Does Venture Capital Foster the Most Promising Entrepreneurial Firms?

Bygrave W. Fast N. Khoylian R. Vincent L. Yue W. , “Rates of Return of Venture Capital Investing: A Study of 131 Funds,” in Kirchhoff B.A. Long W.A. Vesper K.H. Wetzel W.E. Jr. , eds., Frontiers of Entrepreneurship Research (Babson Park, MA: Babson College, 1988), pp. 275–289; Economics Venture , “Venture Capital Performance 89,” Venture Capital Journal, 29/4 & 11 (1989).

Although expressed here in the singular, the term should also be interpreted as reference to a team of entrepreneurs.

For further details on the many dimensions of seed investment, see “The Challenges of Seed Investing,” a special report that was published in the Venture Capital Journal, op. cit.

MacMillan I.C. Siegel R. Narasimha P.N.S. , “Criteria Used by Venture Capitalists to Evaluate New Venture Proposals,” Journal of Business Venturing, 1/1 (1985): 119–128.

A mathematical treatment of the issues discussed in this article can be found in Amit R. Glosten L. Muller E. , “Entrepreneurial Ability, Venture Investments and Risk Sharing,” Management Science (forthcoming, 1990).

Drucker P.F. , Innovation and Entrepreneurship (New York, NY: Harper & Row, 1985).

Leibenstein H. , “Entrepreneurship and Development,” American Economic Review, 38/2 (1968): 72–83.

Kamien M.I. Schwartz N.L. , Market Structure and Innovation (Cambridge, MA: Cambridge University Press, 1982); Teece D.J. , ed., The Competitive Challenge: Strategies for Industrial Innovation and Renewal (Cambridge, MA: Ballinger Publishing Co., 1987), Chapter 9.

Rumelt R.P. , “Theory, Strategy, and Entrepreneurship,” in Teece D.J. , ed., op. cit.

MacMillan I.C. Kulow D.M. Khoylian R. , “Venture Capitalists' Involvement in Their Investments: Extent and Performance,” Journal of Business Venturing, 4 (1988): 27–47; Gorman M. Sahlman W.A. , “What Do Venture Capitalists Do?” Journal of Business Venturing, 4 (1989): 231–248; Rosenstein J. Bruno A.V. Bygrave W.D. Taylor N. , “Do Venture Capitalists on Boards of Portfolio Companies Add Value Besides Money?” in Brockhaus R. , eds., Frontiers of Entrepreneurship Research (Wellesley, MA: Babson College, 1989); Sapienza H.J. Timmons J.A. , “The Role of Venture Capitalists in New Ventures: What Determines Their Importance?” Academy of Management Best Papers Proceedings (1989), pp. 74–83.

More on this contracting arrangement can be found in Chan Y.S. Siegel D. Thakor A.V. , “Learning, Corporate Control, and Performance Requirements in Venture Capital Contracts,” Working Paper No. 36, Northwestern University, J.L. Kellogg Graduate School of Management, Finance Department, Evanston, IL, 1987.

In a more complex setting, one could envision a bargaining process between the entrepreneur and the venture capitalist. The qualitative results, however, are the same.

“The Entrepreneur of the Decade,” Inc. (April 1989), pp. 114–128.

Posner B.G. Burlingham B. , “The Hottest Entrepreneur in America,” Inc. (January 1988), pp. 44–58.

“The 500,” Inc. (December 1989), pp. 87–123.