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Cleland and Ireland (2002) noted the use of project management helps to facilitate a

―paradigm for how the management functions of planning, organizing, motivation, directing, and

control carried out in the commitment of resources on the project‖ (p. 40). The PMBOK guide

indicated project management is a process used to manage the implementation of strategy

(Kenny, 2003). Tucker (2006) noted project management is often a process involving the

―application of knowledge, skills, tools, and techniques to a br oad range of activities needed to

meet the requirements of a project‖ (p. 2).

Project life cycle

The project life cycle consists of five processes groups (see Figure 5), including (a)

initiation, (b) planning, (c) execution, (d) monitoring and controlling, and (e) closure (PMI,

2004; Westland, 2006). The initiation process group includes the identification of a business

opportunity, definition, and authorization of the project (PMI, 2004). Following the authorization

of start of project, the planning process group involve tasks such as define and refine project

objectives, plan how to attain the objectives, and develop project management plan, quality plan,

resource plan, communications, procurement plan, and risk plan (PMI, 2004).

The project execution process group consists of the construction of project deliverable

through the execution of tasks listed in the project management plan (Tucker, 2006). Monitoring

and controlling process group involves measuring the progress against the project baselines,

monitor the progress to identify deviations from the project management plan, and recommend

corrective actions to meet project objectives if needed (PMI, 2004). Figure 5 shows the process

groups of project management and the associated project management processes and activities

(Hamel, 2001).



Project success factors

The use of standard triple constraints, such as cost, schedule, risk, quality, scope, and

customer satisfaction can help to measure the success of a project (PMI, 2004). A project that

meets stak eholder and customer‘s expectations, and achieves goals within the triple constraints

often considered as successful (Shatz, 2006; Verma, 2007). Jugdev and Muller (2005) described

the importance of the satisfaction of stakeholder in defining the success of projects. The

academic researchers from U.S. Department of the Interior Bureau of Reclamation (2007) noted

project success is ―the delivery of the required product, service or result on time and within

budget‖ (p. 52).

Evidence indicated technical knowledge and skills, including the people skills of project

managers and team members have a positive impact on the success of projects (Tucker, 2006).

Technical skills had a direct impact on how a project manager performs in project management

disciplines. People skills facilitate effective project communication between project managers

and teams (Cleland & Ireland, 2002). No research exists in other disciplines with regard to

project management, especially in areas such as project execution, project monitoring phases,

and reporting.

Toney and Powers (1997) studied Fortune 500 companies to examine success factors and

concluded strategic communications, project management professionalism, and project

management are the best practices to achieve success. Loo (2002) studied 34 Canadian

organizations and concluded people practices are as important as technical practices in the

success of projects. According to Loo (2002), the technical best practices included ―(a) having an

integrated project management system; (b) effective scope management of projects; (c) effective



project planning, scheduling, execution, and controlling; and (d) effective contract management‖

(p. 30). According to Jugdev and Muller (2005), the critical success factors for projects included:

(a) mission; (b) top management support; (c) schedule/plan; (d) technology to support the

project; (e) monitoring; (f) channels of communication; and (g) regular project meetings.

Project management literature gaps

A group of management research professionals from Standish Group declared U.S. firms

lost $81 billion because of project cancellations in 1994. The situation was the same in 2004

(Ferguson, 2004). Earlier researchers questioned the findings of professionals from Standish

Group and criticized them for not disclosing their methodology and using inconsistent reporting

(Glass, 2005).

Emam and Koru (2008) conducted an international Web survey of information

technology (IT) departments in 2005 and 2007 to estimate the cancellation rates of IT projects

and determine what factors caused the cancellations. Emam and Koru surveyed 232 IT managers

in 2005 and 156 IT managers in 2007. Emam and Koru observed 15.5% of projects cancelled in

2005 and 11.5% cancelled in 2007 without yielding any deliverable. Thirty three percent of the

combined participants contended a lack of senior management involvement was the reason

behind the cancellation of the projects, whereas 28% posited a lack of project management skills

resulted in the project failures.

The statistics regarding projects success and failure indicated a need for substantial

improvement in project management discipline to achieve project success (Shenhar & Dvir,

2007; Tucker, 2006). According to Hyvari (2006), an unambiguous criterion for successful

projects does not exist in the body of knowledge regarding project management. Hyvari (2006)



observed a knowledge gap with regard to the process of achieving the success of projects in an

organizational context.

Critical success factors for projects comprise five groups: project related, project manager

related, project team related, organization related, and external environment related (Hyvari,

2006). Several earlier researchers have studied the relationship between the style of project

leadership and project success (Leban & Zalauf, 2004). Literature exists on the impact of

leadership traits on the success of project management and projects (Gehring, 2007). Tucker

(2006) noted PMBOK guide failed to elaborate on knowledge management and sharing within

the project team and failed to provide strategies for effective project execution, project

monitoring, and project reporting.

Project Planning, Execution, Monitoring, and Reporting Strategies

Gilbert (2004) contended, ―From an etymological perspective, ‗execution‘ refers to

following up on a decision, or transforming an idea into reality‖ (p. 1). The project execution

phase is an important process group involving the execution of the project in accordance with the

approved project plan to achieve the end deliverable. The project execution phase includes the

tasks of execution whereas monitoring and controlling phase includes measuring and evaluating

the progress of projects, exercising management controls, and reporting project status (PMI,

2004).

Project managers must measure project performance and monitor project risk as part of

controlling project (PMI, 2004). Project managers control the execution of projects through

regular analysis of the work done or to be done. Mulcahy (2006b) posited project managers

should involve the team in execution and monitoring phases by holding frequent meetings and



sending reports to all members. The use of improvement meetings such as regular project

knowledge-sharing meetings helps teams to improve their performance (Lewis, 2007). The

implementation of regular status meetings serves as a maintenance strategy to review the status

and keep the project on track.

