King, Brian L (2008) - Strategizing at Leading Venture Capital Firms of Planning, Opportunism and Deliberate Emergence PDF

Long Range Planning 41 (2008) 345e366 http://www.elsevier.
com/locate/lrp
Strategizing at Leading Venture

Capital Firms: of Planning,
Opportunism and Deliberate
Emergence
Brian L. King
Venture capitalists are often lauded, as well as sought after, for their expertise as
strategists. How they influence the direction of the firms they invest in is well understood,
but how they develop strategy for their own firms has received limited attention in the
literature. This study adopts a strategy as practice perspective and examines decision
making processes at leading venture capital firms in Boston and Silicon Valley. Three main
ideas are advanced. First, that venture capitalists are bifurcated strategists, using planning
for their portfolio companies, while using emergent strategies on their own behalf. Second,
that some leading firms use deliberately emergent strategies, a finding that is consistent
with other empirical studies of strategizing in turbulent environments. Finally, a dynamic
model is proposed showing how these strategies are put into practice.
2008 Elsevier Ltd. All rights reserved.
Venture capitalists have developed a powerful mythology based on

a series of spectacular successes . but how do these expert strategists
put their skills to work on their own behalf?
Introduction
The venture capital industry has grown from a single firm in 1946 to a multi-billion dollar global
financial marketplace that offers attractive returns and has been shown to have an important impact
on both innovation and economic growth.1 The field has developed a powerful mythology based on
a series of spectacular successes, including Apple, Federal Express and Google. Venture capitalists
0024-6301/$ - see front matter 2008 Elsevier Ltd. All rights reserved.
doi:10.1016/j.lrp.2008.03.006
have been praised for their expertise in strategy by both the successful entrepreneurs that they have
funded and by the academics who have studied them.2 These accolades, however, are for the work
they do refining business plans and influencing the direction of the firms they invest in, known as
portfolio companies. However the ways in which they develop strategies for their own firms is a dis-
tinctly different process, which is less well understood and has received limited attention in the lit-
erature. In essence, the question raised in this article is: How do these expert strategists strategize? -
in other words, how do they put their skills to work on their own behalf?
The term venture capital is sometimes used as a synonym for private equity, meaning private
capital invested in businesses outside the public equity markets; this is especially true in Europe.
This study restricts its focus to studying partnerships that provide capital to young, high technology
ventures. A recent international study by Seppa that examined the strategy logic of venture capital
firms noted that both geographic location and ownership structure have an important influence on
their strategy.3 While venture capital can be provided by a variety of institutions, such as banks,
corporate subsidiaries and government agencies, this study examines the dominant form found
in North America - the venture capital partnership.
Indeed, recent studies in finance have shown the industry to be heterogeneous. While classical
finance theory - see Fama, for example - suggests that over time the performance of all firms
will tend towards the mean, newer research discerns that certain firms persistently show superior
returns. Kaplan and Schoar found this when they examined top tier firms, and suggest this is
not only because of their enhanced positioning, but also because venture capitalists show hetero-
geneity in skill and quality.4 The current article focuses on the strategy practices of leading firms,
skills that may enhance their competitive advantage.
Understanding their strategizing is part of the recent practice turn in strategy research that fo-
cuses on processes and methods, originating with an article by Whittington in 1996.5 Venture cap-
ital firms operate in a rapidly changing environment. In order to achieve success, firms look at
a stream of business plans from entrepreneurs, typically examining a hundred proposals for every
one eventually selected for investment. Operating in fluctuating financial markets and raising funds,
while simultaneously looking for attractive divestment opportunities for their present portfolio
companies (either through a sale or an IPO), is challenging. Understanding their practices may
add to our understanding of strategy in fast-changing environments.
venture capitalists are bifurcated strategists, using carefully controlled

planning for their portfolio companies [but] more emergent strategies
on their own behalf
Findings based on the information gathered from public sources and confidential interviews with
leading venture capitalists will be presented, and three main ideas advanced. First, that venture
capitalists can be called bifurcated strategists, as they take two distinct approaches to strategy:
on the one hand they plan for their portfolio companies in a carefully controlled manner, while
on the other hand they use more emergent strategies on their own behalf, balancing their need
to specialize with the advantages to be gained by remaining opportunistic. Second, this article sug-
gests that some leading firms engage in formal processes that resemble deliberately emergent strat-
egies. Third, a more dynamic version of this model, as observed in the turbulent environment
experienced by these firms, will be presented.
Literature review
There are several perspectives on strategy that are helpful in understanding the issues faced by ven-
ture capital firms. Porters analysis helps to explain firms behaviours: the venture capital industry
346 Strategizing at Leading Venture Capital Firms

has followed a life cycle where low barriers to entry and diseconomies of scale - as each transaction
requires careful attention - have produced a fragmented industry where firms are becoming more
specialized. Ghemawat and del Sol have made a similar observation about private equity firms, sug-
gesting that these firms should develop specific resources, such as knowledge, and this is consistent
with Lwendahls work on strategy for professional firms, which emphasizes the importance of re-
sources.6 The current study seeks to understand the processes by which this specialization occurs
and how valuable knowledge resources are acquired.
The rational planning systems popularised in the 1960s, when venture capital firms first came to
prominence, are reflected in the methods they use for their portfolio companies. Sahlman notes
how staged investments - where additional capital is contributed only when key milestones have
been achieved - ensure that business plans are followed. However, when venture capitalists strate-
gize for their own firms, their rapidly changing environments preclude the use of such detailed
plans. In fact, scholars have suggested that rational planning is not effective in such contexts, which
have been variously described as hypercompetitive, high velocity or turbulent. This article adopts the
latter term, originally proposed by Emery and Trist, and used more recently by Grant. Classical
management scholars have suggested approaches to deal with such environments; Daft, Sormunen
and Parks studied environmental scanning as a mechanism executives use to understand change.
Weicks work on sensemaking is also pertinent for professionals seeking to adapt to their environ-
ment. Finally Marchs work is important here: he might characterize a venture capital firms strat-
egy work with portfolio firms as exploitation, given that companies are generally funded only once
a clear plan is in place, while their own strategizing would be deemed exploration, as they constantly
seek to understand and adapt to their turbulent environments.7
Many authors, starting with DAveni, have specifically examined strategy in fast-changing envi-
ronments. In Hypercompetition, he looked at industries in these contexts, noting the importance of
anticipating disruption and being able to exploit it. Eisenhardt carried out a series of such studies,
first showing the importance of fast decision making, gathering data widely and paying careful at-
tention to implementation in a study of the mini-computer industry. Her later work with Brown
focused on firms in unpredictable environments, finding the best approaches to strategizing to be
pro-active, diverse, continuous and time-paced, where the needs of the business set a rhythm of
change for the entire corporation.8 Other scholars suggest that incremental strategies, originally
proposed by Lindblom, are the most effective in these environments; Mintzberg coined the term
emergent strategies to describe this approach. In his later work with Waters, he made a notable con-
tribution towards helping to understand venture capital strategizing: that planning and emergent
strategies can be considered as two poles of a continuum, and that all strategies contain elements
of both; the discussion builds on this point.9 It is also important to distinguish emergence from
opportunism, as the latter term (used by some informants to describe the behaviour of certain
firms) can carry contentious overtones. The current article would define opportunism (as in the
online Merriam Webster dictionary) as the art, policy or practice of taking advantage of opportunities
or circumstances, often with little regard for principles or consequences, rather than Williamsons self-
interest seeking with guile. In fact, this articles use of the term is closer to another Williamson
phrase e simple self-interest seeking e because, while venture capitalists could use guile (which im-
plies deceit and cheating), this tendency would be tempered by the fact that they work in a system
of recurrent transactions among highly networked players and, as Granovetter has suggested, these
actors are socially embedded, and those who engage in unfair or unethical behaviour risk exclusion
from future deals.10 Mintzberg and Waters are clear that emergent strategies are patterns in a stream
of actions, where strategy is defined as consistency of behaviour, whether intended or not.11 There-
fore, completely opportunistic behaviour results in random action, where no resultant pattern or
coherent shape of actions emerges. Mintzberg and Waters made another important contribution
to understanding strategy under uncertainty in proposing the concept of deliberately emergent strat-
egies, where management sets general boundaries and everyone operates within these parameters.
Grant noted a similar concept, planned emergence, at work in his study of strategizing by oil majors
in a turbulent environment.
Long Range Planning, vol 41 2008 347

