Picking winners or building them? Alliance, intellectual, and human capital as selection criteria in venture financing and performance of biotechnology startups

In the entrepreneurial setting, financial intermediaries such as venture capital firms (VCs) are perhaps the dominant source of selection shaping the environment within which new ventures evolve. VCs affect selection both by acting as a "scout" able to identify future potential and as a "coach" that can help realize it. Despite the large literature on the role of VCs in encouraging startups, it, is generally taken for granted that VCs are expert scouts and coaches, and so the ways in which VCs actually enhance startup performance are not well understood. In this study, we examine whether VCs' emphasize picking winners or building them by comparing the effects of startups' alliance, intellectual, and human capital characteristics on VCs decisions to finance them with the effects of the same characteristics on future startup performance. Our findings point to a joint logic that combines the roles: VCs finance startups that have strong technology, but are at risk of failure in the short run, and so in need of management expertise. Our findings thus support the belief in VC expertise, but only to a point. VCs also appear to make a common attribution error overemphasizing startups' human capital when making their investment decisions. (C) 2003 Elsevier Inc. All rights reserved.