Cleland and Ireland (2002) contended, ―The unexamined project is not worth much. No

matter how perfect the plan, without regular reviews during neither the life of the project the

project can progress nor the reality of the plan can be assessed‖ (p. 377). The use of regular

meetings also helps in controlling the project (Cleland & Ireland, 2002). Project managers or

leaders must monitor the progress of project continuously, evaluate the execution of the project

plan, and ensure project execution complies with other plans such as the risk plan, quality plan,

and the procurement plan.

Project daily knowledge-sharing and problem-solving meetings

The use of daily project meetings during the planning and execution phases is to focus on

knowledge dissemination and problem-solving. This might help project managers or leaders to

execute successfully and control projects. The daily knowledge-sharing and problem-solving

meetings might help the entire project team to execute projects with respect to the project plan.

The regular meetings may act as a vehicle to bring the entire project team together, which is vital

for the success of projects (Gilbert, 2004).

Such meetings during the planning and execution phases facilitate daily interaction with

the team and help in the acquisition of feedback from the project team members that help the

project manager become cognizant of issues or problems during completion of the project.

Frequent meetings result in a platform for facilitating formal communication within a project



team (Kendrick, 2006; PMI, 2004). Kendrick (2006) noted the use of meetings helps to facilitate

another form of continuous risk analysis.

The process of comparing project performance with planned performance helps in

identifying deviations from the project plan, identifying factors that caused the deviations, and

determining corrective actions (PMI, 2004). Daily knowledge-sharing and problem-solving

meetings might help the project manager in comparing planned and actual performance of

projects in the project execution phase. The daily meetings might help in recommending

corrective action to correct deviations.

Communication is another important factor in the success of projects (PMI, 2004). A lack

of effective communication is a major obstacle to project success (Cleland & Ireland, 2002).

According to Cleland and Ireland (2002), the ―project manager should realize that

communication is the capstone of the management functions of planning, organizing, motivating,

directing, and controlling; without effective communications these management functions cannot

be planned or carried out adequately‖ (p. 486).

Regular project meetings, such as those used to monitor status or knowledge sharing,

help to facilitate face-to-face conversations, the most effective of all communication channels

(Kendrick, 2006). Regular meetings serve as a communication vehicle and allow information

sharing, which is vital for the success of projects (Kendrick, 2006). Frequent project meetings

establish close communication links within the project team, which is critical to the success of

projects (Anantatmula, 2008).

Project knowledge-sharing meetings result in an opportunity to revise, review; educate

the team, build the team, and share knowledge possessed by the team among other members of

the team (Jugdev & Muller, 2005). Such knowledge includes the knowledge team members



acquired individually during previous work. Cleland and Ireland (2002) emphasized the project

knowledge-sharing meetings enable team members to ―become and remain committed to the

project‖ (p. 494). The use of regular knowledge sharing meetings also helps to facilitate

knowledge conversion (Jugdev & Muller, 2005). Anantatmula (2008) studied 54 project

management professionals with an average of 10 years of project management experience

selected from the IT (23%), telecom (24%), government (15%), consulting (15%), and

automotive industries (15%).

Anantatmula (2008) noted by using regular project review process, project managers can

review the performance of the project regularly during the project execution phase and collect or

document ideas and experiences from team members. The regular project knowledge-sharing and

problem-solving meetings enable project managers to convert the tacit knowledge of the project

team members into explicit knowledge (Anantatmula, 2008).

To achieve the success of projects, project coordinators must establish working relations

with the project teams (Regional Management Support Centre, 2004). Teams must establish a

bond to achieve project success. Successful project management requires continuous flow of

information and knowledge among team members. Daily project knowledge-sharing meetings

might serve as a team building activity and help to bond the team together. Regular project

knowledge-sharing and problem-solving meetings provide a means to maintain a relationship

with the entire project team (Kendrick, 2006). Gilbert (2004) discussed guidelines for meetings

that include the following:

Demonstrate progress to the wider audience; present and discuss best practices; ensure

the wider audience generates ideas and suggestions for improvements; reinforce the

communication; walk the talk, with respect to objectives, discipline, realism, supportive



challenges; show progress-related interest and ask progress-related questions; ensure behaviour

and performance have consequences; and use every opportunity to communicate your execution

(p. 4).

Mulcahy (2006a) discussed guidelines for making project meetings more effective:

a) The meeting time must be as short as possible.

b) Recurring meetings must be scheduled in advance.

c) Teams must meet regularly.

d) Meetings must have a purpose and agenda.

e) Meeting minutes must be documented and sent to all team members and;

f) Deliverable and time limits for all activities must be assigned. Kendrick (2006)

purported the frequency of project knowledge-sharing and problem solving meetings are

important. Kendrick (2006) contended meeting and collecting status information from team

members once a week can result in serious control problems. Discussions in daily knowledge-

sharing meetings might result in solutions to problems that team members face. The entire team

could share past experiences and tacit knowledge to solve a problem, which saves project time

(Kendrick, 2006).

Frequent project meetings might allow managers to know problems that exist. A problem

with the project may result in failure of the entire project and, in turn, failure of the entire start-

up organization if the problem is not solved in time. The use of regular problem-solving

meetings might help the manager remain up to date with regard to the project and any potential

problems (Wysocki, 2007). Wysocki (2007) contended meetings should be conducted regularly

to address problems and identify solutions more quickly, when a project is approaching a vital

milestone, at the end of a crucial phase, at the end of the project, or when the project is critical.



Some researchers posited unless demanded, more frequent meetings can be unproductive

and waste time. Daily meetings are expensive because they result in reduced work hours for the

entire team. Project team members might perceive daily project knowledge-sharing meetings as a

micromanagement. Lemmex (2007) contended micromanagement may be the right choice under

critical conditions including the following: (a) project deadlines slip, (b) the project manager

needs more daily information to report to a top manager, and (c) team members need help with

problems. Chambers (2004) contended micromanagement results in low morale, low

productivity, and inefficiency among the employees.

