Strategizing at Leading Venture Capital Firms: of Planning, Opportunism and Deliberate Emergence

Long Range Planning 41 (2008) 345e366 http://www.elsevier.com/locate/lrp

Strategizing at Leading VentureCapital Firms: of Planning,Opportunism and DeliberateEmergence

Brian L. King

Venture capitalists are often lauded, as well as sought after, for their expertise asstrategists. How they influence the direction of the firms they invest in is well understood,but how they develop strategy for their own firms has received limited attention in theliterature. This study adopts a strategy as practice perspective and examines decisionmaking processes at leading venture capital firms in Boston and Silicon Valley. Three mainideas are advanced. First, that venture capitalists are ‘bifurcated strategists’, using planningfor their portfolio companies, while using emergent strategies on their own behalf. Second,that some leading firms use deliberately emergent strategies, a finding that is consistentwith other empirical studies of strategizing in turbulent environments. Finally, a dynamicmodel is proposed showing how these strategies are put into practice.� 2008 Elsevier Ltd. All rights reserved.

Venture capitalists have developed a powerful mythology based on

a series of spectacular successes . but how do these expert strategists

put their skills to work on their own behalf?

IntroductionThe venture capital industry has grown from a single firm in 1946 to a multi-billion dollar globalfinancial marketplace that offers attractive returns and has been shown to have an important impacton both innovation and economic growth.1 The field has developed a powerful mythology based ona series of spectacular successes, including Apple, Federal Express and Google. Venture capitalists

0024-6301/$ - see front matter � 2008 Elsevier Ltd. All rights reserved.

doi:10.1016/j.lrp.2008.03.006

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have been praised for their expertise in strategy by both the successful entrepreneurs that they havefunded and by the academics who have studied them.2 These accolades, however, are for the workthey do refining business plans and influencing the direction of the firms they invest in, known asportfolio companies. However the ways in which they develop strategies for their own firms is a dis-tinctly different process, which is less well understood and has received limited attention in the lit-erature. In essence, the question raised in this article is: How do these expert strategists strategize? -in other words, how do they put their skills to work on their own behalf?

The term venture capital is sometimes used as a synonym for private equity, meaning privatecapital invested in businesses outside the public equity markets; this is especially true in Europe.This study restricts its focus to studying partnerships that provide capital to young, high technologyventures. A recent international study by Seppa that examined the ‘strategy logic’ of venture capitalfirms noted that both geographic location and ownership structure have an important influence ontheir strategy.3 While venture capital can be provided by a variety of institutions, such as banks,corporate subsidiaries and government agencies, this study examines the dominant form foundin North America - the venture capital partnership.

Indeed, recent studies in finance have shown the industry to be heterogeneous. While classicalfinance theory - see Fama, for example - suggests that over time the performance of all firmswill tend towards the mean, newer research discerns that certain firms persistently show superiorreturns. Kaplan and Schoar found this when they examined top tier firms, and suggest this isnot only because of their enhanced positioning, but also because venture capitalists show ‘hetero-geneity in skill and quality.’4 The current article focuses on the strategy practices of leading firms,skills that may enhance their competitive advantage.

Understanding their strategizing is part of the recent ‘practice turn’ in strategy research that fo-cuses on processes and methods, originating with an article by Whittington in 1996.5 Venture cap-ital firms operate in a rapidly changing environment. In order to achieve success, firms look ata stream of business plans from entrepreneurs, typically examining a hundred proposals for everyone eventually selected for investment. Operating in fluctuating financial markets and raising funds,while simultaneously looking for attractive divestment opportunities for their present portfoliocompanies (either through a sale or an IPO), is challenging. Understanding their practices mayadd to our understanding of strategy in fast-changing environments.

venture capitalists are ’bifurcated strategists’, using carefully controlled

planning for their portfolio companies [but] more emergent strategies

on their own behalf

Findings based on the information gathered from public sources and confidential interviews withleading venture capitalists will be presented, and three main ideas advanced. First, that venturecapitalists can be called ‘bifurcated strategists’, as they take two distinct approaches to strategy:on the one hand they plan for their portfolio companies in a carefully controlled manner, whileon the other hand they use more emergent strategies on their own behalf, balancing their needto specialize with the advantages to be gained by remaining opportunistic. Second, this article sug-gests that some leading firms engage in formal processes that resemble deliberately emergent strat-egies. Third, a more dynamic version of this model, as observed in the turbulent environmentexperienced by these firms, will be presented.

Literature reviewThere are several perspectives on strategy that are helpful in understanding the issues faced by ven-ture capital firms. Porter’s analysis helps to explain firms’ behaviours: the venture capital industry

346 Strategizing at Leading Venture Capital Firms

has followed a life cycle where low barriers to entry and diseconomies of scale - as each transactionrequires careful attention - have produced a fragmented industry where firms are becoming morespecialized. Ghemawat and del Sol have made a similar observation about private equity firms, sug-gesting that these firms should develop specific resources, such as knowledge, and this is consistentwith Løwendahl’s work on strategy for professional firms, which emphasizes the importance of re-sources.6 The current study seeks to understand the processes by which this specialization occursand how valuable knowledge resources are acquired.

The rational planning systems popularised in the 1960s, when venture capital firms first came toprominence, are reflected in the methods they use for their portfolio companies. Sahlman noteshow staged investments - where additional capital is contributed only when key milestones havebeen achieved - ensure that business plans are followed. However, when venture capitalists strate-gize for their own firms, their rapidly changing environments preclude the use of such detailedplans. In fact, scholars have suggested that rational planning is not effective in such contexts, whichhave been variously described as hypercompetitive, high velocity or turbulent. This article adopts thelatter term, originally proposed by Emery and Trist, and used more recently by Grant. Classicalmanagement scholars have suggested approaches to deal with such environments; Daft, Sormunenand Parks studied environmental scanning as a mechanism executives use to understand change.Weick’s work on sensemaking is also pertinent for professionals seeking to adapt to their environ-ment. Finally March’s work is important here: he might characterize a venture capital firm’s strat-egy work with portfolio firms as exploitation, given that companies are generally funded only oncea clear plan is in place, while their own strategizing would be deemed exploration, as they constantlyseek to understand and adapt to their turbulent environments.7

Many authors, starting with D’Aveni, have specifically examined strategy in fast-changing envi-ronments. In Hypercompetition, he looked at industries in these contexts, noting the importance ofanticipating disruption and being able to exploit it. Eisenhardt carried out a series of such studies,first showing the importance of fast decision making, gathering data widely and paying careful at-tention to implementation in a study of the mini-computer industry. Her later work with Brownfocused on firms in unpredictable environments, finding the best approaches to strategizing to bepro-active, diverse, continuous and time-paced, where the needs of the business set a rhythm ofchange for the entire corporation.8 Other scholars suggest that incremental strategies, originallyproposed by Lindblom, are the most effective in these environments; Mintzberg coined the termemergent strategies to describe this approach. In his later work with Waters, he made a notable con-tribution towards helping to understand venture capital strategizing: that planning and emergentstrategies can be considered as two poles of a continuum, and that all strategies contain elementsof both; the discussion builds on this point.9 It is also important to distinguish emergence fromopportunism, as the latter term (used by some informants to describe the behaviour of certainfirms) can carry contentious overtones. The current article would define opportunism (as in theonline Merriam Webster dictionary) as ‘the art, policy or practice of taking advantage of opportunitiesor circumstances, often with little regard for principles or consequences’, rather than Williamson’s ‘self-interest seeking with guile.’ In fact, this article’s use of the term is closer to another Williamsonphrase e ‘simple self-interest seeking’ e because, while venture capitalists could use guile (which im-plies deceit and cheating), this tendency would be tempered by the fact that they work in a systemof recurrent transactions among highly networked players and, as Granovetter has suggested, theseactors are socially embedded, and those who engage in unfair or unethical behaviour risk exclusionfrom future deals.10 Mintzberg and Waters are clear that emergent strategies are ‘patterns in a streamof actions,’ where strategy is defined as consistency of behaviour, whether intended or not.11 There-fore, completely opportunistic behaviour results in random action, where no resultant pattern orcoherent shape of actions emerges. Mintzberg and Waters made another important contributionto understanding strategy under uncertainty in proposing the concept of deliberately emergent strat-egies, where management sets general boundaries and everyone operates within these parameters.Grant noted a similar concept, planned emergence, at work in his study of strategizing by oil majorsin a turbulent environment.

