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'Venture Capital for the Future - Implications of Founding Visions in the Venture Capital Setting'


Ph.D. Dissertation by Miriam Garvi, Jönköping International Business School

Chapter One: The Theme of this Research (pp. 3-22)


First Scene: The Assignment
The play opens in a large office. The walls are white; there is a huge window at one end letting in bright sunlight. A couple of bookcases are surprisingly empty. Two young women are sitting at their desks at the window, glancing through their calendars. There is a soft knock on the door; RAT-A-TAT. The two women turn around as a middle-aged man enters the room, greets them and takes a seat in the empty chair by the door...
THE PROFESSOR: … So, welcome both of you to our Business School. I think it would be good for you to start with a research project. We try to get our Ph.D. Students enrolled in a project as soon as possible. It’s like a form of research apprenticeship. (The two women are listening intently, nodding). Now I’m not really sure what your research interests are. (Turning to one of the women) I understand you’re into marketing?
FIRST WOMAN: Yes. Well, I haven’t really decided yet. Marketing or management, I have a background in both.
THE PROFESSOR: Anyway, I’ve had a project in mind for some time now. I was thinking that maybe one of you would like to be involved! You see, I know a guy who teamed up with other successful business founders to launch a regional venture capital firm. There is a lot of innovation happening in that Region. And now a group of quite prominent people in our Region has taken a similar initiative. There may just be a different business logic here that could be worth exploring. (Pausing, then addressing both women) What do you think? Does it sound interesting?
FIRST WOMAN (In a hesitant voice): Eh… I don’t know. It doesn’t really sound like my area…
THE PROFESSOR (Addressing the second woman): And how about you?
THE RESEARCH APPRENTICE (eagerly): I think it sounds exciting! I’d like to be involved! I don’t have that much to do at the moment, either, besides taking a few classes. 
THE PROFESSOR: Good. Maybe you could start then by writing down a couple of pages on venture capital and how you would picture this project. I think we can find some funding for it here at the Business School. Then we can have a meeting and discuss how to get the project started. (Takes his leave and exits the room).
(The first woman leaves the room.)
THE RESEARCH APPRENTICE (Addressing the audience): What did I just get myself into? What is venture capital, anyway? Well, he’s this great professor, if he thinks it’s important then it must be! (Distressed) What am I going to write about? What did he say the project should focus on? I’d better get down to the library right away; there must be some literature that can give me a clearer idea of what I’ve got myself into…

The emergence of a research theme
Research may start with the most naïve of questions, the one you would not venture to pose in academic circles for fear of publicly exposing your ignorance. For me, it started with a question that was immediately quelled by my eagerness to get started; “What is venture capital?” My feelings of inadequacy in being unfamiliar with the term sparked a search that might never have come about had I been dished out an answer.
From this confessional tale (cf. Van Maanen 1988) it might seem as though this dissertation was a product of happenstance. I assure you, it is not. Just as there are various ways of conducting research, there are various ways in which a research theme will come about. Seeing research as a process of life development, Judi Marshall contends that “...people study topics that are relevant to them. (…) This personal involvement is not a burden, a source of unwanted bias; rather it  provides the energy for research and heightens my potential as a sense-maker.” (1992:281). Somewhere along the line, something triggers one’s commitment that finds its strength in one’s personal mosaic of background, personality, and aspirations, influencing what phenomena to study and what questions to explore. In an interview commenting her book ‘Men and Women of the Corporation’, Rosabeth Moss Kanter explains how as a researcher she would not “…want to do anything that doesn’t make a contribution to improving the world.” (in Puffer 2004:97-98). My motivation for finding a way through the quagmire has very much been the desire of making a contribution to more than my own awareness and understanding. This original seed has been a continuous source of motivation that has helped me overcome the frustrations and discouragements that are so intrinsically linked with any research process (see Eisner & Powell 2002).
As a freshly-enrolled Ph.D. Candidate I had no particular preference as to what kind of business activities I wanted to study. But, in the back of my mind, there were questions calling for investigation, questions that would surface from time to time prompting for answers. As a young child, I moved with my family to the African continent because my parents were carrying a vision of what they wanted to do with their lives. And so the realisation of that vision – involving the move to three different countries, with new languages to learn and new cultures to explore – was a notable part of my childhood. Enrolling as a student at the Gothenburg School of Economics and Commercial Law, I was taught the golden maxim of profit-maximisation. But this did not fit with the harsh realities of sustenance and survival I had left behind in Africa. Nor did the fact that some people do not choose to walk the mainstream way seem worthy of much theoretical consideration.
