Venture capital

Investment decisions

We know that start-up capital is vital for entrepreneurial success but, equally, we fret at the thought that the bulk of the investment proposals that venture capitalists receive end up in the bin after a quick scan. In a series of papers we seek to understand what lies behind the investor’s fleeting judgment of what is or isn’t a good investment opportunity. The first three papers (Dimov et al., 2012; Dimov and Martin de Holan, 2010; Dimov et al., 2007) show that the nature of both the experience as an investor and the experience prior to becoming an investor can serve as subjective sifts for attractive proposals. In the first, we show that the ability to invest in emerging industries is honed by experiential learning. In the second, we show that the depth and breadth of the investor’s experience can affect the range of what are seen as feasible opportunities. In the third we show that venture capital investors with finance-industry background – primed to quantify risk and return – tend to avoid early-stage investments.

Dimov, D., Martin de Holan, P., and Milanov, H. 2012. Learning patterns in venture capital investing in new industries. Industrial and Corporate Change, 21(6): 1389-1426. (download)

Dimov, D. and Martin de Holan, P. 2010. Firm experience and market entry by venture capital firms (1962-2004). Journal of Management Studies, 47(1): 130-161. (download)

Dimov, D., Shepherd, D.A., and Sutcliffe, K.M. 2007. Requisite expertise, firm reputation, and status in venture capital investment allocation decisions. Journal of Business Venturing, 22: 481-502. (download)

In two other papers (Dimov and Gedajlovic, 2010; Dimov and Murray, 2008) we show that the ways an investment fund is set up and managed have important implications for the types of investments that the fund makes. Notably, only certain arrangements make investors more open to backing new market domains and early-stage, innovative companies.

Dimov, D. and Gedajlovic, E. 2010. A property rights perspective on venture capital investment decisions. Journal of Management Studies. 47(7): 1248-1271. (download)

Dimov, D. and Murray, G.C. 2008. Determinants of the incidence and scale of seed capital investments by venture capital firms. Small Business Economics, 30: 127-152. (download)

Investment performance

Beyond the mystery of why some companies receive venture capital backing while others do not, lies the mystery of why some of the so financed companies succeed while others do not. Just as experience matters for sifting through investment proposals, so it matters for helping the selected companies succeed in the marketplace. In a series of papers, (De Clercq and Dimov, 2008; Dimov and De Clercq, 2006; Dimov and Shepherd, 2005), we show that the nature of both the experience as an investor and the experience prior to becoming an investor can be instrumental for investment success. Developing domains of specialization as well as working with other investors can both enhance investment success and reduce failure. In addition, certain investor backgrounds are associated with making companies less likely to fail, while others are associated with making them more likely to succeed.

De Clercq, D. and Dimov, D. 2008. Internal knowledge development and external knowledge access in venture capital investment performance. Journal of Management Studies, 45: 585-612. (download)

Dimov, D. and De Clercq, D. 2006. Venture capital investment strategy and portfolio failure rate: A longitudinal study. Entrepreneurship Theory and Practice, 30(2): 207-223. (download)

Dimov, D. and Shepherd, D.A. 2005. Human capital theory and venture capital firms: Exploring ‘home runs’ and ‘strike outs’, Journal of Business Venturing, 20: 1-21. (download)

Investment syndication

Over half of venture capital investments are syndicated, i.e. they involve more than one investor. Beyond the financial rationale for doing so (e.g. the investment amount is too large for individual investors) lies the rationale of uncertainty reduction. Faced with proposals with uncertain prospects, investors may feel more comfortable with the advice and expertise of others. In two papers (Dimov and Milanov, 2010; De Clercq and Dimov, 2004) we show such a knowledge-sharing rationale in the patterns of co-investments among venture capital firms. Notably, the former paper shows that when investors lack sufficient knowledge of the prospective business domain, they are more likely to seek partners; but partners come along only to the extent that the investor is perceived to be worthy of association.

Dimov, D. and Milanov, H. 2010. The interplay of need and opportunity in venture capital syndication. Journal of Business Venturing, 25(4): 331-348. (download)

De Clercq, D. and Dimov, D. 2004. Explaining venture capital firms’ syndication behvior: A longitudinal study. Venture Capital: An International Journal of Entrepreneurial Finance, 6(4): 243-256. (download)