Do Venture Capitalists Have a Continuation Bias?

Dmitry Khanin, Raj V. Mahto

Research output: Contribution to journalArticle

2 Citations (Scopus)

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.

Original languageEnglish
Pages (from-to)203-222
Number of pages20
JournalJournal of Entrepreneurship
Volume22
Issue number2
DOIs
Publication statusPublished - Sep 2013
Externally publishedYes

Fingerprint

Venture capitalists
Venture
Investors
Funding
Financing
Start-ups
Investment criteria
Evaluation
Contingency factors
Escalation of commitment
Decision-making bias
Status quo bias
Sunk costs

Keywords

  • continuation bias
  • information fallacy
  • involvement fallacy
  • start-ups
  • VC financing

ASJC Scopus subject areas

  • Business and International Management
  • Strategy and Management
  • Economics and Econometrics

Cite this

Do Venture Capitalists Have a Continuation Bias? / Khanin, Dmitry; Mahto, Raj V.

In: Journal of Entrepreneurship, Vol. 22, No. 2, 09.2013, p. 203-222.

Research output: Contribution to journalArticle

Khanin, Dmitry ; Mahto, Raj V. / Do Venture Capitalists Have a Continuation Bias?. In: Journal of Entrepreneurship. 2013 ; Vol. 22, No. 2. pp. 203-222.
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