the aggregation of our conceptual categories into theoretical dimensions capable of explaining how SVC duality affects the evaluation of and engagement with new ventures. In this stage, we considered the role of the venture attributes and actions in shaping and developing investment outcomes. Approaching the data from this perspective, we observed that certain strategies were used to evaluate ventures as they were presented, and led to behaviors such as “filtering out,” “be as helpful as possible,” and
“pursue.” “Filtering out” and “be as helpful as possible” served the purpose of allowing the Firm to enact and reinforce its own hybridity without leading to an investable outcome. “Pursue,” though rarer (due to the rarity of venture-fund fit and strong hybridity claims all around), at times led to an investable outcome. Finally, other strategies were applied when the Firm was convinced by a portion of the venture’s identity claims (e.g., the social claims or the commercial claims) and sought to explore the venture’s hybridity potential. When successful, these latter strategies allowed the Firm to co-create an investment opportunity not previously available.
This recursive process revealed an intuitive set of strategies the Firm applied to evaluate and shape investment proposals along social and commercial dimensions and nudged us towards the literature on the
104 Drafts of earlier data displays are included in the appendix of this chapter.
plausibility of identity claims (Lounsbury & Glynn, 2001), new venture identity assessment (Navis & Glynn, 2011), and new venture duality (Smith & Besharov, 2017). We refined our model with the research question: How do hybrid resource providers assess and influence the plausibility of new venture identity claims among hybrid ventures?
Findings
In this part of our study we detail five strategies used by a dualistic early-stage investment firm to understand and shape identity duality in evaluated ventures. We demonstrate empirically how the assessment of new venture efficacy across social and commercial identity claims led—or did not lead to—capital acquisition (Lounsbury & Glynn, 2001; Navis &
Glynn, 2011). We organize the patterns of decisions we observed into five strategies: Cautious Pursuit, Tinkering, Rapprochement, Helping, and Filtering Out. When successful, these strategies allow the investor to identify and avoid investments in ventures with a high risk of hybridity collapse, termed “Trade-off Hazard.” They also enable the SVC to increase the plausibility of ventures’ social and commercial identity claims and co-create attractive hybrid investment opportunities. However, these strategies are costly in terms of time, social capital, and emotional labor.
First, in the section on social and commercial identity claims baselines, we present the initial ways in which the Firm expressed and assessed duality, highlighting the venture attributes most important to the Firm and how this affects SVC behavior (Cautious Pursuit and Filtering Out Strategy). Next, in the section on hybrid identity reinforcement, we further detail its understanding of new venture hybridity (“Trade-off Hazard”). In the third section, we detail additional strategies the Firm applied to improve the plausibility of evaluated ventures’ hybrid identity claims, inadvertently shaping new ventures’ hybrid identities (Tinkering and Rapprochement Strategy). Here, we present a variance model detailing the actions taken by the Firm when evaluating investment proposals, as well as the influence it has on new venture identity. In the last section, we discuss a strategy we observed the Firm using without the intention of accessing an investable deal (Helping Strategy), and point to the hybridity-buffering effects these strategies had on the Firm’s own duality.
Baseline Social and Commercial Identity Claims and Implications for Venture Assessments
We know from the literature that social investors use social and commercial filters in their selection and evaluation process (see white space in the following figure, Figure 26). These filters act as “floors” that demarcate the minimum social or commercial potential that a venture can
claim before being denied funding (Höchstädter & Scheck, 2015).
Depending on the fund, the level of these floors changes. The amount of capital (plus interest) expected in return, as well as the extent of social outcomes delivered, changes according to each fund’s baseline commercial expectations (Chiappini, 2017).
Figure 26: Expectation of investment firm behavior based on literature
As illustrated in the following section, our data confirms this concept of floors and goes further by qualifying the demarcation threshold in SVCs.
We find a parallel structure in terms of social and commercial baseline (which is expected due to our sampling criteria). However, while these baselines exist, we do not observe a consistent action based on the
baselines, as we will explain when presenting the SVC’s shaping strategies (see: Helping Strategy) later in the Findings. Investment deals are only immediately Filtered Out if plausibility is judged to be low-low across both claims, but the Firm’s evaluation process extends beyond this initial assessment. However, we do observe the SVC using both social and commercial considerations as independent filters to assess objective venture attributes—and essentially plot ventures on a mental model of two axes (as shown above).
