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DETERMINANTS OF LONG-TERM VENTURE PERFORMANCE

Attempts to understand and explain new firm performance have generally been either theoretical and model building (e.g., Cooper, 1995) or empirical investigations based on cases studies or cross-sectional survey research (e.g., Steier and Greenwood, 1995). Factors that have mentioned as potentially impacting venture performance and the risk associated with that performance have been (1) the individual background and decision making skills of the entrepreneurs, (2) initial firm characteristics or characteristics at the time of first-round funding, (3) sources of assistance and the learning process of the new venture managers, (4) dismissal of NVT managers, (5) the perceived fairness of the governance process used by stakeholders such as financiers; industry environments, and (6) competitive strategies pursued. However, only a few empirical studies have directly examined the impact of these theoretical factors on the long term prosperity of the entrepreneurial firm while controlling for important alternative explanations. This is critical because the potential explanations for firm performance differences can be quite diverse as illustrated by the variety of potential determinants explored by both entrepreneurial researchers and researchers focused on large, diverse firms. Holding some of the most apparent performance explanations constant in order to achieve a more conservative test of the theoretical explanation of interest is critical for advancement of knowledge in entrepreneurial research and in prioritizing resources for future theory testing.
This study extends current empirical knowledge by introducing a theoretical framework through which to view the potential influence of the VC over the entrepreneurial venture's performance after the terms of the first round venture financing deal have been finalized. Three types of theories are highlighted in examining VCs' involvement: (1) learning assistance approaches, (2) procedural justice approaches, and (3) agency approaches. The remainder of the theoretical discussion addresses these three approaches.

Learning Assistance Theory and VC Assistance

Whether firms can adapt to changing competitive conditions and exploit their firm-specific resources depends upon how quickly they become aware of these contingencies (Mahoney, 1995; Mezias and Glynn, 1993). In addition, entrepreneurial firms regularly engage in new organizational and technological processes that place heavy demands on their learning capacities. These demands often occur at a time when they are also required to satisfy investor demands for rapid growth. Being required to learn and grow simultaneously may tax the resources of even experienced NVTs. Despite their impact, little is understood about the long-term benefits of different learning arrangements with entrepreneurial firms.

Considerable research has focused on the relationship among the NVT and the principals of its venture capital firm. One reason for the interest in this relationship is that it is thought that VCs can provide valuable advice and information to their investees c.f., Ehrlich et al, 1994; Sapienza, 1992). An implicit assumption of this stream of research is that VC advice improves a venture's financial performance by supplementing the NVT's strategic and operational learning (Barney, Busenitz, Fiet & Moesel, 1996; Perry, 1988; Rock, 1991).

A fundamental assumption of virtually all organizational learning models is that learning improves performance (c.f., Argyris, 1994; Mezias and Glynn, 1993). MacMillan, Kulow and Khoylian (1989) identified operational assistance and strategic assistance as the two most common types of VC assistance. Rock (1991), Ehrlich et al., 1994), and Sapienza (1992) suggest VCs commonly offer operational and strategic assistance. In addition, several researchers note that VCs frequently make use of boards of directors to provide VC input to their investees (Bygrave and Timmons, 1992; Rosenstein, 1988).

There are at least two reasons to suspect that a VC's advice may be valuable to its investee firms. First, VCs have been educated by their various experiences with other ventures. A VC that has faced both success and failure and has survived to invest in other ventures can expertly describe the outcomes that can be expected under each of these scenarios. These additional perspectives can encourage a NVT to fully consider its managerial options before taking action (Bygrave and Timmons, 1992). Second, their broader exposure to the labor market, key suppliers and customers can save time and money that would otherwise be spent in making first-time contacts. Occasionally, VCs may even serve as intermediaries with these key factor providers. All of these VC-provided contacts have the potential to provide the NVT with a broader and more informed view of its options, and assuming that their advice is acted upon, add value to the venture (Sapienza, 1992; Perry, 1988). We now develop two hypotheses that examine the possible influences on changes in NVT learning and their effect on performance: operational assistance and business management advice.

VCs spend approximately one-half their time monitoring an average of nine investee firms (Gorman and Sahlman, 1989), which amounts to about 110 hours per firm per year. Their frequent contacts put them in a position to provide operational assistance. VCs are often operational experts because many of them prefer to specialize in particular industries, such as computers, or to emphasize particular stages of development (c.f., Norton & Tenenbaum, 1993).

Gorman and Sahlman (1989) identified planning and introductions to potential customers and suppliers as common forms of operational assistance. Although VCs apparently spend more of their time with portfolio companies discussing strategic issues (MacMillan, et al, 1989), assistance with operational issues also appears to be common. Operational assistance is VC input about such functional practices as personnel procedures, delivery schedules, and customer relations. Their experience with other ventures may enable VCs to show NVTs how to save money finding customers, suppliers, or key employees. To the extent that a venture can reduce its operational expenses and function more efficiently, it should improve its long term performance. Formally stated, these arguments lead to the first hypothesis:

H1: Operational assistance received by the NVT from their VCs will be positively related to long-term venture performance.

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