Ethnic-immigrants in founding teams: Effects on prospector strategy and performance in new Internet ventures

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Journal of Business Venturing 23 (2008) 113 – 139

Ethnic-immigrants in founding teams: Effects on prospector strategy and performance in new Internet ventures ☆ Rajeswararao (Raj) S. Chaganti a,⁎, Allison D. Watts b,2 , Radha Chaganti a,1 , Monica Zimmerman-Treichel d,3 a

Innovation and Entrepreneurship Institute, Fox School of Business, 201D Speakman Hall, Temple University, Philadelphia, 19122, United States b Fox School of Business, 380 Speakman Hall, Temple University, Philadelphia, 19122, United States c Department of Business Policy and Environment, College of Business Administration, Rider University, Lawrenceville, NJ 08648, United States d Fox School of Business, Speakman Hall, Temple University, Philadelphia, 19122, United States Received 1 January 2004; received in revised form 1 May 2006; accepted 1 July 2006

Abstract We investigated differences in strategy and performance between new Internet ventures with ethnic-immigrant members in the founding team and a matched set of Internet ventures with nonethnic-non-immigrant team members. Results showed that new ventures with an ethnic-immigrant presence in the founding teams tended to pursue a more aggressive prospector strategy than those with non-ethnic-non-immigrant founding team members. Still, performance of the two groups of ventures was comparable. However, the positive effects of ethnic-immigrant presence on founding teams depended on team size and average age of the founding team members. © 2006 Elsevier Inc. All rights reserved. Keywords: Ethnic immigrants; Founding teams; Strategy; Internet

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The authors would like to acknowledge the valuable guidance provided by the two anonymous reviewers. ⁎ Corresponding author. Tel.: +1 215 204 5675; fax: +1 215 204 8029. E-mail addresses: [email protected] (R.S. Chaganti), [email protected] (A.D. Watts), [email protected] (R. Chaganti), [email protected] (M. Zimmerman-Treichel). 1 Tel.: +1 609 895 5529. 2 Tel.: +1 610 662 9650. 3 Tel.: +1 215 204 6876. 0883-9026/$ - see front matter © 2006 Elsevier Inc. All rights reserved. doi:10.1016/j.jbusvent.2006.07.004

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1. Executive summary Existing studies on top management team make-up consider several demographic variables and their impact on decision-making and performance. Since the U.S. is comprised of immigrants from various countries and has been so for a long period of time, research on the impact of ethnic immigrants seems appropriate. This study focuses on ethnic entrepreneurs and specifically those migrating to the U.S. from countries in Far East Asia, Southeast Asia, South Asia, and South and Central America. In recent years, we have seen a high representation of ethnic-immigrant entrepreneurs in computer, information technology and Internet industries. This leads us to examine the contribution that ethnicimmigrant entrepreneurs make and specifically their contribution to the strategy and performance of new high-tech ventures. For this purpose, we investigated differences in strategy and performance between new Internet ventures with ethnic-immigrant members in the founding team (i.e., had at least one founding team member from any of the countries in Far East Asia, Southeast Asia, South Asia, and South and Central America) and a matched set of Internet ventures with nonethnic-non-immigrant team members. Following a four-step process, we identified 26 matched-pairs of new Internet ventures. We define Internet ventures as firms that use Internet technology in their business including firms that use the Internet to re-form markets for known products and services as well as those that use the Internet to pursue breakthrough market opportunities. Results showed that new ventures with an ethnic-immigrant presence in the founding teams tended to have a more aggressive prospector strategy than those with non-ethnic-nonimmigrant founding team members. Ethnic-immigrant entrepreneurs showed a strong propensity to seek and pursue entrepreneurial opportunities, suggesting that the act of migrating to a new country could lead to an aggressive strategic orientation. Does this effect of ethnic-immigrant presence depend on other team characteristics? According to our findings, size and age of the founding team played an important role. Ethnic-immigrant entrepreneurs' tendencies to pursue entrepreneurial strategies were weaker in ventures with large teams than in small teams. Further, ethnic-immigrant entrepreneurs were better able to move new Internet ventures towards the opportunity-oriented prospector strategy when the founding teams were made up of younger rather than older members. We found no significant differences between ventures with ethnic-immigrant members and non-ethnic-non-immigrant members in terms of new venture performance. Performance in growth rates – sales, assets, and employee growth – was quite comparable. However, ethnic-immigrant members of founding teams seemed to contribute significantly to asset growth rate when the founding teams were comprised of relatively young members. A general conclusion of this study is that ethnic-immigrant members of founding teams of new ventures do make a difference in the venture's relative aggressiveness, and under certain conditions, this could enhance new venture performance as well. The positive effects of ethnic-immigrant presence are best realized in smaller and younger teams. Does the number of ethnic-immigrants in the founding teams make any difference? Based on our study the answer is no. We found that it is not the number of ethnic-immigrants but the mere presence of ethnic-immigrants on the founding teams that seemed to count. The study

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presented in this paper implies that ethnic presence in founding teams that becomes possible with the free flow of high-level human capital into the U.S. may be beneficial in stimulating entrepreneurial activities for Internet ventures. 2. Introduction Literature on ethnicity and entrepreneurship points to a multitude of factors that influence the emergence of business startups, the types of businesses that ethnic entrepreneurs enter, and their success. These factors include patterns of immigration, levels and types of human and social capital in an ethnic community, and availability of opportunities in the broader economy for individuals from ethnic communities. Early research showed that the businesses owned and managed by ethnic-immigrants were marginally successful (Butler and Greene, 1997; Nee and Nee, 1986; Portes and Bach, 1985; Wilson and Portes, 1980). More recent research indicates notable success for ethnicimmigrant entrepreneurs in computer, information technology and Internet-based firms in the late 1990s. For example, in the late 1990s, 29% of Silicon Valley firms were headed or founded by entrepreneurs of Asian background (Saxenian, 2001; Thatchenkery and Cheng, 1997). This suggests that it is important to investigate the entrepreneurial actions of ethnicimmigrants and to compare them with those of non-ethnic-non-immigrants. In the present study we focused on ethnic-immigrant entrepreneurs from countries in Far East, Southeast Asia, South Asia, and South and Central America. We focused on the differences in strategy and performance between new Internet ventures with ethnic-immigrant members of the founding team compared to similar Internet ventures without such a presence. Further, we analyzed whether size of the founding team and the age of the founding team members modify the relationships of ethnic-immigrant presence to strategy and/or performance of new ventures. 3. Literature review 3.1. Ethnic-immigrant entrepreneurship In the literature, the terms “ethnic entrepreneurship” and “immigrant entrepreneurship” have been used interchangeably (e.g. Saxenian, 2002b). Ethnic entrepreneurship refers to “a set of connections and regular patterns of interaction among people sharing common national background or migration experiences” (Waldinger and Aldrich, 1990: 3). Immigrant entrepreneurship, on the other hand, refers to the self-employment efforts by individuals that voluntarily migrate to a different country and engage in business ownership. Immigrant entrepreneurs can be readily classified as having a shared “ethnic” background based on cultural, and possibly racial, similarities. However, members of a particular ethnic community may not be immigrants (e.g. Native Americans, Jews, and Hispanics) if they were born in the country in which they now live. Overall, it would appear that voluntary immigrants of any ethnic origin would be more opportunity-oriented relative to those that do not immigrate. One key reason they move to a host country is the perception (or reality) that the host country affords greater opportunities than the home country (Vogler and Rotte, 2000). Above average economic achievements of ethnic-immigrant communities (e.g.

