a lack of insight do venture capitalists really understand their own decision process abstract what decision criteria do venture capitalists vcs use to make their investment decisions this question has received much attention within entrepreneurship literature i e wells 1974 poindexter 1976 tyebjee and bruno 1984 macmillan seigel and subba narasimha 1985 macmillan zeman and subba narasimha 1987 robinson 1987 timmons et al 1987 sandberg schweiger and hofer 1988 hall and hofer 1993 zacharakis and meyer 1995 for a number of reasons first vc backed ventures achieve a higher survival rate than non vc backed businesses kunkel and hofer 1990 sandberg 1986 timmons 1994 second a better understanding of the decision process may lead to even better survival rates finally entrepreneurs seeking venture funding benefit if they understand what factors are most important to the vc although past research has greatly contributed to our understanding of the decision it may be biased and somewhat misleading the majority of past studies rely on post hoc methodologies e g interviews and surveys to capture the decision process post hoc methods assume that vcs can accurately relate their own decision processes but studies from cognitive psychology suggest that people in particular experts are poor at introspecting introspection is subject to rationalization and post hoc recall biases using social judgment theory and the associated lens model as a framework the current study investigates how well vcs introspect about their own decision process and by extension whether the past research efforts are biased the current research uses policy capturing a real time method common in cognitive psychology to capture the vc s actual theories in use versus their espoused theories hitt and tyler 1991 policy capturing requires that vcs make a series of real time decisions based on various information factors regression analysis of each vcs decision captures how important each of the information factors is to her his actual decision process after the vcs make their decisions they provided a weighting of how they believe they used the information factors comparing the captured decision policies to stated decision policies provides a measure of vc insight the findings suggest that vcs are not good at introspecting about their own decision process even within the confines of a controlled experiment which greatly reduces the amount of information considered vcs lacked strong understanding of how they made decisions most decision makers would like to have all relevant information available for their decision however as more information becomes available insight diminishes finally this study finds that vcs are very consistent in their decision process even though they do not necessarily understand how they make their decisions vcs face a plethora of information when making an investment decision i e business plan outside consultants due diligence etc it may be difficult for vcs to truly understand their intuitive decision process because of all the noise caused by this information overload this lack of systematic understanding impedes learning vcs cannot make accurate adjustments to their evaluation process if they do not truly understand it therefore vcs may suffer from a systematic bias that impedes the performance of their investment portfolio the methodology used in this experiment can be modified and used as a training tool for active vcs in addition the consistent nature of vc decision making even if they do not have a strong understanding of that process is favorable to the development of decision aides decision aides can minimize the danger of salient information e g the lead entrepreneur is a winner clouding the vc s judgment past research also needs to be interpreted in a new light although vcs undoubtedly use some of the information cited in past studies the relative importance of that information needs to be reevaluated vcs may not for instance rely most on the background of the entrepreneurial team in addition it is likely that the past studies provide more information factors than vcs actually use people have a tendency to overstate the information they believe they relied upon and to use far less information typically three to seven factors to make a decision than they actually think they use the methodology used in this experiment has the potential to identify the more relevant information factors cited in previous work even though vcs are experts in the new venture funding realm their decision process has room for improvement almost 40 of all backed ventures fail to provide a return to the vc considering the billions invested each year a modest improvement in the failure rate can have a substantial impact on venture portfolio returns that improvement starts by better understanding the decision process this study is a step in that direction

the board and strategy venture capital and high technology abstract in the area of strategy formulation the part played by the board of directors in high technology firms operating with funds provided by venture capital organizations has not been investigated before this exploratory study although based on a limited sample looks at some of the fundamental issues and contrasts the involvement of the board in firms of this kind with very limited involvement of the board in small conventional firms and in large publicly held corporations the relative power of management and the board of directors is of great importance in contrast with the small conventional firm and the large corporation in both of which the chief executive officer is usually in firm control of the board and generally does not look to the board for active involvement in strategy formulation the high technology firms funded by venture capital organizations are characterized by a board of directors that has high power relative to management this power can be understood not only in terms of the power of the purse high concentration of the ownership in hands external to management but also in terms of the expertise of the venture capitalists and their access to important networks the business plan which is a key element in obtaining initial funding is in effect a statement of strategy that is carefully scrutinized by the venture capitalists some of whom will assume positions on the board of directors the board is similarly involved in the revisions of business plans in conjunction with later rounds of funding the study found that the board is typically small with outsiders rather than management in control further at least some of the outside members were found to have a high degree of expertise and a close working relationship with management board meetings are frequent and deal actively with key issues and with the review of how the strategy is working and what changes in strategy may be required reviews of the business plan when a new round of funding is required or when major new product or marketing decisions are needed are examples of likely occasions for involvement of the board in strategy revisions further research should center on identifying the conditions under which board involvement can play a constructive role in the strategy process of these high technology companies some pertinent variables are suggested the next step in research should be more structured and quantitative and should use a geographically dispersed sample but field interviews will be of continuing value as a complement for firms funded by venture capital organizations the board of directors is a significant interface between the venture capitalists and the internal management group the working relationship between inside and outside directors in this arena in strategy formulation and in other major business decisions is a matter of considerable practical importance

new venture teams assessment of learning assistance from venture capital firms abstract prior research examining whether venture capital firms vcs add value to the ventures in their portfolios by advising their new venture teams nvts has led to inconclusive results whereas most prior studies have assumed that nvts value vc assistance this study tests for the possibility that they differentially value two different types of vc assistance business management and operational we collected data by surveying 837 firms identified in the venture capital journal that had received financing from venture capital firms only firms that received first round financing were included in our analysis which reduced our sample size to 205 firms our central finding is that systematic differences exist among nvts in their evaluation of learning assistance from vcs even though vcs can chose their own level of involvement with an nvt successfully improving venture performance through nonfinancial assistance at least partially depends upon the extent to which the nvt values vc input our results indicate that nvts with more industry experience and longer team tenure in the current venture are negatively related to both business management advice and operational assistance offered by their vcs however when an nvt has previously worked together and when its primary experience is from another industry it tends to welcome business management advice from its vc one interpretation of this finding is that an advanced level of operational specialization already exists in such a team which reinforces established operating patterns changing established operating patterns could make it more costly to adopt vc input on operational issues however business management advice may be more welcome because the nvt is still learning how to compete in a new industry these findings add to the growing literature that suggests that vcs play a particularly important role in entrepreneurial ventures when they pursue the development of new technologies ehrlich et al 1994 sapienza 1992 however business management advice is not highly valued by nvts that pursue more technical innovations these findings in combination with those of sapienza and amason 1993 suggest that conflict in the vc nvt relationship may be the greatest when the parties attempt to resolve critical differences which ironically appear to be the ones where the nvt could derive the greatest benefit from listening to its vc finally current firm performance is not related to the nvt s evaluation of vc assistance although cross sectional measures of performance have obvious limitations particularly with new ventures these results indicate that the nvt evaluation of vc assistance is not driven by short term performance past research has shown that vcs vary widely in their preferred level of involvement with the managers of firms in their portfolio some vcs prefer a laissez faire approach whereas others think that they must be more involved if they are to ultimately receive high rewards the central finding from this study is that significant differences exist among nvts in their evaluation of business management and operational assistance for vcs that are more involved these findings suggest that the optimal level of involvement is also partially contingent upon the nvts openness to learning ignoring the contingent nature of the vc nvt relationship vcs could reduce their influence as a tool to improve firm performance and to ensure the ultimate survival of the venture

does marriage really make men more productive this paper presents new descriptive evidence regarding marital pay premiums earned by white males longitudinal data indicate that wages rise after marriage and that cross sectional marriage premiums appear to result from a steepening of the earnings profile data from a company personnelfile that includes information on job grades and supervisor performance ratings reveal large marital status pay differences within a narrow range of occupations managers and professionals and environments a single firm married workers tend to be located in higher paying job grades there are very small pay differentials within grades married men receive higher performance ratings than single men as a result they are much more likely to be promoted controlling for rated performance however eliminates the promotion differential sanders korenman is an assistant professor of economics and public affairs at princeton university and is a faculty associate of the office of population research at princeton university and a research affiliate of the national bureau of economic research nber david neumark is an assistant professor of economics at the university of pennsylvania and a research affiliate of the nber korenman wishes to acknowledge the hewlett foundation and the harvard university center for population studies for financial support the authors are grateful to james medofffor making available an extract from the company personnelfile questions regarding data availability should be directed to professor james

