CATALYZING STRATEGIES AND EFFICIENT TIE FORMATION: … · Goodwin, 1994). Some research has shown...

CATALYZING STRATEGIES AND EFFICIENT TIEFORMATION: HOW ENTREPRENEURIAL FIRMS OBTAIN

INVESTMENT TIES

BENJAMIN L. HALLENLondon Business School

KATHLEEN M. EISENHARDTStanford University

Although network ties are crucial for firm performance, the strategies by whichexecutives actually form ties are relatively unexplored. In this study, we introduce anew construct, tie formation efficiency, and clarify its importance for superior net-work outcomes. Building on fieldwork in nine Internet security ventures seekinginvestment ties, we unexpectedly identify two “equifinal” paths for how executivesform ties efficiently. One relies on existing strong direct ties and is only available toprivileged firms. The other relies on a second new concept, catalyzing strategies, ameans by which executives advantageously shape opportunities and inducements toform ties that is available to many firms. Overall, we add insights to the network andsignaling literatures and to the nascent literature on how strategic action, especially bylow-power actors such as entrepreneurs, shapes critical network outcomes.

Network ties are often critical to firm performance.At the level of individual ties, the right partners mayimprove firm performance by providing valuable re-sources, information, and status (Davis & Eisenhardt,2011; Ketchen, Ireland, & Snow, 2007). At the portfo-lio level, firms benefit from having many ties, part-ners that complement one another, and a mix ofstrong and weak ties (Baum, Calabrese, & Silverman,2000; Ozcan & Eisenhardt, 2009). At the networklevel, central positions provide broader informationand greater status, and positions rich in “closure”(dense interconnections among partners) enhance

trust (Powell, Koput, & Smith-Doerr, 1996; Shipilov &Li, 2008). Overall, research at tie, portfolio, and net-work levels all suggest that firm performance ishigher when firms have many network ties of variedstrength with the right partners.

A key implication of this research is that tieformation efficiency is likely to be beneficial forachieving superior network outcomes and firm per-formance. An attempt to gain interorganizationalrelationships that (1) results in a completed tie, (2)is secured with relatively little time and effort, and(3) yields ties with desired partners has tie forma-tion efficiency. When firms form ties efficiently,they avoid lengthy and high-effort searches, failedattempts, and undesirable partners. As a conse-quence, compared to firms that form ties ineffi-ciently, these firms are likely to form more tiesgiven the same time and effort, and they are likelyto gain faster access to better resources from thoseties. In contrast, inefficient tie formation is likely toresult in wasted effort, reduced benefits, and de-layed access to resources (Baum et al., 2000; Graeb-ner & Eisenhardt, 2004). Overall, tie formation effi-ciency is likely to be essential for firms seekingsuperior network outcomes and firm performance.

Yet although efficient tie formation is likely to beimportant, it is unclear how firms form ties effi-ciently. Rather, the literature offers a descriptiveaccount of which ties form. The resource depen-dence theory argument is that firms with interde-pendent resource needs are likely to form ties (Gu-

The authors thank Riitta Katila, Tom Byers, PamHinds, Steve Barley, Dave Waguespack, Melissa Graeb-ner, Ben Cole, Chris Zott, Matt Bothner, Gautam Ahuja,Elissa Grossman, Duane Ireland, our anonymous review-ers, and participants at the Stanford SCANCOR seminar,Harvard Business School Entrepreneurship Managementseminar, Chicago Booth Organizations and Marketsworkshop, Wharton Entrepreneurship seminar, Univer-sity of Maryland Entrepreneurship Conference, Mid-At-lantic Strategy Colloquium (Darden), Greif ResearchSymposium (USC), and INSEAD Networks Conferencefor their helpful feedback and comments on this studyand article. The research assistance of Julie Shin, CamilleHearst, and Josh Schwarzapel is gratefully acknowl-edged. The research project was funded by the EwingMarion Kauffman Foundation and the Stanford Technol-ogy Ventures Program. All errors are our own.

Editor’s note: The manuscript for this article was ac-cepted for publication during the term of AMJ’s previouseditor-in-chief, R. Duane Ireland.

� Academy of Management Journal2012, Vol. 55, No. 1, 35–70.http://dx.doi.org/10.5465/amj.2009.0620

35

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lati, 1995; Katila, Rosenberger, & Eisenhardt, 2008).The social network theory argument is that firmsthat leverage their direct and indirect ties (Gulati,1995; Hsu, 2007) or have information signals ofquality (Ahuja, 2000; Dushnitsky, 2010; Eisenhardt& Schoonhoven, 1996) are likely to form ties. To-gether, these theories offer a deterministic accountof tie formation in which firms with attractive re-sources, direct and indirect ties, and high qualityare especially able to form ties. But this “rich-get-richer” account does not directly address the pro-cess or outcome of efficient tie formation, includingfailed attempts, speed of formation, and effort ex-pended to form ties. It also neglects the fact thatfirms often face rivalry for ties. It leaves especiallyunclear how well-endowed firms efficiently gainties outside their local networks and how less wellendowed firms form ties at all.

In contrast, an emerging stream of research takes astrategic view of tie formation (Santos & Eisenhardt,2009; Vissa, 2010). This work emphasizes how firmsand individuals actively shape their approach to tieformation through thoughtful agency (Emirbayer &Goodwin, 1994). Some research has shown that sym-bolic management strategies are likely to improve thesuccess of tie formation attempts (Zott & Huy, 2007).Related research has shown that successful strategiesfor tie formation are contingent on focal firm charac-teristics such as executive background (Hallen, 2008).But although strategic action is likely to be germane toefficient tie formation, research has yet to address tieformation efficiency and clarify the range of relevantstrategies.

Taken together, previous research studies (1) showthat firms gain performance benefits from numerousties with desirable partners, (2) provide a descriptiveaccount of which ties are likely to form, and (3) sug-gest a role for agency and strategic action. But theliterature lacks an in-depth of account of how firmsform ties efficiently. Our study addresses this gap. Weask, How do firms efficiently form interorganizationalties? Given limited theory and evidence, in this re-search we used multiple-case theory building (Eisen-hardt, 1989). Relying on detailed fieldwork, wetracked how executives in a cohort of nine internetsecurity ventures formed new investment ties overtheir initial five years. By studying variation in tieformation efficiency within- and across firms in acohort, we offer an unusually revealing comparisonof rival strategies for forming ties.

Our study contributes to interorganizational net-work theory and the resource acquisition strategiesof entrepreneurs. First, we introduce the new con-cept of tie formation efficiency and highlight itsimportance for creating superior ties, portfolios,and networks. Although tie formation is relevant,

our central insight is that efficiency is a more pre-cise conceptualization of the source of superiornetwork outcomes. Simply put, without efficiency,it is difficult to achieve superior network outcomes.Second, we contribute a theoretical framework thatunexpectedly describes two (not one) “equifinal”paths for how firms efficiently form ties (equifinalpaths are those that are distinct but produce thesame focal outcome). One path relies on strong directties and is available to privileged firms. The otherpath relies on catalyzing strategies and is available tomany firms. Catalyzing strategies, a second conceptintroduced here, are either network actions that ad-vantageously shape tie opportunities or signaling ac-tions that amplify the inducements of potential part-ners. Catalyzing strategies are significant becausethey broaden access to superior network outcomes,offering such outcomes to many firms, not just theprivileged few. Third, we add to the social networkand information signaling literatures by sketchingtheir complementarity and temporal interdepen-dence. Finally, we identify scope conditions, notingthat catalyzing strategies are most germane for firmsof intermediate quality and embeddedness, most im-portant for distant and “heterophilous” ties, and mostnecessary when firms are mismatched with potentialpartners who are willing to delay. Overall, we add tothe nascent literature on how strategic action, espe-cially by low-power actors such as entrepreneurs, canshape critical network outcomes.

THEORETICAL BACKGROUND

Our research question asks how firms efficientlyform interorganizational tie. By “efficiently form,” wemean that these firms achieve adequate outcomesexpending less time and effort than what might beexpended to achieve similar outcomes.1 Thus, effi-ciency relates to a favorable ratio of outputs to inputs.Tie formation is most efficient when it requires littletime and effort and yields a desirable partner. It ismoderately efficient when these conditions are par-tially met (e.g., fast and low effort, but a less desirablepartner; high time and effort, but a very desirablepartner). It is least efficient when there is no outcome(e.g., failed tie formation) or an inadequate outcome(e.g., undesirable partner) after much time and efforthave been expended.

Tie formation efficiency is important because itenhances the likelihood of superior network out-

1 The efficiency of a tie formation process is distinctfrom the efficiency of a network structure for informationflow (Burt, 1992; Watts & Strogatz, 1998). We appreciatean anonymous reviewer’s advice to clarify this point.

36 FebruaryAcademy of Management Journal

comes. Forming ties with less time and effort andfew failures enables firms to add more new tieswith the same time and effort and to gain the ben-efits of those ties sooner. Having more ties alsocreates a positive feedback loop that gives firms amore complete network of ties that can be furtherleveraged into new ties (Gulati & Gargiulo, 1999).Adding ties faster also propels firms to a centralnetwork position and so aids future tie formationand performance (Ozcan & Eisenhardt, 2009; Pow-ell et al., 1996). Forming ties with desirable part-ners accelerates these favorable dynamics. Ofcourse, at a certain point, adding more ties may notbe optimal. But even then, efficient tie formationexpedites the replacement of ties, and so develop-ment of better network portfolios (Powell et al.,1996; Shipilov & Li, 2008). Finally, adding ties withless effort enables executives to devote more energyto managing other aspects of their firms.

By contrast, forming ties slowly with less desirablepartners expending high effort, and suffering nu-merous failures wastes time and effort. Occa-sional failures may be instructive (Sitkin, 1992),but many failures are stigmatizing (Jensen, 2006)and demoralizing, and they inhibit learningthrough defensiveness and ineffective attribution(Bingham & Haleblian, 2012). Although a slowprocess can mean careful vetting of potentialpartners, it often means that potential partnersare duplicitously “stringing along” a firm (Graeb-ner, 2009; Santos & Eisenhardt, 2009). Addition-ally, a slow process with high effort limits the num-ber of ties that can be formed, and so it is likely tostall firms at the network periphery. A slow processalso delays access to needed resources (Baum et al.,2000; Graebner & Eisenhardt, 2004) and allows ri-vals to capture the best partners first (Ozcan &Eisenhardt, 2009). Moreover, “settling” for less de-sirable partners is less efficient because such tiesusually yield poorer resources and fewer networkbenefits. Finally, even when a firm has resourcesand an attractive network position that lessen thevalue of speed, extensive effort to form ties is stilldistracting and expensive. Overall, tie formationefficiency is important because it is likely to im-prove ties, portfolios, and network positions and togenerally enhance firm performance.

