According to finance professor Tania Babina, exposure to a firm’s research and development department can provide valuable insight to those hoping to start an entrepreneurial venture.
In a recent paper she co-authored with Sabrina T. Howell of NYU Stern School of Business, Babina found that when former R&D employees leave a firm, they often join startups or establish their own companies.
“Our hypothesis was that corporate R&D is an important source of ideas for employees to found their own firms,” Babina says.
Babina and Howell became interested in tracking the career paths of those workers who migrated from the corporate world to entrepreneurialism after the two professors took notice of recent academic work describing the general decline of investment in research and development among large firms.
“There was a macro-motivation to understand if R&D was actually an important source for those employees to get valuable ideas,” Babina said. “Experience with corporate R&D is a key predictor of employees leaving for startups or becoming entrepreneurs.”
In their study, they employ a broad definition of “entrepreneurship,” using the term to mean a “founding team of a new firm; the group most likely to contribute ideas and crucial skills to the startup.”
Babina and Howell then used figures from the US Census from 1990 to 2008, as well as a database which tracks employee job changes, to follow R&D-exposed workers’ various career paths. The research demonstrated that a 100 percent increase in a firm’s R&D activity translated to an 8.4 percent increase in the rate of employees leaving for entrepreneurial ventures.
Not all entrepreneurial ventures are successful; Babina and Howell accounted for that by tracking the flow of venture capital to these new projects, a sound indicator of a valuable firm.
“The data tell us that these new firms are quite important because venture capitalists invest in them,” Babina says. “These are sophisticated investors.”
The research also addressed the concern that businesses are typically reluctant to let top talent leave.
Babina says that the major reason R&D-exposed workers leave is because of changes in investment strategies that tend to narrow the focus of research departments. She added that when these employees move on, their entrepreneurial projects typically have a different mission than their former workplace.
Although that might sound counterintuitive, Babina says the different direction is due in part to non-compete clauses that prevent workers from using ideas developed at their former company.
“Suppose there’s an engineer at Google who is working on a machine-learning project, a kind of technology that is quite general,” Babina says. “Once you know how that works, you can apply the technology in different sectors.”
Babina says her research on employees familiar with R&D departments also provides insight into potential career paths for aspiring entrepreneurs no matter the field.
“You want to be an entrepreneur, don’t have a good idea just yet,” Babina says. “ Try working at companies that are innovative and forward-looking. You can get great ideas for when you start your own.”