attitudes and behaviors of informal investors toward early stage investments technology based ventures and coinvestors abstract seed capital financing for new firms is important to the commercialization of business innovations yet few entrepreneurs have the personal resources necessary to finance very early stage ventures and they often find themselves relying on external sources of seed capital their personal financial capabilities can easily become exhausted and the venture capital industry represents only a partial source of needed capital for start up and infant firms in recent years researchers have discovered the individual of financial means who invests a portion of his assets in early stage risk ventures this individual is variously termed an informal investor or an angel following an initial study by seymour and wetzel in 1981 researchers have expanded the knowledge about the backgrounds investment interests and behavioral patterns of informal investors the fact that informal investors generally invest within 50 miles of their homes or offices makes their participation in the entrepreneurial process particularly important for local economies our understanding of the general role of informal investors in risk venture financing has been greatly enhanced by prior studies however additional work is needed to identify characteristics of persons committed to start up firms or to technology based ventures two especially important types of business activity in the regional competition for economic development fifty five informal investors participated in a mail questionnaire modeled after prior studies sponsored by the small business administration respondents differentiated themselves on a scale of very early stage start up versus later stage risk venture investments and on a scale of technology oriented versus nontechnology oriented investments informal investors in this sample also differed on the average number of coinvestors including institutions per investment implications arise from the study for individuals interested in regional economic development and for entrepreneurs seeking seed capital first persons more committed to start up investing are more likely to have been or to be currently entrepreneurs themselves also these individuals may not be the most visible community members in terms of past entrepreneurial success and acquired wealth in fact persons committed to start up investing tend to have a lower annual income and lower net worth than persons investing in later stage risk ventures individuals playing this important financing role are particularly hard to identify a valuable key to their identification may lie in the fact that they tend to have worked or currently work in ventures similar to those in which they invest individuals committed to investments in technology oriented risk ventures give very little information about their personal characteristics however they do indicate a considerable amount about their investment patterns these investors play a higher risk higher return investment game than do persons less committed to technology based firms technology oriented investors also report a number of actions that appear to help them manage the risks inherent in their investment behaviors contrary to conventional wisdom about informal investors in general technology oriented investors use friends as referral sources less frequently people more interested in technology based ventures in the future look more to business service professionals investment business brokers and accounting law persons as referral sources finally a person s pattern of coinvesting indicates that individual s orientation toward risk a greater number of individual coinvestors in a typical deal is associated with a willingness to invest further from home for example and with a lower return expectation also persons investing with a fewer number of different types of coinvestors individuals and institutions tend to have more personal entrepreneurial experience to invest more in very early stage ventures and to be more interested in financing inventors this study is relevant to community leaders and entrepreneurs in several ways first the project begins to ask pertinent research questions about types of informal investors who play particularly important roles in local economic development second a more differentiated view of the role of the informal investor is suggested because special characteristics of start up investors and technology based investors can be distinguished third some initial clues about identifying these key individuals emerge the study demonstrates a productive line of thinking for community leaders and entrepreneurs in the risk venture financing process

allocation of attention within venture capital firms in this article we use a simple queuing network to model the process through which entrepreneurs receive venture capital funding our model focuses in particular on the allocation of venture capitalists attention between pre and post investment activities and on the degree of selectivity in deciding which ventures to fund based upon this model we develop expressions for the financial performance of the venture capital process both overall and also from the perspectives of the entrepreneurs investors managers and venture capitalists involved for these financial measures we derive the optimal allocation of attention between pre and post investment activities and the optimal proportion of venture proposals to accept further analysis shows how these different financial measures and optimal values respond to changes in the business climate more interestingly our analysis also shows where and to what extent the different parties could be expected to agree or disagree on how best to manage the process

the association between venture capitalists selection and value adding behavior evidence from early stage high tech venture capitalists building upon self efficacy and collective effort theories we study the association between the selection behavior of venture capitalists and their involvement in value adding activities we argue that investors who prioritize different characteristics of a business proposal during selection will be more or less confident of their own abilities and the abilities of entrepreneurial teams to effectively add value to portfolio companies and hence will be more or less involved in providing value adding activities in order to test this claim we use a stratified sample comprising 68 european early stage high tech venture capitalists results show that venture capitalists who focus on entrepreneurial team characteristics or financial criteria during selection are less involved in value adding activities compared to their peers who focus on technological criteria we discuss these findings from a theoretical and practical perspective

the effects of job relocation on spousal careers evidence from military change of station moves we investigate the impact of military job relocation on spousal earnings and employment by creating a unique longitudinal database that tracks over 900 000 military spouses over the period 2001 2012 based on data from two administrative sources military records on personnel and their dependents and social security earnings records this database allows us to estimate the effects of military change of station moves controlling for some key observable characteristics of the service member and household and controlling for individual spouse fixed effects we find that military moves cause a substantial decline in spousal earnings in the year of the move on the order of 2 100 or 14 of average spousal earnings moves also increase the likelihood that the spouse has no earnings for the year we find larger earnings reductions for moves that cross state lines and for older spouses male spouses and those with young children the career costs persist over time and spouses continue to experience significantly lower earnings 2 years after the move this persistence combined with the typical military member experiencing a change of station move every 2 or 3 years may substantially limit the ability of military spouses to accumulate human capital over time jel h56 r23 j45 j16 j64

labor immobility and the formation of gender wage gaps in local markets family ties have an important effect on the wage gap between male and female workers because wives are often more geographically tied to their husband s location which may not be the best market for the wife s skills theory implies a testable inverse relationship between urban size reflecting labor market size and male female wage differentials our results indicate that the wage gap between married men and women narrows with urban size about 17 percent of the wage gap between married men and women can be accounted for by urban size or more fundamentally by geographic immobility due to the family tie constraint

internationalization of western venture capitalists into emerging markets risk assessment and information in india this paper provides the first analysis of the internationalization of venture capital firms through an examination of risk assessment and information usage by firms in india personal interviews were conducted with executives in 31 84 of the active venture capital firms the paper extends previous research by comparing perceptions of the behavior of domestic venture capital firms in india foreign primarily u s venture capital firms in india and u s venture capital firms in their domestic markets foreign firms in india place significantly greater emphasis on product market factors and accountants reports than domestic firms in india they place significantly less emphasis on financial contributions of management in assessing risk and own due diligence and information from entrepreneurs than do u s firms in their domestic market they make more use of information from trade publications and relating to production capacity and technology and information from accountants reports than do domestic venture capital firms in india the evidence is consistent with venture capital firms adapting to local market conditions rather than implementing recipes from their domestic markets

strategy and the board of directors in venture capital backed firms abstract the results of this research demonstrate that boards of directors in venture capital backed companies are more involved in both strategy formation and evaluation than are boards where members do not have large ownership stakes these same results are demonstrated even when industry board size level of diversification and insider board representation are held constant agency theory and institutional theory are advanced as reasons for this higher level of involvement venture capitalists are generally seen as value added investors who have played a significant role in the development of many entrepreneurial businesses bygrave and timmons 1992 this success has lead students of industrial competitiveness like thurow 1992 to argue that the venture capitalist should serve as an example for directors of all types of organizations one of the most significant value added activities of the venture capitalist is involvement with strategy fried and hisrich 1995 macmillan kulow and khoylian 1988 sapienza 1989 sapienza et al 1996 rosenstein bruno bygrave and taylor 1993 implicit in the writings extolling directors who act like venture capitalists porter 1992a porter 1992b bhide 1994 thurow 1992 is the belief that they will be more active than traditional board members however little empirical work has been done to directly compare the level of strategic involvement of the two types of boards building on the work of judge and zeithaml 1992 this study compares the level of board involvement with strategy by the boards of venture capital backed companies with the boards of other types of organizations after establishing different levels of involvement it then examines why there is a difference finally this study provides additional empirical evidence on the relationship between board involvement and performance zahra and pearce 1989

why are power couples increasingly concentrated in large metropolitan areas using the panel study of income dynamics psid we test costa and kahn s colocation hypothesis which predicts that power couples couples in which both spouses have college degrees are more likely to migrate to the largest cities than part power couples or power singles we find no support for this hypothesis instead regression analyses suggest that only the education of the husband and not the joint education profile of the couple affects the propensity to migrate to large metropolitan areas the observed location trends are better explained by higher rates of power couple formation in larger metropolitan areas

the living dead phenomenon in venture capital investments abstract 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 venture capital managers reported that living dead conditions were usually caused by deficiencies in investee management particularly in responding to market conditions as well as markets that were too small or two slow growing missed opportunities and unanticipated competition the timeframe of this phenomenon is typically after product development and initial sales have been achieved and during the rollout stage of pushing for rapid growth and market share the key characteristic of living dead companies in the eyes of their investors is their very poor prospects for producing a successful exit for their investors usually because of more limited growth than originally anticipated or inadequate profitability although the rate of return boundaries for living dead companies were wide ranging from a rate of return ror of 0 on the low side to 10 on the high side most were described by venture capital managers as economically self sustaining in the near term and a number of living dead companies had reached 5 m to 15 m in revenues thus the concept of a living dead investment is specific to the context of venture capital backed investing and represents primarily a failure of investor expectations as distinct from an economic failure of the venture overall the 80 venture capital firms projected that 20 6 of their investments would end up as living dead companies by the point of final distribution when living dead situations occur venture capital managers use a number of strategies to attempt to turnaround these companies or to achieve an exit the most often used strategy was to attempt to sell or merge the company but usually only after one or more preliminary steps to turnaround the company had been attempted first including replacing investee management repositioning the product and making revisions to the venture opportunity strategy firms that projected lower percentages of living dead investments at distribution as well as firms using high rate of return targets for their portfolios were slightly more likely to use active intervention strategies to turnaround or liquidate living dead investments than firms that expected higher percentages of living dead companies at distribution or firms that used lower rate of return targets overall venture capital managers were able to achieve a successful turnaround or exit in only 55 9 of living dead situations and these results were unrelated to the age of the venture capital firms their size or the relative availability of investor personnel for monitoring investees this result in conjunction with the high number of causal factors identified for living dead situations that involved adverse market factors suggests that successful or unsuccessful outcomes with living dead investments may be largely determined by the underlying causation of the living dead problems and whether or not these causal factors are controllable by the venture capital investors inadequate investee management and internal operational problems can potentially be remedied by venture capital investors whereas markets that are too small or too slow growing or severe industry oversupply conditions are largely outside of their control

