Academic journal article Entrepreneurship: Theory and Practice

The Influence of the Venture Capitalist's Governance Activities on the Entrepreneurial Firm's Control Systems and Performance

Academic journal article Entrepreneurship: Theory and Practice

The Influence of the Venture Capitalist's Governance Activities on the Entrepreneurial Firm's Control Systems and Performance

Article excerpt

Venture capitalists (VCs) contribute to entrepreneurial firms by engaging in governance activities, such as providing services and monitoring the entrepreneurial firm's operations and performance. This study examines the role and influence of the VC's governance activities on 93 Dutch entrepreneurial firms. Results suggest that while the VC's governance activities may help to stimulate the use of the entrepreneurial firm's control systems, they also moderate the relationship between the entrepreneurial firm's use of control systems and its financial performance. It appears in particular that cost control systems contribute positively to the entrepreneurial firm's financial performance when the VC provides service activities. However, the use of cost control systems tends to be negatively related to the entrepreneurial firm's financial performance when the VC is highly focused on monitoring.

Introduction

Venture capitalists (VCs) provide risk capital to high-potential entrepreneurs. By owning a large stake of the ownership rights, VCs usually gain substantial influence over the entrepreneurial firm, which allows them to play an active role in the firm's strategy development by offering value-adding activities. Although seminal work has reached general consensus as to which value-adding activities are provided to entrepreneurial firms (e.g., Deakins, O'Neill, & Mileham, 2000; Ehrlich, Noble, Moore, & Weaver, 1994; Fried, Bruton, & Hisrich, 1998; Gabrielsson & Huse, 2002; Gorman & Sahlman, 1989; MacMillan, Kulow, & Khoylian, 1989; Rosenstein, Bruno, Bygrave, & Taylor, 1993; Sapienza, 1992; Sapienza & Timmons, 1989), there is still little agreement on the extent to which these activities influence the entrepreneurial firm's performance (Barney, Busenitz, Fiet, & Moesel, 1996; Busenitz, Fiet, & Moesel, 2004; Flynn, 2001; Higaside & Birley, 2002; Rosenstein et al., 1993; Sapienza, Manigart, & Vermeir, 1996).

Previous research on the impact of VCs has mainly focused on direct effects of the VC's value-adding activities on the one hand, and the entrepreneurial firm's features and financial performance on the other hand. Little work has been done to investigate these relationships in a more complex manner, such as considering the impact of moderating mechanisms through which the VC may enhance or damage the entrepreneurial firm's financial performance. This article attempts to resolve the "VC added value" problem from a corporate governance point of view by proposing that the contribution of the VC's value-adding activities to the entrepreneurial firm's performance depends on the way the VC tries to govern the entrepreneurial firm. As such, the value-adding activities provided by the VC's representatives on the board, the investment manager, and all other VC staff who are involved with the entrepreneurial firm combined, are regarded as the VC's governance activities. Accordingly, two main sets of VC's governance activities can be distinguished, which are related to agency theory and resource dependency theory (Daily, Dalton, Johnson, & Ellstrand, 2003; Hillman & Dalziel, 2003; Zahra & Pearce, 1989). The first comprises the VC's monitoring activities that arise from the VC's perception of an agency problem, which occurs when the entrepreneurial firm's management possesses more or better information than the VC and when there is a mismatch between the goals and interests of the two parties (see e.g., Cable & Shane, 1997; Jensen & Meckling, 1976; Lynall, Golden, & Hillman, 2003; Sapienza, Korsgaard, Goulet, & Hoogendam, 2000). The second comprises the VC's service activities that result from an asymmetric resource-dependency relationship between the VC and the entrepreneurial firm. This implies that the viability and continuity of the entrepreneurial firm depends on critical resources controlled by the VC (see e.g., Johnson, Daily, & Ellstrand, 1996; Pfeffer & Salancik, 1978). …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.