Frontiers of Entrepreneurship Research 1994

Frontiers of Entrepreneurship Research

Abstracts from the 1994 Edition

Navigational Aids

  • Frontiers of Entrepreneurship Research Topical Index
  • Babson-Kauffman Entrepreneurship Research Conference (BKERC)
  • Entrepreneurial Research at Babson College
  • Center for Entrepreneurial Studies Homepage

    Order hard copy editions of Frontiers of Entrepreneurship Research by mail


    Jay B. Barney
    Doug Moesel

    Lowell W. Busenitz

    CBA - Management (Busenitz)
    University of Houston
    Houston, TX 77204-6283




    James O. Fiet

    Department of Management (Fiet)
    Clemson University
    Clemson, SC 29634-1305

    Principal Topics
    This study examines the relationship between venture capitalists (VCs) and entrepreneurs or new venture team (NVT'). There is mixed support for the proposition that VCs do add value to the ventures they fund. One important dimension of the VC-NVT relationship that has yet to be examined is the receptivity of the NVT to input from its VC. If the NVT is not amenable to input from its VC, their advice would probably not be integrated into the venture. Prior research has mainly investigated the VC-NVT relationship from the perspective of the VC and assumed that the entrepreneur and his or her associates accept whatever advice their VC offers. However, if there is to be a meaningful exchange of information between a new venture team and its VC, there must be some receptivity on the part of the NVT. Stated differently, "openness of communication and personal chemistry are crucial" to the VC-NVT relationship (Bygrave & Timmons, 1992, p. 216). The purpose of this study is to investigate which factors influence a NVT's receptivity to VC advice.

    Since prior research suggests that VCs become actively involved in the strategic and operational management issues, this study examines VC advice from both of these perspectives. Strategic advice is herein defined as input regarding the overall direction for the entire organization while operational advice addresses more functional matters such as employee issues and customers.

    There is evidence from previous research that each of the following factors could influence the receptivity of the NVT to VC advice: (1) industry experience, (2) team tenure in current venture, (3) overall team tenure, (4) technical differentiation, (5) the number of VC seats on the board of directors, and (6) new venture performance. This study tested the relationship of these six factors with strategic and operation advice.

    Subjects for this research were entrepreneurial firms that had received at least first round venture capital funding. The actual subjects were identified in the Venture Capital Journal as having received VC funding. Most of the subjects were "high tech" firms. Screening for candidates with valid addresses yielded a sample of 837 firms. Data was collected through the use of mail surveys. This methodology generated replies from 235 firms, for a response rate of 28%. A firm was excluded if it received funding for the expressed purpose of carrying out a leveraged buyout. Also, due to some missing data and outliers, the final sample for this study was 205 firms.

    Major Findings
    The results show strong support for industry experience. The years of NVT experience is inversely related to the entrepreneurs receptivity to strategic and operational advice from VCs. The less experience possessed by NVT in its current industry, the more it valued the advice from its VC. NVT's receptivity to strategic and operational advice were also negatively related to the team's tenure in the current venture. The longer the NVT has worked together in the funded venture, the less open they were to advice from their VCs.

    These data also indicate a significant relationship between overall team tenure receptivity to strategic advice. However, the direction of this relationship is positive. Because the variance for industry experience and firm tenure has already been partialed out, these results suggest that the longer a NVTs overall tenure, regardless of whether it was in the current venture, the more receptive it will be to VC advice. Overall team tenure was not significantly related to operational advice.

    The degree of technical innovation did not significantly impact the N\frs receptivity to its VC's strategic advice. However, operational advice from VCs was well received by entrepreneurs whose venture depends upon technical innovation. Venture-backed firms that depend upon technical innovation were more open to receiving their VC's operational advice. The proportion of seats held by VCs and the financial performance of the venture were not significantly related to either strategic or operational advice. Overall, while past research has treated VC advice largely as a single construct, this study found some notable differences in strategic versus operational advice, suggesting that further research should consider this more fine grained approach.

    Past research has shown that VCs vary widely in their level of involvement in the firms in which they invest. Some prefer more of a hands-off approach while other VCs apparently feel the need to be more involved if they are to ultimately receive high rewards. The central finding from this study is that for those who decide to be more involved in giving counsel and advice, significant differences exist among entrepreneurs in their receptivity to strategic and operational advice from VCs. Even though VCs can largely determine on their own how much they want to be involved, they would do well to remember that successfully dispensing information also involves the receptivity of entrepreneurs to their advice.

    These results also have some important implications for entrepreneurs. If entrepreneurs have some latitude in choosing their VC partners, these results identify specific criteria with which they can evaluate themselves and the type of financial partners that are likely to work with the best. For example, if the founders have a high level of industry experience, and they team up with a VC who prefers to provide extensive advice, their overlapping expertise may tend to close down their communication channel. Such an arrangement could lead to increased conflict in the VC-NVT relationship. Conversely, entrepreneurs with little industry experience and a relatively inexperienced team are likely to be well served by a VC who prefers to be actively involved in giving advice.

    Return to Babson College
    Main Home Page
    Table of
    1996 Babson College. All rights reserved.
    Last updated November 19, 1996 by Cheryl Ann Lopez