Douglas D. Moesel

The Market for Corporate Control and Firm Innovation

This research examines an integrated theoretical model that explains how strategies for participating in the market for corporate control (acquisitions and divestitures) affect internal control mec...

Corporate Divestiture Intensity in Restructuring Firms: Effects of Governance, Strategy, and Performance

Both inadequate governance and inappropriate strategy have been proposed as antecedents of the divestment activity of restructuring firms in the 1980s. We combined both views in a structural equati...

New venture teams' assessment of learning assistance from venture capital firms

Abstract Prior research examining whether venture capital firms (VCs) add value to the ventures in their portfolios by advising their new venture teams (NVTs) has led to inconclusive results. Whereas most prior studies have assumed that NVTs value VC assistance, this study tests for the possibility that they differentially value two different types of VC assistance-business management and operational. We collected data by surveying 837 firms identified in the Venture Capital Journal that had received financing from venture capital firms. Only firms that received first-round financing were included in our analysis, which reduced our sample size to 205 firms. Our central finding is that systematic differences exist among NVTs in their evaluation of learning assistance from VCs. Even though VCs can chose their own level of involvement with an NVT, successfully improving venture performance through nonfinancial assistance at least partially depends upon the extent to which the NVT values VC input. Our results indicate that NVTs with more industry experience and longer team tenure in the current venture are negatively related to both business management advice and operational assistance offered by their VCs. However, when an NVT has previously worked together and when its primary experience is from another industry, it tends to welcome business management advice from its VC. One interpretation of this finding is that an advanced level of operational specialization already exists in such a team, which reinforces established operating patterns. Changing established operating patterns could make it more costly to adopt VC input on operational issues. However, business management advice may be more welcome, because the NVT is still learning how to compete in a new industry. These findings add to the growing literature that suggests that VCs play a particularly important role in entrepreneurial ventures when they pursue the development of new technologies (Ehrlich et al. 1994; Sapienza 1992). However, business management advice is not highly valued by NVTs that pursue more technical innovations. These findings in combination with those of Sapienza and Amason (1993) suggest that conflict in the VC-NVT relationship may be the greatest when the parties attempt to resolve critical differences, which ironically appear to be the ones where the NVT could derive the greatest benefit from listening to its VC. Finally, current firm performance is not related to the NVTs evaluation of VC assistance. Although cross-sectional measures of performance have obvious limitations, particularly with new ventures, these results indicate that the NVT evaluation of VC assistance is not driven by short-term performance. Past research has shown that VCs vary widely in their preferred level of involvement with the managers of firms in their portfolio. Some VCs prefer a laissez-faire approach, whereas others think that they must be more involved if they are to ultimately receive high rewards. The central finding from this study is that significant differences exist among NVTs in their evaluation of business management and operational assistance. For VCs that are more involved, these findings suggest that the optimal level of involvement is also partially contingent upon the NVTs openness to learning. Ignoring the contingent nature of the VC-NVT relationship, VCs could reduce their influence as a tool to improve firm performance and to ensure the ultimate survival of the venture.

Signaling in Venture Capitalist—New Venture Team Funding Decisions: Does It Indicate Long-Term Venture Outcomes?

According to signaling theory, new venture teams (NVTs) can communicate to venture capitalists and other potential investors both a “value” signal and a “commitment” signal, based on the level of personal investment in a venture. Venture capitalists (VCs) typically want to know if a NVT is really committed to a venture and if its members truly believe that a venture has wealth creating potential. Team members can convey signals via their investment behavior. We test our hypotheses based on a sample of 183 VC–backed ventures that we tracked over a ten–year time period. These data indicate that the signals sent to VCs in the early stages of the funding process do not appear to have any significant relationship with long–term venture outcomes. We explore possible explanations for these findings, as well as their implications for signaling theory and future research.

Using “knowledge champions” to facilitate knowledge management

Executives and strategists have long recognized the value of knowledge as a primary driving source for a firm’s sustainable competitive advantage – hence the creation by many firms of a position called the chief knowledge officer (CKO). However, many people have proposed differing perspectives and models relating to the concept of knowledge management. In this paper differing knowledge management viewpoints are examined, by examining and integrating theories relating to the diffusion of innovations and change agents. The roles of change agents, innovators, and opinion leaders, such as CKOs, are explored in terms of effective knowledge management strategies and techniques. A model and strategies are proposed that can serve as a framework for CKOs and other knowledge management change agents to effectively facilitate the acquisition and use of knowledge in the firm by effectively using an organizational memory system.

The Framing of Perceptions of Fairness in the Relationship between Venture Capitalists and New Venture Teams

This paper investigates how a variety of conditions in place at the time of first-round funding can frame a new venture teams (NVT) perception of the fairness of its relations with its venture capitalists (VC). It assumes that a teams perception of whether its treatment by its VC is procedurally just will affect a teams receptivity to VC advice. An analysis of data from 116 firms funded by venture capitalists indicated that some governance mechanisms and the background of the venture team significantly framed perceptions of fairness in their relationship. A major finding of this research is that the indiscriminant use of contractual covenants can adversely frame a NVTs perception of how fairly it is treated by its VC, which ultimately could inhibit the formers receptivity to advice. Directions for future research are indicated.

