Do Venture Capitalists Have a Continuation Bias?

Dmitry Khanin, Raj V. Mahto

Research output: Contribution to journalArticlepeer-review

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 1 2013

Keywords

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

ASJC Scopus subject areas

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

Fingerprint Dive into the research topics of 'Do Venture Capitalists Have a Continuation Bias?'. Together they form a unique fingerprint.

Cite this