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Venture Capital Investment Strategy and Portfolio Failure Rate: A Longitudinal Study
Abstract
Given the importance and prevalence of new venture failure, having a better understanding of the factors that affect its occurrence is a paramount research objective. In view of the increased focus on venture capital firms (VCFs) as important stakeholders for entrepreneurial ventures, in this study we examined the relationship between VCFs' investment strategies and their portfolio failure rates. We examined two aspects of a VCF's investment strategy: (1) the extent to which the VCF develops specialized expertise and (2) the extent to which the VCF undertakes investments in cooperation with other investors through syndication. We tested our hypotheses on longitudinal data of the realized strategies of 200 U.S.-based VCFs over a 12-year period. We found that a VCF's specialized development stage expertise had a negative effect on the proportion of defaults in the VCF's portfolio. We also found that the level of syndication positively—rather than negatively—affected the proportion of defaults. We discuss our findings from both theoretical and practical points of view.
... Both theoretical arguments and empirical findings from prior studies are also equivocal. Some research finds that larger syndicates are advantageous by highlighting the collaborative benefits based on the pooled resources and capabilities from multiple members in the syndicate (Giot and Schwienbacher 2007), whereas others find the opposite by focusing on the internal agency problems and coordination challenges associated with a large syndicate (Dimov and De Clercq 2006;Falconieri, Filatotchev, and Tastan 2019). These mixed findings indicate that the relationship between syndicate size and performance may be nonlinear, calling for proper theorization on the underlying mechanisms. ...
... In sum, large VC syndicates produce two simultaneous yet countervailing forces on the performance of the syndicate, suggesting that the relationship is likely to be nonlinear. In particular, although both resource benefits and coordination costs are expected to increase with syndicate size in different ways, prior research has examined only linear relationships and the findings have been mixed at best (Dimov and De Clercq 2006;Falconieri, Filatotchev, and Tastan 2019;Giot and Schwienbacher 2007;Jääskeläinen 2012). ...
... Moreover, empirical findings based on a handful studies have been mixed at best. Some researchers have found that larger syndicate size enhances the successful exit of portfolio firms (Giot and Schwienbacher 2007), whereas others have found that larger syndicate is detrimental to the exit and longterm performance of new ventures (Dimov and De Clercq 2006;Falconieri, Filatotchev, and Tastan 2019). Our study contributes to this literature by clarifying the influence of syndicate size. ...
Venture capital (VC) syndicates pool diverse resources from their members to accomplish the common goal of nurturing new ventures for a successful exit. Although the size of syndicate is a fundamental attribute impacting performance, the influence of syndicate size is less understood in prior studies with mixed findings. To address the gap, we suggest that there is an inverted U relationship between a syndicate size and venture performance. As the number of partners in a VC syndicate increases, a syndicate can provide more heterogeneous resources that can help its portfolio company succeed, but coordination costs increase as well. We thus predict that the net effect combining these two countervailing effects yields an inverse-U relationship between syndicate size and performance. We further examine two boundary conditions under which the nonlinear relationship is likely to manifest. Analyzing 407 investment syndicates formed by 1,106 VC firms for new ventures in the U.S. information and communications technology sector between 1990 and 2006, we find that the relationship between syndicate size and performance is an inverse-U shape. We further find that geographic distance among syndicate partners flattens the inverse-U curve, whereas a strong reputation of the lead VC firms shifts the inverse-U curve to the right.
... However, many BAs choose to diversify their portfolios into new industries despite their lack of knowledge in these new domains. Because of their unfamiliarity with the markets, technologies, and business models, BAs who start to diversify into new industries will face large search costs to make these investments (Dimov and De Clercq, 2006). The role of knowledge-acquisition costs has received much attention in the entrepreneurial finance literature. ...
... For our industry diversification measure, we used a Herfindahl-Hirschman Index (HHI), which has been used extensively in the VC literature to calculate portfolio diversification (Buchner et al., 2017;Dimov and De Clercq, 2006;Yang et al., 2014) and to proxy distant search 4 (Kim et al., 2013;Lin and Patel, 2018). HHI is measured as follows: ...
... Sixth, although HHI is a robust measure of portfolio industry diversification (e.g., Buchner et al., 2017;Dimov and De Clercq, 2006;Yang et al., 2014), it has also been criticized for not capturing the nuances of industry relatedness in a given investment portfolio (Rodan and Galunic, 2004;Wadhwa et al., 2016). To test whether the results for Hypothesis 1 were influenced by our choice of diversification measure, we constructed a new measure that captures how different the industries are from the investor's main industry as well as how different the investments are from each other (Wadhwa et al., 2016). ...
This paper investigates the performance effects of business angel portfolio industry diversification. Using a unique bi-annual panel dataset of 142 members of a professional angel investment platform and their portfolio returns between 2013 and 2017, we consider the costs and benefits of diversifying investments into various industries. Drawing upon theoretical arguments about distant search, we theorize and find a nonlinear (S-shaped) relationship between portfolio industry diversification and performance. Further, we pay specific attention to a proposed overdiversification effect that takes place at high levels of portfolio industry diversification and show that this effect is moderated by individuals' access to industry knowledge through their co-investment networks. For business angels who have a central position within a diverse network of industry specialists, the overdiversification effect is less pronounced.
... Adverse selection (risks from hidden information) and Moral Hazard (risks from hidden actions) are the two prominent risks arising out of the asymmetric information between the VCs and the entrepreneurs (Amit, Brander and Zott, 1998). As such, the VCs are known to deploy several strategies to control such riskswith specialization and deal syndication being the most prominent among these (Dimov and Clercq, 2006). ...
... First, we add to the literature on VC investment strategiesspecialization and syndication. While specialization and syndication have been separately analyzed (Hochberg et al., 2007;Dimov and De Clercq, 2006;, the way their specific intensities and the interactions therein are driven by -the underlying resource structure of the VCs, the need to augment the same and the relative transactions costs of accessing such resources, has not been fully explored. Especially, issues such as 'how the native institutional set-up hinders domain specialization' or 'why is stagespecialization easier to practice than sector-specialization, especially in emerging economies' is not yet well-understood. ...
... In general VCs with a lower level of experience possess less social capital (Sorenson and Stuart, 2001) and are found to syndicate more in order to piggy-back on their more experienced counterparts (Hopp and Rieder, 2006) for the same. By the same rationale, the VCs with a greater level of social capital are also more likely to be approached by other VCs for potential syndication relationships and are thus likely to syndicate to a much higher extent (Dimov and De Clercq, 2006). ...
This paper presents an analysis of syndication and domain specialization strategies pursued by the venture capital (VC) firms in India. Using the theoretical lens of the resource-based view, we explore how three main resource-related attributes: resource structure of the VC firms, resource requirements of the investee ventures and the ease of access to resources, drive the intensities of syndication and specialization for the VC firms under study.
We use the K-means cluster analysis technique, to analyse and profile four distinct VC firm segments – a. Low Syndication and Low Specialization, b. High Syndication and Low Specialization, c. Low Syndication and High Specialization and d. High Syndication and High Specialization. Our study contributes to the extant literature on VC investment strategies, Top Management Teams and fills an important gap on the literature pertaining to VC firms in India.
... In the same vein Dimov and De Clercq (2006) find that VC partners' relevant human capital, with respect to industry or stage of development, decreases the likelihood of venture failure (i.e. bankruptcy or ceased trading). ...
... Finally the third research area pertains to the performance outcomes of syndication (De Clercq and Dimov, 2008;Dimov and De Clercq, 2006), and in this section we will elaborate on our knowledge within these areas of research. ...
... Finally Dimov and De Clercq (2006) find, somewhat counter-intuitively, that syndication may increase, rather than decrease, portfolio failure rates, measured as the proportion of a VC firm's investments that have filed for bankruptcy or simply have ceased trading. Once a portfolio company loses its promise of high returns, it may lack access to the human capital of the investment syndicate, which renders it one of the 'living dead' (Ruhnka et al., 1992). ...
... Second, VCs' expertise can contribute to mitigating information asymmetry and commercializing innovation. VCs' portfolios are much more concentrated than non-VCs' (Chan and Park, 2013;Fulkerson and Riley, 2019); VCs' specialization strategy may be represented by developing specialized expertise (Dimov and De Clercq, 2006). Their specialized expertise allows Frontiers in Psychology 05 frontiersin.org ...
... Their specialized expertise allows Frontiers in Psychology 05 frontiersin.org for a better understanding of the complexities associated with industries (Dimov and De Clercq, 2006). It thus may facilitate learning and assessing entrepreneurial firms' R&D investments in an industry context. ...
Studies show that research and development (R&D) may not always benefit entrepreneurial firms. This paper focuses on the double-edged effect of R&D activities on attracting institutional investment in entrepreneurial firms. Based on a panel dataset of 700 listed entrepreneurial firms in ChiNext, we document: (1) an inverted-U relationship between R&D intensity and future institutional investment, which we argue is evidence that institutional investors are concerned about R&D overinvestment; (2) an inverted-U relationship between R&D capitalization and future institutional investment, which we argue shows suspicion of the institutional investors towards high R&D capitalization. Furthermore, by splitting institutional investors into venture capitals (VCs) and non-venture capitals (non-VCs), we confirm that VCs have higher acceptance of both R&D intensity and capitalization as VCs have more expertise to alleviate a certain level of risks.
... In order to decrease the risks and increase the return rate in investment, the theories and methods for investment are used regularly and widely, which are very important to people and enterprises that could help them make investment choices and decisions more effectively and efficiently. [2] Sometimes, we can consider combining the risk-free assets with the investment group of the risk assets. Specifically, in a specific portfolio, the proportion should also be different due to the difference in the risk of investment varieties. ...
... Thirdly, the Sharpe ratio is essential in asset allocation since it is defined as the unit return on the unit of risk. Moreover, Sharpe ratio, as the slope of the capital allocation line (CAL) (CAL equation is shown below, which represents the Sharpe ratio), (2) it helps determine whether each mutual fund's CAL line is tangent to the efficient frontier. Knowing the tangency leads to the finding of the optimal portfolio. ...
... In line with the benefits of specialization, Bernile, Cumming, & Lyandres (2007), Dimov & De Clercq (2006), Jackson III et al. (2012) as well as Kanniainen & Keuschnigg (2003) argue that managing and assisting investees requires significant resources from the investor. ...
... Hence, the investors in our dataset are geographically homogenous. With respect to the other two dimensions, we build upon the previous literature (Buchner et al., 2017;Cressy et al., 2014;Dimov & De Clercq, 2006;P. Gompers et al., 2009;Jääskeläinen et al., 2006;Yang, Narayanan, & De Carolis, 2014) to define the following measures: macro industry diversification (MacIndDiv) as {1 -Herfindahl index of the different industries represented in the portfolio of investor k}, and stage diversification (StaDiv) as {1 -Herfindahl index of the different initial investment stages represented in the portfolio of investor k}. ...
