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InterorganizationalCommitment inSyndicatedCross-Border VentureCapital InvestmentsMarkus M. MäkeläMarkku V.J. Maula
Cross-border venture capital has become increasingly common in recent years. Little isknown, however, about the antecedents of venture capitalists’ commitment to portfolio firmsin international settings. We used a multiple case study to build a grounded model ofinterorganizational commitment in cross-border syndication networks. The model proposesthat changes in a venture’s prospects influence investors’ commitment levels. This relation-ship is amplified by the remoteness of the investor and is mitigated by the investor’sembeddedness in local syndication networks and the relative investment size. The modelcontributes to the literature on cross-border venture capital and interorganizational commit-ment in international settings.
Introduction
Cross-border venture capital has become increasingly common in recent years(Baygan & Freudenberg, 2000; Bottazzi, Da Rin, & Hellmann, 2004; Gompers & Lerner,2003). The need for changes in the academic literature on venture capital has also becomeevident. Previously, the literature predominantly viewed venture capital as a localizedactivity and used the term “international venture capital” to refer to comparisons ofventure capital within various countries. In contrast, more of today’s literature recognizesthe increasing globalization and frequent cross-border transactions of the activity(Bottazzi et al., 2004; Wright, Pruthi, & Lockett, 2005). However, the literature oncross-border venture capital investments is still in its infancy. Some of the first attempts tocreate an understanding of this fairly recent phenomenon have focused on the drivers ofcross-border investments (Baygan & Freudenberg, 2000; Guler & Guillen, 2004; Hall &Tu, 2003; Maula & Mäkelä, 2003), the adjustments in venture capitalists’ investmentbehavior when investing abroad (e.g., Cumming & MacIntosh, 2003; Pruthi, Wright, &Lockett, 2003; Wright, Lockett, & Pruthi, 2002; Zhang, 2002), and the potential benefitsfor portfolio companies from cross-border investments (Hursti & Maula, 2002;
Please send correspondence to: Markus M. Mäkelä, e-mail: [email protected], at the University of Turku,Ylhäistentie 2, FI-24130 Salo, Finland.
PTE &
1042-2587© 2006 byBaylor University
273March, 2006
Jääskeläinen & Maula, 2005; Mäkelä & Maula, 2005). What is missing from priorresearch is an attempt to create understanding on the specific challenges of managingcross-border venture capital relationships. In particular, we observe that maintaining thecommitment of more distant, foreign investors presents a major challenge to the practiceof cross-border venture capital, a challenge that has not been explored in prior research.Therefore, in this article, we focus on the question “What factors drive investor commit-ment in cross-border venture capital syndicates?”
The theoretical perspective that we apply in our research is commitment theory(Anderson & Weitz, 1992; Beamish & Banks, 1987; Becker, 1960; Cullen, Johnson, &Sakano, 1995), which we attempt to enhance with our grounded theory study. Commit-ment theory posits that the expected rewards associated with a relationship are necessaryantecedents of commitment (Becker, 1960). Prior research on commitment has largelyfocused on commitment between individuals within an organization, but it has beenshown that commitment also occurs on an interorganizational level (Anderson & Weitz,1992; Beamish & Banks, 1987; Cullen et al., 1995). Our study adopts the followingdefinition for commitment (Beamish, 1984): actions and values of decision makers con-cerning the continuation of a relationship, acceptance of joint values and goals, and thewillingness to deploy resources in a relationship. Commitment theory’s other definitionsfor commitment include the following: commitment represents an exchange partner’senduring desire to foster a valued relationship (de Ruyter, Moorman, & Lemmink, 2001);commitment exists when a party believes that a relationship is important and uses sig-nificant efforts to maintain or improve the relationship (Morgan & Hunt, 1994); and theviewpoint can be taken that commitment is a decision involving nonrecoverable orcostly-to-recover costs, and lock-in to a set of subsequent actions and lock-out of someothers; commitment is thus characterized by a certain degree of irreversibility (Ghemawat,1991).
Assessing the likely commitment of transaction counterparts can be particularlydifficult in international settings (Thompson, 1996). Commitment in international settingshas recently received research attention within the context of international joint ventures(Beamish & Banks, 1987; Cullen et al., 1995; see also Buckley & Casson, 1988;Contractor & Lorange, 1988; Lane & Beamish, 1990), as well as in industrial marketingand relationship marketing (Coote, Forrest, & Tam, 2003; Morgan & Hunt, 1994; deRuyter et al., 2001).
Our article deepens the insights on commitment theory by identifying new moderatingconstructs. The constructs were identified by first developing a grounded model in anempirically novel context of international interorganizational relationships, cross-borderventure capital investments and syndicates, which has thus far received little attention inprior literature. The literature on international venture capital has only recently started todevelop beyond international comparisons of domestic activities and addresses the spe-cific issues of cross-border venture capital investments (Wright et al., 2005). This articlecontributes to this emerging stream of literature by analyzing the determinants of com-mitment in cross-border venture capital relationships. We define venture capitalist com-mitment as continued active provision of value-added services, such as managerial adviceand contacts, and as continued financing of the venture in future investment rounds.Syndication of cross-border venture capital investments offers an interesting ground tostudy how commitment is created and sustained between networked organizations. Thecross-border syndicates that we study in this article typically have participants frommultiple countries, a feature of the research design that allows for variation in key factorsthat underlie our results. We define cross-border venture capital syndication as a venturecapital syndicate where not all investors manage the investment from the same country.
274 ENTREPRENEURSHIP THEORY and PRACTICE
Given the lack of prior research examining commitment in cross-border venturecapital, we use the grounded theory approach (Glaser & Strauss, 1967; Strauss & Corbin,1998) to develop a model of factors influencing commitment in cross-border syndicationnetworks. The data in this study, gathered from multiple sources, cover 29 investor–investee relationships resulting from investments in eight cross-border syndicates. Themodel demonstrates how an investor’s expectations for a portfolio venture’s future affectthe interorganizational commitment that the investor exhibits toward the venture. Themodel also demonstrates three key factors that moderate this effect. Distance of theinvestor from the venture strengthens the effect of expectations on continued commitment,while social embeddedness of the investor and the financial importance of the investmentmitigate the effect. These identified moderation relationships enrich the understanding ofcommitment in interorganizational settings: the relationship between expectations andcommitment is not uniform (Cullen et al., 1995) but in fact varies between relationshipsdepending on these moderating factors as indicated in this article.
Following the typical sequence in reporting inductive research, we start by discussingour selected methodology, i.e., theory building from multiple case studies. We thendescribe our data and methods, introduce the insights gained from the data, and synthesizethe resulting view into an integrated model of propositions. Suggestions for furtherresearch are then presented.
Methods
Research DesignGiven the relative newness of the studied phenomenon, commitment in cross-border
venture capital syndicates, we chose the grounded theory approach building on casestudies (Eisenhardt, 1989). Grounded theory could also provide a fresh perspective on atopic that has already received empirical attention (Hitt, Harrison, Ireland, & Best, 1998)while allowing researchers to benefit from the quality of rich, qualitative data (Birkinshaw,1997). Moreover, the use of comparative case studies has been on the increase in recentyears (Bergmann Lichtenstein & Brush, 2001). To enable “replication” logic (Yin, 1994),we studied multiple cases. In this approach, we first studied the cases as independent“experiments” and subsequently made cross-case comparisons.
The data are a part of a larger set produced by a research project consisting of threemajor studies. In that project, data were collected covering the financings and other eventsof 10 new ventures that had received cross-border venture capital investments. Conve-nience sampling was involved in the sense that the cases were investment relationshipswith ventures that had started their operations in the same country, Finland. This sample,however, does allow us to make “generalizations to theory” that form the essence of thegrounded theory method (Eisenhardt, 1989; Strauss & Corbin, 1998; Yin, 1994). From ourresults, we also believe that intermediate generalizations in the other “statistical” sense(see a review from Yin, 1994, pp. 30–32) can be suggested in many areas. However,characteristic of a grounded theory study, this article leaves it to theory-testing research toconclude thoroughly the domains to which our results can be generalized.
The relevant unit of analysis for the problems of this study is that of an investor–investee relationship. Typical of case research (Eisenhardt, 1989; Yin, 1994), oursampling was based on theoretical reasoning and not on pursuing statistical representa-tiveness. Our sampling led us to include the investment rounds of eight of these compa-nies, producing data from 29 investment relationships that were analyzed as separatecases. Two investee firms of the original 10 were omitted because their syndicates were
275March, 2006
not multinational and precluded the finding of variation as suggested for theoreticalsampling (Eisenhardt, 1989).