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Jews, Chinese, Indians, and Japanese), compared to the achievements of non-immigrants, have been documented in the U.S. and other countries (Sowell, 1990, 1994, 1996). Furthermore, among most ethnic groups, immigrants exhibited higher rates of selfemployment compared to their native-born counterparts (Borjas, 1986; Fernandez and Kim, 1998). Ethnic immigrant populations are of interest because they carry the influences of their home country to their adopted country (Sowell, 1994). Within the ethnic entrepreneurship literature, we see two broad streams: Cross-national comparative studies and studies of ethnic communities in the U.S. Cross-national comparative studies of entrepreneurs indicate important similarities and differences in the values, attitudes, goals and intentions of entrepreneurs from different countries (Holt, 1997; McGrath et al., 1992). Many of these studies (e.g., McGrath et al., 1992; Thomas and Mueller, 2000) compared individuals from countries with Confucian cultures (or Chinarelated countries) to individuals from European and American cultures. Entrepreneurs from Confucian cultures were lower on values like individualism and egalitarianism (McGrath et al., 1992), as well as locus of control and risk-taking (Thomas and Mueller, 2000). Yet, entrepreneurs across cultures were also found to share common values like achievement, non-conformity, low uncertainty avoidance, and innovativeness in terms of looking for new opportunities outside of current infrastructure (Holt, 1997; McGrath et al., 1992; Thomas and Mueller, 2000). Thus, entrepreneurs differed by country and culture, but shared similar values and were more like each other than non-entrepreneur peers from their own country (McGrath and MacMillan, 1992). Research on entrepreneurship among ethnic communities in the U.S. explored forces driving entrepreneurial activity within individual ethnic groups of Latino and Asian descent and found that lack of attractive opportunities in the mainstream economy was one reason that some of these individuals turned to business ownership (Aldrich and Waldinger, 1990; Bonacich and Modell, 1980; Light, 1972). Ethnic-immigrants were often isolated from mainstream society and confined to low earning sectors, and hence relied on co-ethnics for funding, advice, employees, and customers (Nee and Nee, 1986; Portes and Bach, 1985; Wilson and Portes, 1980). Insular communities in which business is conducted by, for, and with other members of the same ethnic group are ethnic enclaves. Overall, the majority of such businesses within these enclaves tend to provide subsistence earnings to owners hampered by limited capital, education, and lack of fluency in the host country's predominant language; these independent businesses were marginal contributors to the larger economy (Bonacich and Modell, 1980; Butler and Greene, 1997). However, recently scholars have begun to report that ethnic-immigrants have made strong entrepreneurial strides (Bates and Dunham, 1993; Bates, 1994a,b; Butler and Greene, 1997; Fernandez and Kim, 1998; Saxenian, 2001) in professional and technical sectors. Unlike ethnic-immigrants that operated marginal ethnic enclave businesses, these individuals enjoyed the advantages of extensive professional and technical education and of work experience in home country and/or host country (Fernandez and Kim, 1998). Business expertise gained through managerial and technical careers in their home and/or host countries allowed them to reach beyond their enclave into the mainstream networks of the country to which they immigrated (Bates and Dunham, 1993; Bates, 1994a; Butler and Greene, 1997). The population, education, and income data on one ethnic-immigrant group, Asians, suggests that some ethnic-immigrants, in fact, may achieve a higher level of success than

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the general population. Asians comprise approximately 3–4% of the total U.S. population as of 2000 (Reeves and Bennett, 2004; Statistical Abstract, 2004-2005). The majority of Asians in the U.S. are foreign born (69%) and most arrived in the U.S. since 1980 (76%). When we consider specific groups, 50% of Asian Indians, Japanese and Pakistanis immigrated between 1990 and 2000. In terms of achievement: 44% of all Asians have at least a bachelor's degree compared to 24% of the general population, 45% have managerial/ professional/technical positions, and both Asian men and women earn more than their peers in the general population (Reeves and Bennett, 2004). Saxenian (2001) found 29% of Silicon Valley's technology businesses were being run by individuals of Asian descent. In terms of ethnic-immigrant entrepreneurship, Fairlie and Meyer's (1996) study on selfemployment found high levels of entrepreneurship among non-Europeans. Using U.S. Census data they reported that self-employment rates ranged between 11% and 23% among persons of Middle Eastern ancestry such as Syrians, Iranians, Iraqis, and Turks. Rates varied among Asian ethnic groups from a low of 5% for Filipinos, to 11% among Japanese and Asian Indians, to 13% among Chinese, to a high of 27% among Koreans. The rates were typically lower for Hispanic groups, ranging from 3% for Puerto Ricans, to 6% for Mexicans, to a high of 15% for Cubans. These rates are comparable to the U.S. average rate of self-employment of 11% (Fairlie and Meyer, 1996) and indicate that entrepreneurial predispositions are prevalent among several ethnic-immigrant groups. Prior researchers of ethnic-immigrant entrepreneurship have examined the effects of several variables, including the influence of environment (Peterson and Meckler, 2001), sources of financing (Bates, 1997), personal characteristics of entrepreneurs (Peterson and Meckler, 2001; Waldinger et al., 1990), and social networks (Saxenian, 2002a,b). Still, few studies have hitherto investigated the strategic impact of the ethnic-immigrant entrepreneurs in general, and particularly in Internet ventures. This issue is pertinent for entrepreneurship research given the increasing number of ethnic-immigrant new ventures in the high-tech sector. 3.2. Top management team heterogeneity Top Management Team (TMT) heterogeneity is typically measured in terms of observable characteristics, such as functional background, education, tenure, and age, which serve as proxies for psychological attributes that influence strategic choices and firm performance (Hambrick and Mason, 1984). Heterogeneity within the TMT provides broader perspective, experience, knowledge, and insight in decision-making. It has been argued that TMT heterogeneity can be beneficial to the firm in that it promotes cognitive diversity (e.g., Amason and Sapienza, 1997; Wiersema and Bantel, 1992), creative and wide-ranging problem solving (Glick et al., 1993), more comprehensive and increased environmental scanning (Murray, 1989), and increased innovation and creativity (Glick et al., 1993; Hambrick et al., 1996). Kilduff et al. (2000) showed a positive relationship between heterogeneity and performance of established firms. Yet, research also points that heterogeneity when it results in cognitive conflict, can have a negative affect on performance (Amason and Sapienza, 1997). Overall, evidence regarding the effects of TMT heterogeneity on firm performance (Finkelstein and Hambrick, 1996) is mixed and inconclusive. Though ethnic heterogeneity has not been addressed in TMT literature, Hambrick