While many studies of venture capital firms examine how they help young firms and influence
their strategies,12 fewer investigate how they set their own strategy. Some (starting with Tyebjee and
Bruno) study firm decision making and look to understand how venture capitalists evaluate the
business plan of a prospective portfolio company and decide whether or not to invest.13 While
this is an important issue, since these investments directly impact the future direction of the
firm, it does not address how such plans are chosen for evaluation or how longer-term decisions
are made. Indeed, Zacharakis and Shepherd noted recently that most research has focused on
how venture capital firms identify promising portfolio companies, to the exclusion of considering
how they make decisions about their own firms. Only two authors have looked at this explicitly.
Twenty years ago Robinson undertook a survey of mid-level firms to understand how venture cap-
ital firms set their own strategy, and confirmed (consistent with Porter) that the industry has
evolved towards much more specialized strategies. However, he found their strategies were charac-
terized by uncertainty and reaction and no insight was offered as to the underlying causality. More
recent work by Seppa notes that the strategies of venture capital firms differ according to their geo-
graphic location and ownership structure. This study re-examines the venture capital strategy ques-
tion in light of what is now known about the segmentation of the industry, and focuses specifically
on practices in the top tier firms which, as Kaplan and Schoar note, persistently show superior re-
turns.14 Our research question can be stated more formally as:
How do leading American venture capital firms, reputed as expert strategists for their work with
young companies, develop a strategy for their own organizations?
Research design and methods

Because of the nature of this industry, collecting field data from venture capitalists presents a chal-
lenge: they are notoriously difficult to connect with and can be secretive about their methods. The
research was composed of two distinct phases. An exploratory phase consisted chiefly of inter-
views with 12 venture capitalists, primarily in Canada, supplemented by secondary source
accounts describing the decision making processes found in the industry. This generated a prelim-
inary proposition: that while venture capitalists use planning for their portfolio companies, they
use more opportunistic or emergent strategies for their own firms. In order to develop a more
thorough understanding of their strategy processes, a second round of 11 interviews took place
with a carefully selected sample of more experienced informants, partners in Boston and Silicon
Valley, where the most prominent and, by reputation, most sophisticated firms practice. Using
a new semi-structured questionnaire, these interviews were analysed for statements that informed
on the preliminary proposition as well as on other themes that emerged. (See Appendix A for
more detail on methods.)
Findings
After first looking at venture capitalists traditional forte - their involvement in portfolio compa-
nies strategizing - much of this section will examine the firms own many strategy processes, paying
particular attention to how they conduct research to discover high potential market segments. Next,
an important and related question is examined: can a firm change strategies? Finally, a process used
by some leading firms to evolve their strategy will be discussed, for which the author introduces the
descriptive term themed investing.
Portfolio company strategy work

While not the primary focus of this enquiry, our interviewed informants were asked about their
involvement with strategy for their portfolio companies. Largely consistent with prior research,
all of them described being keenly aware of the strategies of their portfolio companies, and also in-
volved in helping make them, but only where they perceived the companies need their assistance. As

background, when venture capitalist firms invest in a portfolio company, they are investing in a con-
cept and a management team. They contribute capital in stages called financing rounds (typically
every 6 to 18 months) which allows the portfolio company to advance to its next critical milestone
and, if successful, to be assessed at a higher monetary valuation. In this way adherence to the busi-
ness plan is monitored, as the venture capitalists retain the option to contribute (or not) more cap-
ital when funds are next needed. Interestingly, informants in this study spoke more about
milestones than they did about plans, as is illustrated by this comment from informant 8:
Milestones are critically important, particularly, part of the whole concept of staged investing,
which is really what venture capital is built upon, its the staged money in and around expected
milestones. . We reward or punish the company around meeting those milestones. So our
companies are always looking at two dimensions, one is the various expected rounds of financing
out into the future, and second, on an annual basis, where they are going.
Another veteran industry practitioner stated: People in this business are either milestone guys or
planning guys. Im a milestone guy. This attitude of being more interested in milestones and
less involved with the details of the plans was not entirely consistent with prior studies, which sug-
gest that venture capitalists are heavily involved with planning.
informants spoke more about milestones [for their portfolio

companies] than they did about plans
One possible explanation would be that some portfolio companies might require more strategiz-
ing assistance from their venture capital firms than others. This idea can be seen in a comment
made by informant 3, who was with a top firm and then helped start a lower tier firm:
The problem is, when youre starting off as a fund, youre not on the short list of those A+
management teams. All the top tier guys are on their 5th fund, 6th fund. They are on the short
list. . You look at the B+ management teams and therefore [to] make those companies really
successful, you end up spending more time with them.
Top tier venture capital firms attract start-up companies that have high quality management
teams capable of both strategizing and executing their plans, thus requiring less involvement
from the venture capital firm in these areas and allowing them to focus on milestones. Since the
informants in this study are all partners in top firms, they are less involved in planning than
many other venture capitalists.
Venture capital firm strategizing

Strategizing for their own firm is a challenge for venture capitalists who operate in a turbulent envi-
ronment. They face a constant barrage of information, and are exposed to new ideas when being
pitched proposals by prospective entrepreneurs, listening to issues their current portfolio companies
face or talking to other venture capitalists. They need to sort through this information and pick which
market segments to focus on. Interviews showed that, for their own firms, venture capitalists consider
the term strategy as referring to the acquisition of capital (how and from whom to procure it, and
when they will receive it) as well as to decisions about deploying it (how, where and how much
they will spend or invest). Much more time is spent on the latter activity, because identifying and com-
mitting support to high potential companies is complex and time-consuming.
As might be expected, the interviews showed that venture capital firms are heterogeneous when it
comes to strategy. The first sample of smaller (primarily Canadian) firms tended to be more

opportunistic and the larger, more established American firms in the second sample were more
strategic. One response from informant 9, an industry veteran, touched somewhat cynically on
the varied approaches:
I think that some venture firms probably dont have any strategy. and I think some do and some
express it. Some have strategies and dont talk about them, and its hard to figure it out. And some
have no strategy and talk about it a lot.
The leading firms interviewed for this study all spent large amounts of time and resources on
strategy, as was clearly stated by informant 7:
We are among the more strategic but perhaps not the most strategic of venture firms. We devote
a lot of time and energy to strategy.
This informants firm, like others, organizes off-site meetings for strategy discussions, engages in
formal research processes and deliberates carefully before they choose which markets to specialize
in. However, the informant continues:
Having said that, this is a business where you can have all the strategy you want and its all about
the companies that you run across and you find and you invest in. So, you know, a strategy points
you where to look, but it doesnt dictate what you find, and it is sometimes no substitute for dumb
luck.
Other informants made similar comments: that while strategies and strategizing are important, to
be successful in the industry requires seizing opportunities when they appear. Informant 9 de-
scribed this:
By and large, they [venture firms] are all pretty forward looking. And if they have a strategy, spoken or
not articulated, its to be ahead of the curve. And some firms have much, much more highly developed
strategies. But I think that opportunism, as opposed to strategy, is more characteristic of the industry.
The goal of a venture capital firm is to generate high returns for their limited partners. As infor-
mant 7 notes: If you had no strategy and the numbers were great, they wouldnt care; and why should
they? This was the position of an informant from the exploratory interviews, who maintained that
his firm did not need a strategy; after they articulate a proposal for the limited partners during
fundraising, they just need to do good deals. This perspective suggests that it is not the firms
direction that matters, but rather being aware of and taking advantage of what is most promising
at any given moment - which translates to opportunism.15
we dont need a strategy, we just need to do good deals, which

translates to opportunism.
While informants were clear that choosing investments in a turbulent environment involves op-
portunistic behaviour, the leading firms interviewed appreciate that their reputation and brand at-
tract deals, and therefore they give careful consideration to each deal and how it fits into the bigger
picture. Leading venture capital firms have identifiable positions (niches) in the industry, which
suggests that they may be using emergent strategies rather than opportunism. The next section
will look at actual processes and seek to understand how these emergent strategies are put into
practice.