Our research question led us to select a different unit of analysis for this article thanthat of the other two articles of the umbrella project, affording us this large number ofcases. While Eisenhardt suggested that “between 4 and 10 cases usually works well,” sheadded that “there is no ideal number of cases” (1989, p. 545). Several recent case studieshave significantly exceeded 10 cases, with some analyzing more than 50 in detail (seeAmit & Zott, 2001; Danis & Parkhe, 2002; Uzzi, 1997). Using the selected unit ofanalysis, we sought to employ our large set of rich data and are confident in the reliabilityof our results.
Table 1 describes the cases and corresponding interviews. The total number of inter-views is 56. In four cases, the focal firm no longer employed the interviewee at the timeof the interview. In some firms, we conducted several interviews, and some individualrespondents were interviewed twice. The indicated total number of investor firms discardssmall investors not relevant to this study, such as some angel investors.
Data CollectionWe collected data using interviews, observations, and secondary sources, with inter-
views being our primary source. The interviews were semistructured to allow the con-versation to flow more freely according to the answers of the interviewees, and to allowan in-depth inquiry into the nature of the issues addressed. As documented in Table 1,all entrepreneurial respondents were members of the venture’s management team, oftenchief executive officers. Nearly all venture capitalist interviewees were the representa-tives of their employers in the ventures’ governance. The table also describes the inves-tors, investees, and investment rounds. Our data were collected from June to August2002.
For the interviews, we used an interview guide that was designed during the study forthe purposes of the umbrella project. The first 12 interviews were used as a pilot study,after which revisions were made to the interview guide. The interviews after the first 18were less uniform due to additional questions that were drafted specifically for eachinterview. These questions dealt with issues raised in the previous interviews concerningthe focal cases. The 12 pilot study interviews are included in this study’s total number of56 interviews.
One rationale for adding elements to the interview guide was to achieve the benefitsof triangulation (Eisenhardt, 1989; Miles & Huberman, 1994) by asking about a par-ticular phenomenon from virtually every respondent in each case. This served to reducepossible biases in the data, such as those potentially caused by post hoc rationalization.There were only a few answers with misaligned responses, and we are rather confidentthat the depth of our knowledge sufficed to reveal the true state of things during theresearch process.
Additional interview questions resulted from the preliminary data analysis. Thisoverlap of phases is a key feature of theory-building studies using cases, enabling theresearchers to make adjustments during the data collection phase (Eisenhardt, 1989) andto probe more efficiently for emergent themes. According to Eisenhardt, this flexibilityallows improvements in the quality of the results, providing “controlled opportunism inwhich researchers take advantage of the uniqueness of a specific case and the emergenceof new themes” (1989, p. 539). In some instances, further viewpoints on the subjectmatter were obtained. With one exception, the interviews were tape-recorded and latertranscribed.
276 ENTREPRENEURSHIP THEORY and PRACTICE
Tabl
e1
Des
crip
tive
Dat
aon
the
Cas
esan
dth
eIn
terv
iew
s
Nam
e†
Inve
stee
firm
sIn
vest
ors
Indu
stry
Foun
ded
Inte
rvie
ws
Nam
eD
ates
ofro
unds
Loc
atio
nIn
terv
iew
s
Alta
irSo
ftw
are
1997
CE
O,V
PB
usin
ess
Dev
elop
men
t(t
wo
inte
rvie
ws)
And
rom
eda
4Q20
00N
orth
ern
Am
eric
a1
Aqu
ariu
s19
98,4
Q20
00Fi
nlan
d2
Car
ina
1998
,4Q
2000
Finl
and
1Su
nflow
er4Q
2000
Uni
ted
Kin
gdom
1T
rian
gulu
m4Q
2000
Cen
tral
Eur
ope
1T
hree
othe
rs4Q
2000
Ant
ares
Soft
war
e20
00C
EO
,CT
OC
apri
corn
1Q20
00,3
Q20
00Fi
nlan
d2
Cen
taur
us3Q
2000
U.S
.Wes
tC
oast
1H
ydra
1Q20
00,3
Q20
00Fi
nlan
d1
Bet
elge
use
Soft
war
e19
99D
eput
yC
EO
(2),
CFO
Cap
rico
rn1Q
2001
,4Q
2001
Finl
and
2Fo
rnax
4Q20
01Fi
nlan
d2
Pega
sus
4Q20
01N
orth
ern
Eur
ope
1C
apel
laSo
ftw
are
1997
CE
O,C
TO
(2)
Cap
rico
rn3Q
2000
,3Q
2001
Finl
and
2Ph
oeni
x3Q
2001
Uni
ted
Kin
gdom
1Fo
mal
haut
Com
mun
icat
ions
devi
ces
1999
Ex-
CE
O,e
x-C
EO
,CT
OC
ygnu
s1Q
2001
,3Q
2001
Uni
ted
Kin
gdom
1Fo
rnax
1Q20
00,1
Q20
01,3
Q20
01Fi
nlan
d2
Spin
dle
3Q20
01U
nite
dK
ingd
om1
Pollu
x(H
Qon
U.S
.Eas
tC
oast
sinc
ew
inte
r20
01)
Soft
war
e19
97C
TO
,VP
R&
D,e
x-V
PM
arke
ting
Hel
ix3Q
1999
,3Q
2000
Cen
tral
Eur
ope
1H
ercu
les
3Q20
00,1
Q20
02U
.S.E
ast
Coa
st1
Sagi
ttari
us1Q
2002
U.S
.Wes
tC
oast
1Pr
ocyo
nSo
ftw
are
and
rela
ted
serv
ices
1999
CE
O(3
)A
quar
ius
2Q20
00,3
Q20
01Fi
nlan
d2
Hyd
ra2Q
2000
,3Q
2001
Finl
and
2U
rsa
3Q20
01N
orth
ern
Eur
ope
1R
igel
(HQ
onU
.S.W
est
Coa
stsi
nce
1999
)So
ftw
are
1992
CE
O,C
TO
Pola
riss
ima
4Q20
00U
.S.W
est
Coa
st1
Sext
ans
4Q20
00U
nite
dK
ingd
om—
Tri
angu
lum
4Q20
00C
entr
alE
urop
e—
Zw
icky
4Q19
97,4
Q20
00Fi
nlan
d1
Tota
lnu
mbe
rof
inte
rvie
ws:
56
†O
fth
ein
vest
ors,
only
thos
ere
leva
ntfo
rth
isst
udy
are
incl
uded
;inv
esto
rsth
atco
uld
notb
eco
nsid
ered
vent
ure
capi
tali
nves
tors
wer
eno
tide
ntifi
edas
rele
vant
.Pse
udon
yms
are
used
for
all
com
pani
es.T
hefir
ms’
head
quar
ters
(HQ
)ar
elo
cate
din
Finl
and,
exce
ptfo
rth
etw
oex
cept
ions
indi
cate
d.C
EO
,chi
efex
ecut
ive
offic
er;
VP,
vice
pres
iden
t;C
TO
,chi
efte
chno
logy
offic
er;
CFO
,chi
effin
anci
alof
ficer
;R
&D
,res
earc
han
dde
velo
pmen
t.
277March, 2006
Field notes, a means of facilitating data analysis concurrent with data collection(Eisenhardt, 1989), was another extensively used method of recording the interview data.The interviewer typed the notes directly onto a laptop computer during the interviews.There are two categories of notes. First, brief remarks of the interviewer’s insightsobtained during the interviews, followed by a synthesis of those remarks. Second, noteswere taken on the content of virtually all answers given by the interviewees, except whenthe discussion was irrelevant to the study. Thus, the field notes comprise both observationand analysis as suggested by Eisenhardt (1989). We gave special notice to writing downimportant perceptions of our own, such as questions regarding the correctness of theobtained data.
For the field notes, which comprised more than 300 pages for the 56 interviews,necessary supplements were written in the hours following the interview to keep theprocedure compliant with the “24-hour rule” (Miles & Huberman, 1994). The averageinterview lasted for just over an hour, with the shortest taking 40 minutes, and somerunning for two and a half hours. In addition to the actual interviews, the intervieweeswere called at a later date, when necessary, to supplement the data.