Long Range Planning, vol 41 2008 347

While many studies of venture capital firms examine how they help young firms and influencetheir strategies,12 fewer investigate how they set their own strategy. Some (starting with Tyebjee andBruno) study firm decision making and look to understand how venture capitalists evaluate thebusiness plan of a prospective portfolio company and decide whether or not to invest.13 Whilethis is an important issue, since these investments directly impact the future direction of thefirm, it does not address how such plans are chosen for evaluation or how longer-term decisionsare made. Indeed, Zacharakis and Shepherd noted recently that most research has focused onhow venture capital firms identify promising portfolio companies, to the exclusion of consideringhow they make decisions about their own firms. Only two authors have looked at this explicitly.Twenty years ago Robinson undertook a survey of mid-level firms to understand how venture cap-ital firms set their own strategy, and confirmed (consistent with Porter) that the industry hasevolved towards much more specialized strategies. However, he found their strategies were charac-terized by ‘uncertainty and reaction’ and no insight was offered as to the underlying causality. Morerecent work by Seppa notes that the strategies of venture capital firms differ according to their geo-graphic location and ownership structure. This study re-examines the venture capital strategy ques-tion in light of what is now known about the segmentation of the industry, and focuses specificallyon practices in the top tier firms which, as Kaplan and Schoar note, persistently show superior re-turns.14 Our research question can be stated more formally as:

How do leading American venture capital firms, reputed as expert strategists for their work withyoung companies, develop a strategy for their own organizations?

Research design and methodsBecause of the nature of this industry, collecting field data from venture capitalists presents a chal-lenge: they are notoriously difficult to connect with and can be secretive about their methods. Theresearch was composed of two distinct phases. An exploratory phase consisted chiefly of inter-views with 12 venture capitalists, primarily in Canada, supplemented by secondary sourceaccounts describing the decision making processes found in the industry. This generated a prelim-inary proposition: that while venture capitalists use planning for their portfolio companies, theyuse more opportunistic or emergent strategies for their own firms. In order to develop a morethorough understanding of their strategy processes, a second round of 11 interviews took placewith a carefully selected sample of more experienced informants, partners in Boston and SiliconValley, where the most prominent and, by reputation, most sophisticated firms practice. Usinga new semi-structured questionnaire, these interviews were analysed for statements that informedon the preliminary proposition as well as on other themes that emerged. (See Appendix A formore detail on methods.)

FindingsAfter first looking at venture capitalists’ traditional forte - their involvement in portfolio compa-nies’ strategizing - much of this section will examine the firms’ own many strategy processes, payingparticular attention to how they conduct research to discover high potential market segments. Next,an important and related question is examined: can a firm change strategies? Finally, a process usedby some leading firms to evolve their strategy will be discussed, for which the author introduces thedescriptive term ‘themed investing’.

Portfolio company strategy workWhile not the primary focus of this enquiry, our interviewed informants were asked about theirinvolvement with strategy for their portfolio companies. Largely consistent with prior research,all of them described being keenly aware of the strategies of their portfolio companies, and also in-volved in helping make them, but only where they perceived the companies need their assistance. As


background, when venture capitalist firms invest in a portfolio company, they are investing in a con-cept and a management team. They contribute capital in stages called financing rounds (typicallyevery 6 to 18 months) which allows the portfolio company to advance to its next critical milestoneand, if successful, to be assessed at a higher monetary valuation. In this way adherence to the busi-ness plan is monitored, as the venture capitalists retain the option to contribute (or not) more cap-ital when funds are next needed. Interestingly, informants in this study spoke more aboutmilestones than they did about plans, as is illustrated by this comment from informant 8:

Milestones are critically important, particularly, part of the whole concept of staged investing,which is really what venture capital is built upon, it’s the staged money in and around expectedmilestones. . We reward or punish the company around meeting those milestones. So ourcompanies are always looking at two dimensions, one is the various expected rounds of financingout into the future, and second, on an annual basis, where they are going.

Another veteran industry practitioner stated: ‘People in this business are either milestone guys orplanning guys. I’m a milestone guy.’ This attitude of being more interested in milestones andless involved with the details of the plans was not entirely consistent with prior studies, which sug-gest that venture capitalists are heavily involved with planning.

informants spoke more about milestones [for their portfolio

companies] than they did about plans

One possible explanation would be that some portfolio companies might require more strategiz-ing assistance from their venture capital firms than others. This idea can be seen in a commentmade by informant 3, who was with a top firm and then helped start a lower tier firm:

The problem is, when you’re starting off as a fund, you’re not on the short list of those A+management teams. All the top tier guys are on their 5th fund, 6th fund. They are on the shortlist. . You look at the B+ management teams and therefore [to] make those companies reallysuccessful, you end up spending more time with them.

Top tier venture capital firms attract start-up companies that have high quality managementteams capable of both strategizing and executing their plans, thus requiring less involvementfrom the venture capital firm in these areas and allowing them to focus on milestones. Since theinformants in this study are all partners in top firms, they are less involved in planning thanmany other venture capitalists.

Venture capital firm strategizingStrategizing for their own firm is a challenge for venture capitalists who operate in a turbulent envi-ronment. They face a constant barrage of information, and are exposed to new ideas when beingpitched proposals by prospective entrepreneurs, listening to issues their current portfolio companiesface or talking to other venture capitalists. They need to sort through this information and pick whichmarket segments to focus on. Interviews showed that, for their own firms, venture capitalists considerthe term strategy as referring to the acquisition of capital (how and from whom to procure it, andwhen they will receive it) as well as to decisions about deploying it (how, where and how muchthey will spend or invest). Much more time is spent on the latter activity, because identifying and com-mitting support to high potential companies is complex and time-consuming.

As might be expected, the interviews showed that venture capital firms are heterogeneous when itcomes to strategy. The first sample of smaller (primarily Canadian) firms tended to be more


opportunistic and the larger, more established American firms in the second sample were morestrategic. One response from informant 9, an industry veteran, touched somewhat cynically onthe varied approaches:

I think that some venture firms probably don’t have any strategy. and I think some do and someexpress it. Some have strategies and don’t talk about them, and it’s hard to figure it out. And somehave no strategy and talk about it a lot.

The leading firms interviewed for this study all spent large amounts of time and resources onstrategy, as was clearly stated by informant 7:

We are among the more strategic but perhaps not the most strategic of venture firms. We devotea lot of time and energy to strategy.

This informant’s firm, like others, organizes off-site meetings for strategy discussions, engages informal research processes and deliberates carefully before they choose which markets to specializein. However, the informant continues:

Having said that, this is a business where you can have all the strategy you want and it’s all aboutthe companies that you run across and you find and you invest in. So, you know, a strategy pointsyou where to look, but it doesn’t dictate what you find, and it is sometimes no substitute for dumbluck.

Other informants made similar comments: that while strategies and strategizing are important, tobe successful in the industry requires seizing opportunities when they appear. Informant 9 de-scribed this:

By and large, they [venture firms] are all pretty forward looking. And if they have a strategy, spoken ornot articulated, it’s to be ahead of the curve. And some firms have much, much more highly developedstrategies. But I think that opportunism, as opposed to strategy, is more characteristic of the industry.

The goal of a venture capital firm is to generate high returns for their limited partners. As infor-mant 7 notes: ‘If you had no strategy and the numbers were great, they wouldn’t care; and why shouldthey?’ This was the position of an informant from the exploratory interviews, who maintained thathis firm did not need a strategy; after they articulate a proposal for the limited partners duringfundraising, they ‘just need to do good deals.’ This perspective suggests that it is not the firm’sdirection that matters, but rather being aware of and taking advantage of what is most promisingat any given moment - which translates to opportunism.15

‘we don’t need a strategy, we just need to do good deals’, which

translates to opportunism.

