Linking vertically related industries: entry by employee spinouts across industry boundaries

This article examines vertical spinouts, defined as new and independent ventures founded by the ex-employees of established firms in either an upstream or a downstream industry. These spinouts represent a type of organizational structure through which knowledge is shared and transferred between vertically related industries. We propose that a key determinant of both their formation and their successful performance is the contextual knowledge that they inherit from their pre-entry experience in a vertically related industry. We examine spinout entry and performance in three vertically related industries over a 10-year period: semiconductors, telecommunications equipment, and telecommunications networks/connectivity. Our results show that vertical spinouts constitute a significant share of startups in these related industries and that they are more likely to survive than other de novo entrants. We discuss the implications of our findings for the literatures on entrepreneurship and industry dynamics.