My senior year at university involved writing a master’s thesis together with a fellow student. Finding a research topic was a dilemma until our supervisor-to-be planted the idea of looking into telework among Scandinavians abroad. Location theories that we came across in economic geography about why people moved from one place to another and what determined their choices emphasised the maximisation of the individual’s own utility (cf. Etzioni 1988). But this did not reflect the complexity of motives revealed in our investigation. Interviewing sixty Scandinavians who had moved to the Mediterranean Sun Belt, we found a commonality in that they had (re-)arranged their work lives so as to improve their quality of life (Garvi & Kullenberg 2000). Behind the move from Scandinavia to Italy, France or Spain lay a vision of what these people desired in life and wanted to accomplish (cf. Senge 1990/2006). What the vision was about was as diverse as the people we encountered.
Arriving in Jönköping, the very first research work I undertook as a Ph.D. Candidate was a small-scale project together with a colleague. Intrigued by young people’s rising ambitions to create new companies and their visions of growth, we interviewed ten entrepreneurs at the Business Incubator connected to Jönköping International Business School (JIBS). What we found was a mixture of visions of grandeur and quality of life, sometimes combined with unrealistic implementation – what Barbara Bird and Candida Brush (2003) would call ‘naïve entrepreneuring’. Clearly, having grand visions was one thing – putting them into practice quite another. And here we saw that the ability to realise a vision and involve other people in this process varied greatly among the individuals we met.
As I embarked on the research project that was to become the bulk of this dissertation, I realised that the effectiveness of a model depends on what one wants to achieve. It made little sense for me to try to understand what the people I encountered were looking to accomplish, unless I tried to grasp what it was that they wanted to do – unless I included their motives and visions. And so my encounters with people in the venture capital setting were guided by the desire to understand what it was that they intended to accomplish.
What transpires in the sketch of my research journey is the room for volition, for the opportunity to make choices and decisions. Two people – in identical or similar circumstances – can have entirely different visions of what they want to accomplish depending on differing perceptions of reality and dispositions. I thus see a vision as reflecting the intended purpose of what we want to achieve, which may or may not coincide with how things actually are. It holds the rationale for what others may see as straggly but that to you makes perfect sense. And therein lies its beauty; a vision can entail a strong commitment to a cause, sparking the will towards new accomplishments (see Levin 2000).
Let us start this journey, therefore, as I started mine – with impatient curiosity as to what people might envision when they embark on something new. Imagine, for a second, that you had the opportunity to talk with Karl-Oskar and Kristina only moments before they set out on their voyage to America, in the hope of a new future. What did they – and their fellow boat passengers – envisage as they took that bold step to change their lives? Did they share the same dream, the same ambitions? Or were they simply united in their escape from misery and their hopes for something better? Though the literary world of Vilhelm Moberg bears little resemblance to the realm of venture capital, these questions that help us make sense of human initiative still linger through time and space. 

In the wake of venture capital
Is access to capital what makes the subtle difference between success and failure? The ‘power of money’, ‘money talks’, ‘cash is king’ – various idioms reflect the view that the access to financial resources is a powerful facilitator. Adding the epithet of ‘venture’ directs one’s thoughts towards a specific kind of capital that involves chance, risk, or danger (Longman 1984). As I turned my attention toward the on-going debate on venture capital, I became concerned with what it would mean for the founder of a business, who had started his or her enterprise with a notion of who and what it was for, to become affiliated with a partner taking an ownership stake in the business.
Let me put these reflections in their proper context by dwelling briefly on the background surrounding the early stages of my research. In late 1999, Sweden and much of the industrialised world was living the ‘IT bubble’. As the valuations of stock in computer technology companies – and in particular anything related to the Internet and e-commerce – reached astonishing levels and reports flowed in of individuals turning millionaires almost overnight, there seemed to be no shortage of money. For many of the young entrepreneurs at the business incubator connected to JIBS, any business idea in e-commerce was expected to bring on a flow of venture capital, taking the new venture on an exciting ride to the heart of the capital’s booming IT district. My impression at the time was that venture capital was almost everyone’s desire, as a magic wand for what many people seemed to be dreaming of – namely fame and fortune.
Many of the dreams and ambitions encountered in 1999-2000 appear naïve and unrealistic with hindsight. But they echoed also in the media, such as in this article raising the challenge; “If you want to get rich, be an engineer!” and providing the recipe for making new millionaires:
How do you become rich? Well, you get yourself a proper education. Preferably within an area that is somehow related to information technology. Then you continue with research or at least developing some kind of speciality within that area. After that, you found a company around your speciality together with a few research colleagues and many venture capitalists. A few years later, you sell it all for a couple of billion kronor.
Though the article was written on an ironic note, the marvel at a new era where wealth was suddenly within the reach of anyone who was brave enough to set up his or her own venture was tangible.
