Requisite expertise, firm reputation, and status in venture capital investment allocation decisions

doi:10.1016/j.jbusvent.2006.05.001

Journal of Business Venturing

Volume 22, Issue 4, July 2007, Pages 481-502

https://doi.org/10.1016/j.jbusvent.2006.05.001 Get rights and content

Abstract

Drawing together research in the upper echelon perspective, strategy, and organizational sociology, this paper examines (1) the relationship between the finance expertise of a venture capital (VC) firm's management team and investment selection, and (2) the moderation of this relationship by the VC firm's social position. We find that while finance expertise is associated with a lower proportion of early-stage investments, this relationship is weaker for firms with high reputation and stronger for firms with high status. We conclude with a discussion of the importance and nuances of external image considerations on investment decisions as well as insights into the importance of the requisite nature of expertise.

Section snippets

Executive summary

There has been significant scholarly interest in understanding the investment selection decisions of venture capital (VC) firms, e.g., the selection criteria or cognitive processes involved in making these decisions. Researchers have made a substantial contribution to the literature by identifying common elements to the decision making processes across VC firms. With this paper, we seek to understand why these processes lead to different selection results, i.e., why equally aspiring VC firms

Theory and hypotheses

Venture capital firms raise funds from various investors and then seek to invest these funds in private companies with the purpose of achieving superior investment returns. While some VC firms invest in companies that are in the process of exploring ideas for which there are not yet developed commercial products or tested markets (i.e. early-stage companies), others prefer late-stage companies, i.e. those with well-defined market and product characteristics, seeking to expand or improve their

Sample

We designed the study with four factors in mind. First, we required VC firms that faced decisions to invest in the “same” industry (Wireless Communication), but an industry that provided considerable choice of portfolio companies at different stages of development. Second, we required VC firms that have made a sufficient number of investments, so that enough data would be available to infer the top managers' various investment choices. Third, since background data were to be collected on

Results

Table 1 presents the correlations and descriptive statistics for the variables. To test the hypotheses, we used OLS regression analysis. Our diagnostic tests indicated that the data did not violate the assumptions of linearity, normality, homoskedasticity, and independence necessary for an unbiased and efficient OLS estimation.⁷

Discussion and conclusion

The results of this paper suggest that investment choices are strongly influenced by the type of expertise possessed by the VC firm's management team. In addition, this expertise–choice relationship is moderated by the VC firm's social standing – its dynamics change as the firm's reputation or status increase. While the current research view of venture capitalists is predominantly as homogeneous decision makers, the theoretical insights of this paper add important team- and firm-specific

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View full text

Requisite expertise, firm reputation, and status in venture capital investment allocation decisions

Abstract

Section snippets

Executive summary

Theory and hypotheses

Sample

Results

Discussion and conclusion

J. Bus. Venturing

J. Bus. Venturing

J. Bus. Venturing

J. Financ. Econ.

J. Bus. Venturing

Res. Policy

J. Financ. Econ.

J. Econ. Behav. Organ.

J. Bus. Venturing

J. Econ. Theory

J. Bus. Venturing

J. Bus. Venturing

J. Bus. Venturing

J. Bus. Venturing

J. Bus. Venturing

Top management and innovations in banking: does the composition of the top management team make a difference?

Strateg. Manage. J.

Inequality and Heterogeneity: a Primitive Theory of Social Structure

The development and institutionalization of subunit power in organizations

Adm. Sci. Q.

Power and centrality: a family of measures

Am. J. Sociol.

Ucinet for Windows: Software for Social Network Analysis

Divergence between archival and perceptual measures of the environment: causes and consequences

Acad. Manage. Rev.

Comparing alternative conceptualizations of functional diversity in management teams: process and performance effects

Acad. Manage. J.

Structural Holes: the Social Structure of Competition

The information matrix test and its implied alternative hypotheses

Underwriting spreads and reputational capital: an analysis of new corporate securities

J. Financ. Res.

Venture capital firms' preferences for projects in particular stages of development

J. Small Bus. Manage.

Risk taking by mutual funds as a response to incentives

J. Polit. Econ.

Artificial intelligence and the dynamic performance of organizational designs

Applied Multiple Regression/Correlation Analysis for the Behavioral Sciences

A Behavioral Theory of the Firm

Reputation acquisition in debt markets

J. Polit. Econ.

Agency theory: an assessment and review

Acad. Manage. Rev.

Top management team tenure and organizational outcomes: the moderating role of managerial discretion

Adm. Sci. Q.

The intraorganizational power struggle: the rise of finance presidents in large corporations, 1919–1979

Am. Sociol. Rev.

Top management teams and pioneering: a resource-based view

Int. J. Hum. Resour. Manag.

Reputation: Realizing Value from the Corporate Image