While informants were clear that choosing investments in a turbulent environment involves op-portunistic behaviour, the leading firms interviewed appreciate that their reputation and brand at-tract deals, and therefore they give careful consideration to each deal and how it fits into the biggerpicture. Leading venture capital firms have identifiable positions (niches) in the industry, whichsuggests that they may be using emergent strategies rather than opportunism. The next sectionwill look at actual processes and seek to understand how these emergent strategies are put intopractice.


Firm strategy processesThe interviews showed that strategizing at venture capital firms is a mix of both formal and in-formal processes. Three firms have four formal off-site meetings a year, many have just onemulti-day meeting, while one firm has discontinued off-sites, preferring to integrate strategic dis-cussions into their regular meetings. But all firms recognized the need to have meeting time de-voted to longer term direction and, most importantly, to identifying high potential investmentareas. On- or off-site meetings with strict agendas and restricted discussion topics keep the focuson the bigger picture; considerations of pending deals or current portfolio companies are notpermitted.

Part of a firm’s strategy agenda might be considered operational issues. These discussions includeensuring the availability of adequate cash to handle their portfolio companies’ financing needs; re-viewing whether investments are adequately diversified, which may mean discontinuing activities ina particular sector where too much capital is tied up; examining staffing needs to ensure adequatehuman resources are available given the demands of the next funding cycle; and deciding on thetiming for raising an additional fund.

A critical part of firms’ strategy processes deals with researching high potential investmentareas (as discussed in the next section). The other important element is documentation of theirstrategy for their investors and for their own internal needs. All firms update their limited part-ners on strategic developments at annual meetings, which create what some informants calleda ‘forcing function’ compelling them to document their strategies. While this may give the im-pression that they look at their strategies only periodically - blowing the dust off the file, so tospeak - on the contrary, the interviews showed that (consistent with Eisenhardt and Brown)strategizing is a continuous process at these firms, because of their turbulent environment andthe need for opportunism. Two typical informant observations were: ‘It’s all the time. It’s a con-tinuous dialogue’ (Informant 6); ‘At every partner’s meetings, things come up which, either explic-itly, implicitly or subliminally, impact upon the direction’ (Informant 9). Thus strategizing is bestcharacterized as an ongoing process, punctuated by the demands of limited partners to documentthe current thinking on firm direction.

Some firms have formal procedures - documenting due diligence on every transaction, creatinganalysis reports on the competition and writing white papers on technology evolution - and limitedpartner reports are a synthesis of these documents. Other firms are much more informal: partnersturn off their cell phones for a marathon weekend writing session to document their current think-ing for their limited partners. This article focuses on the more formal activities, as informants wereable to provide richer descriptions; most of these formal activities have informal counterparts atother firms. The most formal firms were those that took the ‘themed investing’ approach discussedin the last part of the findings.

Research functionsWhile the some of the strategy processes that informants described included resolving operationalissues and documenting their strategies for internal and external purposes, the primary emphasisfor these firms was determining which investment areas to target. For a venture capital firm, a largepart of strategizing is about specialization: where to develop expertise and reputation in the market.Most firms have formal research processes to determine this matter, which involves keeping a keeneye on the investments being made by competitors. Four firms described this as a highly formalprocess; they organize disciplined peer comparisons to examine those deals completed and thosemissed. As informant 8 reported:

We test our strategy against the data several times a year. So, in another words, we look atwhat’s going on competitively. We look at deals that we’ve seen and not done that havebeen successful and unsuccessful. We look at deals that we didn’t see, particularly the onesthat have been successful, and really test our strategy against what’s happening in themarketplace.


strategizing is about developing expertise and market reputation. Most

firms have formal research processes to keep a keen eye on

competitors’ investments

This type of benchmarking, also described by scholars (such as Daft et al) as environmentalscanning, is one of the processes used to figure out which areas show the most promise. Firmsalso organize formal research processes:

We recently, for example, tasked our associates with pulling together a list of billion-dollaropportunities, billion-dollar marketplaces - for us to sit down in groups and walk through thevarious pros and cons of focusing on those areas, kind of as a verbal way of creatinga prioritization filter. (Informant 10)

Firms involve outsiders in their research processes. CIO ‘roundtables’ are organized where exec-utives from various firms discuss information technology directions; scientific advisory boards arehosted, meeting quarterly to discuss recent research findings16; and key technologists are offered thechance to invest at an attractive rate in exchange for advisory services.

[We manage a].side fund; we invite people in who like being involved and start a process and, asa quid pro quo for us managing some of their money, they provide us with some of their time andresources to source deals, evaluate deals and in some cases have an ongoing board or advisory boardrelationship between us. These people we pick, we go after any expertise that we feel that we don’thave in areas we might be investing in. (Informant 10)

Some firms perform this type of research in a highly systematic way. They produce focusedresearch and written plans which may even include a schedule outlining when to start andstop investing in a particular segment. (This is the themed investing approach discussed laterin this section.)

Much has been written about the way venture capitalists create networks through shared deals: asHochberg et al discuss, this is a multi-faceted, multi-purpose activity which involves a firm buildingan important network of shared ties as well as creating a large Rolodex of significant contacts it canexploit. This article uses an expanded and more colloquial use of the word ‘networking’ to includenot only these shared ties, but also the larger base of contacts that venture capitalists create. At a fun-damental level, venture capitalists exploit their networks in order to find deals. Emerging opportu-nities are not to be found in the classified ads, but through a variety of contacts: accountants, patentagents, scientists and professors, among others. Here the informants described their use of networksas serving many purposes.

One illustration of this multi-faceted use of networking comes from correspondence with a foundingpartner of Kleiner Perkins Caufield & Byers, probably the world’s best known venture capital firm. Ina journalistic interview, partner John Doerr refers to Brook Byers as a ‘lab rat’. Byers is quoted as saying,‘Right after this meeting I’m going up to UCSF and visiting labs, prowling labs, that’s the best part of this job.Going to visit principal investigators in different labs. I’ve been doing this for more than 20 years.’17 Thisintriguing comment inspired an email asking, ‘Mr. Byers, why do you prowl labs?’, to which he replied:

I ‘prowl labs’ for many reasons, including: enjoying the intellectual stimulation, mapping the stateof science discovery in my field of life sciences, helping mentor researchers, building over timea macro sense of trends in science and potential clinical applications, applying what I learn toour day-to-day filtering of business plans and opportunities that come to KPCB, being a better


board member at our portfolio companies because I have a feeling for science, and meetingmotivated people who want to make a difference in the world through medical innovation.18

Additional aspects of networking surface here. It acts as another example of environmental scan-ning, helping to alleviate risk through providing a fuller understanding of the surrounding environ-ment. It also develops a tacit feeling for the way technology is evolving, akin to what Weick hascalled sensemaking. Table 1 shows excerpts both from Byers’ response and from informant inter-views that speak to these multiple motivations for venture capitalists to use their networks.

Identifying emerging opportunities through sensemaking is one of the most critical skills for ven-ture capitalists to develop - and the most difficult for firms to evaluate in choosing new partners. Onesenior partner noted that the best venture capitalists develop an instinct for making an investmentdecision even before markets emerge and technological solutions have crystallized: ‘No matter howformal your process is, if you can absolutely determine what the market for something is, you’re probablytoo late’ (Informant 9). How do successful venture capitalists develop this crucial sense that enablesthem to exploit the way that technology is evolving? As this quote implies, this is not an easy skillto formalize. However, some firms use the themed investing approach in trying to address this issue.

Benchmarking, formal research and networking (for deal finding, scanning and sensemaking) allhelp firms identify their target markets. These strategies involve specialization in order to build knowl-edge and to develop a brand. However, if firms continue to specialize - and get entrenched in a niche -how do they manage to react as the environment changes? The next section addresses this question.

