Secondly, instead of linking the network struc-
ture directly to performance, we distinguish three
entrepreneurial processes that are affected in a
positive or negative way by the presence of weak
and strong ties. These three processes may be seen
as intervening processes that regulate the key per-
formance outcomes and are labelled as entrepre-
neurial processes. As entrepreneurship is
concerned with the discovery and exploitation of
profitable opportunities (Shane and Venkataraman,
2000), the first process is the discovery of oppor-
tunities. The discovery process is affected by prior
knowledge (Shane, 2000) and information
regarding the opportunity (Fiet, 1996). The
network of the start-up gives access to relevant
information about markets, ways to serve these
markets and ways to deal with customers. The
second process deals with the ability of the start-
up to acquire resources. In the early phase firms
must access, mobilize and deploy resources in
order to exploit the opportunities they have spotted
(Garnsey, 1998). Securing resources is one of the
crucial tasks of the entrepreneur(s) in new
ventures and their key relationships have to be
used to get “privileged” access (Starr and
MacMillan, 1990). The third entrepreneurial
process involves obtaining legitimacy. When an
entrepreneur embarks on something that is
innovative, it has to secure legitimacy (DiMaggio,
1992). A new venture has to deal with the
“liability of newness.” The more innovative it is,
the greater its need to organize institutional
support and legitimacy (Stinchcombe, 1965; Baum
et al., 2000). The venture has to mobilize its
network to overcome the legitimacy barriers
(Aldrich and Fiol, 1994; Van de Ven, 1993).
Thirdly, we introduce the distinction between
radical and incremental innovations as a new
contingency. A number of researchers utilize a
contingency approach to reconcile the different
network benefits. For example, the industry
context is introduced as a contingency factor by
Rowley et al. (2000) and Hite and Hesterly (2001)
show that as ventures progress from emergence
to growth the evolving resource needs require a
shift in network structure. Start-ups based on
radical innovations require a different mix of
strong and weak ties from those pursuing incre-
mental innovations. We argue that this degree of
innovation affects the way firms approach their
network relationships and seek to benefit from
them. By taking this contingency into account, we
address the challenge posed by Leenders and
Gabbay (1999) to look for particular contingen-
cies in network benefits.
Most research on network benefits for start-ups
has focussed on the dynamic relationship between
networks, resources and growth (Hite and
Hesterly, 2001; Yli-Renko and Autio, 1998). We
also include the particular contribution strong and
weak ties make to the scanning of opportunities
and of gaining legitimacy through networking.
The unit of analysis in this study is the
emerging venture. A new venture is initiated by a
single entrepreneur or by a team, as is often the
case in new technology-based firms (Roberts,
1991). We focus on the way high-technology
ventures use their personal and business networks
to get started, and to create the conditions for
growth (Dubini and Aldrich, 1991). In this paper
the leading research question is the following:
How do networks, and in particular the mix of
strong and weak ties, affect the ability of the high-
technology start-up to discover opportunities, to
obtain resources and to acquire legitimacy? We
will present three case studies, two of which are
based on Information Communication Technology
(ICT) firms and one of which is based on a
410
Tom Elfring and Willem Hulsink
biotechnology company. All three are Dutch firms.
These cases provide empirical material from
which we develop a number of propositions con-
cerning the effects of networking on the success
of high-tech start-ups.
2. Venturing through networks
The presupposition of this paper is that high-tech
entrepreneurs and their ventures are embedded in
ongoing social and economic relations, including
personal and professional ties, (non-)equity part-
nerships and other networks, all of which affect
the way their career and their firm develop.
Economic transactions between firms do not take
place in a vacuum but rather, are often based upon
a history of past dealings and ongoing social
interactions (Granovetter, 1985; Uzzi, 1997).
Furthermore, economic transactions may produce
social networks as well: arm’s length ties may
eventually be transformed into embedded ties
(Uzzi, 1996). These networks are vital when it
comes to gaining access to opportunities, col-
lecting the resources needed to build a new enter-
prise and obtaining legitimacy (Birley, 1985;
Aldrich and Zimmer, 1986; Johannisson, 1987;
Dubini and Aldrich, 1991).
The structure of networks may vary from a
loose collection of ties to close-knit business
groups, in which the focal organization is
embedded. In our study, we examine the effect of
a particular mix of strong and weak ties in entre-
preneurial networks, because this mix allows for
an analysis of support networks in terms of both
the depth and width of relationships. Granovetter
(1972, 1982) specifies the intensity and diversity
of relationships, i.e. the difference between strong
and weak ties, on the basis of four criteria: namely,
the frequency of contacts, the emotional intensity
of the relationship, the degree of intimacy and
reciprocal commitments between the actors
involved. While weak ties provide access to (new)
industry information and to new business contacts,
strong ties are relations one can rely upon both in
good times and in bad times.
