Industry environments and new venture formations in U.S. manufacturing: A conceptual and empirical analysis of demand determinants

Through integration of theoretical perspectives from Austrian economics, industrial organization economics, and organizational theory, this study builds and examines empirically a model of the demand determinants of new venture formations in manufacturing industries. Austrian economics and other writings on market disequilibrium imply that the dynamics of industries create market opportunities that are available to economic actors. The greater the changes occurring in an industry, the greater the opportunities created, and the further the market is moved from an equilibrium state. Entrepreneurship is viewed as the process of seizing opportunities through combinations of productive inputs. The more available market opportunities in an industry, the greater is the potential for entrepreneurial activity and, more specifically, new venture formations. Entry barriers constrain the formation of new ventures by prohibiting new ventures from taking advantage of available emerging opportunities. The inertial properties of existing firms constrain their ability to move toward these opportunities and thereby increase the potential for new ventures to exploit these market opportunities.The empirical analysis utilizes the Small Business Administration's U.S. Establishment and Enterprise Microdata file to test the model on a large sample of U.S. manufacturing industries. Results indicate that dynamic industries have greater new venture formations. More specifically, new venture formations are associated with industry growth, the dynamism of industry niches, and technological development. Moreover, entry barriers were found to strongly constrain rates of new venture formations. Industry capital requirements, concentration, and excess capacity were all related negatively to the formation of new ventures. The hypothesized positive relationship between industry-level measures of organizational inertia and new venture formations was also borne out in the empirical analysis. New venture formations were related positively to the extent of vertical integration in an industry as well as to the failure of incumbent firms to invest in new capital.Overall, the independent variables explained more than 50% of the variance in rates of new venture formations in manufacturing industries. The results support an Austrian perspective on entrepreneurship and imply that demand factors and industry structural variables are important determinants of new venture creations.The results imply that dynamic industries should spawn new ventures, and industries with high sales growth, changing consumer preferences, and rapid technological change should exhibit high rates of venture formations. For potential entrepreneurs, the model presented herein might be a useful guide to focus their venture activities. Entrepreneurs who can spot the fundamental sources of market change can exploit their knowledge for economic gain. Yet, there are a number of difficulties in suggesting that the model presented herein could be directly applied by entrepreneurs. First, it is always easier to estimate the dynamics of an industry post hoc than it is ex ante. For example, whereas it is simple to catalogue the technological change that occurred in an industry over time, it is another matter to predict the nature of future technological developments. Second, entrepreneurial opportunity can persist only if other potential economic actors do not know of the presence of the opportunity or cannot act upon it. Any model that gains acceptance as a means of predicting the presence of opportunities would, through its widespread usage, neutralize those opportunities for economic profit. Nonetheless, entrepreneurs who have that unique capability to spot industry dynamics and associated profit opportunities where others do not will gain from that ability.     

The impact of formal processes for market information acquisition and utilization on the performance of Chinese new ventures

The authors examine the performance impact of formal market information processes. Specifically, a theoretical model is developed that hypothesizes that formal processes for market information acquisition and utilization have direct and positive main effects on new venture success and is then tested using a sample of 222 new ventures located in China. Findings indicate that new venture success is positively correlated with the use of formal processes for market information acquisition and use. Moreover, the relative importance of formal processes to the acquisition and use of market information depends on whether the new venture serves an emerging or established market. In particular, the impact of formal processes for information acquisition is higher among new ventures that serve emerging markets. In contrast, the impact of formal processes for information use is higher among new ventures that serve established markets. We present managerial implications of our results. For example, a new venture with a strong market orientation can respond quickly to emerging marketplace needs, and can even seize the advantage from incumbents. If it is in an emerging market, however, the new venture management team should strive to excel at information acquisition; in an established market, it is important for the management team to excel at information utilization.     

