This study investigates how the knowledge capabilities of industry incumbents affect the generation, development, and performance of "spin-outs" (entrepreneurial ventures by ex-employees). Using data from the disk drive industry from 1977 to 1997, the authors test hypotheses that incumbents with strong technological and market pioneering know-how generate fewer spin-outs than firms with strength in only one area. They also find that an incumbent’s capabilities at the time of a spin-out’s founding positively affect the spin-out’s knowledge capabilities and its probability of survival. The study contributes to the understanding of knowledge-based capabilities in new ventures and the resource-based view of the firm, highlighting the importance of organizational capabilities in shaping performance. The findings suggest that the manner in which a firm uses its knowledge is more critical than the abundance of knowledge itself in generating spin-outs. Additionally, inherited knowledge from incumbents positively impacts the spin-out’s knowledge capabilities and survival, with spin-outs showing higher levels of technological and market pioneering know-how over time. The study also finds that spin-outs have a survival advantage over other types of entrants due to their insider knowledge and entrepreneurial origin.This study investigates how the knowledge capabilities of industry incumbents affect the generation, development, and performance of "spin-outs" (entrepreneurial ventures by ex-employees). Using data from the disk drive industry from 1977 to 1997, the authors test hypotheses that incumbents with strong technological and market pioneering know-how generate fewer spin-outs than firms with strength in only one area. They also find that an incumbent’s capabilities at the time of a spin-out’s founding positively affect the spin-out’s knowledge capabilities and its probability of survival. The study contributes to the understanding of knowledge-based capabilities in new ventures and the resource-based view of the firm, highlighting the importance of organizational capabilities in shaping performance. The findings suggest that the manner in which a firm uses its knowledge is more critical than the abundance of knowledge itself in generating spin-outs. Additionally, inherited knowledge from incumbents positively impacts the spin-out’s knowledge capabilities and survival, with spin-outs showing higher levels of technological and market pioneering know-how over time. The study also finds that spin-outs have a survival advantage over other types of entrants due to their insider knowledge and entrepreneurial origin.