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  Dr Yanfeng ZHENG  
  Dr Jun XIA  

This study examines how venture capital (VC) firms terminate their investments in portfolio companies. The VC literature to date has primarily focused on how and why VC firms select certain investments and the performance consequence of their strategies. Little research has examined why and when VC firms terminate their investments – the flip side of the coin. We contend that the strategic discretion over termination is shaped by the resource dependence relationships along two dimensions: a vertical one between the focal VC firm and its portfolio companies and a horizontal one between the focal VC firm and its syndicate partners. We propose a novel theoretical framework to investigate how strategic discretion is situated in the inter-organizational power relationships. Our study suggests that strategic options should be viewed from a social-political perspective to better understand the actual strategic decisions.

To test our hypotheses, we primarily collected archival data from one major VC data source in China, Zero2IPO, triangulated with ChinaVenture. We also substantiated archival data with more than 30 personal interviews with various stakeholders such as entrepreneurs and venture capitalists. Event history analyses of approximately 8 000 VC deals made in China between 2001 and 2010 reveal that when similar investments increase, a VC firm is more likely to exercise its discretion over investment termination. Moreover, deal network embeddedness and brokerage advantage negatively and positively moderate the relationship between similar investments and propensity to terminate an earlier investment, respectively.

The findings provide important implications for the literature on strategic decision making and entrepreneurial finance. Our study suggests that the power balance relationship is a critical factor that contributes to the investment decision that goes beyond economic consideration. For the invested companies or start-ups, the structural change of a VC firm’s portfolio may provide signals to predict the likelihood of the VC firm’s termination decision. In addition, our research setting – the VC industry in China – not only extends the applicability of the resource dependence and network embeddedness perspectives, but also offers practical implications for VC investment management in an emerging economy context.

Dr Yanfeng ZHENG
School of Business

The University of Hong Kong