Performance aspirations in venture capital-backed companies

The Behavioral Theory of the Firm (BTOF) is one of the most widely used theories to explain firm conduct. According to the theory, decision-makers prospectively set targets for acceptable performance based on their firm’s historical performance and the performance of industry peers, and evaluate the need to change strategies by comparing actual organizational performance with those targets. While a sizeable body of work has built on the theory to explain a wide set of strategic outcomes (including expansion; mergers and acquisitions; diversification; changes to product format; and market positioning), empirical results often remain mixed. In this project, we propose that more accurate predictions of firm strategic conduct can be obtained by adopting a governance perspective to BTOF on how decision makers set their targets for acceptable performance, and hence evaluate and respond to performance outcomes. In particular, we propose that venture capital (VC) investors are a key party who may substantially influence what managers pay attention to. First, we study under what conditions VC-backed firms focus more on peer relative to historical performance. While we know both components matter for performance evaluation, we know far less about which matters more when. Second, we examine under what conditions firms focus more on recent than distant performance when confronted with performance discrepancies. To date, scholars have assumed all companies are the same in terms of how much they weigh recent versus more distant past performance in their performance evaluations – we challenge this by proposing that key governance factors will shift the relative attention more to one over the other. Finally, we study how the strategic focus of VCs may impact what performance metric managers pay attention to and the type of strategic (re)action management initiates in case of performance discrepancies. Overall, this project will provide a better insight into how decision-makers such as entrepreneurs set targets for acceptable performance and will more accurately explain strategic firm conduct – most notably in a VC-backed context. VC’s importance to our overall economy cannot be underestimated: VC-backed companies employed roughly 10 million people in Europe in 2019 and VC has been shown to be a key accelerator for firm growth and innovation (Invest Europe, 2020; Lerner & Nanda, 2020; Rosenbusch et al., 2013). As an illustration, whereas only 0.5% of all companies receive VC, more than half of all publicly traded companies are VC-backed (Lerner & Nanda, 2020). Our research questions will be addressed through a combination of field data gathered from VCs, financial accounting and governance information from databases such as Orbis Global (Bureau Van Dijk), media and CEO/board turnover information from ProQuest Global Newsstream, innovation data from Patstat and the Community Innovation Surveys of Eurostat and VC fund focus data from the Thomson Reuters Eikon database. We strongly believe part of the strength of our proposal comes from the combination of direct access to unique field data (private forecasts are often not available for academic research) and more traditional databases available for academic research.