Opportunity recognition and international new venture creation in university spin-offs—Cases from Denmark and Ireland

Extant research suggests that the founder’s activities and interactions are considered pivotal in driving the opportunity recognition process leading to international new venture emergence. This paper aims to explore the opportunity recognition process and international new venture emergence in the context of university high-technology spin-offs that are internationally market driven from inception. University spin-offs (USOs) are defined as ‘new firms created to exploit commercially some knowledge, technology or research results developed within a university’ (Pirnay et al., Small Bus Econ 21:355–369, 2003). To address this inquiry, this study imports theory from the entrepreneurship literature on organizational emergence, opportunity recognition, effectuation and the principle of individual self-efficacy. Drawing on empirical case data from four case USOs from Denmark and Ireland, this paper finds that the inventor-founders are typically engaged in opportunity recognition processes that are characterized as creative, driven by scientific innovations. It is indicated that the process of USO emergence and continuous development involves activities and interactions similar to typical international new ventures. The scientific knowledge that created opportunities for the emergence of INV-USOs across our cases endorses the view that innovation and internationalization are strongly correlated. Insights are provided on inventor-founders’ entrepreneurial intention demonstrated through activities and interactions in the on-going processes of creating the USO. Findings further highlight that self-efficacy of the inventor-founder(s) and access to specific resources (means at hand) are salient determinants for international new ventures to materialize. The study concludes with a proposed conceptual framework for further research on the creation of INV-university spin-offs. Conclusions and implications are drawn at the end of the article.     

The Corridor Principle

This article discusses how many entrepreneurs create multiple ventures, and thereby apparently lengthen the duration of their entrepreneurial careers. A new concept, called the Corridor Principle, is proposed as a possible explanation of the multiple venture phenomenon. The Corridor Principle states that the mere act of starting a venture enables entrepreneurs to see other venture opportunities they could neither see nor take advantage of until they had started their initial venture.The Corridor Principle presents an alternative model to the linear single venture career model, embodied by such celebrity entrepreneurs as Ray Kroc of MacDonald' s and Kenneth Olsen of Digital Equipment Corp. Six hypotheses test expectations about the timing and duration of entrepreneurial careers, as well as the relationship between entrepreneurial career length and the creation of multiple ventures.The findings strongly support: • the position that entrepreneurship is a dynamic, multi-venture process for a great many entrepreneurs the rule, rather than the exception. • the existence of a positive correlation between finding at least a second venture and realizing a longer entrepreneurial career. Though there are a variety of explanations for this, and the patterns include both sequential and overlapping ventures, the net effect of creating multiple ventures appears to produce a longer entrepreneurial career. • the position that significant numbers of entrepreneurs create their second venture very early in their entrepreneurial careers especially when contrasted to the group of ex-entrepreneurs, who create multiple ventures (if at all) at a slower rate and later in their careers.Overall, these observations reinforce the notion of the Corridor Principle. Though who can and cannot take advantage of the Corridor Principle is not entirely revealed by the data, some indication exists that an entrepreneurs ability to use Corridor Principle strategy to prolong his or her career is related both to age at startup, and to conscious anticipation and preparation for an entrepreneurial career.The main implications for entrepreneurship practitioners, advisors, researchers, teachers and students are these: Whether studying the entrepreneurial process or planning to start an entrepreneurial career, a long-term view should be taken, one that includes the likely possibility of multiple ventures. The minimum economic returns of earlier ventures can be lower than previously thought if these ventures provide entry to subsequent ventures that possess higher (more acceptable) returns to the entrepreneur. The evidence thus far available indicates that the creation of subsequent ventures occurs relatively quickly when corridors of opportunity become visible and attainable after earlier ventures are established. The likelihood of career failure, as opposed to venture failure, may be lowered if one selects earlier ventures based on their potential to reveal follow-on-venture opportunities that the entrepreneur can investigate and possibly pursue.     

Dysfunctional competition & innovation strategy of new ventures as they mature

Drawing on a sample of 288 new ventures from three disperse locations in China, we examine how dysfunctional competition impacts the innovation strategy of new ventures as they mature. Our results show that: 1) innovation strategy has a positive effect on new venture competitive advantage; 2) the impact of dysfunctional competition positively moderates this relationship in the early stages of the venture; 3) dysfunctional competition negatively moderates it as the venture matures. Thus, dysfunctional competition forces new ventures to focus on their resource shortages through innovation strategy. However, as these ventures mature, they accumulate greater resources, and dysfunctional competition acts to limit the firm's competitive advantage. With these findings, we contribute to the theoretical understanding of innovation strategy in a dysfunctional competition environment and how new ventures strive for competitive advantage in such a setting.     

