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.     

Is venture capital worth it? Effects on firm performance and founder returns

This paper extends research on venture capital (VC) finance by studying its effects on a venture's performance and on its founders' returns beyond an initial public offering (IPO). A “founder performance” construct, defined as a founder's financial and nonfinancial returns, is proposed and used to measure and compare returns to founders with returns to investors and firm performance. In general, venture characteristics pre-IPO and venture performance post-IPO were not significantly different when comparing ventures with and without VC backing. Only when VC backing is very high, do pre-IPO resources and funding improve significantly. However, higher levels of resource endowments did not seem to affect post-IPO performance for the venture or its investors. On the other hand, founders resorting to VC funding before taking their company public generated significantly less wealth for themselves and were less likely to remain as CEOs of their ventures after the IPO. Results suggest that founders motivated primarily by wealth creation and those motivated by remaining in control of their ventures should, in both instances, minimize VC backing when taking their ventures public. The finding that founder performance differs from venture and investor performance calls for future research to explore potential conflicts of interest that may arise from the double role of founders as principals and agents.     

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.     

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.     

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.     

Exploring the multi-level processes of legitimacy in transnational social enterprises

Transnational entrepreneurship has emerged as a form of migrants' participation in the social, economic, and political lives of both their countries of origin and of residence. Leveraging increasing evidence about migrants' involvment in transnational social enterprises, we examine the multi-level processes through which organizational legitimacy is molded by transnational entrepreneurs to reflect country-level institutional settings, and how organizational-level legitimacy affects entrepreneurs' social status. We longitudinally examine the multi-level processes of legitimation in a transnational social enterprise operated by Ghanaian migrants across Italy and Ghana. We analyze secondary and ethnographic data for two years, observing how transnational social enterprises harvest moral and pragmatic legitimacy from the institutional contexts in which they operate. We study how entrepreneurs construe their social status through pragmatic legitimacy obtained from their transnational ventures, and their institutional environments inspired by micro- and meso legitimacy reconfigurations. We discuss theoretical implications for social and transnational entrepreneurship and practical contributions for policy-making.     

Networking Ability and the Financial Performance of New Ventures: Moderating Effects of Venture Size,Institutional Environment,and Their Interaction

Building on prior research, this study provides insights on the complex interaction between individual, organizational, and environmental factors in the field of new venture success. Specifically, we develop and test hypotheses on how venture size, institutional context, and their interaction moderate the effect of entrepreneurs' networking ability on the financial performance of new ventures. Based on a sample of 283 new ventures in Germany and Brazil—two countries that differ significantly in terms of their institutional frameworks—our analyses reveal moderating effects of venture size and the interaction between venture size and institutional environment.     

New venture internationalization: The role of venture capital types and reputation

This study examines how different types of venture capital relate to new venture internationalization. Using a sample of 646 U.S. new ventures that executed IPOs between 1995 and 2010, we find that ventures with foreign or corporate venture capital have higher levels of international intensity. We also investigate the moderating role of VC reputation on the relationship between foreign venture capital and international intensity and corporate venture capital and international intensity. Our results suggest that VC reputation weakens the positive relationship between corporate VC and international intensity.     

Home country institutions,social value orientation,and the internationalization of ventures

We examined how home country formal institutions and the venture’s value orientation influenced the venture’s likelihood of internationalization based on a data set that was adapted from the Global Entrepreneurship Monitor (GEM) data in the year 2009, covering 7668 individual ventures in 25 countries. Better-developed home country formal institutions are found to have a supportive impact on the venture’s likelihood of internationalization. The supportive impact is also found to be weaker for socially oriented ventures than for profit-oriented ventures. The venture’s social value orientation negatively moderates the home country formal institutions–likelihood of internationalization relationship. The negative moderating effects can be explained as follows: Socially oriented ventures in the better-developed home country institutional environment are less likely to develop coping skills against uncertain and risky institutional environments, which are common in their host countries. Besides the theoretical contributions, this paper also highlights the implications for both business researchers and policy makers.     

Following the Crowd—Does Crowdfunding Affect Venture Capitalists’ Selection of Entrepreneurial Ventures?

Given the increasing popularity of crowdfunding as a new means to finance entrepreneurial ventures, we assess whether and how crowdfunding campaign‐specific signals that affect campaign success influence venture capitalists’ selection decisions in ventures’ follow‐up funding process. Our study relies on cross‐referencing a proprietary data set of 56,000 crowdfunding campaigns that ran on Kickstarter between 2009 and 2016 with 100,000 investments in the same period from the Crunchbase data set. Drawing on signaling theory and the microfinance literature, our empirical findings reveal that a successful crowdfunding campaign leads to a higher likelihood to receive follow‐up venture capital (VC) financing, and that there exists an inverted U‐shaped relationship between the funding‐ratio and the probability to receive VC funding. Further, we find statistical evidence that an endorsement by the platform provider has a likewise positive impact on the receipt of VC. Contrary to our expectations, word‐of‐mouth volume seems to be a negligible factor when it comes to follow‐up VC financing. Our results support the view that crowdfunding signals are factored into the VC’s funding decision in order to evaluate the potential of entrepreneurial ventures.     

Upper echelons and portfolio strategies of venture capital firms

In this study we analyze how the composition of the top management team (TMT) influences the portfolio strategy choice in venture capital (VC) organizations. We develop a model of risk perception to investigate how education and experience of TMT members impact whether VC organizations invest with a focus on early stage ventures or not, specialize or diversify across industries, and invest with a broad or narrow geographic scope.Evaluation of data on TMTs and portfolio strategies of 136 European VC firms revealed that VC firms with higher proportions of TMT members with science/engineering education and entrepreneurial experience more likely invest with an early stage focus. Furthermore, TMTs with more management education diversify their portfolios more across industries. Finally, the more international experience TMT members of VC organizations have, the broader the geographic scope of investees. We discuss the implications of our findings for the VC literature.     