determinants of the incidence and scale of seed capital investments by venture capital firms employing both behavioral decision making and agency theories our study seeks to identify those factors that influence a venture capital vc firm s decision to undertake seed capital investments and subsequently the scale of such activity using data on the investments made by 2949 vc funds raised worldwide between 1962 and 2002 we find investor age timing of investment and fund location to be of importance in addition the size of the fund and the existing number of portfolio firms exert opposite influences on the level of seed capital activity of the vc firm these results suggest that seed activity is a valuable source of market intelligence for leading vc firms seeking proactively to identify and invest in novel technologies

selection of entrepreneurs in the venture capital industry an asymptotic analysis we study a model of entrepreneurs who compete in an auction like setting for venture capital vc funding in a setting where limited capital dictates that the vc can only finance the best entrepreneurs with asymmetric information vcs can only assess entrepreneurs by the progress of development which in equilibrium reveals the quality of the new technology using an asymptotic analysis we prove that in attractive industries having a large number of entrepreneurs competing for vc funding could lead to underinvestment in technology by entrepreneurs as the effort exerted by losing entrepreneurs is wasted the study then proceeds to characterize the conditions under which a greater number of competing entrepreneurs is better the model also demonstrates that vcs could possibly increase their payoff by concentrating on a single industry in addition the study also provides some insights on the effects of multiple investments by vcs and the effects of competition among vcs on the same investments

the relationship between governance structure and risk management approaches in japanese venture capital firms abstract this paper attempts to understand what drives japanese venture capital jvc fund managers to select either active managerial monitoring or portfolio diversification to manage their firms investment risks j bus venturing 4 1989 231 unlike u s venture capitalists that use active managerial monitoring to gain private information in order to maximize returns j finance 50 1995 301 jvcs have traditionally used portfolio diversification to attenuate investment risks hamada y 2001 nihon no bencha kyapitaru no genkyo current state of japanese venture capital nihon bencha gakkai vc seminar may 7 we found that performance pay is positively related to active monitoring and that management ownership is positively related to active monitoring and negatively related to portfolio diversification the managerial implication of our study is that venture capitalists should be as concerned about the structure of their incentive systems for their fund managers as they are for their investee firm entrepreneurs agency theory says that contingent compensation is a self governing mechanism for individual effort that is difficult to measure and verify when properly applied equity ownership and performance based pay can have powerful influencing effects on the strategic choices of managers

multistage financing of technical start up companies in silicon valley abstract financing remains an issue that entrepreneurs face long after their initial financing has been obtained in technical companies that face changing customers competitors and technology the need to finance new products to replace earlier products can be of vital importance to growth and survival venture capital firms that invest in technical companies also recognize the need for subsequent financing to maintain growth and thus protect the initial investment this research explored both the venture capitalist s and the entrepreneur s viewpoints the principal questions asked in the research were 1 how are subsequent rounds of investment considered and made by venture capitalists and 2 what problems occur in the entrepreneur s search for subsequent funding a combination of in depth interviews and mailed questionnaires was used in the research to obtain responses from a sample of venture capitalists and entrepreneurs in silicon valley this approach produced observations on the venture capitalists methods of making risk return trade offs and on the reasons why entrepreneurs face problems in obtaining funding for second new products specifically it was found that venture capital firms reduce the risk associated with funding young companies by showing preferences for certain stages of financing or for funding single versus multiple round investments these preferences appear to be idiosyncratic and entrepreneurs must be careful to deal with venture capitalists whose tendencies are consistent with the entrepreneurs goals it was also found that a major problem faced by entrepreneurs seeking funding for second products is the effort required for the search this effort takes away from their ability to perform day to day management activities at a crucial time in the growth of the firm implications are drawn for improving the effectiveness of entrepreneurs and venture capitalists efforts as well as for future research

the entrepreneur s search for capital abstract the popular media have been inundated with stories of the spectacular success of start up companies whose very existence let alone their meteoric growth would not have been possible without the infusion of venture capital by comparison there is a dearth of scientific research on the topic of venture capital in this article we take a systematic look at entrepreneurs in search of risk capital this inquiry is based upon five data bases including surveys of venture capitalists and entrepreneurs we have tracked 193 ventures which were denied venture capital surveyed 179 new high technology companies in northern california and reviewed the dun bradstreet credit reports of 145 new ventures in california in sic codes related to the high tech sector with follow up interviews of 86 of these 145 start ups

the structure of the investment networks of venture capital firms abstract 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

variants of agency contracts in family financed ventures as a continuum of familial altruistic and market rationalities abstract funding is a critical dimension of new creation although instances of family involvement in new venture financing are common ironically their role has been largely ignored in much of the mainstream business and economics literature when family members invest in the ventures of other family members they must make many choices either explicitly or implicitly about organizational form and governance consequently the governance of these exchange relationships tends to be highly variable this paper explores the primary rationalities governing the exchange relationships in family investment decisions during the early stages of new venture creation it presents activities as variants of agency contracts occurring within a continuum of familial altruistic and business market rationalities existing venture capital theory is extended through the introduction of rationalities and more comprehensive models of decision making

on growth drivers of high tech start ups exploring the role of founders human capital and venture capital abstract in this paper we jointly analyze the effects of the human capital of founders and access to venture capital vc financing on the growth of 439 italian new technology based firms ntbfs we rely on econometric models that control for survivorship bias and the endogeneity of vc financing as to non vc backed firms the competence based argument that the capabilities of ntbfs coincide with founders skills is confirmed nonetheless once a ntbf obtains vc this coincidence vanishes pointing to the coach function performed by vc investors conversely the view that sees the scout function as the main task performed by vc investors is not supported

university spin out companies and venture capital abstract the creation of university spin out companies that create wealth is a major policy objective of governments and universities finance is a catalyst of this wealth creation yet access to venture capital is a major impediment faced by these companies in this article we adopt a finance pecking order perspective to examine the problems faced by those university spin out companies seeking to access venture capital we triangulate evidence from spin out companies university technology transfer offices and venture capital firms in the uk and continental europe to identify the problems and to suggest policy developments for these parties as well as government we compare perceptions of high tech venture capital firms that invest in spin outs with those that do not and also consider vcs views on spin outs versus other high tech firms our evidence identifies a mismatch between the demand and supply side of the market in line with the pecking order theory venture capitalists prefer to invest after the seed stage however in contrast to the pecking order theory ttos see venture capital as more important than internal funds early on we develop policy implications for universities technology transfer offices academic entrepreneurs venture capital firms and government and suggest areas for further research

assessing the contribution to innovation of private equity investors a study on european buyouts abstract the paper provides an empirical analysis of the patenting activity of a sample of western european manufacturing firms undergoing a buyout between 1998 and 2004 a panel data design is used to test whether the characteristics of the deal and of private equity pe firms can affect acquired companies subsequent innovation effort as measured by the number of patents granted by the epo results support the view that the innovation activity of portfolio firms is affected by different types of investors pursuing different objectives and differing in their risk propensity expected returns and investment policies the characteristics of lead investors size stage specialization geographical location and of the deal amount invested presence of multiple investors are also investigated and are found to differently affect the post buyout innovation activity of sample firms

determinants of required return in venture capital investments a five country study abstract using two complementary theoretical perspectives we develop hypotheses regarding the determinants of the return required by venture capitalists and test them on a sample of over 200 venture capital companies vccs located in five countries consistent with resource based theory we find that early stage specialists require a significantly higher return than other vccs when investing in later stage ventures consistent with financial theory we find that acquisition buyout specialists require a significantly lower return than other vccs when investing in expansion companies furthermore in comparison to specialists highly stage diversified vccs require a significantly higher return for early stage investments independent vccs require a higher rate of return than captive or public vccs in general higher required returns are associated with vccs who provide more intensity of involvement have shorter expected holding period of the investment and being located in the us or uk in comparison to those in france belgium and the netherlands

