Do Venture Capitalists Have a Continuation Bias?

Dmitry Khanin and Raj V. Mahto
Additional contact information
Dmitry Khanin: Dmitry Khanin is Assistant Professor, Department of Management, College Business and Economics, Cal State University Fullerton, California, USA.
Raj V. Mahto: Raj V. Mahto is Assistant Professor of Entrepreneurship, Anderson School of Management, The University of New Mexico, New Mexico, USA.

Journal of Entrepreneurship and Innovation in Emerging Economies, 2013, vol. 22, issue 2, 203-222

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.

Keywords: VC financing; start-ups; continuation bias; information fallacy; involvement fallacy (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://journals.sagepub.com/doi/10.1177/0971355713490818 (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:sae:jouent:v:22:y:2013:i:2:p:203-222

DOI: 10.1177/0971355713490818

Access Statistics for this article

More articles in Journal of Entrepreneurship and Innovation in Emerging Economies from Entrepreneurship Development Institute of India
Bibliographic data for series maintained by SAGE Publications ().