Our secondary sources included company websites, press releases, information fromthe most important news outlets, Thomson Financial’s VentureXpert database (which wasmainly used for filling in the gaps in our information for Tables 3 and 4), and othermaterial. In some cases, this material provided an effective means for data triangulationand thus helped increase data reliability and validity (Miles & Huberman, 1994). Beforethe first interview concerning a specific case, the interviewer familiarized himself withthe secondary data, drafting an initial version of the venture’s timeline of events. Thissupported the interview process by enabling “refreshers” to be given from the secondarydata when asking about the history of the company. This sometimes enabled us to verifythe accuracy of the secondary sources.
Data AnalysisIn analyzing the data, we used several procedures suggested by Eisenhardt (1989),
Miles and Huberman (1994), and Yin (1994). First, we conducted a within-case analysis,treating data from each case as a separate “experiment” (Eisenhardt, 1989). We started thisphase by reviewing and supplementing the timelines we had built for the cases, and thencompared them with other data records and the analyses and syntheses in the interviewer’snotes. The detailed interview notes and our other review and analysis articles wereexamined, and concepts were identified and recorded by hand. This process involvednumerous discussions and reviewing of text and various forms of tabular material, givingus a detailed view of each case and potentially mitigating the difficulty posed by the largevolume of data in the cross-case analysis (Eisenhardt, 1989).
Second, the within-case analysis was succeeded by a cross-case analysis, in which wesought similarities and differences between two or more cases. The cases that appearedsimilar were also compared to discover patterns that may have gone unnoted previously.As noted by Eisenhardt (1989, p. 541), “the juxtaposition of seemingly similar cases by aresearcher looking for differences can break simplistic frames.” This type of cross-caseanalysis permits the emergence of new categories and concepts.
During the cross-case analysis, we went back intermittently to our coding notes torefine our classifications. Taken together, the procedures suggested by Eisenhardt (1989),Strauss and Corbin (1998), and Yin (1994) called for such continuous rotating amongdata, literature, and emergent themes. We used tabular displays (Miles & Huberman,1994) to reduce the data and employed tables in this article to present information on the
278 ENTREPRENEURSHIP THEORY and PRACTICE
cases, data collection, and causal relationships. We continuously sought to raise the levelof abstraction, obtaining comments from colleagues to supplement and test our insights.As a result of this iterative process, the resultant constructs and interlinkages becamesharper and their grounding in data was verified. The constant comparisons led to theidentification of the model’s components and their relationships. Comparison also repre-sents a form of verifying relationships (Eisenhardt, 1989).
Once something that prominent authors suggested avoiding (Glaser & Strauss, 1967),we took advantage of our knowledge of existing literature and familiarized ourselves withthe relevant literature, allowing the findings to be constantly juxtaposed with earlier work,as suggested by Eisenhardt (1989). We consulted existing literature extensively, particu-larly in the phase following data collection (see Eisenhardt, 1989). Various fields’ earlierliterature gave us the basis on which to build our model and a solid platform for com-parison. We had no a priori hypotheses, however, at any stage. Along the way, we wentthrough several versions of the model that integrated the emerging propositions into acohesive whole and finally arrived at the final model shown in Figure 1. We have usedseveral variance-representation tables (Miles & Huberman, 1994) to articulate the supportof the data for the propositions.
A Model of Interorganizational Commitment in Syndicated Cross-BorderVenture Capital Investments
Investor CommitmentA key observation from our data was that some investors in some cross-border
syndicates notably lowered their level of commitment. In 12 of the 29 investment rela-tionships, investors had exhibited a significant decline in commitment and contribution to
Figure 1
A Model of Interorganizational Commitment in Syndicated Cross-BorderVenture Capital InvestmentsP1, proposition 1; P2, proposition 2; P3, proposition 3; P4, proposition 4.
Expected value Commitment+
–+ –
EmbeddednessDistance Financial importance
P1
P2 P3 P4
279March, 2006
their investee venture’s development. These cases offered a possibility to study thephenomenon in detail. Conveniently, the other cases formed an appropriate comparisongroup that enabled us to obtain further insight into what causes changes in commitmentlevels. The last two columns in Table 2 describe the commitment levels and changes ininvestor commitment for all cases. The table illustrates the substantial variation in the caserelationships regarding investor commitment patterns. Antares, Betelgeuse, and Procyonexperienced no notable changes in commitment levels, only individual and minor disap-pointments at worst. In contrast, the histories of Altair, Capella, Fomalhaut, Pollux, andRigel showed significant changes in investor commitment levels. This variation offered usa good starting point for elaborating a model of commitment. In studying the cases, weused our knowledge of how these syndicates were formed, making use of the rich insightswe had gained from the data. This allowed us to better distill the effects of the modelindependently.1
Changes in Expected Value CreationAs the main effect in our model, our case evidence shows that changes in investors’
expectations for value creation by their portfolio companies influence investors’ subse-quent commitment toward the portfolio companies. When the company does not live upto the expectations of the investor, the investor is likely to decrease its commitment towardthe venture. In practice, when the prospects of a venture decrease compared with impli-cations of the business plan and investors’ expectations, investors are likely to become lessactive in supporting the development of the venture and are more likely to discontinue thefunding of the venture in later investment rounds. In the article, we specifically explain thedeviance of realized levels of investor commitment from levels expected by entrepreneursand other syndicate members prior to the investment. In Table 2, we present a summaryand illustrations of the investors’ expectations concerning value creation and the changesin these expectations since the time of the investment.
Based on our interviews and other data, it is evident that commitment levels changefor different reasons pertaining to the value that the focal investor expects to receivefrom the investment. However, a major reason for decreased expectations between theinvestment period and the summer 2002 interviews was the slowdown in informationtechnology investments and financial markets in 2000–2002. Our case companies arehigh-technology firms operating in industries dependent on high investment from corpo-rate clients. Between 2000 and 2002, the decline in corporate information technologyinvestments and company valuations in public stock and venture capital markets signifi-cantly influenced the expected value creation of the ventures. In addition to marketconditions, business plan execution was another main reason for these changes. Some
1. Table 2 includes columns for two key components of the expected value of the firm: financial value andnonfinancial or strategic value—the latter referring to value that can only indirectly be conceived as holdingfinancial value. Nonfinancial value includes, for instance, technological learning, and a change in an investorfirm’s learning needs may drive commitment decline. In our data, many corporate venture capitalists pursuestrategic benefits. The effect of individuals leaving is accounted for as a dimension of the investor’s expec-tations, but we do not have a dedicated column for this factor, which was only present in the Helix–Pollux andPhoenix–Capella investment dyads. In both cases, the investment manager’s departure was an important factorpromoting the decline in commitment. Importantly, our analysis strongly supports the view that the departuresfirst affected the expectations of the investor. The investors could not find a new investment manager withgenuine interest in the case, and both firms considered this an essential prerequisite. This—the lack of aninvestment manager with sufficient personal interest—then caused the decline in commitment in accordancewith our model.
280 ENTREPRENEURSHIP THEORY and PRACTICE
Tabl
e2
Sum
mar
yof
the
Exp
ecte
dV
alue
ofth
ePo
rtfo
lioFi
rman
dth
eC
omm
itmen
tof
the
Inve
stor
Inve
stee
Inve
stor
Inve
stor
s’ex
pect
atio
ns†
Subs
tant
ial
decr
ease
inex
pect
edva
lue?
Com
mitm
ent‡
Fina
ncia
lSt
rate
gic
Des
crip
tion
Cha
nge§
Alta
irA
ndro
med
aH
igh
—N
oC
omm
itted
“The
yco
ntri
bute
,with
asp
ecia
lem
phas
ison
finan
cial
figur
es.”
No
chan
ge
Aqu
ariu
sH
igh
—N
oC
omm
itted
“The
yac
tivel
ydi
scus
sw
ithth
em
anag
emen
t.T
hey
brin
gid
eas
and
thou
ghts
.”
No
chan
ge
Car
ina
Hig
hIn
itial
lyhi
gh,t
hen
muc
hlo
wer
“Whe
nm
akin
gth
ein
vest
men
t,C
arin
a’s
busi
ness
was
rela
ted
with
this
indu
stry
.But
the
stra
tegi
cde
velo
pmen
t[s
ince
]ha
sbe
endi
ffer
ent.”
Yes
Som
epa
rtic
ipat
ion
all
the
time,
but
less
than
hope
dfo
r,pa
rtic
ular
lyne
arer
the
time
ofda
taco
llect
ion
“Car
ina
has
been
rath
erpa
ssiv
e.”
Med
ium
decr
ease
Sunfl
ower
Hig
hSo
me
chan
ge.H
owev
er,a
part
ofex
pect
atio
nsca
nbe
satis
fied
pass
ivel
y(o
bser
ver
stat
us).