Although tie formation efficiency is important, itis unclear how firms efficiently gain new ties. Re-source dependence theory emphasizes induce-ments to form ties and implies that firms are morelikely to form ties when they have interdependentresource needs (Casciaro & Piskorski, 2005; Gulati& Sytch, 2007; Katila et al., 2008). Thus, it seemslikely that firms with many and attractive resourcesare more able to form ties efficiently than less well

endowed firms. But although suggestive, resourcedependence does not directly address how tiesform or, specifically, how they form efficiently interms of the time and effort required. Also, thistheory neglects the point that tie formation effi-ciency may be challenging for even well-endowedfirms if desired partners are not compelled to formties quickly, demand high effort, or have manypotential partners. In other words, many and attrac-tive resources may not be sufficient to ensure tieformation efficiency. Finally, the theory leavesopen how less well endowed firms form ties at all.

Social network theory emphasizes opportunitiesfor tie formation and implies that direct and indi-rect ties provide information about tie opportuni-ties and reduce uncertainty about the quality ofpotential partners (Gulati, 1995; Rider, 2011; Stu-art, 1998). Similarly, the theory implies that stronginformation signals of quality also reduce uncer-tainty about the quality of potential partners(Ahuja, 2000; Dushnitsky, 2010; Hallen, 2008). Sowell-connected firms or those with strong signals ofquality (e.g., successful executives, impressive firmaccomplishments) seem likely to form ties effi-ciently. But the theory does not directly addresshow ties form or, specifically, how they form effi-ciently in terms of effort and failures. Moreover,even well-connected firms may be challenged toform ties efficiently when they seek distant part-ners or when other well-connected firms are vyingfor the same potential partners (Baum, Rowley,Shipilov, & Chuang, 2005; Ozcan & Eisenhardt,2009). Thus, social embeddedness and informationsignals of quality may be insufficient for efficienttie formation. Finally, it is again unclear how lessconnected firms form ties at all.

Recent research on strategic action and networkagency suggests that executives can purposivelybreak away from the constraints of network structuresto form advantageous ties (Chen, Yao, & Kotha, 2009;Santos & Eisenhardt, 2009). For example, Zott andHuy (2007) examined symbolic management strate-gies for tie formation. They found that entrepreneurswho use symbols conveying personal quality (e.g.,high-status MBAs) and firm quality (e.g., prestigiouslocations) more successfully gain resource relation-ships with customers and investors. Similarly, Ozcanand Eisenhardt (2009) examined the network strate-gies of entrepreneurs seeking ties with “complement-ers.” They found that entrepreneurs who attemptmultiple ties at once are particularly successful. Vissa(2010) found that Indian software entrepreneurs whorely on a strategy of leveraging direct (but not indi-rect) ties tend to form more ties. Complementing thisresearch on strategies, Hallen (2008) examined howfirm-level contingencies influence successful strate-

2012 37Hallen and Eisenhardt

gies for tie formation. He found that well-connectedentrepreneurs should seek ties early on, but less wellconnected ones should wait until they gain accom-plishments. Together, these studies indicate that spe-cific strategies such as symbolic management en-hance the likelihood of tie formation. But this workdoes not directly address how ties form efficiently, orwhether various strategies to achieve efficiency maycomplement or substitute one another.

Overall, the literature suggests: (1) firms are morelikely to form ties when they have more resources,(2) firms are more likely to form ties when theyhave social connections and signals of quality, and(3) strategic actions such as symbolic managementimprove the likely success of tie formation at-tempts. But the literature does not address effi-ciency. Thus, despite the importance of efficiency,a granular account of how firms efficiently forminterorganizational ties is lacking.

METHODS

Given limited theory and evidence for how firmsefficiently form ties, we used inductive theorybuilding with embedded multiple cases (Eisen-hardt, 1989). Multiple cases enable building morerobust, generalizable, and parsimonious theorythan single cases (Eisenhardt & Graebner, 2007).Our embedded design has several levels of analysis(i.e., round and venture) to improve the likelihoodof rich and accurate theory (Yin, 1994).

We focus on venture executives seeking new in-vestment ties with venture capital and corporateventure capital investors (whom we term “profes-sional investors”). We define an investment tie as arelationship between a venture and professionalinvestor that entails the infusion of capital re-sources, often extensive advice, and sometimesother resources in exchange for equity (Hsu, 2004;Katila et al., 2008). Ventures typically seek invest-ment ties in a series of discrete rounds, with eachround providing capital for the near future andincluding one or more investors with the sameterms (Byers, Dorf, & Nelson, 2010). First roundsmay include one or several investors. Later roundstypically involve all prior professional investorsplus one or more new ones (Byers et al., 2010). Ourpilot interviews revealed that venture executivesand investors generally prefer to add at least onenew investor (termed the “lead investor”) in eachround to set the round price and so gain a closerapproximation of fair market value for all parties.Following industry norms, we call the first roundover $1 million “series A” and label subsequentrounds with sequential letters; if a round precededthe series A, this was labeled the “seed” round.

New investment ties were an attractive contextfor our study for several reasons. First, investmentties are important for ventures. They infuse criticalresources (Hallen, 2008; Katila et al., 2008), influ-ence survival (Shane & Stuart, 2002) and status(Gulati & Higgins, 2003; Hsu, 2004), shape industryarchitecture (Santos & Eisenhardt, 2009), and spurthe likelihood of acquisition and going public(Hochberg, Ljungqvist, & Lu, 2007). Second, tie for-mation efficiency is important because venturesoften have scarce managerial talent and need re-sources quickly (Vissa, 2010; Zott & Huy, 2007).Third, since ventures vary widely in their successin forming investment ties (Kirsch, Goldfarb, &Gera, 2008), there is likely to be useful variation inhow firms form ties. Finally, since venture execu-tives usually seek new investment ties in eachround, we could track within-firm (as well asacross-firm) variation in how executives attempt toform ties. Within-firm tracking controls several ex-traneous sources of variation and is a significantadvantage of our research design.

A key issue is whether venture executives areprimary actors in forming new investment ties.Several sources support the view that they are.First, our pilot interviews with both investors andventure executives indicated that although existinginvestors often give advice about fund-raising strat-egies, suggest potential investors, provide introduc-tions, and sometimes veto a potential investor, ven-ture executives typically develop the actualstrategy for a round, generally choose which poten-tial investors to target, and personally handle theinteractions underlying investment tie formation(e.g., pitching, providing updates, answering duediligence questions, etc.). By contrast, professionalinvestors have conflicts of interest regarding valu-ation and extensive demands on their time thatcircumscribe their role. Second, our cases corrobo-rate this view in examinations of multiple fundingrounds in multiple firms. Third, extant research isconsistent. For example, the primary role of ven-ture executives has been supported in researchbased on detailed fieldwork with entrepreneursforming ties including equity relationships (e.g.,Ozcan & Eisenhardt, 2009; Zott & Huy, 2007), large-sample research on entrepreneurial tie formation(Hallen, 2008; Hsu, 2004; Katila et al., 2008), andresearch on investor decision processes (Bruno &Tyebjee, 1985; Chen et al., 2009; Kirsch et al.,2008). Although a few studies have assertedthat existing investors “invite” potential investorsto form new investment ties (e.g., Sorenson & Stu-art, 2008), these studies have not examined eitherthe actual tie formation process or the alternativeexplanation that venture executives play a primary


role in forming new investment ties. Overall, ourdata and most research indicate that venture exec-utives and existing investors actively engage in theprocess of seeking new investments but that ven-ture executives have primary responsibility (espe-cially for the interactions that influence tie forma-tion) and so are particularly important for tieformation efficiency. Overall, we rebalance theventure capital syndication equation by emphasiz-ing the critical role of venture executives.2

The setting for our research is the internet secu-rity industry, in which firms develop softwareproducts to safeguard computer networks fromhackers and viruses. This setting was appropriatefor several reasons. First, studying a single industryenables more valid comparison of ventures. Sec-ond, this industry attracts a variety of executivesbecause developing an initial product often takesonly a few engineers and about 9–18 months, yetventures can become large and highly profitable(e.g., Barracuda Networks). Thus, the industry at-tracts executives who range from highly successful,serial entrepreneurs to novices who pay employeesin IOUs. Such variety increases the likelihood ofdiverse strategic actions for tie formation.

Our sample was nine internet security venturesfounded in 2002. We tracked their attempts to formnew investment ties from founding through 2006. Wechose 2002 because this founding year was suffi-ciently distant from our data collection period (2005–06) to allow multiple attempts to form new invest-ment ties to have occurred and yet recent enough thatrespondents were likely to recall events correctly(Huber & Power, 1985). Cohort sampling is especiallyuseful as it enables comparison of similar venturesunder the same industry and economic conditions.

We selected these ventures from the VentureX-pert database, which provides accurate data on U.S.venture financing (Gompers & Lerner, 1999; Kaplan& Schoar, 2005). We used VEIC codes 2721, 1561,and 2675 to identify internet security ventures. Ourresearch is theory building in nature, and so ouraim was to induct accurate, parsimonious, and gen-eralizable theory. In keeping with this aim, we usedtheoretical sampling to select focal ventures (Eisen-hardt, 1989). In contrast to random sampling,which is appropriate for deductive research using

statistical analysis, theoretical sampling is pur-posefully nonrandom. Each case is chosen for the-ory-building reasons—that is, to illuminate the fo-cal phenomenon and fill theoretical categories thatenhance generalizability (Eisenhardt, 1989).3 Thus,sample bias is not germane.

In keeping with our theoretical sampling ap-proach, we chose ventures with at least one invest-ment tie. This enabled selection of ventures thatevidenced the relevant phenomenon (i.e., formingnew investment ties). By contrast, it eliminatedventures that lacked “trivial” necessary conditionsfor tie formation (Fiss, 2007); for example, theydid not try to form ties (e.g., chose to bootstrap) orlacked sufficient quality to form ties regardless ofstrategic actions. Although we selected ventureswith at least one new investment tie, the resultingsample has high within-firm (at the tie attemptlevel) and across-firm variation, including varia-tion in failed attempts. Within-firm variation is es-pecially striking—that is, the same executives useddifferent strategic actions with varied outcomes.This variation is useful for our aim of inductingaccurate, parsimonious, and generalizable theory.

Applying this criterion, we selected two groupsof ventures, as summarized in Table 1. Four firms(group A) were in Silicon Valley and founded byserial entrepreneurs whose past ventures receivedprofessional investment and had either gone publicor been acquired. By selecting ventures with manyadvantages identified in prior research (i.e., strongprior ties, strong signals of quality, and many localpotential partners [Hallen, 2008; Hsu, 2007]), wefocused on how well-endowed executives form tiesefficiently. In keeping with our use of theoreticalsampling to improve generalizabilty, we also se-

2 We thank an anonymous reviewer for suggestingclarification of the roles of venture executives and exist-ing investors. Further, recent research on banking syndi-cates indicates that clients exert a greater influence onthe formation of syndicates than do investment banks(Shipilov & Li, 2010). In contrast with prior research, thisresearch points to the greater influence of vertical ties intriads, over horizontal ones, as do we.