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et al. (1998) examined the effects of differences in nationality among TMTs and posited that in situations requiring a high degree of creativity, diversity of nationality increases the effectiveness of such differences. Thus, the presence of ethnic-immigrant founding members in new venture TMTs is an under-researched area. While there is a wealth of research on the role of TMTs in established firms, research on the effects of TMTs in new and young ventures is limited. Eisenhardt and Schoonhoven (1990) reported a linkage between the founding teams of new ventures and the strategies that the teams pursued. Mudambi and Zimmerman-Treichel (2005) found that founding team characteristics like age and team size correlated with the types of decisions made by teams of Internet ventures facing financial crisis. These few examples suggest that TMTs of new ventures can significantly influence firm conduct. It can be argued that the impact of the management team is likely to be much more salient for new and young ventures than for more established firms. After all, in new ventures, the TMT members make not only the strategic decisions but also the operational decisions (Carpenter et al., 2003). In fact, it has been well established that venture capitalists and angel investors evaluate new ventures based largely upon the founding team (MacMillan et al., 1985). As the young firm grows and potentially goes public, the management team continues to play an important role (Carpenter et al., 2003; Nelson, 2003; Welbourne and Cyr, 1999) in shaping its strategy and performance. Challenges faced by top executives of new ventures and those faced by the top executives of large and established firms are distinct: For the manager of a new venture, the starting point is typically a chaotic organization with minimal structure and the time orientation that hypnotically centers on the future. For the managers of an established firm, the starting point is typically a bureaucratic organization with a rigid structure and a tendency to stay locked in the past (Eisenhardt et al., 2000: p. 52). The TMT of a new and growing firm launches the firm's initial strategic direction by making decisions that affect the firm's early success or failure. While TMTs of established firms may be faced with adhering to or adjusting the direction of their predecessors, the founding TMT has the task of establishing the initial direction. In this study, we will refer to the TMTs of new ventures as the founding teams. Extending the concept of TMT heterogeneity to ethnic-immigrant related diversity would contribute to research on both TMTs and ethnic-immigrant entrepreneurship. Such research is worthwhile in countries like the U.S. where immigration is both significant and continuing. The growing presence of ethnic-immigrant entrepreneurs in the TMTs of new ventures in the Internet sector further supports the importance of an inquiry into the ethnicimmigrant presence and venture strategy relationship and then the ethnic-immigrant presence and venture performance relationship. 4. Hypotheses development In this study of ethnic new ventures we are most concerned with the choices that founding teams make with respect to the new ventures' business domains and associated

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product-market decisions. While it can be argued that all firms seek growth and profitability, entrepreneurial firms search for supernormal profitability (Meyer and Heppard, 2000) by being innovative, aggressive, and taking calculated risks. These aggressive, innovative (as compared to conservative), and risky strategies have been referred to as entrepreneurial strategies (e.g., Covin et al., 1990) and as pioneering strategies (in contrast to follower strategies) (e.g., Covin et al., 2000; Shepherd and Shanley, 2000). In high tech firms, entrepreneurial strategies are characterized by high spending on research and development, intensity of product upgrades, and radical innovations (Zahra and Bogner, 2000). The entrepreneurial strategy is akin to the “prospector” strategy identified by Miles and Snow (1978). Firms following a prospector strategy continually seek new growth opportunities, exploit new market and product opportunities, and engage in frequent experimentation. In prospector firms, the goals of the founding teams are to identify, develop and enter new domains of businesses, expand the domains in which they operate, and transform their industry (Miles and Snow, 1978). The general expectation is that, over time, such initiatives would result in significantly stronger growth in sales, assets, and employees. Miles and Snow (1978) noted that the “prospector's technologies are embedded in people” (p. 59). Based on this premise, in this paper we investigate whether ethnicimmigrant entrepreneurs are more predisposed towards the prospector strategies than nonethnic-non-immigrant counterparts. Immigrants are considered to have a high level of opportunity-seeking orientation that leads them to migrate, and this opportunity-seeking orientation is likely to be pronounced among immigrant entrepreneurs (Sowell, 1994). Further, all entrepreneurs across cultures and countries are recognized to be more innovative, creative and imaginative than their non-entrepreneurial peers (McGrath and MacMillan, 1992; Thomas and Mueller, 2000). It follows then that ethnic-immigrant entrepreneurs would combine the opportunity-seeking orientation of immigrants with the innovativeness, creativeness, and imagination of entrepreneurs. Hence the strategic actions of ethnic-immigrants would be more attuned towards a prospector strategy. In the case of Silicon Valley high-tech entrepreneurs, ethnic-immigrants appear to be especially well positioned to enhance firm performance. They benefit from the combination of high levels of human capital (e.g. education, technical, managerial experience), a strong opportunity orientation which is common to immigrants (Sowell, 1994), and a proactive and creative orientation that is common to entrepreneurs in general. The ethnic-immigrant entrepreneur's drive, creativity, innovation, and desire to succeed may enhance the performance of the venture s/he manages (Gunz and Jalland, 1996). Accordingly: Hypothesis 1a. The presence of ethnic-immigrant member(s) in a new venture's founding team will be positively associated with the prospector strategy. Hypothesis 1b. The presence of ethnic-immigrant member(s) in a new venture's founding team will be positively associated with venture performance. 4.1. Effects of team size and age of founding team members TMT literature (e.g., Hambrick et al., 1996) on heterogeneity suggests that the effects of team heterogeneity depend on the context in which the team makes the decisions. Also, in

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an extensive review of the writings on the effects of diversity in organizational groups, Milliken and Martins (1996) found that the composition of corporate boards, top management teams, and organizational groups, affect outcomes of these organizations. Scholars observed two demographic attributes of team, i.e. team size (Eisenhardt and Schoonhoven, 1990) and average age of the team members (Boeker, 1988), have a significant impact on new venture strategy and performance. New ventures present founding teams the opportunity to create and coordinate tasks required in formulating new venture strategy and later its execution. 4.1.1. Founding team size Findings on team size, decision-making and performance are mixed. While large teams have a greater ability to process information and make decisions (Haleblian and Finkelstein, 1993; Sanders and Carpenter, 1998) they are potentially constrained by weak communication, limited social interaction, lack of cohesion, and sub-group power plays (Amason and Sapienza, 1997; Bales and Borgatta, 1966; Wiersema and Bantel, 1992). Larger teams are positively linked to greater access to resources (Pfeffer and Salancik, 1978), larger sums of proceeds from initial public offerings (IPOs), new venture growth (Eisenhardt and Schoonhoven, 1990) and in some cases to performance (Finkle et al., 2000). It appears that the positive aspects of a large TMT may be particularly valuable for new ventures that have to navigate a tumultuous environment, such as the one faced by Internet new ventures. Internet new ventures with larger TMTs that include ethnic-immigrant members would have not only the advantage of the proactive and creative orientation and opportunity orientation of ethnic-immigrants but the advantage of diverse and deep technical and managerial skills found in a larger team (Eisenhardt and Schoonhoven, 1990; Miller et al., 1998). These positive attributes would be particularly useful for ventures with the prospector strategy because the members' distinct expertise and experience enable them to design and introduce innovations and respond to the numerous challenges in finding new business domains. Of course these advantages may not accrue if the team experiences the harmful effects of size. Assuming that the benefits of size are at work, we propose the following: Hypothesis 2a. Ethnic-immigrant presence and founding team size will interact such that the larger the team size, the stronger will be the positive effect of ethnic-immigrant presence on prospector strategy. Hypothesis 2b. Ethnic-immigrant presence and founding team size will interact such that the larger the team size, the stronger will be the positive effect of ethnic-immigrant presence on venture performance. 4.1.2. Age of founding team members Age of founding team members can be viewed as a proxy for experience. Older top managers are thought to have more experience. However, it can be argued during the dot-com era that younger TMTs were better able to lead new Internet ventures because of their affinity to and understanding of the technology, markets, and metrics of the Internet-based new economy. Research in large corporations indicates that relatively young executives take greater risks compared to older executives (Carlson and Karlsson, 1970; Vroom and Pahl,