Knowledge Acquisition Asymmetries and Innovation Radicalness

This study extends a knowledge‐based theory of opportunity discovery to innovation creation using degree of radicalness. Findings from a sample of 166 founders of new technology ventures in university incubators suggest that asymmetries in knowledge acquisition during early venture development are vital to innovation creation. Innovation radicalness was positively associated with acquiring knowledge of customer problems and markets. However, acquiring knowledge of ways to serve markets was negatively associated with innovation radicalness. This suggests a counterintuitive conclusion—the less technology entrepreneurs know about comparable offerings in the market and how to development them, the greater their chances of creating breakthrough innovations.     

Parent inheritance,founder expertise,and venture strategy: Determinants of new venture knowledge impact

A genealogical theory of new venture creation posits that “parent” firm routines are transferred to “progeny” ventures founded by the former employees of these parents. This study examines how the knowledge available to a venture from its parent firms and individual founders, as well as its initial technological direction, influences its own creation of impactful knowledge. We argue that new knowledge creation involves the recombination of underlying knowledge elements and hypothesize that the degree to which the venture's knowledge domain overlaps with the parents' knowledge has positive, but diminishing effects on the impact of knowledge created by the venture. We also predict that the breadth of founders' personal knowledge has a positive effect, but that the divergence between individual founders' and parent firm's knowledge domains has a negative effect on the creation of impactful knowledge by the venture. We test our predictions using a sample of 219 biotechnology ventures founded over the eleven year period 1990–2000 and tracked through 2010. Our results contribute to the entrepreneurship, knowledge creation, and genealogical literatures.     

Linking prefunding factors and high-technology venture success: An exploratory study

This study reports on the exploratory phase of a research project on prefunding factors influencing the success of high-technology start-up companies. The study was done in collaboration with two major West Coast venture capital firms that allowed the authors full access to the due diligence files, investment proposals, and closing documents associated with eight ventures. Half of the eight ventures studied are currently public companies with sales that range from $65 million to $500 million and with an after-tax profit of about 10% of sales. The other half have either been dissolved or did not reach $3 million in sales within the five years following their funding.Information was obtained on those prefunding factors that were available for investor review prior to funding, such as the founders track records, the characteristics of the founding team, the nature of the target market, the technological strategy of the firm, the proposed composition of the board, and the deal structure.In spite of the small sample size, findings of this research revealed discernible differences between successful and unsuccessful firms. The founders of the successful ventures had more prior experience working together; tended to form larger, more complete teams; and had more extensive experience in the function they performed in the new venture. Successful founders also had experience in rapid growth firms that competed in the same industry as the start-up.The successful ventures targeted product-market segments with high buyer concentration in which, through technological advantage, their products could attain and sustain a competitive edge. Often this advantage was achieved by careful management of the product-development process, which resulted in early market entry and its corollary, reduced competition.On the other hand, some factors that the authors had predicted would allow them to distinguish between success and failure were not found to do so. Both successful and unsuccessful ventures targeted high growth markets, anticipated high gross margins, had founders with over five years of relevant experience, had experienced venture capitalists on their boards, and were characterized by a wide range of founder equity shares.     

Explaining the formation of international new ventures: The limits of theories from international business research