3 Several logical differences underlie sampling for the-ory-building (inductive) research versus theory-testing(deductive) research. First, theory-building research us-ing cases goes from data to theory and aims to inductgeneralizable theory. Theory-testing research goes fromtheory to data and is intended to rigorously test deductedtheory. Second, theory-building research uses replicationlogic (Eisenhardt, 1989; Yin, 1994), whereby each caseserves as a distinct experiment. In contrast, theory-test-ing research generally uses pooled logic, whereby anentire sample is pooled and serves as a single experi-ment. Third, whereas statistical theory testing usingpooled logic relies on random sampling from a popula-tion (for example, Hallen [2008], our companion theory-testing paper, uses random sampling), theory buildingusing replication logic relies on theoretical sampling inwhich each case is selected nonrandomly for the pres-ence of the focal phenomenon and its ability to enhancetheoretical generalizability. We thank an anonymous re-viewer for encouraging us to clarify theoretical sampling.


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lected five firms (group B) located in the UnitedStates (but not Silicon Valley) with founders hav-ing diverse experiences and ties to professionalinvestors. Including Group B allowed explorationof tie formation efficiency in a rich variety of con-texts with likely variation in behavioral strategies.

Data Collection

We used several data sources: (1) interviews, (2)follow-up e-mails and phone calls to track ongoinginvestment attempts and clarify details, and (3) ar-chives, including media, corporate material, andthe VentureXpert database. Such triangulation bol-sters confidence in the accuracy of the emergenttheory. We also conducted eight pilot interviewswith investors and venture executives. Adding toour contextual understanding were one author’sexperience as the cofounder responsible for secur-ing professional investment ties at an internet ven-ture and the other author’s experience as an inves-tor in multiple venture capital (VC) funds, advisorto a corporate venture capitalist, and participant inthe management of a VC fund.

The primary data source was semistructured inter-views with two types of informants: (1) venture exec-utives with key responsibilities for raising a round,typically the CEO of a firm, non-CEO founders of thefirm, and (in some cases) the firm’s chief financial ortechnology officer (CFO or CTO), and (2) representa-tive investors who invested in the round. A keystrength is our rare interview data about actions (e.g.,failed attempts, strategic reasoning) viewed from bothinvestor and executive perspectives that are unavail-able from other sources. Interestingly, many investorsconsidered ties with several sampled ventures, thusadding unusually rich comparative data. We con-ducted 51 interviews plus follow-ups on ongoing at-tempts. Each interview was 45–90 minutes long,taped, and transcribed.

In each venture, we began with an overview inter-view with the CEO, the executive identified in ourpilot interviews as most relevant. This interview fo-cused on the venture’s founding, competitive posi-tion, executives, and an open-ended chronology of itsinvestment history. We then conducted round inter-views for each attempted round with the activelyengaged venture executives (typically one or two in-dividuals). This interview centered on the chronol-ogy of events, including interactions with potentialinvestors, offers, and round outcome. We also con-ducted investor interviews with representative profes-sional investors in the firms. The focus was the in-vestor’s history with the venture, includingchronologies of round attempts in which the investor

was involved and also round attempts in which othersampled ventures approached the investor.

We addressed potential informant bias in severalways. First, we triangulated data from multiplesources and informants for each round and venture,including accounts from both venture executives andinvestors. Second, since most ventures were seekingnew investment ties during our study, we blendedretrospective accounts, which offer efficiency, withreal-time accounts of ongoing attempts (Leonard-Bar-ton, 1990). Third, we used open-ended questioning ofhighly knowledgeable informants regarding recent,important activities. This practice limits recall biasand enhances accuracy (Golden, 1992; Koriat, Gold-smith, & Pansky, 2000). Fourth, we used “courtroomquestions” that focused on factual accounts of whatinformants did or observed others doing (e.g., dates,meetings, participants) and avoided speculation (Hu-ber & Power, 1985). Fifth, we gave anonymity to ourinformants and their firms, which encourages candor.Finally, our informants, especially venture execu-tives, were very motivated to be accurate becausethey were highly interested in learning how to raisefunds more efficiently. Such strong interest amonginformants usually improves the accuracy of theiraccounts.

Data Analysis

Following multiple case study methods (Eisen-hardt, 1989), we began by writing case histories ofthe tie formation process for each venture. To en-sure completeness and accuracy, a second re-searcher reviewed the data and formed an indepen-dent perspective that we integrated into each case.We had no a priori hypotheses.

In keeping our use of with inductive methods(Eisenhardt & Graebner, 2007), our definition(given earlier) and assessment of tie formation effi-ciency emerged from our informants. First, we mea-sured investment completion by whether an at-tempt yielded a formal investment offer that wasaccepted. Second, we measured time to form bycomputing the months elapsed from the time whenexecutives formally began to look for new investorsfor a specific round until the time when they re-ceived their first formal investment offer. Althoughour definition of efficiency includes time and ef-fort, a venture’s executives (CEO and often CFO)usually work full time on fundraising when theyare formally seeking new investment ties. Thus,time and effort are highly correlated in our setting.Since time is more easily measured, we (and ourinformants) used time as the measure of both.Third, we measured investor desirability bywhether (1) the firm received multiple offers from


desired investors and so could choose among them,(2) other investors were actively conducting duediligence when a desired offer was accepted, or (3)an explicitly desired investor (i.e., target investor)made an offer. We used these criteria because theyindicate situations in which executives have notonly successfully formed a tie, but have done sowith a desired partner and/or from among desiredpartners. This indicates a desirable tie, not just anadequate one. It is important to note that investordesirability can change from round to round. Forexample, venture executives often consider a high-status investor (often at lower valuation) more de-sirable in early rounds (Hsu, 2004) and an investor(often of lower status) offering high valuation moredesirable in later rounds (Byers et al., 2010). Thus,we measured investor desirability in terms of afirm’s preferences in each focal round.

We designated a round’s efficiency as high (newinvestment tie achieved in two months or less, andinvestor desirability is high); moderate (new in-vestment tie with high investor desirability takinglonger than two months to achieve, or new invest-ment tie with low investor desirability achieved intwo months or less); low (new investment tie withlow investor desirability and taking longer thantwo months to achieve); or abandoned (no newinvestment tie). Since the ventures were somewhatconsistent over rounds regarding their efficiency,we categorized them as high or low in efficiency bycomputing their average tie efficiency and desig-nating a threshold value, as indicated in Table 2.“/H” was added to the pseudonyms of the highlyefficient firms, and “/L” was added to the pseud-onyms of those with low efficiency.

We used the individual case histories to conductwithin-venture analysis. Our initial focus was iden-tifying actions at the tie attempt (round) level. Wethen linked these actions to round efficiency, usingreplication logic. Although the ventures had someconsistency, most also had both efficient and inef-ficient (or even abandoned) rounds. Analysis ofAspen/H, which achieved a “turnaround” (i.e.,abandoned its first round, changed strategies, andachieved highly efficient rounds), was especiallyinsightful. Once rough constructs and relationshipshad emerged, we began cross-venture comparisonsby round. In keeping with replication logic, wethen tested emerging theoretical relationshipsacross ventures and within and across groups.

We also compared our emergent theoretical frame-work with extant literature to refine our constructdefinitions, abstraction levels, and theoretical rela-tionships (Eisenhardt, 1989). Extant literature was es-pecially useful in sharpening underlying logical ar-guments. We engaged in repeated iterations until

theoretical saturation—that is, close match betweentheory and data—was reached. The resulting theoret-ical framework explains the dramatic differences intie formation efficiency that we observed. Catalyzingstrategies, which we define as behaviors by whichexecutives advantageously shape their firm’s oppor-tunities or others’ inducements to form ties, emergedas a focal, new construct.

HOW FIRMS FORM NETWORK TIESEFFICIENTLY

Transforming Network Ties: Casual Dating

How do firms form ties efficiently? Social net-work research suggests firms are likely to use priorties to form new ties (Gulati, 1995; Hallen, 2008;Hsu, 2007). Supporting this argument, we find net-work ties play a positive role in investment tieformation. Executives usually approached poten-tial investors whom they knew (i.e., direct ties) orto whom they were introduced by a mutual ac-quaintance (i.e., indirect ties). For example Squaw/H’s CEO restricted his searches to investors “thatwe could reference. We didn’t go to anybody thatwe didn’t know or know of.” But executives lessefficient in forming ties did the same. Purgatory/L’sfounder said: “I never cold-called any VC. I wouldalways reference my way in. I don’t think I ever gotturned down to meet.” So although important, net-work ties do not fully explain efficiency.

Instead, we find that firms often form ties effi-ciently when their executives engage in a catalyz-ing strategy they termed casual dating. Followingtheir implicit usage, we define casual dating as anexecutive’s informal but deliberate, repeated meet-ing with a few potential partners prior to attempt-ing to form a formal tie. Thus, casual dating disen-tangles familiarizing potential investors fromadversarial negotiation to make a deal. Central tocasual dating is that executives explicitly avoidboth purely social and investment tie discussions.This strategy is also not about chatting about theventure with potential investors whom an execu-tive might meet in a setting such as at a dinnerparty or board meeting. Rather, casual dating’s re-peated interactions focus on gaining general adviceabout common entrepreneurial issues (e.g., busi-ness model, hiring), with the deliberate aim of ex-panding the pool of potential partners.

We assessed casual dating from investor and ex-ecutive interviews. We found that most high-effi-ciency attempts included casual dating or strongdirect ties (a contingency we detail shortly). In bothgroups A and B, casual dating is a key determinantof efficient tie formation. Attempts with casual dat-


TABLE 2Investment Tie Formation Efficiencya

Venture andStage

Targeted PotentialPartners Outcome

InvestmentCompletion

Monthsto Form

InvestorDesirability

InvestmentTie Formation

Efficiency

Group AHeavenly/HSeed 1 VC. Accepted offer from 1 VC. � 1 � HighSeries A 2 VCs. Accepted offer from 1 VC; other

still doing due diligence.� 1 � High

Series B 10 VCs. Accepted offer from 1 VC; fourother offers.

� 1 � High

Series C 1 VC. Accepted offer from 1 VC. � 1.5 � HighSquaw/HSeed 1 VC. Accepted offer from 1 VC. � 1 � HighSeries A 1 VC. Accepted offer from 1 VC. � 1 � HighSeries B Approached by VC. Abandoned as VC backed out. Œ 2 Œ AbandonedSeries B 1 VC, 2 back-up

VCs.Accepted offer from 1 desired VC;

others still doing due diligence.� 1 � High

Series C 3 VCs, then 12 VCs. Accepted offer from 1 VC; fiveother offers.

� 0.5 � High

Mammoth/HSeries A 1 VC, then 15 VCs. After a VC with a strong direct tie

declined, accepted offer from 1VC.

� 5 Œ Low

Series B 9 VCs. Accepted offer from 1 VC; oneother offer; others still doingdue diligence.

� 1 � High

Series C 3 back-up VCs, 2VCs.

Accepted offer from 1 desired VC;others still doing due diligence.

