Do venture capitalists have a continuation bias? Khanin, Dmitry.
By: Khanin, Dmitry
Contributor(s): Mahto, Raj V
Material type:
ArticlePublisher: The Journals of Entrepreneurship 2013Description: 203-222Subject(s): Involvement Fallacy | Information Fallacy | Continuation Bias | Start-Ups | Vc Financing | Venture Capital FinancingOnline resources: Click here to access online
In:
The Journal of EntrepreneurshipSummary: Venture capitalists (VCs) follow elaborate procedures to identify the top candidates, out of countless aspiring start-ups, for financing and other types of investor support. Purportedly, VCs also carefully evaluate, based on venture performance, whether or not it deserves to receive follow-on funding. But could decision making biases interfere with the evaluation process? In this article, we introduce the notion of a continuation bias defined as the proclivity to provide follow-on funding contingent on investor’s earlier investment. We argue that a continuation bias differs from sunk costs, status quo bias and escalation of commitment as it stems from the dual fallacy—information and narcissistic—exaggerating the benefits of greater data availability at later stages of investment and investor’s own contribution to the venture. We also argue that a continuation bias is influenced by contingency factors such that it is more likely to be observed when VCs apply competition-related rather than venture-related investment criteria. A survey of 51 VCs from the US provided support for the hypotheses.
| Item type | Current location | Call number | Vol info | Status | Date due | Barcode |
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Articles
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Ahmedabad (HO) | (Browse shelf) | Vol. 22, Issue. 2 | Available | 017932 |
Venture capitalists (VCs) follow elaborate procedures to identify the top candidates, out of countless aspiring start-ups, for financing and other types of investor support. Purportedly, VCs also carefully evaluate, based on venture performance, whether or not it deserves to receive follow-on funding. But could decision making biases interfere with the evaluation process? In this article, we introduce the notion of a continuation bias defined as the proclivity to provide follow-on funding contingent on investor’s earlier investment. We argue that a continuation bias differs from sunk costs, status quo bias and escalation of commitment as it stems from the dual fallacy—information and narcissistic—exaggerating the benefits of greater data availability at later stages of investment and investor’s own contribution to the venture. We also argue that a continuation bias is influenced by contingency factors such that it is more likely to be observed when VCs apply competition-related rather than venture-related investment criteria. A survey of 51 VCs from the US provided support for the hypotheses.
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