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Amphibious Entrepreneurs and the Emergence of Organizational Forms* Walter W. Powell Kurt Sandholtz Stanford University 2012 This work appears in two formats,

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1 Amphibious Entrepreneurs and the Emergence of Organizational Forms* Walter W. Powell Kurt Sandholtz Stanford University 2012 This work appears in two formats, as chapter 13 in The Emergence of Organizations and Markets, J. Padgett and W. Powell, Princeton University Press, 2012, and in a different form in Strategic Entrepreneurship Journal, in press.

2 Motivating questions: What fosters the emergence of and variety among organizational forms? Form: the set of characteristics that identify an organization as both a unique entity and a member in a group of like entities (Romanelli 1991) In what ways might a pragmatist account of entrepreneurship challenge and/or complement prevailing perspectives? Put differently, what arguments are less heroic and instrumental, more boundedly agentic and improvisational, and more theoretically compelling? If we avoid sampling on the dependent variable (looking only at success stories), can we discern which elements combine, in novel ways, to produce “fresh action”? 2

3 Mechanism of novelty #1: Recombination Innovation is an interstitial phenomenon Tools, concepts, and practices from one domain are combined with those of a proximal domain Reassembly of known elements generates many technological and organizational innovations Ample theoretical and empirical support ( Arthur 2009, Nelson and Winter 1982, Schumpeter 1942 ) 3

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6 Mechanism of novelty #2: Transposition Transposition creates new interstices Tools, concepts, and practices from one domain are introduced into settings where they are foreign The assembly of previously unrelated practices can produce social invention Less frequent, and much less likely to be successful But even failures at transposition can generate experiments that have profound tipping effects 6

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10 Amphibious entrepreneurs Simultaneously occupy positions of influence in two distinct domains Act as agents of transposition, carrying practices, assumptions, and decision premises across domains As such, often seen as “trespassers” or “rule creators” (Becker 1963) not boundary-spanners doing import/export not “strategic actors” engaging in arbitrage Play a crucial, albeit unintentional role in the emergence of novel forms 10

11 A pragmatist view of entrepreneurship When established routines prove lacking, people search and experiment ( Dewey, 1938; Becker, 1986; Stark, 2009 ) People have little choice, however, but to draw on their stock of existing knowledge to cope with situations without precedent Existing knowledge and routines in new settings offer the possibility of novel social arrangements 11

12 Empirical setting: the invention of a new model of organizing - - the DBF The “dedicated biotech firm” (DBF) emerged in the early ‘70s Distinct from corporate hierarchies, universities, and government labs, but with practices transposed from each: fundamental scientific research horizontal structure of information flow project-based organization of work porous organizational boundaries strong protection of intellectual capital unprecedented venture financing (quantity and duration) 12

13 “It was like maybe a dam waiting to burst or an egg waiting to hatch, but the fact is, there were a lot of Nobel Prizes in molecular biology, but no practical applications.” -- Ron Cape, Cetus co-founder Fertile ground for studying emergence of new organizational forms 13

14 Political and economic conditions complemented scientific advances Massive political support for university-industry tech transfer, most notably Bayh-Dole Act passed in 1980 Diamond v. Chakrabarty (1980) Supreme Court decision permitted patenting of man-made living organisms ERISA and “Prudent Man” rulings permitted pensions and endowments to be invested in high-risk VC funds But poisedness does not imply predictability, nor dictate potential outcomes 14

15 No evidence of a biotech blueprint borrowed from ICT or physical sciences “We were naïve. I think if we had known everything about all the potential huge competitors, we might not have even done it. One of the benefits we had, I suppose, was some combination of naïveté and ambition and this desire to do something on our own. I think there was a feeling of a green field, and that we were the first…We did not have the business model mapped out, or the ultimate value proposition, which are all things that we do today in doing a startup.” -- Brook Byers, VC & 1 st CEO of Hybritech 15

16 Why we chose to study the first decade 1972 provides a natural starting point Seminal papers on rDNA presented at conferences First bioscience firm founded: Cetus By 1981, legal and political foundation was in place After 1982, serial entrepreneurs began founding second biotech ventures (replication of early models) Limits of archival record: pioneers attract more attention, easier to find contemporary accounts of their founding 16