“Never before have so many been willing to invest so much in new and unlisted companies” trumpeted a headline in the business magazine Veckans Affärer in the summer of 2000. Announcing that more than 50% of the total risk capital amounting to 170 billion SEK was available for new investments, venture capital was now a global phenomenon with capital flowing in from oversees at an astonishing pace. “The phenomenon is global. In the U.S., with an estimate of two thirds of all the risk capital world-wide, as much funds have been pumped in during the last two years as in the preceding twenty.” 
I was one of the many people who read reportages such as the one above with increasing attention, as I followed two groups of individuals who had recently involved themselves with the provision of venture capital. Stories of successful investments proliferated. One case which received its fair amount of publicity was the acquisition in May 2000 of Altitun, a laser technology company, by the American corporation ADC Telecommunications. The deal was reportedly worth 8 billion SEK. The company had only existed for three years, and with equity shares worth well over 500 million SEK each for its founders, the press had a field day. In the climate surrounding the millennium, ‘growth’ was the buzz word. However, it was not gradual, long-term growth that was confirmed through such stories as Altitun, but the astonishing pace at which financial value could be created. At the annual event organised by the Swedish Venture Capital Association (SVCA) in March 2001, the Altitun story was the highlight of the programme. Listening to the co-founder and CEO of the company as well as one of the venture capitalists having made the ‘lucky’ investment, I wondered at how an ever-accelerating growth pace was the management fashion. Rapid growth meant rapid changes, such as the arrival of new employees or new contracts. But rapid growth could also prove challenging when an acquired entity was to be incorporated into an existing organisation in order to expand its resource base. The potential challenges of this fashion were not, however, the topic of the day.
Meanwhile, in my fieldwork I was encountering several people who were questioning the sustainability of an idea when profitability was not part of the equation. A brochure distributed in 2000 by Connect Sweden, a network organisation for entrepreneurs, subtitled ‘How You as a growth entrepreneur handle investors’, gave the following cautionary advice: “Perhaps you should decline when an investor offers 10 million kronor for 30 per cent, and instead accept the offer of another who is willing to venture merely 5 million kronor, but who will be building value in the company in a much better way.” (2000:20). In another report published by Connect Sweden in the following year, nine IT entrepreneurs having received venture capital in 1999-2000 were interviewed by students Niclas Qvist and Henrik Saläng. They found that the financiers in question – venture capitalists and business angels alike – focused on rapid increases in investment value through short-term measures. For lack of a long-term or at least a medium-term perspective, these actors could hardly be reconciled with the image of investors who were patient enough to await the due course of development of a fledgling venture. The lack of experience of these venture capitalists – some of which were only just starting out – was also brought to attention. “The thought that these venture capital firms and business angels who made their investments in the good times didn’t really have control of their own operations is just as fascinating as it is scary.” (Qvist & Saläng 2001:39). The moral of these stories was for entrepreneurs to choose their investors with care.
By 2001, rapid growth had become risky business. In the spring of 2000, several e-commerce ventures filed for bankruptcy. By February 2003, Altitun’s assets had been auctioned off, marking the end of an existence of little more than five years. The fact that many of these ventures were backed by well-known industrial or financial profiles fuelled concerns that risk capital, or venture capital, was perhaps not as serious nor as competent as it had been depicted to be. When the value of IT stock plummeted, it seemed that risk capital lost some of its favour with the media. In the search for explanations, investors behind those ventures that had failed were not exempt from blame, raising the question of whether they should, in fact, have ‘known better’. Amidst accusations of incompetence and poor judgement, venture capital now appeared to be a problem.
In February 2004, the Swedish Agency for Economic and Regional Growth (Nutek) published a report with the following observation by Per Åhlström, a publicist and consultant:
Venture capital companies often assert that there is no shortage of risk capital, there is only a lack of capable entrepreneurs with good ideas. That’s just another way of saying that they have a hard time finding investment objects that correspond with their requirements. But many entrepreneurs are for their part not particularly pleased with their affiliation with venture capitalists. They’re afraid of losing control of their business, they feel (often rightly so) that the venture capitalists’ conditions are unreasonable or that their offers are unacceptable. Many business owners bear witness to the fact that most venture capitalists demand unreasonably rapid growth and the possibility to exit after too short a time, often only a couple of years. (Åhlström 2004:57).
The image conveyed here was not that of a harmonious partnership where venture capitalists were welcomed as ‘knights in shining armour’ and entrepreneurs were valued for their creative ingenuity. Instead, it highlighted conflicting, possibly irreconcilable, perspectives between two parties with little reason to trust one another. In this context, venture capital emerged as intriguing, triggering my purpose of elaborating the phenomenon. 

