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. CEOs and venture capitalists rated the nature and intensity of their interaction as well as the performance of the venture over a one-year period. CEOs also provided data on strategy, level of innovation, environmental uncertainty, and their level of experience. Regression analyses indicated that a significant portion of variation in the value of venture capitalist involvement was explained by these factors. Specifically, the greater the innovation pursued by the venture, the more frequent the contact between the lead investor and the CEO, the more open the communication, and the less conflict of perspective in the venture capitalist-CEO pair, the greater was the value of the involvement. Neither the stage of the venture nor the CEO's experience had a significant impact on value added. The value of venture capitalists' involvement was also strongly positively correlated with venture performance. The implications for the venture capitalists include the following: (1) the value of involvement varies with circumstances; (2) the most effective venture capitalists are those who maintain frequent, open communications while minimizing conflict; (3) opportunities exist for adding value in all venture stages; and (4) both experienced and inexperienced CEOs can benefit. For entrepreneurs, three key findings are: (1) because venture capitalists can add value beyond the money supplied, choosing the right one at the outset is very important; (2) once in, it is important to keep communication channels open; and (3) high innovation ventures benefit most from venture capitalist involvement. The results are important because they provide insight into controllable circumstances that impact the value of venture capitalist involvement in their portfolio companies. Given the general economic conditions now facing entrepreneurs and the degree of cut-throat competition in the venture capital industry, such information may prove extremely useful to both as they plan strategies for the 1990s.
In this study, we examine how relational capital and commitment affect a venture capital firm's (i.e., VCFs) perception of the performance of its portfolio companies (i.e., PFCs). That is, we examine how perceived performance is affected by the social nature of the relationship between the VCF and PFC. The study's hypotheses are tested by applying quantitative analyses to survey data collected from 298 U.S.-based venture capital firms. The data from the survey are complemented with additional information drawn from secondary data sources and interviews with several venture capitalists. We found that the amount of relational capital embedded in the VCF–PFC dyad and the extent to which the VCF is committed to the PFC are strongly related to perceived performance. We speculate that relational capital and commitment enhance learning, an effect that increases VCFs' perceptions of performance. Further, these perceptions of performance will also be amplified by the positive affect generated by relational capital and commitment. We discuss the limitations and contributions of our findings and provide directions for future research.
Using data on 935 small firms and bank managers, we differentiated customers' relational trust in their banks from beliefs about the banks' self-interested motivations. Relational trust mediated the relationship between bank strategies (customer orientation and manager continuity) and the likelihood a firm would switch banks, and the effect of trust went beyond that of beliefs about self-interest. Further, customer orientation reduced bank switching through relational trust, whereas manager continuity operated on switching both directly and through relational trust.
We examine the antecedents of international and domestic learning effort in independent firms. We combine learning theory and the “attention-based” view to examine how firms' degree of internationalization, the age at international entry, and entrepreneurial orientation are associated with the extent to which they engage in foreign and domestic learning activities. In particular, our study shows that early entry in foreign markets and an entrepreneurial orientation are positively related to a culture that promotes learning effort in international and domestic markets. On the other hand, whereas a firm's degree of internationalization does not have a significant association with international learning effort, the degree of internationalization is negatively related to domestic learning effort. We discuss the implications of our study for theory, practice, and future research.
This research used a procedural justice perspective to examine the impact of entrepreneurs' management of information flows in the form of feedback and influence on entrepreneur-investor relations. We conducted both an experiment with master's-level business students and a field survey of venture capitalists regarding their relations with the CEOs of their portfolio companies. The findings revealed the importance of timely feedback in promoting positive relations between investor and entrepreneur. Together, the studies provide strong evidence for the usefulness of procedural justice theory as a framework for understanding the management of interorganizational relations involving new ventures.
This study examined the impact of agency risks and task uncertainty on venture capitalist-chief executive officer (VC-CEO) interaction. Results from 51 VC-CEO dyads indicate that the frequency of interaction depends on the extent of VC-CEO goal congruence, the degree of the CEO's new venture experience, the venture's stage of development, and the degree of technical innovation it is pursuing. However, contrary to conventional expectations, the degree of management ownership had no impact on the frequency of interaction.