17 Table 1: DBFs founded in the first 10 years Company Founding Year LocationCurrently Cetus1972 Berkeley, CAAcquired by Chiron (1991) Enzo Biochem1976 New York City, NYIndependent Genentech1976 South San Francisco, CASubsidiary of Roche (2010) Genex1977 Rockville, MDAcquired by Enzon (1991) Biogen1978Zurich, and Cambridge, MAMerged with Idec to form Biogen Idec (2003) Hybritech1978 San Diego, CAAcquired by Eli Lilly (1986) then Beckman Coulter (1995) Centocor1979 Philadelphia, PASubsidiary of Johnson & Johnson (1999) Molecular Genetics1979 Minneapolis, MNAcquired by Eisai (2008) Seragen1979 Hopkinton, MAAcquired by Ligand (1998) Amgen1980 Thousand Oaks, CAIndependent Codon1980 South San Francisco, CAAcquired by Berlex (U.S. arm of Schering AG) (1990) Cytogen1980 Princeton, NJAcquired by EUSA (2008) DNAX1980 Palo Alto, CAAcquired by Schering-Plough (1982) Genetic Systems Corp.1980 Seattle. WAAcquired by Bristol-Meyers (1987) Genetics Institute1980 Boston, MAAcquired by Wyeth (1996), which Pfizer acquired (2009) Chiron1981 Emeryville, CAAcquired by Novartis (2006) Genzyme1981 Boston, MASubsidiary of Sanofi-Aventis (2011) Immunex1981 Seattle, WAAcquired by Amgen (2002) ImmunoGen1981 Cambridge, MAIndependent Integrated Genetics1981 Framingham, MAAcquired by Genzyme (1989) Repligen1981 Cambridge, MAIndependent California Biotechnology1981 Mountain View, CASubsidiary of Johnson & Johnson (2003) SIBIA1981 San Diego, CAAcquired by Merck (1999) Synergen1981 Boulder, COAcquired by Amgen (1994) Xoma1981 Berkeley, CAIndependent ZymoGenetics1981 Seattle, WASubsidiary of Bristol-Meyers Squibb (2010) 17

18 Method: Multi-case comparison Reliance on accounts made in the 1970s and ‘80s by the founders (in newspapers, magazines, TV interviews, annual reports, IPO prospectuses, etc.) 2,000 plus pages of oral histories in UC Berkeley Bancroft Library collection Excellent science journalism and scholarship chronicling the era (Kenney 1986; Hall 1987; Teitelman 1989; Wright 1994; Robbins-Roth 2000; Vettel 2006) Supplemented by our own interviews with founders, board members, and VCs 18

19 Table 2: Summary of data sources Data SourceData Type # of pages analyzed Companies included Regional Oral History Office, UC-Berkeley Bancroft Library First-person accounts of scientists, venture capitalists, executives, and employees of the earliest biotech firms 2,000+ Amgen, Genentech, Centocor, Chiron, Cetus, Hybritech, DNAX Lexis/Nexis U.S. newspaper database, ABI Inform Journalist accounts of the companies and their founders 950+All American Men and Women of Science Brief biographies of notable scientists18N/A Mergent Business Profiles (formerly Moody’s) Annual summaries of corporate information, including characterization of business focus and major agreements with research or commercialization partners 100+ All except Codon, DNAX and Zymogenetics (which were not publicly traded) edgar.gov, Lexis/Nexis SEC database S-1 (IPO prospectus), 10K (financial results), Annual Reports 300+ All except Codon, DNAX and Zymogenetics ISI Web of SciencePublication counts and citation analysisN/AAll Books (industry analyses, founder biographies, etc.) First- and third-person versions of the founding stories of the earliest biotech ventures 1,500+All Primary dataSemi-structured telephone interviews200+Codon, Genex, Genzyme, Immunex, Integrated Genetics, ZymoGenetics 19

20 Sequence of analysis 1.Developed detailed case histories of each company’s founding 2.Distilled salient attributes and practices within each case 3.Cross-case comparison yielded 28 unique DBF practices; consolidated and winnowed to 13 practices that were shared by at least five of the firms 4.Coded all companies for the presence/absence (1/0) of these practices 20

