Abstract

Extant research has been divided as to whether VCs are likely to offer a venture additional financing after they had provided it with the initial round(s) of investment. Some scholars have argued that VCs prefer not to continue investing in a portfolio company for diversification reasons (Dean & Guglierano, 1990). Conversely, proponents of escalation of commitment have claimed that VCs become too emotionally attached and organizationally bound to their portfolio companies; hence, VCs fail to discontinue funding of even clearly failing ventures in a timely fashion (Ryan, 1998, Guler, 2003, Birmingham et al., 2003). In contrast to both approaches, we argue that VCs exhibit a continuation bias because of their belief in a substantial reduction of uncertainty at the post-investment stage due to greater availability of information and their own involvement in venture governance.

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