Competition is intensifying in the venture capital industry in the U.S. The number of venture capital firms (VCFs) tripled from 1980 to 1989. Supplier power (in the form of institutional investors such as pension funds) continues to grow. Foreign venture capital has grown to the extent that commitments to foreign VCFs exceeded domestic commitments in both 1988 and 1989. Further, alternative sources of financing for entrepreneurs such as individual investors (“angels”), corporations, and strategic alliances are increasingly viable options. VCFs face pressure to seek lower risk investments, improve rates of return, and provide value to new venture development. Surprisingly, few scholarly studies have begun to investigate the strategies VCFs are aiming to implement in order to deal with this increasing pressure. Building on the premise that decisions regarding product-market scope are a key component of firm strategy (Hofer and Schendel 1978), this study examined 169 domestic VCFs in order to identify factors that might explain variations in preferences regarding the industry diversity and geographic scope of their investments. The sample, drawn from California, Massachusetts, and Texas, represented about 27% of all U.S.-based VCFs in 1987, the year in which the data were gathered. In terms of the total size of investment portfolio, the average for these 169 VCFs was $69.8 million, which is statistically indistinguishable from the U.S. average of $65 million. Results indicate that (1) VCFs specializing in early stage ventures 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 preferences regarding industry diversity but is associated with a preference for narrower geographic scope. One implication of these results is that VCFs in the U.S. are not homogeneous as regards the intended product-market scope of their portfolios. This, in turn, holds implications, not only for VCFs, but also for their suppliers (limited partners), buyers (entrepreneurs), and policy-makers. VCFs can no longer rely on haphazard investment schemes; they need to attract investors by virtue of the benefits offered by their portfolio strategy, and they need to attract superior investments via offering valueadded services and know-how. Potential investors in venture capital will want to examine, for example, the impact on risk and return of investing smaller amounts in several VCFs at one extreme versus making one large investment in a very diversified VCF at the other extreme. The results of this and other studies suggest that outcomes (timing, magnitude, and riskiness of returns) of choosing such alternatives will vary widely and will depend in great part on the strategies of the VCFs involved. It will not be possible for investors to make wise choices without a full examination of their own objectives and of the profiles of VCFs. Entrepreneurs with the most attractive ventures have alternative sources of financing to consider and should weigh the benefits of being financed and supported by various VCFs as part of the VCFs' portfolios. Knowing a VCF's preferences regarding product-market scope improves their chances of approaching and selecting the right fit and, for those entrepreneurs with a narrower set of options, such knowledge may make the difference between receiving and not receiving financing in a timely manner. Finally, policy-makers may be able to make use of knowledge of the forces that influence the investment strategies of VCFs. Presently, concerns for policy-makers may include the gap in seed capital, increased foreign presence in the U.S. market, and the export of promising innovative technology via alliances with foreign firms. All of these factors are influenced by the strategies pursued by VCFs as they jockey for position in the increasingly competitive venture capital market.
