THE JOURNAL OF FINANCE • VOL. LX, NO.

2 • APRIL 2005

Entrepreneurial Spawning: Public Corporations

and the Genesis of New Ventures, 1986 to 1999

PAUL GOMPERS, JOSH LERNER, and DAVID SCHARFSTEIN∗

ABSTRACT
We examine two views of the creation of venture-backed start-ups, or “entrepreneurial
spawning.” In one, young firms prepare employees for entrepreneurship, educating
them about the process, and exposing them to relevant networks. In the other, indi-
viduals become entrepreneurs when large bureaucratic employers do not fund their
ideas. Controlling for firm size, patents, and industry, the most prolific spawners
are originally venture-backed companies located in Silicon Valley and Massachusetts.
Undiversified firms spawn more firms. Silicon Valley, Massachusetts, and originally
venture-backed firms typically spawn firms only peripherally related to their core
businesses. Overall, entrepreneurial learning and networks appear important in cre-
ating venture-backed firms.

THERE IS NOW A LARGE AND GROWING LITERATURE analyzing the factors that deter-
mine whether entrepreneurs raise venture capital funding (Hellmann and Puri
(2000), Burton, Sørensen, and Beckman (2002)) and the factors that affect the
terms of this financing (Gompers (1997), Kaplan and Strömberg (2003)). There
is much less understanding of how these venture capital-backed entrepreneurs
come to be entrepreneurs in the first place. In this paper, we try to fill this gap
by examining the factors that lead to the creation of venture capital-backed
entrepreneurs, a process we term “entrepreneurial spawning.”
We examine two views of the spawning process. In one view, young firms
prepare employees to be entrepreneurs by educating them about the en-
trepreneurial process and by exposing them to a network of entrepreneurs
and venture capitalists. The prolific spawning of entrepreneurial firms by
Fairchild Semiconductors and its descendents is a prominent example of “how
entrepreneurial learning and networks may function,” as Saxenian (1994,

∗ Paul Gompers, Josh Lerner, and David Scharfstein are at Harvard University and National
Bureau of Economic Research. Seminar participants at the Bank of Italy, Berkeley, Boston College,
Boston University, Harvard, London Business School, MIT, the NBER, Stanford, the Stockholm In-
stitute for Financial Research, the University of Chicago, and the University of Wisconsin provided
useful comments, as did Rebecca Henderson, Steve Kaplan, Steven Klepper, Antoinette Schoar,
Rob Stambaugh (the editor), Noam Wasserman, and an anonymous referee. We thank Harvard
Business School’s Division of Research and the National Science Foundation for financial support.
We are grateful for the research assistance of Jason Breen, Jon Daniels, Sonia Koshy, Robin Lee,
Jonathan Man, Beatrix Mietke, Oguzhan Ozbas, and Bernard Yoo. We also thank David Witherow
of VentureOne and Tracey Boylston of Thomson Delphion for providing us with the data. All errors
are our own.

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