The influence of venture capital
Venture capitalists have been credited with the development of dynamic regions such as Route 128 in Boston and Silicon Valley in California, and with the emergence of new industries such as computers and biotechnology (Bygrave & Timmons 1992; Hambrecht 1984). It is not uncommon to view venture capital as a vital and necessary element for a dynamic socio-economic landscape, one which is characterised by growth and renewal (cf. Braunerhjelm 1999). In 2001, Paul Gompers and Josh Lerner concluded; “No matter how we look at the numbers, venture capital clearly serves as an important source for economic development, wealth and job creation, and innovation.” (:83). Venture capital can create a much-needed space for ideas and initiatives to flourish where the road towards fruition is far from straightforward.
Fuelled by national statistics (such as quarterly reports on venture capital published by Nutek in Sweden), one debate on the venture capital phenomenon focuses on the availability of funds for investment in unlisted companies, and in particular of funds directed towards the earlier life stages of a venture. Implicit here is the long-held tenet that securing venture capital is a key to the success of a new venture (cf. Waluszewski & Wedin 2005). However, the role of venture capital in the emergence of investment ‘bubbles’ (e.g. Sahlman & Stevenson 1987) is an indicator of the fact that venture capital in itself is no guarantee to success. As Vance Fried and Robert Hisrich so poignantly observe, “The VC can be either a constructive force, an impotent one, or even a destructive force in the company.” (1995:102).

Venture capitalists as valuable partners for fledglings
Venture capitalists are typically associated with the development of firms in need of capital in order to launch a project, grow, expand, or venture into new lines of business. This provides the basis for a business model that relies on the growth of invested capital that can spring from such a development process (enabling the ‘recycling’ of funds into new affiliates, e.g. Braunerhjelm 1999; Isaksson 2006; Zider 1998). Venture capitalists are also associated with ‘more than just money’, accounting for the venture epithet (see Bygrave & Timmons 1992). In this context, it is common to refer to active investing (e.g. Hellmann & Puri 2000), signalling that venture capital brings an involvement beyond the passive holding of an investment – though the level of involvement may vary depending on the ‘choice’ of the venture capitalist in question (see Elango, Fried, Hisrich & Polonchek 1995) and on the particulars of the investment situation (see Fredriksen 2003).
In a world of unpredictability, the venture capitalist is often applauded for displaying a more patient outlook than the average investor, simply because the venture capitalist, just as the business founder, will reap the benefits of the investment only after a particular outcome is successfully reached (cf. Bygrave & Timmons 1992). One can readily envisage how this investment in money and in time may be a valuable recourse for business founders, entrepreneurs, and innovators in need of resources in order for their product or service to reach its market, where other avenues of financing such as bank loans are inaccessible (e.g. Wasserman 1988). In particular, their networks can be valuable resources for any founder or entrepreneur in need of financial, commercial or technology-based contacts to bring the venture to life (e.g. Rickne 2000; Powell et al. 2002), and their knowledge and experience of business development (Sapienza & De Clercq 2000) may serve to check those risks which are easily disregarded by a founder blinded by an enthusiastic belief in his or her idea (e.g. Amit, Glosten & Muller 1990; Gompers & Lerner 2001). In many cases, the endorsement by a high profile venture capitalist will boost the reputation of a start-up, by giving credibility to an actor with no track-record (e.g. Hsu 2004). Some will conclude that venture capitalists are ‘serious and responsible partners’, becoming actively involved with an affiliate in those situations and circumstances where this is called for, such as in the face of a public offering or a crisis; leaving considerable leeway as to the daily operations of the company (see Fredriksen 2003). It is therefore not surprising that venture capitalists are generally held in high esteem as vital elements of an innovation system (Eliasson & Eliasson 1996) and as ‘intelligent financiers’ who specialise in a particular kind of knowledge (cf. Amit, Brander & Zott 1998; Cable & Shane 1997; Sapienza & De Clercq 2000).

Implications of venture capital affiliation
Venture capitalists are known to influence a number of issues which have a bearing on the strategic orientation of their affiliates (see Hellmann & Puri 2000; Hsu 2006; Rosenstein 1988; Sweeting 1991). Control is ensured through concentrated equity positions and various governance mechanisms which provide ownership and economic rights (see Sahlman 1990; Jain & Kini 1995). The board of the affiliate is a frequently employed arena for interaction (Rosenstein 1988; Rosenstein, Bruno, Bygrave & Taylor 1993; Gabrielsson & Huse 2002; Gabrielsson 2003), where venture capitalists act out strategic (i.e. acting as a financier, business consultant, and sounding board), interpersonal (i.e. acting as friend/confidant and coach/mentor), and operational (i.e. being a source of industry and professional contacts, and a managerial recruiter) roles (Sapienza, Amason & Manigart 1994). The venture capitalist enjoys an influential position in a broad array of matters which will shape the development of a venture.
