Optimal Project Rejection and New Firm Start-Ups

The goal of this study is to discover why startups aremuch more likely than established firms to commercialize innovations. There arethree possible alternatives regarding the fate of an innovation: it can becommercialized by an incumbent firm as an internal venture, commercialized by astartup as an external venture, or not commercialized at all. A model thatpredicts how internal ventures differ from external ventures is developed andused to generate several propositions, the most important of which predictsthat innovations commercialized through internal ventures are likely to be agood fit with established firms' internal resources. Other propositions suggestthat internal ventures are likely to cannibalize the established firm'sexisting businesses and be less profitable than innovations commercializedthrough external ventures. A survey of existing industrial organizationliterature is used to evaluate the model. The results contradict the literaturebut support the predictions of the model. (SAA)