For fledgling ventures, part of the growth process is to develop key systems, both external (such as marketing and sales) and internal (such as accounting and human resources). To date, most researchers have assumed that these systems develop uniformly as ventures scale and complete developmental milestones. According to HKUST’s Pavel I. Zhelyazkov and colleagues, however, this assumption is flawed. In a study with critical implications for investors and entrepreneurs, the researchers show how the initial market positioning of entrepreneurial ventures shapes different paths to professionalization.

“In general,” say the authors, “prior work gives the impression that professionalization occurs relatively uniformly across ventures.” In reality, however, ventures do not follow a single professionalization path as they scale up. According to the researchers, initial market positioning holds the key to their heterogeneous growth. “We propose that young ventures advance unevenly,” they explain, “in accordance with their initial market positions.”

First, when a company enters an “unconventional market space,” such as a market involving pioneering services or products, it tends to focus on building external interfaces. The company’s unconventional market position results in a greater demand for engagement work, explain the researchers, which “pull[s] resources and attention away from internal process roles.” Second, “ventures that begin in more established markets face fewer pressures to engage in external engagement,” say the researchers. “As a result, we expect conventional ventures to more extensively elaborate their internal process functions relative to unconventional peers.”

To test their predictions, the authors used a novel longitudinal data set drawn from 3,748 venture capital financed entrepreneurial ventures based in the United States. “We supplement our quantitative analyses with insights from 30 interviews with founders, venture capital investors, and entrepreneurial team members,” the researchers add. The subjects were interviewed on the dynamics of professionalization and internal organizational development in young ventures.

Rigorous analysis of the quantitative data revealed that the firms’ most professionalized function was the external interface of marketing and sales. Combining the quantitative results with the insights gained from the survey supported the researchers’ predictions. “The degree of unconventionality that a venture has staked from the very beginning,” report the authors, “is associated with two different paths: privileging external interfaces (for unconventional companies) versus privileging internal processes (for conventional companies).”

In sum, unconventional ventures prioritize external interfaces due to “the need to evangelize and educate audiences about their novel programs,” say the authors. However, these efforts “crowd out resources and divert managerial attention” from internal processes. The authors also discovered that a firm was less likely to develop external interfaces when its peers were doing so, but the opposite was true for internal processes.

These findings indicate that firms that are positioned in an unconventional market “are better able to justify the relative focus on professionalizing external interface functions and get away with deprioritizing the internal process functions” relative to their more conventional peers. This novel study not only contributes in several ways to research on entrepreneurship and new firm development, as well as organizational theory more broadly, but also offers important implications for practitioners. For example, a key consideration for startups is “the ‘terrain’ of the market landscape on which the jockey and horse position themselves at the gate,” note the authors.