Abstract
Employing both behavioral decision making and agency theories, our study seeks to identify those factors that influence a venture capital (VC) firm’s decision to undertake seed capital investments and, subsequently, the scale of such activity. Using data on the investments made by 2949 VC funds raised worldwide between 1962 and 2002, we find investor age, timing of investment, and fund location to be of importance. In addition, the size of the fund and the existing number of portfolio firms exert opposite influences on the level of seed capital activity of the VC firm. These results suggest that seed activity is a valuable source of market intelligence for leading VC firms seeking proactively to identify and invest in novel technologies.
Similar content being viewed by others
References
Admati A. R., Pfeiderer P. (1994) Robust Financial Contracting and the Role of Venture Capitalists. Journal of Finance 49:371–402
Almeida P., B. Kogut, 1999, Localization of Knowledge and the Mobility of Engineers in Regional Networks. Management Science 45(7)
Amit R., Brander J., Zott C. (1998) Why do Venture Capital Firms Exist? Theory and Canadian Evidence. Journal of Business Venturing 13:441–466
Aston Business School (1990) Constraints on the Growth of Small Firms. DTI, London
Bank of England (1996) The Financing of Technology-Based Small Firms. Bank of England, London
Audretsch d. (2002) The Dynamic Role of Small Firms: Evidence from the US’, Small Business Economics 18(1–3):13–40
Berger A., Udell G. F. (1998) The Economics of Small Business Finance: The Roles of Private Equity and Debt Markets in the Financial Growth Cycle. Journal of Banking and Finance 22:613–673
Birkinshaw J., Murray G., van Basten Batenburg R. (2002) Corporate Venturing: The State of the Art and the Prospects for the Future. London Business School, London
Branscomb L. M., Auerswald P. E. (2002) Between Invention and Innovation: An Analysis of Funding for Early-stage Technology Investment. Economic Development Office, Advanced Technology Programme and National Institute of Standards and Technology, Gaithersburg MD
Burgel, O, 2000, UK Venture Capital and Private Equity as an Asset Class for Institutional Investors, London: British Venture Capital Association
Bygrave W. D. (1987) Syndicated Investments by Venture Capital Firms: A Networking Perspective. Journal of Business Venturing 2:139–54
Bygrave W. D., Timmons J.A. (1992) Venture Capital at the Crossroads. Harvard Business School Press, Boston, MA
Cameron A. C., Trivedi P. K. (1998) Regression Analysis of Count Data. Cambridge University Press, Cambridge, UK
Cyert R. M., March J.G. (1963) A Behavioral Theory of the Firm. Prentice-Hall, Englewood Cliffs, NJ
Denis D.J. (2004) Entrepreneurial Finance: An Overview of the Issues and Evidence. Journal of Corporate Finance 10(2):301–326
Dimov D. P., Shepherd D. A. (2005) Human Capital Theory and Venture Capital Firms: Exploring “home runs” and “strike outs”’. Journal of Business Venturing 20:1–21
Edwards C. (1999) Entrepreneurial Dynamism and the Success of US High Tech, Joint Economic Committee Staff Report, Office of the Chairman, US Senator Connie Mack. U.S. Senate, Washington, DC
Einhorn H. J., Hogarth R. M. (1985) Ambiguity and Uncertainty in Probabilistic Inference. Psychological Review 92:433–61
Elango B., Fried V. H., Hisrich R. D., Polonchek A. (1995) How Venture Capital Firms Differ. Journal of Business Venturing 10:157–79
European Commission (1998) Risk Capital: A key to Job Creation in the European Union. Commission of the European Communities, Luxembourg
European Venture Capital Association, 2005, “Long term performance ‘stable’ at 9.5%”, EVCA press release, London 16 June
