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Evaluating Venture Technical Competence in Venture Capitalist Investment Decisions

Aggarwal, Rohit ; Kryscynski, David ; Singh, Harpreet

Management science, 2015-11, Vol.61 (11), p.2685-2706 [Peer Reviewed Journal]

Linthicum: INFORMS

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  • Title:
    Evaluating Venture Technical Competence in Venture Capitalist Investment Decisions
  • Author: Aggarwal, Rohit ; Kryscynski, David ; Singh, Harpreet
  • Subjects: Competence ; econometrics ; Evaluation ; Funding ; Investment ; Investment decision ; Investments ; Joint ventures ; technical competence ; VC assessment ; VC funding ; Venture capital ; Venture capital companies ; Ventures
  • Is Part Of: Management science, 2015-11, Vol.61 (11), p.2685-2706
  • Description: Although much research emphasizes the importance of venture technical competence for venture success and, therefore, the importance of venture technical competence in venture capitalist (VC) investment decisions, we know little about why some VCs may be better than others at assessing the technical competence of ventures. We gathered unique and proprietary data from 33 VCs and 308 ventures that sought Series A funding from those VCs. We show that VC assessment of ventures predicts VC investment, and venture technical competence predicts subsequent venture failure. This means that VCs that overassess ventures are more likely to invest in firms that are more likely to fail. We then show that higher VC technical competence leads to lower errors in assessment, but that greater similarity between the VC and venture in technical competence leads to higher assessments, ceteris paribus. We thus conclude that VC competence enhances the accuracy of VC assessments, but similarity in technical competence between VCs and ventures may lead to positive assessment bias. This paper was accepted by Sandra Slaughter, information systems .
  • Publisher: Linthicum: INFORMS
  • Language: English
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