THE ROLE OF SOCIAL CAPITAL IN EXPLAINING FAILURE OF VENTURE CAPITAL BACKED ISRAELI HIGH-TECHNOLOGY START-UPS
Ronit Yitshaki-Hagai, Bar Ilan University
Susanna Khavul, London Business School
Principal Topic
Over the last ten years, venture capital firms have invested heavily in high technology start-up firms in Israel’s emerging technology sector. A growing proportion of these firms are now ceasing to operate. The causes of failure remain poorly understood. In this paper, we report on a survey of entrepreneurs whose venture backed firms have failed and ask if a firm’s social and human capital can serve as indicators to venture failure. Social capital has been found to be associated with new firms emergence (Davidsson and Honig, 2002). Social capital captures the external relations that actors have in a social structure which allows them to recognize and exploit opportunities. Likewise, the social capital captures the relationships within the organization (Adler and Kwon, 2002; Yli-Renko, Autio and Tontti, 2002). However, research reveals that there are differences between firms in creating and exploiting social capital (Nahapiet and Ghoshal 1998). Furthermore, the social capital structure affects product innovation (Tsai and Ghoshal, 1998). Previous research on human capital indicates that specific human capital as education, training and experience in specific business in which the venture operates, influence the venture performance and survival (Gimeno, Folta, Cooper and Woo, 1997). However, more needs to be understood about the way that such specific human capital affects the ability of the entrepreneurial team to formulate and implement business strategy in high velocity environments like those found in the high technology sector (Bourgeois and Eisenhardt, 1988).
Method
Of the approximately one thousand Israeli firms that have received venture capital over the last eight years, we have identified and tracked a sample that have ceased to operate. Based on the extant literature and grounded field case studies, and archival record we have developed a survey instrument to examine factors affecting new venture failures.
Results and Implications
At this stage, we expect that entrepreneurs will attribute venture failure to lack of external social capital and to their poor integration into the industry and financial social structure. In addition, we expect to find that entrepreneurs without previous sector experience, that is specific human capital, will be more likely to attribute lack of connections in the social structure, that is, lack of bounding social capital, as a contributing factor to their firm’s failure.
Failed ventures and their entrepreneurs are notoriously difficult to track. This research represents a very timely attempt to understand the failure of high technology firms that have received venture capital financing.
CONTACT: Ronit Yitshaki–Hagai, Department of Sociology and Anthropology, Bar-Ilan University Haifa University, Israel; (T) +972-9-745-0963; yitshr@mail.biu.ac.il
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