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1971) and pursue novel and unprecedented approaches (Hambrick and Mason, 1984). Age is a demographic characteristic that affects group process (Williamson and O'Reilly, 1989), and firm performance (Kilduff et al., 2000), specifically firm growth (Child, 1974). Wiersema and Bantel (1992) noted that age decreases one's flexibility and increases resistance and rigidity in attempt to maintain the status quo. Hambrick and Mason (1984) also theorized that TMT age negatively influences firm performance, i.e., specifically growth, and this was confirmed by Weinzimmer (1997). Boeker (1988) in analyzing new ventures found that younger entrepreneurs tended to adopt first mover strategies. In Internet new ventures, the entrepreneurial orientation of ethnic-immigrant founding team members and innovative, risktaking tendencies of young founding team members might interact to increase the prospector orientation of the venture and enhance its performance. Thus, we hypothesize: Hypothesis 3a. Ethnic-immigrant presence and age of founding team members will interact such that the younger the founding team members, the stronger will be the positive effect of ethnic-immigrant presence on prospector strategy. Hypothesis 3b. Ethnic-immigrant presence and age of founding team members will interact such that the younger the founding team members, the stronger will be the positive effect of ethnic-immigrant presence on venture performance. 5. Study design For the purposes of this paper, we defined Internet ventures as firms that use Internet technology in their business including firms that use the Internet to re-form markets for known products and services as well as those that use the Internet to pursue breakthrough market opportunities. For the purposes of identifying ethnic-immigrant founding team members, we used three criteria. The founding member: 1. had an ethnic surname, i.e., a surname associated with countries in Far East Asia (including Korea, Japan, Taiwan, Hong Kong, People's Republic of China), Southeast Asia (including Vietnam, Thailand, Indonesia, Singapore), South Asia (including India, Bangladesh, Pakistan), and South and Central America (including Argentina, Cuba, Mexico). Henceforth, we will refer to these countries as countries of ethnic origin; 2. Completed his undergraduate degree in one of the countries of ethnic origin; and 3. His place of birth was in one of the countries of ethnic origin. We identified Internet ventures with ethnic-immigrant members in the multi-step procedure described below: Step 1. We examined the Security and Exchange Commission (SEC) filings (S-1s and SB-2s) of Internet ventures that were tracked by Pegasus Research International, an independent investment research firm, and reported on by Willoughby in Barron's (Willoughby, 2000). Among the 227 Internet ventures tracked by Barron's, there were 35 ventures (15%) that had at least one founding member who had an ethnic surname associated with the countries of origin. Step 2. A surname is a readily identifiable indicator of ethnicity, yet all individuals with an ethnic surname might not be immigrants. Therefore, in this step we went on to track the

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country in which the founding members completed their undergraduate degree. The country, in which undergraduate education was completed, in conjunction with ethnic surname, indicates that the individuals spent their formative years in the country of ethnic origin and were not directly influenced by American social and economic context until they were adults. We found that the set of 35 Internet ventures identified in Step 1 had at least one founding team member who had an ethnic surname and completed his undergraduate education in one of the countries of ethnic origin. In addition, we identified 13 (6%) ventures that had founding team members who completed their undergraduate degree in one of the countries of ethnic origin. However, because these individuals had non-ethnic surnames, we decided to exclude them from further analysis. Step 3. In the next step, we went on to track country of birth of the founding team members of these 35 Internet ventures. Particularly, we were interested in identifying ventures with founding team members who were born in the selected countries of ethnic origin. Identification of the country of birth further confirms the ethnic background of the team members. We were able to verify that 26 (out of 35) Internet ventures had at least one founding team member with an ethnic surname, the member completed his undergraduate education in one of the countries of ethnic origin, and he was born in the same country. We referred to these 26 Internet ventures as those with ethnic-immigrant presence in founding teams. Ventures with founding members that did not meet the three criteria were identified as ventures with non-ethnic-non-immigrant founding team members. Thus the nine Internet ventures with ethnic founding team members whose country of birth could not be established were excluded from analysis. Further, there were 13 ventures with founding team members with non-ethnic surnames but had completed their undergraduate education in the countries of ethnic origin. We did not follow-up on these cases because the individuals did not meet all three criteria.4 Step 4. Because we were interested in comparing ethnic-immigrant ventures with nonethnic non-immigrant ventures, we used a matched-pair design, where the two ventures in the pair were “similar” in important respects except on ethnic-immigrant vs. non-ethnicnon-immigrant aspect of the founding team. A matched-pair design is an accepted method when examining why similar subjects have different outcomes (Schnatterly, 2003). The design is favored in studies where a confounding variable is believed to have a very strong effect. It is particularly useful in contexts where the effects of a particular variable, e.g., ethnic-immigrant presence in this study, are difficult to untangle from other possible effects.

4 One reviewer pointed out that some ethnic-immigrants might satisfy fewer than three criteria but should still be considered. The example cited was that of Mr. Jerry Yang, part of Yahoo's! founding team, who was born and spent his early years in Taiwan, but completed his undergraduate and graduate education in the US (source: http:// en.wikipedia.org/wiki/Jerry_Yang). Based on our definition, Mr. Yang meets two of the three criteria, and is, therefore, not an ethnic-entrepreneur. Our concern with having a third category of ‘in-between’ ethnic and nonethnic was the difficulty in establishing clear guidelines of how many and/or which criteria would apply. This would result in confusion regarding what the third category really represents.

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Matched-pair designs have been used in a wide range of fields and settings, e.g., psychological studies (e.g., Bandura's, 1977 study on social learning theory), and epidemiological studies involving new treatments (e.g., Kupper et al., 1981). Within the strategy field, for example, Chaganti et al. (1985) used matched-pair design in studying the impact of corporate boards on bankruptcies among retailing firms. Hambrick and D'Aveni (1988) used the design to study failures in large corporations. Schnatterly (2003) used matched-pair design to investigate white collar crime. Kerlinger and Lee (2000) recommend that in using the matched-pair design, samples should be matched on a variable that is strongly correlated with the dependent variable to control for extraneous variables and to reduce the error term. In our sample of Internet ventures, we identified the business model to be such a variable. It affects strategy and is a determinant of success. During our sample's time-frame, Internet technology was new and its trajectory of growth was uncertain; boundaries that defined the space were still forming; technologies, strategies, and scope of the ventures that were operating in the space were evolving. The Internet space was comprised of a wide array of ventures with business models ranging from breakthrough market opportunities (e.g., portals and search engines) to businesses that used Internet technology to re-form markets for existing products and services (e.g., on-line banks, pharmacies and retailers), as well as businesses with variations between the two ends. Further, the strategy, performance, survival and mortality rates of new ventures tended to be different across this continuum of business models (Day et al., 2003). Indeed, Day et al. (2003) reported that differences in the characteristics of business models explained the shakeout in the Internet space that occurred after the 1990s. Business models have been distinguished on a number of dimensions, such as, where the business is located in the supply chain, the type of market on which it focuses, whether it sells directly on line, types of revenue sources, types of resources and assets used, and their cost structures (Applegate, 2001; Applegate and Collura, 2000; Chen, 2003; Mahadevan, 2000). These dimensions are important contextual factors that influence venture performance and are likely to be similar among new ventures that are based upon a similar business model. In Step 4, we matched each new venture with an ethnic-immigrant presence in the founding team with another new venture that had non-ethnic-non-immigrant founding team members and which used the same business model. Further, wherever possible, we matched the ventures on the time elapsed between their founding date and their initial public offering (IPO) date. Thus, both ventures were approximately of same age at IPO and so faced similar “age-related” issues, if any. At the end of the matching process in Step 4, we identified 52 Internet ventures for detailed analyses – 26 Internet ventures with ethnic-immigrant members in the founding team and 26 Internet ventures with non-ethnic-non-immigrant members in the founding team. And so ventures in each pair used the same business model and were more or less of same age. In the matching process we gave priority to matching new ventures on their business model and the time elapsed between their founding date and their initial public offering date. Any missing values in variables other than ethnic-immigrant presence were handled using one of several options available for missing values in the SPSS package. We did not replace the cases with missing data, as that would have meant a trade-off on the “quality” of the matched pairs.

