Upside-Down Venture Capitalists and the Transition Toward Pyramidal Firms: Inevitable Progression, or Failed Experiment?

Posted: 4 Nov 2009  

Noam Wasserman

University of Southern California - Lloyd Greif Center for Entrepreneurial Studies

Date Written: 2005

Abstract

Focuses on the current changes in the structureof firms in the venture capital (VC) industry. The early-stage VC industry wasdominated by small firms composed primarily of senior staff members and only afewjunior members. In this, they resembled many other professionalservices firms. In the late 1990s, a number of VC firms (following otherprofessional services firms) adopted pyramidal structures and new internalprocedures, relying on a larger number of junior staff, and becoming moreinstitutional and professional. This analysis examines the effects of the recent downturn in the VC industryon the structure of VC firms. The study was based on field research and datafrom a large-scale panel dataset of 327 VC firms covering the years 1997 to2002. A model is presented of the motivation for and obstacles to achievingtransformation to the pyramidal model. The paper discusses the reasons("trigger events") that cause firms to change as well as the problemsfirms that encounter in transitioning to the pyramidal form and the barriersthat might prevent a change from becoming widespread or permanent. It was found that, due to a VC market downturn beginning in 2000, some firmshave retreated from plans to adopt a pyramidal organization because of barriersand resistance. Hence, the VC industry is still in the midst of significantupheaval. Certain triggers (such as generational transition) will increase incoming years. Different philosophies about the value created by generalpartners in VC firms will affect ways that VC firms structure themselves. It ispossible the pyramid may become a powerful organizational model for theindustry. (TNM)

Keywords: Barriers to change, Organizational hierarchy, Pyramid firms, Professional services firms, Executive succession, Change strategies, Venture capital firms, Organizational structures, Organizational change, Organizational cultures

Suggested Citation

Wasserman, Noam, Upside-Down Venture Capitalists and the Transition Toward Pyramidal Firms: Inevitable Progression, or Failed Experiment? (2005). Entrepreneurship, Vol. 15, p. 151-208 2005. Available at SSRN: https://ssrn.com/abstract=1497742

Noam Wasserman (Contact Author)

University of Southern California - Lloyd Greif Center for Entrepreneurial Studies ( email )

United States

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