Informal involvement is a notable ingredient of a venture capital process (see Tyebjee & Bruno 1984), where the interpersonal role of venture capitalists in providing e.g. moral support becomes particularly visible (see Fried & Hisrich 1995). Interactions with ‘professional venture capitalists’ who bring their own ideas about what is strategically relevant or desirable shape the venture even before a formal relationship has been established (Willquist 2001). Elements of social exchange, such as perceived fairness (e.g. Sapienza & Korsgaard 1996), communication and commitment play in on the development of the venture, as aspects conducive to a climate of trust and cooperation (see De Clercq & Fried 2005; cf. Harrison & Dibben 1997). This is particularly delicate considering the dual role of an ‘insider’ (e.g. as a strategic resource) and an outsider (as an external owner looking to protect its own interests which may or may not coincide with those of the affiliate) that is taken on by the venture capitalist in its relationship with the affiliate (Fredriksen 1997). Furthermore, as illustrated by a recent article entitled the ‘Entrepreneur’s Guide to the Venture Capital Galaxy’, such a relationship involves dynamic roles as it progresses through various phases (De Clercq, Fried, Lehtonen & Sapienza 2006).
From the receiving end, venture capital involves relinquishing control over a number of issues which serve to define the identity of what is created. In particular, it may engender a deeper conflict as to the vision for one’s business, in terms of what people want and what they seek to achieve. The process that is initiated and intensified with venture capital affiliation often leads to the departure of a founder, by own accord or by replacement (see Hellmann & Puri 2002). Fundamental differences with respect to divergent motives and time perspectives (Florida & Kenney 1988) and the kind of innovation that is fostered (Perry 1988) may lead to costs in terms of the loss of motivation and creative ability which seem as detrimental to the development of a new venture as the financial costs incurred by a conflict (cf. Higashide & Birley 2002). When such a partnership compromises with core ideas and fundamental values, this inevitably raises concerns as to how rewarding or fulfilling venture capital affiliation may be on the human as well as the strategic level.
The multiple dimensions that are affected by venture capital investment imply that venture capital is a complex matter in both strategic and human terms.  This brings the question of who is providing the venture capital to the forefront. Sanford Ehrlich and his colleagues conclude:
…an overzealous founder may find that the long-term costs far exceed the short-term benefits if there is a mismatch in expectations between the relevant parties. Who the entrepreneur gets his/her money from is just as important as the amount of capital obtained initially. (Ehrlich, Noble, Moore & Weaver 1994:145).
Research that focuses on the individuals behind venture capital provision can thus contribute to a better a priori understanding of the implications of venture capital affiliation, both in strategic and in human terms. 

Inconsistencies of a phenomenon
The influence of the venture capital phenomenon is reflected in research, where venture capital has emerged as an academic field of enquiry since the 1980’s, gaining ground in the 1990’s and attracting growing interest from various disciplines (see Fried & Hisrich 1988; Barry 1994). As Vance Fried and Robert Hisrich note, “Given the importance of venture capital financing to economic development as well as venture creation, it is not surprising that venture capital has emerged as a topic of more interest and research effort.” (1988:15). In this sense, the emergence of venture capital as a field for research is associated with the recognition of its importance for economic development and venture creation (see Gorman & Sahlman 1989). In the editorial of the first issue of Venture Capital, a specialised journal in the field, Colin Mason and Richard Harrison refer to ‘a broad consensus of opinion’ recognising the importance of entrepreneurial activity for economic development and the role of venture capital in shaping the socio-economic landscape; “…there is now growing appreciation of the key role of venture capital in innovation, job creation, economic growth and industrial renewal in a wide range of geographical contexts.” (1999:1).
The debate that surrounded venture capital in 1999-2001 contrasted the view of venture capital as an ideal solution for business development with that of the venture capitalist as an irresponsible speculator of other people’s money. And although the heterogeneity of those providing venture capital was increasingly acknowledged, venture capitalists typically came across in the research literature as a homogeneous group of actors with similar goals and motivations. Such inconsistencies set the scene for further investigation. 
Tensions between venture and capital
One inconsistency of the venture capital phenomenon concerns the tension between venture and capital, between venture capital as an instrument for business development and venture capital as an instrument for capital gains. As Rosenstein and his colleagues summarise the debate: “At one end of the spectrum, venture capitalists incubate start-ups and nurture hatchlings, while at the other extreme, so-called “vulture” capitalists feed on fledgling companies.” (1993:99). In a sense, this becomes a question of whether and to what extent venture capital is beneficial for other implicated parties than the capital owners. Evidence on resource misallocation (Amit et al. 1990; Florida & Kenney 1988), investment bubbles (see Sahlman & Stevenson 1987) or precipitated initial public offerings (Florida & Kenney 1988; cf. Gompers 1996) point towards ‘vulture’ capitalism. In the context of high-tech firms, recent evidence has suggested that the influence of venture capitalists on the affairs of the affiliate is mainly limited to a financial perspective (see Eliasson & Eliasson 1996; Rickne 2000), which may also be indicative of the dominance of capital over its venture epithet.