Managing Risk in a Transitional Environment: An Exploratory Study of Control and Incentive Mechanisms of Venture Capital Firms in China

In this study, we examine the control and incentive mechanisms of domestic and foreign venture capital (VC) firms in China. Primary findings show that most VC firms use staged capital infusion, value reassessment based on subsequent performance, and other tools reflecting the flexible and dynamic characters of the investment systems and rarely replace management team. On the other hand, domestic VC firms are less active in monitoring, less likely to retain veto rights, and less likely to introduce stock options into target firms and for all employees. They are also less motivated to provide value-added services than their foreign counterparts. Instead, they concentrate their monitoring and participation on the financial aspects of the invested ventures. We discuss these findings and suggest directions for future research.     

Patents and Early‐Stage Financing: Matching versus Signaling

This paper investigates the role of patents on early‐stage financing. We consider two questions: are patents signals of quality and why do patents relate to venture capital (VC) financing but not angel financing? Analyzing data from 468 Canadian early‐stage ventures, we show that patents are not signals of quality. Instead, the data support a match‐on‐financing need hypothesis: ventures match with VCs, who have financial capacity to support their patent protection strategies.     

The export intensity of venture capital backed companies

In this study we examine how venture capital (VC) firms influence the export behavior of their investee companies. VC firms perform an important governance function for investee companies by providing monitoring and value-added activities. Drawing on agency theory, the resource-based view of the firm and governance life-cycle theory we hypothesize that the relationship between VC governance resources and investee exporting behavior is moderated by investment stage. Employing a sample of 340 VC-backed firms, our results confirm this hypothesis. Monitoring resources are most effective in promoting export behavior for late-stage ventures and value-added resources in promoting export behavior in early-stage ventures.

Contextualizing international learning: The moderating effects of mode of entry & subsidiary networks on the relationship between reforms & profitability

This empirical paper studies how MNEs from developing and emerging markets may learn through their choice of entry mode and subsidiary network configuration, and use this knowledge to increase their responsiveness to pro-market reforms in their home market. The paper proposes that entry modes and network configurations that facilitate knowledge acquisition provide firms from developing countries an advantage when responding to such institutional changes. The analyses use data for the largest Latin American companies from 1989 to 2008. The findings provide evidence for a positive moderating effect of equity international joint ventures, international acquisitions, and subsidiary network centrality closeness on the relationship between reforms and profitability.     

Internationalization of emerging-economy new ventures: The role of within-country differences

New ventures are increasingly internationalizing from emerging economies, but the role of their home country and any associated within-country regional differences are not well understood. In this article, we look at a new venture in China and how its headquartered region promotes its internationalization. We present empirical evidence that shows the interrelatedness between a venture’s region and internationalization: When institutional development in a region is strong, the impact of foreign firm presence on venture internationalization becomes even stronger. We discuss implications for managers of multinational enterprises and new ventures operating in emerging economies as well as policymakers in these economies.     

Social corporations under the spotlight: A governance perspective

A series of new legal statutes for profit-seeking social ventures has emerged across geographic and institutional settings. Extant studies commonly do not make a clear distinction between these ventures. Such confusion leads to blurriness in research design and methodology, thereby limiting the relevance of findings. Moreover, researchers, entrepreneurs, and policymakers often lack a clear view of the unique organizational and governance aptitudes these ventures call for, to sustain and grow over time. Thus, this study has two objectives: (1) to clarify the panorama of novel companies that legally commit themselves to a social mission, gathered under the term “social corporation,” by providing a comprehensive typology of these organizations and (2) to identify the governance capabilities that social corporations develop to be sustainable and avoid mission drift in the long run. Our analysis of corporate-governing documents leads us to classify social corporations into three types: hard-law, soft-law, and bylaw. In addition to this typology, our multiple case study uncovers five key governance capabilities of social corporations related to performance, conformance, and responsibility—the main pillars of organizational governance. Overall, our work contributes to a better understanding of novel forms of social entrepreneurship emerging on the market. More important, it casts light on the governance processes that characterize them.     

Internationalization and value orientation of entrepreneurial ventures—a Latin American perspective

Entrepreneurial ventures from Latin American emerging economies are underexplored on the current international entrepreneurship literature. This paper is aimed to contribute empirical evidence on entrepreneurial ventures from Latin American emerging economies and their internationalization and value orientation. Based on the 2009 Global Entrepreneurship Monitor data, we found that institutional voids on Latin American emerging economies were a double-edge sword: on one hand, inefficient and unregulated markets make ventures from Latin American emerging economies encounter the liability of their country of origin; on the other hand, less active governments and absence of influential NGOs alternatively trigger more social entrepreneurial opportunities, with some of them across the national border. Some entrepreneurs from Latin American emerging economies have been active in exploiting those international social opportunities. International social entrepreneurship can be regarded as an alternative solution to social problems which governments, NGOs, or for-profit ventures fail to tackle on Latin American emerging economies.     

Signaling and initial public offerings: The use and impact of the lockup period

To reduce information asymmetries for potential investors considering investment in an IPO venture, owners can signal the firm's longer-term viability and quality in several ways. The lockup period, is one signal that can be offered. We investigated the lockup period of a sample of 640 ventures going through the IPO and find that a longer lockup period acts as a substitute signal to venture capital (VC) and prestigious underwriter backing. Furthermore, we find that ventures which have a going concern issue can reduce the amount of underpricing at the time of the IPO by accepting a longer lockup period.