The potential of actuarial decision models: Can they improve the venture capital investment decision?

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.     

A lack of insight: do venture capitalists really understand their own decision process?

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.     

Venture capitalist governance and value added in four countries

The rapid internationalization of markets for venture capital is expanding the funding alternatives available to entrepreneurs. For venture capital firms, this trend spells intensified competition in markets already at or past saturation. At issue for both entrepreneurs and venture capital firms is how and when venture capitalists (VCs) can provide meaningful oversight and add value to their portfolio companies beyond the provision of capital. An important way VCs add value beyond the money they provide is through their close relationships with the managers of their portfolio companies. Whereas some VCs take a very hands-off approach to oversight, others become deeply involved in the development of their portfolio companies.Utilizing surveys of VCs in the United States and the three largest markets in Europe (the United Kingdom, the Netherlands, and France), we examined the determinants of interaction between VCs and CEOs, the roles VCs assume, and VCs' perceptions of how much value they add through these roles. We examined the strategic, interpersonal, and networking roles through which VCs are involved in their portfolio companies, and we analyzed how successful such efforts were. By so doing we were able to shed light on how and when VCs in four major markets expend their greatest effort to provide oversight and value-added assistance to their investment companies.Consistent with prior empirical work, we found that VCs saw strategic involvement as their most important role, i.e., providing financial and business advice and functioning as a sounding board. They rated their interpersonal roles (as mentor and confidant to CEOs) as next in value.Finally, they rated their networking roles (i.e., as contacts to other firms and professionals) as third most important. These ratings were consistent across all four markets. VCs in the United States and the United Kingdom were the most involved in their ventures, and they added the most value. VCs in France were the least involved and added the least value; VCs in France appeared to be least like others in terms of what factors drove their efforts. Our theoretical models explained a greater proportion of variance in governance and value added in the United States than elsewhere. Clear patterns of behavior emerged that reflect the manner in which different markets operate. Among the European markets, practices in the United Kingdom appear to be most like that in the United States.Determinants of Governance (Face-to-Face Interaction)We operationalized VC governance or monitoring of ventures as the amount of face-to-face interaction VCs had with venture CEOs. We found some evidence that VCs increase monitoring in response to agency risks, but the results were mixed. Lack of experience on the part of CEOs did not prompt significant additional monitoring as had been predicted. A more potent determinant was how long the VC-CEO pairs worked together; longer relationships mitigated agency concerns and reduced monitoring. Contrary to expectations, perceived business risk in the form of VCs' satisfaction with recent venture performance had little impact on face-to-face interaction. Monitoring was greatest in early stage ventures, indicating that VCs respond to high uncertainty by increased information exchange with CEOs. We measured two types of VC experience and found different patterns for the two. Generally speaking, VCs with greater experience in the venture capital industry required less interaction with CEOs, whereas VCs with greater experience in the portfolio company's industry interacted more frequently with CEOs than did VCs without such experience.Determinants of Value AddedWe argued that VCs would most add value to ventures when the venture lacked resources or faced perceived business risks, when the task environment was highly uncertain, and when VCs had great investing and operating experience. Contrary to expectations, VCs added most value to those ventures already performing well. As we had predicted, VCs did add relatively more value when uncertainty was high: e.g., for ventures in the earliest stages and for ventures pursuing innovation strategies. Finally, we found that VCs with operating experience in the venture's focal industry added significantly more value than those with less industry-specific experience. These results are consistent with anecdotal evidence that entrepreneurs have a strong preference for VCs with similar backgrounds as their own. We found no evidence that experience in the venture capital industry contributed significantly to value added. Together, these results suggest that investigations of the social as well as economic dimensions of venture building may prove a fruitful avenue for future study. Overall, the results showed that value-added is strongly related to the amount of face-to-face interaction between VC-CEO pairs and to the number of hours VCs put in on each individual venture.Implications for Venture CapitalistsThe competition for attractive investments is heating up as economies become more globalized. Thus, the pressure on venture capital firms to operate both efficiently and effectively is also likely to build. It is as yet unclear whether the recent trend toward later stage, safer investments will continue, and how those venture capital firms following this path can differentiate themselves from other sources of capital. Venture capital firms that are able to choose the appropriate bases for determining governance effort and the appropriate roles for delivering added value to their portfolio companies will be those most likely to survive.In the largest, most robust markets (i.e., the United States and the United Kingdom), more effort is expended by venture capitalists to deliver something of value beyond the money. This suggests that the tradeoff preferred by those succeeding is to be more rather than less involved in their investments. Our results indicate that VCs clearly economize on the time they devote to involvement in their portfolio companies. However, our results also indicate that they do this at the great peril of producing value insufficient to justify the cost of their product.Implications for EntrepreneursOur findings provide two important insights for entrepreneurs. First, they show that where and when they obtain venture capital is likely to have an impact on the extent and nature of effort delivered by their venture capital investors. It appears that on average entrepreneurs receiving venture capital in the United States and the United Kingdom will be more closely monitored and will receive more value-adding effort from their VCs than will those in France or the Netherlands. Needless to say, entrepreneurs should consider their preferences for level and type of involvement from their investors as they consider their choice of partners. In France, for example, VCs put great emphasis on their financial role in comparison with other roles, but they contribute much less than VCs elswhere via other strategic, interpersonal, and networking roles.The second key implication of our findings is that entrepreneurs may be able to gauge what roles VCs will see as most important, when VCs are more or less apt to become involved in their companies, and when they believe they can most add value. Such knowledge may help CEOs anticipate VC activity, be aware of the parameters of VCs' preferences, communicate their own preferences, and negotiate the timing and extent of interaction. For example, although our results indicate that geographic distance significantly limits face-to-face interaction, it appears to have less impact on the amount of value added.Implications for ResearchersMuch more can be learned about the relative efficiency and effectiveness of alternative governance arrangements. Little is known about how formal structures such as contract covenants and board control work in conjunction with informal oversight and interaction. Even less is known about how value is added and how it is best measured. Although this study took a step toward developing a model of the circumstances under which value is added, the theory and its operationalization await further development.     