Yes
Com
mitm
ent
not
satis
fact
ory.
The
inve
stor
isno
long
erso
inte
rest
edin
the
vent
ure.
“The
diffi
culty
isth
eco
nsis
tenc
yof
the
inte
rest
leve
l...
.Now
,[m
ost
stra
tegi
cin
vest
ors]
have
not
been
inte
rest
edan
ymor
e.”
Subs
tant
ial
decr
ease
Tri
angu
lum
Hig
hH
igh;
can
besa
tisfie
dpa
ssiv
ely
“For
Tri
angu
lum
and
[ano
ther
CV
C],
this
isa
grea
tpl
ace
toge
tin
form
atio
n.”
No
Stro
ngly
com
mitt
edT
heag
reem
ent
onan
inte
ntle
tter
“has
beco
me
mat
eria
lized
.”H
owev
er,“
they
dono
tha
veth
esp
eed
tom
ove
with
inth
em
arke
t—th
eir
inte
rnal
deci
sion
mak
ing
take
sto
olo
ng.”
Min
orde
crea
se
Oth
erth
ree
vent
ure
inve
stor
s¶
Hig
hH
igh;
can
besa
tisfie
dpa
ssiv
ely
“For
Tri
angu
lum
and
[ano
ther
CV
C],
this
isa
grea
tpl
ace
toge
tin
form
atio
n.”
“The
indu
stri
alin
tere
st[o
fso
me
inve
stor
s]w
asw
hat
ultim
atel
yaf
fect
ed[t
heve
ntur
e’s]
sele
ctio
nof
inve
stor
s.”
No
Com
mitm
ent
not
satis
fact
ory.
The
inve
stor
spu
rsue
lear
ning
bene
fits,
and
thes
ear
eob
tain
able
even
with
out
cont
inue
dac
tive
cont
ribu
tion.
“Alta
irha
sno
tgo
tw
hat
was
wan
ted.
”“W
e[A
ltair
]sh
ould
have
mad
ea
form
alag
reem
ent
[on
cont
ribu
tion]
.”“T
hey
wan
ted
tole
arn,
not
tohe
lpA
ltair.
”
Subs
tant
ial
decr
ease
281March, 2006
Tabl
e2
Con
tinue
d
Inve
stee
Inve
stor
Inve
stor
s’ex
pect
atio
ns†
Subs
tant
ial
decr
ease
inex
pect
edva
lue?
Com
mitm
ent‡
Fina
ncia
lSt
rate
gic
Des
crip
tion
Cha
nge§
Ant
ares
Cap
rico
rnH
igh
—N
oC
omm
itted
.Con
tact
pers
onw
asch
ange
dfr
omth
em
anag
ing
part
ner
toan
othe
rin
vest
men
tm
anag
er,
how
ever
.
No
chan
ge
Cen
taur
usH
igh
Exp
ress
edex
plic
itly
inth
ebe
ginn
ing
that
they
wis
hto
prob
ein
vest
ing
into
this
tech
nolo
gyar
ea“T
hey
wan
ted
toco
me
here
toex
plor
eho
wth
em
arke
ts[f
orth
iste
chno
logy
]w
ork.
”
No
Com
mitt
ed“T
heir
bigg
est
help
has
been
know
ledg
efr
omth
eSt
ates
.The
yha
vere
laye
din
form
atio
nfr
omth
e[v
entu
reca
pita
l]m
arke
ts.I
nad
ditio
n,th
eykn
owso
met
hing
ofA
sia.
”
No
chan
ge
Hyd
raH
igh
—N
oC
omm
itted
,alth
ough
“the
yha
vebe
enm
ore
ofa
stab
lefo
rce
inth
eba
ckgr
ound
[com
pare
dw
ithC
apri
corn
].”M
inor
decr
ease
Bet
elge
use
Cap
rico
rnH
igh
—N
oC
omm
itted
,but
part
icip
atio
nte
nds
tova
ryov
ertim
e.“T
heir
cont
acts
onth
efin
anci
alse
ctor
have
bene
fited
us.”
“We
have
part
icip
ated
thei
rst
rate
gyw
ork
quite
alo
t,an
dhe
lped
them
toco
nfigu
reth
eir
orga
niza
tion.
”H
owev
er,“
thei
rin
volv
emen
tva
ries
alo
tov
ertim
e.”
No
chan
ge
Forn
axH
igh
—N
oC
omm
itted
,alth
ough
isso
met
imes
seen
asun
able
tom
ake
deci
sion
sin
real
time:
“we
have
not
seen
[in
boar
dm
eetin
gs]
peop
lese
nior
enou
ghto
mak
ede
cisi
ons
[on
beha
lfof
Forn
ax].”
No
chan
ge
Pega
sus
Hig
hSo
me
rele
vanc
eN
oC
omm
itted
.Are
abou
tto
sell
thei
rve
ntur
ein
vest
men
ts,
but
this
isin
itial
lyex
pect
edno
tto
affe
ctB
etel
geus
e.N
och
ange
Cap
ella
Cap
rico
rnH
igh
—N
oC
omm
itted
.The
yw
ere
pivo
tal
inbr
ingi
ngPh
oeni
x,a
very
wel
l-kn
own
VC
,as
anin
vest
or.
“Of
[the
man
agin
gpa
rtne
r’s]
cont
ribu
tion,
cont
acts
have
been
mos
tva
luab
le.”
No
chan
ge
282 ENTREPRENEURSHIP THEORY and PRACTICE
Phoe
nix
Hig
h—
Yes
Bec
ame
pass
ive
upon
leav
ing
the
firm
ofth
ein
vest
men
tm
anag
erw
hoha
dm
ade
the
inve
stm
ent.
“We
don’
tkn
ow,w
hat
they
[Pho
enix
]w
ant
now
—th
eym
ight
wan
tto
,for
inst
ance
,clo
seth
eir
Lon
don
offic
e.”
“It
isre
ally
apr
oble
mif
peop
lele
ave.
An
inve
stm
ent
isan
inve
stm
ent
ofon
epe
rson
—ge
tting
anot
her
[per
son]
inte
rest
edis
abi
gpr
oble
m.”
Subs
tant
ial
decr
ease
Fom
alha
utC
ygnu
sIn
itial
lyhi
gh,t
hen
low
ered
—Y
esL
ower
than
expe
cted
from
near
lyth
ebe
ginn
ing
on;
deal
was
agre
edup
onw
itha
seni
orpa
rtne
r,bu
tan
inve
stm
ent
man
ager
with
muc
hle
ssex
peri
ence
was
then
assi
gned
toth
eca
se.
“The
actu
alco
ntac
tha
sbe
ena
rath
eryo
ung
guy—
noin
dust
rial
back
grou
nd.A
bank
erba
ckgr
ound
.He
cam
edi
rect
lyou
tof
scho
ol.”
Med
ium
decr
ease
Forn
axH
igh
—N
oC
omm
itted
No
chan
geSp
indl
eH
igh
—N
oL
ower
than
expe
cted
.The
initi
alco
ntac
tpe
rson
nolo
nger
wor
ksfo
rth
efir
m,a
ndhi
ssu
cces
sor
isfe
ltno
tto
have
the
know
ledg
eba
sefo
rco
ntri
butin
gac
tivel
yto
man
agem
ent.
“[T
hecu
rren
tpe
rson
]ha
sa
bank
erba
ckgr
ound
.Fo
mal
haut
was
abi
tun
luck
y.O
urho
pes
for
bette
rm
anag
eria
lhe
lpco
uld
have
com
etr
ue[w
ithth
epr
edec
esso
r].”
Med
ium
decr
ease
Pollu
xH
elix
Initi
ally
high
,the
nm
uch
low
er
Initi
ally
high
,the
nsi
gnifi
cant
lylo
wer
edY
esIn
itial
lyco
mm
itted
.The
n,a
key
pers
onle
ftth
efir
m,
and
Hel
ixba
cked
aco
mpe
titor
ofPo
llux.
Aft
erth
is,
Hel
ixha
sbe
ento
tally
pass
ive.
“Ile
ftfr
omH
elix
,and
that
had
abi
gim
pact
.Hel
ixtu
rned
pass
ive,
beca
use
Ile
ft.I
tis
alw
ays
ape
rson
alre
latio
nshi
p.”
“The
coop
erat
ion
has
not
been
very
succ
essf
ul.”