� 0.5 � High

Donner/LSeries A 10–15 VCs. Abandoned. Œ 2 Œ AbandonedSeries A 30–40 VCs. Accepted offers of 3 VCs; 4 other

offers.� 7 � Moderate

Group BAspen/HSeed 10 VCs. Abandoned. Œ 6 Œ AbandonedSeed 4 VCs. Accepted offer from 1 VC; others

still doing due diligence.� 1 � High

Series A 10 VCs. Accepted offer from 1 VC; othersstill doing due diligence.

� 2 � High

Series B 2 VCs, 3 back-upVCs.

Accepted offer from 1 desired VC;others still doing due diligence.

� 1.5 � High

Keystone/HSeries A 5 VCs, then 20 VCs. Accepted offers from 2 VCs; 1

other offer.� 6 � Moderate

Series B Approached by VC. Accepted offer from VC. � 6 � ModerateMonarch/LSeries A 3 VCs. Abandoned. Œ 1 Œ AbandonedSeries A 3 VCs, then

e-mailed verymany VCs.

Accepted offers from 3 VCs;others still doing due diligence.

� 5 � Moderate

Series B About 25 VCs. Accepted offers from 1 VC. � 3 Œ LowSeries C 1 VC, later 4 back-

up VCs.Accepted offer from 1 less-desired

VC.� 5 Œ Low

Buttermilk/LSeries A 8 VCs. Accepted offer from 1 VC. � 4 Œ LowPurgatory/LSeed 3 VCs. Accepted offer from 1 VC. � 5 Œ LowSeries A About 60 VCs. Abandoned. Œ 6 Œ AbandonedSeries A About 30 VCs. Abandoned. Œ 8 Œ AbandonedSeries A About 30 VCs. Accepted offers from 2 VCs;

others still doing due diligence.� 4 � Moderate

a� � present; Œ � not present. The order of the ventures is based on the average efficiency of attempted rounds within groups A and

B. “High” � 3 points; “moderate” � 2 points; “low” � 1 point; and “abandoned” � 0 points. The threshold average efficiency of attemptedrounds (H vs. L) � 2 points.


ing are likely to be completed, completed quickly,and completed with high investor desirability. Wesummarize these data in Table 3 and provide fur-ther data in Appendix A.

Squaw/H’s series C provides an example of ca-sual dating in group A. A few months prior to

seeking new investment ties, the venture’s CEObegan having lunches with three target investors.He focused on gaining advice, including adviceabout possible business models. As he described:“This is just casual. You’ll talk about the businessand stuff, but you won’t pitch. And you won’t go to

TABLE 3Tie Formation: Paths and Efficiencya

Catalyzing Strategies

Ventureand Stage

StrongDirect Tie

CasualDating

Timingaround

ProofpointsScrutinizing

InterestCrafting

Alternatives


Efficiency

Group AHeavenly/HSeed � Œ Œ Œ Œ HighSeries A � Œ � Œ Œ HighSeries Bb

� Œ � � � HighSeries C Œ � � � � High

Squaw/HSeed � Œ Œ Œ Œ HighSeries A � Œ Œ Œ Œ HighSeries Bc

� Œ Œ Œ Œ AbandonedSeries B � Œ � Œ � HighSeries C Œ � � � � High

Mammoth/HSeries Ad

� Œ Œ � Œ LowSeries B Œ � � � � HighSeries C Œ � � � � High

Donner/LSeries A Œ Œ Œ Œ Œ AbandonedSeries A Œ Œ � � �

e Moderate

Group BAspen/HSeed Œ Œ Œ � Œ AbandonedSeed Œ � � � � HighSeries A Œ � � � � HighSeries B Œ � � � � High

Keystone/HSeries A Œ Œ Œ � � ModerateSeries B Œ Œ Œ � Œ Moderate

Monarch/LSeries A Œ Œ Œ Œ Œ AbandonedSeries A Œ Œ � Œ Œ ModerateSeries B Œ Œ � Œ Œ LowSeries C Œ � Œ Œ �

e Low

Buttermilk/LSeries A Œ Œ Œ Œ Œ Low

Purgatory/LSeed Œ Œ Œ Œ Œ LowSeries A Œ Œ Œ Œ Œ AbandonedSeries A Œ Œ Œ Œ Œ AbandonedSeries A Œ Œ � Œ �

e Moderate

a� � tie or catalyzing strategy present in attempt; Œ � no such tie or catalyzing strategy.

b Heavenly/H series B—2 paths: Targeted both strong direct ties and indirect ties via catalyzing strategies.c Squaw/H abandoned B—Strong direct tie initiated process, then quickly declined.d Mammoth/H series A—2 paths: Targeted strong direct tie quickly declined; then targeted indirect ties via catalyzing strategies.e Venture executives could have used crafting alternatives much sooner in the tie formation process than they did.


the partner meeting [i.e., where up or down invest-ment votes occur] and you won’t let them do dili-gence on you.” After several months of lunchtimeinteractions that involved advice about the venture,the CEO informed the three investors that Squaw/H’s board had officially decided to raise series C.Very quickly (within ten days), he received his firstinvestment offer (i.e., a term sheet) from one of thecasually dated investors. Others followed. Thisround was thus highly efficient, completed quicklyand with low effort, and with a desired investor.

We also observed casual dating in group B. Forexample, two months prior to the expected start of hisseries B, the founder of Aspen/H casually dated twoinvestors. He met each repeatedly, eventually severaltimes a week. Meetings were casual and focused ongeneral advice, including discussion about candi-dates for senior hires and technical alternatives. As hedescribed: “They’d come into our office, maybe get afeel of the product or something like that. ... On someof the technology, we’d do some white-board sessionswith them. But again, we wouldn’t do any presenta-tions.” After five weeks of casual dating, Aspen/H’sfounder announced a series B round. Six weeks later,several potential investors accelerated their due dili-gence, and a casually dated investor made an offerthat was accepted. The round was thus completedquickly, with modest effort, and with a desiredinvestor.

Despite the efficiency of casual dating, it is lessnecessary when executives already have strong directties with targeted investors. We categorize a strongdirect tie as one involving a prior substantial, per-sonal, working relationship between an executiveand investor. For example, in Heavenly/H’s series Aand series B attempts, the executives targeted inves-tors to whom they had strong direct ties (e.g., inves-tors for whom they had consulted or who had backedtheir prior ventures), and experienced high efficiencywithout casual dating.4 Given the fluid communica-tion and high trust of strong direct ties (Uzzi, 1997),these executives were able to use streamlined com-munication to familiarize potential investors. For ex-ample, Heavenly/H’s CEO described his series B in-

teractions to familiarize strongly connected potentialinvestors with the venture and its executives as “typ-ically two or three meetings.” Yet interestingly, evenwell-connected executives used casual dating in laterrounds when they chose to approach investors towhom they had only weak or indirect ties. So casualdating is relevant for many types of firms.

In contrast, executives are less efficient when theyuse neither casual dating nor strong direct ties. Forexample, in both of Donner/L’s two attempted seriesA rounds, the CEO approached investors at the timehe hoped to form an investment tie. Yet in neitherattempt was a tie quickly forthcoming. The founderabandoned the first attempt and slowly completedthe second. This “just-in-time” approach to investorsalso occurred in group B. For example, executives atMonarch/L often approached investors when theyneeded capital. These executives abandoned somerounds and completed others slowly, gaining fewdesired investors. Overall, rounds with neither casualdating nor a strong direct tie were more likely to beabandoned, to take longer, and to involve less-desiredinvestors.

Casual dating improves tie formation efficiencyfor several reasons. First, casual dating facilitatesfamiliarization of investors with a venture (andvice versa) by distancing participants from the of-ten adversarial negotiations of formal tie formation.Second, venture executives who ask for advice in-gratiate themselves with investors (Gordon, 1996;Westphal, 1998). Asking for advice flatters an in-vestor and validates the individual and her/his ex-pertise, leading to positive affect and psychic in-debtedness toward venture executives (Jones, 1964;Vonk, 2002). Moreover, asking for advice is a par-ticularly subtle, and thus effective, ingratiation tac-tic as it cognitively focuses the target on providingadvice, making the manipulation less overt (Stern &Westphal, 2010). Third, when potential investors’advice is followed, casual dating not only may im-prove the venture, but also “co-opt” investors byengaging them in the venture’s development. So-cial psychology research indicates that cooptationamplifies liking by causing the coopted party toview the other party and the relationship with thatparty as a part of their own identity (Aron, Aron,Tudor, & Nelson, 1991; Elsbach & Kramer, 2003).Fourth, by delaying formal evaluation and negoti-ation, casual dating reduces the salience of conflictand inhibits self-serving attributions that mightlead investors to perceive ventures less favorably(Molm, Peterson, & Takahashi, 2003). Overall, ca-sual dating develops a network of potential part-ners who are familiar with and have positive affectfor a venture prior to its seeking a formal tie. The

4 We appreciate the encouragement of an anonymousreviewer to clarify casual dating and its relationship withstrong direct ties. Casual dating involves recent, re-peated, and deliberate interactions that are focused ongeneral venture issues with the aim of creating familiar-ity that expands a venture’s pool of potential investors. Incontrast, many interactions in strong direct ties (e.g.,meetings at a conference, board meetings of other firms,and social occasions) lack these traits. Given these dis-tinctions, casual dating may occur both outside of andwithin strong direct ties.


result is transforming weak or indirect ties intostronger, although informal, direct ties.

In contrast, in the absence of either strong directties or casual dating, the interactions during whicha potential partner becomes familiar with a venturecomingle with formally seeking a tie. Although theelapsed times for casual dating and just-in-timeattempts are similar, the latter require more effortbecause interactions during formal tie attempts areoften scripted presentations requiring much prep-aration. Also, since learning about a venture andmaking an investment are intertwined, just-in-timeinteractions are often formal, adversarial, and soless fluid and effective. Both sides are more likelyto be wary of and to engage in deception (e.g.,executives hiding information, potential investorsfaking interest), making communication less pro-ductive, familiarity more difficult to gain, and pos-itive affect less likely. In contrast, casual datingtakes fewer hours and less preparation to yieldfamiliarity and positive affect more reliably.

Although casual dating is typically helpful, ven-ture executives recognize potential drawbacks. One isthat they might reveal excessive weakness. For exam-ple, as one executive told us, approaching investorstoo soon can be problematic if a venture’s strategy isunclear, because investors may prematurely catego-rize the venture as low quality. Accordingly, thisexecutive noted that he was careful about when andhow he began casual dating. So even if he encoun-tered a potential investor at a social (e.g., party) orbusiness (e.g., conference) event, he avoided discuss-ing the venture. Casual dating thus requires execu-tives to be careful about timing and focus on generalissues commonly faced by ventures.

Finally, how did potential investors view casualdating? Our investor interviewees recognized thatthey were being “casually dated.” But they, like theexecutives, believed that casual dating was an easyway for them to get to know possible venture part-ners without spending a lot of time. It also allowedthem to ingratiate themselves with executives andobtain an early lead in evaluating ventures. Casualdating also helped them learn more about the in-dustry. Thus, although they typically did not initi-ate casual dating, potential investors were oftenwilling participants.

