122 ENTREPRENEURSHIP
tive for obtaining the product or service is not always available. When this is the case,
the customer can encourage and even provide assistance (managerial, technical, and
financial) to the entrepreneur who can satisfy the customer’s needs. Both customer con-
tract and second-source sponsorships generally lead the firm to use parallel competition
as its major wedge.Parent Company Sponsorship. A parent company can help launch a new venture in
four ways. Two of these methods require ongoing parent-company relationships: licens-
ing and joint venturing. The other two methods may continue the parent–new venture
relationship, but are optional: market relinquishment and the spin-off.
Under a licensing agreement, the entrepreneur contracts with the parent company to
produce a product or service or to employ a system or technology. The connection
between the entrepreneur and the parent provides momentum for the new venture, be-
cause the founders have previous organizational experience with the parent as well as
technical experience with the product or technology. The joint venture differs from the
licensing format in two significant ways: (1) Resources are commingled when the joint
venture is formed, and (2) Ownership rights in a joint venture require negotiation.
These differences make the joint venture more difficult to manage, but the benefits of
having two (or more) organizational parents can outweigh the cost.
For example, if we wanted to create an Internet business that used Java software, we
would license the software from Sun Microsystems, Inc.^13 There would be no need for
a joint venture with Sun because all the details of the relationship between the venture
and Sun could be handled in the legal document. However, when the major automobile
companies wanted to create a common application, using Java, for credit for a car loan,
they formed a new company, RouteOne LLC. This company was formed as a joint ven-
ture.^14
Market relinquishment means that the parent company decides to stop serving a mar-
ket or producing a product. Although its motivation can vary, the parent usually makes
such a decision because the firm is not cost-efficient. This is especially likely to be true
if the product volume or market niche is small, for a large company’s overhead can be
high enough to make a small niche unprofitable. However, such a niche may be prof-
itable for a small firm. The most likely candidates to start that small firm are the large
firm’s former managers of that product/market niche. Therefore, when the larger corpo-
ration relinquishes the market, the former managers may have the opportunity to pur-
chase the larger firm’s specialized assets and continue in their jobs, but this time as
owner/managers instead of simply managers, thus providing the new venture with
strong momentum. The change may not be visible to customers and suppliers, but the
new firm can be much more profitable (and perhaps strategically more flexible) when it
does not have to support the corporate bureaucracy.
One of the most common starting points for new venture creation (based on previ-
ously acquired knowledge) is the spin-off. A spin-off is a new firm created by a person
or persons leaving an existing firm and starting a new firm in the same industry. The
most frequent examples of spin-offs today are in high-tech businesses—biotechnology
and life sciences, semiconductors and computers, consulting, law, and medicine (and
medical devices). What do these diverse industries have in common? Both emerging and