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Dean A. Shepherd and Andrew Zacharakis

This article examines the perception of potential family business leaders from a behavioral economics theory perspective. The findings suggest that high financial and behavioral sunk costs, as well as the requirement to 'earn' the right to lead the family business results in the future leader valuing the business more highly. Only financial sunk costs lowered the successors proclivity to take risky action after acquiring the business. Therefore founders should structure succession so that the future leader incurs both financial and behavioral sunk costs as well as hold the future leader to stringent performance requirements prior to the succession.
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Dean A. Shepherd and Andrew Zacharakis

Decision making is central to the ability of venture capitalists to predict those new ventures likely to succeed, yet most studies into their decision making use post-hoc methodologies that may generate biased results. People are poor at introspection and often suffer from recall and post-hoc rationalization biases among others. Therefore, researchers should consider using real-time methods that eliminate many of these biases. One such method is conjoint analysis. The purpose of this paper is to reveal the potential that conjoint analysis has to: (1) improve the validity of prior research into VCs’ decision making; and (2) act as a catalyst for adopting conceptual tools from other disciplines that can be tested empirically. Both these functions have the purpose of increasing one’s insight into the assessment policies of VCs.
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Andrew Zacharakis and Dean A. Shepherd

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Jennifer Walske, Mariarosa Scarlata and Andrew Zacharakis

This chapter examines the specific human capital held by founders of independent philanthropic venture capital (PhVC) and traditional venture capital (TVC) firms, using both qualitative and quantitative data. PhVC, like TVC, provides funding and value-added services to its investees. A key difference, though, is that TVC firms hold a primary objective of creating an economic return on their investments, while PhVC firms seek a combination of economic and social returns on their investments. Our findings show that the specific human capital of firm founders mirrors the differing TVC and PhVC firm objectives. Specifically, TVC firm founders have higher levels of venture capital, finance, and technology experience, which is considered more economically oriented, while PhVC firm founders have higher levels of government, social enterprise management and social startup experience, which is considered more socially focused.

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Andrew L. Zacharakis and Dean A. Shepherd

Venture capitalists (VCs) are considered experts in identifying high potential new ventures - gazelles. Thus, the VC decision process has received tremendous attention within the entrepreneurship literature. Yet, most studies on VC decision-making focus on which decision criteria are central to selecting gazelles. Although informative, the majority of these studies has neglected cognitive differences in how VCs make decisions. This is surprising considering the influence cognitive differences are likely to have on the exploitation of an opportunity as well as its influence on likely success. The current study investigates whether VCs are overconfident, as well as the factors surrounding the decision that lead to overconfidence. Overconfidence describes the tendency to overestimate the likely occurrence of a set of events. Overconfident people make probability judgments that are more extreme than they should, given the evidence and their knowledge. In the case of the new venture investment decision, overconfident VCs may overestimate the likelihood that a funded company will succeed. The results of the current study indicate that VCs are indeed overconfident (96% of the 51 participating VCs exhibited significant overconfidence) and that overconfidence negatively affects VC decision accuracy (the correlation between overconfidence and accuracy was 0.70). The level of overconfidence depended upon the amount of information, the type of information, and whether the VC strongly believes the venture will succeed or fail.
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Andrew L. Zacharakis, Jeffery S. McMullen and Dean A. Shepherd

This paper examines the influence of economic institutions upon venture capitalists' (VCs) decision policies. We conducted policy-capturing experiments on 119 VCs across three countries, representing distinct economic institutions (US, mature market economy; South Korea, emerging economy; and China, transitional economy). Results show that VCs in rules-based market economies (US) rely upon market information to a greater extent than VCs in emerging economies (Korea), and Chinese VCs (transitional economy) weight human capital factors more heavily than either US or Korean VCs. Findings suggest that, although professional institutions may dictate which information is included in VC decision policies, the extent to which that information emphasized is determined partly by the economic institution in which the decision-maker operates.