Exploring toward partners: Entry into new business domains in the U.S. venture capital industry

This paper examines the role of interfirm collaboration in firms' exploration into new business domains. The general tendency of exploration-averseness is due to the lack of knowledge in the unexperienced business domains and resultant domain-specific uncertainty. We suggest that interfirm collaboration, as a venue of information and knowledge transfer among partners, reduces such domain-specific uncertainty. Thus, we predict that firms' exploration will be directed towards the domains in which their collaborators have experience. We test this prediction in the empirical context of the U.S. venture capital firms and find that VC firms' investments into new business domains are sorted into the domains in which their collaborators have already made investments. We further find that this tendency of exploration directed towards partners¿ experience is strengthened under conditions of weak presence of non-collaborators in the domain as well as in the unpopular/unfashionable domains. This paper advances the research on firm search behavior by linking firms' search direction to their profile of interfirm collaboration.