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DISCUSSION

Venture capitalists utilize timing, key success factor stability, educational capability, lead time, competitive rivalry, industry related competence and timing's interaction with key success factor stability, educational capability and lead time in their assessment of new venture profitability. However, venture capitalists do not use a new venture's scope strategy nor its degree of entry wedge mimicry in their assessment of new venture profitability. The most important criteria in venture capitalists' new venture profitability assessments, in descending order of importance, are industry related competence, competitive rivalry, timing, educational capability, lead time, mimicry, scope, timing-lead time interaction and all other interactions. These findings are now discussed in terms of previous research.

TABLE 2
Level of Support for Hypotheses

Hyp # Independent Variable Z Score Significant (a) Direction (b)
1 Key Success Factor * Timing -1.86 Supported Supported
2 Educational Capability * Timing 2.12 Supported Unsupported
3 Lead Time * Timing 5.93 Supported Unsupported
4 Competitive Rivalry -12.54 Supported Supported
5 Scope * Timing 1.62 Unsupported Unsupported
6 Entry Wedge Mimicry * Timing 0.87 Unsupported Unsupported
7 Industry Related Competence -28.08 Supported Supported

Venture capitalists use contingent decision making policies when assessing new venture profitability. The findings demonstrate a contingent relationship between key success factor stability, timing and venture capitalists' assessment of profitability. New venture strategy theory provides insight into why venture capitalists may use such a policy, i.e., key success factor instability can accelerate the decline of a pioneer's advantage either as a result of ineffective investment of research funds (Aaker and Day, 1986), using inappropriate methods (Nelson and Winter, 1982), and/or reluctance to withdraw from mature technologies that are highly profitable (Yip, 1982). Further, venture capitalists decision policies are consistent with new venture strategy studies such as Yip (1982), where late followers are better positioned for profitability, relative to pioneers, as a result of learning from competitor's mistakes (Aaker and Day, 1986) in unstable key success factor environments.

A contingent relationship between educational capability, timing and venture capitalists' assessment of profitability was also found. The findings are therefore consistent with new venture strategy studies that demonstrate the importance of educational capability whether it be, for example, to create a customer frame of reference for an innovative product (Slater, 1993) or to create increased customer familiarity with the venture's offerings (Schmalensee, 1981). High educational capability is associated by venture capitalists with higher new venture profitability and to be more important to a pioneer than a late follower. However, the findings demonstrate that venture capitalists' assessment of profitability declines with late entry regardless of the level of educational capability indicating a stronger main effect for timing than expected.

There is evidence of a contingent relationship between lead time, timing and venture capitalists' assessment of profitability. Once again venture capitalists' decision making is consistent with new venture strategy studies that demonstrate a long lead time for a pioneer is associated with higher profitability (Abell & Hammond, 1979; Porter, 1980) whether it be as a result of establishment of a stronger brand name (Schmalensee, 1982), experience (Abell & Hammond, 1979), or time to erect barriers to entry (Porter, 1980). The findings provide evidence that venture capitalists' believe a pioneer's long lead time adversely affects the profitability of late followers who may have to overcome higher barriers to entry (Porter, 1980) and compete against a more experienced competitor (Abell & Hammond, 1979).

Venture capitalists more favorably assess the likely profitability of a pioneer and a late follower when the pioneer has a long lead time. This finding may indicate more about venture capitalists' assessment of industry attractiveness than a venture's attractiveness relative to other industry participants. Based on the assumption that an industry that provides a long lead time is more attractive, a pioneer or a late follower from an industry that yields a long lead time is assessed more favorably by venture capitalists than a pioneer or late follower from an industry that yields only a short lead time.

Competitive rivalry plays an important and specific role in new venture strategy theory, with competitive rivalry usually reducing mean industry profitability (Porter, 1980; Slater, 1993). This study's analysis of venture capitalists' decision making supports past new venture strategy research. From the venture capital literature, Bruno and Tyebjee (1983) found that entrepreneurs believe the nature of competition is a reason for venture capital denial. This study's results indicate that the entrepreneurs belief that competition is a significant consideration of venture capitalists is well founded.

