How Exactly Do Networking Investments Pay Off? Analyzing the Impact of Nascent Entrepreneurs Networking Investments on Access to Start-Up Resources

Abstract

It is widely recognized that networks provide access to the resources necessary for founding a business. Up until now, however, the relationship between networking investments and the availability of resources has not been analyzed in depth. Using a sample of 416 nascent entrepreneurs, we address this issue, and provide evidence that networking investments lead to diminishing marginal resource returns in terms of financial, informational, emotional and contact support. Our results also show that resource returns strongly vary with resource type.While emotional support is quite easy to get, many more networking investments are needed to achieve financial support.

The Two Sides of the Story: Network Investments and New Venture Creation

“…Similarly, when working routines and shared norms of understanding are well established and resource exchange is already very efficient, an additional increase in the amount of time spent will not have a similar significant impact. In summary and in line with the results provided by previous research (Semrau and Werner 2009), we thus expect positive but diminishing returns of increasing investments in relationship quality.…”

“…First, in line with previous research results, we expect the profits generated by further extending a network to increase at a decreasing rate (Semrau and Werner 2009). Although adding more partners to a small network will most probably enhance the variety of resources available, adding more contacts to a larger network will likely mean adding ties that provide resources that are already provided by existing network contacts.…”

“…Specifically, we demonstrate that investing time and energy to develop and maintain more network contacts and more intense relationships may not always pay off. Additionally, we contribute to theory in the field by providing an explanation for the inverted U-shaped relationship between network investments and founding success, which is based on two complementary effects-positive but diminishing resource returns, which have empirically been observed in a prior study (Semrau and Werner 2009), and opportunity costs of time, which come with the necessity of investing time in developing and maintaining network contacts.…”

“…Although there are several studies in the field showing a positive performance effect of large networks and intense relationships (Hansen 1995; Lee and Tsang 2001; Powell, Koput, and Smith‐Doerr 1996; Raz and Gloor 2007), other results indicated no effect at all (Aldrich and Reese 1993; Johannisson 1996). Additionally, most recent studies suggest that the relationship between the frequency of interaction between entrepreneurs and their network contacts and performance may be best described by a nonlinear relationship (Semrau and Werner 2009; Watson 2007).…”

“…Finally, most recent research indicates that the relationship between these network variables and entrepreneurial success might be nonlinear. One study directly focused on nascent entrepreneurs' resource access via network contacts, for example, indicates that the resource returns in terms of access to financial, informational, emotional, and contact support that result from enlarging a network and intensifying network relationships are diminishing (Semrau and Werner 2009). Additionally, Watson (2007) showed, based on longitudinal data, that the frequency with which small and medium‐sized enterprise owners seek advice from different network sources has a positive effect on performance only to some extent and may afterward even hinder survival and growth.…”