Firm strategy processes
The interviews showed that strategizing at venture capital firms is a mix of both formal and in-
formal processes. Three firms have four formal off-site meetings a year, many have just one
multi-day meeting, while one firm has discontinued off-sites, preferring to integrate strategic dis-
cussions into their regular meetings. But all firms recognized the need to have meeting time de-
voted to longer term direction and, most importantly, to identifying high potential investment
areas. On- or off-site meetings with strict agendas and restricted discussion topics keep the focus
on the bigger picture; considerations of pending deals or current portfolio companies are not
permitted.
Part of a firms strategy agenda might be considered operational issues. These discussions include
ensuring the availability of adequate cash to handle their portfolio companies financing needs; re-
viewing whether investments are adequately diversified, which may mean discontinuing activities in
a particular sector where too much capital is tied up; examining staffing needs to ensure adequate
human resources are available given the demands of the next funding cycle; and deciding on the
timing for raising an additional fund.
A critical part of firms strategy processes deals with researching high potential investment
areas (as discussed in the next section). The other important element is documentation of their
strategy for their investors and for their own internal needs. All firms update their limited part-
ners on strategic developments at annual meetings, which create what some informants called
a forcing function compelling them to document their strategies. While this may give the im-
pression that they look at their strategies only periodically - blowing the dust off the file, so to
speak - on the contrary, the interviews showed that (consistent with Eisenhardt and Brown)
strategizing is a continuous process at these firms, because of their turbulent environment and
the need for opportunism. Two typical informant observations were: Its all the time. Its a con-
tinuous dialogue (Informant 6); At every partners meetings, things come up which, either explic-
itly, implicitly or subliminally, impact upon the direction (Informant 9). Thus strategizing is best
characterized as an ongoing process, punctuated by the demands of limited partners to document
the current thinking on firm direction.
Some firms have formal procedures - documenting due diligence on every transaction, creating
analysis reports on the competition and writing white papers on technology evolution - and limited
partner reports are a synthesis of these documents. Other firms are much more informal: partners
turn off their cell phones for a marathon weekend writing session to document their current think-
ing for their limited partners. This article focuses on the more formal activities, as informants were
able to provide richer descriptions; most of these formal activities have informal counterparts at
other firms. The most formal firms were those that took the themed investing approach discussed
in the last part of the findings.
Research functions
While the some of the strategy processes that informants described included resolving operational
issues and documenting their strategies for internal and external purposes, the primary emphasis
for these firms was determining which investment areas to target. For a venture capital firm, a large
part of strategizing is about specialization: where to develop expertise and reputation in the market.
Most firms have formal research processes to determine this matter, which involves keeping a keen
eye on the investments being made by competitors. Four firms described this as a highly formal
process; they organize disciplined peer comparisons to examine those deals completed and those
missed. As informant 8 reported:
We test our strategy against the data several times a year. So, in another words, we look at
whats going on competitively. We look at deals that weve seen and not done that have
been successful and unsuccessful. We look at deals that we didnt see, particularly the ones
that have been successful, and really test our strategy against whats happening in the
marketplace.

strategizing is about developing expertise and market reputation. Most
firms have formal research processes to keep a keen eye on
competitors investments
This type of benchmarking, also described by scholars (such as Daft et al) as environmental
scanning, is one of the processes used to figure out which areas show the most promise. Firms
also organize formal research processes:
We recently, for example, tasked our associates with pulling together a list of billion-dollar
opportunities, billion-dollar marketplaces - for us to sit down in groups and walk through the
various pros and cons of focusing on those areas, kind of as a verbal way of creating
a prioritization filter. (Informant 10)
Firms involve outsiders in their research processes. CIO roundtables are organized where exec-
utives from various firms discuss information technology directions; scientific advisory boards are
hosted, meeting quarterly to discuss recent research findings16; and key technologists are offered the
chance to invest at an attractive rate in exchange for advisory services.
[We manage a].side fund; we invite people in who like being involved and start a process and, as
a quid pro quo for us managing some of their money, they provide us with some of their time and
resources to source deals, evaluate deals and in some cases have an ongoing board or advisory board
relationship between us. These people we pick, we go after any expertise that we feel that we dont
have in areas we might be investing in. (Informant 10)
Some firms perform this type of research in a highly systematic way. They produce focused
research and written plans which may even include a schedule outlining when to start and
stop investing in a particular segment. (This is the themed investing approach discussed later
in this section.)
Much has been written about the way venture capitalists create networks through shared deals: as
Hochberg et al discuss, this is a multi-faceted, multi-purpose activity which involves a firm building
an important network of shared ties as well as creating a large Rolodex of significant contacts it can
exploit. This article uses an expanded and more colloquial use of the word networking to include
not only these shared ties, but also the larger base of contacts that venture capitalists create. At a fun-
damental level, venture capitalists exploit their networks in order to find deals. Emerging opportu-
nities are not to be found in the classified ads, but through a variety of contacts: accountants, patent
agents, scientists and professors, among others. Here the informants described their use of networks
as serving many purposes.
One illustration of this multi-faceted use of networking comes from correspondence with a founding
partner of Kleiner Perkins Caufield & Byers, probably the worlds best known venture capital firm. In
a journalistic interview, partner John Doerr refers to Brook Byers as a lab rat. Byers is quoted as saying,
Right after this meeting Im going up to UCSF and visiting labs, prowling labs, thats the best part of this job.
Going to visit principal investigators in different labs. Ive been doing this for more than 20 years.17 This
intriguing comment inspired an email asking, Mr. Byers, why do you prowl labs?, to which he replied:
I prowl labs for many reasons, including: enjoying the intellectual stimulation, mapping the state
of science discovery in my field of life sciences, helping mentor researchers, building over time
a macro sense of trends in science and potential clinical applications, applying what I learn to
our day-to-day filtering of business plans and opportunities that come to KPCB, being a better

board member at our portfolio companies because I have a feeling for science, and meeting
motivated people who want to make a difference in the world through medical innovation.18
Additional aspects of networking surface here. It acts as another example of environmental scan-
ning, helping to alleviate risk through providing a fuller understanding of the surrounding environ-
ment. It also develops a tacit feeling for the way technology is evolving, akin to what Weick has
called sensemaking. Table 1 shows excerpts both from Byers response and from informant inter-
views that speak to these multiple motivations for venture capitalists to use their networks.
Identifying emerging opportunities through sensemaking is one of the most critical skills for ven-
ture capitalists to develop - and the most difficult for firms to evaluate in choosing new partners. One
senior partner noted that the best venture capitalists develop an instinct for making an investment
decision even before markets emerge and technological solutions have crystallized: No matter how
formal your process is, if you can absolutely determine what the market for something is, youre probably
too late (Informant 9). How do successful venture capitalists develop this crucial sense that enables
them to exploit the way that technology is evolving? As this quote implies, this is not an easy skill
to formalize. However, some firms use the themed investing approach in trying to address this issue.
Benchmarking, formal research and networking (for deal finding, scanning and sensemaking) all
help firms identify their target markets. These strategies involve specialization in order to build knowl-
edge and to develop a brand. However, if firms continue to specialize - and get entrenched in a niche -
how do they manage to react as the environment changes? The next section addresses this question.
Can a firm change its strategy?

