Venture Capital Time Bombs and New Ventures: Do Boards Limit the Damage?

Abstract

Venture capital funds have a limited lifecycle, which requires venture capitalists (VCs) to liquidate investments and return capital by the end of the fund. VCs shift attention from growing to exiting ventures as funds age. When valuable exits appear less likely, VCs facing exit pressure may pursue low-value M&As or liquidations. This pursuit could hurt the interest of those ventures that can continuously operate. Venture boards play a crucial role in exit decisions, so it is unclear if a VC’s exit pressure has a material impact on venture exit, and if board composition can limit the impact of the VC’s exit pressure. Building on resource dependence theory, we predict and show that VCs’ exit pressure increases the likelihood of low-value M&As and liquidations. We also find that the presence of non-CEO founders and CVCs on the board exacerbates the impact of VCs’ strong exit pressure, thus increasing the likelihood of low-value M&As and liquidations, while a higher proportion of independent directors alleviates the effect of VCs’ strong exit pressure on ventures. The results suggest inviting VCs onto board solves resource dependence in the short-term but has future concerns, and board composition influences the interdependent relationship between ventures and VCs.