Cognitive Biases in the Venture Capitalist – Entrepreneur Dyad: The Role of Entrepreneurs’ Experience in VCs’ Investment Decisions

Abstract

Venture capital is a critical source of funding and development of new ventures. The investment decision of venture capitalists (VCs) is a multi-stage assessment process where the entrepreneurs’ characteristics are the most important criteria to determine the decision to accept or to reject the proposal at the screening stage. At this stage, the decision-making of VCs is influenced by their subjective characteristics and their interactions with the entrepreneurs who share the same characteristics as theirs. How do the entrepreneurial experiences of both VCs and entrepreneurs interact and bias the evaluation? Several studies have tried to provide an answer to this still pending question. Research concurs in that entrepreneurial experience drives primarily the screening decisions of VCs. Yet, if many studies have shown that VCs are prone to cognitive biases in their evaluations, research focusing on the relationship between of those biases and entrepreneurial experience in the context of investment decision is scarce. VCs’ cognitive biases have been linked to the subjective characteristics of VCs. Most precisely, many studies have shown that a common bias among investors is the similarity-attraction bias such that VCs’ evaluations improve when VCs and entrepreneurs share the same characteristics. As a result, it is likely that entrepreneurial experience plays a significant role in explaining biases in investment decisions. Overall, research points out the importance of entrepreneurial experience of both VCs and entrepreneurs, their interactions and the cognitive biases shaped by their respective experiences in explaining the investment decisions of VCs at the screening stage.

Citation

Souakri, A. (2020), "Cognitive Biases in the Venture Capitalist – Entrepreneur Dyad: The Role of Entrepreneurs’ Experience in VCs’ Investment Decisions", Caputo, A. and Pellegrini, M.M. (Ed.) The Entrepreneurial Behaviour: Unveiling the cognitive and emotional aspect of entrepreneurship (Entrepreneurial Behaviour Series), Emerald Publishing Limited, Leeds, pp. 259-269. https://doi.org/10.1108/978-1-78973-507-920201017