Innovation Risk and Human Capital in Seed and Early Stage Venture Capital Investments

Venture Capital Firms (VCFs) function as an important intermediary for the funding of New Technology-Based Firms. Within the last decade there has been a significant change in the global landscape of seed and early stage investing. This research explored what has changed in the investment environment and analyzed how VCFs learn about technology to support their decision-making processes and deal with informational asymmetries and the high level of uncertainty inherent to technology-based businesses. Primary data was collected from 17 interviews with VCFs active in Europe. Analytical procedures followed deductive – based on the framework of organizational learning proposed by Huber (1999) – and inductive approaches. VCFs from the sample acquire knowledge about technology mainly through the process of vicarious learning – by observing other funds’ behaviors, and by grafting – acquiring knowledge from personal networks and from their portfolio companies. Technology strategists are VCFs that possess a high level of specialized internal knowledge base within their funds. For these firms learning about technology has only marginal effects on informational asymmetry but can help reduce the level of innovation risk. Technology opportunists are VCFs not heavily affected by IA because they bridge their knowledge gap through a network of trusted peers.