assessing venture capital investments with noncompensatory behavioral decision models abstract this article examines the prospect of a decision support system for the assessment of venture capital investments it approaches the task of developing decision models from the perspective of the venture capitalist thus venture capitalists have played an active role in defining the predictor variables and in providing data on their own investments venture capitalists and recent research underscore the importance of the entrepreneur in new ventures and the predictor variables selected reflect this bias the literature is now replete with studies demonstrating the superiority of multiattribute actuarial models over human judgment for diverse decision environments ranging from medical science to finance this class of behavioral decision models consists of the simultaneous consideration of several attributes relevant to a decision actuarial models of this kind can be applied to attribute and decision data based on the decision maker s judgments i e expected outcomes before the events transpire termed judgment based models they can also be applied to data on past events or actual outcomes where known termed environment based models again it needs to be emphasized that actuarial models whether based on the decision maker s judgments or on the environment usually outperform the decision maker these general principles are applied here among actuarial models a particular subclass of models is called noncompensatory in these models a low value for one attribute cannot be compensated by a high value for another attribute as an example in selecting a place kicker in football athletic skills other than kicking ability are irrelevant in this study two types of noncompensatory actuarial models conjunctive and disjunctive are used to model both venture capitalists judgments and the environment interviews with venture capitalists reveal that some place strong emphasis on one or two attributes in judging a potential investment this type of decision making behavior indicates a disjunctive decision process at the same time there can be a tendency to ensure that a prospective investment is satisfactory at a minimum the entrepreneur s tenacity courage is a redundant variable that is sublimated in desire for success and enthusiasm capacity for work

escalation of commitment in venture capital decision making differentiating between domestic and international investors drawing upon an escalation of commitment framework this study investigates how differences between cross border and domestic venture capital investors in emotional social and institutional factors affect their decision to terminate an unsuccessful investment we track the exit outcome of 1060 venture capital investments in 684 european technology companies results show that domestic investors have a high tendency to escalate their commitment to a failing course of action while cross border investors terminate their investments efficiently even when investing through a local branch this is explained by cross border investors having a lower social and emotional involvement with the project and a lower embeddedness in the local economic and social environment decreasing individual decision biases further they are affected to a lower extent by normative pressures to further invest from their co investment network local branches of cross border investors are also shielded from escalation of commitment we conjecture that their international investment committee acts as an organizational safeguard against individual decision biases domestic investors may hence benefit from mimicking the behavior of cross border investors

economic methodology in a nutshell he literature on economic methodology is concerned mainly with questions of theory confirmation or disconfirmation or empirical theory choice the central question is usually how one can tell whether a particular bit of economics is good science economists would like methodologists to provide the algorithm for doing good economic science and they want the algorithm to vindicate their own practice and to reveal the foolishness of those who do economics differently for example milton friedman 1953 tells economists that good theories are those that provide correct and useful predictions while paul samuelson 1947 1963 tells economists to formulate theories with operational concepts that are ideally logically equivalent to their descriptive consequences in my view not only are these and most other specific views on theory appraisal mistaken but the concern with problems of empirical appraisal is exaggerated for there are also interesting methodological questions to consider both normative and descriptive concerning the structure strategy goals and heuristics of various economic theories for example few writers on economic methodology recognize that the activities of formulating economic models and investigating their implications are a sort of conceptual exploration instead most mistakenly regard these activities as offering empirical hypotheses and assess them in terms of some philosophical model of confirmation or falsification as a tendentious survey of standard methodological literature this essay will however share its preoccupation with the empirical appraisal of theory microeconomic theory in particular i shall in particular discuss four approaches to praising or damning microeconomic theory that have dominated methodological discussions

venture capital in transition a monte carlo simulation of changes in investment patterns abstract this article examines the nature of the investment process which has historically generated high returns for venture capital funds and the impact on fund returns of perceived changes in management practice and the structure of the industry the article outlines some policy implications for fund managers investors and the general management of corporations the authors have investigated the investment process and the changes in the nature of the process through the use of a monte carlo simulation model information gathered from interviews with fund managers and the available published data on venture fund performance including proprietary surveys was used to develop and calibrate the model the model replicates the relatively high average fund returns and distribution of returns for funds through the early 1980s the model simulates a multistaged investment process which draws on a pool of investment opportunities which have a log normal distribution of returns and a low zero average return the model readily permits the exploration of the impact of management and industry practices on fund returns the conditions identified by the authors which led to high rates of return on the part of venture capital funds include 1 1 multistaged investment or commitment of funds on an incremental basis with evaluation of venture performance before commitment of additional fund 2 2 objective evaluation of venture performance with the clear distinguishing of winners from losers 3 3 parlaying funds or having the confidence to commit further funds to ventures identified as winners 4 4 persistence of returns from one round to the next which implies that valuable information is gained from previous rounds of investment in the same venture 5 5 long term holding of investment portfolios for a period sufficient for geometric averaging of compound returns to cause the winners to take over or raise portfolio returns taken together these conditions have permitted venture capital funds to historically realize strong average returns with a few of them realizing extraordinary returns the article also explores the consequences of what some believe is happening in the industry a trend toward holding investments for shorter periods increased competition both for investments and later in the product market arena and a growing lack of loyalty between investors and investees all of these conditions and their indirect consequences were shown by the model to negatively impact the limited partners in the venture capital funds while general partners given the structure of fees and the distribution of investment returns generally realized a reasonable to extraordinary return the article outlines a number of management and investment policy implications for investors and fund managers

the informal venture capital market aspects of scale and market efficiency abstract risk capital is a resource essential to the formation and growth of entrepreneurial ventures in a society that is increasingly dependent upon innovation and entrepreneurship for its economic vitality the performance of the venture capital markets is a matter of fundamental concern to entrepreneurs venture investors and to public officials this article deals with the informal venture capital market the market in which entrepreneurs raise equity type financing from private investors business angels the informal venture capital market is virtually invisible and often misunderstood it is composed of a diverse and diffuse population of individuals of means many of whom have created their own successful ventures there are no directories of individual venture investors and no public records of their investment transactions consequently the informal venture capital market poses many unanswered questions the author discusses two aspects of the informal venture capital market questions of scale and market efficiency the discussion draws upon existing research to extract and synthesize data that provide a reasonable basis for inferences about scale and efficiency private venture investors tend to be self made individuals with substantial business and financial experience and with a net worth of 1 million or more the author estimates that the number of private venture investors in the united states is at least 250 000 of whom about 100 000 are active in any given year by providing seed capital for ventures that subsequently raise funds from professional venture investors or in the public equity markets and equity financing for privately held firms that are growing faster than internal cash flow can support private investors fill gaps in the institutional equity markets the author estimates that private investors manage a portfolio of venture investments aggregating in the neighborhood of 50 billion about twice the capital managed by professional venture investors by participating in smaller transactions private investors finance over five times as many entrepreneurs as professional venture investors 20 000 or more firms per year compared to two or three thousand the typical angel backed venture raises about 250 000 from three or more private investors despite the apparent scale of the informal venture capital market the author cites evidence that the market is relatively inefficient it is a market characterized by limited information about investors and investment opportunities furthermore many entrepreneurs and private investors are unfamiliar with the techniques of successful venture financing the author s scale and efficiency inferences coupled with evidence documenting gaps between private and social returns from innovation prompt questions about public as well as private initiatives to enhance the efficiency of the informal venture capital market the article concludes with a discussion of venture capital network inc vcn an experimental effort to enhance the efficiency of the informal venture capital market vcn s procedures and performance are described followed by a discussion of the lessons learned during the first two years of the experiment

predictors of success in new technology based ventures abstract several recent studies have examined the causes of success and failure in new ventures from these a three level analysis has evolved which considers the management the venture s strategy and its competitive environment empirical testing is still at an early stage but results have generally supported the three level approach however the findings are not very strong this study considers only high potential technology based new ventures the companies on which venture capitalists concentrate it suggests that such firms face unusual time pressures and uncertainty and that their responses to these forces are major determinants of success or failure we propose 11 easily measured qualities describing management the firm s strategy and its environment which should influence how quickly the venture can act these should predict a new venture s performance the 11 attributes are tested on 36 new ventures representing essentially all of the startup investments of a major venture capital firm between 1974 and 1982 the data are taken from the firms original business plans performance is measured from the subsequent financial history using the compound rate of return to all shareholders founders employees and investors the ventures in this sample are primarily based on electronic or information technologies they are highly successful as a group with an average compound rate of return of 98 per year they are also very risky the standard deviation of returns is 171 per year and in 11 of 36 cases the shareholders lost on their investments results from a single sample must always be treated cautiously however several findings are strong enough to merit further study and to be incorporated as a part of a process for evaluating new ventures 1 1 a set of four measures representing all three areas explains 57 of the variance the four completeness of the founding team technical superiority of the product expected time for product development and buyer concentration all behave as expected the first two have a positive effect the latter two have an inverted u shaped relationship with an optimum development time of 12 months and an optimum number of customers of approximately 60 three other measures prior shared experience of the founders competitive conditions and projected market share show an influence when management strategy and environment are examined one area at a time 2 2 these relatively simple measures predict success well probably at least as well as any other study has done using more subtle measures 3 3 the measures used in this study though they have strong predictive power apparently did not influence the young capitalists otherwise the relationships should have been different when the return to venture capital investors was used in place of the total return in fact they were the same this suggests that the venture capital investors did not give sufficient weight to the qualities that we consider and could make better choices by giving greater attention to those measures 4 4 prospective entrepreneurs and investors should benefit from using our model aspart of their screening processes specifically they might calculate a predicted rate of return if it is low say below 30 per year they should examine the reason for the low score and consider whether circumstances exist which outweigh or invalidate that apparent weakness 5 5 an additive model seems realistic that is one can combine dissimilar qualities with appropriate weighting for relative importance to arrive at an overall figure of merit with strong predictive power the specific parameters imply that a company must have a complete management team and score well on two of the remaining three measures in order to be an attractive opportunity more generally the model allows a practitioner to make a rough assessment of the tradeoffs among management product and industry this is important because few if any new companies have all the qualities an investor may desire 6 6 although individual qualities of the founders are no doubt important this remains a difficult matter to demonstrate statistically 7 7 firms exist in an ever changing competitive environment to the extent that these findings are valid beyond this sample they may have been recognized and incorporated in more recent new ventures if so this may change the nature of competition and alter the key determinants of success or failure