Can a firm change its strategy?Sometimes a firm may want to change its strategy, perhaps seeking to deploy capital in a differentmarket segment: but this can be a difficult undertaking. Consistent with Porter, informants ex-pressed the view that the industry is moving towards specialization. Some of the reasons will beexamined here, along with a discussion as to how this can constrain a firm from moving to a seg-ment that might offer greater potential.

Industry veterans report that, prior to the 1980s, venture capital firms tended to be generalists,funding everything from airlines to semi-conductors, and it was uncommon for a firm to havea strategy, formal or informal, other than ‘to find high return opportunities,’ (Informant 4). How-ever, by the 1990s the industry had become much more specialized, with some firms targeting

Table 1. Networking Rationales by Venture Capitalists

VC Activity Find deals Assess and mitigate risk Define emerging areas

Illustrative

quotations:

Meeting motivated people who want to

make a difference in the world through

medical innovation. (Byers)

We are strategic in that we are

pro-active in developing networks of

relationships and we have a very

carefully planned out program of.relationships we think will be

important to the firm among other

investors, among VCs, among

investment bankers, among consultants

in the industry, key executives, etc.’

(Informant 7)

Applying what I learn to

our day-to-day filtering of

business plans and

opportunities. (Byers)

We end up closing the gap,

knowledge wise, with the

entrepreneur so we’re not

so much at a disadvantage.

(Informant 2)

Building over time a macro

sense of trends in science and

potential clinical applications.

(Byers)

But I think that to a great

extent, that ability to under-

stand where the vectors are

heading is abetted, enhanced,

may be even created by

your network. (Informant 9)

Motivation:

(per theory)

Exploiting a network Reduce information

asymmetry; Environ-

mental scanning

Sensemaking


specific market segments - medical devices, for example - and other, larger generalist firms becom-ing more ‘silo-ey’ (to quote informant 1), with individual partners focusing on specific market seg-ments. Today, strategy for a venture capital firm implies specializing in particular market segments:

More and more firms are becoming more and more specialized, as a response to competitivedynamics, which again is symptomatic of strategy, not just chasing [deals]. (Informant 5)

During the interviews, venture capitalists mentioned three reasons for such specializing: to in-crease their knowledge of a particular market by achieving multiple transactions (as suggested byGhemawat and del Sol); to build a brand in that particular market to attract more deals; and finally,to respond to the expectations of the limited partners. The first two of these are well understood: ina specific market segment, a firm will climb a learning curve, thus gaining valuable information thatcan be applied to future transactions. And even more important than knowledge is a firm’s repu-tation or brand within a certain entrepreneurial community, not only that of their prospective en-trepreneurs, but also of key advisors such as lawyers and accountants. As informant 3 notes: ‘Youwant be on the short list in companies’ minds that are looking for capital, when they start to seek cap-ital.’ However, in terms of motivations to specialize, all informants reported that one of the primarydrivers for specializing is that their limited partners, looking to understand their future directionand their market position relative to other firms, have come to expect it.

To give some background, limited partners provide a commitment to a venture capital fund overa ten-year period, with the larger part of the monies to be drawn down over the first five. The ven-ture capital firm requests funds periodically, but only when needed, so as to minimize the capital onhand and thereby maximize returns.19 While venture capitalists keep their limited partners in-formed about their investments, in order to maintain their limited liability status these partnerscan only act in an advisory capacity and cannot withhold committed funds. Each time they raisea fund, firms articulate a strategy in their offering memorandum that commits them to invest inspecific business sectors. In other words, if the limited partners read in the offering memorandumthat the firm strategy is to invest in early-stage biotechnology, they expect the bulk of the investedfunds to go to start-ups in that designated industry. There are no specific legal covenants that ac-tually mandate venture capitalists to invest the funds as per their offering memorandum, but de-viation from an articulated strategy would be at the firm’s own peril. Limited partners are notgenerally tolerant in such cases, especially if investments go poorly, and would commonly reactby electing not to participate in the next fund. As informant 7 points out:

It’s far more defensible to say, ‘‘We pursued this strategy and then it didn’t work out.’’. That’s atleast better than saying, ‘‘We told you one thing, we did something else, it didn’t work, now fund usagain.’’.That doesn’t play very well.

There is tension between venture capitalists and their limited partners

over portfolio diversification. but the golden rule generally applies:

those with the gold make the rules

The limited partners (and especially the institutional investors, such as pension funds) insist onthis specialization because they want to invest in many narrow specialized funds in order to builda diversified portfolio. This creates a tension between the limited partners and the venture capi-talists over the control of portfolio diversification. For example, a venture capitalist might like thediscretion to invest in the most promising medical companies, while the limited partners mightprefer to build a diversified portfolio and thus choose venture funds that invest in narrower targetmarkets: biotechnology, medical devices and radiology technologies. This is not unlike the


traditional finance question: should conglomerates diversify through various operating divisionsin different markets, or should their investors do so by buying a portfolio of stocks?20 Interviewinformants confirm that, in venture capital, the golden rule generally applies: those with the goldmake the rules - and the limited partners have considerable influence in deciding how firmsshould specialize. In sum, while there are clear reasons for the trend towards specialization, interms of economic benefits to the firm, another significant factor is in play: limited partnerscan insist on a narrow specialization that can diminish a venture capital firm’s ability to exploitnew opportunities.

This raises a fundamental question: how difficult is it for a venture capital firm to change strat-egies? Informants concur that such changes are not easy. As discussed, there are three constraints:knowledge, reputation and their limited partners. Knowledge is less of an issue; they can hire ex-pertise or bring in a new partner with specific experience. A bigger issue is their brand reputationin the entrepreneurial community, which can attract certain deals. Informant 5 describes the chal-lenge of shifting to a related market segment:

And so in [Segment A] we now have that kind of competitive dynamic that works in our favour andserves us as well, but in [Segment B] that’s not true for us. And . we are not on that shortlist of the go-to groups and to get there would require too much re-deployment of capital and a change in theconstruction of the personnel. For us that’s a very strategic decision as to what to do about [Segment B].

Similarly, the constraints of limited partners can be a big issue; venture capitalists operate ina changing environment, and firms must be careful not to get locked into a market segment that‘goes cold’ or ceases to provide interesting opportunities. Some informants reckon that limitedpartners are driving overspecialisation of venture capitalists to the point where they lose investmentopportunities.

I think that a significant amount of the money from the limited partner community pushes firmsinto defective strategic decisions and. encourages firms to specialize quite narrowly. (Informant 8)

This is especially true for younger venture capital firms that lack successful financial trackrecords, which can take a decade or more to develop.

Firms become successful in the industry because they’ve initially picked a less covered sector or anemerging sector. They end up being very successful and then when they go back to the limitedpartner market to raise their second or the third fund, most of those institutions say, ‘‘Were youreally successful at telecom? You have no experience anywhere else, so we’ll back you in thetelecom sector.’’ And unless the firm is robust enough to be able to make a transition to thosespecific industry sectors, odds are they won’t do as well. (Informant 3)

These younger firms face a paradox: their greatest concern is to maintain a strong relationshipwith their limited partners in order to be able to raise the next fund; as they are less established,their limited partners scrutinize their strategy closely, which in turn constrains their opportunisticabilities. At the same time, because they lack deal flow relative to the more established firms, theyare under pressure to accept deals that are not exactly suitable or that do not entirely fit their statedstrategy, and therefore may act in more opportunistic ways.

one reason the largest, most successful firms make exceptional returns

is because of their ability to change strategy to anticipate trends.


Indeed, informants from the largest, most successful firms reported that one reason their firms wereable to make exceptional returns is because of their ability to change strategy to anticipate trends:

The real problem with strategy in venture capital is your ability to change it. And I think most firms nowdo have a strategy because in order to raise money they have to and because they have to distinguishthemselves to limited partners. The fact is there are only 20 firms that actually can have a strategy.and those 20 firms are firms like ours, because we will get money regardless, right? (Informant 2)

Some of these firms, those with strong market power relative to their capital suppliers, use a pro-active approach - themed investing.

