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Do Venture Capitalists Have a Continuation Bias?

Author

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  • 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
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    References listed on IDEAS

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