Fama E. F., French K.R. (2004) The Capital Asset Pricing Model: Theory and evidence. Journal of Economic Perspectives 18(3):25–47
Fenn G., Liang N., Prowse S. (1995) The Economics of the Private Equity Market. Board of Governors of the Federal Reserve System, Washington DC
Florida R. and M. Kenney, 1988, Venture Capital Financed Innovation and Technological Change in The U.S.A. Research Policy, 119–137
Ghosh D., Ray M. R. (1997) Risk, Ambiguity, and Decision Choice: Some Additional Evidence. Decision Sciences 28:81–104
Gifford S. (1997). Limited attention and the role of the venture capitalist. Journal of Business Venturing 12:459–82
Gilbert, B.A., D.B. Audretsch and P.P. McDougall, 2004, `The Emergence of Entrepreneurship Policy', Small Business Economics, 22, 313–323
Gompers P. (1995) Optimal investment, monitoring, and the staging of venture capital. Journal of Finance 50(5):1461–1489
Gompers P. (1996) Grandstanding in the Venture Capital Industry. Journal of Financial Economics 43:133–156
Gompers P., Lerner J. (1999) The Venture Capital Cycle. MIT Press, Cambridge MA
Gompers P., Lerner J., Sharfstein D. (2005) Entrepreneurial Spawning: Public Corporations and the Genesis of New Ventures 1986 to 1999. Journal of Finance 60(2):577–614
Gupta A. K., Sapienza H. J. (1992) Determinants of Venture Capital Firms’ Preferences Regarding the Industry Diversity and Geographic Scope of their Investments. Journal of Business Venturing 7(5):347–362
Heath C., Tversky A. (1991) Preference and Belief: Ambiguity and Competence in Choice under Uncertainty. Journal of Risk and Uncertainty 4:5–28
Hellman T., Puri M. (2002) Venture Capital and the Professionalization of Start-Up Firms: Empirical Evidence. Journal of Finance 57(1):169–197
Howcroft D (2001) After the Goldrush: Deconstructing the Myths of the dot.com Market. Journal of Information Technology 16(4):195–204
Hughes A. (1997) Finance for SMEs: a U.K. Perspective. Small Business Economics 9:151–166
Jaaskelainen M., Maula M., Seppa T. (2002) The Optimum Portfolio of Start-up Firms in Venture Capital Finance: The Moderating Effect of Syndication and an Empirical Test, Frontiers of Entrepreneurship Research. Babson College, Wellesley, MA
Jääskeläinen M., Maula M., Murray G. C. (2004) The Effects of Incentive Structures on the Performance of Publicly Funded venture capital funds Frontiers of Entrepreneurship Research. Babson College, Wellesley, MA
Kanniainen V., Keuschnigg C. (2003) The Optimal Portfolio of Start-up Firms in Venture Capital Finance. Journal of Corporate Finance 9(5):521–534
Kahn B. E., Sarin R. K. (1988) Modeling Ambiguity in Decisions under Uncertainty. Journal of Consumer Research 15:265–272
Kaplan S. N., Stromberg P. (2001) Venture Capitalists as Principals: Contracting, Screening, and Monitoring. American Economic Review 91(2):426–430
Kaplan S. N., Stromberg P. (2004) Characteristics, Contracts, and Actions: Evidence from Venture Capitalist Analyses. Journal of Finance 59(5):2177–2210
Kenney M., von Burg U. (1998) Technology, Entrepreneurship, and Path Dependency: Industrial Clustering in Silicon Valley and Route 128. Industrial and Corporate Change 8(1):67–103
Lange l. (1982) Interpretation of Events and Behavior Control – Critique of Attribution Theories. Zeitschrift fur Psychologie 190(3):303–313
Lerner J. (1994a) The Syndication of Venture Capital Investments. Financial Management 23:16–27
Lerner J. (1994b) Venture Capitalists and the Decision to go Public. Journal of Financial Economics 35:293–316
Lerner J. (1995) Venture Capitalists and the Oversight of Private Firms. Journal of Finance 50:301–318
Lorenz A. (1989) Venture Capital Today 2nd ed., Woodhead-Faulkner, London
