IDEAS home Printed from https://ideas.repec.org/a/sae/jouent/v22y2013i2p203-222.html
   My bibliography  Save this article

Do Venture Capitalists Have a Continuation Bias?

Author

Listed:
  • Dmitry Khanin

    (Dmitry Khanin is Assistant Professor, Department of Management, College Business and Economics, Cal State University Fullerton, California, USA.)

  • Raj V. Mahto

    (Raj V. Mahto is Assistant Professor of Entrepreneurship, Anderson School of Management, The University of New Mexico, New Mexico, USA.)

Abstract

Venture capitalists (VCs) follow elaborate procedures to identify the top candidates, out of countless aspiring start-ups, for financing and other types of investor support. Purportedly, VCs also carefully evaluate, based on venture performance, whether or not it deserves to receive follow-on funding. But could decision making biases interfere withthe evaluation process? In this article, we introduce the notion of a continuation bias defined as the proclivity to provide follow-on funding contingent on investor’s earlier investment. We argue that a continuation bias differs from sunk costs, status quo bias and escalation of commitment as it stems from the dual fallacy—information and narcissistic—exaggerating the benefits of greater data availability at later stages of investment and investor’s own contribution to the venture. We also argue that a continuation bias is influenced by contingency factors such that it is more likely to be observed when VCs apply competition-related rather than venture-related investment criteria. A survey of 51 VCs from the US provided support for the hypotheses.

Suggested Citation

  • Dmitry Khanin & Raj V. Mahto, 2013. "Do Venture Capitalists Have a Continuation Bias?," Journal of Entrepreneurship and Innovation in Emerging Economies, Entrepreneurship Development Institute of India, vol. 22(2), pages 203-222, September.
    • Handle: RePEc:sae:jouent:v:22:y:2013:i:2:p:203-222
    DOI: 10.1177/0971355713490818
    as