International new ventures (INVs) represent a growing and important type of start-up. An INV is defined as a business organization that, from inception, seeks to derive significant competitive advantage from the use of resources and the sale of outputs in multiple countries (Oviatt and McDougall 1994). Their increasing prevalence and important role in international competition indicates a need for greater understanding of these new ventures (Oviatt and McDougall 1994).Logitech, as described in a case study by Alahuhta (1990), is a vivid example of an INV. Its founders were from two different countries and had a global vision for the company from its inception. The venture, which produces peripheral devices for personal computers, established headquarters in both Switzerland and the U.S. Manufacturing and R&D were split between the U.S. and Switzerland, and then quickly spread to Taiwan and Ireland. The venture's first commercial contract was with a Japanese company.Using 24 case studies of INVs, we found that their formation process is not explained by existing theories from the field of international business. Specifically, neither monopolistic advantage theory, product cycle theory, stage theory of internationalization, oligopolistic reaction theory, nor internalization theory can explain the formation process of INVs. These theories fail because they assume that firms become international long after they have been formed, and they therefore highlight large, mature firms. They also focus too much on the firm level and largely ignore the individual and small group level of analysis (i.e., the entrepreneur and his or her network of business alliances).We propose that an explanation for the formation process of INVs must answer three questions: (1) who are the founders of INVs? (2) why do these entrepreneurs choose to compete internationally rather than just in their home countries? and (3) what form do their international business activities take?Who are the founders of INVs? We argue that founders of INVs are individuals who see opportunities from establishing ventures that operate across national borders. They are “alert” to the possibilities of combining resources from different national markets because of the competencies (networks, knowledge, and background) that they have developed from their earlier activities. Following the logic of the resource-based view of the firm, we argue that the possession of these competencies is not matched by other entrepreneurs. Only the entrepreneur possessing these competencies is able to combine a particular set of resources across national borders and form a given INV.Why do these entrepreneurs choose to compete internationally rather than just in their home countries? The founders of INVs recognize they must create international business competencies from the time of venture formation. Otherwise, the venture may become path-dependent on the development of domestic competencies and the entrepreneur will find it difficult to change strategic direction when international expansion eventually becomes necessary. As the founder of one INV explained, “The advantage of starting internationally is that you establish an international spirit from the very beginning” (Mamis 1989:38).What form do their international business activities take? Founders of INVs prefer to use hybrid structures (i.e., strategic alliances and networks) for their international activities as a way to overcome the usual poverty of resources at the time of start-up.This study has important implications for the practice of management. In financing decisions relating to INVs, venture capitalists and other venture financiers should look for entrepreneurs who have a global vision, international business competence, and an established international network. When entrepreneurs start INVs they should create hybrid structures to preserve scarce resources. Finally, given the path-dependence of competence development, founders of new ventures should consider whether establishing a domestic new venture with plans to later internationalize will be as successful a strategy as establishing a new venture that is international from inception.     

Angels and non-angels: Are there differences?

The market for informal venture capital is an elusive and nearly invisible source of financing for entrepreneurial ventures. This market consists of a diverse set of high net worth individuals (business angels) who invest a portion of their assets in high-risk, high-return entrepreneurial ventures. The emerging consensus of the characteristics of the individual investor is that of a well-educated,middle-aged individual with considerable business experience and a substantial net worth. These informal investors appear to prefer investing in the early start-up stage of the venture and, if given a choice, prefer that their investments be located close to home. One consequence of this consensus is the tendency to assume that the traits of these business angels are as tightly clustered around the norm as are the traits of venture capital funds. They are not. In terms of their competence in the many areas of venture investing, these Individual investors range from the successful, cashed-out entrepreneur on the one hand to individuals with little or no experience with venture investing on the other. At the same time, little is known about the characteristics of high net worth individuals who never ventured where angels dare to tread, or about these non-angels' propensity to join the fold. Thus, this study seeks to fill the void by examining the characteristics of high net worth individuals regardless of their investment history or their interest in venture investing.An analysis of the data reveals three groups of high net worth Individuals: business angels with experience investing in entrepreneurial ventures, interested potential investors with no venture investment history but who express a desire to enter the venture investment market, and uninterested potential investors who under no circumstances would consider investing in entrepreneurial ventures as part of their investment strategy. Business angels and potential investors (both the interested and non-interested segment) share similar views about the economic significance of the entrepreneur and the difficulty in securing the equity capital for development of the venture. As the issues move from the general to the specific, divergence in investment attitudes takes place among the two groups, but this divergence is in terms of magnitude or intensity, rather than in contrasting or opposing views of the process. The potential investor tends to view investing in entrepreneurial ventures on a smaller scale than the active investor, especially in terms of the dollar amount committed to any one investment. While the business angel is more interested than the potential investor across all stages of financing, the interest for both groups increases as the type of financing progresses from the seed stage to expansion financing. In contrast, the potential investor is more likely to seek diversification as a motivation for venture investing than their angel counterparts.The potential investor pool is segmented into those potential investors who appear willing to take on the role of business angels and those individuals who have no desire to participate in the venture market. For the interested group to increase their interest in providing venture capital, these potential investors want assistance in monitoring the performance of the venture investment, followed by assistance in pricing and structuring. Both of these resources relate more to the technical aspects of venture investing and Indicate that these are the areas where the potential investor is least likely to have expertise. Other resources, such as finding and evaluating the investment opportunity, appear to represent less of a stimulus for the potential investor. In many respects, interested potential investors act like business angels across several dimensions. Both consider the later stages of the development of the venture as the preferred stage to invest. The business angel and interested potential investor prefer investments to be located relatively close to their primary residence and share similar views on the amount of the investment portfolio to allocate to venture investing. Where the interested potential investor and business angel clearly differ is on the scale of the commitment and the motivation for investing. The potential investor will commit a smaller dollar amount to any one venture, is more inclined to participate with other investors, and is more apt to see venture investing as a diversification strategy than is the seasoned business angel.     