Our data illustrates that the Firm also uses social and commercial considerations as lenses to assess the long-term plausibility of the venture’s social and commercial identity claims (i.e., where the ventures are on the axes), which we termed “Trade-off Hazard.” Finally, we also illustrate the types of preferences the Firm upheld which were not specifically related to either their social or commercial mandate. We detail how these
considerations were applied by the Firm in the following section.
Filtering Out Strategy: The Firm did not consider ventures whose commercial claims did not meet baseline plausibility expectations. The Firm prioritized the plausibility of a new venture’s commercial identity claims in the early stages of the evaluation process. Its behavior towards new ventures’ commercial claims was triggered by venture attributes commonly discussed in the venture capital and investor decision-making literature (MacMillan et al., 1985; Petty & Gruber, 2011; Wells, 1975). In their investment proposals, ventures made claims about (1) their offer, (2) target market and market response, (3) financial model, and (4) founding team qualities, which were together intended to affect the overall plausibility of the commercial identity claims.
However, over the course of our fieldwork, the Firm found fault in one or more of these venture claims in multiple venture proposals. For example, they were concerned about one of the following: production risk, value proposition effectiveness and differentiation, commercialization strategy (offer); competition, size, market response, product-market-fit (market); high capital requirement, ineffective revenue model (financial matters); or the founder’s personality, commercial motivation, business expertise or technology expertise (founder/founding team). Strong concerns in one or more of these claims decreased the overall plausibility of the new venture’s commercial claim, which we and/or the Firm then rated as a weak or average commercial claim.
We observed that the Firm consistently filtered out ventures that had significant commercial concerns, i.e., ventures whose commercial claims had weak plausibility. For example, in a Pre-Investment Committee (IC) Poll on investment opportunity 756, which uses coffee grinds to produce energy, the Firm’s Partner wrote:
“[vote no].105 with current v low energy prices in question their ability to generate cheap enough energy. here's the rub - this is basically a biofuel generator. There are LOTS of biofuel generators, and people dont need to be as elaborate as collecting coffee from coffee shops - you can create biofuel from all sorts of agri[cultural] waste - cuttings, offal etc. I dont [sic] see the economic logic, UNLESS the energy conversion coefficient is MEANINGFULLY higher than other sources of biofuel, which I am certain it is not. FOLLOW UP QUESTION - how does energy conversion of coffee compare to other biowaste?”
The Firm reiterated concerns with a venture’s commercial claims in another example, which is a message from the Firm to the venture explaining their investment decision. The Firm pointed to four main
105 The SVC drew on its branding to indicate a “yes” or “no” vote. Hence, we omit the actual term to protect the Firm’s identity.
concerns: market competition, venture competitive advantage, revenue model, commercialization strategy:
“First, the competitive landscape has become quite saturated over the past few years, with corporates facing an increasing spectrum of similar propositions for their employees. The team struggled to see what the competitive edge is for corporates to choose [venture] over these propositions. Additionally, the team has found that the revenue models in this space are quite difficult to get right, especially when seeking to scale across multiple clients. The complexity here may [be] caused by the "lumpiness" of revenue from [Corporate Responsibility] budgets and long sales cycles associated with corporate entities with [our firm] having preference for business' that are less 'contract' based.” (720, Correspondence with venture).
Baseline social and commercial requirements helped to inform the overall assessment of social or commercial plausibility of a venture (as indicated in Figure 27). As illustrated in this section, an investment decision was often based on concerns about multiple aspects of the venture’s commercial claim, however, the Firm also expressed concern for both commercial claims and social claims in the same investment decision. We detail the Filtering Out strategy for social claims in the following section.