... En se référant à la théorie des ressources, Barney (1991) explique que l'accumulation de ressources et de compétences difficilement imitables présente un avantage concurrentiel durable. Ainsi, un investisseur spécialisé dans un secteur d'activité donné sera à même de mieux sélectionner les opportunités d'investissement qui s'y présentent (Colombo, Grilli et Piva, 2006), de traiter l'information collectée sur l'entreprise cible dans un laps de temps plus court (Sapienza, Manigart et Vermeir, 1996), de réduire le risque inhérent au financement de l'entreprise (Manigart et al., 2002 ;Dimov et De Clercq, 2006) Gupta et Sapienza, 1992). Comme le soulignent Levitt et March (1988, p. 319), les organisations apprennent lorsqu'elles « encodent les conclusions qu'elles tirent de leur expérience sous forme de routines guidant le comportement ». ...
... Cette attitude spécifique aux investisseurs de la classe 2 peut cependant être accentuée par un effet de taille induit par la gestion de portefeuille plus conséquent, et traduire une volonté d'assurer une meilleure allocation du temps consacré à la gestion des participations, amenant l'investisseur à ne pas s'impliquer dans la gestion postinvestissement de firmes qui ne sont pas à même de produire des taux de rendements finaux attractifs ou des opportunités de sorties intéressantes (Ruhnka, Feldman et Dean, 1992). Dimov et De Clercq (2006) expliquent, quant à eux, que ce manque d'implication peut provenir aussi bien du niveau d'incertitude auquel font face les partenaires financiers pour la sélection de leurs investissements que de leur incapacité à ajouter de la valeur aux firmes financées. ...
... En se référant à la théorie des ressources, Barney (1991) explique que l'accumulation de ressources et de compétences difficilement imitables présente un avantage concurrentiel durable. Ainsi, un investisseur spécialisé dans un secteur d'activité donné sera à même de mieux sélectionner les opportunités d'investissement qui s'y présentent (Colombo, Grilli et Piva, 2006), de traiter l'information collectée sur l'entreprise cible dans un laps de temps plus court (Sapienza, Manigart et Vermeir, 1996), de réduire le risque inhérent au financement de l'entreprise (Manigart et al., 2002 ;Dimov et De Clercq, 2006) Gupta et Sapienza, 1992). Comme le soulignent Levitt et March (1988, p. 319), les organisations apprennent lorsqu'elles « encodent les conclusions qu'elles tirent de leur expérience sous forme de routines guidant le comportement ». ...
... Cette attitude spécifique aux investisseurs de la classe 2 peut cependant être accentuée par un effet de taille induit par la gestion de portefeuille plus conséquent, et traduire une volonté d'assurer une meilleure allocation du temps consacré à la gestion des participations, amenant l'investisseur à ne pas s'impliquer dans la gestion postinvestissement de firmes qui ne sont pas à même de produire des taux de rendements finaux attractifs ou des opportunités de sorties intéressantes (Ruhnka, Feldman et Dean, 1992). Dimov et De Clercq (2006) expliquent, quant à eux, que ce manque d'implication peut provenir aussi bien du niveau d'incertitude auquel font face les partenaires financiers pour la sélection de leurs investissements que de leur incapacité à ajouter de la valeur aux firmes financées. ...
Notre étude cherche à identifier, dans un cadre théorique articulant les approches juridico-financières et cognitives de la gouvernance, le profil-type des investisseurs participant au financement d’un rachat d’entreprise par son propriétaire (owner buy out, OBO). En nous appuyant sur une grille d’analyse regroupant les facteurs explicatifs d’une prise de participation dans le cadre d’un OBO, nous avons procédé à une analyse typologique fondée sur une classification hiérarchique ascendante en deux étapes (two-step cluster analysis).
Nos résultats, obtenus grâce à une enquête administrée auprès d’un échantillon de 42 investisseurs financiers spécialisés opérant en France, ont fait émerger deux classes d’investisseurs présentant des caractéristiques clairement différenciées. La différence entre les deux classes est d’ordre disciplinaire et cognitif et concerne essentiellement la perception qu’ont les investisseurs des enjeux stratégiques d’une opération OBO et la nature des indicateurs conduisant à la maîtrise du couple risque/rentabilité caractérisant un tel montage.
... VC institutions are bounded by their current and past syndication, i.e., joint investments with others. Besides identifying leading VC institutions, the syndication network of VC institutions can be used to predict the alliance's exit [15], quantify the social capital, evaluate the reputation of VC institutions [16], and predict the portfolio failure rate [17]. Unveiling the latent structure of VC syndication networks and investment behaviors is crucial for deepening our understanding of the VC industry and boosting the healthy development of the market and economy. ...
Venture capital (VC) is a form of private equity financing provided by VC institutions to startups with high growth potential due to innovative technology or novel business models but also high risks. To against uncertainties and benefit from mutual complementarity and sharing resources and information, making joint-investments with other VC institutions on the same startup are pervasive, which forms an ever-growing complex syndication network. Attaining objective classifications of VC institutions and revealing the latent structure of joint-investment behaviors between them can deepen our understanding of the VC industry and boost the healthy development of the market and economy. In this work, we devise an iterative Loubar method based on the Lorenz curve to make objective classification of VC institutions automatically, which does not require setting arbitrary thresholds and the number of categories. We further reveal distinct investment behaviors across categories, where the top-ranked group enters more industries and investment stages with a better performance. Through network embedding of joint investment relations, we unveil the existence of possible territories of top-ranked VC institutions, and the hidden structure of relations between VC institutions.
... Third, authors of existing work suggest that the likelihood of new venture failure is reduced when startups obtain venture capital, due to benefits from the knowledge of experienced investors (Dimov and De Clercq, 2006). Similarly, undercapitalised firms have been related to greater chances of failure (Lussier, 1995). ...
Crowdfunding has become a viable alternative to traditional venture capital and business angel funding. However, new ventures are prone to failure despite exceeding their funding goals. Extant literature presents broad knowledge of the antecedents of crowdfunding success but lacks insights into the causes and consequences of entrepreneurial failure, especially failure after massive overfunding via crowdfunding. We use a qualitative narrative approach to investigate how massive overfunding in crowdfunding threatens entrepreneurial activities. We present our findings as a taxonomy of the causes of failure, at the environmental, firm, and individual levels, based on actual cases that failed after receiving massive overfunding. Our framework challenges established thinking on resources and financing as measures of entrepreneurial success by providing insights into the processes leading to failure despite availability of resources. This serves as a reference for backers aiming to safely invest via crowdfunding and for startups to avoid the common pitfalls of overfunding.
... These affect the start-ups through two key mechanisms: firstly, directly through the provision of finance and human capital and, secondly, indirectly by providing access to further financing institutes, thus taking on a mediating role [62]. In addition, the benefits of venture capital financing are multiple, as venture capital firms provide start-ups with human capital with upgraded management and management skills, experience, and expertise [63]. Another major source of funding for start-ups is angel investors, individuals who provide capital but also nonfinancial resources, such as knowledge, experience, mentoring, and networking. ...
Start-up development, success, and sustainability are affected by contextual factors that constitute a regional entrepreneurship ecosystem. Based on previous literature, we propose the conceptual framework Start-Up Ecosystem (StUpEco) that highlights the contextual drivers of a start-up business affected by the entrepreneurial ecosystem entities involved within the quadruple helix model. Furthermore, the proposed framework is tested according to the perceptions of Greek start-uppers through an empirical survey. According to our findings, the start-uppers’ motivation is explained mainly through opportunity rather than necessity. The study identifies government issues, such as tax incentives and acceleration of starting procedures, availability of funding opportunities, connectivity of stakeholders, entrepreneurship education, previous start-up experience, incubator support, as well as mentoring, as the most significant issues affecting the successful development of start-ups.
... The discourse of entrepreneurial activity success has been complemented by the study of business failure of emerging entrepreneurships, leading to interesting conclusions regarding the success and failure determinants of start-ups (Chatterjee and Das, 2016;Dimov and De Clercq, 2006;Pardo and Alfonso, 2017;Song, Podoynitsyna, Van Der Bij, and Halman, 2008). However, the question of what happens to entrepreneurs after business failure still remains. ...
This research aims to estimate the influence of age, entrepreneur household provider status, public financial support, and close business for bankruptcy, on the willingness of the entrepreneur to restart after business failure. The sample include 274 Chilean entrepreneurs who failed in their last entrepreneurial activity and who declare their intention to start again or not. The results suggests that the age and bankruptcy have significant influence, both negative, on the probability of restart-up. This research contributes to identifies the variables that influence the likelihood that an entrepreneur will restart a business after failure. In this vein, the findings may have practical implications on public policy to stimulate the resilience and develop a favorable entrepreneurial ecosystem for serial entrepreneurs.
... Despite these numerous positive results and valuable reasons to syndicate, a few research studies have demonstrated that syndication can also undergo problems: conflicts of interests may appear between investors (Stévenot-Guery, 2007); free riders may lead to underinvestment in start-up support (Dimov and De Clercq, 2006); and excessively large syndications create coordination problems , including conflicts of interest between investors. On the whole, however, the advantages of deal syndication are really greater than their limitations and risks. ...
Driven by technological change, new legal frameworks, growing demand for cash from start-ups, and a growing maturity of market operators, innovation finance professionals have partly modified their practices. On the one hand, traditional financing tools have modernized their organizations and methods, and on the other, new forms of financing have emerged. These numerous evolutions open essential theoretical questions, while questioning the traditional theories of the financing of innovation as well as suggesting new theoretical considerations.The thesis investigates three of these modes of financing. The first, the Social Impact Bonds (otherwise known as Contrats à Impact Social, in France) are a way of financing the non-entrepreneurial social innovation that appeared in 2010 in Great Britain. The second tool analyzed is about equity crowdfunding. Emerging form of financing entrepreneurial projects by the crowd on the internet, it knows a strong growth since a decade. The thesis analyzes the impact of innovation degree on campaigns’ success. The third and last tool mentioned in this thesis is that of the funds of Multi Corporate Venture Capital (MCVC).
... Early-stage investment decisions are inherently risky with extremely high failure rates. (Dimov and De Clercq, 2006). 1 Given the lack of track record and the extreme uncertainty that surrounds entrepreneurship (Stevenson et al. 2020), it is not uncommon for investors to lose the entire sum of their investment when they fund companies at this stage. Thus, an understanding of why some investors are successful at "picking winners" (cf. ...