Do market information processes improve new venture performance?

Does market information improve new venture performance? While some researchers argue that entrepreneurs do not need formal processes to collect and use market information, others suggest that the use of formal market information processes is positively related to firm performance. In this paper, we hypothesize that new venture performance is an increasing function of (1) the firm's level of customer interaction and (2) the use of formal processes for collecting and utilizing market information. We also hypothesize that these linkages will be stronger among new ventures serving emerging markets (i.e., markets in which customer needs and segments are evolving). We test these hypotheses using data collected from 224 new ventures located in the United States. Our findings indicate that, regardless of market condition, formal processes for the collection of market information are positively associated with the use of formal processes for market information utilization and this relationship is stronger among firms serving established markets. In addition, new venture performance is positively associated with the use of formal processes for utilizing market information and this relationship is also stronger in established markets. We also find that, in emerging markets, new venture performance is a positive function of the use of formal processes for collecting market information. Contrary to expectations, we find that, regardless of market condition, the level of customer interaction has a negative relationship with the use of formal processes for market information utilization and no significant relationship with performance.     

Value proposition evolution and the performance of internal corporate ventures

The success of internal corporate ventures (ICVs) is contingent upon their ability to: (1) anticipate the bases on which their offerings appeal to their target markets, (2) adjust these value propositions as the venture develops, and (3) leverage their parent corporations' relevant knowledge stocks. Aimed at developing a deeper understanding of the process requirements of successful exploratory initiatives, we build and test a model of venture performance using data from 145 ICVs. We find that value proposition evolution is related to venture performance in a curvilinear manner. ICVs whose value propositions exhibit moderate evolution perform better than ICVs whose value propositions exhibit no evolution or extensive evolution. Furthermore, the value proposition evolution–performance relationship is moderated by the parent corporation's familiarity with the venture's target market.     

Perceived risks and choices in entrepreneurs' new venture decisions

Though risk plays a central role in most entrepreneurial decision making, little empirical research has explicitly examined how the elements of risk, risk perceptions, and entrepreneurs' propensities to take risks influence choices among potentially risky entrepreneurial ventures. This experimental study asked a sample of entrepreneurs leading America's fastest growing firms to make choices among a series of hypothetical new ventures. The results indicate that such choices are influenced by the risks inherent in the new ventures, as evidenced by the pattern of outcomes anticipated in each venture, the entrepreneurs' differing perceptions of those risks, and differences in their personal propensities to take risks.The subjects in our sample of entrepreneurs tended not to choose ventures having a high degree of variability in their pattern of anticipated outcomes. This avoidance of outcome variability suggests that the sensitivity analyses commonly prescribed for examining new venture attractiveness may inhibit risk taking, and may deter potential investors from investing in their firms. New approaches to assessing and presenting new venture risk, other than the traditional best case/expected case/worst case approach, may be advisable, as well as sufficiently through market research to provide evidence of the degree to which market acceptance is likely for the venture's products or services.We also found an effect of differences in risk propensities among entrepreneurs on their new venture choices. This effect suggests not only that entrepreneurs should be wary of any biases they bring to their new venture decisions, but that prospective investors should consider the degree to which entrepreneurs in whom they choose to invest are well-matched to the investors' own risk-taking propensities.Finally, while our sample of entrepreneurs tended to shun high levels of variability in their new venture choices, they appeared willing to accept a considerable degree of hazard, or possible downside, in their new venture choices, presumably in pursuit of potentially significant gains. Entrepreneurs are advised to seek a clear understanding of the downside entailed in their proposed ventures, and develop strategies to mitigate the likelihood of adverse outcomes. Thus they will not jeopardize chances for near term success and attracting support of investors and others in later stages of the venture or in subsequent ventures.Our research did not attempt to examine how our subjects' choices would have played out in terms of performance, but the apparent biases which entrepreneurs' risk propensities bring to their assessment of proposed new ventures is a potentially important issue that merits further scrutiny. On one hand, such biases may lead to patterns of suboptimal decisions. On the other hand, our results suggest that investors should entrust their new venture investments to entrepreneurs whose risk propensities (and perhaps other personal characteristics) best match the needs of both the opportunity at hand and the investor's objectives. As many venture capitalists attest, the management of a proposed new venture should lie at the heart of their investment decision.     

