Abstract

We aim to add to the entrepreneurial forecasting literature by examining forecast rationality in the context of venture capital-backed companies. In this setting, entrepreneurs’ forecasts of future venture performance may not only be influenced by cognitive biases such as overconfidence or optimism (Cassar, 2010), but also by strategic incentives of entrepreneurs to present themselves more favorably to their venture capitalists, trying to ensure continued support and funding at better terms from their investors (Smith and Smith, 2002). Therefore, we argue that initial forecasts of entrepreneurs in venture capital-backed companies are likely to suffer from overestimation. Further, we will examine a previously unaddressed aspect of forecasting bias in entrepreneurial settings, namely their evolution. Venture capitalists are known to monitor their portfolio companies and hold them accountable when expectations are not met (Parhankangas and Landstrom, 2006). Combined with an increased tendency to internalize venture capitalists’ concerns, resulting in reduced overconfidence (Forbes, 2005), one would expect entrepreneurs’ forecasting biases to shrink as investment duration increases.

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