Abstract
We explore how and under what conditions venture capital (VC) funding affects a new venture’s propensity to generate novel innovations. Drawing on behavioral agency perspective, we suggest that venture capitalists (VCs) are initially motivated to boost their prospective wealth and help their early stage venture investees to develop novel innovations. However, as VCs’ current wealth dominates prospective wealth with their late stage investees, leading to greater risk-aversion propensity, VC funding has a negative effect on innovation novelty of late stage ventures. We further argue that the VC effect on innovation novelty of their venture investees depends on the power sources of venture CEOs, who are responsible for the managerial decisions at their respective ventures. Based on a sample of 456 biotech ventures, we find that structurally powerful CEOs, who are in a position to take greater risk, intensify the positive effect of VC funding on innovation novelty of early stage ventures and attenuate the negative effect of VC funding for late stage ventures. However, CEOs with expertise power, typically seeking more balanced innovation orientation, attenuate both the positive effect of VC funding on innovation novelty of early stage ventures and the negative effect of VC funding for late stage ventures.
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