Overall, by shaping social embeddedness, exec-utives proactively expand their ventures’ networksof potential partners. In effect, casual dating acti-vates indirect and weak ties to potential partners.Thus, executives who use strong direct ties or ca-sual dating begin formal tie formation with a robustportfolio of potential partners that makes tie forma-tion efficiency more likely.

Hypothesis 1.Executives who use either casualdating or target strong direct ties are likely toform new interorganizational ties moreefficiently.

Amplifying Signals of Quality: Timing around“Proofpoints”

Research indicates that information signals ofquality improve the likelihood of tie formation(Ahuja, 2000; Eisenhardt & Schoonhoven, 1996;Podolny, 1994). In the context of ventures seekinginvestments, information signals such as firm prog-ress, founder accomplishments, and existing inves-tors’ high status are important signals of venturequality, and thus are likely to attract potential in-vestors (Gulati & Higgins, 2003; Hallen, 2008).

In keeping with this argument, executives effi-ciently forming investment ties had backgrounds ofaccomplishment, and their ventures had madeprogress. For example, when seeking a series Bround, Mammoth/H’s founder could show a strongbackground (e.g., her prior venture was acquired),and her current venture was selling products. Yetexecutives experiencing less efficiency often hadequal signals—for example, although Monarch/L’sfounder was a successful serial entrepreneur andthe firm had a product prototype, this executiveabandoned his first attempt at a series A. Similarly,some executives with high-status investors had in-efficient attempts (e.g., Monarch/L’s later rounds),but others with lower-status investors had highlyefficient attempts (e.g., Squaw/H’s series A). Thus,although signals of quality are important, thismechanism does not fully explain variation in tieformation efficiency.

Instead we find that firms often form ties effi-ciently when they formally begin to seek a tie usinga second catalyzing strategy: timing around “proof-points.” Both investors and executives used theterm “proofpoint.” Building on their implicit defi-nition, we define a proofpoint as a positive signal ofsubstantial venture accomplishment of a criticalmilestone that is confirmed by key external (notinternal) actors. By involving external confirma-tion, proofpoints provide relevant third-party vali-dation of accomplishments. In our setting, proof-points often focus on critical customer milestones,such as a first customer’s paying for a venture’sproduct.5 Recency further amplifies this alreadystrong information signal of venture quality.

5 Specific proofpoints depend on context. For exam-ple, customer actions were proofpoints in our setting ofinternet security. By contrast, proofpoints are likely todepend on the actions of regulatory agencies (e.g., the


Proofpoints are distinct from other informationsignals that do not resolve a critical uncertainty.Investors pay particular attention to the former as astrong signal and discount the latter. For example,investors regarded customers using a venture’sproduct as a proofpoint when the customers saidthe product was complete (e.g., Heavenly/H’s seriesA). But investors did not regard customers’ using aproduct as a proofpoint when the customers be-lieved key product features were missing (e.g., Don-ner/L’s first attempted series A). This criterion ofresolving a critical uncertainty also distinguishesproofpoints from many legitimating endorse-ments—that is, obtaining a fourth high-status cus-tomer may be a legitimating endorsement (Podolny,1993; Rao, 1994), but it is not a proofpoint. Finally,the quality signal of a proofpoint is further ampli-fied when its achievement was recent.

Using our data, we assessed timing around proof-points by whether executives formally began a tieattempt within three months of accomplishing atleast one proofpoint. We find that high-efficiency at-tempts involved either timing around proofpoints orstrong direct ties (a contingency we detail shortly).We summarize these data in Table 3 and providemore complete data in Appendix B. Timing aroundproofpoints guides executives as to when to begin toseek ties formally, and so it follows casual dating.Executives time around proofpoints in several ways.

First, executives may use acceleration, seeking anew tie before the tie is needed. For example, whenHeavenly/H had obtained a paying customer (aproofpoint), a Heavenly/H investor advised theventure’s CEO to raise its series C, even thoughfunds would not be needed for about nine months.This investor noted, “We had enough proofpointsto show that we had a market, and I’m not sure wecould’ve gotten a better price two more quartersfrom now. Maybe a year from now, but wewould’ve needed the capital before then.” The CEOdid so, and the desired investor quickly made anoffer within two months of being approached.Overall, tie attempts using acceleration to timearound proofpoints (in both groups A and B) werecompleted with moderate to high efficiency.

Second, executives may use preemptive structuringto synchronize a future tie attempt with a futureproofpoint. For example, Heavenly/H’s founderraised US$4 million in series A because he thoughtthis was the capital necessary to reach the next proof-point of “finishing off the product.” When the CEO

later wanted to attempt series B, the anticipatedproofpoint had just been reached, and the round wascompleted with high efficiency. Overall, such roundswere typically highly efficient.

A third tactic is to delay a tie attempt until aproofpoint is achieved. For example, when As-pen/H was running out of capital prior to having apaying customer (its next proofpoint), the founderdelayed seeking new ties. When a customer finallypurchased the product, the founder immediatelysought the series B round, which was completedwith high efficiency.

Despite the efficacy of timing around proofpoints,we observed that it is less necessary when strongdirect ties are present. For example, Squaw/H execu-tives relied on the trust inherent in their strong directtie with their targeted investor for their seed round tosignal the high quality of the venture via quick, cred-ible communication with this investor. They did nottime around a proofpoint. Similarly, they also reliedon a strong direct tie (with immediate proofpoint) intheir highly efficient series A. Overall, potential part-ners may not require the amplified signaling of timingaround proofpoints when they can rely on trust, hon-esty, and rich communication with executives withwhom they have strong direct ties to convey quality.

In contrast, tie formation without strong directties is less efficient when timed around “resourceneeds.” For example, Purgatory/L’s CEO began theseries A attempt because the venture had “only$800K or so.” But his venture had no immediateproofpoint—that is, its product lacked essentialcustomer features and was still in development.Although the CEO engaged in time-consuming andhighly effortful meetings with about 60 investors,none committed to a tie. The CEO abandoned theround. His next attempt, again without an immedi-ate proofpoint, was also abandoned. Only when acustomer began using the fully featured product (aproofpoint) was the third attempt at series A com-pleted. Similarly, when Monarch/L’s CEO first at-tempted a series A, the venture had “written a firstprototype and we were going to maybe start drivingrevenue [i.e., selling the product] in short order.”But without external confirmation of the proto-type’s desirability, the venture lacked an immedi-ate proofpoint. Though the CEO extensively pre-pared for meetings with three prominent investors,none moved forward. The CEO abandoned the at-tempt. After completing the first product sale (aproofpoint) three months later, the CEO again at-tempted a Series A and succeeded with moderateefficiency. Overall, tie formation attempts timedaround resource needs are likely to be abandonedor slow, and have less-desired investors.

FDA) in the biotechnology and medical devices indus-tries. We thank an anonymous reviewer for encouragingus to clarify this.


Timing around proofpoints improves tie forma-tion efficiency by amplifying the signal of quality.First, proofpoints are extreme signals of qualitybecause they indicate achievement of unusuallycritical milestones. Further, since they are con-firmed by external (not internal) actors, proofpointsare particularly credible and difficult-to-fake indi-cators (Spence, 1974). Thus, they are unusuallystrong information signals and so are especiallylikely to attract potential partners. Second, theirrecency further amplifies the signal because indi-viduals overweight immediacy (De Bondt & Thaler,1985; Kahneman, Slovic, & Tversky, 1982). Follow-ing the dictum, “What have you done for me lately?”,potential partners inflate accomplishment quality onthe basis of immediacy and discount distant or cu-mulative successes. Thus, potential partners arestrongly attracted to ventures with immediate proof-points, although actual quality may be unchanged.Finally, since it is such a strong quality signal, arecent proofpoint is highly persuasive (Cialdini,1993), making it easier for individuals to convinceothers in their firms to form a new tie.

Although timing around proofpoints is oftenhelpful, executives recognize potential drawbacks.For example, acceleration and preemptive structur-ing require accurate foresight of the timing of futureaccomplishments and resource needs. This is oftendifficult because executives typically face high un-certainty, especially in new markets. A seconddrawback is that, although delay does not requireforesight, it often involves significant hardships(e.g., forgoing salaries) that restrict action and en-danger morale. Thus, although acceleration andpreemptive structuring are preferable because theylimit hardship, delay is more widely feasible be-cause it does not require foresight. Overall, timingaround proofpoints requires a careful linkage ofresource needs, venture accomplishments, and tieformation attempts that is not always easy to do.

What did investors think about timing aroundproofpoints? We observe that investors are con-sciously attracted to proofpoints. For example, indescribing his lack of interest, a potential investornoted: “What you’re missing for this to be attractiveis a handful of reference customers where you’vegot deployments [i.e., a proofpoint].” Moreover, in-vestors perceive proofpoints as strong signals ofprogress. For example, Heavenly/H’s seed investorreferred to each proofpoint as the next step thatsubstantially bolstered the likelihood of venturesuccess. Investors were also attracted to timingaround proofpoints because they reduce type I er-rors (i.e., false positives). By contrast, investorswere less sensitive to type II errors (i.e., false neg-

atives) because they had many more attractive in-vestment opportunities than they could address.

A key point is whether timing around proofpointsis available only to high-quality ventures. Although itis probably true that very low quality ventureswill not have proofpoints, all of our ventures wereabove this quality threshold and achieved several.Thus, although proofpoints are rare (occurring aboutonce per year), timing around them is often feasible.But surprisingly, executives do not always timearound proofpoints, even when they easily can. Forexample, the timing of Monarch/L’s failed series Awas close to a proofpoint (about three months away),but the attempt was not delayed.

Overall, timing around proofpoints is a catalyz-ing strategy that amplifies signals of quality. Al-though casual dating is a network action that ex-pands opportunities for ties prior to their beingformally sought, timing around proofpoints is asignaling action that follows casual dating. Itguides when to formally seek ties. Executives whohave strong direct ties or who use timing aroundproofpoints launch formal tie formation by sendingstrong signals of quality that attract desired poten-tial partners.

Hypothesis 2. Executives who either timearound extreme signals of quality such asproofpoints or target strong direct ties arelikely to form new interorganizational tiesmore efficiently.

Culling Network Nodes: Scrutinizing Interest

According to resource dependence theory, firmsare more likely to form ties when they have re-sources that potential partners want (Gulati, 1995;Pfeffer & Salancik, 1978). This suggests that execu-tives are likely to form ties to investors with pref-erences for their ventures’ particular resources(Eisenhardt & Schoonhoven, 1996). For example,investors often form ties with ventures in specificregions, development stages, or industries (Gupta &Sapienza, 1992). But although this research is help-ful, it focuses on easily observed preferences. Inreality, investors often have subtle preferences, ortheir preferences change, or they do not even knowtheir preferences. Moreover, as Graebner (2009) ob-served, potential partners may consciously deceiveand string along venture executives, or inflate theextent of their own interest. Thus, it can be chal-lenging for venture executives to discern whichpotential partners are actually interested at the timethat their venture seeks to form a tie.