Venture capitalists' expertise: A call for research into decision aids and cognitive feedback

This article proposes that research into decision aids can improve venture capitalists' (VCs) decision process and decision accuracy and speed up the acquisition of expertise. After reviewing research into the accuracy of decision aids such as bootstrapping models and the use of these models in cognitive learning, we propose that theory on the use and performance of decision aids can have important implications on how VCs gain expertise in predicting new venture performance. This discussion leads to a proposed research agenda.     

How useful is venture capital prestige? Evidence from IPO survivability

This study examines the effect of venture capitalist (VC) prestige on the post-issue survivability of IPOs and how VC characteristics influence the effect. We find that IPOs backed by prestigious VCs are less likely to delist for performance failure and have longer listing duration relative to those without VC backing; however, IPOs backed by ordinary VCs are as likely to delist as IPOs without VC backing. The finding is robust for Internet and high-tech firms. We further examine heterogeneous VC characteristics and find that the ability of prestigious VCs to improve IPO survival is a function of their investment experience and managerial ability. VC prestige characterized by industry specialization and syndication networks is not related to IPO survival. Overall, the results suggest that the VC characteristics that produce prestige, rather than the prestige itself, drive the long-term survival of IPOs.     

Broadening versus reinforcing investor portfolios: Social structure and the search for venture capital investors

This paper highlights the venture capital investor (VC) portfolios of startups, and explores how the portfolios evolve. We emphasize the important trade-off between broadening and reinforcing VC portfolios (i.e., expanding to new VCs versus relying on existing VCs). This is because, to startups, new and existing VCs generate very different opportunities and constraints. Focusing on the social structure of existing VCs, we argue that startups are more likely to opt for new VCs when the internal networks of existing VCs are denser, when the external networks of existing VCs are smaller, and when the status of existing VCs is lower. Additionally, we not only focus on whether new VCs are on board, but also pay attention to which new VCs are introduced, by analyzing the ex-ante embeddedness between existing and newly-introduced VCs. We stress that when new VCs are highly embedded with existing VCs, their involvement makes only a limited contribution to broadening a startup's portfolio and network. We test the hypotheses using a sample of VC financing rounds in the U.S. and find broad support.     

Singapore Venture Capitalists (VCs) Investment Evaluation Criteria: A Re-Examination

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.     

