Session 106

Current Thoughts on Signaling and Venture Capital

Track K

Date: Tuesday, October 13, 2009


Time: 11:30 – 12:45

Common Ground

Room: Meeting Room 10

Zeki Simsek, Clemson University

Title: Diversification in the Venture Capital Industry: Leveraging Knowledge Under Uncertainty


  • Sharon Matusik, University of Colorado, Boulder
  • Markus Fitza, Frankfurt School of Finance and Management

Abstract: We examine the relationship between diversification and performance in the example of knowledge-intensive firms, specifically venture capitalist (VC) firms. Drawing on the knowledge and organizational learning literature, we discuss how the diversification level of knowledge in a VC firm affects 1) its ability to efficiently develop and leverage companies it invests in; 2) its ability to solve complex problems and develop novel solutions; and 3) its ability to develop a company down a variety of different trajectories. We find that there is a U shaped relationship between VC diversification and performance. Uncertainty plays an important role in this relationship. When uncertainy is highest (i.e., early stage investing, no co-investors), the effects are most pronounced.

Title: Entrepreneur Evaluations of Venture Capitalists: Naïve or Sophisticated?


  • Benjamin Hallen, University of Washington

Abstract: This paper examines the ability of entrepreneurs to accurately potential venture capital investors. Although there has been significant research on how experienced actors use social network ties and status to accurately evaluate potential partners, relatively little attention has been given to the evaluation abilities of less-experienced entrepreneurs. In this paper, I develop a theory considering how entrepreneurs may be mislead by their own inexperience, while also considering the guidance they may receive from third party intermediaries. I empirically test and find support for these logics in a study of entrepreneurs posting anonymous evaluations of venture capitalists to an online forum. Overall, I find that even though entrepreneurs may be limited in their ability to directly evaluate potential partners, the guidance of intermediating brokers may save entrepreneurs from their own limitations.

Title: Interpretation of Signal Under Different Types of Uncertainties


  • Qiang Li, Hong Kong University of Science and Technology

Abstract: There have been extensive studies on impact of founders’ career history on formation of new ventures (Beckman, 2006; Eisenhardt & Schoonhoven, 1990). Some studies find that founders’ individual reputation can foster new venture’s formation. Some other studies find that reputation of founders’ prior affiliation is positively related to success of new venture. Few studies have investigated the relative importance of these factors simultaneously. This study argues that both individual reputation and prior affiliation’s reputation impact new venture outcome through signal mechanism. When venture capitals face different types of uncertainties, they choose different signals as indicators of quality of new ventures. Therefore, the impact of reputation on outcome of new venture is contingent on types of uncertainty.

Title: Targeted Signals: How Do Venture Capital Firms and Angel Investors Differ in Signal Interpretation


  • Azi Gera, Drexel University

Abstract: This essay tests whether signals are target specific. I use startups solicitation of funding from both Business Angel investors and Venture Capital firms to learn the respective roles of the legitimizing and informational interfirm signals. The study considers the structure of the signal and the differences between the two types of private equity investors, while controlling for the abilities of the startup to generate the signal. Thus, this study tests how the differences in the sender’s abilities influence the structure of the signal, and, if the signal's structure determines the type of receiver who is more likely to respond favorably to the signal.

Title: The Yale Endowment, IPO Run-ups, and the Founding of Venture Capital Firms


  • Rory McDonald, Stanford University
  • Emily Cox Pahnke, University of Washington
  • Benjamin Hallen, University of Washington

Abstract: Cognitive legitimacy, or the perception that an organizational form or practice is appropriate, has traditionally been explained as arising slowly from the increased prevalence or that form or practice. We build on insights from cognitive psychology to suggest institutional beacons as an alternative path by which cognitive legitimacy can rapidly arise. We argue that a single, notable demonstration of actual or apparent success is often sufficient to facilitate legitimacy. We test and find support for this logic in a study of the influence of the Yale Endowment and successful venture capital investments on the foundings of venture capital firms from 1980 through 2006. Our findings and theory offer insights into the microfoundations of institutional theory and a refined model of institutional diffusion dynamics.

Title: When Do Venture Capital Firms Make New Investments?


  • Yong Li, State University of New York at Buffalo
  • Joseph Mahoney, University of Illinois at Urbana-Champaign

Abstract: This paper examines how venture capital firms respond to public market information in deciding when to make new investments. Analysis of venture capital investments between 1980 and 2006 indicates that venture capital firms tend to defer new investment projects in target industries with substantial market volatility. This delay effect of market volatility is reduced if public firms experience high demand growth or if competition among venture capital firms is severe. The paper provides further evidence to the view that venture capitalists rationally respond to market shifts in their investment decisions.

All Sessions in Track K...

Sun: 10:00 – 11:30
Session 254: Developing a Game Plan for Strategy Research on Social Entrepreneurship
Sun: 13:00 – 14:30
Session 253: Knowledge Spillovers and Strategic Entrepreneurship
Sun: 15:00 – 16:30
Session 252: Key Issues and Emerging Questions in Entrepreneurial Strategy Research
Sun: 16:30 – 17:30
Session 315: Entrepreneurship & Strategy, IG Meeting
Mon: 12:45 – 14:00
Session 102: Networks, Alliances and Entrepreneurship
Session 244: Entrepreneurship in Emerging and Transition Economies
Mon: 15:45 – 17:00
Session 100: Founders, Founding Conditions and Human Capital
Session 249: Examining Entrepreneurial Phenomena at Multiple Levels
Mon: 17:15 – 18:30
Session 101: Opportunities & Founders
Session 248: Issues in Governance and Technology Commercialization in New Ventures
Tue: 10:00 – 11:15
Session 107: Current Thoughts on Entrepreneurship in Emerging and Transition Economies
Session 111: Opportunties, Uncertainty & Innovation in Entrepreneurial Ventures
Tue: 11:30 – 12:45
Session 106: Current Thoughts on Signaling and Venture Capital
Tue: 14:30 – 15:45
Session 108: The Impact of Institutions, Regions and Countries on Entrepreneurial Ventures
Wed: 10:00 – 11:15
Session 105: Current Research on Serial Entrepreneurs and Market Makers
Session 112: The Impacts of Diversification on Entrepreneurial Ventures
Wed: 11:30 – 12:45
Session 104: Employees Mobility and Corporate Entrepreneurship
Session 109: Current Research on Uncertainty and Entrepreneurship

Strategic Management Society

Washington DC