NEW VENTURE TEAMS ASSESSMENT OF LEARNING ASSISTANCE FROM VENTURE CAPITAL FIRMS

Prior research examining whether venture capital firms (VCs) add value to the ventures in their portfolios by advising their new venture tea ms (NVTs) has led to inconclusive results. Whereas most prior studies have assumed that NVTs value VC assistance, this study tests for the p ossibility that they differentially value two different types of VC as sistance - business management and operational. We collected data by s urveying 837 firms identified in the Venture Capital Journal that had received financing from venture capital firms. Only firms that receive d first-round financing were included in our analysis, which reduced o ur sample size to 205 firms. Our central finding is that systematic di fferences exist among NVTs in their evaluation of learning assistance from VCs. Even though VCs can chose their own level of involvement wit h an NVT, successfully improving venture performance through nonfinanc ial assistance at least partially depends upon the extent to which the NVT values VC input. Our results indicate that NVTs with more industr y experience and longer team tenure in the current venture are negativ ely related to both business management advice and operational assista nce offered by their VCs. However, when an NVT has previously worked t ogether and when its primary experience is from another industry, it t ends to welcome business management advice from its VC. One interpreta tion of this finding is that an advanced level of operational speciali zation already exists in such a team, which reinforces established ope rating patterns. Changing established operating patterns could make it more costly to adopt VC input on operational issues. However, busines s management advice may be more welcome, because the NVT is still lear ning how to compete in a new industry. These findings add to the growi ng literature that suggests that VCs play a particularly important rol e in entrepreneurial ventures when they pursue the development of new technologies (Ehrlich et al. 1994; Sapienza 1992). However, business m anagement advice is not highly valued by NVTs that pursue more technic al innovations. These findings in combination with those of Sapienza a nd Amason (1993) suggest that conflict in the VC-NVT relationship may be the greatest when the parties attempt to resolve critical differenc es, which ironically appear to be the ones where the NVT could derive the greatest benefit from listening to its VC. Finally, current firm p erformance is not related to the NVT's evaluation of VC assistance. Al though cross-sectional measures of performance have obvious limitation s, particularly with new ventures, these results indicate that the NVT evaluation of VC assistance is not driven by short-term performance. Past research has shown that VCs vary widely in their preferred level of involvement with the managers of firms in their portfolio. Some VCs prefer a laissez-faire approach, whereas others think that they must be more involved if they are to ultimately receive high rewards. The c entral finding from this study is that significant differences exist a mong NVTs in their evaluation of business management and operational a ssistance. For VCs that are more involved, these findings suggest that the optimal level of involvement is also partially contingent upon th e NVTs openness to learning. Ignoring the contingent nature of the VC- NVT relationship, VCs could reduce their influence as a tool to improv e firm performance and to ensure the ultimate survival of the venture.