Themed investing observed at leading firms‘Themed investing’ is a term coined by this author to describe a particular strategy process that involvesdisciplined research to identify high potential market segments and setting a clear investment agendawith time-limited boundaries. Four of the informants reported using strategies that exemplified thismethod, each with differing degrees of formality, and other firms that take a similar approach wereidentified through published sources (illustrative quotations are presented in Appendix B).21

Four distinct common steps were observed in these firms using themed investing. The first iden-tified underlying forces that predict a technology or market evolution: ‘anticipating disruptions’, assuggested by D’Aveni. While no one can forecast precisely, Mermann suggests that study does allowfor some indication: ‘Just as we can predict with confidence that dinosaurs will not evolve by tomorrowout of today’s existing animal species, it is safe to predict that the African nation of Uganda will notemerge tomorrow as the largest chip producer in the world.’ The second step is to develop an under-standing of which companies might benefit most from this evolution; here, venture capitalists usebroad predictions to identify what Kogut and Kulatilaka define as platforms d ‘technological andorganizational investments that permit a firm to enter into a wide menu of future markets’ d to bettertarget their investments.22 Through studying the evolution of technology, the types of companiesthat will benefit and, more particularly, when this might occur, become more evident. Third, part-ners then write formal documents to clearly elaborate the specific type of investments they will seekand how long they anticipate this trend to last. This document is then approved so that the entirepartnership understands the rationale. Later, when a prospective deal is on the table, this documentfacilitates communication as well as buy-in to the proposed investment theme. Finally, once an in-vestment theme is approved, resources are assigned to researching, building a network, looking forprospective investments and gaining a reputation in the sector.

Themed investing is a pro-active approach to charting a firm’s future, reminiscent of Miles andSnow’s prospectors and suggested by Eisenhardt and Brown.23 Informant 11 described moving tothis model after being frustrated with what he described as the traditional approach to venture capital:

Every day a bunch of business plans arrived in the mail and we would sort through them. We weretotally reactive. We figured there just had to be a better way.

When asked why they used themed investing, informants expressed rationales similar to thosedescribing the forces driving specialization in the industry - developing specialized knowledgeand networks - but also mentioned four other reasons why the approach was valuable. The firsttwo have to do with timing; firstly since themes begin and end, they are better aligned with thepace of technological change, in contrast to specialization that tends to be tied to the career of a par-ticular partner in the firm. Secondly, investments can be timed so that they are made at the point ofmaximum opportunity. Dave Cowan’s blog entry (see Appendix B) discusses the timing of themedinvesting (which he calls ‘road maps’):

Perhaps the most difficult step of road map investing is knowing when to burn the map. Some of thebest and worst decisions we have made over the years centred around this question of when enough


was enough. We successfully exited biotech in 1993, big box retail in 1995, and etailing in 1998before those sectors busted, but on the flip side we failed to exit telecom in 1999.24

This signals the most intriguing element of themed investing and, according to our informants,the biggest challenge (which is reminiscent of Eisenhardt and Brown’s time-pacing): how to stopinvesting in a theme before the sector gets too crowded. A third reason mentioned was that themedinvestments promote the placing of multiple ‘bets’ on emerging trends - since venture capital firmsretain an option to invest in each round, they can then fund the most promising companies. Finally,themes create a framework for evaluating opportunities that enhances the ability of partners tomake well-reasoned decisions. This last point is highly valued by some firms. Since their dailywork is transactional and the opportunities show up sequentially, rather than all at once, focusingon themes helps to put opportunities into a discussion and an evaluation framework, and helps totemper opportunism by forcing venture capitalist firms to examine both the short- and long-termimplications of each investment.

While firms must remain opportunistic, the most successful firms are

those skilled at putting emergent strategies to work.

DiscussionThe findings show that leading firms continually strategize; they constantly monitor and evaluatewhere they are positioned, what other firms are doing, which sectors are the most promisingand how they can lay the groundwork for future success. While firms must remain opportunistic,there is more to their behaviour than that. This article suggests that perhaps these results can beseen in another light: that the most successful firms may be those more skilled at putting emergentstrategies to work. Venture capitalists often pursue opportunities in fields related to prior invest-ments; each investment leads to increased personal knowledge and at the same time serves to legit-imate the firm, in turn attracting more prospective investments in a particular sector. This isconsistent with Mintzberg’s argument that strategies can emerge in this manner from a series ofdecisions (even with limited intentions) based on an organizational tendency to build on pastsuccesses. If venture capitalists find a good deal in an unexpected niche - molecular biology, forexample - not only does this success strengthen their overall portfolio return, it also builds exper-tise, enabling them to better evaluate future deals in that sector. In turn, success with one companybuilds legitimacy within that sector, which then attracts more players from the same niche - othermolecular biologists, for example - to approach the firm.

After first noting the contrast with strategizing at their portfolio companies, this discussionexamines how venture capital firms put emergent strategies into action. It proposes that themedinvesting is a form of deliberately emergent strategy, with key boundaries being set and periodicallyadjusted. A general model is then presented that suggests how firms can take a pro-active approachto strategizing in a turbulent environment.

Bifurcated strategistsIn strategizing for their own firms, informants spoke of exploration: researching and targetingsegments where they can gain knowledge, make important contacts and then time multiple invest-ments to maximize opportunities. In so doing they demonstrate the use of emergent strategies, incontrast with the exploitation approach (as identified by March) which they use for their portfoliocompanies, where a business plan is used to focus on building value while moving towards the nextmilestone. Venture capitalists are unusual as business professionals in that they strategize in twodifferent contexts: as ‘owners’ of their portfolio companies and as ‘managers’ of their own firms.


This dual approach - using both planning and emergence - leads this author to introduce a newterm to describe them; ‘bifurcated strategists’. This behaviour does not reflect a double standardor hypocrisy; rather, it is an appropriate method for dealing with the two distinct contexts in whichthey operate.25 Is this bifurcated approach conscious? It appears so, as the informants recognizedthat charting the future of their firm requires remaining open to opportunism, in sharp contrastwith what they expect from their portfolio companies. Ultimately, they see these different processeslinked perhaps only by the output - which, in both cases, is strategy. To state this more formally:

Proposition: Venture capitalists use planning and fixed milestones for their portfolio companies,while using more emergent strategies for their own firms.

As already mentioned, Mintzberg and Waters suggest that planned and emergent strategies canbe seen as being situated at opposite poles of a continuum, while noting that most outcomes con-tain elements of both types of strategies: Figure 1 illustrates this notion for portfolio and venturecapital firms’ strategies.

Venture capital firms are heterogeneous; where they are on the continuum is based on their po-sition in the industry. Younger or poorer performing firms are constrained by their capital supplierswho insist they remain specialized; consequently, they tend to be more towards the left-hand,‘planned’ side of this continuum. Leading firms, because of their track records, can be more flexibleand, as discussed, also attract more seasoned ‘A+’ portfolio management teams that require less de-tailed plans; therefore these portfolio companies are able to shift towards the right-hand, moreemergent side of the continuum.

Deliberate emergenceIn examining how leading venture capital firms define their strategies - and especially those that usethemed investing - there appears to be a match between their approach to setting direction andwhat have been called ‘deliberately emergent’ strategies. Mintzberg and Waters originally proposedthis as one of a typology of possible forms of emergence, (also calling it an ‘umbrella strategy’)where management establishes an envelope for acceptable firm actions, but also deal withexceptions.

leading venture capital firms using themed investing spend time and

energy setting and periodically adjusting clear boundaries, then finding

deals that fall within these established criteria.

PORTFOLIO

COMPANY

STRATEGY

VENTURE

CAPITAL FIRM

STRATEGY

PLANNED EMERGENT

LEADING FIRMS CAN ALLOW FOR MORE EMERGENCE

Figure 1. The Strategy Continuum for Venture Capital Firms


In venture capital firms that use themed investing, the leadership (the partners) agree on clearboundaries for each investment theme. These firms are quite deliberate about how and whenthey adjust their boundaries, producing clear documents based on supporting research that are cri-tiqued by their partners and by outside experts. Boundaries are adjusted periodically, but not con-stantly, typically on a quarterly or half-yearly basis. Their time and energy resources are expended toset these boundaries and then to find deals that fall within the established criteria. Stated moreformally:

Proposition: Some leading venture capital firms use deliberately emergent strategies.