Subs
tant
ial
decr
ease
Her
cule
sH
igh
—N
oC
omm
itted
,alth
ough
som
ewha
tle
ssso
afte
rth
ela
test
roun
d,af
ter
whi
chSa
gitta
rius
took
apr
imar
yro
le.
Took
ave
ryst
rong
role
inin
tern
atio
naliz
ing
Pollu
x.“H
ercu
les
took
ast
rong
role
....
The
[U.S
.]of
fice
[to
whi
chth
eH
Qw
asm
oved
]w
ases
tabl
ishe
d[a
lrea
dyat
that
time]
due
toth
eir
dem
ands
.Pol
lux
wou
ldha
vene
eded
am
ore
mat
ure
orga
niza
tion—
Her
cule
sw
asin
ate
rrib
lehu
rry.
”“A
fter
the
begi
nnin
g,th
eir
guid
ance
has
rem
aine
dat
ara
ther
low
leve
l.”
No
chan
ge
Sagi
ttari
usH
igh
—N
oC
omm
itted
No
chan
ge
283March, 2006
Tabl
e2
Con
tinue
d
Inve
stee
Inve
stor
Inve
stor
s’ex
pect
atio
ns†
Subs
tant
ial
decr
ease
inex
pect
edva
lue?
Com
mitm
ent‡
Fina
ncia
lSt
rate
gic
Des
crip
tion
Cha
nge§
Proc
yon
Aqu
ariu
sH
igh
—N
oC
omm
itted
No
chan
geH
ydra
Hig
h—
No
Com
mitt
ed,b
utw
ithso
mew
hat
less
inpu
t.“I
nke
epin
gw
ithits
inve
stm
ent
focu
s,H
ydra
may
[cho
ose
tosk
ipfu
rthe
rin
vest
men
tro
unds
]at
som
epo
int.”
Min
orde
crea
se
Urs
aH
igh
—N
oC
omm
itted
No
chan
geR
igel
Pola
riss
ima
Initi
ally
high
,the
nde
clin
ed
—Y
esC
omm
itmen
tlo
wer
edso
onaf
ter
inve
stm
ent.
“[Po
lari
ssim
ais
]ra
ther
like
Sext
ans:
they
look
[at
Rig
el]
usin
gth
eir
own
stat
istic
s—th
ebe
nefit
tous
isno
tas
grea
tas
one
coul
dha
veho
ped
for.”
Med
ium
decr
ease
Sext
ans
Initi
ally
high
,the
nde
clin
ed
—Y
esR
athe
rlo
wco
mm
itmen
tfr
omne
arly
the
begi
nnin
gon
.“A
bove
all,
they
have
not
been
able
toco
ntri
bute
the
tech
nolo
gyvi
sion
,whi
chw
asho
ped
for.”
Med
ium
decr
ease
Tri
angu
lum
Hig
hSo
me
rele
vanc
eN
oH
ave
cont
ribu
ted
wha
tth
eyw
ere
expe
cted
to.
“We
have
gotte
nco
ntac
ts,w
hich
was
wha
tw
asex
pect
ed.”
No
chan
ge
Zw
icky
Hig
h—
No
Com
mitt
ed“T
hey
have
look
edat
usop
enly
and
enth
usia
sm.
Prim
arily
,we
[Rig
el]
have
bene
fited
from
the
rela
tions
hip.
The
yha
da
lot
ofco
ntac
tsto
seco
ndro
und
inve
stor
s.”
No
chan
ge
†T
hech
ange
inex
pect
atio
nsre
fers
toth
ech
ange
from
the
time
ofse
tting
upth
ein
vest
men
tto
the
time
ofou
rpr
imar
yda
taco
llect
ion
inJu
ne–A
ugus
t20
02.
‡C
omm
itmen
tref
ers
here
toho
ww
ella
nin
vest
oris
com
mitt
edto
aro
leas
anac
tive
vent
ure
capi
talis
t(co
mm
itted
toac
tive
part
icip
atio
nin
man
agem
enta
ndin
prov
idin
gad
vice
,and
tom
akin
gsu
bseq
uent
inve
stm
ents
whe
nne
eded
)re
lativ
eto
wha
tw
asex
pect
edfr
omth
atin
vest
or.
§“N
och
ange
,”fir
ms
that
have
cont
ribu
ted
asth
een
trep
rene
uria
ltea
man
dot
her
inve
stor
sin
itial
lyex
pect
ed;“
min
orde
crea
se,”
firm
sw
ithsl
ight
lyle
ssco
ntri
butio
n;“m
ediu
mde
crea
se,”
firm
sw
ithra
ther
little
cont
ribu
tion;
“sub
stan
tial
decr
ease
,”fir
ms
that
prac
tical
lyla
ckth
eex
pect
edco
ntri
butio
n.¶
The
sam
ere
mar
ksgo
for
all
ofth
ese
thre
ein
vest
ors
inA
ltair
.C
VC
,cor
pora
teve
ntur
eca
pita
l;V
C,v
entu
reca
pita
l.
284 ENTREPRENEURSHIP THEORY and PRACTICE
companies simply failed to deliver what they had promised, whereas others performedvery well despite difficult market conditions.
In addition to changes related to market and business plan execution, there are otherfactors that influence the expected value creation. One factor that emerged from our datawas the lower-than-expected resources and capabilities of the investors to support thedevelopment of the ventures. Although decreased investor resources may contribute todecreased commitment (even when the portfolio firm still seems to be worthy of continuedeffort), this factor was left out of the scope of the present article. Also, our data includeobservations that (1) some investors, particularly corporate venture capitalists who actu-ally may seek technological learning, may obtain their goals by just attending boardmeetings as observers, and (2) individual investment managers with special interest in aportfolio firm may leave, which often results in a less passionate venture capitalistbecoming the responsible investment manager. Under certain circumstances, these factorsseem to share in driving commitment decline. The first effect was present in a few casesonly, and we could not study it in detail with our data. The second effect was present intwo cases—the Helix–Pollux and Phoenix–Capella investment dyads—and was consid-ered to represent a form of decreased investor expectations.
Several events in our cases demonstrated that lowered expectations concerning theportfolio firm’s future value creation decreased investor commitment. For instance, inAltair’s case, Carina’s commitment decreased because this corporate venture capitalinvestor shifted its technological interest away due to developments in the businessenvironment. In Pollux’s case, Helix regeared its interests toward another technology. Inthe latter case, however, the departure of a key person was also a major factor underlyingthe commitment decline, and it is difficult to distill from our data whether it was financialor other expectations that had dropped prior to the commitment decline. In any case, themanager’s departure significantly affected expectations in that the firm expected toprovide its investment managers with interesting cases, and they no longer had an inter-ested investment manager. Moreover, the response of commitment to declined expecta-tions is evident in Rigel and Fomalhaut. Taken together, our findings indicate that when aventure is not meeting the expectations set by the investors, the investors tend to reducetheir commitment to the venture’s continuing development and to subsequent investmentsin it. Given that our data are mainly from decreases in expectations and commitment, welimit our generalization to decreases in our model. Summarizing our findings, we advancethe following proposition:
Proposition 1: A decrease in the investment’s expected value causes a decrease ininvestor commitment.
The Moderating Effect of DistanceOur data suggest that distant investors, compared with local ones, are more likely to
stop active contribution if they perceive that a venture’s prospects have fallen. This leadsto the identification of distance as a moderating factor to our model’s main relationshippreviously introduced. When performance does not reach the expected level, distanceincreases the difficulties in correcting the situation because of the challenges in meetingface to face and working together to solve the problems. From the investors’ perspective,distant problems are often easier to ignore than solve. In addition to the results of ouranalysis, many of our respondents echoed the view that distance has an important effect.The following interview excerpts illustrate their views:
285March, 2006
If it [the success of an investee venture] is not good, then I believe that an internationalinvestor is more keen to react in the situation and will develop a merger case, orsomething like that (thereby reducing his or her need to contribute to that venture asa distinct entity).
Problems [in the participation of foreign investors] are not entirely theoretical—onehas to think of them quite a lot. We have an international investor involved in many ofour [portfolio] companies—these things [risks] do actually exist, there is no questionabout it.