Complementary theoretical perspectives on the dismissal of new venture team members

Abstract This article is for venture capitalists (VCs) and managers belonging to a new venture team (NVT) who are interested in understanding factors that lead to NVT dismissal. Because dismissals can be a costly and ineffective way to improve venture performance, it is in a VCs interest to know when to avoid funding ventures that are likely to be impacted by dismissals. However, from an NVT perspective it is also essential that they avoid making costly mistakes that could lead to their dismissal. If NVTs could recognize signals that their actions were viewed as being detrimental to the venture, this recognition could enable them to take corrective actions and avoid being dismissed. Most importantly, if we understood the factors that were driving NVT dismissals, we could begin to evaluate how dismissals might be used to create long-term value for a ventures backers. Contractual covenants limiting salaries paid to venture managers were found to be related to fewer dismissals, which supports the view that clearly signaling the consequences of underperformance may motivate managers to perform better. We may also infer that contractual covenants can effectively align an NVTs financial incentives with those of the VC and the ventures board of directors. However dismissal covenants that force a change in the new venture team were an ineffective means of preventing dismissal. It may be that individual managers can only imagine dismissal covenants being used against other team members and not against themselves. Or it is possible that the use of explicit contractual covenants to signal the adverse consequences of underperformance may not eliminate dismissals if the signals are misunderstood or disbelieved. Moreover, these signals could be costly investments with uncertain returns. Practically speaking, we learn that specifying the conditions that will lead to a change in management is an ineffective mechanism for aligning the VCs interests with those of the NVT. This study found a negative relationship between sales improvement per employee since first-round funding and dismissal. This result is consistent with studies of large firms—dismissal occurs when firms perform poorly. Increasing the total number of seats on a ventures board of directors was negatively related to NVT dismissals; however, the effect reversed itself when the antecedent was the number of VC appointees on the board. This result raises the question of when VC appointees should borrow authority from their positions on the board to sanction (or even push for) a dismissal and when they should cooperate with other board members in being patient with an NVTs performance, even though as insiders they could band together to force a change in management. Before committing itself to fund a deal, a VC ought to consider how the structure of the board of directors will limit its power to affect changes in the composition of the management team. The larger the board, the more difficult it will be to make changes unless VC appointees occupy most of the seats. This study also found a negative relationship between procedural justice in the VC-NVT relationship and NVT dismissal. There is apparently a need to demonstrate that NVT dismissals are carried out fairly and are in the best interests of the venture, the NVT survivors, and the VC. Otherwise, survivors could be less enthusiastic about any success the venture might enjoy, because they might fear that they would not be employed long enough to enjoy it.

The substitution of bonding for monitoring in venture capitalist relations with high technology enterprises

Abstract This paper presents a theory-based rationale that new venture team managers may utilize to reduce the cost of monitoring their venture. Because monitoring is costly and is eventually charged back to the venture, the present analysis suggests that there is at least one way for managers to protect their equity stake from such assessments. Drawing on concepts from institutional economics, it is shown that the level of monitoring depends upon the level of market and agency risk associated with the investment. However, actions taken by venture managers are shown to substitute for risk-reducing measures that could be taken by venture capitalists, which would otherwise result in the reduction of the equity stake of the managers. Moreover, a willingness by team members to bond themselves to the deal may increase the value of their stake in it, whereas resorting to monitoring can only depreciate the value of their stake.

CONSUMER EXPENDITURES AT DIRECT PRODUCE MARKETS

Interviews of customers at direct produce markets were conducted to determine why expenditure patterns vary. Frequency of shopping at outlets, income, uses of produce, household composition, and distance to the outlet are important determinants of expenditures at direct product outlets.

Embedded fitness landscapes-part 1: How a venture capitalist maps highly subjective risk

Sensemaking frameworks are used to develop the metaphor of shifting, multidimensional fitness landscapes mentally embedded in increasing higher levels of abstraction. Cognitive maps illustrate the simplified visualization used by early stage venture capitalists (VCs) to understand venture risk. Risk assessments of new, high-growth potential ventures are often highly subjective. In this first article of a three-part series, we define the nature of the uncertainty and equivocality that VCs face and relate these to traditional approaches to categorizing risk. Next, we introduce fitness landscapes and review two approaches relating these to business strategy. The metaphor is extended to focus on multiple embedded landscapes rather than a single map. Map instability is linked to ongoing sensemaking activities of the VC. Finally, the remaining two papers in the series on cognitive representation and experiential learning of VCs are previewed. The papers in the series all focus on developing a new research approach to understanding the conceptualization and management of highly subjective risk by VCs.