No research existed on the impact of daily project knowledge-sharing and problem-

solving meetings on the success of projects and the success of start-ups. Because both positive

and negative consequences of daily project meetings during the project planning and execution

phase exist, the intent of the current study was to examine the perceived effect of project

planning and execution strategies such as daily project knowledge-sharing during project

planning phase and problem-solving meetings during project execution phase on the success of

projects and the ultimate success of start-ups.

Project monitoring strategies: project daily status meetings

The academic researchers in project management from Regional Management Support

Centre (2004) defined project monitoring as a process of ―gathering information on actual

progress and performance, assessing deviations from targets, analyzing possible causes, and

taking remedial action‖ (p. 3). Gilbert (2004) contended project managers must continuously

measure the performance of the project to ensure the project progresses according to the project

plan. Cleland and Ireland (2002) noted monitoring is a process that helps to keep track of all



project activities. Monitoring enables the evaluation and appraisal of how project activities are

progressing and enables the team to make informed decisions about the project performance

(Cleland & Ireland, 2002).

According to academic researchers in project management from ITRM Guidelines

(2006), project performance monitoring means collecting, analyzing, and reporting of

information on project performance to provide the status of project execution to stakeholder.

Project performance monitoring is an important task in the monitoring the process group of

project management as well as controlling it. In the monitoring and controlling phase, cost,

schedule, and performance of the actual project require periodic review and comparison with the

planned cost, schedule, and performance to determine if the project is performing according to

the project plan.

The use of monitoring helps project managers to analyze the impact of a project‘s critical

path on the project schedule and analyze the risks. Project managers monitor the critical path

with regard to project execution, project schedule, work that must still be accomplished, costs,

and progress of modifications. The use of monitoring also enables project managers to perform

gap analysis through monitoring and comparison of the actual start and completion dates with

that of the original project plan. Rad and Anantatmula (2005) contended projects become

successful when project status monitoring is a part of daily project management.

According to McBride, Henderson-Sellers, and Zowghi (2007), projects can be

monitored on two levels. The first level involves daily interactive monitoring of project status

with respect to the project plan. The second level of monitoring is part of the project life cycle

and helps to ensure work accomplished to date is up to quality, follows the project plan, and

meets the triple constraints. According to McBride et al. (2007), agile projects support two types



of monitoring: interactive monitoring and structural monitoring. McBride et al. (2007) contended

interactive monitoring involves the comparison of project progress to the project plan, whereas in

structural monitoring, project monitoring occurs either at the start or the end of each increment

boundary.

According to academic researchers in project management from Regional Management

Support Centre (2004), the monitoring phase should include day-to-day contact with the

beneficiaries, analysis of the project and project documents, and informal relations with team

members. The aim of the project monitoring and control phase is to understand and evaluate the

progress of the project to allow project managers to take appropriate corrective actions when the

project‘s performance deviates from the original plan (Ross, 2005). According to Ross (2005),

the main functions of the monitoring phase include (a) monitoring project planning parameters,

(b) monitoring commitments, (c) monitoring project risks, (d) monitoring data management, and

(e) monitoring stakeholder involvement (Ross, 2005).

According to academic researchers in project management from ITRM Guidelines

(2006), the monitoring of project execution enables project managers or leaders to ensure

projects are progressing on par with the actual project plan. The academic researchers from

ITRM Guidelines (2006) noted continuous monitoring helps management to identify problems

and take action when the project slips from the actual cost, schedule, or performance plans. The

project manager or leader must always keep the top management, stakeholders, and project team

aware of status information with regard to projects (ITRM Guidelines, 2006). Continuous

monitoring of project performance would be possible through the use of regular status-

monitoring meetings (ITRM Guidelines, 2006).



Daily status meetings might result in day-to-day interactions and communications with

team members, and continuous monitoring of the project to ensure the project is on the right

track with respect to the original plan. Daily status-checking meetings might help to identify if

the project deviates from the plan and to determine corrective actions to bring the project status

back on track. Daily status meetings might also help the project leader to be consistently aware

of the project status, issues, and revise schedules.

The use of project status-checking meetings and derivative actions serve as the primary

driving forces behind the successful execution of any project (Whitten, 2005). The main purpose

of a project status meeting is to maintain control (Whitten, 2005). The status-checking meetings

help project managers to identify potential problems/risks and take corrective actions before

unrecoverable harm occurs. Status reporting must address all variables that elucidate the project

progress compared with the plan so all cross functional team members are aware of the variables

(Wysocki, 2007).

Wysocki (2007) purported regular status meetings are the norm whenever a project

becomes critical. Because the success of start-ups depends on the success of the project, project

execution is critical in start-up organizations. The regular status-checking meetings result in all

the information project managers require for tracking the progress of the project and its

successful execution (Wysocki, 2007). Kendrick (2006) posited regular project status meetings

allow project managers or leaders to meet the project team and collect desired information about

the project for further risk planning, quality planning, problem-solving, and communication with

other stakeholder.

The frequency of project status-checking meetings is important (Kendrick, 2006).

Whitten (2005) noted meeting less often may delay the discovery or discussion of potential



problems that can negatively impact the project. Daily project status meetings enable managers

to know all potential problems immediately, whereas traditional once weekly status meetings

might incur a delay of one week.

Kendrick (2006) reported at least two potential problems with frequent status meetings.

Team members may feel daily status meetings waste precious time if they do not have any new

status to report (Kendrick, 2006). Whitten (2005) noted project status checking meetings and

project knowledge-sharing meetings should differ because project knowledge-sharing meetings

that consist of problem-solving discussions become a waste of time for team members not

involved in the potential problem area.

