The social structure of entrepreneurial financing: Capital allocation decisions in United States venture capital, 1965-1999

My dissertation explores the social construction of financing in U.S. venture capital, 1965--1999. Specifically, I assess how industries construct funding policies in conditions of high risk and how these patterns change over time as structural conditions of an industry shift. I apply sociological perspectives of industry development (Dobbin, 1993; Fligstein 1985, 1990) to the study of risk and resource allocation. Risk and resource allocation is an important issue because financial decisions are increasingly being made in high-risk industries, yet we know very little about the dynamics behind resource allocation for new entrepreneurial firms. Most arguments in this area focus on individual and organization-level decision making. I advocate a structural analysis of high-risk funding, where features of an industry and its environment shape funding patterns. I examine how shifts in these industry features spark changes in funding strategies over time.;I find that the venture capital industry goes through distinct periods during which funding strategies differ substantially. Prior to 1980, funding was concentrated in the highest-risk funding rounds and was typically allocated all at once. The passage of an amendment to the ERISA Law in 1979 sparked significant changes to venture capital funding. After 1980, funding was comparatively more heavily concentrated in less risky funding rounds, with funding being "staged" or offered across multiple rounds more frequently. Then, after a significant industry shock in the mid 1990s, funding shifted back to higher risk and up-front allocation. Archival and interview data suggest that investors used a "risk as threat" frame in the 1980--1994 period, where risk was something to be carefully managed or avoided altogether. In contrast, investors took a "risk as opportunity" frame after 1994, when the highest-risk investment opportunities were welcomed as optimal sources for profits. These findings imply that industry-level structural conditions can spark distinctions in the use of high-risk investment strategies over time, suggesting that a structural perspective can help explain funding patterns currently ascribed to individual and organizational action.