Recognizing the challenge of assessing genuineinterdependence, firms that form ties efficiently


often engage in a third catalyzing strategy: scruti-nizing interest. We define scrutinizing interest astaking actions to discern potential partners’ actualinterest in a tie. Scrutinizing interest improves tieformation efficiency by enabling executives to ig-nore potential partners who are not interested andfocus on those who are. Moreover, given that inves-tor preferences are often fluid, scrutinizing interesttypically occurs during the tie formation process.Scrutinizing interest or strong direct ties (a contin-gency we address later) occurs in many high-effi-ciency attempts. Table 3 summarizes these data,and Appendix C gives more complete data.

Executives scrutinize interest in several ways.First, they use network verification, in which theyproactively ask mutual acquaintance(s) to verify aninvestor’s actual interests. Recalling Keystone/H’sseries A, the founder said: “I would know some-body tied into a couple of VC firms. I would callthat person and ask them if they had knowledge orif they could fish around about whether or not suchand such a firm was still doing deals.” Although hehad numerous weak and indirect ties to potentialinvestors, he identified about 20 target investorsusing network verification. Many were highly in-terested, and 3 made investment tie offers. Simi-larly, after casual dating between Heavenly/H’sCEO and a potential series C investor and aftertiming around a proofpoint to launch the formalseeking of a tie, this CEO used network verificationto ask a current investor to probe actual interest.This investor said: “I went through the backdoorand asked ‘Are you guys sniffing us out? Or are youreally open to going ahead?’ ” After confirming in-terest, Heavenly/H’s CEO devoted considerable at-tention to this potential investor, who made anoffer six weeks later. Overall, tie attempts usingnetwork verification enabled executives to focustheir networks and were often highly efficient.

Second, executives scrutinize interest by directanalysis of interactions with potential investors.Mammoth/H’s founder was particularly astute atthis. She paid close attention to how quickly inves-tors called her back after a meeting (i.e., the numberof days), how quickly they began due diligence(i.e., the number of weeks), and whether they in-cluded a partner. For example, this CEO devotedlittle time to meeting with associates in a potentialinvestor firm in the series B attempt. But once apartner in the investor firm began calling, she de-voted “a lot of attention” to this investor, whichextended an offer within a month. Similarly, in hishighly efficient second series A attempt, Aspen/H’sfounder ignored investors who involved only asso-ciates and focused his time on meeting with poten-tial investors who sent partners. Overall, tie at-

tempts with direct analysis were often efficient.Moreover, since network verification and directanalysis rely on different information, they arecomplementary and together allow executives toscrutinize interest especially well.

Despite the efficiency of scrutinizing interest, itis less necessary when executives use strong directties. Neither Heavenly/H nor Squaw/H scrutinizedinvestor interest in their seed or series A rounds,and yet these rounds were completed with highefficiency. When we probed, these executives re-vealed long work histories with the targeted inves-tors. In keeping with the existence of strong directties, these targeted investors were honest abouttheir actual interest, which mitigated the need forscrutinizing interest. For example, when Mam-moth/H’s CEO approached an investor from hersuccessful last venture for series A, he quickly saidno. So although delayed by her initial targeting ofthis investor, the CEO moved on and used scruti-nizing interest to eliminate unlikely potential in-vestors, focus on genuinely interested ones, andsalvage the round.

In contrast, without scrutinizing interest or strongdirect ties, attempts to form ties are less efficient.Indiscriminately “shopping for ties” does not distin-guish well between genuine and faked interest. Bybelieving easily faked or misleading indicators of in-terest, executives misallocate their effort and wastetime. For example, Buttermilk/L’s founder ap-proached potential series A partners who had previ-ously formed ties with internet security ventures andto whom he could be introduced. But although thisfounder had been a successful entrepreneur in thissector and had an extensive network, he did not usehis network to verify interest. Several targeted inves-tors met multiple times with the founder, but nonecommitted to a tie. After much effort and delay, anuntargeted investor finally came forward to form a tie.Similarly, Purgatory/L’s CEO met with any potentialinvestor who would meet. He engaged with over 90investors during his first two attempts at a series A.Although many professed interest, were friendly andenthusiastic, and repeatedly met, none moved to a tie.Both attempts were abandoned. Overall, when exec-utives fail to scrutinize interest or use strong directties, tie attempts are often inefficient.

Scrutinizing interest improves tie formation effi-ciency by clarifying potential partners’ actual inter-est. Executives can then cull the network and focuson potential partners with genuine interest. This iscritical, because potential partners often exaggeratetheir interest to advantageously preserve their ownalternatives, while discouraging ventures from form-ing ties with others (Padgett & Ansell, 1993; Santos &Eisenhardt, 2009). Indeed, we observed that many


potential investors enthusiastically meet, but rarelytake the effortful next step of conducting due dili-gence and generally avoid saying no. Since meetingsand verbal professions of interest are relatively cost-less for investors, they are not very useful for discern-ing actual interest. Yet ironically, venture executivesoften find such actions persuasive, because they areflattering and appear to validate the venture (Jones,1964; Westphal, 1998). Moreover, given the tendencyof individuals to see another’s level of trust and hon-esty as matching their own (Graebner, 2009), honestventure executives often overestimate the interest ofdeceptive investors. Scrutinizing interest helps avoidsuch overestimation by triangulating potential part-ners’ interest with credible behavioral cues and third-party information. Overall, like casual dating, scruti-nizing interest is a catalyzing strategy by whichexecutives shape their networks. But while casualdating adds and strengthens relationships, scrutiniz-ing interest culls less promising potential partnersand creates a focused, better network of potentialpartners.

Although often useful, scrutinizing interest has po-tential drawbacks. One is that executives may incor-rectly cull potential partners who are interested. Butthis is less problematic than it seems, because genu-inely interested investors are sensitive to this possi-bility. For example, when Mammoth/H’s CEOstopped meeting with associates of a potential inves-tor, the partner intervened, attended meetings, andbegan due diligence. The CEO turned her attentionback, and a tie was quickly formed. In contrast, un-interested investors usually do not escalate their ef-forts when executives cull them. Another drawbackis that network verification requires that network in-termediaries have relatively strong relationships withpotential partners. So when indirect ties are few, thisapproach is unlikely to work.

What do investors think of scrutinizing interest?Many confessed that they frequently exaggerate theirinterest to keep open the possibility of a tie. As oneconfessed: “I have a set of hot ventures and a set ofcold ventures. I act interested in both, but I’m movingthe hot ones along.” Likewise, investors also spokeabout the useful information gained in meeting exec-utives even when they were not interested in a tie.For example, a Monarch/L’s investor claimed that heunderstood the internet security space because “we’dseen [but not invested in] several companies in thespace.” So investors often avoid rejecting venturesoutright, suggesting that venture executives couldeasily waste their time and effort.

Overall, scrutinizing interest helps executives todiscern actual interest so that they can then cullunlikely potential partners and focus on the mostpromising ones. Thus, timing around proofpoints is

a signaling action that guides when to form ties, butscrutinizing interest is a network action that guideswhom to target to form ties. Executives with strongdirect ties or scrutinizing interest better distinguishgenuine from faked or exaggerated interest and socan cull their networks to focus on the most prom-ising potential partners.

Hypothesis 3. Executives who either scrutinizethe interest of potential partners or targetstrong direct ties are likely to form new interor-ganizational ties more efficiently.

Creating Signals of Scarcity: CraftingAlternatives

Research on tie formation has neglected how part-ners finalize ties. Yet finalizing ties is likely to bechallenging, especially when one potential partnerhas no immediate need for the tie or has multiplesuitors vying for its favor. Particularly when suchasymmetries exist, one side is likely to hesitate andrequire more time or effort before committing.

We observed that ventures often face this chal-lenge. In line with previous research (Kirsch et al.,2008), we observed that many investors were ap-proached by far more ventures than they couldaccommodate. Thus, we observed that even veryinterested investors were often reluctant to committo ties. An investor summarized: “There is no in-centive for me to act too soon. I would rather givethe company plenty of time to either prove to methat what they said—three-four months ago wascorrect or prove that it was incorrect.”

Recognizing the challenge of gaining commitment,firms that form ties efficiently often use a fourth cat-alyzing strategy: crafting alternatives. We define craft-ing alternatives as developing multiple routes to endthe tie formation process. Crafting alternatives is asignaling action that promotes efficiency by motivat-ing very interested potential partners to commit.Thus, crafting alternatives occurs at the end of thesequence of catalyzing strategies, and it focuses oncreating inducements to conclude the tie formationprocess. We assessed crafting alternatives from inves-tor and executive interviews. Table 3 summarizesthese data, and Appendix D adds details. Most high-efficiency attempts used crafting alternatives orstrong direct ties (a contingency we detail shortly).Executives crafted alternatives in several ways.

First, executives may establish different resourcepaths that use funding sources other than investors(e.g., friends, bootstrapping) and entail differentdecision processes than those of desired investors.For example, for Aspen/H’s successful seed round,the CEO decided to use his family wealth and cut


expenses if his desired investor continued to delay.He gave this investor a two-week deadline, whichthe investor met. Similarly, in the series C round,Heavenly/H’s CEO told the desired investor that hewould use the venture’s cash and abandon theround if a tie were not forthcoming. The investormade an offer in six weeks. Rounds with this tacticwere often highly efficient.

Second, executives may approach less-desirablepartners in addition to desired ones. The former areusually of lower status, relative to the ventures’ qual-ity. Since these investors often regard speed as theiradvantage, they are especially useful for this tactic. Agood example is series B at Aspen/H. After casuallydating two high-status investors, the founder formallydecided to seek new investment ties. The founderapproached the casually dated investor that he pre-ferred but also contacted three lower-status investorsknown for their speed. The latter rapidly launcheddue diligence and moved to a tie. Simultaneously, thefounder kept his desired investor aware of the others’actions. The desired investor responded with a tieoffer. Overall, approaching less desirable partnersyields efficiency when used early, and it avoids aban-donment when used later.

Third, executives may structure competitionamong highly interested investors by setting dead-lines. Heavenly/H’s CEO did this in its series Bround. After several of the ten targeted investorsscheduled partnership meetings (late-stage meetingsconsistent with high interest), the CEO informed theother desired investors of these actions and estab-lished a deadline. As he received offers, he kept theremaining investors informed. There were five offerswithin a month. Similarly, once Squaw/H’s CEO be-gan partner meetings indicative of high investor in-terest in his venture’s series C round, he set a ten-daydeadline for offers and received six. Overall, attemptsin which executives structure competition via dead-lines typically have at least moderate efficiency.

Crafting alternatives, however, is less necessarywhen executives have strong direct ties to targetedinvestors. For example, in Heavenly/H’s and Squaw/H’s seed rounds, executives targeted investors withwhom they had strong direct ties and finalized thoseties quickly without crafting alternatives. The hon-esty and trust of strong direct ties mean that investorsavoid disingenuous stringing along of executives andcommit (or not) quickly. But even well-connectedexecutives may craft alternatives when seeking tiesoutside their local networks, and crafting alternativesis thus relevant for many types of executives.