Sometimes a firm may want to change its strategy, perhaps seeking to deploy capital in a different
market segment: but this can be a difficult undertaking. Consistent with Porter, informants ex-
pressed the view that the industry is moving towards specialization. Some of the reasons will be
examined here, along with a discussion as to how this can constrain a firm from moving to a seg-
ment that might offer greater potential.
Industry veterans report that, prior to the 1980s, venture capital firms tended to be generalists,
funding everything from airlines to semi-conductors, and it was uncommon for a firm to have
a strategy, formal or informal, other than to find high return opportunities, (Informant 4). How-
ever, by the 1990s the industry had become much more specialized, with some firms targeting
Table 1. Networking Rationales by Venture Capitalists
VC Activity Find deals Assess and mitigate risk Define emerging areas
Illustrative Meeting motivated people who want to Applying what I learn to Building over time a macro
quotations: make a difference in the world through our day-to-day filtering of sense of trends in science and
medical innovation. (Byers) business plans and potential clinical applications.
We are strategic in that we are opportunities. (Byers) (Byers)
pro-active in developing networks of We end up closing the gap, But I think that to a great
relationships and we have a very knowledge wise, with the extent, that ability to under-
carefully planned out program of. entrepreneur so were not stand where the vectors are
relationships we think will be so much at a disadvantage. heading is abetted, enhanced,
important to the firm among other (Informant 2) may be even created by
investors, among VCs, among your network. (Informant 9)
investment bankers, among consultants
in the industry, key executives, etc.
(Informant 7)
Motivation: Exploiting a network Reduce information Sensemaking
(per theory) asymmetry; Environ-
mental scanning

specific market segments - medical devices, for example - and other, larger generalist firms becom-
ing more silo-ey (to quote informant 1), with individual partners focusing on specific market seg-
ments. Today, strategy for a venture capital firm implies specializing in particular market segments:
More and more firms are becoming more and more specialized, as a response to competitive
dynamics, which again is symptomatic of strategy, not just chasing [deals]. (Informant 5)
During the interviews, venture capitalists mentioned three reasons for such specializing: to in-
crease their knowledge of a particular market by achieving multiple transactions (as suggested by
Ghemawat and del Sol); to build a brand in that particular market to attract more deals; and finally,
to respond to the expectations of the limited partners. The first two of these are well understood: in
a specific market segment, a firm will climb a learning curve, thus gaining valuable information that
can be applied to future transactions. And even more important than knowledge is a firms repu-
tation or brand within a certain entrepreneurial community, not only that of their prospective en-
trepreneurs, but also of key advisors such as lawyers and accountants. As informant 3 notes: You
want be on the short list in companies minds that are looking for capital, when they start to seek cap-
ital. However, in terms of motivations to specialize, all informants reported that one of the primary
drivers for specializing is that their limited partners, looking to understand their future direction
and their market position relative to other firms, have come to expect it.
To give some background, limited partners provide a commitment to a venture capital fund over
a ten-year period, with the larger part of the monies to be drawn down over the first five. The ven-
ture capital firm requests funds periodically, but only when needed, so as to minimize the capital on
hand and thereby maximize returns.19 While venture capitalists keep their limited partners in-
formed about their investments, in order to maintain their limited liability status these partners
can only act in an advisory capacity and cannot withhold committed funds. Each time they raise
a fund, firms articulate a strategy in their offering memorandum that commits them to invest in
specific business sectors. In other words, if the limited partners read in the offering memorandum
that the firm strategy is to invest in early-stage biotechnology, they expect the bulk of the invested
funds to go to start-ups in that designated industry. There are no specific legal covenants that ac-
tually mandate venture capitalists to invest the funds as per their offering memorandum, but de-
viation from an articulated strategy would be at the firms own peril. Limited partners are not
generally tolerant in such cases, especially if investments go poorly, and would commonly react
by electing not to participate in the next fund. As informant 7 points out:
Its far more defensible to say, We pursued this strategy and then it didnt work out.. Thats at
least better than saying, We told you one thing, we did something else, it didnt work, now fund us
again..That doesnt play very well.
There is tension between venture capitalists and their limited partners

over portfolio diversification. but the golden rule generally applies:
those with the gold make the rules
The limited partners (and especially the institutional investors, such as pension funds) insist on
this specialization because they want to invest in many narrow specialized funds in order to build
a diversified portfolio. This creates a tension between the limited partners and the venture capi-
talists over the control of portfolio diversification. For example, a venture capitalist might like the
discretion to invest in the most promising medical companies, while the limited partners might
prefer to build a diversified portfolio and thus choose venture funds that invest in narrower target
markets: biotechnology, medical devices and radiology technologies. This is not unlike the

traditional finance question: should conglomerates diversify through various operating divisions
in different markets, or should their investors do so by buying a portfolio of stocks?20 Interview
informants confirm that, in venture capital, the golden rule generally applies: those with the gold
make the rules - and the limited partners have considerable influence in deciding how firms
should specialize. In sum, while there are clear reasons for the trend towards specialization, in
terms of economic benefits to the firm, another significant factor is in play: limited partners
can insist on a narrow specialization that can diminish a venture capital firms ability to exploit
new opportunities.
This raises a fundamental question: how difficult is it for a venture capital firm to change strat-
egies? Informants concur that such changes are not easy. As discussed, there are three constraints:
knowledge, reputation and their limited partners. Knowledge is less of an issue; they can hire ex-
pertise or bring in a new partner with specific experience. A bigger issue is their brand reputation
in the entrepreneurial community, which can attract certain deals. Informant 5 describes the chal-
lenge of shifting to a related market segment:
And so in [Segment A] we now have that kind of competitive dynamic that works in our favour and
serves us as well, but in [Segment B] thats not true for us. And . we are not on that shortlist of the go-
to groups and to get there would require too much re-deployment of capital and a change in the
construction of the personnel. For us thats a very strategic decision as to what to do about [Segment B].
Similarly, the constraints of limited partners can be a big issue; venture capitalists operate in
a changing environment, and firms must be careful not to get locked into a market segment that
goes cold or ceases to provide interesting opportunities. Some informants reckon that limited
partners are driving overspecialisation of venture capitalists to the point where they lose investment
opportunities.
I think that a significant amount of the money from the limited partner community pushes firms
into defective strategic decisions and. encourages firms to specialize quite narrowly. (Informant 8)
This is especially true for younger venture capital firms that lack successful financial track
records, which can take a decade or more to develop.
Firms become successful in the industry because theyve initially picked a less covered sector or an
emerging sector. They end up being very successful and then when they go back to the limited
partner market to raise their second or the third fund, most of those institutions say, Were you
really successful at telecom? You have no experience anywhere else, so well back you in the
telecom sector. And unless the firm is robust enough to be able to make a transition to those
specific industry sectors, odds are they wont do as well. (Informant 3)
These younger firms face a paradox: their greatest concern is to maintain a strong relationship
with their limited partners in order to be able to raise the next fund; as they are less established,
their limited partners scrutinize their strategy closely, which in turn constrains their opportunistic
abilities. At the same time, because they lack deal flow relative to the more established firms, they
are under pressure to accept deals that are not exactly suitable or that do not entirely fit their stated
strategy, and therefore may act in more opportunistic ways.
one reason the largest, most successful firms make exceptional returns
is because of their ability to change strategy to anticipate trends.

Indeed, informants from the largest, most successful firms reported that one reason their firms were
able to make exceptional returns is because of their ability to change strategy to anticipate trends:
The real problem with strategy in venture capital is your ability to change it. And I think most firms now
do have a strategy because in order to raise money they have to and because they have to distinguish
themselves to limited partners. The fact is there are only 20 firms that actually can have a strategy.
and those 20 firms are firms like ours, because we will get money regardless, right? (Informant 2)
Some of these firms, those with strong market power relative to their capital suppliers, use a pro-
active approach - themed investing.
Themed investing observed at leading firms

Themed investing is a term coined by this author to describe a particular strategy process that involves
disciplined research to identify high potential market segments and setting a clear investment agenda
with time-limited boundaries. Four of the informants reported using strategies that exemplified this
method, each with differing degrees of formality, and other firms that take a similar approach were
identified through published sources (illustrative quotations are presented in Appendix B).21
Four distinct common steps were observed in these firms using themed investing. The first iden-
tified underlying forces that predict a technology or market evolution: anticipating disruptions, as
suggested by DAveni. While no one can forecast precisely, Mermann suggests that study does allow
for some indication: Just as we can predict with confidence that dinosaurs will not evolve by tomorrow
out of todays existing animal species, it is safe to predict that the African nation of Uganda will not
emerge tomorrow as the largest chip producer in the world. The second step is to develop an under-
standing of which companies might benefit most from this evolution; here, venture capitalists use
broad predictions to identify what Kogut and Kulatilaka define as platforms d technological and
organizational investments that permit a firm to enter into a wide menu of future markets d to better
target their investments.22 Through studying the evolution of technology, the types of companies
that will benefit and, more particularly, when this might occur, become more evident. Third, part-
ners then write formal documents to clearly elaborate the specific type of investments they will seek
and how long they anticipate this trend to last. This document is then approved so that the entire
partnership understands the rationale. Later, when a prospective deal is on the table, this document
facilitates communication as well as buy-in to the proposed investment theme. Finally, once an in-
vestment theme is approved, resources are assigned to researching, building a network, looking for
prospective investments and gaining a reputation in the sector.
Themed investing is a pro-active approach to charting a firms future, reminiscent of Miles and
Snows prospectors and suggested by Eisenhardt and Brown.23 Informant 11 described moving to
this model after being frustrated with what he described as the traditional approach to venture capital:
Every day a bunch of business plans arrived in the mail and we would sort through them. We were
totally reactive. We figured there just had to be a better way.
When asked why they used themed investing, informants expressed rationales similar to those
describing the forces driving specialization in the industry - developing specialized knowledge
and networks - but also mentioned four other reasons why the approach was valuable. The first
two have to do with timing; firstly since themes begin and end, they are better aligned with the
pace of technological change, in contrast to specialization that tends to be tied to the career of a par-
ticular partner in the firm. Secondly, investments can be timed so that they are made at the point of
maximum opportunity. Dave Cowans blog entry (see Appendix B) discusses the timing of themed
investing (which he calls road maps):
Perhaps the most difficult step of road map investing is knowing when to burn the map. Some of the
best and worst decisions we have made over the years centred around this question of when enough

