Venture capital and the delegation of decision authority in startups: an exploratory study

Abstract

AbstractWe study the delegation of authority over strategic decisions in startups and how it relates to venture capital (VC) investment through a mixed-methods study. We first show that startups typically centralize decision authority. The extent of delegation is higher if startups are VC-backed. In startups backed by corporate VC investors the aim is to leverage the unique knowledge possessed by entrepreneurial team members in a context characterized by low principal-principal agency costs. In those backed by independent VC investors, the increase in delegation is paired with the emergence of a polyarchy and decoupling between the formal and real organizations. In this situation delegation may serve as a control mechanism aligning the actions of startups with the interests of the VC investors.