Frequent project meetings allow team members to communicate with each other on a

regular basis and remain focused on commitment and goals (Kerzner, 2003). No existing

research included an examination of the impact of daily project status-checking meetings on the

success of projects and the success of start-ups. Because both positive and negative

consequences of daily project status checking meetings exist, the intent of the current study was

to examine the perceived effect of daily project status-checking meetings on the success of

projects and technology start-ups.

Project reporting strategies: status reports to cross-functional teams

Project reports may act as a vehicle to keep cross-functional teams and stakeholder

informed of project success (Cleland & Ireland, 2002). Several types of project reports are

necessary during the process of monitoring and controlling group of project management (PMI,

2004).These status reports include



a) Status reports reporting where the project stands with respect to performance

measurement baselines in scope, cost, schedule, and quality.

b) Forecast reports – reporting the predictions on future project status and

performance.

c) Progress reports – reporting what accomplished so far.

d) Trend reports – reporting the trends followed by examination of project results

over time and conclude if performance is improving or deteriorating.

e) Earned value reports – reports that assess project performance through integration

of cost, schedule, and scope measures and,

f) Variance reports – reports the results of comparison of actual project results with

baselines (PMI, 2004).

In general a team member sends status report to a manager or leader. Instead, sending

weekly project reports to members of self-team and cross-functional teams might be a good way

to bring visibility of all areas of the project to corresponding members of the self-team and cross-

functional teams. Such reports might result in an opportunity to communicate with or inform the

appropriate cross-functional teams regarding important issues and project status. The use of the

weekly project status report strategy might allow the project manager to make decisions based on

input from teams.

Status reports also provide a means of communication between cross-functional teams.

The process of sending a project status reports to cross-functional teams helps the cross-

functional team members know the status of different parts of a whole project, where the

individual parts fit into the general collective aim of the group, and where individual success can

contribute to team success (Cleland & Ireland, 2002). No research existed on the impact of



sending weekly status reports to the self-team and cross functional teams on the success of

projects and the success of start-ups. The intent of the current study was to examine the

perceived effect of the project report strategy on the success of projects and the success of

technology start-ups.

Team dynamics: team members‘ prior start-up experience

Team dynamics theory included team oriented strategies for start-up organizations to

improve the quality of work and organizational performance. This strategy included employees‘

previous start-up experience. Start-up organizational leaders consider employees with previous

start-up experience could understand the start-up work environment, adjust to the start-up

workload, and produce quality of work and improve organizational performance.

Employers must assemble a reliable and economical workforce to succeed in business.

The selection of workers often based on observable characteristics, such as education, training,

and prior experience. Management might regard previous start-up experience as prior practice in

adjusting and understanding the work environment of start-ups, which might be an important

factor in the determination of appropriate candidates for hiring.

Researchers did not agree on the relationship between start-up personnel and the success

of start-ups. Bruno, Leidecker, and Harder (1987) focused on the reasons behind the failure of

technology start-ups. Bruno et al. (1987) concluded the failure of new and inexperienced

employees to produce adequate quality products was a reason behind the failure of technology

start-ups. According to Thompson (1988), failure to hire the correct people with the appropriate

skills, attitudes, and commitment is as critical as capital funding for technology start-ups.



products, more responsibilities, fewer people, high demand for output, and a requirement for

high energy (Evens & Sylvestri, 2007). Evens and Sylvestri (2007) noted in start-ups,

―territorialism often is minimal as groups are small, needs are large, camaraderie is the

behavioural norm, and standard operating procedures are few‖ (p. 745).

As start-ups consist of fewer employees to execute high work demands, heavy pressure

on employees is unavoidable (Evens and Sylvestri, 2007). Employees of start-ups might also

need to spend more hours in the execution of tasks to meet heavy workloads. A general

impression is only employees with previous start-up experience could understand the start-up

work environment and adjust to the start-up workload (Madireddy, 2010).

Start-up organizations seek candidates with prior start-up experience. The recruiting

strategy might base on the above assumption that only employees with previous start-up

experience could understand the start-up work environment and adjust to the start-up workload

and pressure. Start-up organizations might lose appropriate candidates because the assumption

forces restrictions on candidates from large organizations, who have no previous start-up

experience.

No empirical research existed on the validity of the above assumption. Research does

exist on the relationship between entrepreneurs‘ previous start-up experience and the success or

failure of technology start-ups (Cantner et al., 2007), but no researchers examined the impact of

employees‘ previous start-up experience on the success of technology start-ups. A gap existed in

the literature with regard to examination of the effect of employees‘ previous start-up experience

on the success of start-ups. The intent of the current study was to examine the perceived effect of

employees‘ earlier start-up experience on the success of start-ups.



Conclusions

The literature review included an explanation of the need for the current study and

appraises the shortcomings in the existing body of knowledge of projects and start-ups (Cooper

& Schindler, 2003). Peer-reviewed and other literature researched for the current study yielded

information on failure rates of projects, failure rates of start-up organizations, and the reasons for

such failures. The literature review indicated a gap in the area of CSFs and provided support for

the baselines that justify the need for the current study.

The literature review also highlighted the continuing underachievement of projects,

which might result in the failure of start-up organizations (Chulkov and Desai, 2005; Stanleigh,

2006). Many start-up organizations failed within the first few years of inception (Brandt, 2004;

Carter and Van Auken, 2006; Headd, 2003; Rowe, 2006) because of project failures (Chavan,

2005; Mehralizadeh and Sajady, 2006; Puleo, 2003). Many projects failed because of a lack of

proper project management practices (McCartan-Quinn and Carson, 2003; Shenhar and Dvir,

2007; Verma, 2007). The available statistics on the contributions of start-up organizations

highlighted the significance of start-up organizations and their success in the context of

economic challenges.

