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.