was enough. We successfully exited biotech in 1993, big box retail in 1995, and etailing in 1998
before those sectors busted, but on the flip side we failed to exit telecom in 1999.24
This signals the most intriguing element of themed investing and, according to our informants,
the biggest challenge (which is reminiscent of Eisenhardt and Browns time-pacing): how to stop
investing in a theme before the sector gets too crowded. A third reason mentioned was that themed
investments promote the placing of multiple bets on emerging trends - since venture capital firms
retain an option to invest in each round, they can then fund the most promising companies. Finally,
themes create a framework for evaluating opportunities that enhances the ability of partners to
make well-reasoned decisions. This last point is highly valued by some firms. Since their daily
work is transactional and the opportunities show up sequentially, rather than all at once, focusing
on themes helps to put opportunities into a discussion and an evaluation framework, and helps to
temper opportunism by forcing venture capitalist firms to examine both the short- and long-term
implications of each investment.
While firms must remain opportunistic, the most successful firms are
those skilled at putting emergent strategies to work.
Discussion
The findings show that leading firms continually strategize; they constantly monitor and evaluate
where they are positioned, what other firms are doing, which sectors are the most promising
and how they can lay the groundwork for future success. While firms must remain opportunistic,
there is more to their behaviour than that. This article suggests that perhaps these results can be
seen in another light: that the most successful firms may be those more skilled at putting emergent
strategies to work. Venture capitalists often pursue opportunities in fields related to prior invest-
ments; each investment leads to increased personal knowledge and at the same time serves to legit-
imate the firm, in turn attracting more prospective investments in a particular sector. This is
consistent with Mintzbergs argument that strategies can emerge in this manner from a series of
decisions (even with limited intentions) based on an organizational tendency to build on past
successes. If venture capitalists find a good deal in an unexpected niche - molecular biology, for
example - not only does this success strengthen their overall portfolio return, it also builds exper-
tise, enabling them to better evaluate future deals in that sector. In turn, success with one company
builds legitimacy within that sector, which then attracts more players from the same niche - other
molecular biologists, for example - to approach the firm.
After first noting the contrast with strategizing at their portfolio companies, this discussion
examines how venture capital firms put emergent strategies into action. It proposes that themed
investing is a form of deliberately emergent strategy, with key boundaries being set and periodically
adjusted. A general model is then presented that suggests how firms can take a pro-active approach
to strategizing in a turbulent environment.
Bifurcated strategists
In strategizing for their own firms, informants spoke of exploration: researching and targeting
segments where they can gain knowledge, make important contacts and then time multiple invest-
ments to maximize opportunities. In so doing they demonstrate the use of emergent strategies, in
contrast with the exploitation approach (as identified by March) which they use for their portfolio
companies, where a business plan is used to focus on building value while moving towards the next
milestone. Venture capitalists are unusual as business professionals in that they strategize in two
different contexts: as owners of their portfolio companies and as managers of their own firms.

This dual approach - using both planning and emergence - leads this author to introduce a new
term to describe them; bifurcated strategists. This behaviour does not reflect a double standard
or hypocrisy; rather, it is an appropriate method for dealing with the two distinct contexts in which
they operate.25 Is this bifurcated approach conscious? It appears so, as the informants recognized
that charting the future of their firm requires remaining open to opportunism, in sharp contrast
with what they expect from their portfolio companies. Ultimately, they see these different processes
linked perhaps only by the output - which, in both cases, is strategy. To state this more formally:
Proposition: Venture capitalists use planning and fixed milestones for their portfolio companies,
while using more emergent strategies for their own firms.
As already mentioned, Mintzberg and Waters suggest that planned and emergent strategies can
be seen as being situated at opposite poles of a continuum, while noting that most outcomes con-
tain elements of both types of strategies: Figure 1 illustrates this notion for portfolio and venture
capital firms strategies.
Venture capital firms are heterogeneous; where they are on the continuum is based on their po-
sition in the industry. Younger or poorer performing firms are constrained by their capital suppliers
who insist they remain specialized; consequently, they tend to be more towards the left-hand,
planned side of this continuum. Leading firms, because of their track records, can be more flexible
and, as discussed, also attract more seasoned A+ portfolio management teams that require less de-
tailed plans; therefore these portfolio companies are able to shift towards the right-hand, more
emergent side of the continuum.
Deliberate emergence
In examining how leading venture capital firms define their strategies - and especially those that use
themed investing - there appears to be a match between their approach to setting direction and
what have been called deliberately emergent strategies. Mintzberg and Waters originally proposed
this as one of a typology of possible forms of emergence, (also calling it an umbrella strategy)
where management establishes an envelope for acceptable firm actions, but also deal with
exceptions.
leading venture capital firms using themed investing spend time and
energy setting and periodically adjusting clear boundaries, then finding
deals that fall within these established criteria.
PORTFOLIO VENTURE
COMPANY CAPITAL FIRM
STRATEGY STRATEGY
PLANNED EMERGENT
LEADING FIRMS CAN ALLOW FOR MORE EMERGENCE
Figure 1. The Strategy Continuum for Venture Capital Firms

In venture capital firms that use themed investing, the leadership (the partners) agree on clear
boundaries for each investment theme. These firms are quite deliberate about how and when
they adjust their boundaries, producing clear documents based on supporting research that are cri-
tiqued by their partners and by outside experts. Boundaries are adjusted periodically, but not con-
stantly, typically on a quarterly or half-yearly basis. Their time and energy resources are expended to
set these boundaries and then to find deals that fall within the established criteria. Stated more
formally:
Proposition: Some leading venture capital firms use deliberately emergent strategies.
Exceptions frequently occur: when promising opportunities that fall outside the boundaries
arise, the partners must decide whether or not to invest. To be considered, any deal must present
strong potential economic returns, but should also offer follow-on potential. Venture capitalists
are keenly aware that transactions are path dependent, so each new deal must be examined to
see if it leads to a segment that offers high potential. These decisions are important, as partners
know that off the radar opportunities can sometimes evolve into new, promising investment
themes.
While the focus of Mintzberg and Waters original theoretical reflection was about management
setting boundaries, this study shows that there are two additional elements at work in the use of
deliberately emergent strategies: environmental constraints and the pro-active, time-paced ap-
proach needed to work in a turbulent environment. These are examined in the next section.
A dynamic model of venture capital firm strategizing

