Dispersion of Entrepreneurs’ Power and Venture Performance After Initial VC Investment

Abstract

Previous research has debated the consequences of venture capital (VC) entry into ventures. Building on the power literature, this study uses a two-stage model that, first, develops and tests how initial VC investment reduces entrepreneurs’ power structures in new venture boards, and, second, explores how such power dispersion affects venture performance through the mediating role of financial slack resources. We develop the argument that financial slack is the core element indicating how entrepreneurs’ resource discretion changes in VC-funded firms. Our results show that initial VC investment decreases entrepreneurs’ discretion and their power over financial slack resources, which in turn has a negative effect on performance. Our analysis informs our understanding of how venture capitalists introduce governance mechanisms and how these mechanisms can have deleterious effects on venture performance. We discuss our contributions to the larger theoretical discussions about the effects of changing entrepreneurs’ structural power and the determinantal implications of venture capitalists’ standard governance mechanisms on venture performance.