Effectuation and Venture Capitalists in Early-Stage Venture Investment Decisions

Abstract

This study investigates whether expert early-stage venture capitalists differ from novices in using effectuation decision making logics. The protocol analysis of Chinese venture capitalists shows that expert venture capitalists use effectuation to a significantly higher extent than novices. Specifically, expert venture capitalists are more likely than novices to emphasise execution, be sceptical about market data, prefer their own personal knowledge of the product, place emphasis on entrepreneurs’ resources and their value addition to the venture, and consider the business development cost and partnership. Expert venture capitalists are more aware of unexpected contingencies and are more likely to emphasise the importance of exploiting opportunities arising from the contingencies. The results of this study, however, provide a critical reflection on effectuation versus causation in the current literature. It is found that expert early-stage venture capitalists and novices do not differ in emphasizing the importance of entrepreneurs’ goal setting and competition. Contradictor to the hypothesis, expert early-stage venture capitalists place even more emphasis on expected return than novices do. These findings advance our understanding of how early stage venture capital investment decisions are made in an emerging economy.