Qualifications and turnover of managers and venture capital-financed firm performance

Abstract

This study investigates relationships between experience and education aspects of manager qualifications and performance measures in a sample of 103 Portfolio Companies (PC) of German Venture Capital Firms (VCF). In addition, we consider whether lower PC performance induces higher PC manager turnover and if VCF actively influences such PC manager turnover. Bivariate and multivariate analyses confirmed that PC manager qualifications correlate significantly with PC performance. Specifically, characteristics of PC manager experience in marketing/sales, planning/strategy functional areas, as well as in terms of industry experience, were identified as critical success factors.Our findings have substantial implications for VCF management practice: Although deficits in PC manager qualifications were addressed previously both in English and the German language academic literature, to date management practices did not recognize the relevance of such qualifications for investment success and the need to influence PC manager qualifications systematically through tailored selection and development procedures for PC managers. Had the need to compensate for gaps in PC manager qualifications been given adequate priority, our sample would neither contain a high variance for qualification variables nor significant correlations between multiple aspects of PC manager qualifications and success. Therefore, our findings suggest that (German) VCF should in due diligence put more emphasis on (1) PC managers' business functional experience and, unless the PC is active in an entirely new market, (2) a high proportion of managers with experience in the relevant industry. Beyond due diligence, VCF may have to actively realign or replace top managers of PCs in cases where success is substantially below expectations. It is highly likely that there is room for further improvement in this area, in particular in constructing incentives against “living dead” cases, where PCs develop substantially below expectations, but do not fail completely.