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For the purposes of matching the pairs on the business model, we followed the business model typology suggested by Applegate and Collura (2000). Applegate and Collura (2000) identified four main business models: commerce, content, community, and infrastructure. Commerce revenue is generated from the sale of physical products, license of informationbased products (e.g. software), or service and transaction fees. Content revenue is realized from subscription and registration fees. Community revenue is collected from advertising activities, referral fees, and membership fees. Infrastructure revenue is generated from the sale (or license) of technology products, installation or integration fees, maintenance fees, hosting fees, and access fees. 5.1. Measures For each Internet venture included in the matched pairs, the following attributes were examined: 5.1.1. Founding team characteristics For the purposes of this paper, the top management team that was in place at the time of initial public offering was referred to as the founding team. We included the following two attributes of the founding team: 1. Founding team size was measured as a count of individuals listed in the prospectus as comprising the firm's management team (Shrader et al., 2000) but did not include Directors and Key Employees. 2. Age of the founding team members was measured as the average of the chronological age of team members (not including Directors and Key Employees). For biographical information on the founding team members, we relied on the Dun and Bradstreet database and biographical stories that appeared in various print media, primarily Business Week, Fortune Magazine, Business 2.0, the New York Times, the Wall Street Journal, and their on-line editions. 5.1.2. Prospector strategy Hambrick (1983), in his study testing functional attributes of Miles and Snow (1978) typology, showed that prospectors tend to be the big spenders on research and development (R&D) and on marketing relative to sales of the firm. Within the entrepreneurship literature Zahra and Bogner (2000) found that technology strategies of software new ventures emphasize R&D, incurring high level of R&D expenses. We compared R&D and marketing expenses to total expenses (including General and Administrative expenses). We used total expenses rather than revenue because during the sample period many of the Internet ventures were more concerned about “growing big fast” and incurred huge expenses in the hope of producing growth in sales and in assets. The traditional metrics of performance were turned upside down by the Internet ventures (King, 2000). Further, we considered expressing R&D and marketing expenses as a percent of total expenses rather than as a percent of sales as more appropriate because sales was part of the dependent variable Sales Growth Rate. The data for R&D, marketing

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expenses, and general and administrative expenses were collected from the Compustat database. 5.1.3. New venture performance Prior research used multiple measures of new venture performance (Barth, 2003; Brush and Van der Werf, 1992; Chandler and Hanks, 1993). Growth, sales, and profit indices were most widely used. We used annual growth rate – in sales, in assets and in employees – as measures of new venture performance. Growth rather than profit was our preferred indicator, both because young Internet new ventures strongly emphasized growth and because these new ventures did not always attain profitability during our sample time period of 1997–2000. Sales level was considered a somewhat unreliable measure for these young ventures in their early stages of life. Hence the three growth measures were used. Sales growth indicates development in terms of customer base, employee growth signals the need for additional resources to meet customer demands, and asset growth indicates that the firm is investing for the future. Performance data were collected from the Compustat database for all years between the year in which the venture completed its IPO and 2000.5 6. Results The annual revenue of 52 ventures (26 ventures with ethnic-immigrant members and 26 ventures with non-ethnic-non-immigrant members in the founding teams) included in the study ranged from zero to $134M. The mean was $10.5M, and the median was $3.7M at the time of the venture's IPO. The venture's age, i.e., time taken to complete IPO from the time venture was founded, ranged from 5 months to 162 months with a mean of 45.35 months and a median of 40.50 months. Among the 26 new ventures that met all three criteria and that were included in the study, the distribution of ethnic-immigrants was as follows: there were fifteen (58%) ventures with one ethnic-immigrant, four ventures (15%) with two, four (15%) ventures with three, one venture (4%) with five and two ventures (8%) with seven ethnic-immigrants. The distribution of business models in the group of 26 ventures was as follows: twenty (77%) were based on the infrastructure model, four (15%) on the community model and two (8%) on the commerce model. There were no firms in our sample that were based on the content model. The firms included Internet service providers (infrastructure), software firms (infrastructure), technology integrators (infrastructure), web advertising (community), as well as product sales (commerce). The mean and standard deviation of the variables as well as the correlations among the variables are presented in Table 1.

5 The period 1997 through mid-2000 was a boom time for Internet new ventures. Among the 26 pairs of new ventures that we examined in the study, 6 pairs survived as independent entities until 2003; in 5 pairs both ventures ceased to exist as independent entities; in 9 pairs, new ventures with an ethnic-immigrant presence in the founding team ceased to exist as independent entities; and in 6 pairs the new ventures with non-ethnic-nonimmigrant founding members ceased to exist. Chi-square test on the results showed that survival rates were not significantly different between new ventures with ethnic-immigrant team members and new ventures with nonethnic-non-immigrant team members.

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Table 1 Pearson correlations matrix with means and standard deviations Variable

Ethnic immigrant presence

Prospector orientation

Founding team size

Age of founding members

Months to IPO

Sales growth rate

Asset growth rate

Mean (S.D.)

n

n

n

n

n

n

n

Prospector orientation 0.62 (0.25) Founding team size 8.65 (3.51) Age of founding team members 40.84 (4.14) Months to IPO 45.35 (28.42) Sales growth rate 478.83 (1242.58) Asset growth rate 644.90 (1612.72) Employee growth rate 79.74 (10.76)

0.31** 52 0.13 52 − 0.11

0.08 52 0.19

0.11

52 0.01 52 0.09 43 0.11 47 − 0.22 41

52 0.30** 52 0.04 43 −0.20 47 −0.07 41

52 0.17 52 0.08 43 − 0.16 47 0.10 41

0.38*** 52 −0.14 43 −0.42*** 47 −0.20 41

− 0.19 43 − 0.18 47 − 0.10 41

0.25 43 0.48*** 39

0.58*** 41

**Correlation is significant at p b 0.05 level (two-tailed). ***Correlation is significant at p b 0.01 level (two-tailed).