Investors in early-stage companies want to detect and select high-potential opportunities to maximize their long-term returns. However, in this uncertain and risky investment context, company information is often opaque and decision-making timeframes are compressed. Although there is an abundance of prior work on how investors make structured decisions based on their experience and expertise, there is a very limited understanding of how time-based factors can sway investment decisions. The circadian process is the 24-hour sequence that serves as an individual’s internal timer influencing not only sleep cycles, but also attention and performance on a wide range of cognitive tasks. Understanding how the circadian process impacts early-stage investment holds implications for optimal investment decisions. We build on social cognitive theory and propose that investor-level factors (i.e., chronotypes) and environmental factors (time of the day) interact to influence the amount of information investors search for, and consequently, their investment decisions. We hypothesize and find that investors are influenced by the time of day they make early-stage investment decisions. Lark investors make better investment decisions in the morning, whereas owl investors make better decisions in the evening.
... Although this creates accountability issues vis-à-vis the society writ-large, ex ante determination of firm success seems far from the actual economic events taking place in markets. This is a reality that private venture capitalists have long internalized in their selection processes (Dimov and De Clercq, 2006;Roure and Keeley, 1990). Granted that, attempts at better understanding regularities in performance drivers for KIE firms can still offer valuable insights for researchers, policymakers and managers. ...
Knowledge-intensive entrepreneurship (KIE) is a socioeconomic phenomenon that drives economic aggregate competitiveness and innovative capabilities in economies worldwide. However, while prior literature has significantly advanced in terms of identifying critical elements associated with the success of knowledge-intensive entrepreneurial ventures, we are still far from consensus on how these firms manage knowledge-related assets in order to become competitive and generate such impacts. Our goal in this article is to offer a comprehensive perspective on different facets of knowledge management and their effects on the performance of knowledge-intensive entrepreneurial ventures. Our empirical setting involves SMEs located in the State of São Paulo, Brazil. Primary data for 223 KIE firms was obtained through questionnaires applied to companies which applied to the PIPE Program, a SBIR-like initiative run by the São
Paulo Research Foundation. Econometric results assessed the drivers of competitiveness in terms of firm growth, R&D intensification, and technology transfer. Overall results highlight the complexity involved in reaching a proper predictive framework for KIE results. Notwithstanding, some interesting insights on the moderation effects of Strategic Knowledge Management systems over technical skills could be identified with particular emphasis for the case of academic spin-offs. Ecosystem-level drivers present a good explanation power for technology transfer practices but fall short in providing answers for firm-level growth dynamics. It is also noteworthy that public and private investments in KIE firms are similarly associated with positive impacts – contrary to the view that private investors perform better than governmental sources in picking promising small ventures.
... Following this rationale, policies that focus on fostering KIE activity should accept heterogenous impacts from funding (Eberhart et al., 2017). This is a reality that private venture capitalists have long internalized in their selection processes (Dimov & De Clercq, 2006;Roure & Keeley, 1990). Granted that, attempts at better understanding regularities in performance drivers for KIE firms can still offer valuable insights for researchers, policymakers and managers. ...
... Bien qu'elles datent des années 1980, elles continuent à occuper une place importante dans les recherches entrepreneuriales sur l'échec (Carter et Auken, 2006;Lussier et Halabi, 2010;Lussier et Pfeifer, 2000;Perry, 2001;Pompe et Bilderbeek, 2005;Rauch et Rijsdijk, 2013). Deux catégories de recherche peuvent être distinguées : les recherches mettant en évidence les facteurs discriminant les entrepreneurs et/ou les petites entreprises qui réussissent à celles qui échouent (Lussier et Halabi, 2010;Lussier et Pfeifer, 2000;Pompe et Bilderbeek, 2005;Dennis et Fernald, 2001;Watson, 2003) et les recherches mesurant l'influence marginale d'un certain nombre de facteurs sur les dimensions manifestes de l'échec (Carte et Auken, 2006;Dimov et De Clercq, 2006;Hiemstra et al., 2006;Cook et al., 2012;Perry, 2001;Rauch et Rijsdijk, 2013). ...
L'évolution de la littérature entrepreneuriale sur l'échec laisse apparaître un foisonnement de problématiques, de théories et de méthodes à partir desquelles ce phénomène est appréhendé. Malgré les multiples tentatives d'en proposer une lecture holiste, cette littérature demeure à ce jours fragmentée. Face à ce foisonnement "désorienté", nous proposons dans le cadre de cette communication de faire le point sur l'état des connaissances actuelles sur l'échec entrepreneurial pour mettre en évidence les différentes orientations susceptibles de contribuer à une meilleure compréhension de ce phénomène. A cette fin, une revue de la littérature a été conduite sur la base des articles répertoriés dans 'Business Source Complete' et des articles publiés dans les revues les plus contributives en entrepreneuriat, sur la période janvier 2000-juillet 2017. Cette littérature a été répertoriée et analysée à partir de cinq paramètres d'analyse : la thématique abordée, le niveau d'analyse choisi, le corpus théorique mobilisé, l'approche méthodologique utilisée et le contexte empirique étudié.
... Determining NAVs or IRRs without records like term sheets, capitalization tables, or audited financial statements could be considered highly subjective. As such, survival has been the go-to measure for many studies investigating early stage investment performance (e.g., Dimov & De Clercq, 2006;Manigart et al., 2002). Second, from a methodological point of view, training a robust ML algorithm requires a certain number of cases. ...
Investors increasingly use machine learning (ML) algorithms to support their early stage investment decisions. However, it remains unclear if algorithms can make better investment decisions and if so, why. Building on behavioral decision theory, our study compares the investment returns of an algorithm with those of 255 business angels (BAs) investing via an angel investment platform. We explore the influence of human biases and experience on BAs’ returns and find that investors only outperformed the algorithm when they had extensive investment experience and managed to suppress their cognitive biases. These results offer novel insights into the role of cognitive limitations, experience, and the use of algorithms in early stage investing.
... Research conducted by Popov and Roosenboom (2012) and Hsu (2007) found that collaborating with venture capital has helped companies in developing core technology, finding collaboration partners and improving the legitimacy of the company. On the other hand, authors such as Dimov and de Clercq (2006) and Anokhin, Wincent, and Oghazi (2016) have presented cases where collaboration with vc has adversely affected companies' performance. Ghosh and Nanda (2010), Guler (2007) and Anokhin (2006) studied the causes of the failure and identified that lack of industry-specific specialization, high technology risk, accelerated exit plans or opting for less suitable deals are some of the causes of these failures. ...
Venture Capital (VC) plays an important role in the success of their
portfolio companies. Small- and medium-sized companies often struggle
with the resources required to succeed in the market. vc not only
helps companies with the required financing but also provides the
knowledge, understanding and expertise required to excel in the market.
The study explores vc non-financial value-added contributions in
the commercialization of clean technologies. Cleantech is a term associated
with the companies involved with technologies, products, processes
or services that seek to lower the negative environmental impact
by improving efficiencies, reducing waste, encouraging the use
of sustainable sources and environmental protection. However, the
success of companies operating in this sector, at times, becomes challenging
since these technologies are often disruptive in nature, contest
business-as-usual practices by inducing efficiencies in the current processes
or radically transforming the existing infrastructures. This qualitative
case study is based on five companies operating in the Finnish
clean technology sector. Data is collected in the form of semi-structured
interviews whereas within the case and cross-case analysis approach
is adopted to gain a comprehensive understanding of the studied phenomena.
This study delineated vc’s contribution to technology development,
corporate governance, mentoring & industry expertise, recruitment,
collaboration & internationalization, acquiring additional financing
and certification effect. The findings of this research provide important
insights for the industry specialists, managers as well as the scientists
involved in this field of research.
... Another study (Mauboussin et al., 2018) points out that between 1963 and 1982 life span of more the 250,000 US manufacturing firms that were analysed was roughly 65% for 5 years, and only 20% of the manufacturing firms were present for a decade. Companies of different sizes and industries failing at a high rate is not a new phenomenon, and certainly it is not exclusive for high tech companies and start-ups where the rate of failure is the highest and the life span is the shortest (Luo and Mann, 2011;Dimov and De Clercq, 2006). When observing the failure rate of an industry, it can be of great value to observe the dynamics of failure on a micro level inside of a company, where in certain industries the default rate of projects and large scale corporate initiatives can reach close to 70% (Daniels and La Marsh, 2007). ...
... Although both IPO and buyout strategies are favorable outcomes for VC firms, the most common exit process result for new ventures is failure. Dimov and De Clercq (2006) pour scorn on entrepreneurship literature for focusing disproportionately more attention on success factors and stories rather than investigating the reasons behind the more numerous new venture and VC-backed firm failures. They found a positive correlation between a VC firm's specialized expertise and the reduction of defaults in their venture's portfolio. ...
A framework of the venture capital (VC) process, encompassing the (1) pre-investment phase, (2) management phase, (3) exit phase, and the interrelationships between them was developed into a cycle using the exit phase in a feedback loop. The review of 166 articles from top-tier, Grade 4, journals suggests that most prominent Entrepreneurial & Management (E&M) literature assesses the VC operating environment, and the managerial expertise and skills of both VC firms and entrepreneurs independently. Finance Literature, however, centers its independent analysis on contracts, risk, returns and VC governance. A network analysis follows comparing E&M and Finance literature VC research agendas by country, author, institution, and journal. Finally, the manuscript identifies trends and future areas for VC cycle research by comparing and exploring the current state and progress of the VC cycle in Entrepreneurial literature.
... Another study (Mauboussin et al., 2017) points out that, between 1963 and 1982, life span of more than 250,000 analysed US manufacturing firms was 5 years for roughly 65 % of them, and for 20 % of them was 10 years. Companies failing at a high rate is not a new phenomenon, and certainly it is not exclusive for high tech companies and start-ups where the rate of failure is the highest (Dimov and De Clercq, 2006;Luo and Mann, 2011). It is important to observe the failure rate on a micro level inside of a company as well, where in certain industries the failure rate of projects can be close to 70 % (Daniels and La Marsh, 2007). ...
The goal of this paper is to examine the current state of research on optimal approaches to making effective models that simulate the behaviour of the enterprise as a whole, for the risk assessment purposes with an emphasis on stress testing. Stress testing can potently aid in the development of highly uncertain policies like the shift to the circular economy, or other policies that have a high impact in the areas of sustainable development. The paper will examine this problem through the scope of system dynamics modelling, however, the goal of the paper is to examine the right heuristics where this kind of modelling can be done with different approaches. When proposing a novel concept like the shift to a more circular economy, a variety of economic and other benefits could be anticipated in the long run, but the potential for large losses in the short term should not be neglected. The paper explores novelty on two levels, in proposing the model for this use, as well as advocating for stress testing approach that has been neglected in use and research outside of the financial industry.
... The two concepts of status and reputation are often used interchangeably despite the fact that they differ along several dimensions (Sorenson, 2014). Status can be seen as an externally assigned measure of social position, and is the consequence of the pattern of social relationships (Patterson et al., 2014;Dimov and De Clercq, 2006). As such, the term "status" is highly intertwined with hierarchical position, an ordering system that is somewhat stable, and a measure of social standing (Podolny, 2010;Patterson et al., 2014). ...
