Venture Capital and the Professionalization of Start-Up Firms: Empirical Evidence
Posted: 17 Nov 2009
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Venture Capital and the Professionalization of Start-Up Firms: Empirical Evidence
Date Written: 2002
Abstract
Explores the role that venture capitalists play in the development of new enterprises - specifically, whether as financial intermediaries, venture capitalists perform additional roles in the startup process. The internal organizational aspects of firms are observed using data collected from 173 startups found in California's Silicon Valley, during 1994 to 1997. In order to determine whether venture capitalists provide support in building up the internal organization, a variety of evidence is examined including: the recruitment processes, the overall human resources policies, the adoption of stock option plans, and the hiring of a vice president of marketing and sales. Also considered is whether venture capitalists play a role in determining if the firm's founder is replaced by an outsider as CEO. Finally, an attempt is made to differentiate between turnovers where the investor takes a supportive versus a controlling role and to understand the interactions between the various roles played by venture capitalists. Results suggest that obtaining venture capital is related to how firms recruit employees and that venture-capital-backed firms make greater use of business and professional contacts for recruiting, especially for recruiting deeper down into the organization. It is found that obtaining venture capital is associated with a significant increase in the likelihood of: (1) adopting a stock option plan; (2) appointing a vice president of sales and marketing; (3) faster professionalization; and (4) appointing an outsider to the position of CEO. In addition to the finding that venture capitalists play an important role in the professionalization of top leadership, the evidence demonstrates that venture capitalists play important roles in turnover events both where the founder stayed with the startup and where the founder left. Also, the roles of venture capitalists include helping develop human resources, attracting professional CEOs, and imposing control of the firm when it is in a difficult state. (SFL)
Keywords: Startup process, Chief executive officers (CEOs), Founders, Startups, Human resource management, Intermediaries, Employee recruitment, Organizational practices, Venture capitalists, Silicon Valley
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