The optimal level of control in venture capital

Abstract

The level of control required by venture capitalists in the portfolio enterprises they invest can have materially influence the trajectory of enterprise performance. Although VCs stress control to mitigate investment non-performance, intense control may avert the ability of ENs in maximising the enterpriseÕs return on investment. An understanding into optimal level of control is evidently important. To gain an understanding into the optimal level of control in venture capital to enable the attainment of more optimal cooperative outcomes. This multiple case study research explored what the optimal level of control is, explore what moderating factors influence this optimum level, and explore what suggestions could achieve more optimal cooperative outcomes. By investigating optimality through a cooperative rather than a competitive exchange perspective to provide insights into how and why different allocation arrangements and exertion methods are applied across three cases of South African VCs operating different types of seed, start-up, growth, and development stage venture capital firms.

This research found that optimal level of control should satisfy the venture capitalistÕs financing constraint by enabling the venture capitalist to monitor and direct entrepreneur behaviour to ensure invested capital is used appropriately, while maximising the entrepreneurÕs incentives by being more relational than formal, more supportive than interfering, and more strategic than managerial. That the optimal level of control is a function of the venture capitalistÕs relative bargaining power, the venture capitalistÕs perceived level of trust and confidence in cooperation with the entrepreneur, and the venture capitalistÕs preferred approach, where the venture capitalistÕs preferences in conjunction with their own perceptions have the greatest influence. To achieve more optimal cooperative outcomes, venture capitalists and entrepreneurs should improve trust and confidence in cooperation by revealing private information new to the other and encouraging procedural justice by treating the other honestly and fairly