interorganizational commitment in syndicated cross-border venture capital investments

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

mailto:[email protected]

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.


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

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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

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us1Q

2002

U.S

.Wes

tC

oast

1Pr

ocyo

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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

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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


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.


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


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.


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


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


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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


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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.


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.

297March, 2006

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).


interorganizational commitment in syndicated cross-border venture capital investments

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