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What Silicon Valley can learn from Mother Russia

Venture capitalists deciding whether to fund a new start-up could learn a thing or two from imperialist Russia. A new analysis of relationships among Russian entrepreneurs during the economic boom of the late 1800s and early 1900s reveals that the most successful teams were a mix of outgoing, gregarious networkers and cohesive, insular types.
Those ventures may have been trading in beets, barley and burlap, but they still hold lessons for doing business in the digital era. When investigating a potential start-up, investors should consider the mix of founding members in addition to each individual’s credentials, Brandy Aven, an expert in organizational behavior and theory at Carnegie Mellon University in Pittsburgh, reported June 20 at the International Conference on Network Science.
Entrepreneurship research tends to focus on the characteristics of individuals when examining winning ventures; there’s little research on teams and even less consensus on what makes for success, Aven noted. Members of tight-knit, cohesive teams tend to have a lot of trust and share knowledge and information well. But these dense little groups may have fewer outside contacts and miss opportunities. Teams of brokers — people with wide and varied contacts — have a lot of access to new information and opportunities, but may lack trust and solidarity.

To get at whether all-broker or nonbroker teams fare better, Aven turned to data from late imperialist Russia, when both railroads and population were expanding and there was explosive growth in private enterprise and industrial output. To best tax this burgeoning economy, the czarist state began gathering data on all partnerships and joint-stock companies. Those contracts were later digitized by legal historian Thomas Owen, an independent scholar affiliated with Harvard University. These data included information on industry sector, including mining, manufacturing, finance, railroads, textiles, beets and malt. Contracts also revealed team size and membership, where the firm was located and how much capital it had raised.

Aven and Henning Hillmann of the University of Mannheim in Germany used this data gold mine to trace the relationships among team members for 2,053 Russian firms founded between 1869 and 1913. The teams that raised the most capital turned out to be functionally diverse — some members had connections with a lot of outside people, and some members were from networks that were cohesive and tight-knit.

“All things being equal, if I have two firms to choose between, I should go with the one with more diversity,” said Aven. People tend to think that brokers have all the advantages: They are very good at finding and using new stuff — and at making money, said Ron Burt, an expert in networks and behavioral science at the University of Chicago. “But once you are trying to get an operation running, closed can be better.”

By Rachel Ehrenberg