Dynamic capabilities and venture performance: The effects of venture capitalists

After going through the initial public offering (IPO), new ventures face increased competition, greater public examination, and increased government scrutiny. Resource base weaknesses and external forces pose severe threats to the survival and success of new ventures. Building from resource-based theory, we first examine and delineate dynamic capabilities from entrepreneurial capabilities in entrepreneurship. We then develop theory to explain how venture capitalists (VCs) endue their ventures with greater dynamic capabilities in order to address these weaknesses and threats. We test our hypotheses on a match-pair sample of VC-backed and non-VC-backed new ventures and find that VC-backed ventures demonstrate greater dynamic capabilities as they relate to product and management development but do not display any greater dynamic capabilities as they relate to legal and government regulation threats. Further analysis also revealed that VC experience and VC reputation were positively related to 1-year stock price returns.     

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.     

International entrepreneurship, venture capital networks, and reinvestment decisions

Prior research has established that venture capitalists (VCs) may face significant obstacles in financing ventures from emerging or transition economies. Such hurdles are usually attributed to the weaknesses of host countries’ institutional systems, especially regulatory. These institutional pitfalls may thwart VCs’ ability to exit a portfolio company leading to lower returns than expected. Developing this approach, we argue that exit strategies may also be difficult to execute when VCs expand into advanced economies although for different reasons. Thus, we show that both necessity entrepreneurship prevalent in emerging economies and opportunity entrepreneurship prevalent in advanced economies are positively associated with the number of investment rounds received by portfolio companies. In contrast, we establish that VC firm capital and network density are negatively associated with the number of rounds provided to portfolio companies across distinct institutional environments. This suggests that VCs may improve their performance by choosing an appropriate strategy to navigate unfamiliar institutional environments to minimize their liability of foreignness. Finally, we find that the interaction of VC capital and network density is positively related to the number of VCs’ investment rounds. Apparently, resource-rich VC firms may not fully realize the informational benefits of their dense “knowledge networks” due to insufficient collaboration with partners. At the same time, such VCs may no longer enjoy access to free information flows from prospective allies. Hence, network density and superior resources combined may lead to a greater number of investment rounds.     

The impact of institutional sources of capital upon the minority-oriented venture capital industry

Venture capital (VC) funds specializing in investing equity capital in minority-owned businesses have grown rapidly over the past decade, fueled by the willingness of major institutional investors to support this traditionally neglected niche. We investigate impacts of public pension funds upon the minority VC sector. These funds, providing over half of all capital invested in minority VCs, selectively invest, seeking to fund only those VCs likely to generate high returns. Although they attempt to pick the winners, our findings indicate that they have failed to do so. The influence of public pension funds upon the minority VCs is nonetheless real, skewing investing away from traditional practices and toward those of the venture capital mainstream. In the process, minority VCs funded by pension fund money invest in high-tech fields more than other minority-oriented VC funds do. Further, they are less likely to fund minority-owned small firms, focusing increasingly upon firms owned by nonminority Whites. Neither of these trends has resulted in increased returns. Rather, diverting minority-oriented VCs away from their traditional mission of investing in minority firms operating in a broad range of industries has resulted in lower returns over the years studied.     

Why do contracts differ between venture capital types?

The main objective of the present paper is to investigate differences in the design of contracts between venture capitalists and their portfolio firms across venture capital (VC) types. By controlling for selection effects, we focus on contract design differences which reflect differences in corporate governance approaches across VC types. To address this issue, we use a unique, hand-collected German data set consisting of all contractual details of VC investments into 290 entrepreneurial firms in the period 1990–2004. By employing various matching procedures, we show that VC types differ in their corporate governance approach vis-à-vis their portfolio firms. It turns out that independent VCs, when compared to captive VCs, use significantly more contract mechanisms which induce active intervention.     

