Venture capital plays an important role in the entrepreneurial process
of providing financing and management support to young, rapidly growing
companies. While venture capital investment success stories such as
those of Microsoft, Apple and Google are well known, such "home runs"
are rather rare. Many investments provide little or no return so that
accurately evaluating the prospects of portfolio companies and
terminating further engagement in unsuccessful ventures in time is key
to the overall portfolio performance of venture capital firms. When
venture capitalists act rationally it should be expected that investment
terminations are neither systematically premature nor systematically
delayed. However, recent studies have discovered a systematic tendency
toward delayed project terminations of unsuccessful investments that
cannot be reconciled with a model of rational decision making. The
present study examines such delayed project terminations in the venture
capital industry and investigates whether escalation of commitment may
provide an appropriate perspective on the phenomenon and contribute to
its explanation. The study develops a comprehensive theoretical
framework that synthesizes and integrates several economically
irrational drivers of project escalation. A large scale survey among
European venture capitalists provides the basis for the empirical
analysis of the hypothesized relationships. The analysis yields valuable
new insights into the interaction of different escalation drivers, which
are much more intertwined than previously supposed by the literature,
and permits to suggest effective escalation countermeasures for
practice. The considerations and findings of the study are generalizable
beyond the venture capital context to a wide variety of settings in
which organizations routinely make sequential investment decisions.