... Giot and Schwienbacher 2007also find that syndication size positively influences the likelihood of success for a startup. However, some researchers argue that these findings are the result of a free-rider problem, in which some investors reduce their efforts and rely on other syndicate co-investors (Dimov and De Clercq 2006). Wright and Lockett (2003) contend that the result is due to coordination difficulties in large syndications, or conflicts of interest between syndicate members. ...
This paper investigates the degree to which incumbent information technology (IT) companies efficiently capture information from venture capital (VC) networks. It focuses particularly on the extent to which intangible or financial resources increase the number of relationships with venture capitalists and influence the central position of IT companies within VC networks. Generalized-method-of-moments (GMM) methodology is used herein to analyze the revision of decision-making processes concerning corporate venture capital (CVC) investments conducted by IT companies. To date, the sample used in this study is the first to exclusively focus on CVC investment decisions following the burst of the IT bubble in 2001. The CVC practices of 184 IT companies over the period between 2004 and 2016 are studied, revealing that the R&D investments made by these companies, along with the amount of CVC investments made, strongly impact the number of relationships they forge and maintain and the centrality of their position in VC networks.
... Not surprisingly, in this increasingly professional society, resources like information and knowledge that backed firms need vary drastically across industries. When the industrial distance between VC and its backed firm is smaller, VC reputation and expertise have stronger pertinence and applicability for the firm; furthermore, the resources brought by VC reputation are easier to absorb and to be mobilized on the firm's behalf (Dimov and Clercq 2006;Hsu 2006). As it turns out, a small industrial distance, as a representation of knowledge similarity, will increase the blessing effect, and meanwhile, impair the curse effect. ...
This study investigates whether venture capital reputation is a blessing or a curse for entrepreneurial firm innovation by using data from 1553 observations of venture capital investments on entrepreneurial firms in China’s New Over-the-Counter (OTC) Market. Advantages that venture capital brings to entrepreneurial firms have been widely acknowledged in extant research. However, our research emphasizes the potential resource outflows rather than inflows when firms are embedded in a shared reputable venture capital, and finds that the curse effect of venture capital reputation on entrepreneurial firms is manifested. Furthermore, we develop the concept of venture capital “intra-industrial reputation” and “extra-industrial reputation” to give a contingent answer to the “blessing or curse” question. The conclusions are drawn indicating that the curse effect is contingent on industrial distance. Venture capital intra-industrial reputation is positively linked to entrepreneurial firm innovation, whereas extra-industrial reputation exerts a strong negative impact, which is responsible for the curse effect.
... Overall, the partner-specific risks of syndication become greater when VCs invest in younger ventures because of the potential conflicts arising from investing in highly uncertain ventures. Therefore, coordination mechanisms and trust developed through prior co-investments are more salient in terms of reducing the overall uncertainty, avoiding conflicts and partner opportunism associated with the information asymmetries typical of a younger venture (Dimov & De Clercq, 2006;Sorenson & Stuart, 2001). ...
Research Summary This study provides a reconciliation of previous findings regarding the effects of prior co‐investments among venture capitalists (VCs) and the performance of VC syndicates. We propose a relational agency framework outlining cost–benefit trade‐offs associated with prior co‐investments between VCs. A longitudinal study of 4,550 U.S. ventures receiving syndicated investments from 1980 to 2017 shows that there exists an inverted U‐shaped relationship between the number of prior co‐investments and a venture's likelihood of a successful exit through initial public offering or merger and acquisition. We further find that the relationship between prior co‐investments and syndicate performance is moderated by venture‐ and partner‐specific risks. Managerial Summary We study the effects of prior co‐investments among venture capital (VC) firms on the performance of VC syndicates. We propose a framework outlining cost–benefit trade‐offs associated with prior co‐investments between VCs. A study of 4,550 U.S. ventures receiving syndicated investments shows that there exists an inverted U‐shaped relationship between the number of prior co‐investments and a venture's likelihood of a successful exit through initial public offering or merger and acquisition. Our findings hold implications for managers considering whom to partner with for future co‐investments and the conditions under which prior co‐investments are more or less likely to be beneficial.
... Overall, the partner-specific risks of syndication become greater when VCs invest in younger ventures because of the potential conflicts arising from investing in highly uncertain ventures. Therefore, coordination mechanisms and trust developed through prior co-investments are more salient in terms of reducing the overall uncertainty, avoiding conflicts and partner opportunism associated with the information asymmetries typical of a younger venture (Dimov & De Clercq, 2006;Sorenson & Stuart, 2001). ...
This study provides a reconciliation of previous findings regarding the effects of prior co‐investments among venture capitalists (VCs) and the performance of VC syndicates. We propose a relational agency framework outlining cost‐benefit trade‐offs associated with prior co‐investments between VCs. A longitudinal study of 4,550 U.S. ventures receiving syndicated investments from 1980 to 2017 shows that there exists an inverted U‐shaped relationship between the number of prior co‐investments and a venture's likelihood of a successful exit through initial public offering or merger and acquisition. We further find that the relationship between prior co‐investments and syndicate performance is moderated by venture‐specific and partner‐specific risks.
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... An ample body of research suggests organisational learning may be affected by experience of failure (Khanna et al., 2016;Madsen and Desai, 2010). VCFs are notorious for the high failure rate of their PFCs (Dimov and De Clercq, 2006); thus, we introduced VCF Failure (ln), a natural logarithm of the number of unsuccessful exits (i.e. exits with a valuation below 25%) that a VCF experienced before investing in a focal PFC. ...
This article examines the extent to which venture capital firms (VCFs) learn from successful experience and when such experience influences the likelihood of future successful exits. To test our theory, we drew upon a novel dataset of young French VCFs and their investments. Results indicate that VCFs learn from success, but only up to a certain level of after which the benefits decline. We also found an adverse effect on future performance from the first VCF experience, if it was successful. Refuting our prediction, VCFs appear to learn better from significant, rather than small, successes. Finally, our results reveal that VCFs learn most from more recent success but that extrapolating lessons from more dated experience may harm future performance. Our study contributes to the venture capital and organisational learning literature with practical implications for venture capitalists and entrepreneurs.
... As financial intermediaries, Venture Capitalists (VCs) are focused on funding firms in emerging hightechnology realmswith nascent technologies, domains, business models and intangible assets (Gompers and Lerner, 2004), being the mainstay of these investments. The resultant information asymmetry, warrants the usage of specialized risk assessment and management strategieswith domain specialization and deal syndication being the most prominent (Dimov and De Clercq, 2006). In this paper, we focus on the specialization and syndication strategies pursued by VCs in India and how these vary by distinct VC firm type. ...
Venture Capitalists are financial intermediaries focused on funding projects in emerging high-technology realms. Given the high level of information asymmetry, negotiating the underlying adverse selection and agency risks becomes an important challenge for the investing VCs. In this paper, we review two specific risk management strategies viz. Deal Syndication and Domain Specialization with respect their explicit role in adjudging and managing the overall magnitude of information asymmetry risks. These are analyzed for three distinct categories of VC firms as classified by their-funding stage focus (early vs. late), ownership type (Foreign vs. Domestic) and the human capital composition of the core VC team (Entrepreneurial vs. Investor VC firms). The analysis is based on both secondary data and primary data for active 72 VC firms in India. Syndication is moderately important for Entrepreneurial VC firms but not at all important for Early-stage focused and Foreign VC firms. This finding is distinctly different from what has been conventionally observed in the literature. Among the various arenas of domain specialization, high-technology focus is important for all segments of VC firms. In the context of investment-stage focus, Foreign VC firms exhibit growth-stage specialization; while Entrepreneurial VC firms concentrate on earlier investment stages.
... However, the typical measurement of the presumed benefits of accumulated expertise has taken place at one moment in time (e.g., at the time of the IPO). Other research has emphasized that VC owners specialize in bounded environmental contexts (e.g., the Internet sector in Pollock, Fund, & Baker, 2009), with mixed results on the performance benefits of specialized expertise (Dimov & De Clercq, 2006;Dimov & Shepherd, 2005). 4 While each subfield focuses on its own variables of research interest, they typically share an interest in highlighting the advantage of fit, and define advantage either in terms of similarity or complementarity (cf., Wang & Zajac, 2007). ...
... However, the typical measurement of the presumed benefits of accumulated expertise has taken place at one moment in time (e.g., at the time of the IPO). Other research has emphasized that VC owners specialize in bounded environmental contexts (e.g., the Internet sector in Pollock, Fund, & Baker, 2009), with mixed results on the performance benefits of specialized expertise (Dimov & De Clercq, 2006;Dimov & Shepherd, 2005). 4 While each subfield focuses on its own variables of research interest, they typically share an interest in highlighting the advantage of fit, and define advantage either in terms of similarity or complementarity (cf., Wang & Zajac, 2007). ...
... The right future engagements can not only boost the VC firm's performance, but also offer the start-up access to new information that can bolster the value-add effect. Having more than one VC firm involved in the same financing round, is on the other hand no guarantee for better value-adding, instead it opens up the avenue for possible free-riding problems (Dimov / De Clercq 2006). ...
Entering status dominated environments as new entrant is a difficult endeavor. Accumulated advantages go along with the tendency of incumbents to succeed, whereas entrants are likely to lose (Matthew effect). This study examines what combination of deal resources accumulated by venture capital partners lead to high deal performance in order to analyze if new entrants can nonetheless overcome the burden of being new, i. e. having a low status position and only weak ties with current actors in status dominated environments. Our configurational analysis of 333 venture capital investments reveals opportunities for entrants to succeed that go beyond joining forces with established actors. Our findings contribute to research on interorganizational network formation and the strategic actions new entrants on the VC market may take to be successful. Furthermore, the study sheds light on the effect of syndicated opposed to single venture capitalist deals and suggests that successful syndicates require a certain degree of homogeneity among the investors.
... From the professional point of view of investment in the industry, Gupta, Sapienza (1992) and Franke (2006) found different industries will have different effects on the investment performance; Dimov and Clercq (2006) found that the professional degree of venture capital investment industry is set, the higher the success rate of investment. At the same time, we found that decision making of venture capital institutions in the choice of the project is bound to have an advance understanding about representative index of the industry characteristics, such as enterprises' R&D expenditure and the proportion of R&D personnel through literature, some venture capitalists are preference for invest more research personnel, high technical R&D costs, some tend to invest more core technological products, even much literature study the relationship of high risk industry between venture investment, innovation enterprises and high-tech enterprises, for this kind of high risk industry, when there is a high risk, there is a high yield. ...
... An ample body of research suggests organisational learning may be affected by experience of failure (Khanna et al., 2016;Madsen and Desai, 2010). VCFs are notorious for the high failure rate of their PFCs (Dimov and De Clercq, 2006); thus, we introduced VCF Failure (ln), a natural logarithm of the number of unsuccessful exits (i.e. exits with a valuation below 25%) that a VCF experienced before investing in a focal PFC. ...
