Venture Capitalists’ Managerial Involvement in Entrepreneurships: Is Too Much of a Good Thing Bad?

Abstract

Venture capitalists are investors that provide valuable hand-holding for the companies in which they invest. A venture capitalist chooses the level of involvement with his portfolio companies. Involvement spans from a very relaxed, limited communication ‘laisse faire’ approach to a very involved, almost stifling, ‘hands on’ approach. If venture capitalist involvement is valuable, is more involvement better, or is too much of a good thing bad? The answer to this question lies in the nature of the relationship between venture capitalist managerial involvement and portfolio company performance; specifically, whether it is linear or nonlinear. Using data from Thomson Reuters VentureXpert, I find that there exists a nonlinear relationship between the level of VC involvement for both PC performance and outcome. Results suggest that extreme levels of VC involvement should be avoided.