the effect of firm formation and growth on job creation in the united states abstract this paper demonstrates the importance of new firm formation to economic growth it begins by providing data that describe the united states as having had greater employment growth than most developed nations of the world over the last 25 years and focuses upon why job growth in the united states has exceeded that of other nations job creation by firm size we first examine the data on the relative contribution of small and large firms to u s job growth by summarizing research that is uniformly expressed in two year periods and defines small firms as those with less than 100 employees conclusive evidence emerges that small firms are the major sources of net new creation firm entry exit rates and economic growth further understanding of small firm job creation is obtained when we examine firm entry and exit data here we find that firm entry rates vary considerably from period to period range 10 4 12 5 whereas exit rates remain relatively stable from period to period range 9 6 10 4 thus variation in entrepreneurial activity the formation of new firms is the major cause of net increases in the number firms in both the united states and the united kingdom net firm increases are positively related to overall economic activity firm entry exit and job creation further exploration of this correlation can be conducted by examining job creation and loss defined by source entries expansions exits and contractions the data for 1976 through 1984 shown here demonstrate that new entries account for 74 0 of the 50 8 million new jobs created expansions of existing firms accounted for 26 0 small firms less than 500 employees produced 54 6 of the entry jobs and 56 8 of the expansion jobs on the other hand job losses totaled 33 8 million 79 0 due to exits and 21 0 to contractions small firms account for 53 6 of the jobs lost from exits and 47 8 of those lost from contractions overall small firms account for 60 5 of the 17 0 million net new jobs given the data that show correlation between net firm formation rates and economic growth the finding that entry rates vary more than exit rates and the finding that new entries create most of the new jobs it can be concluded that firm formation especially small firm formation is a significant factor in economic growth increases in small firm formation rates have a significant effect on net job creation schumpeter s model and observed market turbulance another finding from this data on job creation by entry expansion exit and contraction is the large amount of job creation and destruction activity taking place for the period studied three jobs were created and two jobs destroyed for each net new job created this describes a turbulent job market with many workers moving from job to job the labor markets are much less stable that normally envisioned this observed phenomenon fits well with schumpeter s theory of capitalism he proposes that capitalistic growth occurs because entrepreneurs use innovations to form new firms which enter existing markets when successful these growing new firms destroy existing market structures causing decline of established firms while creating increased demand and producing overall economic growth if schumpeter is correct one would expect to find high rates of firm formation and failure and large numbers of jobs created by new firms while many jobs are lost by exits and contractions of established firms the findings reported here show this government policy affects on entry exit our results also show that formation of small new firms is a necessary requirement for economic growth historically however government policy has not considered small firm entry as a central issue thus government policies can and have had a negative effect on entry rates and therefore upon economic growth rates furthermore high rates of new firm formation cause a great deal of turbulence in labor markets with three jobs created and two lost for every one net new job such labor turbulence may be seen by policy makers as undesirable as it entails considerable worker movement from job to job as such policy makers have recently proposed policies to protect workers from job loss due to contractions and exits however such protection policies as demonstrated in recent european experience will also construct barriers to entrepreneurial entry the result may be a decline in small firm entry and a decline in economic growth instead of protecting specific jobs appropriate policies are those that facilitate movement of workers from job to job adequate unemployment compensation for short term unemployment fully vested and portable pension plans and retraining programs are examples of policies that allow the labor market to remain flexible while reducing the negative effect on those who lose jobs

specialization versus diversification as a venture capital investment strategy abstract 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

on matters methodological in economics books reviewed in this article lawrence a boland 1989 the methodology of economic model building methodology after samuelson j c glass and w johnson 1989 economics progression stagnation or degeneration arjo klamer donald n mccloskey and robert m solow eds 1989 the consequences of economic rhetoric brian j loasby 1989 the mind and method of the economist a critical appraisal of major economists in the 20th century john pheby 1988 methodology and economics a critical introduction

deal structuring in philanthropic venture capital investments financing instrument valuation and covenants philanthropic venture capital phvc is a financing option available for social enterprises that like traditional venture capital provides capital and value added services to portfolio organizations differently from venture capital phvc has an ethical dimension as it aims at maximizing the social return on the investment this article examines the deal structuring phase of phvc investments in terms of instrument used from equity to grant valuation and covenants included in the contractual agreement by content analyzing a set of semi structured interviews and thereafter surveying the entire population of phvc funds that are active in europe and in the united states findings indicate that the non distribution constraint holding for non profit social enterprises is an effective tool to align the interests of both investor and investee this makes the investor behaving as a steward rather than as a principal conversely while backing non profit social ventures philanthropic venture capitalists structure their deal similarly as traditional venture capital as the absence of the non distribution constraint makes such investments subject to moral hazard risk both in terms of perks and stealing and social impact focus

institutional differences and the development of entrepreneurial ventures a comparison of the venture capital industries in latin america and asia this paper examines how differences in distinct institutional clusters of countries impact on the vital entrepreneurial activity of venture capital and how individuals organizations and their collective action in turn shape those institutions the focus on venture capital offers researchers the opportunity to view an industry that comes from a common root with strong and consistent traditions in which to examine how the differing institutional settings impact on behaviors in different markets and how the institutions themselves may change in these settings we also focus on emerging economies since such economies offer a natural laboratory to study the impact of institutional change specifically this paper employs an institutional theory perspective to examine venture capital in two regions of the world that form institutional clusters of countries latin america and asia it is found that the venture capital industry exhibits a strong consistency across many dimensions yet institutions in these two distinct settings result in significant differences in industry practice therefore this research is able to contribute to both empirical and theoretical understanding of emerging economies institutions in those environments and venture capital

agency risk control through reprisal abstract we study agency risk control by venture capital vc firms to highlight the importance of vc reprisal ability the central thesis of this paper is that a vc firm s due diligence effort as an ex ante screening for agency risk is contingent upon its ex post reprisal ability applying to the context of emerging markets we develop a testable hypothesis and empirically test it using data from singapore market it is found that foreign vc firms that are relatively weak in reprisal ability spend more effort in due diligence screening compared to local vc firms

private equity investment decisions in family firms the role of human resources and agency costs abstract this study examines decision making criteria that are employed by private equity pe investors selecting family firms hypotheses test the likelihood of investment based on family firm characteristics findings show that pe professionals take into account family specific criteria including human resources and opportunities to reduce agency costs furthermore pe professionals prefer family firms that are already professionalized this research contributes to the family firm literature on both a theoretical and a methodological level exploring nonfamily succession routes and employing techniques conjoint analysis for data collection and multilevel models for data analysis that have seldom been used in this context

emerging strategies in the venture capital industry abstract this article reports a study of the future direction of the venture capital industry by examining the basic strategies and strategic assumptions of a broad sample of venture capital firms there are three main sets of results first the once homogeneous venture capital industry is rapidly dividing into several different strategic groups members of these groups are increasingly distinguishing themselves from other groups on four basic dimensions followed by member firms 1 financial resources equity capital comes from a greater variety of sources five major sources resulting in fundamentally different demands on the mission of the receiving venture capital firm 2 staff resources the way venture capital firms use staff resources particularly regarding investee management assistance is becoming increasingly varied across different groups some firms provide fewer than 2 days per year while others provide up to 450 man days per year per client 3 venture stages while the overall industry retains a primary interest in stage 1 2 and 3 investment specific firms vary considerably in the distribution of investment emphasis across these three stages 4 use of financial resources firms in the industry are becoming increasingly differentiated in the size of minimum investments they make 100 m to 1000 m and in their role as a direct investor versus a broker for institutional funds practicing venture capitalists should make use of this first set of findings in two ways first they may find it useful to compare their firm s orientation along these four strategic dimensions with those of the firm s that comprised this study second they may seek to use these four strategic dimensions as a basis on which they might examine clarify and or redefine the marketing strategy pursued by their firm a second set of results identified three goals and priorities of venture capital firms that have neither changed over time nor across increasingly different strategic groups annualized after tax return on investments of between 25 and 40 remain the most common objective across all firms a 5 to 6 year investment time horizon and a major emphasis on the quality of the management team in evaluating new deals were universal priorities across diverse venture capital firms a third finding in this study was that venture capital firms profess greater certainty about the future direction of the venture capital industry than the direction of their firm the most notable example of this is a strong sense that industry wide rates of return are headed downward yet few senior partners expect their firm to experience this decline practicing venture capitalists may be interested to peruse these results to see what trends are predicted within the venture capital industry by this subsample of that industry second they should consider the finding that industry wide rates of return are headed downward in light of the first two sets of findings to develop their own opinion about the future performance of different strategic groups within the industry it is important to note that the sample of venture capital firms on which this study was based did not include most of the larger older funds some of these funds would be characterized as industry leaders pace setters and innovators the sample provides a solid representation of the broad middle of the venture capital industry and newer entrants into the industry while larger older funds are under represented their impact on future trends and strategies in the industry is captured to some extent in the set of questions about future direction of the venture capital industry finally the emerging strategic groups in the venture capital industry that were identified by this study may be useful information for investors as well as users of venture capital for investors the opportunity to participate in venture capital activity should become more clearly understood and varied basically this study should help investors differentiate the strategic posture of different venture capital firms and funds on four factors rather than simply industry geographic considerations for users of venture capital the results of this study suggest a possibility for multiple options that are both more accessible and more catered to specific needs users of venture capital should find a clearer basis on which to differentiate venture capital firms in terms of venture stage priorities staff utilization orientations sources and uses of financial resources this should make for more informed shopping among different venture capital sources and provide a basis on which to shop for the most compatible firm