Cleantech ventures working on radical hardware-, material-, and chemical-based innovations have a particularly high potential to disrupt currently unsustainable production and consumption systems. Such ventures, however, typically have long development times with high risk and high capital demand, and consequently have difficulties securing sufficient capital to bridge the “valley of death” between basic research and commercialization. Extant research has explored a great variety of success factors for cleantech ventures, but have not provided sufficient resolution on levers for action that can positively influence the investor perceived risk return ratio when considering investments in early-stage, radical cleantech ventures. With a mixed-methods approach, we analyze investment decisions from 45 of the most prominent, early-stage cleantech investors and venture-investing experts in the EU and the USA. Using ex-post analysis of past investment decisions, we analyzed factors that have previously influenced investor decision making, which we then used to extract 27 levers that can either derisk or increase the return of investments in radical, cleantech ventures. We further validated these 27 levers by presenting them to investors, linked to an ex-ante, standardized investment scenario. This allowed us to gather the first data on the relative effectiveness of these levers. The article's contribution to theory is the development of a multi-actor confluence framework – the “who, what, and how” of influencing investor perceived risk-return ratio for early-stage, radical cleantech investments. The main contribution to practice is a “hands-on overview” for implementing these levers to accelerate capital deployment for cleantech innovation.
How does sentiment in a pitch affect an entrepreneur’s fundraising outcomes? Although research suggests that negativity in entrepreneurial “pitches” to investors adversely impacts resource acquisition, there is a lack of empirical research showing whether, and to what extent, this is true. We study over 30,000 entrepreneurial loan requests from one of the largest loan marketplaces to understand how the sentiment in text-only pitches to investors affects fundraising. In contrast to prior literature, we find that negatively-worded pitches are funded faster than positively-worded ones. We also find that negatively-worded pitches result in lower interest rates to entrepreneurs. Finally, we find that negatively-worded loans default less, suggesting that the benefits of negativity are not one-sided but two-sided: negativity helps both resource seekers and resource providers. Collectively, the results from our study reveal how negativity can be beneficial in impression management and offer fresh insights for the psychological foundations of entrepreneurship.
I empirically test and find evidence that venture capital industry experience is more informative and impactful in venture capital investment when measured at the low non-aggregated industry level. Additional evidence shows that venture capital investments made outside of a venture capitalist's preferred investment industry suffer from significant decreases in exit success likelihood. This effect becomes stronger the more distant the investment industry is from the venture capitalist's preferred investment industry.
Despite the increased attention dedicated to research on the antecedents and determinants of new venture survival in entrepreneurship, defining and capturing survival as an outcome represents a challenge in quantitative studies. This paper creates awareness for ventures being inactive while still classified as surviving based on the data available. We describe this as the 'living dead' phenomenon, arguing that it yields potential effects on the empirical results of survival studies. Based on a systematic literature review, we find that this issue of inactivity has not been sufficiently considered in previous new venture survival studies. Based on a sample of 501 New Technology-Based Firms, we empirically illustrate that the classification of living dead ventures into either survived or failed can impact the factors determining survival. On this basis, we contribute to an understanding of the issue by defining the 'living dead' phenomenon and by proposing recommendations for research practice to solve this issue in survival studies, taking the data source, the period under investigation and the sample size into account.
Este artículo investiga los factores que influyen en la probabilidad de volver a emprender luego del fracaso empresarial, entre estos, los factores sociodemográficos y los económicos. En particular, se examina el efecto de la edad, el nivel educacional, el rol proveedor del emprendedor en la familia, la cobertura de los instrumentos y los servicios públicos para el emprendimiento, así como los motivos que llevan al emprendedor al cierre del negocio, sobre la disposición del emprendedor fallido a iniciar una nueva empresa. Se utiliza una muestra de 274 emprendedores fallidos de Chile, el país con la mayor tasa de actividad emprendedora (TEA) en el mundo, según el reporte del GEM 2019/2020. Los resultados de este estudio señalan que las variables principales tienen una influencia negativa en la probabilidad de reingresar al emprendimiento luego del fracaso empresarial, pero solo resultan significativas la edad, la cobertura regional de los servicios técnicos para el emprendimiento, la quiebra, la preferencia por el trabajo asalariado y el desempleo a nivel regional. Esta investigación contribuye a ampliar la evidencia empírica respecto a los factores que influyen sobre los emprendedores en serie y de segunda oportunidad, más allá de los aspectos relativos a la intención emprendedora y los elementos del comportamiento del emprendedor. Este trabajo entrega conclusiones relevantes orientadas al diseño de políticas públicas e instrumentos de fomento para los emprendedores que están dispuestos a crear un nuevo negocio luego del fracaso empresarial.
University spin-offs are important mechanisms for creating and capturing value from scientific inventions. Academic scientists are uniquely positioned to shape such opportunities long before the university spin-off is founded. To better understand how science-based university spin-offs can be endowed for success, the pre-formation stage of 30 ventures co-founded over a 40 year period by a star-scientist-entrepreneur is analysed by matching his 363 co-invented US patents granted to 1476 co-authored publications and these 30 ventures. Employing the extended case method, including the analysis of extensive archival data, iterative interviews, and this unique, longitudinal, multi-level dataset, existing dynamic capabilities theory is confronted and extended with evidence as to how a star-scientist-entrepreneur senses and shapes and seizes opportunities to endow university spin-offs pre-formation. A process model is developed depicting four pre-formation entrepreneurial capabilities with which these science-based university spin-offs are endowed for success. Recommendations are made for scientist-entrepreneurs, investors, university leadership, and for innovation policymakers.
European venture capital (VC) funds have historically underperformed their US counterparts. This has resulted in reduced investment into European VC by the traditional institutional investors. This book investigates the factors that give rise to the performance difference. It is based on the author’s research at the Adam Smith Business School, University of Glasgow which involved a qualitative study of some 64 VC firms in the UK, continental Europe and the US, supplemented by 40 interviews with other stakeholders, including limited partner investors, corporate venturers, entrepreneurs and advisors.
Readers will gain an in-depth understanding of the various structural, operational and wider environmental factors that impact on the performance difference between UK/European and US VC funds. The study is unique in that it provides, for the first time, a holistic and extensive analysis of the entire investment process from sourcing deals to exiting deals specifically contrasting Europe and the US in terms of the variables pertaining to the investment process and the impact on the fund performance. Factors impacting on the performance differential are structural, resulting from characteristics of the funds themselves, operational such as the investment practices of the VC firms which manage the funds and environmental such as culture and attitude to risk and the wider ecosystem in which the funds operate. These factors are set out clearly for the reader. The characteristics of the better performing funds in Europe and the US are also investigated.
The book is aimed at academics who are researching venture capital fund performance and investment practices and also at practitioners, advisors and policymakers who want to learn about best VC investment practices. Whilst the book is focused on European and US VC investing, the best practices are also pertinent for VC firms and funds setting up in other geographies, particularly in emerging markets. To this end, best practice guidelines based on the research are included.
Organizational theory recognizes reputation as a central element to understanding the firm. Examining investor valuations of 1,676 initial public offerings (IPOs) in the United States from 1990 to 2011, we find that reputation transfer through an association of an IPO firm with a venture capital (VC) firm represents a resource whose value can increase/decrease over time depending on investors’ valuations of prior IPOs funded by a VC firm. We conclude that the impact of reputation transfer through association is not unidirectional but, instead, is to be viewed in the context of prior reputational development of organizations the focal firm is associated with. Furthermore, we find that three “transfer enhancers” can improve the impact of VC firm reputation transfer on IPO valuations, including the VC firm’s past experience intensity, the diversity of IPO experiences, and the number of prior syndicated IPOs involving the VC firm as a lead investor.
The syndicated investment strategy of venture capital has merits such as reduction of investment risk, efficient management of
investment resources, and information asymmetry mitigation. This study analyzes the investment strategy and network of venture capital
by collecting and analyzing investment information of Korean venture capital on Korean start-ups for three years from 2014 to 2016. We
could not find statistically significant association with the choice of syndicated investment of the stage of start-ups, the venture capital
expertise (investment concentration), internal competence (number of workforce and professional manpower), and the breadth of investment
network. As a result of this study, the factors that determine venture capital 's syndicated investment in Korea are only the financial
factors such as the size of the investment amount and the size of the fund besides the business field of the invested company. The
results suggest that the majority of venture capital firms in Korea may not customize their investment strategies in terms of their
expertise or inherent business risks of invested companies.
Dieser Beitrag beschäftigt sich mit den Rahmenbedingungen für Unternehmertum innerhalb des deutschen Gesundheitssystems und erfolgversprechenden Strategien von Entrepreneuren. Anhand eines Fallbeispiels wird gezeigt, wie sich serielles Unternehmertum in Form des Aufbaus und der Skalierung von innovativen populationsbezogenen Versorgungsmodellen gestalten kann. Im Zuge der betrachteten unternehmerischen Tätigkeiten kommt es zur Bildung und Weiterentwicklung von Gesundheitsnetzwerken bis hin zu Accountable-Care-Organisationen. Dabei werden die für den deutschen Gesundheitssektor spezifischen Herausforderungen für Entrepreneure deutlich, die Implikationen für Entrepreneure und politische Entscheider aufwerfen.
Using data on corporate venture capital (CVC) investments by 284 US industrial companies between 2001 and 2013, we analyze the CVC expenditures of each based on their prior position in the syndication network and their financial resources. The generalized-method-of-moments models used show that the annual amount of CVC expenditures of these companies depends on the prior number of co-financing relations they have and their cash flows in the previous year, as well as their prior investments. However, the previous centrality of the industrial companies in syndication networks is insignificant, meaning that prior centrality in the VC network does not guide their current CVC expenditures. This result goes against social network theory, which stipulates that the network members strive to improve their centrality in the network they belong.
While venture capitalists are often considered to be expert decision makers, inaccuracies in their judgment are widely evident. To be successful and profitable on a continuing basis, VCs need to be able to cut their losses in a timely manner and get out of investments that are not materializing as expected. This study examines VC investment patterns among 330 early-stage US ventures. Patterns of escalation—reinvestment in ventures headed towards failure—were found among 66 funded ventures. The number of VCs participating in the first round of funding, and any increase or decrease in the number of VCs investing in a venture over time, as well as the timing of first round funding all had a significant impact on the tendency to engage in escalation of commitment. Theoretical implications are discussed.
Much of the prior research on interorganizational learning has focused on the role of absorptive capacity, a firm's ability to value, assimilate, and utilize new external knowledge. However, this definition of the construct suggests that a firm has an equal capacity to learn from all other organizations. We reconceptualize the Jinn-level construct absorptive capacity as a learning dyad-level construct, relative absorptive capacity. One firm's ability to learn from another firm is argued to depend on the similarity of both firms' (1) knowledge bases, (2) organizational structures and compensation policies, and (3) dominant logics. We then test the model using a sample of pharmaceutical-biotechnology RED alliances. As predicted, the similarity of the partners' basic knowledge, lower management formalization, research centralization, compensation practices, and research communities were positively related to interorganizational learning. The relative absorptive capacity measures are also shown to have greater explanatory power than the established measure of absorptive capacity, R&D spending. (C) 1998 John Wiley & Sons, Ltd.