The rapid internationalization of markets for venture capital is expanding the funding alternatives available to entrepreneurs. For venture capital firms, this trend spells intensified competition in markets already at or past saturation. At issue for both entrepreneurs and venture capital firms is how and when venture capitalists (VCs) can provide meaningful oversight and add value to their portfolio companies beyond the provision of capital. An important way VCs add value beyond the money they provide is through their close relationships with the managers of their portfolio companies. Whereas some VCs take a very hands-off approach to oversight, others become deeply involved in the development of their portfolio companies. Utilizing surveys of VCs in the United States and the three largest markets in Europe (the United Kingdom, the Netherlands, and France), we examined the determinants of interaction between VCs and CEOs, the roles VCs assume, and VCs' perceptions of how much value they add through these roles. We examined the strategic, interpersonal, and networking roles through which VCs are involved in their portfolio companies, and we analyzed how successful such efforts were. By so doing we were able to shed light on how and when VCs in four major markets expend their greatest effort to provide oversight and value-added assistance to their investment companies. Consistent with prior empirical work, we found that VCs saw strategic involvement as their most important role, i.e., providing financial and business advice and functioning as a sounding board. They rated their interpersonal roles (as mentor and confidant to CEOs) as next in value. Finally, they rated their networking roles (i.e., as contacts to other firms and professionals) as third most important. These ratings were consistent across all four markets. VCs in the United States and the United Kingdom were the most involved in their ventures, and they added the most value. VCs in France were the least involved and added the least value; VCs in France appeared to be least like others in terms of what factors drove their efforts. Our theoretical models explained a greater proportion of variance in governance and value added in the United States than elsewhere. Clear patterns of behavior emerged that reflect the manner in which different markets operate. Among the European markets, practices in the United Kingdom appear to be most like that in the United States. Determinants of Governance (Face-to-Face Interaction) We operationalized VC governance or monitoring of ventures as the amount of face-to-face interaction VCs had with venture CEOs. We found some evidence that VCs increase monitoring in response to agency risks, but the results were mixed. Lack of experience on the part of CEOs did not prompt significant additional monitoring as had been predicted. A more potent determinant was how long the VC-CEO pairs worked together; longer relationships mitigated agency concerns and reduced monitoring. Contrary to expectations, perceived business risk in the form of VCs' satisfaction with recent venture performance had little impact on face-to-face interaction. Monitoring was greatest in early stage ventures, indicating that VCs respond to high uncertainty by increased information exchange with CEOs. We measured two types of VC experience and found different patterns for the two. Generally speaking, VCs with greater experience in the venture capital industry required less interaction with CEOs, whereas VCs with greater experience in the portfolio company's industry interacted more frequently with CEOs than did VCs without such experience. Determinants of Value Added We argued that VCs would most add value to ventures when the venture lacked resources or faced perceived business risks, when the task environment was highly uncertain, and when VCs had great investing and operating experience. Contrary to expectations, VCs added most value to those ventures already performing well. As we had predicted, VCs did add relatively more value when uncertainty was high: e.g., for ventures in the earliest stages and for ventures pursuing innovation strategies. Finally, we found that VCs with operating experience in the venture's focal industry added significantly more value than those with less industry-specific experience. These results are consistent with anecdotal evidence that entrepreneurs have a strong preference for VCs with similar backgrounds as their own. We found no evidence that experience in the venture capital industry contributed significantly to value added. Together, these results suggest that investigations of the social as well as economic dimensions of venture building may prove a fruitful avenue for future study. Overall, the results showed that value-added is strongly related to the amount of face-to-face interaction between VC-CEO pairs and to the number of hours VCs put in on each individual venture. Implications for Venture Capitalists The competition for attractive investments is heating up as economies become more globalized. Thus, the pressure on venture capital firms to operate both efficiently and effectively is also likely to build. It is as yet unclear whether the recent trend toward later stage, safer investments will continue, and how those venture capital firms following this path can differentiate themselves from other sources of capital. Venture capital firms that are able to choose the appropriate bases for determining governance effort and the appropriate roles for delivering added value to their portfolio companies will be those most likely to survive. In the largest, most robust markets (i.e., the United States and the United Kingdom), more effort is expended by venture capitalists to deliver something of value beyond the money. This suggests that the tradeoff preferred by those succeeding is to be more rather than less involved in their investments. Our results indicate that VCs clearly economize on the time they devote to involvement in their portfolio companies. However, our results also indicate that they do this at the great peril of producing value insufficient to justify the cost of their product. Implications for Entrepreneurs Our findings provide two important insights for entrepreneurs. First, they show that where and when they obtain venture capital is likely to have an impact on the extent and nature of effort delivered by their venture capital investors. It appears that on average entrepreneurs receiving venture capital in the United States and the United Kingdom will be more closely monitored and will receive more value-adding effort from their VCs than will those in France or the Netherlands. Needless to say, entrepreneurs should consider their preferences for level and type of involvement from their investors as they consider their choice of partners. In France, for example, VCs put great emphasis on their financial role in comparison with other roles, but they contribute much less than VCs elswhere via other strategic, interpersonal, and networking roles. The second key implication of our findings is that entrepreneurs may be able to gauge what roles VCs will see as most important, when VCs are more or less apt to become involved in their companies, and when they believe they can most add value. Such knowledge may help CEOs anticipate VC activity, be aware of the parameters of VCs' preferences, communicate their own preferences, and negotiate the timing and extent of interaction. For example, although our results indicate that geographic distance significantly limits face-to-face interaction, it appears to have less impact on the amount of value added. Implications for Researchers Much more can be learned about the relative efficiency and effectiveness of alternative governance arrangements. Little is known about how formal structures such as contract covenants and board control work in conjunction with informal oversight and interaction. Even less is known about how value is added and how it is best measured. Although this study took a step toward developing a model of the circumstances under which value is added, the theory and its operationalization await further development.
