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Learning from own and others’ previous experience: the contribution of the venture capital firm to the likelihood of a portfolio company’s trade sale

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Abstract

The objective of this paper is to examine to what extent different venture capital firms contribute to the likelihood that the portfolio company in which they invested will realize a trade sale. We use arguments from learning theory to hypothesize the relationship between vicarious, experiential and congenital learning of the venture capital (VC) firm and the trade sale hazard of its portfolio companies. Based on our analysis of 206 VC-backed UK start-ups, we find that both trade sale experience of the VC and learning from syndicate partners with trade sale experience significantly increase the trade sale hazard. The routines and procedures learned from experienced syndicate partners complement experience accumulated through trial and error. Congenital trade sale experience of the investment managers on the contrary has no significant influence on the acquisition hazard.

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Notes

  1. We interviewed one investment manager from each of the following VC firms: Imperial Innovations, Index Ventures, Amadeus Capital, Debaeque Venture Capital, Alta Partners, Allegis Capital, VentureScout and Aster Capital.

  2. In one case, a VC told us that the preferred liquidation rights in their initial shareholder agreements were so aggressive that only afterwards they realized that the entrepreneurs in a potential trade sale would keep less than 5% of the value added, which they then had to share with the management. In a number of portfolio companies, this had explained why the entrepreneurs were so passive in looking for trade sale opportunities or even neglected opportunities.

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Acknowledgments

The authors greatly acknowledge the financial contribution of STOIO. We also value the comments of the participants at the Imperial College Business School Research seminar series on previous versions of this paper and the participants of the Gimv PE special workshop at the Vlerick Leuven Gent Management School in preparation of this special issue.

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Authors and Affiliations

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

    Bart Clarysse & Annelies Bobelyn

  2. Imperial College Business School, South Kensington Campus, London, SW7 2AZ, UK

    Bart Clarysse, Annelies Bobelyn & Itxaso del Palacio Aguirre

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  1. Bart Clarysse
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  2. Annelies Bobelyn
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  3. Itxaso del Palacio Aguirre
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Correspondence to Annelies Bobelyn.

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Clarysse, B., Bobelyn, A. & del Palacio Aguirre, I. Learning from own and others’ previous experience: the contribution of the venture capital firm to the likelihood of a portfolio company’s trade sale. Small Bus Econ 40, 575–590 (2013). https://doi.org/10.1007/s11187-011-9381-0

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