Although failure in entrepreneurship is pervasive, theory often reflects an equally pervasive antifailure bias. Here, I use real options reasoning to develop a more balanced perspective on the role of entrepreneurial failure in wealth creation, which emphasizes managing uncertainty by pursuing high-variance outcomes but investing only if conditions are favorable. This can increase profit potential while containing costs. I also offer propositions that suggest how gains from entrepreneurship may be maximized and losses mitigated.
This study examined the impact of institutional linkages on the failure of child care service organizations in Metropolitan Toronto, Canada, between 1971 and 1987. A dynamic analysis shows that organizations with institutional linkages exhibited a significant survival advantage that increased with the intensity of competition. The effectiveness of institutional linkages in contributing to survival also depended on the characteristics of organizations that established ties and the external legitimacy of the ties themselves. Institutional linkages also had a significant moderating influence on the relationship between organizational transformation and the risk of failure. The findings of this study suggest that efforts to establish the prepotency of institutional versus ecological explanations of organizational survival should not preclude inquiry into the causal consistencies and interactions between these theories' predictions.
Previous research has shown that Ss taking part in either physical or cognitive tasks alone and/or in groups put out less effort in groups, an effect called "social loafing." This loafing can be eliminated by telling Ss that their individual outputs can be identified even when they perform in groups. In 4 experiments with 304 undergraduates, the authors demonstrated that loafing can also be reduced either by increasing the difficulty (challenge) of the task or by giving each S a different task to perform. Despite the fact that these Ss felt as unidentifiable as Ss working on the typical loafing task, they performed as well as Ss with identifiable outputs. It is concluded that when Ss perceive that they can make a unique contribution to a group effort, social loafing is reduced even if individual contributions remain unidentifiable. (16 ref) (PsycINFO Database Record (c) 2012 APA, all rights reserved)
In this paper, we argue that the ability of a firm to recognize the value of new, external information, assimilate it, and apply it to commercial ends is critical to its innovative capabilities. We label this capability a firm's absorptive capacity and suggest that it is largely a function of the firm's level of prior related knowledge. The discussion focuses first on the cognitive basis for an individual's absorptive capacity including, in particular, prior related knowledge and diversity of background. We then characterize the factors that influence absorptive capacity at the organizational level, how an organization's absorptive capacity differs from that of its individual members, and the role of diversity of expertise within an organization. We argue that the development of absorptive capacity, and, in turn, innovative performance are history- or path-dependent and argue how lack of investment in an area of expertise early on may foreclose the future development of a technical capability in that area. We formulate a model of firm investment in research and development (R&D), in which R&D contributes to a firm's absorptive capacity, and test predictions relating a firm's investment in R&D to the knowledge underlying technical change within an industry. Discussion focuses on the implications of absorptive capacity for the analysis of other related innovative activities, including basic research, the adoption and diffusion of innovations, and decisions to participate in cooperative R&D ventures.
This paper investigates how a variety of conditions in place at the time of first-round funding can frame a new venture team's (NVT) perception of the fairness of its relations with its venture capitalists (VC). It assumes that a team's perception of whether its treatment by its VC is procedurally just will affect a team's receptivity to VC advice. An analysis of data from 116 firms funded by venture capitalists indicated that some governance mechanisms and the background of the venture team significantly framed perceptions of fairness in their relationship. A major finding of this research is that the indiscriminant use of contractual covenants can adversely frame a NVT's perception of how fairly it is treated by its VC, which ultimately could inhibit the former's receptivity to advice. Directions for future research are indicated.
The objective of this study is to identify realized strategies of venture capital firms when undertaking portfolio investments. We analysed data for the period 1994 through 1997 on a sample of Finnish venture capital firms representing virtually the entire population of the Finnish venture capital industry. The results indicate that, over time, the venture capital firms specialized the industry scope of their portfolio. Further, the venture capital firms consistently diversified geographically throughout the 4 year period of the study, and they diversified their portfolio in terms of stage-of-growth by investing in increasingly later stage companies through the first years of the study, before entering a period of equilibrium in which this degree of stage-of-growth diversification held relatively constant. Finally, the importance of accumulated experience was illustrated by the finding that less experienced venture capital firms showed a time lag in these investment patterns compared to more experienced firms.
This paper investigates how the interorganizational networks of young companies affect their ability to acquire the resources necessary for survival and growth. We propose that, faced with great uncertainty about the quality of young companies, third parties rely on the prominence of the affiliates of those companies to make judgments about their quality and that young companies "endorsed" by prominent exchange partners will perform better than otherwise comparable ventures that lack prominent associates. Results of an empirical examination of the rate of initial public offering (IPO) and the market capitalization at IPO of the members of a large sample of venture-capital-backed biotechnology firms show that privately held biotech firms with prominent strategic alliance partners and organizational equity investors go to IPO faster and earn greater valuations at IPO than firms that lack such connections. We also empirically demonstrate that much of the benefit of having prominent affiliates stems from the transfer of status that is an inherent byproduct of interorganizational associations.•.
This paper examines three rationales for the syndication of venture capital investments, using a sample of 271 private biotechnology firms. Syndication is commonplace, even in the first-round investments. Experienced venture capitalists primarily syndicate first-round investments to venture investors with similar levels of experience. In later rounds, established venture capitalists syndicate investments to both their peers and to less experienced capital providers. When experienced venture capitalists invest for the first time in later rounds, the firm is usually doing well. Syndication also often insures that the ownership stake of the venture capitalist stays constant in later venture rounds. I argue that the results are consistent with the proposed explanations.
The present paper examines the effect of a central cultural value, individualism-collectivism, on social loafing in an organizational setting. A study was conducted to test the hypothesis that collectivistic beliefs influence the incidence of social loafing. Forty-eight managerial trainees each from the United States and the People's Republic of China worked on an in-basket task under conditions of low or high accountability and low or high shared responsibility. The results of regression analyses demonstrate the moderating role of collectivistic beliefs on social loafing, and they are discussed in terms of social responsibility and its relation to performance in work groups.
Data from 492 college students indicated that group size and individuals' identifiability, sense of shared responsibility, and levels of individualism or collectivism influenced peer-rated cooperation in classroom groups. Levels of individualism or collectivism moderated the effects of size and identifiability on cooperation but not those of shared responsibility. These findings suggest that models of free riding and social loafing provide insights into individualistic cooperation in groups but are limited in their ability to explain the cooperation of collectivists.
The general topic of this chapter is the relation of the society outside organizations to the internal life of organizations. Part of the specific topics have to do with the effect of society on organizations, and part of them concern the effects of organizational variables on the surrounding social environment. I intend to interpret the term “social structure” in the title in a very general sense, to include groups, institutions, laws, population characteristics, and sets of social relations that form the environment of the organization. That is, I interpret “social structure” to mean any variables which are stable characteristics of the society outside the organization. By an “organization” I mean a set of stable social relations deliberately created, with the explicit intention of continuously accomplishing some specific goals or purposes. These goals or purposes are generally functions performed for some larger structure. For example, armies have the goal of winning possible military engagements. The fulfillment of this goal is a function performed for the larger political structure, which has functional requirements of defense and conquest. I exclude from organizations many types of groups which have multiple purposes (or which perform multiple functions for larger systems, whether these are anyone's purposes or not), such as families, geographical communities, ethnic groups, or total societies. 1 also exclude social arrangements built up on the spur of the moment to achieve some specific short-run purpose. For instance, I will not consider a campaign committee for some political candidate as an “organization,” although a political party would definitely meet the criterion of continuous functioning and relatively specific purposes.
The objective of this study is to identify realized strategies of venture capital firms when undertaking portfolio investments. We analysed data for the period 1994 through 1997 on a sample of Finnish venture capital firms representing virtually the entire population of the Finnish venture capital industry. The results indicate that, over time, the venture capital firms specialized the industry scope of their portfolio. Further, the venture capital firms consistently diversified geographically throughout the 4 year period of the study, and they diversified their portfolio in terms of stage-of-growth by investing in increasingly later stage companies through the first years of the study, before entering a period of equilibrium in which this degree of stage-of-growth diversification held relatively constant. Finally, the importance of accumulated experience was illustrated by the finding that less experienced venture capital firms showed a time lag in these investment patterns compared to more experienced firms.
Using an attribution theory viewpoint, this exploratory study examines new venture failure from the perspectives of both the entrepreneur and the venture capitalist (VC). Contrary to what should be expected, given attribution theory, entrepreneurs acknowledge that internal causes contributed to their venture's failure. On the other hand, VCs attributed the failure to external causes, differing from the entrepreneur's perception of the event. Both the entrepreneur and VC were more likely to attribute the failure of other ventures to internal factors (the fundamental attribution error). This study suggests that entrepreneurs and VCs view failure differently. These differences might cause misapplication of scarce entrepreneurial resources.
A study examines how the level and nature of European venture capitalist (VC) involvement in their portfolio companies would be impacted by venture innovativeness, venture stage, CEO startup experience, and CEO industry experience. The results show that, as a general rule, venture innovativeness and stage had a consistent impact such that greater involvement was observed for highly innovative ventures and for early stage ventures. On the other hand, the results show that VCs in the Netherlands were less involved with experienced CEOs than anticipated, while VCs in the UK were more involved with experienced CEOs. In France, involvement varied less and did not follow a consistent pattern. The same pattern was observed with regard to the importance given to the roles assumed. While there was some fluctuation within roles, across all contexts the strategic roles were accorded the greatest importance, with the interpersonal roles coming next, followed by the operational roles. The findings generally support the belief that VCs put a great deal of effort not only into selecting winners but also into getting involved selectively.
The paper provides an overview of recent developments in the area of organizational learning curves. The paper discusses whether knowledge acquired through learning by doing is cumulative, as the classic learning-curve model implies, or whether organizational learning evidences 'forgetting' or depreciation. The extent to which the productivity gains associated with learning by doing reside in individual workers, or in the structure of the organization, or in its technology is also analyzed. The paper concludes by reviewing evidence about whether learning transfers across organizations.