Literature on informal venture capital suggests that private investors tend to be more highly motivated by the development of the firm as a reward in itself than formal actors (Osnabrugge 1998 in Sapienza & De Clercq 2000) – also referred to as ‘psychic income’. On the other hand, there is research that suggests that the overall goal of a (formal) venture capital firm may differ, depending on whether the capital owners are investors who seek direct monetary returns on investment, or corporate owners who have other strategic goals for instance (Elango et al. 1995). The latter may be looking to venture capitalist investments as a way of obtaining a window on new technology (cf. Maula 2001). In his case study, Lee Tom Perry (1988) differentiates between three different types of venture capitalists, viz. those who ultimately seek high financial returns, those who are looking to build a company for IPO and those who are driven by the development of new technology. Analogically, he finds that different kinds of entrepreneurs are driven by different motives, and that it is desirable to obtain compatible matches between the objectives of the venture capitalist and those of the entrepreneur. Though the three ideal-type matches suggested by the study may very well need further refinement, Perry highlights that venture capitalists may pursue different ends, leading to differences in behaviour and affecting the relationship with the affiliate on a variety of levels. 
Reviewing the emergence and evolution of venture capital in the U.S., Bygrave and Timmons (1992) contrast a ‘classic’ form of venture capital, which earned its name as patient and risk-taking, with a ‘merchant’ form. Entitled ‘Venture Capital at the Crossroads’, their book raised the concern that ‘classic’ venture development with a focus on early-stage ventures and active involvement was giving way to a form of venture capital which had more in common with investment banking, with financial skills being applied to create capital gains with minimal risks through investments in later, more mature stages. The discussion by Bygrave and Timmons brought attention to whether the primordial focus of venture capital was shifting from the fostering of new firms to the management of investor funds, revealing inherent tensions that may lead to maximising capital gains in the short-term at the expense of the well-fare of a company in the longer-term. Bygrave and Timmons’ concerns appear all the more important as they give rise to questions that relate to ‘Who are we here for?’, or to use the terminology of Peter Blau and Richard Scott (1962), to the ‘prime beneficiary’ of venture capital. The contrast between classic and merchant venture capital, between the image of incubating and nurturing new ventures and that of financial trading, opens up for critical reflections as to the intended beneficiary(-ies) of venture capital.
Venture capital affiliation gives access to a resource pool in terms of e.g. financial, human and social capital. A relevant question is, of course, whether the application of this resource pool is actually beneficial for the venture. Much of the debate on venture capital has been dominated by the issue of value-added (see Mason & Harrison 1999; Manigart & Sapienza 2000) and the circumstances that may cause venture capitalists to add more value (see Willquist 2003). Even so, the value creation effect – i.e. the link between added value in terms of management competence and performance – has yet to be explained (e.g. Barry 1994; Braunerhjelm 1999; Olofsson 1996). However, the complexity of venture capital provision in terms of different approaches to and involvement in the relationship with affiliates makes it difficult to reach any conclusive answer on the matter (Mason & Harrison 1999). And this leads us to the need for incorporating heterogeneity into research designs in the venture capital domain, as a way of problematising issues of intended beneficiary, intended purpose, and of critically reflecting on various implications that are entailed as venture capitalists position themselves somewhere along e.g. classic-merchant or nurturer-vulture spectra. 
Heterogeneity lost in abstraction
Venture capital research tends to convey the idea of a homogenous population of firms, offering little variation on the actor level. It is dominated by studies on the aggregate level, consistent with the aim of providing policy-makers with insights into how best to focus their efforts and initiatives in order to stimulate the provision and efficiency of venture capital (see Callahan & Muegge 2003). From a financial perspective, the venture capitalist is viewed as an intermediary between institutional pools of financing and private equity with high growth prospects (e.g. Gompers & Lerner 1999). This brings attention to the potential macroeconomic benefits resulting from a financial intermediary selecting, monitoring and adding value to the most promising ventures (see Manigart & Sapienza 2000). In most studies, the venture capitalist has become synonymous with the limited partnership organisation. As organised pools of institutional money, limited partnerships are powerful actors on the venture capital arena, spreading across national borders. This organisational form for venture capital provision emerged in the U.S. in the eighties as large pools of capital from pension funds were made available for investment, following the 1979 amendment to the ‘prudent man rule’. It came to outrival an earlier form, the small business investment company (SBIC) that proliferated in the sixties (see Bygrave & Timmons 1992; Gompers & Lerner 1996).