Overall, ethnic-immigrant presence and prospector strategy were positively and significantly correlated (r = 0.31, p b 0.05); average age of founding team members and asset growth rate were negatively and significantly correlated (r = − 0.42, p b 0.01); employee growth rate was positively and significantly correlated with sales growth rate (r = 0.48, p b 0.01) and with asset growth rate (r = 0.58, p b 0.1). Detailed analyses were completed only on the 26 ventures that had ethnic-immigrant presence and 26 matching ventures with non-ethnic-non-immigrant team members.6 6.1. Ethnic-immigrant presence To test the effects of ethnic-immigrant presence, team size, and age of the founding team members on prospector strategy and new venture performance, we completed a series of regression analyses. In the first regression model, prospector strategy was regressed on ethnic-immigrant presence, team size, age of founding team members, cross product of ethnic-immigrant presence and team size, and cross product of ethnic-immigrant presence and age of founding team members. In the second model, the analysis was repeated treating sales growth rate, asset growth rate and employee growth rate as dependent variables. Only the significant results are presented in Tables 2 and 3. We found that ethnic-immigrant presence (beta = 3.36, p b .05) had a significant effect on prospector orientation. Ventures with ethnic-immigrant members in founding teams 6

In all analyses when data were missing, the cases were excluded. Specifically, missing data were calculated using the option: “exclude cases list-wise” in SPSS.

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Table 2 Effects of ethnic-immigrant presence, founding team size and age of the founding team members on prospector strategy of new Internet ventures Variable

Std. beta

t-value

Significance

Ethnic immigrant presence Founding team size Age of founding team members Ethnic immigrant presence × Founding team size Ethnic immigrant presence × Age of founding team members Adjusted R-squared F-value df

3.36 0.30 0.51 − 0.73 − 2.43 0.19 3.40** 5, 46

2.60 1.60 2.71 − 1.87 − 1.90

** n.s. ** * *

*Correlation is significant at p b 0.10 level (two-tailed). **Correlation is significant at p b 0.05 level (two-tailed).

emphasized the prospector strategy to a significantly greater extent than those with nonethnic-non-immigrants. The former group of ventures spent a significantly higher proportion of total expenses on R&D and market development compared to the non-ethnicnon-immigrant counterparts (71% vs. 56%). Based on these results, we found support for Hypothesis 1a which predicted a positive association between an ethnic-immigrant presence on a new venture's founding team and the venture's prospector strategy. We predicted in Hypothesis 1b a positive association between an ethnic-immigrant presence on a new venture's founding team and the venture's performance. However, we did not find support for this hypothesis: There were no significant differences between the two groups of ventures with respect to growth in sales, assets, or employees.7 Therefore, we reject Hypothesis 1b.8 6.2. Founding team size and age of founding team members In Hypothesis 2a, we predicted that founding team size would enhance the positive effect of ethnic-immigrant presence on prospector strategy. According to the results presented in Table 2, founding team size did not have a direct effect on prospector strategy but the 7

Results of this test are not presented in the paper but may be obtained from the authors. In response to a comment made by one of the reviewers, we analyzed the effect of the presence of ethnicimmigrant team members who met two of the three criteria. There were nine such “potential” ethnic-immigrant team members. Results, based on nine matched pairs, showed that the differences between ventures with “potentially” ethnic-immigrant team members and ventures with non-ethnic-non-immigrant team members were significant at p = 0.105. Nonetheless, the results indicated that ventures with ethnic-immigrant presence showed greater prospector orientation than the other ventures; and there were no significant differences in performance. In the same vein, there were 13 ventures that had the presence of team members who had a non-ethnic surname and were born in countries of ethnic-origin. We referred to this group as non-ethnic-immigrant ventures. A comparison of ventures with the presence of non-ethnic-immigrant founding team members and ventures with the presence of non-ethnic-non-immigrant team members showed that the two groups were not significantly different. However, non-ethnic-immigrant ventures tended to have higher prospector orientation than ventures associated with non-ethnic-non-immigrants. These findings suggest that the stringent criteria that we used distinguished the effects of the presence of ethnic-immigrant versus non-ethnic-non-immigrant team members on prospector strategy and new venture performance. 8

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Table 3 Effects of ethnic-immigrant presence, founding team size and age of the founding team members on asset growth rate of new Internet ventures Variable

Std. beta

t-value

Significance

Ethnic immigrant presence Founding team size Age of founding team members Ethnic immigrant presence × Founding team size Ethnic immigrant presence × Age of founding team members Adjusted R-squared F-value df

2.95 − 0.03 − 0.07 − 0.17 − 2.73 0.19 3.01** 5, 41

2.25 −0.12 −0.34 −0.42 −2.06

** n.s. *** n.s. *

*Correlation is significant at p b 0.10 level (two-tailed). **Correlation is significant at p b 0.05 level (two-tailed). ***Correlation is significant at p b 0.01 level (two-tailed).

interaction term for ethnic-immigrant presence and team size was negative and significant (beta = − 0.73, p b 0.10). Although we did not find support for Hypothesis 2a the results were significant but in the opposite direction. In Hypothesis 2b, we predicted that founding team size would enhance the positive effect of ethnic-immigrant presence on venture performance. We found that founding team size was not related to venture performance either directly or indirectly. (The results for asset growth rate are presented in Table 3; the results for revenue growth rate and employee growth rate are not presented but may be obtained from the authors). Therefore, we reject Hypothesis 2b. In Hypothesis 3a, we predicted that ethnic-immigrant presence and founding team age would interact such that the effect of ethnic-immigrant presence would be stronger in ventures with younger team members. As shown in Table 2, the age of the founding team members was significantly related to the strategy (beta = 0.51, p b .10). The interaction term for age and ethnic-immigrant presence was also significantly and negatively related to prospector strategy (beta = − 2.43, p b 0.10). The results supported Hypothesis 3a. Finally, in Hypothesis 3b, we predicted that ethnic-immigrant presence and founding team age would interact such that the effect of ethnic-immigrant presence on new venture performance would be stronger in ventures with younger teams. Effect of only one of the performance measures, viz., asset growth rate, was significant. As shown in Table 3, average age of the founding team members was not significantly related to new venture performance. Ethnic-immigrant presence and average age of the founding team members interacted such that the effect of ethnic-immigrants (beta = − 2.73, p b 0.10) on asset growth rate was found to be stronger in ventures with younger teams. The result lent support to Hypothesis 3b. 7. Discussion and concluding remarks In this study we examined the effect of ethnic-immigrant presence on founding teams of new ventures on strategy and on new venture performance. We also examined the team settings in which the effects of ethnic-immigrant presence are likely to prevail.