Three dimensions of distance appeared to be important: geographic and culturaldistances and location in a foreign country (Grinblatt & Keloharju, 2001; Kogut & Singh,1988). Table 3 provides a detailed view of the three dimensions of distance in the cases.To corroborate the objectiveness of distance measures, we conclude the table with anintegrative measure that groups the cases along the distance separating the investor and theinvestee. Similar to the rank measure presented by Brown and Eisenhardt (1997), this
Table 3
Distance
Case
Location ofinvestor
Distance
Investee Investor
Geographicdistance(miles)
Culturaldistance Foreignness
Distanceattribute
Altair Andromeda Stockholm 250 .8 Foreign LowAquarius Helsinki 0 0 Domestic ZeroCarina Helsinki 0 0 Domestic ZeroTriangulum Munich 990 1.3 Foreign MediumSunflower London 1,130 1.8 Foreign MediumThree others
Antares Capricorn Helsinki 0 0 Domestic ZeroCentaurus California 5,450 1.4 Foreign HighHydra Helsinki 0 0 Domestic Zero
Betelgeuse Capricorn Helsinki 0 0 Domestic ZeroFornax Helsinki 0 0 Domestic ZeroPegasus Stockholm 250 .8 Foreign Low
Capella Capricorn Helsinki 0 0 Domestic ZeroPhoenix London 1,130 1.8 Foreign Medium
Fomalhaut Cygnus London 1,130 1.8 Foreign MediumFornax Helsinki 0 0 Domestic ZeroSpindle London 1,130 1.8 Foreign Medium
Pollux Helix Munich 990 1.3 Foreign MediumHercules Massachusetts 3,940 1.4 Foreign HighSagittarius California 5,450 1.4 Foreign High
Procyon Aquarius Helsinki 0 0 Domestic ZeroHydra Helsinki 0 0 Domestic ZeroUrsa Stockholm 250 .8 Foreign Low
Rigel Polarissima California 5,450 1.4 Foreign HighSextans London 1,130 1.8 Foreign MediumTriangulum Munich 990 1.3 Foreign MediumZwicky Helsinki 0 0 Domestic Zero
286 ENTREPRENEURSHIP THEORY and PRACTICE
measure helped to classify the cases and to better investigate the role of distance incausing variation in commitment.
Geographical distance is the distance separating the cities of the venture headquartersand the investment management location of the investor.2 Cultural distance is measured byentering Hofstede’s indices of national culture (Hofstede, 1980, 1983) in the formulaprescribed by Kogut and Singh (1988) in their central article for calculating the nationalcultural distance3:
CD I I Vi i i
i
12 1 22
1
4
4= −( ){ }=∑
Following the widespread procedure of Kogut and Singh, we defined an actor’s nationalculture as the culture of its focal country of location: a venture’s headquarters or aninvestor’s location of investment management. Unlike quantitative studies usingHofstede’s measures (see Brouthers & Brouthers, 2001 or Shenkar, 2001 for reviews), wedid not use the national cultural distance as our end product, but classified the casesaccording to the values of this distance measure. With both geographic and culturaldistance, we sought to maintain robustness of methodology by clustering the cases in afew classes only. Using more classes seemed too synthetic a solution for these data.
In our analysis, we include foreignness as a subclass of distance, referring specificallyto the country of location. Some locations in a neighboring country may be closer thansome in the same country. Foreignness is also conceptually distinct from national culturaldistance in that it groups investors in two classes only: domestic and foreign. Motivated byour analysis of data, we propose that foreignness is a relevant dimension of the distanceconstruct. The two firms that have moved their headquarters outside Finland4 are consid-ered Finnish companies in this analysis.
Finally, in Table 3, an integrative measure divides the cases into four classes accord-ing to distance. Even though the different distance measures are not greatly comparablewith each other, their comparability is sufficient for our purposes and for the number ofvalues that the distance score takes. Hence,
Proposition 2: Geographic distance, cultural distance, and foreignness—threedimensions of remoteness (distance)—increase the impact that a decrease in expectedvalue has on investor commitment.
2. There are some challenges in calculating geographic distances on the surface of an irregularly shapedplanet (Thomas & Huggett, 1980). These, however, are not relevant in our study, since we only used themeasures for inducing a rough construct for classification. Following the general practice in geography thatis also applied in business studies (Grinblatt & Keloharju, 2001), we calculated the (natural) logarithm of thedistance for our review. This is needed to account for the fact that people cognitively perceive a change in alarge distance as a smaller change than an equivalent change in a smaller distance. This “perceived distance”is termed cognitive distance by economic geographers (Golledge & Stimson, 1987). However, in the table, wereport the actual distance, since it is more illustrative. The distance is presented in miles. Estimates of thedistance separating two locations were drawn in 2002 from a professional World Wide Web distance service.3. CD12 is the cultural distance separating countries 1 and 2. Ii1 is the index for the ith cultural dimension incountry 1, and Ii2 is the index for country 2. Vi is the variance of cultural dimension i. (Hofstede identifieddimensions based on power, uncertainty, individualism, gender, and additionally, long- versus short-termorientation.)4. Pollux and Rigel have moved their headquarters to the United States. Both of these firms are consideredhere as Finnish firms, because they have Finnish origins and have been American firms in legal terms for aminority part of their life span. Still, at the time of the study, Finnish managers were the largest group in themanagement teams of both companies. Both companies retain an office in Finland, and we conclude that thesafest choice is to consider them Finnish.
287March, 2006
The Moderating Effect of EmbeddednessWe next present the notion of venture capitalists’ embeddedness in networks of
venture capitalists and entrepreneurs, referring to investors’ needs to maintain solidrelationships with organizations and individuals in the focal market due to dependency onresources for future collaboration. Once we had identified potential sources of embed-dedness (subsequently discussed), embeddedness as a moderator emerged relativelyclearly from our data. The set of cases illustrates its effect well. Table 4 summarizes theembeddedness of investors in the social networks of the portfolio company and coinves-tors. A summary attribute that combines the different component measures used forembeddedness is presented. Venture capitalists may be network-embedded through dif-ferent kinds of involvement. Various connections to the domain of the investee firm andthe syndicate may indicate that an investor is embedded in this way.
A common theme is that the existence of a local investor in the syndicate maymoderate the impact that change in expected value has on commitment. Evidence suggeststhat the influence a local venture capitalist’s actions or mere presence can have on anotherventure capitalist may cause this. This effect is not present, however, if this local investorshares the focal investor’s interest in relinquishing commitment. As a first part of ourthesis concerning embeddedness, we propose that the existence of a local coinvestor in thesyndicate moderates the impact that change in expected value has on commitment.
Two other possible antecedents of embeddedness are the existence of (1) a cross-border investor in the syndicate that has differing interests and also holds significance tothe focal venture capitalist for future engagements, and the focal venture capitalist inter-ested in investing in the same or similar area in the future. Due to the relatively efficientdispersion of information to nearby actors (Sorenson & Stuart, 2001), in such cases weexpect that venture capitalists want to maintain good relationships with local investors tokeep their reputation as coinvestors untarnished.
The following comment from an entrepreneur illustrates why the existence of arespected local investor is very important in a hypothetical situation of having problemswith cross-border investors. The local investor in point has considerable global presence.
It is clear that their [a foreign investor’s] reputation might suffer [if they do not takecare of their investment]. And Fornax helps [by being there as an investor]. Aninvestor’s reputation towards other investors has a lot of relevance.
To continue, our analysis implies that the focal venture capitalist’s existing relation-ships in the country of investment signal other existing or potential future investmentsthere. The following comment from a representative of a cross-border investor illustratesthis:
It is important that there is a helpful and active local investor . . . in early stages [of theventure’s life] it is very advantageous to have a local VC. [The entrepreneurial teamgets] local contacts and advice et cetera . . . [Foreign] VCs from Europe are morecomfortable if there is a Finnish [local, in this case] investor involved, especially ifthere already is a relationship with such an investor.
If a venture capitalist already has other investments in a country, there is even moredirect evidence of its potential dependence on collaboration possibilities. Moreover, offersof participating syndicates are also a relatively direct indication of future possibilities. Tosummarize the above findings, there are a number of factors that could create and enforcethe embeddedness that our following proposition suggests: our examples include therebeing a local coinvestor in the syndicate; existence of a syndicate member other than the
288 ENTREPRENEURSHIP THEORY and PRACTICE
Tabl
e4
Em
bedd
edne
ssan
dFi
nanc
ial
Impo
rtan
ce
Cas
e
Em
bedd
edne
ssFi
nanc
ial
impo
rtan
ce
Ven
ture
Inve
stor
Ori
gin
ofth
eV
CL
ocal
coin
vest
orin
this
synd
icat
e?
Inte
rnat
iona
lco
inve
stor
inth
issy
ndic
ate?
