Venture capital activism: how to foster sound investor-entrepreneur post-investment relationships?

Fast-growing startups are widely associated with the venture capital (VC) industry. Venture capital financing is for startups an impetus to, inter alia, investments in human capital, products, technologies, investigation of new markets, ipso facto, driving scale and growth. As of writing, the size of the VC industry and the current momentum for entrepreneurship sparked the interest of many academics and policy-makers. The literature is consequently well documented on several core topics related to VCs such as their decision-making process, their internal firm organization, their risk-return profile or the determinants of their exit strategies. Nevertheless, besides the mere provision of finance, the literature has identified a post-investment value-adding role for VCs; these investors provide "more than money" in the investor-entrepreneur relationship, and thus are considered as active investors. While the venture capitalist’s active role has been covered by a plethora of academics and practitioners, there is no convergence over the empirical evidence of the net impact of the venture capitalist’s involvement and the literature remains vague on what is the right degree of investor’s involvement. This highlights the need of opening the black box of VC involvement in portfolio companies and the urgency of understanding what degree of investor’s activism promotes an investor-entrepreneur relationship built for positive venture outcomes. This paper studies the investor-investee relationship with the governance mechanisms ruling this relationship and venture capital activism as key underlyings. The envisioned output of this paper is to provide entrepreneurs and venture capitalists with a set of actionable recommendations for the stimulation of sound investor-entrepreneur relationships. The study starts with a review of the literature. This review draws from the entrepreneurial finance and corporate governance literature, relevant industry reports, and from the analysis of publications made by key opinion leaders. This is done on the premise that an understanding of the challenges of both sides of the table and the governance mechanisms put in place to align their potentially diverging interests is a sine qua non for a robust analysis of the investor-entrepreneur relationship. The second part of the study builds on twenty-one interviews with European venture capitalists and entrepreneurs. Among the key results, this paper suggests that there is no ‘one-size-fits-all’ approach of venture capital activism and the effectiveness of the investor-investee relationship is not a function of the degree of involvement per se, but rather a function of the alignment on the expectations about the shape the investor-investee relationship will take at the post-investment stage. This paper ends with a proposal for investors and entrepreneurs. The proposal is an analytical tool (a four-quadrant matrix) providing the insights to find the sought after alignment on venture capital activism.