    Download full text from publisher

    File URL: https://journals.sagepub.com/doi/10.1177/0971355713490818
    Download Restriction: no
    File URL: https://libkey.io/10.1177/0971355713490818?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Mathew L. A. Hayward & Dean A. Shepherd & Dale Griffin, 2006. "A Hubris Theory of Entrepreneurship," Management Science, INFORMS, vol. 52(2), pages 160-172, February.
    2. Sophie Manigart & Katleen Baeyens & Wim Van Hyfte, 2002. "The survival of venture capital backed companies," Venture Capital, Taylor & Francis Journals, vol. 4(2), pages 103-124, April.
    3. Graham Brown & Sandra L. Robinson, 2011. "Reactions to Territorial Infringement," Organization Science, INFORMS, vol. 22(1), pages 210-224, February.
    4. Ronald K. Mitchell & Lowell W. Busenitz & Barbara Bird & Connie Marie Gaglio & Jeffery S. McMullen & Eric A. Morse & J. Brock Smith, 2007. "The Central Question in Entrepreneurial Cognition Research 2007," Entrepreneurship Theory and Practice, , vol. 31(1), pages 1-27, January.
    5. R. C. Sweeting & C. F. Wong, 1997. "A UK `Hands‐off' Venture Capital Firm and the Handling of Post‐investment Investor‐‐Investee Relationships," Journal of Management Studies, Wiley Blackwell, vol. 34(1), pages 125-152, January.
    6. Zacharakis, Andrew L. & Meyer, G. Dale, 1998. "A lack of insight: do venture capitalists really understand their own decision process?," Journal of Business Venturing, Elsevier, vol. 13(1), pages 57-76, January.
    7. Ronald K. Mitchell & Lowell Busenitz & Theresa Lant & Patricia P. McDougall & Eric A. Morse & J. Brock Smith, 2004. "The Distinctive and Inclusive Domain of Entrepreneurial Cognition Research," Entrepreneurship Theory and Practice, , vol. 28(6), pages 505-518, November.
    8. Steven N. Kaplan & Per Stromberg, 2001. "Venture Capitalists As Principals: Contracting, Screening, and Monitoring," NBER Working Papers 8202, National Bureau of Economic Research, Inc.
    9. Dirk De Clercq & Harry J. Sapienza, 2005. "When Do Venture Capital Firms Learn from Their Portfolio Companies?," Entrepreneurship Theory and Practice, , vol. 29(4), pages 517-535, July.
    10. McCarthy, Anne M. & Schoorman, F. David & Cooper, Arnold C., 1993. "Reinvestment decisions by entrepreneurs: Rational decision-making or escalation of commitment?," Journal of Business Venturing, Elsevier, vol. 8(1), pages 9-24, January.
    11. Zacharakis, Andrew L. & Meyer, G. Dale, 2000. "The potential of actuarial decision models: Can they improve the venture capital investment decision?," Journal of Business Venturing, Elsevier, vol. 15(4), pages 323-346, July.
    12. Samuelson, William & Zeckhauser, Richard, 1988. "Status Quo Bias in Decision Making," Journal of Risk and Uncertainty, Springer, vol. 1(1), pages 7-59, March.
    13. Muzyka, Dan & Birley, Sue & Leleux, Benoit, 1996. "Trade-offs in the investment decisons of European venture capitalists," Journal of Business Venturing, Elsevier, vol. 11(4), pages 273-287, July.
    14. Busenitz, Lowell W. & Fiet, James O. & Moesel, Douglas D., 2004. "Reconsidering the venture capitalists' "value added" proposition: An interorganizational learning perspective," Journal of Business Venturing, Elsevier, vol. 19(6), pages 787-807, November.
    15. Ruhnka, John C. & Feldman, Howard D. & Dean, Thomas J., 1992. "The "living dead" phenomenon in venture capital investments," Journal of Business Venturing, Elsevier, vol. 7(2), pages 137-155, March.
    16. Shepherd, Dean A. & Zacharakis, Andrew & Baron, Robert A., 2003. "VCs' decision processes: Evidence suggesting more experience may not always be better," Journal of Business Venturing, Elsevier, vol. 18(3), pages 381-401, May.
    17. Grimm, Curtis M. & Lee, Hun & Smith, Ken G., 2005. "Strategy As Action: Competitive Dynamics and Competitive Advantage," OUP Catalogue, Oxford University Press, number 9780195161441.
    18. Sapienza, Harry J., 1992. "When do venture capitalists add value?," Journal of Business Venturing, Elsevier, vol. 7(1), pages 9-27, January.
    19. Dean, Burton V. & Giglierano, Joseph J., 1990. "Multistage financing of technical start-up companies in silicon valley," Journal of Business Venturing, Elsevier, vol. 5(6), pages 375-389, November.
    20. Jorge Silva, 2004. "Venture capitalists' decision-making in small equity markets: a case study using participant observation," Venture Capital, Taylor & Francis Journals, vol. 6(2-3), pages 125-145, February.
    21. Steven N. Kaplan & Per Stromberg, 2001. "Venture Capitals As Principals: Contracting, Screening, and Monitoring," American Economic Review, American Economic Association, vol. 91(2), pages 426-430, May.
    22. Arkes, Hal R. & Blumer, Catherine, 1985. "The psychology of sunk cost," Organizational Behavior and Human Decision Processes, Elsevier, vol. 35(1), pages 124-140, February.