New venture strategy and profitability: A venture capitalist's assessment

This study uses theoretically justified criteria from the industrial organization (IO) strategy literature and applies it to a new domain, namely, venture capitalists' decision making. Specifically, the study investigates the types of information venture capitalists utilize when evaluating new ventures and how venture capitalists use this information to assess likely new venture profitability. In the interest of advancing our understanding of the decision making policies of venture capitalists, this study addresses many of the limitations of previous research.A review of IO research suggests important relationships between a number of strategy variables and new venture profitability. Some of the relationships proposed by IO strategy research are contingent in nature. The strategy variables and their relationships with profitability are investigated in the domain of venture capitalists' decision making. Individual and aggregate decision making analyses identified those strategy variables (criteria) venture capitalists utilize in assessing likely new venture profitability, namely, timing, key success factor stability, lead time, competitive rivalry, educational capability, industry-related competence, timing × key success factor stability interaction, timing × lead time interaction, and timing × educational capability interaction.On average, the most important criterion for venture capitalists in their assessment of profitability is industry-related competence. The second tier of importance is competitive rivalry, timing, and educational capability. The third tier of importance is lead time, key success factor stability, and timing × lead time interaction. Other interactions are less important. Therefore, while venture capitalists use contingent decision policies, main effects dominate. If venture capitalists use a reported 8 to 12 minutes on average to evaluate a business plan (Sandberg 1986), then this study's findings may help the inexperienced venture capitalist allocate time towards assessing those attributes of primary importance. Although more complex relationships exist between the attributes, the inexperienced venture capitalist can take comfort from this study's findings that main effects dominant amongst senior venture capitalists. Senior venture capitalists may take less comfort from their importance placed on main effects in light of research from IO, which suggests the importance of contingent relationships. The results may also have practical application towards training.How should venture capital firms train their new employees? Should venture capital firms rely solely on experienced venture capitalists lecturing the inexperienced on the criteria they use in assessing a new venture proposal? Like most decision makers, venture capitalists have limited insight into their assessments and venture capital firms need to be aware of the gap between “espoused” policies and policies “in use.” The information being taught needs to be supplemented with venture capitalists' decision-making research that investigates decision policies “in use”, such as this study. Venture capitalist training could also involve experiential learning, in conjunction with cognitive feedback about the decision policies used, to accelerate the learning process. Experiential learning using cognitive feedback maximizes industry related learning while minimizing the cost of inexperienced decisions. For the entrepreneur seeking capital, this increased understanding of venture capitalists' decision making may help them better target their business plans and presentations at those criteria venture capitalists' find most critical to the profitability of a new venture.     

风险投资、管理层过度自信与企业并购溢价

现有研究多关注管理层过度自信所带来的一系列“后果”，对影响管理层过度自信的“前因”研究较为鲜见，这种“头重脚轻”式的不对称式研究对深入理解管理层过度自信造成了障碍。文章以2012-2017年我国创业板上市企业完成的并购事件为研究样本，从并购视角出发，研究了风险投资对管理层过度自信的影响及其带来的并购后果。结果发现，风险投资能够显著抑制并购活动中管理层的过度自信行为，而抑制管理层过度自信在风险投资降低并购溢价过程中发挥了重要的中介效应，上述作用在民营企业或风险投资派驻了董事的企业中更为显著。进一步分析显示，在考虑了风险投资与管理层过度自信之间的反向因果关系、风险投资这一“外部”监督角色和企业董事会治理这一“内部”监督角色的交互影响对结论可能产生的影响后，上述结论仍显著成立。     

Cognitive biases,risk perception,and venture formation: How individuals decide to start companies