This study's findings provide general support for factors that could be considered to reflect the characteristics of, or impact competitive rivalry. Venture capitalists' decision making factors with implications for competitive rivalry include: product differentiation (Tyebjee & Bruno, 1984), environmental threats (Tyebjee & Bruno, 1984), profitability of the industry (Hall & Hofer, 1993), characteristic of the market (MacMillan et al., 1985; Meyer, Zacharakis & DeCastro, 1993) and strategic competitive forces (Muzyka et al., 1996). The significance of competitive rivalry as a criterion venture capitalists use in their assessment of likely venture profitability provides greater understanding of venture capitalists' decision making by investigating more specifically the general terms of industry profitability (Hall & Hofer, 1993) and characteristics of the market (Meyer et al., 1993).

Venture capitalists' profitability assessment policies are not consistent with new venture strategy studies that demonstrate ventures which enter using a broad scope display superior performance (Miller & Camp, 1985, MacMillan and Day, 1987; Roure and Keeley, 1990). Nor are the findings consistent with new venture strategy studies demonstrating narrow scope strategies lead to superior performance (such as, Low & MacMillan, 1988). Given the assumption that timing of entry dictates industry structure (Miller, et al, 1987), venture capitalists' decision making does not support an interaction between scope and industry structure. An alternate interpretation is venture capitalists do not support the assumption that timing of entry dictates industry structure and that there may or may not be an interaction between scope and industry structure.

However, venture capitalists' decision making policies for assessing profitability are consistent with Stearns et al.'s (1995) study that failed to find support for the performance superiority of ventures which used a broad scope over those that used a narrow scope. It appears scope is not often used by venture capitalists in their assessment of profitability and when it is used, there is no clear preference for broad or narrow scope.

Porter's (1980) proposition that pioneers are more interested in entering with a new technology and protecting a unique position than imitating others was not supported by venture capitalists' assessment policies. If mature markets do have higher barriers to entry and more intense competition (Porter, 1980) and late followers are associated with mature markets (Miller, et al., 1987), then venture capitalists' decision making policies do not support this study's hypothesis that high mimicry is of greater importance to a late follower to overcome higher barriers to entry and lessen the intensity of competition.

The findings that industry related competence is a significant and important venture capitalist consideration provides insight into possible biases or generalizability limitations of previous new venture strategy research arising from sample selection. Studies, such as Biggadike (1976), have used the PIMS data base which contains only corporate ventures and has been used to generalize to all new ventures. The use of industry related competence by venture capitalists in this study provides support for Dunne, Roberts, Samuelson and Levy's (1989) concern that entry sizes and post entry experiences may differ across entrants. If researchers fail to acknowledge that corporate ventures may differ in terms of industry related competence and attempt to generalize their results to all new ventures, then their conclusions about new venture profitability are likely biased.

This study's finding that industry related competence is used by venture capitalists' in their assessment of profitability decisions also provides support for Mitchell's (1991) "newcomer"; Roure and Madique's (1986) finding that successful founders had previous industry experience; and Tyebjee and Bruno (1981) and Dixon's (1991) finding that the most important criteria in venture capitalists assessment of profitability is management skill. However, the findings of this study supporting the use and importance of industry related competence is in contrast to Hall and Hofer's (1993) and Sandberg and Hofer's (1987) finding that venture capitalists place little importance on the entrepreneur or entrepreneurial team. While the significance and importance of industry related competence in this study supports the more general variables of quality of management team (Goslin and Barge, 1986) and management skill (Dixon, 1991), this study's industry related competence factor builds on MacMillan, Zemann and SubbaNarasimha's (1987) market familiarity to indicate that venture capitalists not only assess general business skills but also industry specific knowledge when assessing likely profitability. This provides evidence that an aspect of a 'quality management team' or 'skilled management' includes skills, experience and knowledge related to the industry being entered. This provides increased insight into venture capitalists' assessment of the management team.

Within the context of this research, these findings provide evidence that a model of venture capitalists' assessment of profitability involving key success factor stability, educational capability, lead time, competitive rivalry, scope, mimicry, timing, industry related competence, key success factor stability-timing interaction, educational capability-timing interaction, lead time-timing interaction, competitive rivalry-timing interaction, scope-timing interaction and mimicry-timing interaction, can significantly explain the profitability assessment decisions of most venture capitalists. The results also indicate that individual (and aggregate) venture capitalist's profitability assessment decisions can be modeled and have predictive ability.

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