21 Attributes present in more than half the companies AttributeBasis for code = 1Sources No. (%) of firms for which code = 1 1. Research contracts with large corporations Research contracts cited as a critical source of operating revenue. Mergent reports, BioScan directory, SEC filings, newspapers, and books 21 (81%) 2. Noted scientist(s) At least one founder listed in American Men & Women of Science 1 American Men & Women of Science, 23 rd ed., (73%) 3. “Just-off campus” location Original company address located within 10 driving miles of the research institution with which scientific founder(s) associated. Google Maps 18 (69%) 4. Amphibious scientist(s) At least one founder was a company officer and (a) occupied an academic position simultaneously, or (b) returned to full-time academic research later Oral histories, newspapers, books, American Men & Women of Science, and SEC filings. 14 (54%) 21

22 Attributes present in more than a third of the DBFs AttributeBasis for code = 1Sources No. (%) of firms for which code = 1 5. Non-therapeutic focus Company’s espoused strategy centered on diagnostics, vaccines, or other non-therapeutic products. Mergent reports, SEC filings, newspapers, oral histories 11 (42%) 6. Non-traditional initial public offering Firm went public prior to having (a) any products in its pipeline and/or (b) any patented intellectual property. USPTO patent database; SEC filings, Mergent reports, newspapers 11 (42%) 7. Pharma veteran hired to run the company Within the first five years, company hired an experienced pharmaceutical company executive as president or CEO. Newspapers, oral histories, books 10 (38%) 8. All-Star Scientific Advisory Board Firm (a) had a scientific advisory board (SAB) separate from founders, and (b) this SAB included at least one renowned scientist SEC filings, oral histories, newspapers, and books. 9 (35%) 9. Scientist in chargeAcademic scientist served as president or CEO at some point during first three years of company’s existence. SEC filings, Mergent reports, oral histories, newspapers, and books 9 (35%) 22

23 Attributes present in five or more of the DBFs AttributeBasis for code = 1Sources No. (%) of firms for which code = Encouraged scientific publication Firm’s publication record was above the sample median on both quantity and quality measures. ISI Web of Science (accessed electronically, October 2010) 8 (31%) 11. Prior entrepreneurial experience At least one founder had been involved in a prior start-up. Oral histories, SEC filings, newspapers 7 (27%) 12. Growth through acquisition Within the five years following its founding, the firm made at least one acquisition. Mergent reports, newspapers, SEC filings 6 (26%) 13. Venture capitalist served in operational role Venture capitalist (a) occupied executive role, or (b) actively intervened in day-to-day operations. Oral histories, newspapers, books 5 (19%) 23

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25 25 Hierarchical cluster analysis (HCA) 1.Multivariate technique originally used to create phylogenetic trees from taxonomic data; subsequent uses range from medical image analysis to market research 2.Useful for samples where 8 < n < 100 (“tweeners”) 3.Accommodates both a rich reconstruction of each firm’s founding story and a rigorous cross-case analysis of how practices cohered 4.Why not QCA? Binary coding allows crisp-set analysis; “fuzzy logic” QCA not necessary QCA most useful for determining multiple pathways to outcomes; our focus is less on outcomes and more on processes by which practices were combined Deep knowledge of the cases both precedes and follows HCA in the sequence of our analysis

26 26 How we used HCA 1.Input: rectangular matrix of 26 firms x 13 practices 2.Intermediate step: square matrix of mathematical dissimilarity between each pair of biotech firms 3.Output: “Textual dendrogram” showing how clusters of firms begin to cohere around common sets of practices Tree diagram graphically depicting the clusters Measures of cluster adequacy to help determine “where to cut the tree” (i.e., optimal level of homogeneity within and heterogeneity between clusters)

27 27 Textual dendrogram (aka “icicle diagram”) We selected four clusters as the optimal level of agglomeration

28 Figure 3: Selecting the optimal number of clusters (# of attributes shared with firms outside the cluster – # of attributes shared with firms within the cluster) # total shared attributes E-I ratio = (Krackhardt and Stern, 1988) “Elbow” suggests optimal number of clusters. At < 4 clusters, all firms rapidly lump together. Beyond 4 clusters, the degree of internal dissimilarity decreases much more slowly.