a model of venture capitalist investment activity the paper describes the activities of venture capitalists as an orderly process involving five sequential steps these are 1 deal origination the processes by which deals enter into consideration as investment prospects 2 deal screening a delineation of key policy variables which delimit investment prospects to a manageable few for in depth evaluation 3 deal evaluation the assessment of perceived risk and expected return on the basis of a weighting of several characteristics of the prospective venture and the decision whether or not to invest as determined by the relative levels of perceived risk and expected return 4 deal structuring the negotiation of the price of the deal namely the equity relinquished to the investor and the covenants which limit the risk of the investor 5 post investment activities the assistance to the venture in the areas of recruiting key executives strategic planning locating expansion financing and orchestrating a merger acquisition or public offering 41 venture capitalists provided data on a total of 90 deals which had received serious consideration in their firms the questionnaire measured the mechanism of initial contact between venture capitalist and entrepreneur the venture s industry the stage of financing and product development ratings of the venture on 23 characteristics an assessment of the potential return and perceived risk and the decision vis i vis whether to invest the modal venture represented in the database was a start up in the electronics industry with a production capability in place and seeking 1 million median in outside financing there is a high degree of cross referrals between venture capitalists particularly for the purposes of locating co investors factor analysis reduced the 23 characteristics of the deal to five underlying dimensions namely 1 market attractiveness size growth and access to customers 2 product differentiation uniqueness patents technical edge profit margin 3 managerial capabilities skills in marketing management finance and the references of the entrepreneur 4 environmental threat resistance technology life cycle barriers to competitive entry insensitivity to business cycles and down side risk protection 5 cash out potential future opportunities to realize capital gains by merger acquisition or public offering the results of regression analyses showed expected return to be determined by market attractiveness and product differentiation r2 0 22 perceived risk is determined by managerial capabilities and environmental threat resistance r2 0 33 finally a discriminant analysis correctly predicted in 89 4 of the cases whether or not a venture capitalist was willing to commit funds to the deal on the basis of the expected return and perceived risk the reactions of seven venture capitalists who reviewed the model s specification were used to test its validity

the potential of actuarial decision models abstract venture capitalists vcs are considered experts in identifying high potential new ventures gazelles vc backed ventures survive at a much higher rate than those ventures backed by other sources kunkel and hofer 1991 sandberg 1986 timmons 1994 thus the vc decision process has received tremendous attention within the entrepreneurship literature nonetheless vc backed firms still fail at a surprisingly high rate 20 moreover another 20 of the vc s portfolio fails to provide any return to the vc therefore there is room for improvement in the vc investment process the three staged investment process often begins with venture screening first vcs screen the hundreds of proposals they receive to assess which deserve further consideration those ventures that survive the initial stage are then subjected to extensive due diligence finally the vc and entrepreneur negotiate terms of the investment considering the amount of time that due diligence and negotiation of terms may take it is imperative that vcs minimize their efforts during screening so that only those ventures with the most potential proceed to the next stage yet at the same time the screening process should also be careful not to eliminate gazelles prematurely vcs are in a quandary how can they efficiently screen venture proposals without unduly rejecting high potential investments the answer may be to use actuarial decision aides to assist in the screening process actuarial decision aides are models that decompose a decision into component parts or cues and recombine those cues to predict the potential outcome for example an actuarial model about the vc decision might decompose a venture proposal into decisions about the entrepreneurial team the product the market etc the sub component decisions are than recombined to reach an overall assessment of the venture s potential such models have been developed in a number of decision domains e g bank lending psychological evaluations etc and been found to be very robust specifically these models often outperform the very experts that they are meant to mimic the current study had 53 practicing vcs participate in a policy capturing experiment the participants examined 50 ventures and judged each venture s success potential would the venture ultimately succeed or fail likewise identical information about each venture was input into two different types of actuarial models one actuarial model a bootstrap model used information factors that vcs had identified as being most important to making a good investment decision the second actuarial model was derived by roure and keeley 1990 the roure and keeley model best distinguished between success and failure in a study of 36 high technology ventures the bootstrap model outperformed all but one participating vc he achieved the same accuracy rate as the bootstrap model the roure and keely model although less successful than the bootstrap model outperformed over half of the participating vcs the implications of this study are that properly developed actuarial models may be successful screening decision aides the success of the actuarial models may be attributed to their consistency across different proposals and time the models always weight the information cues the same vcs as are all human decision makers may often be biased by differing salient information cues that cause them to misinterpret or ignore other important cues for example a vc may overlook product weaknesses if s he is familiar with the entrepreneur putting forth a particular proposal although the current study developed a generalized actuarial model each vc firm could create screening models that fit it s particular decision criteria the models could then be used by junior associates or lower level employees to perform an initial screen of received venture proposals thereby freeing senior associates time

venture capital high technology and regional development florida r l and kenney m 1988 venture capital high technology and regional development reg studies 22 33 48 this paper explores the role of venture capital in technological innovation and regional development both aggregate data and a unique firm level data base are employed to determine the location of major centres of venture capital flows of venture capital investments and patterns of investment syndication or coinvestment among venture capital firms three major centres of venture capital are identified california san francisco silicon valley new york and new england massachusetts connecticut as well as three minor venture capital centres illinois chicago texas and minnesota venture capital firms are found to cluster in areas with high concentrations of financial institutions and those with high concentrations of technology intensive enterprises venture capital firms which are based in financial centres are typically export oriented while those in technology centres tend t

an institutional view of china s venture capital industry explaining the differences between china and the west abstract institutional theory argues that institutions in general and culture in particular shape the actions of firms and individuals in a number of subtle but substantive ways the theory has been used to explain a number of significant and substantive managerial differences found in different parts of the world to date the examination of venture capital outside the us and europe however has been rather limited institutional theory also suggests that there would be differences in how venture capital may operate in other parts of the world such as asia where the culture is substantially different from the west based on interviews with 36 venture capitalists in 24 venture capital firms investing in china this exploratory research finds that china s institutional environment creates a number of significant differences from the west the article discusses the impact of these findings on future research on asian venture capital theory development and the activities of venture capital professionals in that region

singapore venture capitalists vcs investment evaluation criteria a reexamination the venture capital vc industry in singapore is of recent origin however funds under management in singapore have grown from s 45 million in 1983 to s 7 86 billion in 1996 these developments together with the recent announcement of government s vision of singapore becoming a hub for venture capital in the region provide an opportunity for an examination of the venture capital industry in singapore the vc industry originated in the western hemisphere in response to the need for risk capital for high technology industries in the light of the differences in investment opportunities around singapore and the nature of industrial developments in south east asia in general the authors anticipated that the investment criteria employed by venture capital firms vcs in singapore would differ the results however reveal that criteria adopted by singapore vcs are not very different from those adopted by vcs in other countries including u s the results also confirm that the entrepreneur s characteristics or the top management s capabilities are seen as being primary indicators of the venture s potential further examination of vcs investment process revealed that the investment criteria adopted by successful vcs were no different from those adopted by less successful vcs this confirms that investment selection is a multi stage process wherein venture assessment is only one of the steps in this process before vcs evaluate a venture they screen investment proposals based on their investment preferences or investment strategies vcs in our sample had definite ideas about where to invest and in what types of firms how do vcs select appropriate investment strategies however has not been adequately dealt in the literature and is a fitting subject for further studies

