Entrepreneurial Firms and VC Ties
Michael Sacks
Assistant Professor of Organization and Management Michael Sacks authored a research paper on how social network ties between entrepreneurial firms and the venture capitalists that fund them evolve over time. Sacks conducted interviews with representatives of twenty-six venture capital firms and about one hundred entrepreneurs in the greater Chicago area.
Q: Can you describe how an entrepreneurial firm can benefit from network ties to the venture capitalists they approach?
A: The venture capitalists I interviewed responded that the number of firms with excellent ideas they’d like to fund range from 20:1 to 200:1 times the number of firms they can afford to fund. Because of this, venture capitalists rely on their contacts within specific industries to help them decide whom to fund.
Q: Once the funding decision is made, what happens to this relationship?
A: Venture capital firms must simultaneously develop strong working relationships with the firms they fund, while also trying to maintain dispassionate adherence to a rigid set of benchmarks established as guidelines for the firms’ success. This careful balance is critical in helping advance the entrepreneurial product to ultimate success.
Q: Once the entrepreneurial firm looks toward an exit strategy, how does the venture capitalist relate to the firm?
A: The entrepreneurial firm should be profitable and prepared to either sell to a larger company or to go public in the near future. The venture capital firm, now satisfied that the benchmarks have been met, is free to develop strong ties in order to maximize the sale value of the firm or its IPO price.—Myra A. Thomas