Abstract:
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
withthe 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