The success factors of the successful start-up phenomenon have a major role in the

viability of start-ups (Anantatmula, 2008; Dyke et al, 1992; Jugdev and Muller, 2005; Mann and

Sager, 2007; Nobeoka and Cusumano, 1997; Nordin, 2006). The review of the literature resulted

in support for the problem statement, purpose statement, research questions that guide the current

study and helped to justify the need for the current phenomenological study that included an

examination of how the CSFs could contribute to the successful start-up phenomenon through

exploration of the lived experiences and perceptions of participants.



Summary

The main purpose of chapter 2 was to review the historical, germinal, and current

literature between mid 2003 and mid 2008 on start-up organizations and CSFs, and thereby

understand the connection between the successful start-up phenomenon and the CSFs. The high

failure rate of start-ups was a major obstacle for prospective VCs, the community, prospective

entrepreneurs, and economic development professionals (Taylor & Seanard, 2004). Because

start-ups make a significant contribute to the economic growth of any nation, the reasons behind

the failures of start-ups need to be investigated (Temtime et al., 2004).

The literature review indicated a need for substantial improvement in project

management discipline to achieve the success of projects (Shenhar & Dvir, 2007; Tucker, 2006).

A dearth of studies included an examination of the impact of daily project knowledge-sharing

and problem-solving meetings, daily project status-checking meetings, weekly status reports to

cross-functional teams. Employee‘s previous start-up experience, patents, and outsourcing

strategies on the success of projects and start-ups and helped to justify the need for the current

study to examine the perceived impact of the CSFs on the successful start-up phenomenon. A

need existed for further research in understanding the reasons for the success of projects and

start-ups. Chapter 3 includes a discussion of the research methodology for the current study.

Contracting

VC Contracts



VC - Limited Partner Contracts

Investment capital, supplied by investors, committed for around 10 years as mandated by

the typical VC partnership. The partnership does not involve providing other continuing

performance information or publishing any financial statements, and is unprotected by U.S.

securities laws (Cumming and Johan, 2006). In addition to what mentioned above, the risk of

opportunistic behaviour should produce unappealing venture capital partnerships for most

investors. However, according to Atanasov (2010), VCs have attracted, primarily, billions of

capital from investors. To be attractive to such capitals, ―Venture Capital partnerships have

designed complex contracts and procedures that, while preserving VC flexibility and control,

allow institutions to feel comfortable investing in this asset class‖ (Atanasov, 2010).

The capital-raising scheme of VC funds is the first vital set of procedures considered

decreasing contingent adverseness of selection and any moral hazard (Meunier and Quinet, 2007.

At the beginning, VCs raise funds for a small capital and, if it does well, Kaplan and Strömberg

(2003) stressed VCs allow their control rights to move toward raising capital for later larger

funds. Fund raising done on average every three to five years, and VCs continuously exposed to

market pressure to perform well and build a solid reputation with investors, even though the

investors in every fund committed for at least 10 years (Atanasov, 2010).

The payment structure of the VC management contracts designed to align the interest of

the VC with his limited partners. Typically, VCs receive a relatively small annual asset

management fee (1 to 2 percent of partnership assets) and a percentage of the partnership profits

(carry) which is much larger — 20 to 25 percent. This fee structure combined with relatively

small funds under management, assures that most VCs have interest to achieve large positive

returns on the partnership capital. Still, if a partnership is large, the VCs can potentially run a



lifestyle fund and live comfortably off asset management fees without returning any cash to

investors. The 10-year life of the limited partnership resolves this concern, while also ensuring

stable funding for illiquid and long-term investments (Atanasov, 2010).

In addition to the VCs pay-for-performance remuneration package, the contracts between

VCs and limited partners often contain various covenants protecting the limited partners

(Gompers and Lerner 1996). Covenants restrict the activities of the general partners; the types of

investments that the fund can make and the fundraising of the venture capital company (see

Metrick, 2006, 38 – 40 for more detail). There are also detailed provisions stipulating the

minimum number of hours that the VC partners should spend working on the fund investments

(Cumming and MacIntosh, 2004). The features intended to further assure the VC‘s exclusive

commitment to the management of the partnership and the fulfilment of her fiduciary duties

towards the limited partners (Atanasov, 2010).

The last major feature of the limited partnership contract that protects investors‘ interest

is the right to stage their capital inflows into the partnership. Typically, investors commit a

certain gross sum, but they pay this amount in equal instalments over the first three to five years

of the partnership (Litvak, 2004). Thus, they maintain flexibility and could forego paying the

remaining instalments if the VC violates his fiduciary duties. At the same time, giving investors

the right to withdraw their capital commitments at any time can be detrimental to the VC and

other limited partners. Therefore, the partnership agreement includes significant penalties for

failed delivery of committed funds (Atanasov, 2010). Litvak (2004) studies the complicated

nature of these penalty provisions and determines that they are an effective deterrent of limited

partner opportunism.



VC-Entrepreneur Contracts

The relationship between a VC and limited partners is relatively straightforward to

regulate with contracts. Contracts turn out to be not as successful in regulating the relationship

between a VC and a start-up founder. Remember that the VC-founder relationship suffers from

two potential agency problems: (1) entrepreneurs acting opportunistically to the detriment of the

VCs and (2) the VCs acting to the harm of entrepreneurs. In this subsection, I outline the main

features of the typical VC-founder contract and discuss their role in solving each of the two

agency problems. However, due to the opposing nature of the two agency problems, in many

cases a reduction in one leads automatically to an exacerbation of the other. Perhaps because

VCs usually have larger bargaining power than entrepreneurs (or are better informed and use

more sophisticated legal advice), I argue that the VC-entrepreneur contracts are on average

biased in favour of the VCs (Atanasov, 2010).