Figure 27: Conceptual visualization of baselines of plausible social and commercial identity claims
Filtering Out Strategy: The Firm did not consider ventures whose social claims did not meet baseline plausibility expectations. The Firm prioritized the plausibility of a new venture’s social identity claims in the early stages of the evaluation process as well, seeking investment in ventures with strong and persuasive social identity claims. As illustrated in the conceptual visualization above, these social claims acted as the mirror image to the commercial claims and provided the baseline required to enable an emergent hybrid identity. Our data revealed that for new venture identities to be socially plausible to the Firm, the venture needed to (1) target an important social issue, (2) provide a significant contribution to the issue, and (3) approach the issue in a way in which progress towards the issue would be easily measured.
When selecting an important social issue, the venture needed to achieve two things. First, the venture needed to address a theme of interest
to the Firm. This finding confirms a social investment strategy that the literature has termed “investment targeting” or “filtering in” (Rudd, 1981), whereby funds focus on one or more critical issues, such as the natural environment, or education. In our case, though the SVC was a generalist investor, they explicitly identified five action areas, including economic development, education, environmental sustainability, healthcare and relationships. Filtering Out ventures, according to these guidelines, was fairly easy for the Firm to execute. For example, the Firm explained in an email describing the investment decision of one venture, “I'm not sure there is a clear enough fit with our investment areas and impact focus, but we do wish you all the best” (179, Correspondence with venture).
Second, the Firm also expected ventures to address a significant problem within these themes. For example, with regards to a health-oriented device, the Firm explained its first reason for not investing as “1).
The high price point excluded large parts of the population, and therefore limited the positive social outcome generation” (1243, Correspondence with venture)—suggesting that while the venture was addressing an important issue (namely, health) the Firm considered it to be addressing a problem felt by a small portion of the population, including a demographic whose needs were perhaps less urgent.
Next, after selecting an important issue to address, the Firm expected the venture to make a significant (and overwhelmingly positive)
contribution towards the problem. In one case, the Firm was considering a venture addressing an important problem in education, one of their target areas. However, the Firm was conflicted about the venture’s actual contribution towards improving children’s education. One viewed the contribution as not significant (i.e., not addressing a root problem), while others viewed the venture as having potential negative outcomes.
Comments from their internal, Pre-Investment Committee Poll on investment opportunity 872 read:
“I want them spending less time on the screen!” (SVC2);
“Agree. Would rather direct children away from screen time” (A2);
“interesting,” (SVC1);
“[vote no]. I can possibly be convinced that educational viewing content generates more positive outcomes than existing media out there for children, but I don't believe this addresses root cause of problem” (SVC3);
“The business makes sense to me as well as the reasons for why they can win (focus on smaller independent producers, timeless content, etc), however I think the critical issue is the ethical one - are we supportive of 'healthy' (ad-free, educational) screen time? Is some screen time necessary evil and therefore re-directing kids from one type of platform/content to another is worthwhile? Or are we more radical than that (screen time is fundamentally wrong)?” (A3).
Although the Firm eventually makes a judgment on a venture’s claim to be providing a significant contribution to an issue, it is sometimes less straightforward to determine. In the following example, the Firm assesses the significance of a venture’s contribution to an issue, which they pair with a concern relating to the venture’s commercial claims as well. In a message to the following venture (#1321), the Firm explained its reason for not investing:
“1). The production of the goods by skilled artisans reduces the social impact of the business, as these are people who almost definitionally have other employment opportunities (as you mentioned in regards to them working for [luxury retail brand]
amongst others). Therefore, we struggled to apply our investment process in a way that was analogous with our other investment decisions.
2). The low run rate of the business is likely to be challenging from a cash flow management perspective in the short-term.”
Next, in addition to targeting an important social issue and providing a significant (positive) contribution to the issue, the Firm also sought a final component prior to Filtering Out investments for social reasons: Ventures needed to approach a social issue in a way in which progress would be easily measured.
“I like the company but raise two questions: 1) How does it fit in our impact metric? [It’s] education, but there are no clear impact metrics defined and they do not use any KPIs [Key Performance Indicators] 2) Very competitive market […] (229, Poll)”
Yet, despite the importance of these three components in helping the fund to determine a venture’s baseline social plausibility, a failure to satisfy these three baseline qualities would not immediately eject the venture from the evaluation process. The Firm often exchanged with ventures and gave them time to augment weak elements of their claims. In one case, the Firm waited two weeks for a contact “to send pipeline and impact measurement data” (IC Minutes). As we will describe in the section on shaping social and commercial claims, once ventures passed a threshold of plausibility (e.g., average), the Firm also took a more active support role. However, by and large, this Filtering Out strategy we observed at the Firm was consistently applied for ventures that displayed significant issues with their social and commercial claims (i.e., their social and/or
commercial identity claims were assessed as having low plausibility). We enclose additional exemplary data in Table 31, at the end of this section.
