Genetically engineered: why some venture capital firms are more successful than others

Entrepreneurship: Theory and Practice, Jan, 2009 by Jennifer M. Walske, Andrew Zacharakis

Research Question

Prior Theory

Stinchcombe (1965) speaks to how a higher proportion of new organizations fail than old ones due to their "liability of newness." He argues that new organizations lack the wealth, power, and legitimacy of older organizations and as such, encounter greater difficulty in obtaining resources. However, when new organizations mimic prior organizational forms, they bring with them "imprints" of the established organizations, lessening their liability of newness. Nelson and Winter (1982) also argue that organizations remember by doing through repetitive action. Such learning or knowledge is most easily transferred into similar organizational forms, reducing the "learning curve" of new firms (Hannan& Freeman, 1984). More recent research has demonstrated that founders' early "imprints" also shape future hiring (Beckman & Burton, 2008), creating an indelible and enduring influence on how enterprises evolve (Boeker, 1989). In keeping with Stinchcombe and Nelson and Winter, other researchers have found that "spawned" entrepreneurial firms, defined as businesses formed within the same industry as the parent firm, have a higher probability of success (Burton, Sorenson, & Beckman, 2002; Chatterji, 2006; Gompers, Lerner, & Scharfstein, 2005).

Hypotheses

Experience. Consistent with evolutionary theory, Stinchcombe's work on imprinting, and our pilot interviews, we view a venture partner's prior experience as a competitive advantage when founding a VCF. VCs with industry experience can more readily delineate true investment opportunities. They can assess a richer asset stock of resources (Dierickx & Cool, 1989), including networks, useful in sourcing new investments (Seppa & Jaaskelainen, 2002). Prior experience is also useful in monitoring PCs (Fried & Hisrich, 1989) and when working with entrepreneurs to build firm value (Spender, 1996). As such, we believe that new VCFs that have, on balance, founders with venture capital experience will scale at a faster pace than those founded by individuals without venture capital experience:

Hypothesis 1a: Nascent VCFs whose founders have greater venture capital experience will be more successful than nascent VCFs founded by individuals with less venture capital experience.

Entrepreneurs also bring many qualifications that can aid VCF success, especially if they ran venture-funded start-ups. First, the seasoned entrepreneur will have a basic understanding of the venture capital investment process, having gone through it. Second, she will have a network of both entrepreneurs and VCs that she can utilize to evaluate potential investments and recruit management teams for her PCs. Finally, the entrepreneur's industry knowledge will be an asset when selecting, monitoring, and exiting PCs if they are in the industry with which the entrepreneur is most familiar. LPs, however, were hesitant to invest in newly founded VCFs run by VCs with mostly entrepreneurial experience. They felt that entrepreneurs lacked the ability to manage a portfolio of firms, favoring instead one or two PCs. Therefore, while we deemed entrepreneurial experience as an important experience variable to capture, its directionality was unclear. In the end, we chose to take a positivist stance in stating its related hypothesis: