VENTURE CAPITALISTS’ COLLECTIVE BELIEFS ON NEW BUSINESS VENTURE INVESTMENTS

Abstract

A multi-method approach (investment case analysis, administrative records, published interviews, questionnaire, and personal interviews) was conducted in order to deal with the widest possible range of aspects connected with venture capitalists’ investments in new businesses. Our study identified 73 decision rules or heuristics associated with such investments and we examined the extent to which these rules were shared by the UK venture capital community. We proposed to find out the reasons for business problems/failures and whether venture capitalists’ attribution of blame is biased. We explained what social functions this attribution serves and what consequences it entails for the venture capitalist, the entrepreneur, and the providers of funds to venture capital firms. Our decision rules demonstrate that not only evaluation criteria are important to understanding success of new ventures but also other heuristics associated with the deal structure, and two basic social processes, namely, hands-on management and networks. This very much reflects the widespread belief among venture capitalists that “it is not just a matter of picking up the winners”. This research has made explicit the venture capitalists’ “theory”of new business failures and illustrates their attribution bias towards the managerial team. This attribution of blame has serious consequences for the managerial team and the venture capitalists themselves as they will try to alter the managerial team rather than any other situational factor, e.g. market, product.