Filtering Out Strategy: The Firm did not consider ventures whose other claims did not fit contextual Firm preferences. The Firm
encountered a number of different attractive ventures that they decided not to pursue due to a lack of fit with contextual and VC-specific preferences.
Like other investors, the Firm had preferences in terms of location, venture stage, deal structure, venture industry, fund capacity and the venture’s fundraising timeline. Although the Firm’s investments at the end of our fieldwork period included companies in three countries and two continents, the Firm preferred companies headquartered nationally. The Firm preferred the valuation of companies in which they were investing in for the first time to be between 1-3 million Euros, and their average investment ticket was 300,000 Euros. In terms of deal structure, the Firm was comfortable with minority ownership, if complemented with a board seat, and usually preferred preference shares,
Though the Firm invested in a range of industries, the venture could not conflict with ventures in the Firm’s existing portfolio, should be the most attractive venture under the consideration by the Firm at that time, and should be operating in a field in which the Firm had some expertise and network connections. The fit with the Firm’s expertise was a key aspect of how they understood their investment strategy ([Redacted], 2017b). Since investing in early-stage ventures is inherently risky, the Firm sought to substantiate as many of the venture’s claims as possible through their expertise and network. They viewed this, as “de-risking,” i.e., reducing (though not eliminating) risk in as many of the venture’s tasks as possible (e.g., by reducing the risk of unsuccessful production, inadequate distributors, etc.). They explain this in the following Pre-IC Poll (#872),
“I don't know the children's content space to fully appraise why / if this is needed - it seems very similar to [another venture] in terms of specialised [sic] content channels for children. I'm not sure how we would look to de-risk this in a meaningful way - as our media contacts are limited” (SVC4).
And regarding another venture,
“Does this actually change consumer behavior significantly enough for recurring use at high enough volumes? Would like to see what assumptions they've tested here to see if they can actually achieve revenue growth that matches free initial adoption (ie: [Lifetime Value vs. Customer Acquisition Costs]). There's a lot of competition (and already some failures!) - what extraneous/uncontrollable variables exist in this space, and can we de-risk through our network?” (SVC3)
Finally, the Firm had limited capacity and could only conduct deep due diligence on 3-4 ventures at a time, hence, timing was crucial for ventures to be considered for investment. Moreover, the Firm required extensive due diligence before feeling comfortable enough to pursue an investment, giving an advantage to ventures which approached the Firm early on in (or even prior to) their fundraising period. We include these considerations because while they did not have any direct bearing on the plausibility of new venture hybridity—or new venture identity in general—these claims did affect the Firm’s overall assessment of investment proposal
attractiveness, and in many cases represented the baseline requirements for being considered for investment.
Conceptual category Empirical Themes Exemplary data106 Baseline commercial
claims
Offer (product or service)
- [We] struggled with the product's ability to be a truly differentiated and 'game changing' technology within the accessibility market. (785, Correspondence with venture)
- I ultimately think this service is still a little ahead of its time and not a holistic enough solution (i.e.: nice to have for those who can afford it, but limited prospect of continual engagement and mass adoption). (1104, IC Poll) - Concerns around willingness to [pay] for separate handset (885, IC Poll) - A huge market but this business doesn't seem to address the main issues that
all ventures in this space struggle with - recruitment of quality carers and preventing disintermediation. (592, IC Poll)
Market - First, the competitive landscape has become quite saturated over the past few years, with corporates facing an increasing spectrum of similar propositions for their employees. The team struggled to see what the competitive edge is for corporates to choose [venture] over these propositions. (720, Correspondence with venture)
- Pass on investing due to competition (836, Database)
- I like the company but raise two questions [sic]: 1) How does it fit in our
- I like the company but raise two questions [sic]: 1) How does it fit in our