Competitive advantages in new corporate ventures: The impact of resource sharing and reporting level

Ideally, new ventures “born” into a corporation's “family” of existing businesses have a wealth of established resources to successfully draw upon. Such new corporate ventures do not have to reinvent every wheel. There are already marketing programs and plants in place as part of the existing business' operations, and they should be able to piggyback upon these. Likewise, the managers from across the corporation already have established a brand name and gained important experience in dealing with customers, and the new venture should get to ride on these coattails. However, along with these benefits come costs that may be more than offsetting. Corporations may try to force the new venture into the established way of doing things in the name of efficiently utilizing existing resources. Perhaps the new venture will be hamstrung by an effort to coordinate its development with the ongoing operations of the corporation's established businesses.It is not at all clear that sharing corporate resources is always a good thing for new corporate ventures. Some have argued that for new ventures to be successful, they often need the direct involvement of top management to see that they get the benefits of corporate resources without suffering the costs. This suggests the general hypothesis underlying much of this work: reporting to top management will be especially beneficial to new corporate ventures heavily involved in sharing corporate resources.In considering this idea, we explore the complicated relationship between resource sharing, top-management involvement, and the ability of new corporate ventures to establish a competitive advantage. We consider both the relative overall quality and relative production costs as forms of competitive advantage. We find that in new corporate ventures heavily involved in resource sharing, achieving either of these advantages is highly contingent upon the level of corporate management to which the new venture regularly reports.In ventures heavily involved in resource sharing, reporting to top-ranking managers appears to be beneficial in terms of controlling cost, but detrimental in terms of the new venture's overall relative quality. In other words, when it comes to benefiting from shared corporate resources, reporting directly to top management is apparently a “two-edged” sword, offering both benefits and costs. (Reporting level appeared to make little difference in new ventures not involved in corporate resource sharing, and competitive advantage is complex and counter to some existing theories.) New theoretical arguments are needed to explain the empirical results. We develop three such theories, all appropriate for further empirical examination.     

Reputation and new venture performance in online markets: The moderating role of market crowding

Reputation represents an important driver of new venture performance. This article shows that the performance benefits of reputation are substantially contingent on ventures' market conditions. My study of 797,087 sales transactions by 5760 new ventures in 119 platform-mediated online markets provides strong evidence that market crowding attenuates the reputation–performance relationship. Ventures benefit 38% to 42% more from a favorable reputation when they compete in an uncrowded (versus crowded) market. By disentangling the underlying mechanisms of reputation, my study allows for more accurate predictions about why, when, and how ventures benefit from reputation.     

The informal venture capital market: Aspects of scale and market efficiency

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.     

International versus domestic entrepreneurship: New venture strategic behavior and industry structure

