Venture Capital and Angel Investors turn slack into Profit and Performance
This study focuses on slack resources in entrepreneurial firms and how venture capital (VC) and angel investors can bring excess resources into play to enhance a firm’s profit and performance.
Slack resources are defined as assets over and above what is needed to meet a firm’s operating requirements. This excess can be found in company finances and in its human capital.
Financial slack is the liquid assets or surplus cash left over once basic operating costs have been met. Human resource slack is the number of employees beyond what is needed to meet operational demands. Both types of resource slack are critical for the emergence and development of entrepreneurial firms.
How slack resources are managed can influence a firm’s performance. For example, a manager’s ability to sense the market might make them better able to allocate slack resources towards entrepreneurial actions that boost performance and profitability.
The Ghent University/Vlerick Business School study tested a number of hypotheses using a sample of 1,215 private firms, including VC-backed firms, angel-backed firms and similar firms without such investors.
By examining differences between the two types of private investors and by examining the role they played in the companies they owned, this study provides insights into the relationship between external investors and entrepreneurs.
The study looked at when, where, and how value is extracted from slack resources.
Prior studies assume that managers “go it alone” when managing their resources. However, managers rarely operate in isolation and are often influenced by powerful external partners, especially VC and angel investors.
The fact that VCs and angels help entrepreneurs is well documented. But we do not have a lot of insight into the ways in which they can help. This study argues that VC and angel investors through their active involvement in entrepreneurial firms act as a source of value creation.
The study found that while VC investors were able to better utilize financial and human resources slack to boost business performance, angel investors were only able to leverage human resource slack. Further, VC investors were only slightly better at helping entrepreneurs extract value from human resource slack than angel investors and were no better when it came to financial slack.
In conclusion, VC-backed firms where investors hold high ownership stakes were discovered to be more successful in utilizing financial and human resource slack to drive business performance, an effect which is significantly stronger than when angel investors hold high ownership stakes.
Read here the full article.
: “The Relationship between Slack Resources and the Performance of Entrepreneurial Firms: The Role of Venture Capital and Angel Investors”
(Journal: ‘journal of management studies). By professors Veroniek Collewaert (Vlerick Business School) and Tom Vanacker (Ghent University), and researcher Ine Paeleman (Ghent University).