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Specifically, we examined if effects of ethnic-immigrant presence would depend on the founding team size and the age of the founding team members. We examined these issues using a matched-pair design on a sample of Internet ventures that completed IPO during the years 1997–1999. Among the 227 Internet ventures that we started out with, 26 new ventures (11.5%) had an ethnic-immigrant presence in the founding team, i.e., had at least one founding member who is an ethnic-immigrant. This was a significantly smaller percentage than the 29% of Silicon Valley high technology startups run by Chinese and Indian immigrants and reported by Saxenian (2001). The difference may be explained by: location of the ventures whole of the U.S. in our study compared to Silicon Valley ventures identified by Saxenian (2001); we used three criteria whereas Saxenian (2001) used only one criterion, namely, the surname of the entrepreneur. Saxenian may have included U.S. born and/or educated Chinese and Indians also. The data we used were for ventures that completed an IPO from 1997–1999, whereas Saxenian (2001) relied on data for the period 1995–1998 and may have included both old and new ventures. New ventures with an ethnic-immigrant presence in the founding teams tended to score higher on the prospector strategy than ventures with non-ethnic-non-immigrant founding team members. This was true regardless of size of the founding team and age of founding team members. The findings offer very strong support to a basic assertion in the immigrant entrepreneurship literature (e.g., Borjas, 1986; Fernandez and Kim, 1998) and a theme that we relied on in this paper, viz., immigrants have a relatively strong propensity to seek opportunities and engage in entrepreneurial activities. Indeed, in our study, decisions made by founding teams that had the presence of ethnicimmigrants were more prospector-oriented than the decisions made by founding team members with non-ethnic-non-immigrants. The positive association between ethnicimmigrant presence in founding team and the prospector strategy that we found in this study adds depth in understanding the value added by the ethnic-immigrants in founding teams. One implication of the finding is that bold and innovative moves benefit from diversity in values and cognitive schema. The mix of ethnic-immigrant and non-ethnic non-immigrant founding team members seems to position these ventures to take on the challenges in a growing but uncertain business environment. This mix perhaps would not be available in ethnically homogeneous teams, whether made up solely of ethnics or non-ethnics. However, the effects of ethnic-immigrant founding team members do not occur in a vacuum. According to our study, efficacy of ethnic-immigrant team members depends on the characteristics of the team itself. Prior researchers reported that ethnically owned enterprises that were not in ethnic enclaves but instead catered to the mainstream market, resembled the businesses of their non-ethnic counterparts (Bates, 1994a,b; Fernandez and Kim, 1998); and the success rates of ethnic and non-ethnic ventures were comparable. According to our study, however, new ventures with ethnic-immigrant members on founding teams surpassed non-ethnic-nonimmigrant ventures in their propensity for innovation. Still, performance of the two groups of ventures was comparable. How do we explain the divergence in the results with respect to strategy? Prior studies on ethnic entrepreneurs largely focused on the service and retail sectors. In contrast, the present

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study focused on strategies of early-stage ventures in the high-tech Internet sector. In the new Internet sector, ethnic-immigrant entrepreneurs seemed to be able to translate their opportunity seeking tendencies into prospector-oriented strategies. Further, the positive effects of an ethnic-immigrant presence on founding teams depended on other team characteristics. As shown graphically in Fig. 1, the positive effect of an ethnic-immigrant presence on prospector strategy was neutralized by the founding team size. Though the magnitude of the positive effect of ethnic-immigrant presence on prospector strategy was very strong (beta = 3.36), the interaction effect of ethnic-immigrant presence and founding team size (beta = − 0.73) was in the opposite direction. The results indicate that large founding teams impose “costs” and can be detrimental to making timely, bold, and decisive responses in the volatile Internet environment. Large teams tend to suffer from a lack of social integration, strained group communications, a lack of group cohesion, and a tendency towards formation of divisive subgroups (Amason and Sapienza, 1997; Bales and Borgatta, 1966; Wiersema and Bantel, 1992). The results are also in line with Hambrick et al.'s (1998) finding that teams with members from multiple ethnic and cultural backgrounds encounter “demeanor” and “language” challenges that result in coordination problems. Another founding team characteristic that seemed to impact efficacy of ethnicimmigrant team members was: age of the founding team members. As shown in Fig. 2, in Internet new ventures with relatively young teams, the effect of ethnic-immigrant presence was positive and strong but in new ventures with relatively old teams, the effect was less positive. The magnitude of the effect of ethnic-immigrant presence (beta = 3.36)

Fig. 1. Moderating role of founding team size in the relationship between ethnic-immigrant presence in founding team and prospector strategy of new Internet ventures.

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Fig. 2. Moderating role of age of founding team in the relationship between ethnic-immigrant presence in founding team and prospector strategy of new Internet ventures.

and the effect of interaction term between ethnic-immigrant presence and age of team (beta = − 2.43) were opposite in direction. Much of the positive effect of the presence of ethnic-immigrants on prospector strategy can be lost in founding teams with relatively older teams. This finding affirms the research on age and innovation: Boeker (1988) pointed out that younger entrepreneurs take a more aggressive approach; and Hambrick and Mason (1984) argued that relatively young managers are more likely to pursue risky strategies. Ethnic-immigrant entrepreneurs predisposed toward opportunity seeking and prospective strategies, may find themselves compatible with relatively younger founding teams. There were no significant differences between the two groups of new ventures on performance in growth rates — sales, assets, and employee growth rates. We conclude that ethnic-immigrant presence is not a sufficient condition for new venture performance differentials between ventures with ethnic-immigrant presence and those without. Since our study was limited to Internet ventures during a time of growth but uncertainty, we cannot generalize these finding to other industries. How might we explain the finding that ethnic-immigrant presence has an effect on prospector strategy and not new venture performance? We posit that tasks associated with strategy formulation and the tasks involved in strategy execution call for distinctive types of TMTs. Formulation, particularly in new ventures, is a creative task and ethnic-immigrant team members may have the necessary intellectual resources to formulate a prospector strategy. In contrast, execution of the strategy involves coordination tasks. Success may hinge on language skills, the ability to relate to people across functions, and the ability to work in highly structured goal-oriented team settings. Homogenous teams (homogeneous as to age, ethnicity, functional background, education, etc.) may be better suited for successful execution. Thus, an ethnic-immigrant

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background in itself may not be sufficient for a more successful execution of the prospector strategy. In prior studies, race and gender diversity in particular were seen to hamper group effectiveness (Chatman and Flynn, 2001). Milliken and Martins (1996) raised the possibility that racial diversity can have negative effects on outcomes like satisfaction with group performance. Our study results did not show detrimental effects for ethnic diversity in founding teams. Indeed, the lack of significant performance differences between ventures with ethnic-immigrant presence and with non-ethnic-non-immigrant teams suggests that the two groups of new ventures are very likely to perform equally well. This is consistent with Finkelstein and Hambrick's (1996) finding that the effect of TMT heterogeneity on performance was inconclusive. Ethnic-immigrants on founding teams, however, did make a significant difference to new venture performance in founding teams that had relatively young members. As shown in Fig. 3, the positive effect of ethnic-immigrant presence on asset growth depended on the average age of the members. For teams that had young members, the positive effect of ethnic-immigrant presence on new venture performance was much greater than on the teams with older team members. In fact, the effect of the presence of ethnic-immigrant team members (beta = 2.95) and the effect of the interaction between an ethnic-immigrant presence and the age of the founding team members (beta = − 2. 73) were comparable in size and opposite in direction. Potentially, a positive effect of ethnicimmigrant presence on new venture performance may be “cancelled” in ventures with relatively old teams. In sum, the pattern of results reported in our study suggests that presence of ethnicimmigrant team members is a necessary but not sufficient condition for new ventures to realize a prospector strategy and a high growth rate. Besides, size of the effects of ethnic-

Fig. 3. Moderating role of age of founding team in the relationship between ethnic-immigrant presence in founding team and compounded growth in assets of new Internet ventures.

