Venture capital funds: Do they meet the expectations of portfolio firms?

Abstract

This paper examines the expectations and post-investment perceptions of value added activities from venture capital funds. Exploring the perspective of the company that is backed by venture capital, the deviation between expectations and post-investment perceptions are analysed. Insight from resource-dependence theory is employed as a theoretical point of departure. The empirical results show that significant gaps exist between the expectations of entrepreneurs and what they perceive to be the contributions from their venture capital backers. Indeed, the venture capitalists (VCs) do not even meet the entrepreneurs' modest expectations of their potential contribution. The difference between expectations and perceived outcome from the venture capitalist's involvement may be due, either to the overselling of their competence by venture capitalists, or to the limited amount of time that they allocate to each venture on account of their large investment portfolios.

Key words:

• Venture capital
• value added
• resource dependency

Notes

1 The performance score is a composite score based on eight factors (return on assets, capital turnover, accounts receivable turnover, debt-servicing ratio, operating margin, operating cash-flow, interest coverage ratio, acid ratio) published by the business search engine purehelp.no.