International entrepreneurship is defined in this study as the development of international new ventures or start-ups that, from their inception, engage in international business, thus viewing their operating domain as international from the initial stages of the firm's operation.One hundred and eighty-eight new venture firms in the computer and communications equipment manufacturing industries are classified according to the percentage of their sales in the international market. Ventures with no sales derived from international activities are considered “domestic” new ventures, and ventures with sales from international activities comprising greater than 5% of total sales are considered “international” new ventures.The strategy and industry structure profiles of international new ventures are significantly different from domestic new ventures. The internationals pursue much broader market-based strategies, seeking a strategy of broad market coverage through developing and controlling numerous distribution channels, serving numerous customers in diverse market segments, and developing high market or product visibility. The internationals also emphasize a more aggressive entry strategy, building on outside financial and production resources to enter numerous geographical markets on a large scale. Securing patent technology is also an important component of their strategy. This suggests that the internationals compete by entering the industry on a large scale, seeking to penetrate multiple markets, with the recognition that external resources are necessary to support such an entry.Whereas both the domestics and the internationals characterize domestic competition as being relatively intense, the international new ventures compete in industries with higher levels of international competition. It is not clear from this research whether the new venture selects an industry with a high degree of international competition and therefore responds with an international orientation or, because the new venture has an international orientation, it perceives or recognizes a higher degree of international competition. Another industry structure difference is the internationals' perceived higher degree of restrictiveness due to government regulation. It is unclear whether this restrictiveness motivates new ventures to seek less-regulated international environments or if it indicates that when competing internationally, the new venture is confronted with increased regulatory requirements.Domestic new ventures are distinguished by their emphasis on a production expansion strategy and customer specialization strategy. The production specialization strategy consists of focusing on limited geographical markets, maintaining excess capacity, and pursuing forward integration. The customer specialization strategy incorporates the production of a specialty product that is purchased infrequently. Thus, for both of the domestic strategies, a consistent “closeness” between the producer and consumer is implied. This may be an important basis underlining the new venture's decision to compete in an exclusive domestic context.This study offers initial support for the notion of international entrepreneurship by its findings that there are significant differences between new venture firms competing domestically and new ventures choosing to also enter international markets.     

The anatomy of a corporate venturing program: Factors influencing success

The author proposes a classification framework for factors that affect corporate venture success. Then, a database of 37 new venture investments by Exxon, including 18 venture capital investments, is analyzed for insight into the relative affect of these factors on venture technical and financial success. This article presents a statistical analysis of those factors which were quantified.As a group the venture capital investments were financially far more successful for Exxon than the internally initiated ventures. This striking difference stimulated the retrospective analysis reported here. The author was in a position to observe the program over its entire life span and had first-hand knowledge of each venture's technology, markets, and personnel. Because of the mix of venture capital and internal investments, the author was also in a position to compare the two modes of investment.Factors affecting venture success are broadly classified as extrinsic and intrinsic. Extrinsic or environmental factors are those determined by the form of investment sponsorship (e.g., corporate or venture capital) and the characteristics of the investment sponsor. Extrinsic factors are segregated into two categories: structural and procedural. These factors are defined as the degree of difference between the corporate and venture environment in each category.The four structural factors (technology, market, organization, and people) are summed up as the overall degree of structural congruence. The author postulates that the degree of congruence is directly related to venture success within the corporation. To take the corporation into new markets some incongruence is required. Too much incongruence probably pushes the risk of failure too high. The corporation's procedures for management of this incongruence will determine the degree to which it can successfully diversify its business.The four procedural factors (control, selection of venture managers, incentive compensation, and financing) are dealt with as differences between the corporate environment and an independent venture environment. Major differences in procedural factors usually exist between corporate and venture capital sponsored ventures. They probably explain to some extent the relative greater financial success of the Exxon venture capital investments as a group. However, the statistical analysis results indicate that the identified intrinsic factors are more important in explaining relative venture success.Intrinsic factors are those inherent to the venture itself, and are subdivided into two categories: product related (market and technical risk levels) and managerial (relative experience levels). Each of the 37 Exxon ventures was rated for success and for the intrinsic factors using a simple ordinal range of 3 to 6 values. The product related risk factors showed a significant inverse correlation with financial success. The level of venture managers' prior experience in the venture's target market area and their level of prior general managerial experience showed an even greater correlation with financial success. The sample correlation coefficient between the financial success rating SF and the sum of the ratings for prior marketing and managerial experience (XS + XM) was 0.809 with a standard error of only 0.105.Selection of the influential extrinsic and intrinsic factors is largely within the control of corporate management. An approach to selection of these factors similar to that used by private venture capital fund managers should greatly improve the overall success of internal corporate ventures.     

