Failing Fast and Asymmetric Peformance Outcomes for Venture Capital Investors and Entrepreneurs

Abstract

When entering exchange relationships, actors decide between vetting and developing working routines with new partners versus choosing imperfect, but familiar partners. Actors engage with those that are more familiar, for example, along ethnicity, gender, or embeddedness within a social network, in order to achieve improved coordination and reduced monitoring costs, which can result in better performance of their exchanges. For venture capitalists, decisions based on familiarity criteria manage downside risk, which leads to improved survival. This leads to more successful investments over a long time horizon but reflects worse financial outcomes for any particular venture. As a result of persistent relationships with investors, entrepreneurs may learn how to “fail fast,” but not how to learn from failure.