    23. Dmitry Khanin & Ofir Turel, 2012. "Short-termism, long-termism, and regulatory focus in venture capitalists' investment decisions," Venture Capital, Taylor & Francis Journals, vol. 14(1), pages 61-76, January.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Rafał Morawczyński, 2020. "Venture Capitalists’ Investment Criteria in Poland: Entrepreneurial Opportunities, Entrepreneurs, and Founding Teams," Administrative Sciences, MDPI, vol. 10(4), pages 1-30, October.
    2. Woike, Jan K. & Hoffrage, Ulrich & Petty, Jeffrey S., 2015. "Picking profitable investments: The success of equal weighting in simulated venture capitalist decision making," Journal of Business Research, Elsevier, vol. 68(8), pages 1705-1716.
    3. Mirjam Knockaert & Tom Vanacker, 2013. "The association between venture capitalists’ selection and value adding behavior: evidence from early stage high tech venture capitalists," Small Business Economics, Springer, vol. 40(3), pages 493-509, April.
    4. Stephen X. Zhang & Javier Cueto, 2017. "The Study of Bias in Entrepreneurship," Entrepreneurship Theory and Practice, , vol. 41(3), pages 419-454, May.
    5. Patzelt, Holger & zu Knyphausen-Aufseß, Dodo & Fischer, Heiko T., 2009. "Upper echelons and portfolio strategies of venture capital firms," Journal of Business Venturing, Elsevier, vol. 24(6), pages 558-572, November.
    6. M. Knockaert & T. Vanacker, 2011. "The Association between Venture Capitalists’ Selection and Value Adding Behavior: Evidence from Early Stage High Tech Venture Capitalists," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 11/741, Ghent University, Faculty of Economics and Business Administration.
    7. Clarysse, B. & Knockaert, M. & Lockett, A., 2005. "How do early stage high technology investors select their investments?," Vlerick Leuven Gent Management School Working Paper Series 2005-21, Vlerick Leuven Gent Management School.
    8. Shepherd, Dean A. & Zacharakis, Andrew, 2002. "Venture capitalists' expertise: A call for research into decision aids and cognitive feedback," Journal of Business Venturing, Elsevier, vol. 17(1), pages 1-20, January.
    9. Massimo G. Colombo & Luca Grilli & Cinzia Verga, 2007. "High-tech Start-up Access to Public Funds and Venture Capital: Evidence from Italy," International Review of Applied Economics, Taylor & Francis Journals, vol. 21(3), pages 381-402.
    10. Alexandra Moritz & Walter Diegel & Joern Block & Christian Fisch, 2022. "VC investors’ venture screening: the role of the decision maker’s education and experience," Journal of Business Economics, Springer, vol. 92(1), pages 27-63, January.
    11. Michael M. Moedl, 2021. "Two’s a company, three’s a crowd: Deal breaker terms in equity crowdfunding for prospective venture capital," Small Business Economics, Springer, vol. 57(2), pages 927-952, August.
    12. Franke, Nikolaus & Gruber, Marc & Harhoff, Dietmar & Henkel, Joachim, 2006. "What you are is what you like--similarity biases in venture capitalists' evaluations of start-up teams," Journal of Business Venturing, Elsevier, vol. 21(6), pages 802-826, November.
    13. Dohyeon Kim & Su Yong Lee, 2022. "When venture capitalists are attracted by the experienced," Journal of Innovation and Entrepreneurship, Springer, vol. 11(1), pages 1-18, December.
    14. Busenitz, Lowell W. & Fiet, James O. & Moesel, Douglas D., 2004. "Reconsidering the venture capitalists' "value added" proposition: An interorganizational learning perspective," Journal of Business Venturing, Elsevier, vol. 19(6), pages 787-807, November.
    15. Poonam Khanna & Lemaro Thompson & Michael Mcdonald, 2015. "Research On Venture Capital Firms’ ‘Investment Behavior A Review’," Working Papers 0197mgt, College of Business, University of Texas at San Antonio.
    16. Nikolaus Franke & Marc Gruber & Dietmar Harhoff & Joachim Henkel, 2008. "Venture Capitalists’ Evaluations of Start–Up Teams: Trade–Offs, Knock–Out Criteria, and the Impact of VC Experience," Entrepreneurship Theory and Practice, , vol. 32(3), pages 459-483, May.
    17. Zacharakis, Andrew & Shepherd, Dean A., 2005. "A non-additive decision-aid for venture capitalists' investment decisions," European Journal of Operational Research, Elsevier, vol. 162(3), pages 673-689, May.
    18. Warnick, Benjamin J. & Murnieks, Charles Y. & McMullen, Jeffery S. & Brooks, Wade T., 2018. "Passion for entrepreneurship or passion for the product? A conjoint analysis of angel and VC decision-making," Journal of Business Venturing, Elsevier, vol. 33(3), pages 315-332.
    19. Zabara, Tatiana, 2019. "Evolution of entrepreneurial teams in technology-based new ventures," Other publications TiSEM cc09d065-3811-47b6-9c93-8, Tilburg University, School of Economics and Management.
    20. Lohwasser, Todor S., 2020. "Meta-analyzing the relative performance of venture capital-backed firms," Discussion Papers of the Institute for Organisational Economics 4/2020, University of Münster, Institute for Organisational Economics.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sae:jouent:v:22:y:2013:i:2:p:203-222. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: SAGE Publications (email available below). General contact details of provider: http://www.ediindia.org/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.