Venture Capital, CEOs' Sources of Power, and Innovation Novelty at Different Life Stages of a New Venture

We explore how the mutual dependence between venture capitalists (VCs) and venture CEOs affects the innovation novelty of new ventures at different stages of their lives. Based on a sample of 482 U.S. biotech companies, we find that VCs encourage their investees to pursue risky and novel innovations in the early stage of a new venture, but discourage them from doing so in the late stage of the venture. Furthermore, structurally powerful CEOs, who are in a position to take greater risks, intensify the positive effect of VC funding on innovation novelty in the early stage of a venture. However, such CEOs attenuate the negative effect of VC funding on innovation novelty in the late stage of the venture. In contrast, CEOs whose power derives from their innovation-related expertise typically seek a more balanced approach to innovation. Such CEOs attenuate both the positive effect of VC funding on innovation novelty in the early stage of a venture and the negative effect of VC funding on innovation novelty in the late stage of the venture. This study sheds new light on the VC-CEO relationship and provides insights into how the risk preference and the abilities of mutually dependent actors affect the innovation outcomes of new ventures.