†O
ther
inve
stm
ents
inth
esa
me
coun
try‡
Sum
mar
y
Num
ber
ofpo
rtfo
lioco
mpa
nies
Sum
mar
y
Alta
irA
ndro
med
aFo
reig
nY
esY
esY
esM
ediu
m20
–100
Med
ium
Aqu
ariu
sL
ocal
——
—H
igh
�20
Hig
hC
arin
aL
ocal
——
—H
igh
�20
Hig
hSu
nflow
erFo
reig
nY
esY
esY
esM
ediu
m�
100
Low
Tri
angu
lum
Fore
ign
Yes
Yes
Yes
Med
ium
�10
0L
owT
hree
othe
rsFo
reig
nY
esY
esY
es(o
neof
thre
e)�
20A
ntar
esC
apri
corn
Loc
al—
——
Hig
h�
20H
igh
Cen
taur
usFo
reig
nY
esN
oN
oM
ediu
m20
–100
Med
ium
Hyd
raL
ocal
——
—H
igh
20–1
00M
ediu
mB
etel
geus
eC
apri
corn
Loc
al—
——
Hig
h�
20H
igh
Forn
axL
ocal
——
—H
igh
�10
0L
owPe
gasu
sFo
reig
nY
esN
oY
esM
ediu
m20
–100
Med
ium
Cap
ella
Cap
rico
rnL
ocal
——
—M
ediu
m�
20H
igh
Phoe
nix
Fore
ign
Yes
No
No
Low
�10
0L
owFo
mal
haut
Cyg
nus
Fore
ign
Yes
Yes
No
Med
ium
20–1
00M
ediu
mFo
rnax
Loc
al—
——
Med
ium
�10
0L
owSp
indl
eFo
reig
nY
esY
esN
oM
ediu
m�
100
Low
Pollu
xH
elix
Fore
ign
No
Yes
No
Low
20–1
00M
ediu
mH
ercu
les
Fore
ign
No
Yes
No
Low
�10
0L
owSa
gitta
rius
Fore
ign
No
Yes
No
Low
20–1
00M
ediu
mPr
ocyo
nA
quar
ius
Loc
al—
——
Hig
h�
20H
igh
Hyd
raL
ocal
——
—H
igh
20–1
00M
ediu
mU
rsa
Fore
ign
Yes
No
No
Low
�20
Hig
hR
igel
Pola
riss
ima
Fore
ign
Yes
Yes
No
Med
ium
�10
0L
owSe
xtan
sFo
reig
nY
esY
esN
oM
ediu
m�
100
Low
Tri
angu
lum
Fore
ign
Yes
Yes
Yes
Med
ium
�10
0L
owZ
wic
kyL
ocal
——
—M
ediu
m�
20H
igh
†,‡
The
mea
sure
ison
lygi
ven
for
fore
ign
inve
stor
s.V
C,v
entu
reca
pita
l.
289March, 2006
focal investor that is foreign for the investee venture (due to its potential centrality ininternational investor networks); existence of a coinvestment relationship between thefocal cross-border venture capitalist and other venture capitalists located in the focalcountry or another geographically close area, or offers to participate in such coinvest-ments; and the cross-border venture capitalist having other investments in the samecountry.
Proposition 3: The network-embeddedness of an investor decreases the impact thata decrease in expected value has on the investor’s commitment.
The Moderating Effect of Financial ImportanceFinally, the financial importance of the investments to the investor seemed to have an
important moderating role on the relationship between changes in expectations andinvestor commitment. Financial importance was considered in terms of the proportion ofthe venture capitalist’s funds invested in the venture. Here, our results support the intuitiveassertion that a reason such as lack of personal interest resulting from a change inpersonnel does not by itself easily stop active participation when the investment representsa significant proportion of the fund’s assets. Sticking to investments nonrationally hasbeen termed escalation of commitment (Staw, 1976). There are several indications in ourdata that financial importance has influenced commitment. A comment from a Finnishventure capitalist illustrates the effect:
An international investor can be so much larger than the local [one] that there can beproblems—their optimum is a bit different size of firm. It may be that if a case will notfly or advances slowly, an international investor is a bit more impatient—if oneinvestment is not doing well, interest may drop. There are so many cases that are moreinteresting [in a large portfolio] that one does not have time [for the less interestingones] but they are left in the portfolio [as “inactive” investments].
In Table 4, financial importance of the case investments for the investors is summa-rized. We present the following proposition:
Proposition 4: Financial importance of the investment to the venture capitalistdecreases the impact that a decrease in expected value has on the commitment of theventure capitalist.
Table 5 summarizes the cases and the major constructs of our model. The tableillustrates the relationships depicted in our propositions.
Discussion
In this article, we set out to examine factors influencing interorganizational commit-ment in a new and unexplored context: cross-border venture capital. In so doing, we havecontributed to the emerging literature on international venture capital by analyzing thepreviously unexplored challenge of managing investor commitment in cross-borderventure capital investments (Wright et al., 2005). We used the grounded theory method todevelop a set of concrete propositions and a model of the factors that influence commit-ment in the international interorganizational relationships in our context, cross-borderventure capital syndicates. In our research, we developed four propositions concerningthe factors that influence investor commitment to portfolio companies and moderate the
290 ENTREPRENEURSHIP THEORY and PRACTICE
Tabl
e5
Sum
mar
yof
the
Cas
es
Cas
e
Subs
tant
ial
decr
ease
inex
pect
edva
lue?
Mod
erat
ors
Com
mitm
ent
chan
geIn
vest
eeIn
vest
orD
ista
nce
Em
bedd
edne
ssFi
nanc
ial
impo
rtan
ce
Alta
irA
ndro
med
aN
oL
owM
ediu
mM
ediu
mN
och
ange
Aqu
ariu
sN
oZ
ero
Hig
hH
igh
No
chan
geC
arin
aY
esZ
ero
Hig
hH
igh
Med
ium
decr
ease
Sunfl
ower
Yes
Med
ium
Med
ium
Low
Subs
tant
ial
decr
ease
Tri
angu
lum
No
Med
ium
Med
ium
Low
Min
orde
crea
seT
hree
othe
rsN
oSu
bsta
ntia
lde
crea
seA
ntar
esC
apri
corn
No
Zer
oH
igh
Hig
hN
och
ange
Cen
taur
usN
oH
igh
Med
ium
Med
ium
No
chan
geH
ydra
No
Zer
oH
igh
Med
ium
Min
orde
crea
seB
etel
geus
eC
apri
corn
No
Zer
oH
igh
Hig
hN
och
ange
Forn
axN
oZ
ero
Hig
hL
owN
och
ange
Pega
sus
No
Low
Med
ium
Med
ium
No
chan
geC
apel
laC
apri
corn
No
Zer
oM
ediu
mH
igh
No
chan
gePh
oeni
xY
esM
ediu
mL
owL
owSu
bsta
ntia
lde
crea
seFo
mal
haut
Cyg
nus
Yes
Med
ium
Med
ium
Med
ium
Med
ium
decr
ease
Forn
axN
oZ
ero
Med
ium
Low
No
chan
geSp
indl
eN
oM
ediu
mM
ediu
mL
owM
ediu
mde
crea
sePo
llux
Hel
ixY
esM
ediu
mL
owM
ediu
mSu
bsta
ntia
lde
crea
seH
ercu
les
No
Hig
hL
owL
owN
och
ange
Sagi
ttari
usN
oH
igh
Low
Med
ium
No
chan
gePr
ocyo
nA
quar
ius
No
Zer
oH
igh
Hig
hN
och
ange
Hyd
raN
oZ
ero
Hig
hM
ediu
mM
inor
decr
ease
Urs
aN
oL
owL
owH
igh
No
chan
geR
igel
Pola
riss
ima
Yes
Hig
hM
ediu
mL
owM
ediu
mde
crea
seSe
xtan
sY
esM
ediu
mM
ediu
mL
owM
ediu
mde
crea
seT
rian
gulu
mN
oM
ediu
mM
ediu
mL
owN
och
ange
Zw
icky
No
Zer
oM
ediu
mH
igh
No
chan
ge
291March, 2006
relationship between expectations and commitment. These moderation propositionscontribute to enriching the current understanding of the determinants of interorganiza-tional commitment and moderating factors. The propositions are synthesized in a theo-retical model. The model of the investor commitment in cross-border venture capital isillustrated in Figure 1.