Examining how venture capital firms develop investment themes can offer insights into a more gen-
eral model of how to put deliberately emergent strategies into action, one that takes into account
a changing environment through time-pacing and external constraints.
While the concept of an umbrella strategy suggests that the boundaries can be moved in response
to the surrounding context, in the venture capital context firms must be pro-active and adjust them
both in response to - and more importantly in anticipation of - the changing environment. This
market moves at a fast pace, and an apparently rich set of opportunities (for example, the telecom
market in 1999) can disappear overnight. Thus boundaries are re-examined every quarter, and an
investment theme has a maximum life of a few years. However, the mechanism of adjusting bound-
aries can be applied to slower-paced markets as well.
The other element of a model that becomes clear from examining how venture capital firms
strategize is the critical role of external constraints. While firms might want to seek blue ocean
or uncontested market spaces,26 the reality is that most firms face outside constraints that can
only be changed or negotiated over the long term. For a venture capital firm, these are the cov-
enants negotiated with their limited partners over what segment they will invest in. However,
there are analogies for other firms: governmental regulation and union labour contracts are
two common constraints that must be respected and cannot be changed over the short term.
Nonetheless, boundaries can be chosen that maximize opportunities while still respecting outside
constraints.
Figure 2 illustrates the resulting dynamic model, showing how deliberate emergence was ob-
served at these leading venture capital firms and suggesting how it can be applied more broadly.
Here opportunities are shown evolving from nascent to real and shifting in a dynamic market.
Firms periodically adjust their boundaries - in the case of the venture capital industry this is
done every few months. The figure shows a hypothetical firm at T2 that needs to decide where
its search resources should be applied. Its historic resource deployment path is indicated in grey,
together with (above and below) the external constraints, and a possible future path illustrated,
between the dotted lines of the revised boundaries. While constraints may evolve over a long period
as society changes and the firm undergoes major developments, in the context of adjusting their
deliberate boundaries they must be considered as hard limits that have to be respected.

T T1 T2 T3
CONSTRAINTS
CONSTRAINTS
EMERGING MATURE SEARCH RESOURCES

HIGH-POTENTIAL VENTURES
Figure 2. Dynamic Model of Deliberately Emergent Strategies
Like all firms, venture capitalists have finite resources - in this case, limited amounts of time -
and using this form of strategizing helps them to make better use of their pro-active search process.
While this type of formal strategizing takes time and discipline, those firms engaging in themed in-
vesting find it worthwhile. Setting boundaries is a formal, deliberate action, the result of a process
that is an important reflection on the immediate past - the brand and the expertise of the venture
capital firm - but also on where they see opportunities developing in the future. For venture cap-
italists, the boundaries of their deliberately emergent strategies are constantly being adjusted, with
one eye on history, the other on opportunity.
the boundaries of their deliberately emergent strategies are constantly

being adjusted, with one eye on history, the other on opportunity.
Limitations and implications for future research

There are important limitations to this study. The findings are based on a pilot study, public source
materials, correspondence and 11 highly prized interviews with venture capitalist partners, and to
understand these processes in greater detail would require more thorough studies with greater ac-
cess to these firms. This exploratory study examines a prominent segment of the global venture cap-
ital business, but its scope is limited to American partnerships, and involves only a small and
relatively homogeneous sample of leading firms in Boston and Silicon Valley. Seppas work has
shown the diversity of organizational forms in venture capital, and while the practices of top tier
firms are clearly of interest, it is not clear how these findings inform on practices in the broader
venture capital and private equity industries.
While the discussion raises many important questions to be addressed by further research, three
are of particular interest to academics. How does this study inform on strategy practices in the

rest of the industry and the larger private equity market? Why do some firms choose to use more
formal processes while others choose not to? And finally, do such formal processes lead to greater
returns?
Implications for practitioners

This study shows how context can influence strategy processes. Both portfolio companies and ven-
ture capitalists face highly uncertain and challenging environments, but two distinct processes have
developed in the industry, as shown in Table 2.
While many managers may equate strategy with planning, seasoned venture capitalists do not.
They use planning with key milestones when appropriate and plausible, but use other processes,
with themes and boundaries, to develop strategy when facing less certain environments. While ven-
ture capitalists may choose an appropriate strategy for a particular context, there is no guarantee
that this will lead to success. In both cases, not only does it matter how choices are made, but
also how the firm then executes them.
While business plans and staged investments have been well documented, the deliberately emer-
gent process described here is less frequently observed in practice. Leading venture capital firms are
careful to adjust boundaries for their investment themes such that they are sufficiently broad to
include multiple opportunities, yet suitably focused to develop a brand in a particular segment
that can attract other transactions. Setting these boundaries keeps the firms focus beyond any
one transaction, and hence serves the important purpose of helping avoid strategic traps. One
of the possible downfalls of an incremental strategy is that a business can make a series of
short-term decisions and end up in a market with little potential, one where their firm-specific
resources (as Ghemawat and del Sol note) will no longer have any value. Because conditions evolve
so rapidly in the venture capital industry, this is especially true: so changing the boundaries be-
comes a critical reflection process.
This approach to strategy is to some extent exclusive to the most powerful firms in the industry,
who have highly sensitised management teams that constantly seek out and evaluate opportunities.
At the same time, their success gives them comparatively strong bargaining power over their capital
suppliers. However, the strategy model proposed here - to create and periodically adjust bound-
aries, operating within external constraints - could be applied by managers in many industries
that face high uncertainty.
Table 2. Two distinct strategy processes, based on context
Planned (Deliberate) Strategy Deliberately Emergent Strategy
Context Portfolio company: high risk, high growth Venture capital firm: highly uncertain environ-
opportunity. ment with strong competition.
Goals Build a valuable company (product or service). Build and liquidate a valuable portfolio in order
to generate high returns.
Funding Short-term, staged investment (6 to 18 months); Long-term funding cycle (3e7 years); investment
tied to milestone accomplishment. is committed with relatively few promises.
Processes (i) Meet key milestones of the business plan; (i) Fundraise;
(ii) Continue to build value by executing against (ii) Scan environment for potential home run
the plan in order to raise the next round of investments;
financing. (iii) Grow and then liquidate current
investments.
Strategy Execute and meet milestones of agreed-upon Build reputation and position (relative to other
business plan. firms) as a result of choosing good investments.

deliberately emergent strategies are where preparation meets
opportunism.
Conclusion
This article gives some insight into how venture capitalists act as bifurcated strategists: their port-
folio companies are held to plans and key milestones, while more emergent approaches are taken
within their own firms. It also reinforces the view of the industry as heterogeneous, with leading
firms using their position to allow for more emergence at both levels. Some firms are more informal
in their strategizing; the most formal may use themed investing for different reasons. In highly tur-
bulent environments, while opportunism is present, disciplined processes can be observed in the
leading firms, who: (i) conduct research that (ii) draws clear boundaries on an emerging sector
that (iii) focus where search resources will be deployed while (iv) remaining opportunistic. To para-
phrase a line often heard in the world of sport, this suggests that deliberately emergent strategies are
where preparation meets opportunism.
Acknowledgements
This article would not have come together without the advice and encouragement I received from
Robert David, Meg Graham, Taeb Hafsi, Kris Jacobs, Jan Jorgensen, Ann Langley, Renaud Legoux
and Henry Mintzberg. Connie Bagley, Irv Grousbeck, Barry Reiter, Charles Sylvestre and Dave
Witherow were also instrumental in connecting me to key practitioners. The patience and insight
shown by editors Richard Whittington, Ludovic Cailluet, Charles Baden-Fuller and the two anon-
ymous reviewers has been much appreciated.
Appendix A. Methodology
The origins of this study lie in a consulting contract from a venture capital firm that needed
help with their annual strategic planning. The preparation for this assignment included a liter-
ature review on this subject, which showed relatively little prior research on how such firms
determined their own strategies. An exploratory study was undertaken in Spring 2005, prior
to the consulting assignment, involving 12 semi-structured interviews (a convenience sample)
arranged with venture capital partners (primarily in Canada) to discuss their approaches to
developing strategy. On average, these informants had 15 years of experience, and the inter-
views lasted 25 minutes. This research, along with findings by Hsu, showed the industry to
be heterogeneous, and suggested that processes at top firms might be of particular interest.
As a result, a second, more thorough round of research was designed with more in-depth qual-
itative interviews with (i) more experienced informants, and (ii) informants from the United
States, since Canadian firms work in a distinct regulatory and legal environment. Professors at
Stanford and Harvard provided introductions to leading venture capitalists in Boston and Sil-
icon Valley, which (after concerted follow-up efforts) resulted in 11 significant interviews (see
Table 3).
A questionnaire was designed to inform on the proposition advanced in the first phase of the
study, but also included open-ended questions aimed at gathering details about how the strategizing
actually occurs. After a preliminary discussion of the informants background (their entry into ven-
ture capitalism and how they joined their particular firm), questions similar to those in Table 4
were asked.
Prior to each interview, the informants background was researched and, where possible, ques-
tions were tailored to enquire about specific events or investments in their firms history. All