Strong ties tend to bind similar people in
longer-term and intense relationships. Affective
ties with close friends and family members may
provide a shortcut to or even preclude the search
for useful knowledge and access to critical
resources. In other words, strong ties contribute to
“economies of time” (Uzzi, 1997, p. 49): the
ability to capitalize quickly on market opportuni-
ties. The manifestation of strong bonds will also
reduce the time spent on monitoring and bar-
gaining over agreements: free-riding is discour-
aged and transaction costs are lowered. Strong ties
are more likely to be useful to individuals in sit-
uations characterized by high levels of uncertainty
and insecurity, e.g. amidst radical innovations. In
such complex settings, individuals rely on close
friends and family members for protection, uncer-
tainty reduction and mutual learning. Krackhardt
(1992, p. 238) has elaborated on the affective com-
ponent of strong ties by arguing that commitment,
loyalty and friendship within an organization will
be critical to an organization’s ability to deal with
major crises. In short, a relational governance
structure based on strong ties will promote the
development of trust, the transfer of fine-grained
information and tacit knowledge, and joint
problem-solving (Uzzi, 1996; 1997; Rowley et al.,
2000).
Strong ties have shortcomings too. There is the
risk of overembeddedness, i.e. of stifling economic
performance (Uzzi, 1996). Close ties within and
among business communities are vulnerable to
exogenous shocks and may insulate such com-
mitments from information that exists beyond their
network. There is the danger of being blind to new
developments or being “locked-in” (Johannisson,
2000).
Weak ties refer to a diverse set of persons
working in different contexts with which one has
some business connection and infrequent or irreg-
ular contact. These loose and non-affective
contacts increase diversity and may provide access
to various sources of new information and offer
opportunities to meet new people. Weak ties
represent local bridges to disparate segments of
the social network that are otherwise unconnected
and may open the door to new options
(Granovetter, 1973, 1982; Burt, 1992). In short,
both strong and weak ties are useful and contribute
to the emergence and growth of firms, although
they are beneficial in different ways and at
different stages of a company’s development.
Therefore, the ideal entrepreneurial network
includes a particular mix of strong and weak
relationships (Uzzi, 1996, 1997). We have distin-
Networks in Entrepreneurship 411
guished three entrepreneurial processes, the ability
to discover opportunities, the ability to secure
resources, and the ability to gain legitimacy, in
which network ties play a role (see Figure 1).
2.1. Opportunities
An important source of new ideas and lucrative
opportunities may be the networks, in which the
entrepreneur is actively participating. Hills,
Lumpkin and Singh (1997) find that about 50
percent of entrepreneurs identify ideas for new
ventures through their social network. In addition,
in the process from idea to the actual start of a
venture, prior knowledge (Shane, 2000) and infor-
mation (Fiet, 1996) are important. According to
Fiet (1996, p. 429): “use of networks may be
viewed as a way of tapping into an information
channel to obtain risk-reducing signals about a
venture opportunity.” Both variables are closely
linked to networks, as network relations can be
seen as ways to gain access to knowledge and
information. In one of the first studies on this
aspect, Birley (1985) carefully documents how
often entrepreneurs seek advice and feedback on
the core ideas of their business plan, when they
turn to friends and family for local issues, and
when they use formal ties to look for financial
support. The start-up was seen as an iterative
process in which the number of informal and
formal ties affect the success of the entrepreneur
in finding a lucrative opportunity.
The environment and the opportunities it
contains are diverse and uncertain. The network
of an entrepreneur is a source of information
helping the entrepreneur to locate and evaluate
opportunities. Networks and in particular weak
ties provide access regarding a diverse set of
topics, ranging from potential markets for goods
and services to innovations and promising new
business practices. Weak ties are supposed to lead
to a more varied set of information and resources
than strong ties can (Bloodgood et al., 1995), and
consequently weak ties enhance the ability of
entrepreneurs to spot opportunities.
2.2. Resources
Providing access to resources is an important
contribution of networks to the venturing process.
Entrepreneurs rarely possess all the resources
required to seize an opportunity. One of the crucial
tasks in a new venture is to access, mobilize and
deploy resources (Garnsey, 1998). This is a diffi-
cult task in the initial stages of a start-up with
limited financial resources and hardly any ability
to generate internal resources and revenues. Close
social support networks (e.g. spouse, family ties)
412
Tom Elfring and Willem Hulsink
Figure 1. Venturing through networks.
