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Throwing Good Money after Bad? Political and Institutional Influences on Sequential Decision Making in the Venture Capital Industry
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BibTeX
@MISC{Guler_throwinggood,
author = {Isin Guler},
title = {Throwing Good Money after Bad? Political and Institutional Influences on Sequential Decision Making in the Venture Capital Industry},
year = {}
}
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Abstract
This study focuses on the political and institutional influences that lead organizational decision makers to avoid terminating unsuccessful investments, even when there is competition and they have the experience and incentives to maximize profits. I examine multilevel influences on sequential investment decisions in the U.S. venture capital industry through a qualitative study of the investment process and a quantitative examination of venture capital investments between 1989 and 2004. Results show that venture capital firms become less likely to terminate investments as they participate in more rounds of financing, despite evidence that expected returns are declining over rounds. Intraorganizational politics, as well as coercive and normative pressures from co-investors and limited partners, may influence the decisions to continue or terminate investments, regardless of the expected returns. The findings suggest that organizational safeguards designed to mitigate individual biases may give rise to political and institutional influences, which may in turn undermine the effectiveness of the decision process. • Bounds on individual rationality shape and constrain the efficacy of organizational decisions (e.g., March and Simon, 1958; Cyert and March, 1963). From a normative perspective, organizations should be able to avoid individual decision errors for several reasons. First, organizations have at their disposal several safeguards, such as monitoring or incentives that
Keyphrases
institutional influence sequential decision making good money venture capital industry investment process organizational decision maker qualitative study intraorganizational politics normative pressure several reason venture capital firm organizational safeguard sequential investment decision decision process u.s. venture capital industry disposal several safeguard individual decision error quantitative examination normative perspective individual bias unsuccessful investment venture capital investment individual rationality shape organizational decision multilevel influence expected return limited partner
