When Do Venture Capital Firms Learn from Their Portfolio Companies?
De Clercq, Dirk, Sapienza, Harry J., Entrepreneurship: Theory and Practice
In this study, we examine when venture capital firms (VCFs) learn from their portfolio companies (PFCs). Relying primarily on learning and behavioral theories, we develop hypotheses regarding the effects of prior experience, knowledge overlap, trust, and PFC performance on learning by VCFs. We use a combination of primary and secondary data from 298 U.S.-based VCFs to test the hypotheses. Interview data are used to illuminate the results and to guide our discussion of implications.
Many of our results were surprising. For example, we found that the VCF's overall experience is negatively related to VCF learning, and we found that trust in VCF-PFC dyads is also negatively associated with VCF learning. Whereas we expected to observe a curvilinear relationship between knowledge overlap and learning, we found that lower levels of knowledge overlap were associated with greater learning in a linear fashion. Finally, we found that VCFs perceive greater learning to occur in higher-performing PFCs. We discuss the limitations and implications of our findings and also suggest avenues for future research.
Given the importance of entrepreneneurial ventures for economic growth and the role played by venture capital firms (VCFs) in the success of these ventures, it is important to gain a better insight into how VCFs can learn from their investments and renew themselves. Various theorists have suggested that VCFs may differ in terms of their ability to develop specialized expertise and add value to their portfolio companies (PFCs) (e.g., Busenitz, Fiet, & Moesel, 2004; Mason & Harrison, 1999; Sapienza, 1992; Wright & Robbie, 1998). Despite the expansion of research on venture capital (see Wright, Sapienza, & Busenitz, 2003), little is known at present about how or when VCFs most add to their knowledge base and learn from their interactions with PFCs. Our intention is to fill this gap by examining the factors contributing to learning by VCFs during the postinvestment phase.
Some researchers have suggested that because the technological basis for competition is continuously changing, it is essential for VCFs to interact intensively with their PFCs in order to develop critical expertise (Sapienza & De Clercq, 2000; Wright & Robbie, 1998). The postinvestment relationship between the VCF and its PFCs may enable the VCF to develop knowledge in a number of technological areas or stages of PFC development (Gupta & Sapienza, 1992). In this study, we argue that VCF experience itself the specific configuration of the knowledge bases of the two parties, the quality of the relationship, and the ongoing performance of the venture will affect the amount of learning a VCF will derive from a specific investment.
In order to develop our learning model, we rely primarily on learning and behavioral theory. However, given the importance accorded to trust in the dynamics of inter- (Ring & Van de Ven, 1994; Yli-Renko, Autio, & Sapienza, 2001; Zaheer, McEvily, & Perrone, 1998) and intraorganizational relations (Nahapiet & Ghoshal, 1998), we also draw on theories of trust. Our study is set in the U.S., the oldest and most fully developed market for venture capital. Our data include quantitative secondary and primary data on 298 VCF-PFC pairs as well as interviews conducted with venture capitalists. The quantitative data pertain to venture capital investments made in the period 1998-2000. The paper is organized as follows: first, we develop the theoretical framework; we then explain the methods employed and report the results; finally, we discuss the implications of our results for theory and practice.
Theory and Hypotheses
We define organizational learning by the VCF as the extent to which a principal in a VCF believes he or she (or the VCF as a whole) has gained new insights or broader understanding via interaction with a particular PFC. We do not focus on the VCFs' "objective" learning as this type of learning is nearly impossible to verify (Spender & Grant, 1996). …