Table 3. Phase 2 Research Interviews
Informant Firm Characteristics Informant Characteristics Interview
# Age of Firm Capital Location Role in firm Years Type &

(Yrs) (Millions) as VC Duration
1 >30 500 Silicon Valley Founder >30 T, 60

2 >30 100 Boston Managing Partner 25 F, 80
3 5 500 Boston Managing Partner 15 T, 75
4 >30 1,000 Silicon Valley Founder >30 T, 55
5 15 1,000 Boston Founder 20 T, 35
6 20 2,000 Silicon Valley Founder 20 T, 30
7 20 2,000 Silicon Valley Managing Partner 20 T, 30
8 >30 2,000 Boston Founder >30 T, 70
9 20 3,000 Silicon Valley Managing Partner 20 T, 30
10 20 800 Boston Managing Partner 20 T, 30
11 15 750 Boston Managing Partner 10 F, 30
Mean 25 1,250 25 49 min
Note: Interviews were held during December 2006 and January 2007. As the venture capital world is small, in order to
protect the identity of the informants, firm age and informant experience were rounded to the nearest 5, and indicated
if over 30. Capital indicates approximate capital under management. T denotes telephone interview, F denotes face-
to-face.
interviews were taped and transcribed, and these documents were analysed using Atlas Ti qualita-
tive analysis software to gather statements that informed on the original proposition as well as on
any other themes that emerged. Charts were created showing the similarities and differences of the
informants, some of which were used to develop the findings presented in this article.
Table 4. Sample Interview Questions
Theme Questions
Processes In your experience, how do venture capital firms set their strategy? How does this happen at your
firm? How has it evolved?
Can you give me an example of a recent change in strategy by your firm? How was it conceived, and
by whom?
Please describe any formal processes that you have for developing your firms strategy. How about
informal processes?
How do you balance your firm strategy versus opportunities that present themselves that are off-
track?
Portfolio Please describe your involvement in portfolio firms strategies. What are your expectations?
Firms Have you been involved in portfolio companies that have experienced a major shift in strategy?
Please elaborate.
Strategy How is your strategy articulated inside and outside the firm?
Articulation Is it shared with non-partners at the firm? Limited partners? The broader public?
Limited Please speak about the importance of limited partners in developing a strategy.
Partners How do you develop the strategy pitch in your offering memorandum? What dialogue do you have
with limited partners about this topic?

Appendix B. Illustrative quotations regarding investment themes
Source Illustrative Quotation or Excerpt
Informant 7 We are also strategic in looking at specific markets that we think will be attractive. We drive investment
theses within the firm and we work on those exact theses. You know, we try to map the market space
with the areas that we think there are market opportunities. But of course, in networking with people
you find deals that arent on your map and werent part of your thesis, and sometimes they are better
than what you are looking at and looking for.
Informant 2 All venture capital was essentially: you try to stir up a dealflow; and it was like looking down a canon;
the deal would be shot from the canon and you have to decide whether this was a good deal or not, not
knowing what the next five deals that were going to come in the door were going to look like, and not
having any way of getting perspective.Then we said, What if we had some sort of a matrix or
a mosaic to put these things in, we could actually judge them better and we can actually then
pro-actively go out and find them?
Informant 5 I do think that firms are reactive to particular deals at times but they tend to be reactive within a scope
or a framework thats defined by their investment strategy. And so I do believe that most firms or
certainly any firms that have a reasonable degree of success and longevity have a strategy and a thought
and philosophy behind what they are trying to do.
Informant 8 The second part (of the meeting) would be the individual business plans presented by each partner,
where each partners says: Heres huge whats going on my place; thats why I want to stay in this place.
I have done no deal for a year, heres why, and I want to stay with this area. I am happy I have done
no deals, but here whats going to happen in the future. or I have done no deals and thats why I am
changing my focus to this new area.
Teaching Case ACM had been deploying its $420-million third fund, using its markets first strategy, an approach
Study that identified and sought to take advantage of discontinuities within the three industry segments it
targeted.. But the partners also believed that the pure opportunistic approach of many venture
firmsdwhere each general partner was often given wide leeway in determining which, and how
many, markets and business models to invest indcould cause the firm to lose sight of the portfolio as
a whole. Without a markets first strategy, through which the entire firm agreed upon the markets of
interest before considering individual companies, the partners felt that firms would invest more on
the basis of the fashion of the moment than on business fundamentals or market analysis.27
Dave Cowan I think I developed the first formal road map at Bessemer. Back in 1992, fresh out of business school, I
Personal Blog joined Bessemer and proceeded to fall in love with every crappy pitch I heard (I recall that one of them
manufactured conference expo booths). Fortunately, before I did any damage, my bosses intervened,
suggesting that perhaps I should take a few months to Think Before I Fund. So I developed a compre-
hensive list of 38 potential investment sectors of high technology, and I spent the next 3 months whittling
it down to 5. .The result was a decision to focus on Data Communications .This road map enabled
me to focus my time very specifically on investment opportunities that matched my plan. I think that
entrepreneurs outside my road map appreciated the quick No, and entrepreneurs on my road map
appreciated the in-depth knowledge I brought to their businesses. Other Bessemer investors noticed how
much more pleasant my life was with a road map, and so they adopted and enhanced the methodology
themselves, with great results.28
Journalistic Azure Capital Partners performed extensive industry research: In 2001 they began doing research
Article into open-source software, including interviews with 50 companies in the sector. The result was three
investments in 2002, when few investors saw the potential of giving away software for free.29
Book Chapter For example, Robert Kagle of Benchmark Capital commented: About a year into Benchmark, at one
of our off-site meetings, we drew the conclusion that e-commerce was going to be really significant. So
we, in some ways, caught that wave early, and got out in front of it. I think we have something like 15
investments in e-commerce right now. Benchmark chose then to turn down many deals, notably
those in health-care, to focus on transactions that built the right knowledge and competencies.30

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equity performance: Returns, persistence, and capital flows, Journal of Finance 60(4), 1792 (2005).
5. R. Whittington, Strategy as practice, Long Range Planning 29(5), 731e735 (1996); and more recently
G. Johnson, A. Langley, L. Melin and R. Whittington, Strategy as Practice: Research Directions and
Resources, Cambridge University Press (2007).
6. See Chapter 8 on industry evolution in M. E. Porter, Competitive Strategy: Techniques for Analyzing In-
dustries and Competitors, Free Press, New York (1980); A five forces analysis of the venture capital industry
by Porter is found on p. 64 of W. D. Bygrave and J. A. Timmons, Venture Capital at the Crossroads,
Harvard Business School Press, Boston (1992); see also P. Ghemawat and P. del Sol, Commitment versus
flexibility?, California Management Review 40(4), 3e42 (1998); B Lwendahl, Strategic Management of
Professional Service Firms (3rd ed.), Copenhagen Business School Press (October 2005).
7. See W. A. Sahlman, The structure and governance of venture-capital organizations, Journal of Financial
Economics 27(2), 473e521 (1990); W. A. Sahlman, Some Thoughts on Business Plans, Publication #
89710, Harvard Business School Press, Boston (1996); R. A. DAveni and R. E. Gunther, introduce the
term hypercompetition in Hypercompetition: Managing the Dynamics of Strategic Maneuvering, The Free
Press, New York (1994); K. M. Eisenhardt and S. L. Brown use the term high velocity in Competing on
the Edge: Strategy as Structured Chaos, Harvard Business School Press, Boston (1998); R. M. Grant uses
the descriptor turbulent in Strategic planning in a turbulent environment: Evidence from the oil majors,
Strategic Management Journal 24(6), 491e517 (2003), although it was originally suggested by F. E. Emery
and E. L. Trist, The causal texture of organizational environments, Human Relations 18(1), 21e32 (1965);
See also J. Daft, R. L. Sormunen and D. Parks, Chief executive scanning, environmental characteristics,
and company performance: An empirical study, Strategic Management Journal 9(2), 123e139 (1988);
K. E. Weick, The Social Psychology of Organizing (2nd ed.), Addison-Wesley Publishing Co., Reading,
MA (1979); J. G. March, Exploration and exploitation in organizational learning, Organization Science
2(1), 71e87 (1991).
8. R. A. DAveni with R. E. Gunther (1994) op. cit at Ref 7; K. M. Eisenhardt, Making fast strategic decisions
in high-velocity environments, Academy of Management Journal 32(3), 543e576 (1989); K. M. Eisenhardt
and S. L. Brown (1998) op. cit at Ref 7.
9. See, for example I. Goll and A. M. A. Rasheed, Rational decision-making and firm performance:
The moderating role of environment, Strategic Management Journal 18(7), 583e591 (1997).
C. E. Lindblom, The science of muddling through, Public Administration Review 19(2), 79e88
(1959); H. Mintzberg, Patterns in strategy formation, Management Science 24(9), 934e948 (1978);
H. Mintzberg and J. A. Waters, Of strategies, deliberate and emergent, Strategic Management Journal
6(3), 257e272 (1985).
10. See O. Williamson, The Economic Institutions of Capitalism: Firms, Markets, Relational Contracting, Collier
Macmillan, NY, (1985) p. 47 and 49. M. Granovetter, Economic action and social structure e the problem
of embeddedness, American Journal of Sociology 91(3), 481e510 (1985).

