Abstract

Agency theory, commonly used to explain the relationships embedded in the VC process (Arthurs & Busenitz, 2003; Sahlman, 1990; Sapienza & Gupta, 1994) assumes that agents have stable risk preferences and that agents are either risk-averse or neutral. Organizational risk taking literature, rooted in behavioral decision making research, lifts these restrictions and introduces the possibility of risk seeking behavior. However, agency-related variables continue to influence VCs’ preference and as such play a role in VC’s decision making.

In this paper, we propose and test a behavioral agency model of VC’ risk taking in the context of VC firms’ investment decision making. We contribute to the VC decision making literature as well as to organizational risk taking research by introducing new, theory-driven “framing” mechanisms of decision making - external governance (fundraising) and signaling (status among peers). In particular, we seek to answer the following set of questions: What is the relationship between a VC firm’s past performance and their subsequent risk taking? Does the subsequent fundraising influence the riskiness of a VC firm’s strategic choices? Does social status influence a VC firm’s risk taking in light of its past performance?

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