In contrast, executives were less efficient whenthey used neither strong direct ties nor crafting alter-natives. For example, although five desired investorsin Monarch/L’s series A conducted due diligence

(which is consistent with high interest), the CEOdid not craft alternatives such as structuring compe-tition with a deadline. Although the investors re-mained interested, the attempt consumed consider-able effort by the CEO and closed very slowly (takingfive months). Indeed, low-efficiency rounds often in-volve multiple potential investors who meet repeat-edly with venture executives without making offers.Thus, hoping for ties in the absence of inducementsfor closure is typically inefficient.

Crafting alternatives improves tie formation effi-ciency by amplifying the signals that induce poten-tial partners to commit. First, although even veryinterested potential partners often wait to form tiesor demand more effort, crafting alternatives signalsscarcity. Such signals motivate greater interest, ur-gency, and risk taking as investors do not want tolose out (Brehm, 1966; Cialdini, 1993; Tversky &Kahneman, 1981). Second, crafting alternatives en-hances the perceived quality of a venture through“social proof” arising from the interest of others.Decision makers rely on social proof, defined aslooking to others for cues to appropriate action,when they themselves are uncertain as to a courseof action (Cialdini, 1993; Podolny, 1993; Rao,Greve, & Davis, 2001). Since venture quality is of-ten difficult to evaluate directly, social proof islikely to influence investors’ willingness to com-mit. Third, and related to social proof, crafting al-ternatives helps executives break self-reinforcing“bystander apathy,” whereby each potential inves-tor interprets others’ lack of commitment as indic-ative of these others’ judging the venture to be oflow quality, and thus also decides not to commit(Banerjee, 1992; Bikhchandani, Hirshleifer, &Welch, 1992; Latané & Darley, 1968).

Although crafting alternatives is often helpful,there are potential drawbacks. For example, sinceinvestors are often skeptical of executives’ claims,alternatives are ineffective if they are not perceivedas credible. For example, potential investors ig-nored Purgatory/L’s vague claim of “strong inter-est” by an unnamed investor in their first series Aattempt. In contrast, since the firm had products tosell, Donner/L’s alternative of bootstrapping in itssecond series A was credible and led to efficient tieformation. Second, executives may overestimatethe interest of potential partners. As a result, theymay have to accept an undesirable alternative, suchas a tie with an unwanted investor, or have no takersin a structured competition. Finally, structured com-petition is often infeasible because it requires highinvestor interest from multiple desired investors.

What do investors think of crafting alternatives?They are neither surprised nor offended. Instead,we found that they view it as effective. For exam-


ple, when Aspen/H’s CEO threatened to fund theseed round himself, an investor praised: “It was agood strategy. I knew that regardless of if I wantedto play or not, the opportunity was going to go awayin two weeks. It was real and credible and probablygot me off of my rear end.” But investors also oftenbelieved that executives might duplicitously exag-gerate, and so they typically probed crafted alter-natives carefully. Thus, alternatives can induce po-tential partners to commit, but the partners must beconvinced of the alternatives’ validity.

Is crafting alternatives only available to high-qual-ity ventures? As with proofpoints, there is probably aminimum quality threshold, but our ventures sur-passed it. Thus, crafting alternatives is often feasible,and most ventures used this strategy in at least oneround. But ironically, executives sometimes couldhave crafted alternatives much sooner than they did(e.g., in Monarch/L’s series C), and so tie formationwas unnecessarily inefficient. Executives can oftencraft alternatives, yet they do not always have theforesight to do so.

Overall, crafting alternatives is a catalyzing strategythat strengthens the signals that induce potential part-ners to commit. Although timing around proofpointsengages initial interest by signaling quality andguides when to begin the formal tie formation pro-cess, crafting alternatives closes the process by signal-ing scarcity and quality at the end. Thus, executiveswho have strong direct ties or who use crafting alter-natives are more likely to induce partners to committo a tie.

Hypothesis 4. Executives who either craft alter-natives or target strong direct ties are likely toform new interorganizational ties moreefficiently.

Toward a Process Theory of Efficient TieFormation

Our emergent framework indicates two equifinalpaths by which firms efficiently form ties (Fig. 1).These paths address the same challenges in distinctways and so are functionally equivalent. Table 4summarizes the challenges and paths to efficient tieformation. The first path builds on strong direct tiesand is available to privileged firms. Strong directties ensure a network of potential partners prior tothe start of formal tie formation (obviating casualdating), communication of strong signals of qualitywhen tie formation formally begins (obviating tim-ing around proofpoints), rapid discernment of ac-tual interest (obviating scrutinizing interest), andquick decisions regarding whether to commit (ob-viating crafting alternatives). Thus, this strategy re-

lies on attributes of strong ties (Powell et al., 1996;Uzzi, 1997)—that is, superior communication, fa-miliarity, honesty, and trust—to achieve efficiency.

The second and more novel path relies on cata-lyzing strategies and is available to many firms.Here, firms ensure a network of potential partnersprior to the start of tie formation through an “activewaiting” strategy, casual dating, which transformsweak or indirect relationships into strong ties. Ex-ecutives begin tie formation when they createstrong signals of quality using a second catalyzingstrategy, timing around proofpoints, which relieson the immediacy of critical accomplishments val-idated by others to amplify signals of quality. Dur-ing tie formation, executives rapidly discern actualinterest by using a third catalyzing strategy, scruti-nizing interest. Finally, executives overcome hesi-tation at the end of tie formation with a fourthcatalyzing strategy, crafting alternatives, by whichthey amplify the signals that induce potential part-ners to commit. Overall, this path of catalyzingstrategies relies on a sequence of complementaryactions to achieve tie formation efficiency.

Aspen/H is a telling example. Its two youngfounders were inexperienced and had no strongdirect ties to potential investors. In the first tieattempt, the founding CEO failed to form a tie. Hethen restrategized his approach. He casually datedtwo potential investors and delayed formally seek-ing ties until achieving a proofpoint. He then scru-tinized interest using direct analysis to cull poten-tial partners with exaggerated interest and focus hisefforts. Once he had engaged an interested anddesired investor, he closed the tie by crafting analternative resource path to signal scarcity. This tieattempt was highly efficient. In his later attempts,he continued to use catalyzing strategies andformed ties with high efficiency.

Like all research findings, our study’s findingsmay have alternative theoretical explanations. Forexample, perhaps a venture’s early partners affectlater tie formation efficiency. Indeed, we find thatearly partners sometimes introduce venture execu-tives to later potential partners and that high-statusearly partners often attract later potential partners.Thus, as in prior research, here early partners in-fluenced with whom later ties are formed (Gulati,1995; Hallen, 2008). But we also find that thesepotential partners still insist on becoming familiarwith a venture, still look for very strong signals ofquality, often fake interest, and frequently hesitateto commit. As a result, although early partners mayinfluence with whom ventures form later ties, theydo not obviate the need for using catalyzing strate-gies (or having strong direct ties) to form ties effi-ciently. Appendix E summarizes the relevant data.


FIGURE 1Two Paths to Efficient Tie Formation

Path 1: Strong Direct Ties

Strong Direct Tie

Tie Formation Efficiency

Path 1’s primary usage: When firms have strong direct ties to desired potential partners.

+

+

Path 2: Catalyzing Strategies

Casual DatingRole: Add potentialpartners to networkNo alternative tactics

Timing around ProofpointsRole: Send strong signal of quality• Accelerate attempt (preferable, but contingent on firm progress)• Preemptive structuring (preferable, but contingent on firm progress and foresight)• Delay attempt (generally feasible, but involves internal hardships)

Scrutinizing InterestRole: Cull potential partners with faked interest• Network verification (preferable, but contingent on knowledgeable intermediaries)• Direct analysis (generally feasible, but less effective alone)

Time

Prior to SeekingInvestment Ties

Formally SeekingInvestment Ties

Investment TieFormation

Serious Interest from at LeastOne Investor

Path 2’s primary usage: When firms lack strong direct ties or when desired potential partners lie outside thelocal network.

Crafting AlternativesRole: Send strong signal of scarcity• Different resource paths (preferable, but contingent on valid resource paths)• Less-desirable partners (generally feasible but often more time-consuming)• Structure competition (preferable, but contingent on high interest)

Key

• Figure 1 depicts the two inducted paths to efficient tie formation.• Solid arrows denote a positive, causal relationship between a path and tie formation efficiency.• Strategies in path 2 are horizontally ordered in their temporal sequence.

• •


Hypothesis 5. Executives who use either thestrong direct ties path or the catalyzing strate-gies path are more likely to form new interor-ganizational ties efficiently.

DISCUSSION

We contribute to interorganizational network the-ory and the study of resource acquisition by entrepre-neurs. A primary contribution is a new concept, tieformation efficiency. Network research has indicatedthat firms benefit when they have many network tieswith the right partners (Ozcan & Eisenhardt, 2009;Powell et al., 1996; Uzzi, 1999). Our insight is thatfirms that form ties efficiently (i.e., quickly, easily,and with desired partners) are the most likely toachieve these superior tie, portfolio, and network out-

comes. Thus, although tie formation is relevant, tieformation efficiency is a more precise conceptualiza-tion of the source of high-performance network out-comes. Without efficiency, it is unlikely that firmscan gain these outcomes.

Theoretical Framework: Two Paths forEfficiently Forming New Ties

A second contribution is an emergent theoreticalframework that unexpectedly identifies two equifi-nal paths for how firms form ties efficiently. Thefirst builds on the well-known strategy of leverag-ing strong direct ties and is only available to priv-ileged firms. The second relies on a new concept,catalyzing strategies. Whereas the literature’s “richget richer” descriptive account of tie formation is

TABLE 4Challenges and Paths to Efficient Tie Formation

Challenge Catalyzing Strategy Strong Direct Ties Inefficient Strategy

Gaining network of potentialpartners prior to formal tieformation attempt

Casual dating: Uses interaction,ingratiation, and cooptationto gain familiarity and likingprior to negotiating. Shapestie formation opportunitiesby ensuring a network ofpotential partners beforeformal tie formation begins.

Strong direct ties: Uses trust,honesty, and well-understoodcommunication in strongdirect ties to gainfamiliarity and likingquickly once formal tieformation begins and priorto negotiating.

Just-in-time ties: Whenpotential investors areunfamiliar with the venture,gaining familiarity andliking mixes with adversarialnegotiating and so createsconflict, distrust, and poorcommunication that impedestie formation.

Having a very strong signalof quality that attractspotential partners

Timing around proofpoints:Uses third party validation ofcompleting a criticalmilestone, amplified byimmediacy, to send strongsignal of quality. Shapespotential partners’ tieformation inducements,attracting them with asufficiently strong signal.

Strong direct ties: Uses thetrust, honesty, and ease ofcommunication of strongdirect ties to quickly,credibly, and clearlyconvey otherwise hard toobserve strong quality.

