P 1/5
A TALE OF TWO CONTEXTS: HOW VENTURE CAPITALISTS CRAFT STRATEGY
Venture capital has evolved from a pioneering group of professionals to a multi-
billion dollar global industry (Wright, Pruthi, & Lockett, 2005). The industry continues
to grow due to strong financial performance—Chen & al. (2002) noted a compound
average return from 1960 through 1999 of 13%—and a compelling mythology driven by
financial home runs, from Digital Equipment Corporation through Google (Gompers,
2001). Venture capitalists raise money from investors, called limited partners, and invest
this capital in start-up and small ventures known as portfolio companies; they not only
provide capital but also critical know-how (Bygrave & Timmons, 1992). Venture
capitalists have developed a reputation for their expertise in strategy, and are regarded as
a model of how other board members should be involved in the strategy formation
process (Fried, Bruton, & Hisrich, 1998).
Yet how do venture capitalists, these expert strategists, craft strategy for their
own firms? A set of exploratory interviews was held with twelve venture capitalists from
firms of diverse size and market focus; they were asked how they develop strategy for
their own firm. Frequently the venture capitalists used humour and banter to deflect the
question, showing discomfort with the topic. When asked why they avoided the question,
venture capitalists referred to the sharp contrast between their high expectations for
disciplined planning at their portfolio companies, and their own less formal approach.
Indeed, venture capitalists are unusual as business professionals in that their daily
work involves strategy in two distinct contexts, as shown in Table 1: for their portfolio
companies, and for their own firm. Starting from the empirical data gathered from the
interviews, this article looks to theory to better understand how venture capitalists
Brian King, McGill University
January 16, 2006
P 2/5
develop strategy by examining the venture