Human Resources in Initial Public Offering Firms: Do Venture Capitalists Make a Difference?
Cyr, Linda A., Johnson, Diane E., Welbourne, Theresa M., Entrepreneurship: Theory and Practice
Venture capitalists' preference for complete, well-balanced founding teams is well established. In addition, the strategic human resource management literature posits that superior performance might accrue to firms that have a member of the top management team responsible for human resources. In this paper, we test whether or not venture capitalist backing affects the likelihood that initial public offering firms will report having a vice president of human resources. We also examine the combined effect on performance as a result of being venture capital-backed and having a vice president of human resources.
The willingness of the venture capitalist to make high-risk investments in the hopes of big payoffs has spawned companies in a variety of industries ranging from computing to biotechnology to the Internet. Intel, Genentech, Federal Express, Netscape, Yahoo!, and Amazon.com are just a few examples of venture capital-backed start-ups that have revolutionized the U.S. economy.
Although capital is a critical resource, a review of the venture capital (VC) literature reveals that venture capitalists provide much more than financing to their portfolio firms. Over time, VCs acquire knowledge about how to help rapidly growing ventures do better, and their active involvement in their portfolio firms allows them to pass that knowledge on to the entrepreneur (Sahlman, 1994). Among the most crucial resources that VCs offer are assistance in developing strategy, acting as sounding boards for the entrepreneur, and providing social networks with the financial community, customers, and suppliers (e.g. Fried & Hisrich, 1995; MacMillan, Kulow, & Khoylian, 1988).
While VCs provide valuable expertise and networking for entrepreneurs, relatively little is known about the potential effect that VC involvement might have on human resources within the portfolio firm. This is surprising given the conventional wisdom that VCs have tremendous influence on the human resources of their portfolio firms. For example, Bygrave and Timmons (1992, p. 123) suggest that the best venture capitalists know how to nurture the kinds of companies that "attract the brightest and best people" and then allow them to use their creativity to accomplish organizational objectives. Yahoo! is but one example of the many companies in which the majority of the firm's assets consist of the intellectual capital of its employees, thereby making people critical to firm success.
The strategic human resource management (SHRM) literature (e.g. Becker & Gerhart, 1996; Pfeffer, 1998) recognizes the centrality of people to organizational performance. SHRM scholars (e.g. Dyer & Kochan, 1995; Martell & Carroll, 1995) suggest that a "strategic" approach to people may result in enhanced firm competitiveness and success. One measure of being "strategic" is having a senior human resource (HR) executive on the top management team. An argument from the SHRM literature for having a senior HR executive reporting to the CEO is that a complete management team results in better business decisions (e.g. Dyer & Kochan, 1995). This argument is consistent with the belief among VCs that a complete, well-balanced founding team will lead to superior new venture performance. No studies exist that examine the relationship between VC backing and the presence of an HR executive on the new venture team and their subsequent effects on firm performance.
In this paper, we address this gap by investigating two key issues in a sample of initial public offering (IPO) firms. First, we examine the effect of VC backing on the likelihood that the portfolio firm will have a person dedicated (i.e. a VP of HR) to human resources. We also explore the moderating effect of firm risk on this relationship. Second, we examine the combined effect of VC backing and the presence of a VP of HR on firm performance.
VC Effect on Human Resources
The venture capital literature provides reason to believe that VC backing will have an effect on the portfolio firm's overall approach to human resources. …