It is common to distinguish between a formal and an informal segment of the capital market (e.g. Braunerhjelm 1999; Isaksson 2006; Karaömerlioglu & Jacobsson 2000; Wright & Robbie 1999), where venture capital firms and private financiers or business angels complement each other in the financing of small businesses (see Harrison & Mason 2000). This is mirrored in the literature on venture capital by two streams of research which emerged as the role of informal investors in financing early-stage ventures gained recognition (see Wetzel 1983).  The increasing tendency of private investors to operate in syndicates, alliances and networks is, however, blurring the boundary between formal and informal (see Mason & Harrison 1999).
Despite an increasing body of research on venture capital, incorporating heterogeneity into research designs is challenging. In the formal stream of venture capital research, one particular form of venture capital is emphasised, whilst other remain in the shadows. As Christopher Barry contends, “There are various types of venture capital organizations. This paper and most of the literature tends to stress the limited partnership form, but there are others.” (1994:12). In the mid eighties, Jeffrey Timmons and William Bygrave noted the discrepancy between a homogeneous view of the venture capital ‘industry’ and the empirical diversity in terms of strategy and organisation among venture capital actors.
The venture capital industry is generally perceived as an agglomeration of homogeneous firms, whereas, in fact, they are quite heterogeneous. Differing objectives, strategies, resources, locations, associations, and organizational forms result in a great deal of variety within the venture-capital industry. This diversity needs to be understood and incorporated into well-focused research designs if studies of the venture-capital industry are to be most productive. (1986:163)
A few years earlier, a seminal paper by Tyzoon Tyebjee and Albert Bruno (1984) structuring the venture capitalist investment activity into a sequential model had cautioned against the design of models that would be too rigid to reflect the heterogeneity of venture capital practices. In the same vein, Fried and Hisrich noted a few years later that research tended to look for similarities among actors, omitting differences that might prove particularly interesting to explore: “…research designs have generally ignored differences between venture capital firms and also between investees.” (1988:22).
Such observations give rise to concerns that potentially important dimensions are lost in abstraction. Turning to literature on small business finance in general, the poor reflection of heterogeneity in research designs appears to be part of a wider problem. As Hans Landström concludes:
In many cases, researchers have considered the actors of both the supply and the demand sides as homogenous; the venture capitalists have been considered as a homogeneous group of financiers, the group ‘small firms’ has been considered to be homogeneous, etc. The increase in knowledge indicates that this is not the case – both the supply and the demand side consist of many different actors… (2003:18).
Reflecting on heterogeneity in the domain of entrepreneurship studies, Per Davidsson writes that:
…I firmly believe that a theory or a research design that assumes that economic aggregates (such as an industry, or demand) are made up of the sum of identical micro-level entities, is unlikely to be a fruitful starting point for understanding or researching the entrepreneurship phenomenon. For example, individuals are heterogeneous with respect to experience, skills and cognitive capacity… and also have heterogeneous motivations… (…) Importantly, they will also have different views on what constitutes a successful or acceptable outcome… (2004:22).
Davidsson’s reflections remind us that business activities are carried out by individuals, and challenge us to go beyond sums of ‘identical micro-level entities’, as we move closer to the realities of the human actors. Identifying two distinct logics of ‘empire builder’ and ‘temporary partner’ amongst Swedish providers of venture/risk capital, Christer Olofsson argues that in order to distinguish between them, a perspective that moves beyond ‘external signs’ of venture capital practices is called for.
… it is important to distinguish between various kinds of venture capital firms. For instance, external signs such as majority or minority ownership are not decisive in determining whether an investor should be considered to be a temporary partner or an empire builder. But ... it is only after an investor has made a number of investments that it is possible give an opinion on the nature of the business with some degree of certainty.  (1986:6).
In many ways, venture capital research has pursued a common avenue, where empirical studies with weak theoretical connections which have served to map out the phenomenon have been coupled with the testing of hypotheses derived from financial theory (with a particular preference for agency theory; see Arthurs & Busenitz 2003). Highlighting the paucity of theoretical perspectives, Fried and Hisrich suggested that venture capital research would benefit from concepts from other fields that would reflect the wider realms of influence on an affiliate:
…financial theory should not be the only theoretical basis for research. Venture capital plays an active role in the strategy, marketing, management and legal structure of the entrepreneurial firm. It is likely that concepts from all of these disciplines are relevant to the study of venture capital. (1988:26).
A decade later, this call was echoed in literature reviews by Mike Wright and Ken Robbie (1998), as well as Mason and Harrison (1999). Tensions between theoretical models, on the one hand, and empirical evidence, on the other, challenges research to focus on other aspects of the venture capital phenomenon that have hitherto remained in the dark. Since, theoretical perspectives from other domains (such as procedural justice, stewardship theory, social capital theory) have been applied in order to broaden horizons, making this field of research a ‘later adopter’ of lenses that are already in use in other domains of social studies. It is perhaps intriguing that venture capital research has hitherto taken a bystander role in promoting more innovative approaches, rather than actively incorporating a venturing element that is so strongly associated with the empirical phenomena of study. In the words of Barry, “Realistic treatments of the issues faced in venture capital research will require innovative approaches.” (1994:14). The challenge of incorporating heterogeneity into research on the venture capital phenomenon is still there for the taking, affecting the choice of methodology, the kind of venture capital firms that are the focus of study, and the role of theory. 