Exceptions frequently occur: when promising opportunities that fall outside the boundariesarise, the partners must decide whether or not to invest. To be considered, any deal must presentstrong potential economic returns, but should also offer follow-on potential. Venture capitalistsare keenly aware that transactions are path dependent, so each new deal must be examined tosee if it leads to a segment that offers high potential. These decisions are important, as partnersknow that ‘off the radar’ opportunities can sometimes evolve into new, promising investmentthemes.

While the focus of Mintzberg and Water’s original theoretical reflection was about managementsetting boundaries, this study shows that there are two additional elements at work in the use ofdeliberately emergent strategies: environmental constraints and the pro-active, time-paced ap-proach needed to work in a turbulent environment. These are examined in the next section.

A dynamic model of venture capital firm strategizingExamining how venture capital firms develop investment themes can offer insights into a more gen-eral model of how to put deliberately emergent strategies into action, one that takes into accounta changing environment through time-pacing and external constraints.

While the concept of an umbrella strategy suggests that the boundaries can be moved in responseto the surrounding context, in the venture capital context firms must be pro-active and adjust themboth in response to - and more importantly in anticipation of - the changing environment. Thismarket moves at a fast pace, and an apparently rich set of opportunities (for example, the telecommarket in 1999) can disappear overnight. Thus boundaries are re-examined every quarter, and aninvestment theme has a maximum life of a few years. However, the mechanism of adjusting bound-aries can be applied to slower-paced markets as well.

The other element of a model that becomes clear from examining how venture capital firmsstrategize is the critical role of external constraints. While firms might want to seek ‘blue ocean’or uncontested market spaces,26 the reality is that most firms face outside constraints that canonly be changed or negotiated over the long term. For a venture capital firm, these are the cov-enants negotiated with their limited partners over what segment they will invest in. However,there are analogies for other firms: governmental regulation and union labour contracts aretwo common constraints that must be respected and cannot be changed over the short term.Nonetheless, boundaries can be chosen that maximize opportunities while still respecting outsideconstraints.

Figure 2 illustrates the resulting dynamic model, showing how deliberate emergence was ob-served at these leading venture capital firms and suggesting how it can be applied more broadly.Here opportunities are shown evolving from nascent to real and shifting in a dynamic market.Firms periodically adjust their boundaries - in the case of the venture capital industry this isdone every few months. The figure shows a hypothetical firm at T2 that needs to decide whereits search resources should be applied. Its historic resource deployment path is indicated in grey,together with (above and below) the external constraints, and a possible future path illustrated,between the dotted lines of the revised boundaries. While constraints may evolve over a long periodas society changes and the firm undergoes major developments, in the context of adjusting theirdeliberate boundaries they must be considered as hard limits that have to be respected.


T T1 T2 T3

SEARCH RESOURCESEMERGING

HIGH-POTENTIAL VENTURES

CONSTRAINTS

CONSTRAINTS

MATURE

Figure 2. Dynamic Model of Deliberately Emergent Strategies

Like all firms, venture capitalists have finite resources - in this case, limited amounts of time -and using this form of strategizing helps them to make better use of their pro-active search process.While this type of formal strategizing takes time and discipline, those firms engaging in themed in-vesting find it worthwhile. Setting boundaries is a formal, deliberate action, the result of a processthat is an important reflection on the immediate past - the brand and the expertise of the venturecapital firm - but also on where they see opportunities developing in the future. For venture cap-italists, the boundaries of their deliberately emergent strategies are constantly being adjusted, withone eye on history, the other on opportunity.

the boundaries of their deliberately emergent strategies are constantly

being adjusted, with one eye on history, the other on opportunity.

Limitations and implications for future researchThere are important limitations to this study. The findings are based on a pilot study, public sourcematerials, correspondence and 11 highly prized interviews with venture capitalist partners, and tounderstand these processes in greater detail would require more thorough studies with greater ac-cess to these firms. This exploratory study examines a prominent segment of the global venture cap-ital business, but its scope is limited to American partnerships, and involves only a small andrelatively homogeneous sample of leading firms in Boston and Silicon Valley. Seppa’s work hasshown the diversity of organizational forms in venture capital, and while the practices of top tierfirms are clearly of interest, it is not clear how these findings inform on practices in the broaderventure capital and private equity industries.

While the discussion raises many important questions to be addressed by further research, threeare of particular interest to academics. How does this study inform on strategy practices in the


rest of the industry and the larger private equity market? Why do some firms choose to use moreformal processes while others choose not to? And finally, do such formal processes lead to greaterreturns?

Implications for practitionersThis study shows how context can influence strategy processes. Both portfolio companies and ven-ture capitalists face highly uncertain and challenging environments, but two distinct processes havedeveloped in the industry, as shown in Table 2.

While many managers may equate strategy with planning, seasoned venture capitalists do not.They use planning with key milestones when appropriate and plausible, but use other processes,with themes and boundaries, to develop strategy when facing less certain environments. While ven-ture capitalists may choose an appropriate strategy for a particular context, there is no guaranteethat this will lead to success. In both cases, not only does it matter how choices are made, butalso how the firm then executes them.

While business plans and staged investments have been well documented, the deliberately emer-gent process described here is less frequently observed in practice. Leading venture capital firms arecareful to adjust boundaries for their investment themes such that they are sufficiently broad toinclude multiple opportunities, yet suitably focused to develop a brand in a particular segmentthat can attract other transactions. Setting these boundaries keeps the firm’s focus beyond anyone transaction, and hence serves the important purpose of helping avoid strategic traps. Oneof the possible downfalls of an incremental strategy is that a business can make a series ofshort-term decisions and end up in a market with little potential, one where their firm-specificresources (as Ghemawat and del Sol note) will no longer have any value. Because conditions evolveso rapidly in the venture capital industry, this is especially true: so changing the boundaries be-comes a critical reflection process.

This approach to strategy is to some extent exclusive to the most powerful firms in the industry,who have highly sensitised management teams that constantly seek out and evaluate opportunities.At the same time, their success gives them comparatively strong bargaining power over their capitalsuppliers. However, the strategy model proposed here - to create and periodically adjust bound-aries, operating within external constraints - could be applied by managers in many industriesthat face high uncertainty.

Table 2. Two distinct strategy processes, based on context

Planned (Deliberate) Strategy Deliberately Emergent Strategy

Context Portfolio company: high risk, high growth

opportunity.

Venture capital firm: highly uncertain environ-

ment with strong competition.

Goals Build a valuable company (product or service). Build and liquidate a valuable portfolio in order

to generate high returns.

Funding Short-term, staged investment (6 to 18 months);

tied to milestone accomplishment.

Long-term funding cycle (3e7 years); investment

is committed with relatively few promises.

Processes (i) Meet key milestones of the business plan;

(ii) Continue to build value by executing against

the plan in order to raise the next round of

financing.

(i) Fundraise;

(ii) Scan environment for potential home run

investments;

(iii) Grow and then liquidate current

investments.

Strategy Execute and meet milestones of agreed-upon

business plan.

Build reputation and position (relative to other

firms) as a result of choosing good investments.


deliberately emergent strategies are where ‘preparation meets

opportunism’.

ConclusionThis article gives some insight into how venture capitalists act as bifurcated strategists: their port-folio companies are held to plans and key milestones, while more emergent approaches are takenwithin their own firms. It also reinforces the view of the industry as heterogeneous, with leadingfirms using their position to allow for more emergence at both levels. Some firms are more informalin their strategizing; the most formal may use themed investing for different reasons. In highly tur-bulent environments, while opportunism is present, disciplined processes can be observed in theleading firms, who: (i) conduct research that (ii) draws clear boundaries on an emerging sectorthat (iii) focus where search resources will be deployed while (iv) remaining opportunistic. To para-phrase a line often heard in the world of sport, this suggests that deliberately emergent strategies arewhere ‘preparation meets opportunism’.

