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Venture Capitalist Behaviours: Frameworks for Future Research

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  • Dave Valliere
  • Rein Peterson

Abstract

Much of traditional investment theory is based on risk taking with known parameters. This article looks at a case where the parameters of the risk function are unknown and investors therefore face uncertainty in risk-taking. We provide a theoretical background to develop alternative cognitive and economic models of investor behaviour. Using a previously developed descriptive model of investor behaviour grounded in interviews with 57 venture capitalists during the internet bubble, we apply theoretical constructs from prospect theory, signalling theory, regret theory, and career concerns and reputation theory to provide deeper insights into different investor behaviours observed empirically. The different perspectives on investor utility offered by the theories developed in this paper serve to explain the unique model components that emerged during the bubble period. No single model or theory was sufficient by itself. Relationships are also suggested between the governance existing with specific investor classes, and the degree to which those investors exhibit the cognitions we model. We conclude that the bubble was a degenerate case that resulted from the failure of VCs with limited experience to follow accepted VC investment practices and governance, and from predictable human nature and weaknesses. This article concludes with theory-based directions for future research.

Suggested Citation

  • Dave Valliere & Rein Peterson, 2005. "Venture Capitalist Behaviours: Frameworks for Future Research," Venture Capital, Taylor & Francis Journals, vol. 7(2), pages 167-183, February.
  • Handle: RePEc:taf:veecee:v:7:y:2005:i:2:p:167-183
    DOI: 10.1080/13691060500088076
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    Cited by:

    1. Jan Smolarski & Neil Wilner & Weifang Yang, 2011. "The use of financial information by private equity funds in evaluating new investments," Review of Accounting and Finance, Emerald Group Publishing Limited, vol. 10(1), pages 46-68, February.
    2. Chang, Victor & Newman, Russell & Walters, Robert John & Wills, Gary Brian, 2016. "Review of economic bubbles," International Journal of Information Management, Elsevier, vol. 36(4), pages 497-506.

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