11. H. Mintzberg and J. A. Waters (1985) op. cit. at Ref 9 above p. 257.
12. See, for example: V. H. Fried, G. D. Bruton and R. D. Hisrich (1998), op. cit. at Ref 2; also J. Rosenstein,
The board and strategy: Venture capital and high technology, Journal of Business Venturing 3, 159e170
(1998); T. Hellmann and M. Puri, The interaction between product market and financing strategy: The
role of venture capital, Review of Financial Studies 13(4), 959e984 (2000).
13. See, for example T. T. Tyebjee and A. V. Bruno, A model of venture capital investment activity, Manage-
ment Science 30(9), 1051e1066 (1984); I. C. Macmillan, L. Zemann and P. N. Subbanarasimha, Criteria
distinguishing successful from unsuccessful ventures in the venture screening process, Journal of Business
Venturing 2(2), 123e137 (1987).
14. A. L. Zacharakis and D. A. Shepherd, The nature of information and overconfidence on venture capital-
ists decision making, Journal of Business Venturing 16(4), 311e332 (2001); R. B. Robinson, Emerging
strategies in the venture capital industry, Journal of Business Venturing 2(1), 53e77, 73 (1987); M. Seppa
(2000) op. cit. at Ref 3; S. Kaplan and A. Schoar (2005) op. cit. at Ref 4.
15. From a theoretical perspective, the argument to remain opportunistic is supported by A. Inkpen and N.
Choudhury, The seeking of strategy where it is not: Towards a theory of strategy absence, Strategic
Management Journal 16(4), 313e323 (1995) who maintain that there are situations where strategy can
be absent, representing a case of constructive ambiguity.
16. See C. Tilghman and J. Denrell, Note on Organizational Learning in Venture Capital, Stanford Graduate
School of Business Publishing, Case E-185, Stanford, CA (2004); F. Hardymon, J. Lerner and A. Leamon,
Adams Capital Management: Fund IV, Case No. 803e143, Harvard Business School Publishing, Boston
(2006).
17. From Q&A with Kleiner Perkins Caufield & Byers, San Jose Mercury News (14 November 2004).
18. From personal correspondence with the author, reprinted with permission, quoted in its entirety.
19. Discussed in P. A. Gompers and J. Lerner, The Venture Capital Cycle (2nd ed.), MIT Press, Cambridge,
MA (2004).
20. C. A. Montgomery, Corporate diversification, Journal of Economic Perspectives 8(3), 163e178 (1994).
21. Firms that use investment themes typically do not have just one per firm. They have several, usually
one per partner. For presentations to limited partners they roll them up into larger, overarching
themes.
22. R. A. DAveni with R. E. Gunther (1994), op. cit. at Ref 7; J. P. Murmann, Knowledge and Competitive
Advantage: The Co-Evolution of Firms, Technology and National Institutions, Cambridge University Press,
Cambridge, NY 14 (2003); B. Kogut and N. Kulatilaka, Capabilities as real options, Organization Science
12(6), 744e758, 749 (2001).
23. Prospectors are discussed in R. E. Miles and C. C. Snow, Organizations: New concepts for new forms,
California Management Review 28(3), 62e73 (1986); Pro-active strategizing was observed by K. M.
Eisenhardt and S. L. Brown (1998), op. cit. at Ref 7.
24. D. Cowan. Who has time for this? personal blog, Available from: http://whohastimeforthis.blogspot.com/2005/
08/road-map-investing.html accessed February 12, 2007. Bessemer is generally recognized as a top tier firm.
25. As distinct from what a colleague jokingly called schizophrenic strategists, who might take two different
approaches to strategy in identical contexts.
26. W. C. Kim and R. Mauborgne, Blue ocean strategy, Harvard Business Review 82(10), 76e84 (2004).
27. F. Hardymon, J. Lerner and A. Leamon (2006), op. cit. at Ref 16.
28. D. Cowan, (2005) op. cit. at Ref 24.
29. West coast VCs, East coast rules, BusinessWeek p. 57 (3 April 2006).
30. U. Gupta, Done Deals: Venture Capitalists Tell Their Stories, Harvard Business School Press, Boston 21
(2001).
Biography
Brian L. King managed two entrepreneurial ventures over a ten-year period after receiving his MBA from Stanford.
Facing middle life, rather than buying a red sports car, he enrolled at McGill University, where he is presently
completing his PhD in Management Strategy: his dissertation examines decision making in the venture capital
industry. Desautels Faculty of Management, McGill University, 1001 Sherbrooke St. West, Montreal, Qc, H3A 1G5
E-mail: brian.king@mail.mcgill.ca

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Long Range Planning 41 (2008) 345e366 http://www.elsevier.

Strategizing at Leading Venture

Venture capitalists have developed a powerful mythology based on

venture capitalists are bifurcated strategists, using carefully controlled

346 Strategizing at Leading Venture Capital Firms

Long Range Planning, vol 41 2008 347

Research design and methods

Portfolio company strategy work

348 Strategizing at Leading Venture Capital Firms

informants spoke more about milestones [for their portfolio

Venture capital firm strategizing

Long Range Planning, vol 41 2008 349

we dont need a strategy, we just need to do good deals, which

350 Strategizing at Leading Venture Capital Firms

Long Range Planning, vol 41 2008 351

352 Strategizing at Leading Venture Capital Firms

Can a firm change its strategy?

Table 1. Networking Rationales by Venture Capitalists

Long Range Planning, vol 41 2008 353

There is tension between venture capitalists and their limited partners

354 Strategizing at Leading Venture Capital Firms

Long Range Planning, vol 41 2008 355

Themed investing observed at leading firms

356 Strategizing at Leading Venture Capital Firms

Long Range Planning, vol 41 2008 357

LEADING FIRMS CAN ALLOW FOR MORE EMERGENCE

Figure 1. The Strategy Continuum for Venture Capital Firms

358 Strategizing at Leading Venture Capital Firms

A dynamic model of venture capital firm strategizing

Long Range Planning, vol 41 2008 359

EMERGING MATURE SEARCH RESOURCES

Figure 2. Dynamic Model of Deliberately Emergent Strategies

the boundaries of their deliberately emergent strategies are constantly

Limitations and implications for future research

360 Strategizing at Leading Venture Capital Firms

Implications for practitioners

Table 2. Two distinct strategy processes, based on context

Planned (Deliberate) Strategy Deliberately Emergent Strategy

Long Range Planning, vol 41 2008 361

362 Strategizing at Leading Venture Capital Firms

Informant Firm Characteristics Informant Characteristics Interview

# Age of Firm Capital Location Role in firm Years Type &

1 >30 500 Silicon Valley Founder >30 T, 60

Table 4. Sample Interview Questions

Long Range Planning, vol 41 2008 363

Source Illustrative Quotation or Excerpt

364 Strategizing at Leading Venture Capital Firms

Long Range Planning, vol 41 2008 365

366 Strategizing at Leading Venture Capital Firms

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