Securities and Cash Flow Rights

Venture capital investments mainly structured as securities that both have liquidation

priority over the founders and early equity investors‘ common stock on the downside and

participation rights on the upside, usually implemented as convertibility into common stock.

Kaplan and Stromberg (2003) find that more than 95 percent of their sample VC investments

structured as convertible preferred stock. In most cases the issue of convertible preferred stock

accompanied with liquidation preferences. Liquidation preferences explicitly specify a multiple

of the VC‘s original investment that the start-up has to return to the VC before other investors

can receive any payoffs.



The choice of convertible preferred equity or debt with liquidation preferences is widely

analyzed in the VC literature (Casammatta, 2010). The main rationale proposed by theoretical

models for this security structure is that it ensures that entrepreneurs receive payoffs from the

firm only when the VC‘s investment improved.

These features make convertible preferred equity attractive for the VC, but they are not

without cost for the entrepreneur and the start-up itself. Fried and Manor (2005) argue that the

preferred equity position of the VC generates various conflicts of interest that are especially

strong when the start-up has reached the exit stage. The VCs can opportunistically decide to sell

the company prematurely and at a low price to ensure return of their capital via their liquidation

preferences and leave little value for the entrepreneur and other common equity investors.

Antidilution and First Refusal Rights

A set of terms present in the majority of VC-entrepreneur contracts are antidilution

provisions and various rights granted to the VC to approve or veto future firm financing. The

antidilution provisions serve the role of standard preemptive rights in protecting the VCs

ownership stake from being diluted by the common stock holders in future rounds of financing.

In addition to these reasonable protections granted in most private companies around the world,

the antidilution provisions of the VC combined with their veto rights to approve future financing

transfer most risk of future decline in firm value to the entrepreneur.

There are good arguments for the transfer of firm-specific risk to the party that best

informed about the firm and has the largest ability to improve firm performance. But, antidilution

provisions transfer not only firm-specific risk but also industry or market risk to the

entrepreneur. Moreover, these antidilution provisions, especially if implemented as ―full



ratchets‖ (see Kuemmerle [2004] for a definition of full versus weighted-average ratchets),

enable an opportunistic VC to dilute the entrepreneur (and any other common stock investor).

The VC only needs to initiate a new round of financing at a depressed price (a down-round),

exclude the entrepreneur from participating, and transfer a large percentage of the entrepreneur‘s

ownership stake in the company to himself.

The veto rights over future financing facilitate dilution even further by allowing the VC

to shut down any alternative sources of capital and delay any financing until the start-up runs out

of cash. Then, the VC can infuse capital at draconian terms and wipe out the common

stockholders. The entrepreneur has no legal recourse, because if the VC did not infuse capital,

the firm would have gone bankrupt and the common stock would have been worthless (Bartlett

and Garlitz 1995).

Corporate Governance and Control

The contracts between VCs and entrepreneurs include various corporate governance and

control clauses. First, the contracts stipulate in detail the composition of the start-up‘s board of

directors. A typical board consists of five members, two of which appointed by the entrepreneur

and two by the VC. The fifth member is an outsider approved by both parties. Kaplan and

Stromberg (2003) document that with each subsequent investment round, the control rights and

respectively the number of board members appointed by VCs increases. An increase in VC board

representation can also occur under certain contingencies, the most common of which is the

start-up‘s not meeting pre-specified milestones.

Examples of milestones include a maximum time period during which the start-up has to

achieve a certain sales number, have a completed product, or break even on a cash flow basis.



Conditional on achieving such milestones, the entrepreneur maintains her ownership, board

seats, and control. If milestones are not met, the VCs can increase their stake at the expense of

the entrepreneur (by receiving free new shares, for example), receive more board seats and

secure majority on the board.

The main value of milestones is that they remove any incentive for misrepresentation of

future performance by the entrepreneur. If an entrepreneur exaggerates future performance

projections, the VCs can set these projections as milestones in the contract, and when they are

not met, the VC will take over, dilute, or even fire the entrepreneur. Thus, milestones punish

overconfidence in entrepreneurs ex post, but allow them to keep their optimistic forecasts and

beliefs ex ante. A fundamental flaw in milestones from an optimal contracting perspective is that

they are absolute — not relative to industry or market performance. As a result, the founder bears

not only firm-specific risk that she can modify and control through expending more effort, but

also industry and market risk, which are exogenous to the entrepreneur.

Another common corporate governance contract clause is that VC capital will transfer to

the start-up not in one large sum but in several payments staged over a period of time. The

transfer of future payments may be conditional on the start-u p‘s meeting milestones or other

conditions. Most importantly, the VCs usually retain complete control/approval rights over any

future source of financing for the start-up. Arguably, staging creates value for all — the start-up

saves on using expensive finance that it does not need immediately; the VC retains a real option

to invest once some uncertainty reduced. In general, staging reduces the overall cost of capital

for the start-up and maintains alignment of interests between VCs and entrepreneurs.

Nevertheless, staging can be costly for the entrepreneur. When a VC does not provide all

necessary capital in one round, his control over future finance and antidilution rights makes



founder dilution more effective. Imagine a scenario in which a start-up has received the first

tranche of VC investment and is about to run out of cash to meet expenditures. The second

tranche of VC money is due soon, but the VC delays it. As the start-up approaches insolvency,

the entrepreneur put in a difficult position. One possibility is that the start-up goes bankrupt and

the VCs can take all useful assets in liquidation due to their preferred credit standing relative to

the entrepreneur, or the VC can extend another infusion of equity capital, but this time at highly

dilute terms for the entrepreneur and other early equity investors.

Employment Terms

The last set of important contractual terms that designed to control the entrepreneur‘s

agency problem is the founder employment provisions. These terms usually included in the term

sheet and shareholder agreement. The most common employment term is vesting of founder

shares. At the time of VC investment, the original founder receives a small percentage of his full

promised ownership stake in the company. The remaining shares vest in regular increments over

the next several years, conditional on the founder maintaining employment with the firm.

