Optimal allocation of decision rights for value‐adding in venture capital

Abstract

Purpose The paper aims to evaluate decision‐making processes in venture capital (VC). Design/methodology/approach The paper develops a conceptual framework to analyse optimal allocation of decision rights in venture capital environments. How investors and investees seek mutual beneficial outcomes is also discussed. Findings The paper finds that entrepreneurial activities are normally associated with the design and production of goods in new emerging or niche markets. Hence, coordinated choices need to be made to bundle activities such as setting up internal infrastructure to produce and serve goods, purchasing quality inputs from suppliers and establishing contacts with long‐term customers. Delegation of authority by VC firms in these areas permits a new entrepreneurial initiative to be successfully managed including the coordination of various strategic decisions as a self‐reinforcing bundle. Originality/value The paper shows that investors may allocate significant decision rights to portfolio company managers because it can be more efficient and feasible to commit to such an action in some environments. A particular instance of such a delegation of decision rights is venture capital finance, which is the subject‐matter of the present study.

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