29 Seragen California Biotech Molecular Genetics Chiron The Dedicated Biotech Firm DNAX Cetus Immunex Genetics Institute Genentech Synergen Repligen ZymoGenetics Biogen Xoma SIBIA Integrated Genetics ImmunoGen Hybritech Genzyme Genetic Systems Codon Centocor Enzo Biochem Amgen Cytogen Genex Branches of the DBF Tree

30 30 “In business to do science” “In science to do business”

31 Engaged in contract research? Just-off- campus location? Four DBF Clusters Amphibious scientific founder? Cluster 2 Differentiating attributes: VC in operational role Senior pharma exec. recruited as CEO Noted scientists involved as founders or on advisory board, but publishing was not emphasized Resembled spin-offs from academic labs Genzyme, Hybritech, ImmunoGen, Integrated Genetics, SIBIA, Xoma Cluster 3 Differentiating attributes: Focused on diagnostics and other non- therapeutic applications Few research contracts with large corporations (i.e., “little r, big D”) Scientific breakthroughs in-licensed from academy Centocor, Codon, Genetic Systems Cluster 4 Differentiating attributes: Deliberately assembled business venture Repeat entrepreneur among founders Pursued growth by acquisition Located away from campus Amgen, Cytogen, Genex, Enzo N Y Cluster 1 Differentiating attributes: Amphibious scientific founders Emphasized publishing scientific results Not reliant on SAB for research direction Biogen, California Biotech, Cetus, Chiron, DNAX, Genentech, Genetics Institute, Immunex, Molecular Genetics, Repligen, Seragen, Synergen, ZymoGenetics N Y N Y “One reason I called this company Integrated Genetics, instead of something else, was because I wanted a company with the integrated functions of research, development, sales and marketing, and not just R & D." -- David Housman, Integrated Genetics co-founder and professor of biology, MIT, Boston Globe, Dec 20, 1983 “According to a study just completed by the Philadelphia-based Institute for Scientific Information (ISI), Genentech leads the biotechnology industry for the period 1981 through June of 1992 in all three categories measured: greatest number of publications, greatest number of citations, and greatest number of citations per paper.... Genentech also achieved a very high comparative ranking in citations per paper when compared to five of America's best university departments of biological sciences. Genentech was second only to the Massachusetts Institute of Technology's (MIT) Department of Biology of the five schools evaluated” (UCSF, Stanford, UC-Berkeley, and Princeton). -- Genentech press release Oct. 23, 1992 “Much of Amgen’s success in raising capital can be attributed to the fact that every one of our senior managers had worked for large corporations. As a result, we had the organizational discipline of a far bigger company, with salary grades, annual performance reviews, monthly reports, and budgets that were taken seriously. All the things that the start-ups rarely do, we did; to us, it was second nature.” – Gordon Binder, Amgen’s first CFO and second CEO Centocor’s strategy was to be “the bridge from the academic research laboratory to the established health care supplier” (Centocor 1982 Annual Report) “We realized it was a lot cheaper to roam academe and pay a royalty back for what we developed than start our own research facilities.” (Founding CEO Hubert Schoemaker)

32 Engaged in contract research? Just-off- campus location? Four DBF Clusters Amphibious scientific founder? Cluster 2a Differentiating attributes: VC in operational role Senior pharma exec. recruited as CEO Noted scientists involved as founders or on advisory board, but publishing was not emphasized Resembled spin-offs from academic labs Genzyme, Hybritech, ImmunoGen, Integrated Genetics, SIBIA, Xoma Cluster 2b Differentiating attributes: Focused on diagnostics and other non- therapeutic applications Few research contracts with large corporations (i.e., “little r, big D”) Scientific breakthroughs in-licensed from academy Centocor, Codon, Genetic Systems Cluster 2c Differentiating attributes: Deliberately assembled business venture Repeat entrepreneur among founders Pursued growth by acquisition Located away from campus Amgen, Cytogen, Genex, Enzo N Y Cluster 1 Differentiating attributes: Amphibious scientific founders Emphasized publishing scientific results Not reliant on SAB for research direction Biogen, California Biotech, Cetus, Chiron, DNAX, Genentech, Genetics Institute, Immunex, Molecular Genetics, Repligen, Seragen, Synergen, ZymoGenetics N Y N Y