The founder employment agreement regulates the conditions under which the founder

can be fired. In most cases, the entrepreneur can be fired by the board ―at will,‖ and usually no

severance package provided for in the contract (compare with the generous golden parachutes

granted to CEOs in public corporations). Replacing the original entrepreneur by a professional

CEO in VC-backed start-ups is common. In fact, it is the norm. Hannan, Burton, and Baron

(1996) and Hellmann and Puri (2002) document that the majority of founders of VC-backed

companies replaced by professional CEOs within five to seven years of initial VC involvement.



The combination of vesting of entrepreneur‘s shares and ―fire at will‖ board power

provide, on one hand, incentives for the entrepreneur to work hard and generate value for both

the VC and the start-up company (Hellman 1998), but on the other hand, grant ample

opportunities for the VC to tunnel the entrepreneur‘s equity via a freeze out. The classic freeze

out of minority shareholders in any corporation involves a forced purchase of minority shares by

the controlling shareholder at a large discount to fair value. In VC-backed start-ups the freeze out

transaction usually implemented by first firing the founder from her CEO position and then

invoking contractual terms that force the entrepreneur to forfeit any invested shares. The freeze

out completed by contractual terms that often give the right to the VC to purchase all vested

founder shares at cost (usually close to zero). This process results in the VC acquiring all founder

common stock at a price well below fair value.

Contractual Protections for Entrepreneurs

The VC-entrepreneur contracts contain many clauses designed to protect VCs from

opportunistic behaviour by entrepreneurs. One would expect that these contracts will at the same

time include a similar number of protections against VC opportunism. Surprisingly, only one

such protection included in most contracts — an automatic conversion of VC preferred stock into

common stock when the company is going public at or above a pre-specified minimum stock

price. This protection analyzed theoretically by Hellmann (2006), who argues that it designed to

resolve a potential VC hold-problem. In the absence of automatic conversion provisions, a VC

can extract a large side payment before he agrees to convert his preferred equity into common

stock. This conversion is necessary because IPO investors are reluctant to invest in companies

with complicated capital structure and multiple classes of shares.



The VC-entrepreneur contracts do not include any specific protections against situations

when VCs force the start-up into an acquisition or other exit transaction at the expense of

entrepreneurs and other investors. There are no explicit protections against asset transfers

(tunnelling), except for the occasional nondisclosure agreement during the due diligence stage.

In summary, VC-entrepreneur contracts are complex and apparently one-sided.

Entrepreneurs have limited protections and bear a lot of risk, including industry and market risk,

while VCs have tremendous contractual power, especially on the downside. All downward

movements in performance lead to VCs‘ taking control of the board and diluting the existing

founder stake via down rounds. The milestone provisions further dilute founder equity. Last, the

fire-at-will and vesting provisions can wipe out the founder‘s stake completely. It is hard to

believe that such contracts can exist in equilibrium if bargaining power evenly split between VCs

and entrepreneurs, entrepreneurs are sophisticated (or use sophisticated legal advice), or no other

mechanisms exist to prevent VC opportunism. If any of these conditions violated ex ante, it is

likely that somewhere along the way, especially in a down market, some VCs will trigger their

contractual powers, freeze out or dilute founders, transfer assets to other start-ups, or find other

ways to behave opportunistically against the founders.

Although VC-entrepreneur contracts offer little protection against VC opportunism, other

contracts could provide some protection for entrepreneurs as an unintended consequence. For

example, Gilson (2002) argues that contracts between VCs and their investors help protect

entrepreneurs against dilute down-rounds, because when a VC depresses the price of an

investment round, the VC has to use the same price to mark down his entire investment in the

start-up. The mark-down will depress the reported value of the VC portfolio, and the VC will



have to report poor annual performance to his investors. Gilson terms the unintended beneficial

interactions between different contracts ―contract braiding.‖

The interest of other parties involved in the start-up can also help protect entrepreneurs

from certain VC opportunism. Fluck et al. 2006 and Bachmann and Schindele (2006) argue that

a VC syndicate will be less inclined to tunnel wealth than a single VC due to coordination and

reputation costs. The existence of outside debt can help against asset tunnelling, because if

excessive asset tunnelling brings the company into bankruptcy, the debt holders can allege

fraudulent conveyance by the VC and claim these assets back. Such recourse, although not

beneficial for entrepreneurs ex post (after all the company is already in bankruptcy and the

entrepreneur equity is worthless), can still serve as a deterrent ex ante.

Policy Implications

The venture capital industry in the United States is perhaps the most developed and best

performing in the world. Previous studies posit that several reasons explain the success of VCs

operating in the United States. Black and Gilson (1998) attribute this success to well-developed

public markets and processes to bring start companies public via an IPO; Gilson (2002) — to

contract braiding and reputation-building; Lerner and Schoar (2005) — to the complex VC-

entrepreneur contracts; Armour and Cumming (2006) — to the U.S. legal system and especially

the ―temperate‖ bankruptcy laws.

The discussion of VC opportunism and mechanisms to control it in the previous sections

suggest that although the U.S. VC industry may be better than any other country, it can still

suffer from costs associated with VC opportunism. In this section, I offer several policy

implications that could help reduce these costs. First and foremost, entrepreneurs who consider



raising capital from venture capitalists should be educated about the various possibilities for VC

opportunistic behaviour. Entrepreneurs need to be first aware of the problem before they can

spend effort to alleviate it.

Second, due diligence on behalf of the entrepreneurs in their selection of VC investors is

critical. I propose three main directions for due diligence: (1) read carefully the reviews and

written comments about each potential VC investor on theFunded.com; (2) Within reasonable

resource boundaries collect data on academic measures of VC reputation; and (3) do a search of

past litigation involving the prospective VCs. More intense due diligence by entrepreneurs will

not only improve their choice of VCs, but also lead to better VC behaviour overall, as VCs

recognize that their opportunism can lead to reduced deal flow.