Tested the major assumption of the diffusion of responsibility hypothesis (i.e., that group members involved in acts with negative consequences should attribute less responsibility to themselves than either individuals who experience negative consequences or groups or individuals who experience positive consequences). Using 80 male undergraduates, this assumption was tested in a 2 * 2 design in which individuals or groups gave advice that led to success or failure. Group failure Ss assumed less responsibility than Ss in the other 3 conditions. Furthermore, individual failure Ss rated the outcomes as less bad and saw themselves as having less influence over the advisee. Other areas of social psychological research in which the combination of responsibility and negative consequences seems to be a critical factor are discussed. (26 ref) (PsycINFO Database Record (c) 2012 APA, all rights reserved)
This paper reviews the literature on organizational learning. Organizational learning is viewed as routine-based, history-dependent, and target-oriented. Organizations are seen as learning by encoding inferences from history into routines that guide behavior. Within this perspective on organizational learning, topics covered include how organizations learn from direct experience, how organizations learn from the experience of others, and how organizations develop conceptual frameworks or paradigms for interpreting that experience. The section on organizational memory discusses how organizations encode, store, and retrieve the lessons of history despite the turnover of personnel and the passage of time. Organizational learning is further complicated by the ecological structure of the simultaneously adapting behavior of other organizations, and by an endogenously changing environment. The final section discusses the limitations as well as the possibilities of organizational learning as a form of intelligence.
Examines how the performance of young firms is influenced by their interorganizational exchange networks and whether the prominence of business partners affects the ability to acquire critical resources, particularly capital. The following four hypotheses are posited: (1) the greater the prominence of the strategic alliance partners of a young company, the better the performance of the new venture; (2) the greater the prominence of the organizations that have acquired ownership stakes in a young company, the better the performance of the new venture; (3) the greater the prominence of the investment bank of a young company, the better the performance of the new venture; and (4) the greater the uncertainty about the quality of the company, the larger the impact of the prominence of the firm's exchange partners on its performance. Data used to test these hypotheses were gathered from 301 young, venture-capital-backed biotechnology firms. Results from the empirical analysis provide strong evidence that the characteristics and prominence of organizations affiliated with young firms have a direct affect on performance. Firms launch IPOs faster and the IPOs earn greater market value with reputable partners. In addition, the advantage of having prominent affiliates is contingent on the level of uncertainty about the startup's quality. The greater the uncertainty, the more that outside evaluators depend upon the prominence of affiliates to draw inferences about the firm's quality. It is clearly demonstrated that sponsorship has the capacity to substitute for accomplishment and experience as a basis for young firms' success. However, experience and accomplishments take on added significance for firms that lack notable sponsors. (SFL)
Much of the prior research on interorganizational learning has focused on the role of absorptive capacity, a firm's ability to value, assimilate, and utilize new external knowledge. However, this definition of the construct suggests that a firm has an equal capacity to learn from all other organizations. We reconceptualize the firm-level construct absorptive capacity as a learning dyad-level construct, relative absorptive capacity. One firm's ability to learn from another firm is argued to depend on the similarity of both firms' (1) knowledge bases, (2) organizational structures and compensation policies, and (3) dominant logics. We then test the model using a sample of pharmaceutical–biotechnology R&D alliances. As predicted, the similarity of the partners' basic knowledge, lower management formalization, research centralization, compensation practices, and research communities were positively related to interorganizational learning. The relative absorptive capacity measures are also shown to have greater explanatory power than the established measure of absorptive capacity, R&D spending. © 1998 John Wiley & Sons, Ltd.
This paper examines the impact venture capital can have on the development of new firms. Using a hand-collected data set on Silicon Valley start-ups, we find that venture capital is related to a variety of professionalization measures, such as human resource policies, the adoption of stock option plans, and the hiring of a marketing VP. Venture-capital-backed companies are also more likely and faster to replace the founder with an outside CEO, both in situations that appear adversarial and those mutually agreed to. The evidence suggests that venture capitalists play roles over and beyond those of traditional financial intermediaries.
Syndicates are a form of inter-firm alliance in which two or more venture capital firms co-invest in an investee firm and share a joint pay-off. Syndication is a significant part of the venture capital market yet little research has been conducted into the process of structuring syndicate deals and the management of syndicates following deal completion. This paper analyses the neglected issues concerning the structuring and management of syndicated venture capital investments from the perspectives of both lead and non-lead syndicate members using two surveys of venture capital firms and examination of syndication documents. Lead investors typically have larger equity stakes and the syndicated investment agreement is a document that enshrines the rights of participants rather than specifying behaviour. Contractual arrangements typically serve as a back drop to relationships as non-legal sanctions are important and decisions are typically reached following discussion and consensus, but lead venture capital investors' residual and specific powers are important in ensuring timely decision-making. The findings extend previous work on alliances by emphasizing the importance of non-legal sanctions, especially reputation effects, in mitigating opportunistic behaviour by dominant equity holders. The paper also adds to the limited research on the dynamics of alliances by highlighting the role of repeat syndicates. Copyright 2003 Blackwell Publishing Ltd..
Using a human capital perspective, we investigated the relationship between the education and experience of the top management teams of venture capital firms (VCFs) and the firms' performance. We found that although general human capital had a positive association with the proportion of portfolio companies that went public [initial public offering (IPO)], specific human capital did not. However, we did find that specific human capital was negatively associated with the proportion of portfolio companies that went bankrupt. Interestingly, some findings were contrary to expectations from a human capital perspective, specifically the relationship between general human capital and the proportion of portfolio companies that went bankrupt. Future research is suggested.
This paper investigates the role of venture capitalists. We view their “raison d’être” as their ability to reduce the cost of informational asymmetries. Our theoretical framework focuses on two major forms of asymmetric information: “hidden information” (leading to adverse selection) and “hidden action” (leading to moral hazard). Our theoretical analysis suggests four empirical predictions.1. Venture capitalists operate in environments where their relative efficiency in selecting and monitoring investments gives them a comparative advantage over other investors. This suggests strong industry effects in venture capital investments. Venture capitalists should be prominent in industries where informational concerns are important, such as biotechnology, computer software, etc., rather than in “routine” start-ups such as restaurants, retail outlets, etc. The latter are risky, in that returns show high variance, but they are relatively easy to monitor by conventional financial intermediaries.2. Within the class of projects where venture capitalists have an advantage, they will still prefer projects where monitoring and selection costs are relatively low or where the costs of informational asymmetry are less severe. Thus, within a given industry where venture capitalists would be expected to focus, we would also expect venture capitalists to favor firms with some track records over pure start-ups. To clarify the distinction between point 1 and point 2, note that point 1 states that if we look across investors, we will see that venture capitalists will be more concentrated in areas characterized by significant informational asymmetry. Point 2 says that if we look across investment opportunities, venture capitalists will still favor those situations which provide better information (as will all other investors). Thus venture capitalists perceive informational asymmetries as costly, but they perceive them as less costly than do other investors.3. If informational asymmetries are important, then the ability of the venture capitalist to “exit” may be significantly affected. Ideally, venture capitalists will sell off their share in the venture after it “goes public” on a stock exchange. If, however, venture investments are made in situations where informational asymmetries are important, it may be difficult to sell shares in a public market where most investors are relatively uninformed. This concern invokes two natural reactions. One is that many “exits” would take place through sales to informed investors, such as to other firms in the same industry or to the venture’s own management or owners. A second reaction is that venture capitalists might try to acquire reputations for presenting good quality ventures in public offerings. Therefore, we might expect that the exits that occur in initial public offerings would be drawn from the better-performing ventures.4. Finally, informational asymmetries suggest that owner-managers will perform best when they have a large stake in the venture. Therefore, we can expect entrepreneurial firms in which venture capitalists own a large share to perform less well than other ventures. This is moral hazard problem, as higher values of a venture capitalist’s share reduce the incentives of the entrepreneur to provide effort. Nevertheless, it might still be best in a given situation for the venture capitalist to take on a high ownership share, since this might be the only way of getting sufficient financial capital into the firm. However, we would still expect a negative correlation between the venture capital ownership share and firm performance.Our empirical examination of Canadian venture capital shows that these predictions are consistent with the data. In particular, there are significant industry effects in the data, with venture capitalists having disproportionate representation in industries that are thought to have high levels of informational asymmetry. Secondly, venture capitalists favor later stage investment to start-up investment. Third, most exit is through “insider” sales, particularly management buyouts, acquisitions by third parties, rather than IPOs. However, IPOs have higher returns than other forms of exit. In addition, the data exhibit the negative relationship between the extent of venture capital ownership and firm performance predicted by our analysis.
The networking of 464 venture capital firms is analyzed by examining their joint investments in a sample of 1501 portfolio companies for the period 1966–1982. Some of the factors that influence the amount of networking are the innovativeness, technology, stage, and industry of the portfolio company. Using the resource exchange model, we reason that the relative amount of networking is explained primarily by the degree of uncertainty associated with an investment rather than by the sum of money invested.
Venture capital firms are linked together in a network by their joint investments in portfolio companies. Through connections in that network, they exchange resources with one another. The most important of those resources are the opportunity to invest in a portfolio company (good investment prospects are always scarce), the spreading of financial risk, and the sharing of knowledge. All venture capitalists operate in very uncertain environments, none more so than the one confronting high innovative venture capitalists, HIVCs,1 that specialize in investing in high innovative technology companies. The most uncertain of all their investments is a high-technology start-up with nothing more than a product in the head of the founder. There is uncertainty about the talent of the entrepreneur, the market need for the product, the development of a saleable product, the raising of second-round financing for working capital and expansion; the manufacturing of the product, competitors' responses, and government policies such as capital gains tax and ERISA rules, to name some of the major components. It is a formidable list. Indeed, it is hard to name a segment of any other industry that bears more uncertainty than HIVCs.A venture capital firm copes with uncertainty by gathering information. This research shows that the amount of coinvesting by a firm depends on the degree of uncertainty it faces. The greater the uncertainty, the greater the degree of coinvesting.By examining how venture capital firms were connected by their joint investments, it was found that the top 21 HIVCs comprise a tightly coupled network. And of that group, none is more tightly bound than the nine HIVCs located in California. In contrast, the group of top 21 firms that invest mainly in low innovative technology companies, LIVCs, is more loosely bound. HIVCs are more tightly bound together because they shoulder more uncertainty and therefore have a greater need to share information with one another.The practical implications of this study are as follows: Venture Capitalists. It is vital to be well-connected to other venture capital firms. They are important sources of information and investment opportunities. For HIVCs, the California group is central in the network, so links to them are valuable. Communications in a tightly coupled system are swift, so it is likely that information is disseminated very quickly among members of the group. It probably facilitates the setting of a market rate for venture capital. A disadvantage of a tightly bound system is that information flowing among the members has a redundancy and sameness about it, so to ensure a supply of fresh information, members should have as many links as possible to other organizations and individuals besides venture capitalists. Entrepreneurs. When entrepreneurs submit a proposal for funding to venture capital firms, they can assume that news will spread fast to other firms. Thus, they should not use a bird-shot approach; rather, they should select their targets with rifle precision. The proposal should be submitted to a few firms that are known to specialize in the type of product or service that the entrepreneur is planning to make. Entrepreneurs should be concerned about more than the price of the deal. When the top 61 firms invest in a portfolio company, they bring information, contacts, and “deep pockets” to the companies in which they invest. Those factors are significant in nurturing a growing company. Policy Makers. The networks of HIVCs and UVCs are quite different. The HIVCs cluster around oases of high-technology entrepreneurship in the northeast and California, whereas the LIVCs are more evenly spread throughout the U.S.A. HIVCs are located almost exclusively in the so-called “bi-coastal regions of prosperity.”This study found cliques among the venture capital firms. But it found no evidence that the top 61 firms exclude other venture capital firms from their coinvestments of first-rounds of capital. More research is needed before conclusions can be drawn about the power and influence of the top firms. Researchers. In a recent article, Granovetter (1985) suggests that if we are to explain economic behavior, we must understand the networks in which transactions are embedded. This research shows that the networks formed by the syndicated coinvestments of venture capital firms may help us to explain their behavior. A general model for coinvestment networks that is developed in this article is applicable to analysis of syndicated coinvestments not only of venture capital firms, but of investors and lenders in general.