33 Publication quantity and quality by cluster* Cluster 2 Average publications per company Average citations per publication Genzyme, Hybritech, ImmunoGen, Integrated Genetics, SIBIA, Xoma Cluster 3 Average publications per company Average citations per publication Centocor, Codon, Genetic Systems Cluster 4 Average publications per company Average citations per publication Amgen, Cytogen, Genex, Enzo Cluster 1 Average publications per company Average citations per publication Biogen, California Biotech, Cetus, Chiron, DNAX, Genentech, Genetics Institute, Immunex, Molecular Genetics, Repligen, Seragen, Synergen, ZymoGenetics * Publications tracked for 1 st 10 years post-IPO. Citations as of Oct. 2010, self-cites excluded. Self cites disproportionately boost Cluster 1’s citation counts. Source: ISI Web of Science

34 Three recombinatorial DBF variants mixed and matched practices borrowed from past experience One DBF variant was associated with amphibians who naively imported practices of the invisible college into venture-financed startups Trespassing was the mother of invention: new scientific norms and new models of funding improvised on the fly Similar financial events, very different meanings: o Acquisition by big pharma – security for recombination-based firms vs. “end of Camelot” for transposition-based firms o IPO – liquidity event vs. “currency exchange” (scientific papers converted into investment capital; helped retain junior scientists). o Publications – scientific leadership vs. “giving away crown jewels” 34 Consequences (in a narrow sense)

35 Impact of the DBF organizing models Scientific productivity of firms that were “in business to do science” catalyzed changes in the conservative halls of the academy Commercial success of firms that were “in science to do business” has resulted in a reordering of drug discovery in the pharmaceutical industry Result: blurred boundaries between university and commercial science “The life sciences innovation system has ultimately replaced the traditional divide between university science and pharmaceutical innovation with a system that depends on interdependent and collaborative knowledge development spanning both public and private organizations.” ( Cockburn and Stern 2010 ) 35

36 Consequences (a broader view) Recombination and transposition can both give birth to new organizational models Recombinatorial novelty is an interstitial phenomenon (Edelman et al., 2001; Morrill 2008) Transposition represents the creation of new interstices, freighted with generative potential Practices flowing across newly-created interstices catalyzed changes in the conservative halls of the academy and industry, having effects well beyond these organizations, opening up previously unconsidered possibilities in different domains. A relational view of entrepreneurship - - amphibians as unintended enablers of social invention; novelty as a consequence of traffic across social worlds, not individual creativity or agency. 36

37 37 Feedback dynamics transform the academy and industry Academy: Embrace and celebration of academic entrepreneurship; remaking of departments and schools to focus on translational research; adoption of metrics to evince innovativeness; industry jobs no longer frowned on, indeed encouraged. Industry: Demise of insular internal R&D labs in Big Pharma; much greater dependence on external sources of knowledge; creation of corporate nonprofit institutes to do collaborative work; funding of postdocs; encourage publishing Campus-like settings to attract the creative class Entrepreneur-in-residence programs at venture capital firms Both: From discipline and department to projects Not a settlement but a continuing disruption, most notably in careers and rewards Not surprisingly, recombination proved a more robust business model in the short term, but transposition had much more far-reaching long-term consequences.

38 38 Implications In the short run, actors make relations. This is a story of pragmatic search, where the tools of everyday practice were used in unfamiliar circumstances, at a time when there was a green field. In the long run, relations make actors. In those settings where science was repurposed, the tools and new interactions concatenated to form new entities with effects that extended far beyond their initial intentions. Some tools are more malleable than others; some regimes of worth allow more ambiguity; some solutions to problems are less specific to particular contexts. The principles and practices of open science both enroll and mediate, undercutting some of the hierarchy of the corporate world, and challenging some of the privileges formerly reserved for the academic priesthood.


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