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immigrants on prospector strategy and new venture performance depends on the founding team size and the average age of the founding team members. 7.1. Implications The central theme of this study, namely, the relationship between an ethnic-immigrant presence and venture strategy and new performance, brings into focus the impact of ethnicimmigrant entrepreneurs as decision-makers in top management positions. A general conclusion was that they do make a difference to the enterprise level strategy and, in certain situations, to venture performance. These new ventures gravitate towards bolder actions and opportunities. Positive effects of an ethnic-immigrant presence are best realized in smaller and younger teams. One of the anonymous reviewers raised the question: is a prospector strategy a “good thing” for new ventures? Goodness of the prospector strategy can be judged in terms of the effect of the strategy on new venture performance, e.g., growth rate, return on investment. To examine the goodness of fit, we compared results from the following recursive regressions: 1. Asset growth rate = Fn (Prospector Strategy) The results showed that prospector strategy did not have significant effect, but there was a non-significant negative relationship.9 Therefore, prospector in itself appears to be neither a good thing nor a bad thing. 2. Asset growth rate = Fn (Prospector Strategy, Ethnic-immigrant Presence, Founding Team Size, Age of Founding Team Members, Ethnic-immigrant presence × Founding Team Size, Ethnic-immigrant presence × Age of Founding Team Members) The results showed that, after controlling for all other variables, prospector strategy had a negative but significant effect on asset growth rate; ethnic-immigrant-presence had a positive and significant effect; and ethnic-immigrant presence, in conjunction with age of the founding team members, had a negative and significant effect, i.e., older teams tend to be lower on prospector orientation.10 The prospector strategy results affirmed early research on the effectiveness of Miles and Snow Typology (Hambrick, 1983), i.e., prospectors, in general, have relatively low performance. Prospector strategy, per se, is not a good thing for performance! However, our results also showed that ethnicimmigrant presence and age of the founding team members can compensate for the negative effect of the prospector strategy and produce an overall positive asset growth rate. To the question: “Is the prospector strategy good for a new venture?” the answer seems to depend on ethnic-immigrant presence and age of the founding team members. 3. Prospector Strategy = Fn (Ethnic-immigrant Presence, Founding Team Size, Age of Team Members, Ethnic-immigrant presence × Founding Team Size, Ethnic-immigrant presence × Age of Founding Team Members) The results, presented in Table 3, show that an ethnic-immigrant presence and average age of the founding team members had a direct, positive, and significant effect on prospector strategy; further, in conjunction with the founding team size and age of the 9 10

Results of this test are not presented in the paper but may be obtained from the authors. Results of this test are not presented in the paper but may be obtained from the authors.

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founding team members, an ethnic-immigrant presence has a negative and significant effect on prospector strategy. When we look at all the results from the above noted regressions, ethnic-immigrant presence had a direct and positive effect on asset growth rate. Therefore, it is a good thing. Also, ethnic-immigrant presence, indirectly through the prospector strategy, had an effect on asset growth rate. Founding teams with an ethnic-immigrant presence and young team members can compensate for the negative effects of the prospector orientation. Does the number of ethnic-immigrants on the founding team make any difference? We tested for the affect, if any, of the number of ethnic-immigrants on the founding team on prospector strategy and venture performance. The results showed that ethnic-immigrant intensity (i.e. the proportion of ethnic-immigrant members in the founding team), per se, had no impact on the prospector strategy or on new venture performance.11 But then, intensity did not hurt new venture performance either. It was not the number of ethnicimmigrants but the mere presence of ethnic-immigrants on the founding teams that seemed to count. Mere presence of ethnic-immigrants on the founding teams seemed to add the requisite amount of diversity to the founding teams to impact the prospector strategy of the venture. In the study presented in this paper, we used a matched-pair design. Reviewers raised the issue of the merits of using a smaller data set (n = 52) in the matched-pair design vs. using the larger data set (n = 227) in the analyses. Hence, we repeated the analyses on the larger data set. The results showed that findings for the larger and smaller data sets were comparable with respect to the positive effect of an ethnic-immigrant presence on prospector strategy.12 This finding suggests that the results from the matched-pair design hold true for the strategy in the larger population of 227 Internet ventures. With regard to new venture performance the results, however, were different. Analyses with the larger data set showed that an ethnic-immigrant presence, after adjusting for the size of the founding team and the age of the team members, had no significant effect on any of the criteria of performance. This was not consistent with the results from the analyses of the smaller data set. Analysis of matched-pairs showed that an ethnic-immigrant presence and venture asset growth rate were related in a significant way and that the relationship was dependent on the age of the founding team members. In other words, by carefully matching ventures with an ethnic-immigrant presence with those that had non-ethnic-non-immigrants on the founding teams, we were able to uncover the relationship between ethnic-immigrant presence and new venture performance, as well as the moderating roles of founding team size and age. In our study, 70% of ventures with an ethnic-immigrant presence were infrastructure-based whereas in the larger data set only (52) 23% of all ventures were infrastructure-based. We conclude that the matched-pair design seems to add value with regard to new venture performance, particularly in settings where some business models occur with greater frequency. Further, results from the matched-pair analyses reinforce the argument that business models determine performance of new Internet ventures (Day et al., 2003). A matched-pair 11 12

Results of this test are not presented in the paper but may be obtained from the authors. Results of this test are not presented in the paper but may be obtained from the authors.

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design was thus helpful in uncovering more complex effects of ethnic-immigrant presence on the ventures studied. 7.2. Limitations Data in this study were limited to new Internet ventures that went public in the late 1990s. Future research across a variety of industries and business models and other time periods would strengthen the generalizability of the results. Further, measuring new venture performance using only growth figures may be insufficient. The study did not speak to other indices like sales level, the overall profitability of the ventures, or the efficiency of resource usage. However, the performance measures used were consistent with the high growth posture of these young Internet ventures few of which achieved profitability. Our criteria for judging ethnic-immigrant presence may be too stringent, but it is designed to ensure that the team members were primarily impacted by their country of origin during the formative years. Critics may note that individuals with unique backgrounds may have been missed in our study. Based on our criteria, an individual who was born in the U.S. but was raised until age 18 in one of the identified countries of origin and later completed his undergraduate education in the U.S. would not qualify as an ethnic-immigrant. Similarly, a U.S. expatriate without an ethnic surname who was born, raised and educated in an identified country of origin would also not have been identified as an ethnic-immigrant even though they may share the values of the citizens of their adopted country. More fine-grained research on ethnic-immigrant diversity and new venture strategy is called for. Also, the absence of any significant direct effect of the founding team size on new venture performance is noteworthy: As one of the reviewers suggested, relatively large founding teams may be associated with new ventures with a relatively large asset base at the outset, and therefore have a smaller asset growth rate. It is plausible that the effects of the founding team size, if any, on asset growth rate were simply lost in this data set. However, when we re-analyzed the data without the outliers (there were six outliers on asset growth rate), the results did not change — neither in significance level nor in direction of effect. Outliers were not responsible for the non-significant results. The effect of the founding team size on new venture performance remains a worthwhile issue for future research. Did the period of data collection, namely, late 1990's, make a difference to the findings? Our data were from ventures that went public during the period that included the “Internet bubble.” Several new ventures rushed to complete an IPO during this period. It can be argued that these were extraordinary times and that a disproportionately high number of ventures with an ethnic-immigrant founding team presence may have rushed to take advantage of the historic opportunities. The exuberance and the related risks were all part of the overall capital market conditions. But these bold and short-lived opportunities were equally inviting to and availed by new ventures with ethnic-immigrant and non-ethnic-non-immigrant founding team members. All things being equal, new ventures with ethnic-immigrant founding team members outpaced those with non-ethnic non-immigrant founding teams on prospector orientation. To the question whether ventures with ethnic-immigrant founding team members would have been less adventurous than those ventures with non-ethnic-non-immigrant founding team members in calmer capital market situations? Past research on Silicon Valley

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