Delayed Project Terminations in the Venture Capital Context

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Venture capital is crucial for financing and supporting young, rapidly growing companies. While success stories like Microsoft, Apple, and Google are well-known, such "home runs" are rare, and many investments yield little or no return. Accurately evaluating portfolio companies and timely terminating unsuccessful ventures is vital for the overall performance of venture capital firms. Rational behavior would suggest that investment terminations should neither be prematurely nor systematically delayed. However, recent studies indicate a tendency for delayed terminations that contradict rational decision-making models. This study explores the phenomenon of delayed project terminations in the venture capital industry, examining whether escalation of commitment can explain this behavior. It develops a theoretical framework that integrates various economically irrational drivers of project escalation. A large-scale survey of European venture capitalists serves as the empirical basis for analyzing the hypothesized relationships. The findings reveal that the interaction of different escalation drivers is more complex than previously thought and suggest effective countermeasures for managing escalation. The insights gained extend beyond venture capital, applicable to various contexts where organizations make sequential investment decisions.