Integration and Cospecialization of Emerging Complementary Technologies by Startups

Abstract

We analyze the market entry problem faced by startups that must integrate their service or product with one or more complementary technologies. The problem is especially challenging when the complementary technologies have uncertain cost reduction potentials. The entrepreneurship literature suggests that startups should pursue focused strategies for various reasons, including bounded rationality and budget constraints, but generally overlooks startups entering markets with complementary technologies. The advice for mature firms investing in complementary technologies is often to diversify investment across multiple complements to manage technological uncertainty. Given competing guidance, we seek to extend the entrepreneurship literature by modeling startups' entry decisions for markets in which complementary technologies exhibit strong learning effects. We find that, consistent with the extant entrepreneurship literature, startups generally achieve higher expected returns by channeling their integration investment to only one complementary technology. However, the mechanisms driving our results differ significantly by hinging on nonlinear feedback effects that occur when firms concentrate integration investment in only one complementary technology. Interestingly, this focused strategy often does not yield the highest market share or the lowest likelihood of bankruptcy. We characterize the situations under which each finding holds and describe the implications of these findings for theory, practice, and policy.

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