While entrepreneurs are the party most interested in effective VC investor selection, the

thorough due diligence proposed in the previous paragraph will be likely more costly than what

the average entrepreneur can afford. The market has already provided an important place for

pooling entrepreneur experiences in selecting VCs —the Funded.com‘s web site. Still,

government or nongovernmental organizations aiming to stimulate entrepreneurship can help

improve the process. These organizations can facilitate founder due diligence by granting

entrepreneurs access to past litigation data and academic measures of VC reputation for a large

number of VCs.

The analysis of lawsuits also suggests that in many cases entrepreneurs do not utilize the

services of experienced lawyers. Forgoing expert legal help can be dangerous for the founders

both at the stage of signing the shareholder agreement and unknowingly agreeing to erroneous

contractual provisions granting excessive power to the VC without corresponding efficient gains

(e.g., full ratchet provisions), and at the litigation stage when the entrepreneurs could kill a



meritorious lawsuit by filing it in the wrong court, with the wrong claims, or the wrong evidence.

Again, careful choice of which lawyer to represent the founder in dealings with VCs can prove

crucial for the founder‘s and the start-up‘s success.

Conclusion

The VC industry is plagued by various conflicts due to informational asymmetry. These

conflicts dealt with in complex contracts, but contracts are incomplete and often not sufficient to

curbing opportunistic behaviour. In fact, many of the terms included in VC-entrepreneur

agreements while protecting the VC, at the same time invite opportunistic behaviour by the VCs

at the expense of the entrepreneur and other equity investors. This chapter argues that reputation

concerns serve a major role in preventing most VC opportunism. Still, some conflicts lead to

litigation that generates publicly available documents describing opportunistic behaviour by VCs

and other parties involved in start-up investments.

Atanasov, Ivanov, and Litvak (2008b) have collected a large number of such lawsuits and

documents, and this chapter discusses the lawsuits contained in their sample. Although litigation

in most cases does not punish rogue VCs directly, they suffer losses to their reputation. These

potential losses serve an important role in keeping the majority of VCs honest and prevent them

from abusing their large contractual powers. Nevertheless, potential entrepreneurs need to be

aware of possible VC opportunistic behaviour and should protect themselves with thorough due

diligence and expert legal advice.

It would be difficult to find a common unit to represent all contributions from different

kinds of projects and benefits (Sanchez and Robert, 2010).



As expressed by Ritchie and Brindley (2007), risks are not only those that may yield a

crisis or a failure, but also those that may influence the ongoing performance in terms of

effectiveness and efficiency.

Other kinds of risks include technical (changes in requirements, problems developing a

technology), external (changes in the market, changes in customer needs), organizational (lack of

funding, increase of project dependencies), or management (wrong estimations, lack of

communication). All of these materialized events affect benefits realization having a subsequent

effect on the accomplishment of portfolio objectives (Sanchez and Robert, 2010).

It is difficult to find KPIs for project portfolios that measure the level of achievement of

portfolio strategic objectives. Most indicators found in the literature based on costs, schedule,

and deliverable. Our contribution proposes a strategic vision that complements those indicators

to have a more holistic view (Sanchez and Robert, 2010).

New ventures importance

New ventures are the important part of the healthy economy. They are vital to the

national economy, with most of the net new jobs created by new ventures, especially in Korea

(Park and Lee, 2000).

Miller and Camp also identified the eight years that a company was in business as the

"start-up" phase of the venture, and the next four years as the "adolescent" phase (Miller and

Camp, 1985). In (Park and Lee, 2000).

This research also used the age of eight years to define ventures that would be classified

as "New" (Park and Lee, 2000).



The ability of the small enterprise to grow and develop will depend on certain key

management activities. These typically grouped into the functional areas of financial, marketing,

human resource and operations management (Kotey & Meredith, 1997). In (Zinger et al, 2001).

Orser and Riding (2003) has documented that entrepreneurs should distinguish the skills andabilities required for each level of growth, and decide either to assist and train existing membersof the team for learn and develop new abilities and skills, or to confront the challenge of including new talent and skills via hiring.

Cassar (2006) found that those entrepreneurs with strong human capital qualities, such as

strong management experience and quality higher education, were more aggressive in their

growth projections for the future of their endeavour.

The impact of the role of the venture capitalist and the venture capital firms VCF in the

overall performance of a company, particularly a new start-up, should not be underestimated.

The funding available to the new start-up company may determine its future performance and

overall viability. Start-up companies who manage to secure funding through a VCF have a

marked business advantage over those who gain their funding through alternative resources

(Davila, Foster & Gupta, 2003). In (Schick, 2008).

Firms lacking financial resources but containing strong human capital are expected to

find the means to gain these necessary resources (Chandler & Hanks, 1998). The existence of a

strong human resource pool affects both the growth and the survival of the venture despite initial

financial shortages (Cooper et al., 1994). In (Schick, 2008).

Haber and Reicehl (2007) concluded that human capital, particularly the managerial skills

of the business leader, is the single most important factor in determining performance success in

the tourism industry.



The findings of this research indicated that there is no significant relationship between

education and experience, or human capital, of the VCF's top-management team and the success

of their portfolio companies (Schick, 2008).

It is reasonable to expect that all businesses that attempt the IPO strategy, already have

sufficiently high human capital. The fact that VCFs evaluate human capital to determine the

viability of this strategy would seem to support the idea that human capital levels do play a role

in IPO success (Schick, 2008).

The results of this study suggest that relying on human capital considerations alone

would be imprudent, since additional criteria beyond human capital may play a key role in

determining the viability of the IPO strategy (Schick, 2008).

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