some hypotheses about risk in venture capital investing abstract venture capital investing differs in important respects from investment decisions involving the securities of fortune 500 companies or decisions to purchase established companies which are generally made in accord with widely recognized financial models investing in new ventures involves a high level of uncertainty as well as a high risk of failure venture capital investing is characterized by high variability in the outcomes of new ventures and in the performance of venture capital portfolios venture capital investing decisions are complicated by a general lack of quantifiable financial and market data for early stage ventures and investment decisions remain hostage to unanticipated competitors market shifts and financial cycles some observers have suggested that venture capital investment decisions are primarily subjective assessments while the question of risk in venture capital investing has been addressed on an ad hoc basis in several empirical studies there has been little effort to develop a theoretical framework of risk perceptions and risk reduction strategies despite differences in investor experience investment preferences and tolerance for risk venture capital managers share many common perceptions of the risks involved in investing in new ventures and the distribution of those risks over the venture capital funded phase of development venture capital managers also utilize many common behaviors and strategies in adapting to these risks these perceptions and reactions to risk in investing and strategies for controlling risk can in theory be used to construct a behavioral framework that can predict how venture capital managers will behave in choosing between various investment opportunities in order to minimize risk and to maximize potential returns in an attempt to begin to identify various elements of such a behavioral framework of venture capital reactions to risk the authors have drawn upon psychological risk theory of decision making under uncertainty including classic expected utility theory later modifications to that theory by kahneman and tversky 1979 and coombs and huang s 1970 portfolio approach to risk that are applicable to venture capital investing these expected behaviors to risk have been used in conjunction with empirical studies of venture capital investment and portfolio outcomes distributions of investments within portfolios and venture capitalist perceptions of risk to propose nine hypotheses about how venture capital managers behave in making investment decisions these hypotheses include differences in variation and magnitude of returns for early stage versus later stage ventures explanations of how risk distributions change over the stagewise development of new ventures differences in the behavior of aggressive versus conservative investors in screening investment prospects and strategies utilizing a lower ideal level of risk to reduce the chances of achieving negative or sub normal final portfolio returns

specialist versus generalist investors trading off support quality investment horizon and control rights abstract we model an entrepreneur s selection of either an active specialist or a passive generalist investor for an innovative venture that requires external equity for startup and expansion financing we assume that the specialist investor provides better support but has a shorter investment horizon than the generalist we particularly focus on the entrepreneur s net present value npv maximizing contract taking into account the specialist s potential moral hazard this latter might try selling his claim in a secondary transaction to an uninformed outside investor even though the project is unsuccessful and should be abandoned we show that the entrepreneur may trade off crucial contract parameters when seeking external financing either type of investor may be preferable contingent on the allocation of control rights the investor s support quality and investment horizon the chances of success and the venture s expected liquidation value

determinants of venture capital firms preferences regarding the industry diversity and geographic scope of their investments abstract 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

does acquiring venture capital pay off for the funded firms a meta analysis on the relationship between venture capital investment and funded firm financial performance abstract researchers and practitioners frequently propose that venture capital vc is an important resource to increase the performance of funded firms especially in environments of uncertainty in this paper we scrutinize these theoretical propositions following an evidence based research approach we synthesize 76 empirical samples on 36 567 firms we find a small positive performance effect of vc investment on funded firm performance however the effect vanishes if researchers control for industry selection effects furthermore we find that the performance effect mainly relates to firm growth while profitability is unaffected we also uncover that performance effects are reduced when the funded firms are very young or very mature in addition studies focusing on ipo events which constitute the majority of studies determine a substantially smaller performance effect we discuss theoretical implications and offer suggestions for future research on vc

a venture capital model of the development process for new ventures abstract for years researchers have hypothesized that new ventures develop in a fairly predictable chronological process by evolving through various functional and strategic developmental stages however cross comparable longitudinal data from large numbers of ventures are still not available to validate these stages of development hypotheses the study sought to determine whether venture capital firms which have extensive experience with the longitudinal development of new ventures operate in accord with a common theory about how this process operates these findings also represent a first step toward empirically validating various elements of stages of development theories the study analyzed the perceptions of the ceo or managing partner of 73 u s venture capital firms about key features of the development process for new businesses venture capital firms were asked whether they differentiated stages in the development process for each such stage information was elicited on what the stage was called distinguishing characteristics of ventures in that stage key developmental goals or benchmarks typically accomplished in that stage and the major risks involved sufficient consensus was found on these aspects of the development process for a venture capital model of this process to be constructed the model consists of five sequential stages 1 seed 2 start up 3 second stage 4 third stage and 5 exit stage strong consensus was found on distinguishing characteristics of ventures in early stages of development key developmental goals or benchmarks in various stages and major developmental risks associated with each stage consensus on developmental characteristics diminished somewhat in later stages presumably because of differential rates of development among investees as well as differing degrees of success in accomplishing earlier objectives nevertheless sufficient differences in functional characteristics remained to clearly distinguish later stage investees from early stage investees and to enable differentiations in maturity between third stage and exit stage investees the venture capital developmental model exhibits both similarities and differences from stages of development paradigms first the venture capital model is primarily strategic and market oriented in focus it gives lesser emphasis to the elements of organizational structure management style and management specialization than some stages of development theories although these elements are identified by venture capitalists as potential areas of risk should problems arise second like stages of development paradigms the venture capital model is universal and not venture specific venture capital firms appear to view all potentially feasible business concepts despite differences in product organizational complexity rate of development or ultimate size as passing through the same process sequence albeit at different speeds and with varying degrees of success third the model while reflecting the financial objectives of venture capital investors is primarily shaped by the naturally occurring functional development of investees it does not represent arbitrary requirements imposed on investees to segment the developmental process into steps that would not otherwise occur the development of venture capital investees is influenced by the strategic and financial objectives of venture capital firms thus the model does not necessarily mirror the strategic and dynamic elements of the development process for firms that are not intended by their founders to grow rapidly and then go public or be acquired by a larger corporation or for ventures that must depend upon internally generated funds or bank loans to finance development the venture capital model representing perceptions of 73 venture capital firms derived from longitudinal data for many hundreds of new ventures appears to empirically confirm the concept of an evolutionary progression through key functional and strategic steps which is a central element of most stages of development hypotheses the study did not go into sufficient depth however to provide detail on the influence of factors such as organizational structure and management styles and control systems on development these factors are central elements in several stages of development theories and are arguably of critical importance in the growth survival and financial success of new ventures

the duhem quine thesis lakatos and the appraisal of theories in macroeconomics the point of this paper is to outline the implications of the duhem quine thesis for the task of appraising theories in economics the duhem quine thesis dqfrom now on states that it is not possible to falsify single hypotheses because it is invariably conjunctions of hypotheses which are being tested thus if a particular hypothesis is found to be in conflict with some piece of empirical evidence all that we can say is that the conjunction of the particular hypothesis with a set of auxiliary hypotheses is false we can never be sure that it is not one or more of the auxiliary hypotheses which is responsible for the anomalous empirical evidence rather than the particular hypothesis in which we are most interested expressed in symbols this means that arguments of the form ho 0 0 ho are not justified where ho is a particular hypothesis o is the observational evidence and the symbols and mean imply conjoined with and not instead our arguments can only justifiably be phrased in the form g1 0 0 g1 where g1 is a conjunction of hypotheses which contains ho there could well be some different conjunction of hypotheses gn which contains ho which is consistent with the empirical evidence the contention of this paper is that many of the debates in macroeconomics have been misguided in that the jointness of hypothesis testing has been ignored by participants in the debates instead the focus of attention has been on the appraisal of single target hypotheses considered in isolation from supportive auxiliary hypotheses the implicit assumption being that it is possible to falsify single target hypotheses the latter assumption is wrong following the logic of the dq thesis we are obliged to conduct our appraisal at the level of groupings of hypotheses that is to appraise any target hypothesis in conjunction with its supportive auxiliary hypotheses the implications of this line of reasoning are perhaps best unravelled in the context of concrete examples from debates in macroeconomics over the last two decades before moving to this task we will in section i provide a brief outline of the history of the dq thesis section ii will then illustrate the misguidedness of appraising target hypotheses in isolation from their supportive auxiliary hypotheses with reference to the often heated and continuing debate regarding the stability of the demand for money function the question of how to appraise groupings of hypotheses is considered in section iii here we will centre the

service for equity arrangements untangling motives and conflicts abstract many professional service organizations have adopted a little understood contractual form service for equity based on in depth case studies of 12 major professional service providers with a combined experience of 179 equity for service deals this paper documents 18 intended and unintended consequences emanating from and expanding beyond agency theory of adopting such a contractual form six propositions are developed which speculate how these consequences categorized under client development service operations financial management and organizational behaviour affect long run performance assuming these propositions cannot be rejected through empirical analysis the paper also provides managerial guidance for effective implementation of equity for service arrangements

