Socioemotional Wealth, Generations and Venture Capital Involvement in Family-Controlled Businesses

Abstract

In this paper we analyze how the will to protect socioemotional wealth affects venture capital (VC) involvement in family-controlled businesses (FCBs). We find that first generation FCBs receiving VC show significantly lower productivity growth than other investees prior to the initial VC investment. We argue that the higher reluctance to lose control in first generation FCBs explains why only those that are not performing well are willing to accept an external investor as new shareholder. We also find, however, that the impact of VC financing on productivity growth is higher in first generation FCBs than in other investees. Since managers’ entrepreneurial orientation decreases over time, the effect of VC involvement is more limited in second or following generation FCBs.