Hybrid conjoint analysis: An estimation probe in new venture decisions

How venture capitalists select start-ups for financing has been an interesting topic for many researchers and practitioners. The underlying assumption is that people who make money investing in new businesses by assessing the proposals should be experienced enough to distinguish losers from winners. Our research study tested three models (self-explicated, conjoint and a hybrid—comprising the two previous ones—conjoint) in order to find out: 1. if these models could be applied to venture capital decision making and if so 2. to demonstrate the potential of conjoint analysis as a practical research method. 3. To test whether or not the characteristics of the entrepreneur, the product and the market replicate the venture capital decision.This research study confirms what normative literature on decision-making emphasizes: that in the first stage of an evaluation (screening), venture capitalists focus on a small subset of criteria in a non-compensatory process (i.e., an unacceptable value on one criterion cannot be offset by a high value of another one). The important criteria in this phase appear to be the entrepreneur's experience and the existence of a prototype for some decision-makers or unique features of the product for others. The screening step is more judgemental than analytic.In a second stage (the evaluation phase), however, venture capitalists end a detailed examination (due diligence process) by choosing the most preferred ventures through processes approximating compensatory rules; that is, a low but acceptable value on one criterion can be compensated by a high value on another. The most important criteria identified by the research in this second stage are criteria found in the previous stage, product gross profit margin and patent.Our research demonstrates agreement among venture capitalists in terms of one criterion to evaluate research proposals: managerial experience. As to the rest of the attributes tested, there was variation in the weights assigned to them.The findings of this pilot study also confirm the applicability of conjoint analysis as a research method in venture capital decision. The approach helps shed light on the decision rules applied, and permits the testing of previously researched criteria for predictive validity. The method has the advantage of retaining individual preferences and clustering them around venture capitalists' demographic and psychographic backgrounds (i.e., years of experience, type of education, life-style, and the like) or other types of information such as venture fund policies (size of the investment, type of industry, etc.).The major implication of the study for entrepreneurs is the importance of previous experience in the industry where they expect to develop their ventures, and a deep knowledge of the product (advantages over competition, technical, production, and cost feasibility) they are to produce and market. These are the factors that have the greatest influence on venture capitalists' evaluation of such projects.     

Limited attention and the role of the venture capitalist

This research analyzes the venture capitalist's incentives to maximize the profits of the entrepreneurs of ventures and the limited partners of a venture fund. Venture capital is a professionally managed pool of capital invested in equity-linked private ventures. Entrepreneurs turn to venture capitalists for financing because high-technology startup firms have low or negative cash flows, which prevent them from borrowing or issuing equity. In addition, venture capitalists are actively involved in management of the venture to assure its success. This solves the problem of startup firms that do not have the cash flows to hire management consultants.Venture capital contracts have three main characteristics: (1) staging the commitment of capital and preserving the option to abandon, (2) using compensation systems directly linked to value creation, and (3) preserving ways to force management to distribute investment proceeds. These characteristics address three fundamental problems: (1) sorting the venture capital among the entrepreneurial ventures, (2) providing incentives to motivate venture capitalists to maximize the value of the funded ventures, and (3) providing incentives to motivate entrepreneurs to maximize the value of the ventures. Venture capitalists fund only about a dozen projects a year out of a thousand evaluated. Each project may receive several rounds of financing. Payoffs to VCs can be very high or be a complete loss.The typical venture capital (VC) firm is organized as a limited partnership, with the venture capitalists serving as general partners and the investors as limited partners. General partner VCs act as agents for the limited partners in investing their funds. VCs invest their human capital by placing their reputation on the line. The goal is to begin to convert the investment into cash or marketable securities, which are distributed to the partners. VC management companies receive a management fee equal to a percentage (usually 2.5%) of the capital of each fund. They also receive a percentage (15–30%) of the profits of each fund, called carried interest. Periodic reports are made by the VC firm to the limited partners. Usually these are only costs of managing the fund, and so revenues are negative. Most contracts specify the percentage of time that the VC will devote to managing the fund.The analysis of this research deals with the incentives of the VC who has limited attention to be allocated between improving current ventures and evaluating new ventures for possible funding. The analysis shows that the VC, as agent for both the entrepreneur and the general partners, does not have the incentives required to maximize their profits. The VC allocates attention among ventures and venture funds less frequently than required to maximize the entrepreneurs' and limited partners' profits. However, the VC does maximize the total profits of all ventures. Because the VC considers the opportunity cost of attention, the VC's allocation of attention is efficient. The implication of this result is that, although the entrepreneurs and limited partners could be made better off with a different allocation of the VC's time, this would be an inefficient use of the VC's time.