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INTRODUCTION

A fascinating decade of dynamic technological change and its resulting profusion of information have greatly increased the interest of scholars and investors in new organizations with growth potential. These new organizations are fundamentally reshaping the nature of modern day business. For example, Bill Poduska pioneered the computer workstation industry with the founding of his company Apollo in 1980—today, Apollo competes in a $20 billion a year industry. Furthermore, the greater incidence of long–term corporate downsizing has convinced many highly skilled professionals that the best way to leverage their own efforts and keep pace in hypercompetitive industry environments is to launch their own ventures (D’Aveni, 1994). Thus, entrepreneurial activity is becoming increasingly central to economic development a key outlet for individual initiative.

Many ambitious entrepreneurs have teamed with venture capitalists for assistance with their aggressive visions (Bygrave & Timmons, 1992). These partnerships have provided the impetus pathbreaking, new industries while dramatically disrupting the competitive norms of others. It is in this context that the venture capitalist/new venture team (VC–NVT) relationship has become a particularly fascinating area in which to examine a variety of organizational and strategic phenomena. Much of the motivation for this stream of research has been to better understand the predictors of firm performance, particularly among high–growth potential firms. It is also paying more attention now to how organizations and teams learn, the impact of perceived fairness on the productivity of partners, and the replacement of key managers. The VC–NVT context provides a relatively easily controllable setting in which to examine these phenomena.

The Venture Capital Option: Positive Involvement or Overinvolvement?

Providers of capital routinely reject the vast majority of requests for financing new ventures, whereas relying upon other industry sources for capital, such as potential suppliers of key components or end users for a product or service, are often viewed unfavorably because they could create an unbalanced power relationship in favor of the external resource. In contrast, not only do VCs commonly invest in innovative ventures, they also may add value beyond providing funding (Sapienza, 1992). Assisting NVTs with strategic and operational decisions is a relatively costless way for VCs to differentiate themselves from other capital providers (Rock, 1991; Perry, 1988).

It may be possible, however, for VCs to become overinvolved with their investees, which could prove to be costly for both parties (Bygrave and Timmons, 1992, p. 223). VCs in attempting to add value through strategic or operational involvement (Barney et al., 1996) could use their power to override the informed judgment of the entrepreneurial team. The ouster of founders by VCs has often been often been characterized as excessive venture capital control, particularly by those effected by the firings (Rosenstein, et al., 1993). Although VCs frequently dispute any notion that they act as "vulture capitalists," who take unfair advantage of the managers of the firms in their portfolio, there are indications that VCs at times unduly constrain them (Gomez–Mejia, Balkin, & Welbourne, 1990; Steier & Greenwood, 1995).

Research on the long–term performance effects of VC post–funding involvement with new ventures is needed to understand which perspective is closer to reality (Barney et al., 1996). Managers of technology–based firms could benefit from knowing whether VCs do, in fact, provide valuable contributions based on their involvement in strategic and operational management issues or whether VCs generally oversell their potential contributions beyond the provision of funds. VCs could also benefit from knowing the true extent of vulture capitalism because it would help them to know how critical it was to rehabilitate their tarnished image if it proved to be pervasive.

Measuring Long–Term Entrepreneurial Venture Performance

Entrepreneurship researchers have typically examined performance to determine why some new firms succeed and others fail (Cooper, 1995). This qualitative difference approach can provides a helpful lens through which to view performance differences that in time could develop across firms. This study follows the lead of earlier research by using a qualitative performance approach to examine venture capital post–funding involvement differences (Busenitz & Fiet, in press). The dependent variables include the three primary exit vehicles available to VCs which are contrasted with a fourth status quo option. Specifically, these four venture categories are the following: (1) still private, which are independent firms that are still in operation (presumably requiring a buyout of VCs’ equity at some point in time), (2) out of business firms, which have disappeared and are presumed to have been liquidated, (3) merged or acquired, which are those that have been taken over by larger firms, and (4) IPOs, which are those that have completed an initial public offering (IPO).

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