reliance upon informants in the venture capital industry abstract can venture capital investors rely upon informants to be forthcoming with what they know or do they need to be concerned about self serving conduct these questions are investigated among two types of venture capital investors business angels and venture capital firms the results of the present study suggest that the more either type of investor is concerned with market or agency risk the less likely he or she will be to use informal network informants business associates and friends market risk is due to unforeseen competitive circumstances whereas agency risk results from the separate and possibly divergent interests of investors and their informants investors with a higher concern for risk consult formal network informants venture capital firm investors for information about market risk but concern with agency risk is not related to the frequency of use of venture capital firm sources agency risk deals with particular self interested individuals who are unlikely to be known to the formal informant network venture capital firm investors consult formal network sources more frequently than do business angels compared to business angels they enjoy a much more efficient flow of information from their informants as they gain more experience exchanging information venture capital firm investors increase their reliance upon formal network informants because informal network informants have less experience exchanging information it is possible that some informal sources could escape being detected if they decided to act in a devious self interested manner rather than relying upon informal informants several investors indicated in face to face interviews that they prefer to perform their own due diligence business angels seem to distinguish between two types of informants close associates with whom they have had extensive investment experience and mere acquaintances to whom they are only weakly tied by a referral from a close associate or someone else it is quite likely that business angels rely upon informants who are close associates however the informants in this study were predominantly acquaintances which may be fairly typical of most business angel informants because they were acquaintances and not close associates they were not utilized much as informants venture capital firm investors rely heavily upon associates at other venture capital firms for market information because they do not trust other informants to the same extent they may wish to de emphasize their reliance upon them similarly there are indications that business angels rely upon close associates to provide them with information about agency factors because angels do not trust others for this information and may in fact have limited access to other informants they may wish to focus their search for information on business associates this would enable them to avoid the expense of investigating the reliability of other informants this research should be helpful to entrepreneurs who are searching for new venture funding it suggests that certain types of informants may be more effective in championing the prospects of a deal to a venture capitalist an entrepreneur with a technical or market advantage ought to approach a venture capital firm because the informant network for venture capital firms is highly interconnected with other venture capital firms it is likely that presenting a request for funding to one of them will quickly result in the sharing of it among their informant associates if entrepreneurs possess a market advantage they ought to concentrate on obtaining funding from the first venture capital firm investor who reviews the deal entrepreneurs who can argue that they are trustworthy or competent even if they lack a technical or market advantage ought to present their deals to a business angel using a close business associate as an intermediary a mere acquaintance used as an intermediary would be much less effective although statistical testing indicated that such an approach would not generate significant success interviews with business angels suggested that using a close associate as an intermediary would improve an entrepreneur s prospects especially if the business angel were relatively unconcerned about a deal s risk moreover using an informant intermediary to contact a business angel would avoid the need to do an initial background check on the entrepreneur

venture capital and high technology entrepreneurship abstract venture capital clearly plays an important role in high technology entrepreneurship the purpose of this article is to explain the differences among various venture capital complexes focusing on where venture capital is important to innovation and entrepreneurship and conversely where it is not we do so through an empirical and historical examination of the seven most important venture capital complexes california san francisco silicon valley massachusetts boston new york illinois chicago texas connecticut and minnesota minneapolis we establish a three part tripartite typology for explaining the differences between these venture capital complexes 1 technology oriented complexes are located close to concentrations of high technology intensive businesses invest most of their funds locally and are net attractors of capital 2 finance oriented complexes are located around financial institutions and export their capital and 3 hybrid complexes mix characteristics of both technology and finance oriented venturing our findings have a series of important practical implications although venture capital is not absolutely necessary to facilitate high technology entepreneurship well developed venture capital networks provide tremendous incentives for entrepreneurship by lowering the difficulties of entering an industry venture capitalists use both their experience and their contacts to reduce many of the information and opportunity costs associated with new business formation the importance of contact networks and information to both deal flow and investment monitoring goes a low way toward explaining why venture capitalists cluster tightly together the availability of venture capital also attracts entrepreneurs and high quality personnel to a region creating a virtuous circle of new enterprise formation innovation and economic development private nonprofit and subsidized public efforts aimed at providing venture capital and stimulating high technology entrepreneurship must confront the fact that venture capital alone will not magically generate entrepreneurship and economic development it is important that such efforts recognize the nonfinancial side of venture investing and attract experienced personnel who can tap into established entrepreneurial networks and secure coinvestors more significantly establishing public venture funding in an area lacking the requisite entrepreneurial climate or technology infrastructure may create a catch 22 situation where locally oriented funds invest in bad deals or where venture capital is simply exported to established high technology regions

informal risk capital investors investment patterns on the east coast of the u s a abstract in this study we profile a group of informal investors their investment criteria and the nature of their referral network the study supports the findings of several earlier studies it indicates the existence of an extensive informal investment community on the east coast of the u s a which can provide substantial financial resources to startup and young firms a full 58 of the sample investments were in startups a huge proportion compared with formal venture capital sources the study further supports earlier findings that this group is difficult to locate for entrepreneurs and researchers alike this opaque market consists primarily of friends and business colleagues who individually provide modest sums of money 20 000 50 000 but are often able to use their network to assemble a group of investors who will sponsor the entire funding requirement 130 informal investors report that in three years they and their networks raised 38 million dollars to support 286 new venture proposals there are also encouraging indications that these angels are both enthusiastic and persistent many of them claim that they have achieved higher returns via angel activity than any other investment options that they have tried of the angels who did better with alternative investment options more than 80 are still prepared to make further investments even those who reported failed investments in the informal risk capital market remain supportive over 65 indicate a willingness to invest again the criteria by which the angels screen the proposals differ markedly from those of the venture capital community in particular the angels do not appear to be interested in a thorough business plan a sine qua non for venture capitalists unlike the capital firms angels are not interested in competitive insulation they do not limit their investments to industries that are appealing or with which they are familiar nor do they care very much about the degree to which the entrepreneur has identified competition however they are in close agreement with the venture capital community in their concern with the management ability of the venture team and a requirement that there be a clear demonstrated need for the product or service preferably in a market with large potential the study has shed some light on the structure of the referral networks of angels though we do not know from this study how the respondents themselves first heard of the ventures that were described in this survey we do know that their referral network is composed primarily of friends and business colleagues to whom they refer as much as 60 of the proposals that they receive and in which they themselves eventually invest thus they pass on serious opportunities to their network their referees are inclined to be very supportive in our sample almost 75 of them also invested in the venture the current strategy for informal investors is to approach mainly close contacts these are inclined to be supportive 85 also invested in the venture and to follow a trusting investment behavior pattern relying mainly on the recommendation of the angel this strategem ensures that the total capital requirements are met via the network however given the results of this study the angels might be well advised not to stop here they might also approach at least one professional only a small proportion of professionals were approached by our sample of angels less than 30 as the study shows professionals are more effective at selecting successful ventures thus a mixed strategy may be called for use mainly trusting referees to ensure full capitalization and a limited number of professional referees to screen the proposals this will help ensure that those proposals that do get supported by the more trusting members of the network have been competently screened thus increasing to the probability of venture success a discriminant analysis revealed some useful pointers in helping the informal investor select successful ventures first it is critical to select only ventures in which the entrepeneur can be relied on to evaluate the risks of the ventures and manage these risks well angels do not need entrepreneurs that will gamble with their money equally important is to avoid placing too much credence on highly articulate sales pitches by the venture team or too much reliance on ventures in which the main emphasis is on product and proprietary protection rather insist on being shown clear evidence that the product or service has channel and or market acceptance it is also important for angels to stick to investments where they know the industry well and to back venture teams with a solid reputation and a propensity to get involved in the details rather than gloss them over as in the case of studies of venture capital investments competitive insulation in the early stages of the venture is also important

how venture capital firms differ abstract 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

the evolution of new technology ventures over 20 years patterns of failure merger and survival abstract relatively few studies of entrepreneurs have examined the evolution of business ventures over a long period of time this paper summarizes the fate of 250 technology based companies founded in northern california during the 1960s the three outcomes studied are failure merger and continued operation in addition interviews with a dozen founders of firms that survived the entire 20 year period shed light on the founders own interpretations of why they succeeded by 1988 50 of the firms in the sample had failed 32 had merged or been acquired and 18 had survived as independent businesses there was a steady and occasionally sharp erosion in the number of survivors throughout the period a striking finding was that fully 78 of the surviving firms in 1988 still had one or more of the original founders in place among the factors predicting failure were product market problems such as product timing difficulties problems of product design or inappropriate distribution channels financial difficulties such as initial undercapitalization or problems with the venture capital relationship and managerial key employee problems such as imbalance in the management team or succumbing to the trappings of success the firms in the data base which were subsequently merged or acquired exhibited a number of macro and micro characteristics from a macro point of view the merger acquisition rates seem to have been lower than the national rate in the late 1960s higher in the later 1970s and similar in the 1980s from a micro point of view discernible patterns existed among acquired firms such as size and year since founding interviews with surviving founders suggested that relations between founders banking and credit problems attempted takeovers and international expansion were among the key crises that had to be overcome by the surviving firms of particular interest was the diversity of motives for founding the business reported by the survivors in addition to the desire to achieve wealth or to be independent we heard mentioned loyalty to a product or technology which would otherwise disappear and commitment to satisfying a customer group also noted were founders who indicated that their career as an entrepreneur came about primarily by accident five themes emerging from the interviews were characterized by the surviving founders as business lessons learned 1 know yourself 2 love your product 3 honor your customer 4 treat your people well and 5 keep your integrity the interviews in conjunction with the data on surviving firms are useful in expanding our understanding of the type of person that starts a business and why some start ups succeed over the long term particularly noteworthy is the number affirms who survived without ever growing larger theories of long term entrepreneurial success may need to take risk aversion into account