Best Paper Award for Prof. Anu Wadhwa

ABSTRACT:

This study highlights how an actor’s reputation both enables and constrains its engagement in novel action that fall outside established business practices.

Our examination of the initial investment decisions of U.S. venture capital (VC) firms in the emerging “clean” energy sector shows that reputation has complex, non-linear effects on the likelihood to invest, the timing of first investment, and level of commitment to this new domain. We find that the effects of VC firm reputation on both the likelihood to invest and the timing of investment entry follow an inverted-U shape pattern, suggesting that the VC firms with medium reputation are more likely to invest in the emerging sector and tend to invest earlier than either their high or low reputation peers.

We also find a U-shaped relationship between VC firm reputation and level of commitment, suggesting that VCs with either low or high reputation commit a greater proportion of their portfolio to the emerging sector than medium reputation VCs.

Together, these findings shed light on the distinct strategies that firms with different reputation levels employ. The firms with medium level of reputation appear to devise an “early entry - low level of commitment” strategy, whereas the most reputable firms and those still in process of developing their reputation tend to engage in later but more significant commitment to the novel action.

Our study contributes to a more fine-grained understanding of the effects of reputation on novel action. It also identifies new theoretical mechanisms that may explain observed differences in VC firm strategies with regards to engagement in novel action, an issue of primary interest to entrepreneurship research.

Authors:

- Antoaneta P. Petkova, San Francisco State University

- Xin Yao, University of Colorado at Boulder

- Sanjay Jain, Santa Clara University

- Anu Wadhwa, EPFL