Key FindingsIn our analysis, we found that ventures may experience problems in retaining the
attention and active contribution of the venture capitalists that have agreed to take part indeveloping the company. Commitment to developing the venture refers to providingvalue-added services actively, such as managerial advice and contacts. Commitment alsorefers to continued financing of the venture in future investment rounds. Lack of com-mitment by the investors is detrimental to the development of the ventures. In addition tothe lack of expected support, the lack of commitment by key stakeholders may be anegative signal about the prospects of the venture, making it more difficult to find newinvestors and partners.
Expectations. Investors’ commitment to the development of their portfolio companies isrelated to the prospects of the venture. If the expected financial returns from the invest-ment decrease, the motivation of the investors to put effort and invest more in thedevelopment of the venture decreases similarly. These results are well in line with priorresearch on interorganizational commitment in other contexts. For instance, Cullen et al.(1995) found in their research on international joint ventures that satisfaction and perfor-mance of the ventures were positively related to the commitment of the joint ventureparent firms. Our findings indicate that commitment is driven by expected benefits ininternational venture capital syndicates as well. This finding is also in line with priorresearch on venture capital, which argues that it may be purely rational for venture capitalinvestors to terminate investments if the venture is not meeting the milestones or otherwisesatisfying the expectations (Guler, 2002; Ruhnka, Feldman, & Dean, 1992).
However, our findings go beyond identifying the relationship between performanceand commitment in an international venture capital setting. In our analysis of cross-borderventure capital investments, we found that there were differences between investors intheir reactions to changes in the expectations concerning the venture. Whereas someinvestors were quick to retreat from the portfolio company in the case of difficulties orlowered expectations, other investors continued to be highly committed despite the chal-lenges. If investors were making decisions purely on an economic basis, the reduction inthe expected financial returns from the investment should have a more uniform effectamong investors across the syndicate. Our findings show that venture capitalists take moreaspects into account than just expectations on financial returns. This finding supports priorresearch on venture capital where it has been demonstrated that investors have challengesin making rational decisions about nonperforming portfolio companies (Guler, 2002;Ruhnka et al., 1992).
In our research, we have expanded the prior research on commitment by systemati-cally examining factors that influence investors’ reaction to changes in expectations. Wefound three important factors that moderate the effect of expectations on commitment: (1)distance separating the focal investor and the venture, (2) embeddedness of the investor inthe social networks of the portfolio company and coinvestors, and (3) the relative financialimportance of the investment to the investor.
292 ENTREPRENEURSHIP THEORY and PRACTICE
Distance. In our analysis, we found that the more distant the investor, the more stronglythe investor reacts to changes in the expectations. We identified three important dimen-sions of distance that moderate the effect of expectations on commitment: geographicdistance, cultural distance, and foreignness (Grinblatt & Keloharju, 2001; Kogut & Singh,1988). We found that the effects of all these dimensions were similar. This finding is inline with prior research on behavioral finance, in which it has been documented thatinvestors in stock markets seem to favor geographically proximate investment targets(Grinblatt & Keloharju, 2001).
Embeddedness. We also found that an investor’s embeddedness in the social networks ofthe portfolio company and coinvestors moderates its reactions to changes in expectations.Whereas disconnected investors act more on a short-term rational economic basis, inves-tors with strong connections to social networks of the portfolio company and the investorsyndicate take more issues into account in their decision making. Specifically, we foundthat if a cross-border investor has other investments in the focal country, it is more likelyto show continued commitment despite declined expectations in a focal portfoliocompany. Similarly, if the investor has other coinvestments with the same investors, it ismore likely to show continued commitment despite potential challenges. These findingsare well in line with prior research on embeddedness arguing that social relations affecteconomic actions (Granovetter, 1985; Uzzi, 1996, 1997) and represent the attitudinaltype of commitment (Coote et al., 2003). From a venture capitalist’s perspective, it mayin fact be rational to remain committed to the syndicate and a portfolio company even ifthe raw calculations suggest otherwise, i.e., if loyalty is important for getting invited toother deals. In venture capital investing, reputation and contacts are highly valuable.The reputation-related risks of relinquishing participation and commitment in the syndi-cate may be too high regardless of the outcome of one investment. Venture capitalinvestors have to take a portfolio approach that safeguards future streams of profitableopportunities.
Financial Importance. Finally, an investment in a single company may represent only avery small fraction of a fund’s value. In such a case, the financial relevance of theinvestment is lower, and this is likely to increase the effect that decreased value expecta-tions have on commitment. We found that investors with large portfolios react morestrongly to a change in a venture’s prospects. On the other hand, if the size of theinvestment is unusually high, investors are more likely to try and save the investment. Thiseffect is again partly rational, but may also reflect biases of the investors relating to theescalation of commitment (Guler, 2002; Staw, 1976).
Broader Implications. Once an international interorganizational network has beenassembled, commitment is needed to hold it together. Of various interorganizationalnetworks, our results may be generalizable to areas such as the management of interna-tional joint ventures and alliances and decision making concerning subsidiaries in multi-national corporations. It appears that distant actors that are not well embedded in socialaction in the vicinity of the focal actor are more likely to relinquish commitment as aresponse to decreased expectations. To take a reverse angle, proximate actors with a highdegree of network embeddedness may exhibit a higher escalation of commitment, i.e., anonrational degree of continuing commitment.
Limitations and Avenues for Future ResearchWhen interpreting the results, there are some limitations to be recognized. We
employed a case-based grounded theory approach by using rich data to build a model that
293March, 2006
is valid for the cases. While we can suggest generalizations to other domains, the exactestablishment of the domain of external validity remains the responsibility of futureresearch in which our propositions can be tested with large-scale data. Initially, we believethis model could make valuable contributions to areas such as international joint ventures,alliances, and decision making concerning subsidiaries in multinational corporations.
In our research, we focused on investments made in one country, Finland. Althoughprior comparative research suggests that venture capital investors operate quite similarlyin different countries (Manigart et al., 2002a; Manigart et al., 2002b; Sapienza, Manigart,& Vermeir, 1996), there may be some country-specific differences in the behavior ofventure capitalists. Research on cross-border investments in multiple countries couldexamine whether commitment is influenced by country-specific factors other than dis-tance, which was explored in this study. Moreover, challenges to validity can be inducedby the fact that different distance measures that could be used in a study such as this oneare not greatly comparable with each other.
Conclusions
In this article, we studied the question of “What factors drive investor commitment incross-border venture capital syndicates?” The article makes two main contributions. First,it advances the literature on international venture capital by moving from internationalcomparisons to the analysis of cross-border venture capital transactions (Wright et al.,2005). Specifically, the study provides a new understanding of the previously unexploredproblems of managing cross-border venture capital relationships. The article shows thatmeeting investors’ expectations is a key driver of continued commitment. However, therelationship is not uniform across investors but is moderated by three key factors relatedto distance, embeddedness, and the financial importance assigned to the investment.Second, through building the grounded model and identifying the three moderatingfactors, the article contributes more broadly to the emerging theoretical literature oninterorganizational commitment in international settings (Cullen et al., 1995). The articleshows that while expectations drive commitment, as shown in prior studies on interorga-nizational associations in international settings, there are moderating factors that influencethe strength of this effect across relationships.
To summarize, the key conclusion from this analysis, presented in the form of atheoretical model, is the following. Although all venture capital investors adjust theircommitment level on the basis of the achievement of milestones and the likelihood ofsuccess and value creation, those with less distance and other investments in the market,more long-term reciprocal contacts with coinvestors, and higher financial stakes are likelyto have more patience in retaining commitment if prospects for the venture decline. Wehope the model inspires additional research on cross-border venture capital and commit-ment in international interorganizational settings.
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Markus M. Mäkelä is a professor of Software Product Development (acting) at the University of Turku,Finland.
Markku V. J. Maula is a professor of Venture Capital at the Institute of Strategy and International Business,Helsinki University of Technology, Finland.
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We thank a number of colleagues for their helpful advice and contributions to our work, including DavidAhlstrom, Richard Harrison, Henrikki Tikkanen, as well as participants in the Academy of InternationalBusiness Meeting 2004, and the University of Nottingham Institute for Enterprise and Innovation (UNIEI)Entrepreneurship Research Workshop held at the UNIEI in June 2004. We also thank an anonymous reviewerand the special issue editors Andy Lockett, Deniz Ucbasaran, and John Butler of Entrepreneurship Theory andPractice for their valuable support. We would also like to acknowledge the financial support from TEKES, theNational Technology Agency of Finland (grant numbers 457/31/04 and 404/38/03).
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