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Title: Normatieve druk en escalation of commitment binnen Venture Capital syndicaten. Een onderzoek naar de uitwerking van normatieve druk binnen Venture Capital syndicaten op escalation of commitment.
Authors: Weert, Krista van-Bergmans
Keywords: Venture Capital
Escalation of commitment
Normative pressure
Issue Date: 25-Sep-2017
Publisher: Open Universiteit Nederland
Abstract: This study focuses on the influence of normative pressure within Venture Capital syndicates that lead organizational decision makers to avoid terminating unsuccessful investments, so called ‘escalation of commitment’ or ‘throwing good money after bad’. Venture Capital organizations tend to invest in syndicate form, because of the risk involved in investing in start-up companies. Investing in syndicate form has many advantages, like improving the performance of Venture Capital organizations and increasing the survival chances of the portfolio companies they have invested in. To be invited to join a syndicate, a Venture Capital organization must have a good network, a good reputation and must be reliable. The reputation and reliability of a Venture Capital organization determine the status of a Venture Capital organization. This status plays a role in choosing future syndicate partners. Status can be determined by measuring the position of the organization within a broader network. The more central within the network, the higher the status. Within syndicates the different syndicate parties have to comply with formal and informal rules of engagement. Formal rules are sanctioned by formal contracts. Informal rules are sanctioned by the logic of social obligations. If the accepted informal rule is consistency and decisiveness, like ‘sticking to their guns’, decision makers may feel the pressure to continue investing even after they have received negative feedback. This is called normative pressure. Not all organizations experience the same amount of normative pressure. Some organizations are more sensitive to normative pressure than others, this depends on the status of the organization. The literature did not give a clear picture of the influence of normative pressure on escalation of commitment. Some scientists claimed that normative pressure has a positive effect on escalation of commitment, where others claimed there was no relationship at all. In the investigation on normative pressure and escalation of commitment, also the role of status was frequently involved. Which role status plays was not clear either. Some studies stated that high status organizations are more sensitive to normative pressure, while other studies stated that high status organizations are less sensitive to normative pressure. This conclusive and contradicting statements suggested further research. A qualitative research was conducted in which 3 Venture Capital syndicates consisting of 8 Venture Capital organizations were investigated. Each Venture Capital syndicate invested in a portfolio company and the presence of escalation of commitment was determined. Professionals of these Venture Capital organizations were interviewed on the subject of normative pressure. Finally the network of these 8 Venture Capital organizations was mapped out to determine the status of each Venture Capital organization. A positive relationship between normative pressure and escalation of commitment was found. The majority of the Venture Capital organizations stated that there are informal norms like ‘sticking to their guns’ which lead to escalation of commitment. The role of status with regard to this relationship remained unclear, because the organizations which were sensitive to normative pressure showed different levels in status.
Appears in Collections:MSc Management Science

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