Manigart S., De Waele K., Wright M., Robbie K., Desbrières P., Sapienza H., Beekman A. (2000) Venture Capitalists, Investment Appraisal and Accounting Information: A Comparative Study of the USA, UK, France, Belgium and Holland. European Financial Management 6(3):389–404
Manigart S., De Waele K., Wright M., Robbie K., Desbrieres P., Sapienza H., Beekman A. (2002) Determinants of Required Return in Venture Capital Investments: A Five-country Study. Journal of Business Venturing 17:291–312
March J. G., Shapira Z. (1987) Managerial Perspectives on Risk and Risk Taking. Management Science 33:1404–18
Martin R., Sunley P., Turner D. (2001) Taking Risks in Regions: The Geographical Anatomy of Europe’s Emerging Venture Capital Market, Working Paper 202, Centre for Business Research. University of Cambridge, Cambridge
Mayer C., Schoorsb K., Yafeh Y. (2005) Sources of Funds and Investment Activities of Venture Capital Funds: Evidence from Germany, Israel, Japan, and the United Kingdom. Journal of Corporate Finance 11:586–608
Murray G. C. (1995) Evolution and Change: an Analysis of the First Decade of the UK Venture Capital Industry. Journal of Business Finance and Accounting 22(8):1077–1107
Murray G. C. (1999) Early-stage, Venture Capital Funds, Scale Economies and Public Support. Venture Capital 1(4):351–384
Murray G., Marriott R. (1998) Why has the Investment Performance of Technology-specialist, European Venture Capital Funds been so Poor?. Research Policy 27(9):947–976
Nelson R. R., Winter S. G. (1982) An evolutionary theory of economic change. Belknap – Harvard University Press, Cambridge, MA
Newell A., Simon H. A. (1972) Human Problem Solving. Prentice Hall, Englewood Cliffs, NJ
NVCA (National Venture Capital Association), 2004, The Venture Capital Industry – An Overview, http://www.nvca.org/def.html
Porter, M.E., 1998, ‘Clusters and the New Economics of Competition’, Harvard Business Review November-December, 77–91
Porter M. E., Ackerman F.D. (2001) Regional Clusters of Innovation. US Council on Competitiveness, Washington, DC
Sahlman W. A. (1990) The Structure and Governance of Venture-Capital Organizations. Journal of Financial Economics 27(2):473–521
Sapienza H. J. (1992) When Do Venture Capitalists Add Value?. Journal of Business Venturing 7(1):9–27
Sapienza H. J., Gupta A. K. (1994) Impact of Agency Risks and Task Uncertainty on Venture Capitalist – CEO Interaction. Academy of Management Journal 37(6):1618–1632
Shane S., Stuart T. (2002) Organizational Endowments and the Performance of University Start-Ups. Management Science 48(1):154–171
Sohl J. E. (2003) The Private Equity Market in the USA: Lessons from Volatility. Venture Capital: An International Journal of Entrepreneurial Finance 5(1):29–46
Storey D. J. (1994) Understanding the Small Business Sector. Routledge, London
Storey D. J., Tether B. (1998) New Technology-based Firms in the European Union: an Introduction. Research Policy 26:933–946
Tyebjeee T., Bruno A. (1984) A Model of Venture Capital Activity. Management Science 30(9):1051–1066
Van Osnabrugge M., Robinson R. J. (2001) The Influence of a Venture Capitalist’s Source of Funds. Venture Capital 3:25–39
Zacharakis A. L., Shepherd D. A. (2001) The Nature of Information and Overconfidence on Venture Capitalist’s Decision Making. Journal of Business Venturing 16(4):311–332
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Dimov, D., Murray, G. Determinants of the Incidence and Scale of Seed Capital Investments by Venture Capital Firms. Small Bus Econ 30, 127–152 (2008). https://doi.org/10.1007/s11187-006-9008-z
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11187-006-9008-z