An entrepreneurial firm's relationships with customers, suppliers, investors, universities, and other organizations have a significant and long-lasting impact on the survival and success of the firm. Yet, little research has focused on how the management of these relationships influences outcomes for entrepreneurial firms. This paper focuses on the customer relationships of new, technology-based firms (NTBFs). We aim to contribute to the literature on the governance of exchange relationships between NTBFs and their customers. Further, in so doing, we seek to explore the implications of such governance for the performance of new firms. Because of their small size, their “liabilities of newness,” and their highly specialized, knowledge-intensive resources, NTBFs are able to maintain only a limited number of close customer relationships. Consequently, NTBFs often become highly dependent on one or a few of their customers. In this study, we focus on the relationships between NTBFs and their single largest customers. We refer to the customer that accounts for the highest proportion of an NTBF's total revenue as the “key customer.” Strategic management literature, resource dependence theory, and transaction cost economics emphasize the risks associated with being dependent on an exchange relationship, focusing on the opportunistic use of power by the exchange partner. These perspectives suggest that firms can minimize their external dependencies and protect themselves against opportunism through the use of contracts. The present paper expands this view by also examining how flexibility in exchange governance may unlock potential benefits or dampen potential dangers that an NTBF faces in its commitment to its single largest customer, e.g., sharing the costs and risks of R&D with the customer, improving the reputation of the NTBF, and realizing savings in sales and marketing costs. We examine the extent to which the realization of the potential positive and negative outcomes of a high level of dependence are moderated by the flexibility of the exchange partners' attitudes toward contractual agreements. The research question that we seek to answer is: Does the manner in which a contractual agreement is implemented affect the outcomes of a customer relationship for an NTBF at high levels of exchange dependence on the key customer? We develop a set of hypotheses that examines how the governance of the key customer relationship affects the NTBF's new product development, reputation, and sales costs when exchange dependence on the key customer is high. We use the term “contractual governance flexibility” to refer to the extent to which the exchange partners are willing to adjust to changes in the relationship instead of relying on the contract. We test the hypotheses with survey data from 195 NTBFs in the UK. The results of regression analyses reveal that contractual governance flexibility moderates the relationship between exchange dependence and outcomes. In relationships with a high level of exchange dependence, greater contractual governance flexibility was associated with greater new product development and sales cost advantages. No such benefits were realized for relationships in which exchange partners relied heavily on the contract. These findings are important because they suggest that by relaxing formal contractual mechanisms governing a relationship, NTBFs can derive benefits from key customer relationships that are characterized by a high level of dependence. Our findings suggest that at high levels of exchange dependence on key customers, NTBFs can benefit when greater contractual governance flexibility is present. Our data indicated that, interestingly, NTBFs tend to do just the opposite: at higher levels of exchange dependence, NTBFs are inclined to rely increasingly on the contract. By so doing, they may fail to realize the potential benefits of the relationships, such as gaining access to complementary resources and reducing costs. These outcomes, which may be derived from dependent exchange relationships by means of contractual governance flexibility, can have a significant influence on the long-term development and competitive advantage of an entrepreneurial firm.