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E. NON-APPROPRIABILITY

When a venture qualifies for a "yes" answer to each of the preceding four questions, it is analogous to a producing mining claim in the California "gold rush." The venture is so valuable, that in the free enterprise system (generally a market free-for-all), those who are aware of its value begin immediately, to try and "appropriate" the profits for themselves. Miners in the gold rush had at least two sources of appropriation risk: (1) the risk from "claim-jumpers" (those who attempted to decrease or eliminate the size of the pie held by the miner), and (2) the risk from outright thieves (those who did not find the gold, but attempted to shrink the size of the slice kept by the miner).

So it is with venture profits. Once a venture is innovative, valuable, persistent over time, and scarce, it is in danger from the claim jumpers and thieves that lie in wait to appropriate the profits of the venture. Unless the venture can be built to resist the demands of these powerful market actors, the answer to question E: Is it Non-appropriable?" will be NO--meaning don't go on, because you cannot keep your profits. You must first take the steps to keep both the size of the pie, and the size of your slice intact.

Accordingly, the two questions that should be asked about venture appropriability are:

1. Is there slack (waste & inefficiency)?
2. Are there hold-up problems?

Here a few citations from the academic literature on the subject of appropriability may be helpful. The reader is invited to consult the articles referenced for additional insight on this most difficult problem. As previously noted, appropriability arises from at least two crucial circumstances:

1. "slack" (Ghemawat, 1991) which decreases the rents from a strategic position (waste & inefficiency making a smaller pie), and
2. "hold-up" (Williamson, 1985; Ghemawat, 1991) which re-distributes gains among constituencies (decreasing the size of the remaining slice to the company).

Hold-up may be controlled through various social/relationship mechanisms which include the establishment or invocation of norms, negotiation, contracting, and posturing (Ghemawat, 1991).