Despite the high risk involved, thousands of individuals decide to start ventures. Past research, however, has found that entrepreneurs do not have a high-risk propensity, that is, a great willingness to knowingly take risks. This study, therefore, explores how individuals cope with the risks inherent in their decisions, and suggests that entrepreneurs may not perceive the riskiness of starting ventures.The study's findings suggest that risk perceptions may differ because certain types of cognitive biases lead individuals to perceive less risk. Cognitive biases are common types of mental shortcuts used to make judgments. This study examines three cognitive biases that previous research has suggested may lower risk perception. The first, overconfidence, refers to the failure to know the limits of one's knowledge. The second bias tested, the illusion of control, occurs when individuals overemphasize the extent to which their skill can increase performance in situations where chance plays a large part and skill is not necessarily the deciding factor. Because the individuals believe that they can control largely uncontrollable events, they also think they can accurately predict the outcome of the events. Finally, the third bias, the belief in the law of small numbers occurs when an individual uses a limited number of informational inputs (a small sample of information) to draw firm conclusions.This study's sample consisted of 191 students pursuing a Masters of Business Administration. The students' responses to a survey based on a case study regarding a decision to start a venture were examined. The survey included questions about the students' willingness to start the venture, their perception of the venture's riskiness, and the extent to which they exhibited cognitive biases in their decision processes.The study's findings tentatively suggest that individuals start ventures because they do not perceive the risks involved, and not because they knowingly accept high levels of risks. The belief in the law of small numbers lowered an individual's perceptions of a venture's riskiness, suggesting that some individuals draw firm conclusions from small samples. An illusion of control also decreased risk perception, suggesting that individuals starting ventures might not acknowledge that certain tasks, important to the venture's success, are beyond their control.Some argue that biases might be associated with venture failure. If this is the case, the very processes that increase the likelihood of starting a venture may actually decrease performance. Entrepreneurs may choose to minimize their biases by soliciting and paying heed to the advice of outsiders, or by using group decision-making techniques, such as devil's advocacy or dialectical inquiry.Others, however, suggest that early in the decision process, biases may be beneficial because they lower risk perception, which allows entrepreneurs to generate the commitment needed for success. Even if this is true, entrepreneurs should still institute processes to increase learning so the venture can adjust to unfolding realities and avoid any damage caused by initial misperceptions. Similarly, entrepreneurs need adequate safety nets in case their biases lead them to encounter unforeseen difficulties. The potential positive and negative effects of biases and perceiving low levels of risk suggest the importance of exploring this area further.     

The consequences of conflict between the venture capitalist and the entrepreneurial team in the United Kingdom from the perspective of the venture capitalist

This research investigates the factors associated with the nature of conflict in the post-investment relationship between the venture capitalist (VC) and the entrepreneurial team (EP) in a venture that was funded by the venture capital firm, and as perceived by the VC. The study hypothesises a relationship between this perceived conflict and the post-investment performance of the investee firm. It examines both cognitive and affective conflict in two strategic areas — organisational goals and policy decisions — and relates them to the performance. The data was collected by a survey of VCs in the UK and a 60% effective response rate was achieved. The results show that conflict as disagreement can be beneficial for the venture performance, although at the same time, conflict as personal friction is negatively associated with performance. These impacts are in general stronger in the conflict related to organisational goals than to policy decisions.     

How venture capital firms differ

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.     

Heterogeneous venture capital,M&A activity,and market response

This study investigates the effects of venture capital (VC) investment on newly listed firms' merger and acquisition activities and takes the lock-up period into consideration. We find that venture capitalists (VCs) tend to postpone M&A activities during a lock-up period, whereas the inhibition role recedes when the lock-up period expires. VCs with a longer investment period dominate this influence. We also illustrate how the market responds to the M&A announcements of VC-backed firms, with the response varying with VCs' investment period.     

Incremental impact of venture capital financing

This paper investigates the differences in the return generating process of venture capital (VC)-backed firms and their peers that operate without VC financing. Using a unique hand-picked database of 990 VC-backed Belgian firms and a complete population of Belgian small and medium-sized enterprises (SMEs), we focus on the extent to which the presence of a VC investor affects the sensitivity of a firm’s returns to the changes in the capital structure, in the operating cycle, and in the industry dynamics. The differences may stem from the (self-) selection of better companies into VC portfolios, from the venture capitalists’ (VCs) value-adding activities, and/or from both. We examine these factors in the context of a complex simulation procedure which allows separating selection from value-adding when traditional approaches are difficult to implement. Our results indicate that VC-backed firms are able to extract more rent from the changing industry conditions and from the optimizations in their capital structure. The presence of VCs in the firm’s equity seems to have only a marginal effect on the operating cycle efficiency. Overall, the results are suggestive of the value-adding being the main driver of the VC-backed firm’s performance.     

Cross-border venture capital investments in Asia: Selection and exit performance

We investigate the investment behavior and exit performance of VCs that have pursued expansion outside their home locations, specifically, in Asia. Our findings indicate that, in the Asian VC markets, foreign VCs have relative advantages over local VCs in terms of size and experience while they are at a disadvantage in information collection and monitoring due to both geographic and cultural distances. When investing alone, foreign VCs are more likely to invest in more information-transparent ventures. Partnership with local VCs helps alleviate information asymmetry and monitoring problem and has positive implication for the exit performance of local entrepreneurial firms. Specifically, we find that after controlling for the endogeneity of selection, firms with both foreign and local VC partnership are about 5% more likely to successfully exit.