Addressing the ‘mystery’ of venture capital
Reflecting on inconsistencies of the venture capital phenomenon brings back questions of who and of why, of individual venture capital providers and their motivations for doing what they do. In a report that gives a face to several Swedish industrial corporations by narrating the story of its founders, Anders Johnson reflects on the apparent anonymity of Swedish business founders in the economic history literature. Though focusing on entrepreneurs rather than venture capitalists, an analogy may be drawn to ‘The mystery of venture capital’ as a phenomenon that is seldom given a face in the research literature. Venture capital is conveyed as an increasingly institutionalised industry, a global force that shapes the economic landscape (see Avnimelech, Kenney & Teubal 2003). In this sense, capital flows gain more attention than the individuals behind the particular initiatives, who are left lurking anonymously in the background. Despite a by now impressive body of research on venture capital, we know little about the motivations of those individuals who are behind and/or involved in particular venture capital initiatives. Venture capital narratives tend to be lost in abstraction as we move into the realm of academic research. As Noam Wasserman shows in his dissertation, the venture capitalist can be seen as an entrepreneur, opening up for interesting research questions as to what happens within the venture capital company itself and between those who are providing the service: “...past studies have treated VC firms as black boxes, neglecting to explore the organizational characteristics within the VC firms that might have important implications for VCs’ roles as financiers.” (2002:20).
As one effort to provide insight into the investor’s perspective, Gerald Benjamin and Joel Margulis (2000) establish a typology of business angels based on their differing interests and motivations for what they are doing. They quote American business angel Norman Brodsky explaining what captures his interest in the venture capital business:
For me, there’s nothing like it – the business of seeing a business rise up from nothing…. There’s just something unbelievably thrilling about seeing the growth, watching the numbers go up, getting the business to stand on its own… I can’t get enough of it. (…) …these deals offer me the opportunity to teach other people some of the things I’ve learned over the years and to share with them the excitement of bringing a new business into existence. (in Benjamin & Margulis 2000:101).
 An interview with another investor reveals that he finds other rewards in his involvement:
It seems to me people often cling to the impression that venture capital is interested only in making money. I don’t believe that’s true at all. I think that people who come into this kind of business perceive needs and have values. (…) The companies that have integrity, that have a product, that have meaning in them, are the ones that I think really matter. (…) I think the money will flow if the service is there. Making money is not the goal; profits and return become the score that gets chalked up after the goal has been reached. (in Benjamin & Margulis 2000:130).
Though relating to people in the ‘informal segment’ of the capital market, the examples above illustrate heterogeneous interests and motivations among its practitioners, with implications on the strategic and human levels.

The research purpose and its intended contribution
Against this background, there are dimensions of venture capital which, though increasingly recognised as potentially important for our understanding of the phenomenon, are not typically the focus of such studies. “Throughout the 20 years of organised research activity on the VC phenomenon, the least attention has been placed on the identity, motivation, and structure of the ones who make it happen.” (Seppä & Ratila 2002:4). Focusing on the mindsets and visions of the individuals behind a particular venture capital initiative – i.e. its founders – is a way of digging for rich descriptions that will help problematise and make sense of the venture capital phenomenon. Drawing attention to the faces and voices of venture capital can give further insights into the implications - both in strategic and human terms - of such affiliation.
Accordingly, the purpose of this dissertation is to elaborate on the venture capital phenomenon, by reflecting on particular venture capital initiatives and the implications of the visions for their founding.
This will involve a plunge into two contemporary venture capital initiatives in Sweden, focusing on the people behind these initiatives and their founding visions (chapters 3 to 6). It will also involve trying to understand why venture capital has come to enjoy such an applauded standing in business development by tracing the intended purpose of a pioneering initiative that emerged in post-WWII U.S.A. and that left a legacy that remains recognised today (chapter 7).
An in-depth analysis of the venture capital phenomenon – both in terms of particular initiatives and in terms of venture capital as originally intended (see chapter 7) – will contribute to our view of the phenomenon, by incorporating differences as well as similarities between actors (also in terms of motivation) and providing a nuanced view of a venture capitalist mindset. This will provide food for thought for business founders or entrepreneurs who are seeking venture capital affiliation, in terms of what may be appropriate for what they seek to accomplish (see Elango et al. 1995). Knowledge of different visions guiding such initiatives will also give room for reflecting on the socio-economic landscape that is being shaped for the future, as a ‘grounded critique’ of the venture capital phenomenon. 

Chapter Two

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