Four potential sources of differences between venture capital (VC) firms were examined—venture stage of interest, amount of assistance provided by the VC, VC firm size, and geographic region where located. Through a questionnaire, 149 venture capitalists provided data about their firms, about what they look for in evaluating an investment, and about how they work with a portfolio company following an investment.Firms were divided into four groups based on venture stage of interest. The earlier the investment stage, the greater the interest in potential investments built upon proprietary products, product uniqueness, and high growth markets. Late-stage investors were more interested in demonstrated market acceptance.There were no differences by stage regarding the desired qualities of management. However, after the investment was made, earlier stage investors attached more importance to spending their time evaluating and recruiting managers. Earlier stage investors sought ventures with higher potential returns—a 42% hurdle rate of return for the earliest stage investor versus 33% for the late-stage investor.Late-stage investors spent more time evaluating a potential investment. However, after the investment was made, there was little difference in the amount of time spent assisting the portfolio company. There were, however, differences in the significance that VCs attached to particular post-investment activities. Firms were split into three groups based upon the amount of time the VC spent with a portfolio company after an investment was made as lead investor. The most active group averaged over 35 hours per month per investment, and the least active group averaged less than seven hours.The difference in assistance provided was not strongly tied to differences in investment stage of interest. There were major differences in the importance the VCs attached to their post-investment activities. Not surprisingly, high involvement VCs viewed their activities as more important.Based upon the amount of capital they managed, firms were also split into three groups. Average fund size varied from 278 to 12 million dollars. The larger firms had more professionals and managed more money per professional. The large firms provided the least, and the medium-sized firms the most, assistance to portfolio companies. Large firms also made larger individual investments. Even though they invested over half their funds in late-stage investments whereas smaller firms focused on the earlier stages, the large firms were still a major source of early stage financing.There were no differences between geographic regions in the proportion of investments where the venture capital firm served as lead investor. There were, however, major regional differences in investment stages of interest. Also differences were observed between regions that were not a result of differing size and investment stage.
Venture capitalists functioning as lead investors and the entrepreneur-CEOs of their portfolio companies responded to questionnaire surveys that asked them to rate the venture capitalists' involvement in the ventures. The perceived effectiveness of the investor's involvement weighted by its perceived importance was used as a proxy for the investor's value to the venture. The survey was administered in the early part of 1988. Eighty percent of venture capitalists and 85% of entrepreneurs surveyed responded; in all, 51 matched pairs of lead investor-CEO surveys were completed and returned. Over 50 hours of interviews were also conducted to help clarify information derived through the surveys.
This article examines why individual venture capital firms (VCFs) prefer varying degrees of industry diversity and geographic scope in their venture investments. Hypotheses linking four factors-stage of venture financing. VCFs' ownership structure. VCF size, and type of financing-to pursuit of diversity and scope are advanced and empirically tested. Analysis of data on 169 VCFs reveals that (1) VCFs specializing in early stage financing prefer less industry diversity and narrower geographic scope relative to other VCFs. (2) corporate VCFs (i.e., those owned by non-financial corporations), prefer less industry diversity but broader geographic scope relative to non-corporate VCFs. (3) larger VCFs prefer greater industry diversity and broader geographic scope than do smaller VCFs. and (4) provision of small business investment companies (SBIC) financing by the VCF has no impact on preference regarding industry diversity but is associated with preference for narrower geographic scope.
What criteria do venture capitalists use to make venture investment decisions?. The criteria venture capitalist use to make their investment decisions are of interest for several reasons. This study attempts to uncover this criteria through semistructured interviews and verbal protocol analysis of venture capitalist' evaluations of actual venture proposals. The article reports the findings of an exploratory research project on venture capitalist decision-making. The objectives of the entire project are (1) to refine the stages of venture capitalists' venture evaluation decision processes; and 2) to identify the criteria used in each of these processes.
Much important work has informed us of rates of return earned by venture capitalists, the importance of venture capitalists to the “going public” process, and the criteria venture capitalists use to evaluate deals. This paper seeks to add to the literature by testing hypotheses, based upon both the finance and strategic management literature, regarding certain venture capitalist investment practices.Venture capitalists seek to control or manage risk (Driscoll 1974; MacMillan, Siegel, and SubbaNarasimha 1985). Financing structure and investment strategy provide several means for venture capitalists to do this. Tools available to the venture capitalist include portfolio diversification to spread risk across different industries, firms, or hot/cold IPO markets to minimize unsystematic or investment-specific risk. Information sharing, networking, and specialization can also be used to control unsystematic risk.Several hypotheses are developed from these conflicting perspectives. Data used to test the hypotheses are derived from responses to a survey of venture capitalists. Three hundred surveys were mailed to venture capitalists; 98, or 32.7%,returned usable responses.Portfolio diversification is a well-known means to control risk exposure by reducing unsystematic or specific risks. However, Bygrave (1987, 1988), as well as financial intermediation theorists, argues that maintaining a high degree of specialization is useful for controlling risk as well as for gaining access to networks, information, and deal flow from other venture investors. The analyses of this paper build upon Bygrave's work. We construct more rigorous tests to resolve the conflict between the diversification and information-sharing hypotheses. Our hypothesis tests were usually resolved in favor of the information-sharing view. For example, venture capitalists in the sample that were heavily involved in seed round financing were diversified across fewer numbers of firms and industries.Further evidence in favor of information sharing is seen in investment patterns across different financing stages. Diversification would imply maintaining a portfolio of investments across the different investment stages. The information sharing/specialization view would argue that it is best to stay focused on a single stage or several “connected” stages. The empirical evidence from the sample once again favors the specialization perspective.This research provides information of use to venture capitalists, as they seek information on how best to control risk; to entrepreneurs, as they learn of the factors venture capitalists consider in determining their investment strategy; and to academicians, as such studies provide insight to general industry practice and thus help to form the basis of classroom discussion and future research endeavors.
It is commonly expected that individuals will reverse decisions or change behaviors which result in negative consequences. Yet, within investment decision contexts, negative consequences may actually cause decision makers to increase the commitment of resources and undergo the risk of further negative consequences. The research presented here examined this process of escalating commitment through the simulation of a business investment decision. Specifically, 240 business school students participated in a role-playing exercise in which personal responsibility and decision consequences were the manipulated independent variables. Results showed that persons committed the greatest amount of resources to a previously chosen course of action when they were personally responsible for negative consequences.
Venture-capital organizations raise money from individuals and institutions for investment in early-stage businesses that offer high potential but high risk. This paper describes and analyzes the structure of venture-capital organizations, focusing on the relationship between investors and venture capitalists and between venture-capital firms and the ventures in which they invest. The agency problems in these organizations and to the contracts and operating procedures that have evolved in response are emphasized. Venture-capital organizations are contrasted with large, publicly traded corporations and with leveraged buyout organizations.
As reported in summary form by W. Moede (1927), an unpublished study found that in a rope-pulling task, while collective group performance increased somewhat with group size, it was less than the sum of the individual efforts (IE). IE decreased as group size increased. The present 2 experiments with 84 undergraduates investigated this effect using clapping and shouting tasks. Results replicate the earlier findings. The decrease in IE, which is here called social loafing, is in addition to losses due to faulty coordination of group efforts. The experimental generality, theoretical importance, widespread occurrence, and negative social consequences of social loafing are examined, along with ways of minimizing it. (26 ref) (PsycINFO Database Record (c) 2012 APA, all rights reserved)
This paper examines competing finance, resource-based and deal flow explanations for the syndication of venture capital investments. Evidence from 60 firms (a 58.8% response rate) is analysed. Overall the finance perspective provides a strong explanation of motives for syndication, but the resource-based view is found to be much more important for those firms involved in at least some early stage transactions. The implications for researchers are that venture capital firms should not be treated as a homogeneous group and that the investment stages in which they operate may strongly influence attitudes towards syndication. In addition, there are implications for practitioners as venture capital firms may not be attributing sufficient attention to the need to augment their own resource base in order to enable them to make superior decisions when selecting deals and managing investments.
This paper examines the structure of staged venture capital investments when agency and monitoring costs exist. Expected agency costs increase as assets become less tangible, growth options increase, and asset specificity rises. Data from a random sample of 794 venture-capital-backed firms support the predictions. Venture capitalists concentrate investments in early stage and high technology companies where informational asymmetries are highest. Decreases in industry ratios of tangible assets to total assets, higher market-to-book ratios, and greater R&D intensities lead to more frequent monitoring. Venture capitalists periodically gather information and maintain the option to discontinue funding projects with little probability of going public. Copyright 1995 by American Finance Association.
This article examines the representation of venture capitalists on the boards of private firms in their portfolios. If venture capitalists are intensive monitors of managers, their involvement as directors should be more intense when the need for oversight is greater. The authors shows that venture capitalists' representation on the board increases around the time of chief executive officer turnover, while the number of other outsiders remains constant. He also shows that distance to the firm is an important determinant of the board membership of venture capitalists, as might be anticipated if the oversight of local firms is less costly than more distant businesses. Copyright 1995 by American Finance Association.
Syndication arises when venture capitalists jointly invest in projects. We model and test two possible reasons for syndication: project selection, as an additional venture capitalist provides an informative second opinion; and complementary management skills of additional venture capitalists. The central question is whether venture capitalists are engaged primarily in selection or in managerial value added. These alternatives imply contrasting predictions about comparative returns to syndicated and standalone investments. Our empirical analysis, using Canadian data, finds that syndicated investments have higher returns, favoring the value-added interpretation. We also discuss risk sharing and project scale as possible reasons for syndication. Copyright (c) 2002 Massachusetts Institute of Technology.
“Living dead” investments represent the middle ground of venture capital investing outcomes, lying between “winners” that produce adequate multiples of return on investment and “losers” that result in loss of invested funds. Living dead investments are typically mid- to later-stage ventures that are economically self-sustaining, but that fail to achieve levels of sales growth or profitability necessary to produce attractive final rates of return or exit opportunities for their venture capital investors. This article reports the results of a survey of 80 U.S. venture capital firms that investigated the living dead phenomenon and strategies used by venture capital investors to deal with living dead companies.