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The association between venture capitalists’ selection and value adding behavior: evidence from early stage high tech venture capitalists

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Abstract

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

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Notes

  1. Whether people investors actually select teams that are of higher quality and are more complete compared to other investors is an interesting question. Nevertheless, irrespective of the actual decision, the perception of people investors that they select the best teams may be a sufficient condition for them to engage in less value adding.

  2. Whether financial investors actually select the ventures with the highest ex-ante potential is an interesting question. The perception of financial investors that they select the ventures with the highest potential may be enough for them to engage in less value adding.

  3. Venture funds having a fund size between 100 million Euro and 250 million Euro are considered to be large funds for venture investments. Mega funds are those funds having a size of more than 250 million Euro, small funds have less than 100 million Euro under management (EVCA definition).

  4. Although VCs may focus on more than one selection criterion, entrepreneurs rarely have business proposals that are complete in every respect (Bhide 1992). Moreover, while VCs may prefer to invest in ventures with both strong business and strong management, different VCs are likely to weigh one or the other more heavily (Kaplan et al. 2009). Consistent with these arguments, the cluster analysis revealed different groups of VCs, who focus more or less on specific selection criteria. Hence, as an example, we do not argue that technology investors do not focus on entrepreneurial team criteria, rather they put technology before people.

  5. These 17 individual regressions (representing each individual value adding activity which represent the entire involvement in value adding scale) are not reported due to space considerations, but are available from the authors upon simple request.

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Acknowledgements

We thank Fabio Bertoni, Vanessa Faktor, Annelore Huyghe, Elien Vandenbroucke and two anonymous reviewers for helpful comments and suggestions. This paper further benefited from discussions with Gimv workshop participants at the Vlerick Leuven Gent Management School. The data used in this paper were collected during the Ph.D. process of the first author, who would like to thank both Bart Clarysse and Andy Lockett for their invaluable support and supervision during this process. The second author gratefully acknowledges the financial support of the Special Research Fund (BOF10/PDO/046).

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  1. Department of Management, Innovation and Entrepreneurship, Ghent University, Tweekerkenstraat 2, 9000, Ghent, Belgium

    Mirjam Knockaert

  2. Centre for Entrepreneurship, University of Oslo, Gaustadalléen 21, 0318, Oslo, Norway

    Mirjam Knockaert

  3. Department of Accounting & Corporate Finance, Ghent University, Kuiperskaai 55E, 9000, Ghent, Belgium

    Tom Vanacker

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Knockaert, M., Vanacker, T. The association between venture capitalists’ selection and value adding behavior: evidence from early stage high tech venture capitalists. Small Bus Econ 40, 493–509 (2013). https://doi.org/10.1007/s11187-011-9378-8

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