AcknowledgementsThis article would not have come together without the advice and encouragement I received fromRobert David, Meg Graham, Ta€ıeb Hafsi, Kris Jacobs, Jan Jorgensen, Ann Langley, Renaud Legouxand Henry Mintzberg. Connie Bagley, Irv Grousbeck, Barry Reiter, Charles Sylvestre and DaveWitherow were also instrumental in connecting me to key practitioners. The patience and insightshown by editors Richard Whittington, Ludovic Cailluet, Charles Baden-Fuller and the two anon-ymous reviewers has been much appreciated.

Appendix A. MethodologyThe origins of this study lie in a consulting contract from a venture capital firm that neededhelp with their annual strategic planning. The preparation for this assignment included a liter-ature review on this subject, which showed relatively little prior research on how such firmsdetermined their own strategies. An exploratory study was undertaken in Spring 2005, priorto the consulting assignment, involving 12 semi-structured interviews (a convenience sample)arranged with venture capital partners (primarily in Canada) to discuss their approaches todeveloping strategy. On average, these informants had 15 years of experience, and the inter-views lasted 25 minutes. This research, along with findings by Hsu, showed the industry tobe heterogeneous, and suggested that processes at top firms might be of particular interest.As a result, a second, more thorough round of research was designed with more in-depth qual-itative interviews with (i) more experienced informants, and (ii) informants from the UnitedStates, since Canadian firms work in a distinct regulatory and legal environment. Professors atStanford and Harvard provided introductions to leading venture capitalists in Boston and Sil-icon Valley, which (after concerted follow-up efforts) resulted in 11 significant interviews (seeTable 3).

A questionnaire was designed to inform on the proposition advanced in the first phase of thestudy, but also included open-ended questions aimed at gathering details about how the strategizingactually occurs. After a preliminary discussion of the informant’s background (their entry into ven-ture capitalism and how they joined their particular firm), questions similar to those in Table 4were asked.

Prior to each interview, the informant’s background was researched and, where possible, ques-tions were tailored to enquire about specific events or investments in their firm’s history. All


Table 3. Phase 2 Research Interviews

Informant Firm Characteristics Informant Characteristics Interview

# Age of Firm

(Yrs)

Capital

(Millions)

Location Role in firm Years

as VC

Type &

Duration

1 >30 500 Silicon Valley Founder >30 T, 60

2 >30 100 Boston Managing Partner 25 F, 80

3 5 500 Boston Managing Partner 15 T, 75

4 >30 1,000 Silicon Valley Founder >30 T, 55

5 15 1,000 Boston Founder 20 T, 35

6 20 2,000 Silicon Valley Founder 20 T, 30

7 20 2,000 Silicon Valley Managing Partner 20 T, 30

8 >30 2,000 Boston Founder >30 T, 70

9 20 3,000 Silicon Valley Managing Partner 20 T, 30

10 20 800 Boston Managing Partner 20 T, 30

11 15 750 Boston Managing Partner 10 F, 30

Mean 25 1,250 25 49 min

Note: Interviews were held during December 2006 and January 2007. As the venture capital world is small, in order toprotect the identity of the informants, firm age and informant experience were rounded to the nearest 5, and indicatedif over 30. Capital indicates approximate capital under management. ‘T’ denotes telephone interview, ‘F’ denotes face-to-face.

interviews were taped and transcribed, and these documents were analysed using Atlas Ti qualita-tive analysis software to gather statements that informed on the original proposition as well as onany other themes that emerged. Charts were created showing the similarities and differences of theinformants, some of which were used to develop the findings presented in this article.

Table 4. Sample Interview Questions

Theme Questions

Processes � In your experience, how do venture capital firms set their strategy? How does this happen at your

firm? How has it evolved?

� Can you give me an example of a recent change in strategy by your firm? How was it conceived, and

by whom?

� Please describe any formal processes that you have for developing your firm’s strategy. How about

informal processes?

� How do you balance your firm strategy versus opportunities that present themselves that are ‘off-

track’?

Portfolio

Firms

� Please describe your involvement in portfolio firms’ strategies. What are your expectations?

� Have you been involved in portfolio companies that have experienced a major shift in strategy?

Please elaborate.

Strategy

Articulation

� How is your strategy articulated inside and outside the firm?

� Is it shared with non-partners at the firm? Limited partners? The broader public?

Limited

Partners

� Please speak about the importance of limited partners in developing a strategy.

� How do you develop the strategy pitch in your offering memorandum? What dialogue do you have

with limited partners about this topic?


Appendix B. Illustrative quotations regarding investment themes

Source

364

Illustrative Quotation or Excerpt

Informant 7
We are also strategic in looking at specific markets that we think will be attractive. We drive investment
theses within the firm and we work on those exact theses. You know, we try to map the market space

with the areas that we think there are market opportunities. But of course, in networking with people

you find deals that aren’t on your map and weren’t part of your thesis, and sometimes they are better

than what you are looking at and looking for.

Informant 2
All venture capital was essentially: you try to stir up a dealflow; and it was like looking down a canon;
the deal would be shot from the canon and you have to decide whether this was a good deal or not, not

knowing what the next five deals that were going to come in the door were going to look like, and not

having any way of getting perspective.Then we said, ‘What if we had some sort of a matrix or

a mosaic to put these things in, we could actually judge them better and we can actually then

pro-actively go out and find them?’

Informant 5
I do think that firms are reactive to particular deals at times but they tend to be reactive within a scope
or a framework that’s defined by their investment strategy. And so I do believe that most firms or

certainly any firms that have a reasonable degree of success and longevity have a strategy and a thought

and philosophy behind what they are trying to do.

Informant 8
The second part (of the meeting) would be the individual business plans presented by each partner,
where each partners says: ‘Here’s huge what’s going on my place; that’s why I want to stay in this place.’

‘I have done no deal for a year, here’s why, and I want to stay with this area.’ ‘I am happy I have done

no deals, but here what’s going to happen in the future.’ or ‘I have done no deals and that’s why I am

changing my focus to this new area.’

Teaching Case

Study

ACM had been deploying its $420-million third fund, using its ‘markets first’ strategy, an approach

that identified and sought to take advantage of discontinuities within the three industry segments it

targeted.. But the partners also believed that the pure opportunistic approach of many venture

firmsdwhere each general partner was often given wide leeway in determining which, and how

many, markets and business models to invest indcould cause the firm to lose sight of the portfolio as

a whole. Without a ‘markets first’ strategy, through which the entire firm agreed upon the markets of

interest before considering individual companies, the partners felt that firms would invest more on

the basis of the fashion of the moment than on business fundamentals or market analysis.27

Dave Cowan

Personal Blog

I think I developed the first formal road map at Bessemer. Back in 1992, fresh out of business school, I

joined Bessemer and proceeded to fall in love with every crappy pitch I heard (I recall that one of them

manufactured conference expo booths). Fortunately, before I did any damage, my bosses intervened,

suggesting that perhaps I should take a few months to Think Before I Fund. So I developed a compre-

hensive list of 38 potential investment sectors of high technology, and I spent the next 3 months whittling

it down to 5. .The result was a decision to focus on Data Communications .This road map enabled

me to focus my time very specifically on investment opportunities that matched my plan. I think that

entrepreneurs outside my road map appreciated the quick No, and entrepreneurs on my road map

appreciated the in-depth knowledge I brought to their businesses. Other Bessemer investors noticed how

much more pleasant my life was with a road map, and so they adopted and enhanced the methodology

themselves, with great results.28

Journalistic

Article

Azure Capital Partners performed extensive industry research: ‘In 2001 they began doing research

into open-source software, including interviews with 50 companies in the sector. The result was three

investments in 2002, when few investors saw the potential of giving away software for free.’29

Book Chapter
For example, Robert Kagle of Benchmark Capital commented: ‘About a year into Benchmark, at one
of our off-site meetings, we drew the conclusion that e-commerce was going to be really significant. So

we, in some ways, caught that wave early, and got out in front of it. I think we have something like 15

investments in e-commerce right now.’ Benchmark chose then to turn down many deals, notably

those in health-care, to focus on transactions that built the right knowledge and competencies.30

Strategizing at Leading Venture Capital Firms

References
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6. See Chapter 8 on industry evolution in M. E. Porter, Competitive Strategy: Techniques for Analyzing In-dustries and Competitors, Free Press, New York (1980); A five forces analysis of the venture capital industryby Porter is found on p. 64 of W. D. Bygrave and J. A. Timmons, Venture Capital at the Crossroads,Harvard Business School Press, Boston (1992); see also P. Ghemawat and P. del Sol, Commitment versusflexibility?, California Management Review 40(4), 3e42 (1998); B Løwendahl, Strategic Management ofProfessional Service Firms (3rd ed.), Copenhagen Business School Press (October 2005).

7. See W. A. Sahlman, The structure and governance of venture-capital organizations, Journal of FinancialEconomics 27(2), 473e521 (1990); W. A. Sahlman, Some Thoughts on Business Plans, Publication #89710, Harvard Business School Press, Boston (1996); R. A. D’Aveni and R. E. Gunther, introduce theterm hypercompetition in Hypercompetition: Managing the Dynamics of Strategic Maneuvering, The FreePress, New York (1994); K. M. Eisenhardt and S. L. Brown use the term high velocity in Competing onthe Edge: Strategy as Structured Chaos, Harvard Business School Press, Boston (1998); R. M. Grant usesthe descriptor turbulent in Strategic planning in a turbulent environment: Evidence from the oil majors,Strategic Management Journal 24(6), 491e517 (2003), although it was originally suggested by F. E. Emeryand E. L. Trist, The causal texture of organizational environments, Human Relations 18(1), 21e32 (1965);See also J. Daft, R. L. Sormunen and D. Parks, Chief executive scanning, environmental characteristics,and company performance: An empirical study, Strategic Management Journal 9(2), 123e139 (1988);K. E. Weick, The Social Psychology of Organizing (2nd ed.), Addison-Wesley Publishing Co., Reading,MA (1979); J. G. March, Exploration and exploitation in organizational learning, Organization Science2(1), 71e87 (1991).

8. R. A. D’Aveni with R. E. Gunther (1994) op. cit at Ref 7; K. M. Eisenhardt, Making fast strategic decisionsin high-velocity environments, Academy of Management Journal 32(3), 543e576 (1989); K. M. Eisenhardtand S. L. Brown (1998) op. cit at Ref 7.

9. See, for example I. Goll and A. M. A. Rasheed, Rational decision-making and firm performance:The moderating role of environment, Strategic Management Journal 18(7), 583e591 (1997).C. E. Lindblom, The science of muddling through, Public Administration Review 19(2), 79e88(1959); H. Mintzberg, Patterns in strategy formation, Management Science 24(9), 934e948 (1978);H. Mintzberg and J. A. Waters, Of strategies, deliberate and emergent, Strategic Management Journal6(3), 257e272 (1985).

10. See O. Williamson, The Economic Institutions of Capitalism: Firms, Markets, Relational Contracting, CollierMacmillan, NY, (1985) p. 47 and 49. M. Granovetter, Economic action and social structure e the problemof embeddedness, American Journal of Sociology 91(3), 481e510 (1985).


11. H. Mintzberg and J. A. Waters (1985) op. cit. at Ref 9 above p. 257.12. See, for example: V. H. Fried, G. D. Bruton and R. D. Hisrich (1998), op. cit. at Ref 2; also J. Rosenstein,

The board and strategy: Venture capital and high technology, Journal of Business Venturing 3, 159e170(1998); T. Hellmann and M. Puri, The interaction between product market and financing strategy: Therole of venture capital, Review of Financial Studies 13(4), 959e984 (2000).

13. See, for example T. T. Tyebjee and A. V. Bruno, A model of venture capital investment activity, Manage-ment Science 30(9), 1051e1066 (1984); I. C. Macmillan, L. Zemann and P. N. Subbanarasimha, Criteriadistinguishing successful from unsuccessful ventures in the venture screening process, Journal of BusinessVenturing 2(2), 123e137 (1987).

14. A. L. Zacharakis and D. A. Shepherd, The nature of information and overconfidence on venture capital-ists’ decision making, Journal of Business Venturing 16(4), 311e332 (2001); R. B. Robinson, Emergingstrategies in the venture capital industry, Journal of Business Venturing 2(1), 53e77, 73 (1987); M. Seppa(2000) op. cit. at Ref 3; S. Kaplan and A. Schoar (2005) op. cit. at Ref 4.

15. From a theoretical perspective, the argument to remain opportunistic is supported by A. Inkpen and N.Choudhury, The seeking of strategy where it is not: Towards a theory of strategy absence, StrategicManagement Journal 16(4), 313e323 (1995) who maintain that there are situations where strategy canbe absent, representing a case of ‘constructive ambiguity’.

16. See C. Tilghman and J. Denrell, Note on Organizational Learning in Venture Capital, Stanford GraduateSchool of Business Publishing, Case E-185, Stanford, CA (2004); F. Hardymon, J. Lerner and A. Leamon,Adams Capital Management: Fund IV, Case No. 803e143, Harvard Business School Publishing, Boston(2006).

17. From Q&A with Kleiner Perkins Caufield & Byers, San Jose Mercury News (14 November 2004).18. From personal correspondence with the author, reprinted with permission, quoted in its entirety.19. Discussed in P. A. Gompers and J. Lerner, The Venture Capital Cycle (2nd ed.), MIT Press, Cambridge,

MA (2004).20. C. A. Montgomery, Corporate diversification, Journal of Economic Perspectives 8(3), 163e178 (1994).21. Firms that use investment themes typically do not have just one per firm. They have several, usually

one per partner. For presentations to limited partners they ‘roll them up’ into larger, overarchingthemes.

22. R. A. D’Aveni with R. E. Gunther (1994), op. cit. at Ref 7; J. P. Murmann, Knowledge and CompetitiveAdvantage: The Co-Evolution of Firms, Technology and National Institutions, Cambridge University Press,Cambridge, NY 14 (2003); B. Kogut and N. Kulatilaka, Capabilities as real options, Organization Science12(6), 744e758, 749 (2001).

23. Prospectors are discussed in R. E. Miles and C. C. Snow, Organizations: New concepts for new forms,California Management Review 28(3), 62e73 (1986); Pro-active strategizing was observed by K. M.Eisenhardt and S. L. Brown (1998), op. cit. at Ref 7.

24. D. Cowan. Who has time for this? personal blog, Available from: http://whohastimeforthis.blogspot.com/2005/08/road-map-investing.html accessed February 12, 2007. Bessemer is generally recognized as a top tier firm.

25. As distinct from what a colleague jokingly called ‘schizophrenic strategists’, who might take two differentapproaches to strategy in identical contexts.

26. W. C. Kim and R. Mauborgne, Blue ocean strategy, Harvard Business Review 82(10), 76e84 (2004).27. F. Hardymon, J. Lerner and A. Leamon (2006), op. cit. at Ref 16.28. D. Cowan, (2005) op. cit. at Ref 24.29. West coast VCs, East coast rules, BusinessWeek p. 57 (3 April 2006).30. U. Gupta, Done Deals: Venture Capitalists Tell Their Stories, Harvard Business School Press, Boston 21

(2001).

BiographyBrian L. King managed two entrepreneurial ventures over a ten-year period after receiving his MBA from Stanford.

Facing middle life, rather than buying a red sports car, he enrolled at McGill University, where he is presently

completing his PhD in Management Strategy: his dissertation examines decision making in the venture capital

industry. Desautels Faculty of Management, McGill University, 1001 Sherbrooke St. West, Montreal, Qc, H3A 1G5

E-mail: [email protected]


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Strategizing at Leading Venture Capital Firms: of Planning, Opportunism and Deliberate Emergence

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