Timing around resource needs:Quality is not validated by atrusted source and notamplified by immediacy. Sothe signal of quality is notsufficiently strong to induceinterest, and may suggestdesperation.

Discerning genuine fromfaked interest amongpotential partners

Scrutinizing interest: Usescredible third partyinformation and behavioralcues to cull potentialpartners with faked interestand focus on those withgenuine interest. Shapes tieformation opportunities byensuring a network ofrealistic potential partners topursue during tie formation.

Strong direct ties: Given thehonesty and trust inherentin strong direct ties,potential partnersaccurately and quicklyindicate their actualinterest.

Shopping for ties: Sinceexecutives are not effectivelydistinguishing betweenfaked and genuine interest,they indiscriminately pursuepotential partners. So theywaste time and effort onthose who lack genuineinterest.

Motivating even veryinterested potentialpartners who hesitate tocommit

Crafting alternatives: Usesstrong signal of scarcity,often combined with socialproof that signals quality, tomotivate commitment.Shapes the inducements ofvery interested potentialpartners to commit to a tie.

Strong direct ties: Given thetrust, honesty, and socialconstraint of strong directties, very interestedpotential partners quicklycommit or not.

Hoping for ties: Naivelyassumes that very interestedpotential partners willcommit when there is noimmediate inducement to doso.


based on the opportunities of existing embedded-ness and inducements of current resources (Ahuja,2000; Gulati & Gargiulo, 1999), this second pathrelies on strategic actions that advantageouslyshape opportunities and inducements to tie forma-tion. These catalyzing strategies are particularlyimportant because they are relevant to many firms.

With catalyzing strategies, executives begin withcasual dating. Casual dating activates indirect orweak ties and transforms them into stronger directrelationships before the executives seek formal ties.Thus, casual dating expands the network of poten-tial partners that have sufficient familiarity with aventure and sufficient positive affect for it to formties. In contrast, just-in-time attempts mix gainingfamiliarity and positive affect with adversarial ne-gotiations. This mixing inhibits developing pro-ductive working relationships and increases thetime and effort required to form ties. An unex-pected network insight is the plasticity of net-works: actors can actively shape their embedded-ness by expanding their opportunities for ties.

Second, executives launch the formal tie formationprocess by timing around proofpoints. That is, theytime their tie attempts to coincide with recentachievement of milestones that reduce significant un-certainty. Timing around proofpoints amplifies qual-ity signals. In contrast, timing around resource needsfails to take full advantage of significant accomplish-ments and may even convey desperation. An unex-pected insight is the time-sensitive interpretation ofsignals: individuals value recent extreme signals ofquality but discount cumulative signals and evensimilarly strong signals when they are distant—evenwhen quality levels may be identical. Thus, deviatingfrom the network literature, we highlight the percep-tual nature of inducements: actors can actively shapeothers’ inducements to form ties.

Third, executives scrutinize the interest of poten-tial partners during the tie formation process. Likecasual dating, scrutinizing interest shapes embed-dedness. But unlike casual dating, which adds andstrengthens ties, scrutinizing interest weakens andeven eliminates ties by revealing faked interest bypotential partners. In contrast, indiscriminateshopping for ties fails to account for duplicitouspotential partners who avoid saying no and for themisleading nature of verbal expressions of interestand low-cost meetings. An unexpected contribu-tion to network theory is our highlighting the valueof exit: although the network literature emphasizesadding ties, actors can also create superior networkoutcomes by cutting relationships to create smallerbut better portfolios of ties.

Fourth, executives end the tie formation processby crafting alternatives that induce very interested

but hesitant potential partners to commit. Like tim-ing around proofpoints, crafting alternatives ampli-fies information signals that enhance the induce-ment of potential partners to form a tie. In contrast,naively hoping for ties is often insufficient to mo-tivate even highly interested potential partners tocommit. An unexpected insight is the importanceof signals of scarcity: crafting alternatives capital-izes on the allure of scarcity and perception ofurgency, even though actual quality may be un-changed. Thus, although the network literature em-phasizes signals of quality, signals of scarcity arealso critical to forming ties.

Together, the various catalyzing strategies are com-plementary network and signaling actions that en-hance tie formation efficiency. Catalyzing strategiesare the viable path when firms lack strong direct ties.But unexpectedly, they are also the path for privi-leged firms when they wish to gain ties outside theirlocal networks. For example, executives of privilegedfirms in our study often selected the first path ofstrong direct ties early on but then switched to thesecond path when they sought distant ties to gainbetter valuations. Overall, catalyzing strategies areespecially significant because they broaden access tosuperior network outcomes for many firms.

Social Embeddedness and Information Signals

A third contribution is weaving together socialembeddedness and information signals. Organiza-tion theory and sociology have long emphasizedthe social embeddedness of network ties (Gulati,1995; Sorenson & Stuart, 2001; Walker, Kogut, &Shan, 1997), and economics and strategy highlightinformation signals (Ahuja, 2000; Dushnitsky,2010; Spence, 1974). We contribute to these litera-tures by clarifying how these mechanisms relate.6

First, we contribute the insight that the networkand signaling actions of catalyzing strategies arecomplements. Specifically, casual dating and scru-tinizing interest are network actions that advanta-geously shape social embeddedness by transform-ing weak or indirect ties into strong ties and byweakening or even cutting ties that lack promise,respectively. These network actions shape a robustset of tie opportunities. In contrast, timing aroundproofpoints and crafting alternatives are signalingactions shaping potential partners’ perceptions of afirm. They amplify signals of scarcity and qualitythat induce others to commit. Prior studies havecast information signals and social embeddednessas substitutes (Gulati & Gargiulo, 1999; Podolny,

6 We appreciate the insight of an anonymous revieweron bringing together these literatures.


1994), but we unexpectedly observed that they arecomplements—that is, they serve distinct yet nec-essary functions in the tie formation process.

Second, we suggest the insight that network andsignaling actions have a temporal order—that is, net-work actions first shape the set of viable potentialpartners, and signaling actions then amplify their in-ducements to form ties. Although the prior literatureneglects timing, we observe a network action–signal-ing action temporal order and a possible rationale.That is, network actions advantageously shape a setof viable opportunities for ties and so set the stage fortie formation. Signaling actions then influence theperceptions of the audience of potential partners andso enhance the likelihood of their commitment. Theresult is a temporal order.

Third, we contribute the insight that network andsignaling actions may be sufficient conditions for ef-ficient tie formation. Conversely, simply relying oncurrent embeddedness or information signals may beinsufficient. For example, the ties and status of earlypartners may influence with whom firms form ties(Gulati, 1995; Hallen, 2008), but they do not guaran-tee efficient tie formation. Potential partners may stillneed to become familiar with a focal firm and observestrong signals of quality, exaggerate interest, and de-lay. Catalyzing strategies address these issues. Thus,the key insight is that limited resources and few tiesmay be less of a hindrance to forming new ties thanneglecting catalyzing strategies.

Scope Conditions and Extensions

A key issue is generalizability. Catalyzing strategiesare likely to be most germane for firms with interme-diate embeddedness and quality. Catalyzing strate-gies can give these firms the boost necessary to over-come potential partners’ tendency to require moretime and effort. In contrast, catalyzing strategies maybe only modestly helpful for firms with very highquality and strong direct ties. These firms may usecatalyzing strategies, but primarily when they seekdistant ties. Firms with low quality and few or no tiesare unlikely to meet or attract potential partners, evenif they attempt catalyzing strategies.

Catalyzing strategies are also likely to be most ger-mane for ties requiring extensive involvement anddifficult-to-exit multiyear commitment. Here, poten-tial partners are likely to hesitate, and so catalyzingstrategies can overcome this tendency. Such relation-ships include the VC investment ties that we studiedand other long-term, high-commitment ties, such asconducting joint R&D and buyer-supplier relation-ships with high asset specificity. This further suggeststhat catalyzing strategies will be especially critical inbiotech and other long product life cycle industries.

By contrast, short-term and low commitment ties,such as licensing agreements and angel investments(e.g., angels often engage only in early rounds [Hallen& McDonald, 2011]) may be less prone to hesitation,rendering catalyzing strategies less necessary. Fi-nally, catalyzing strategies may be less necessary in“hot” markets where potential partners feel pressureto avoid delay.

Overall, catalyzing strategies are likely to mattermost when potential partners have few limits oneffort and time, and conversely, a focal firm hashigh penalties for additional time and effort. Thismismatch often occurs when heterophilous firmssuch as ventures and established firms are potentialpartners. Ventures have limited managerial atten-tion yet need ties quickly to overcome resourcedeficiencies. In contrast, established firms oftenhave sufficient resources and few limits on timeand attention (Katila et al., 2008). Overall, catalyz-ing strategies are most relevant when there is a timeor effort mismatch between potential partners.

An important question is why some executives failto use catalyzing strategies even when they couldeasily do so. Although answering this question isbeyond our scope, our data suggest insights. Demo-graphic explanations such as MBA training, age, andeven entrepreneurial experience are not compellingin our data. A more promising explanation is loca-tion. Silicon Valley executives used catalyzing strat-egies more often even when they had strong directties. So catalyzing strategies may diffuse through re-lationships and imitation in entrepreneurially denseregions. But a more intriguing explanation is a cogni-tive one. Executives who sought ties just in timewhen they had resource needs, uncritically shoppedfor ties, and naively hoped for ties exhibited myopicand linear thinking. They did not incorporate thefuture (e.g., recognizing that potential partners maydelay) or potential partners’ perspectives. By contrast,catalyzing strategies require future-oriented and allo-centric thinking to anticipate how potential partnerswill act. This suggests that the influence of cognitionon network strategies is an unusually promisingavenue.

Toward a Strategic View of Network Agency

Research has emphasized a deterministic view oftie formation that is shaped by exogenously deter-mined interdependence and embeddedness. Yet witha few exceptions (e.g., Hallen, 2008; Ozcan & Eisen-hardt, 2009; Vissa, 2010; Zott & Huy, 2007), this workneglects the process of tie formation and the role ofagency and strategic action. In contrast, we empha-size that an efficient tie formation process is critical tosuperior network outcomes. By identifying equifinal


strategies for efficient tie formation, we offer a partic-ularly encouraging view for less-privileged actorssuch as entrepreneurs. Using catalyzing strategies,these actors may overcome their disadvantages andgain attractive ties, high-performance portfolios, cen-tral network positions, and ultimately superior firmperformance.

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APPENDIX ACasual Dating

Venture andStage

Approach to Casual Datingand/or Use of Strong Direct Ties

StrongDirectTiea

Weak orIndirect

TiebCasualDatingc


Efficiency

Group AHeavenly/HSeed Strong direct tie: Founders had previously worked

with target VC.� Œ Œ High

Series A Strong direct ties: Founders had previouslyworked with target VCs.

� Œ Œ High

Series B Strong direct ties: Founders/CEO had “previousworking relationships” with six target VCs. Hadweak / indirect ties with four others.

� � Œ High

Series C Casual dating: CEO and CTO casually dated targetVC.

Œ � � High

Squaw/H

(Continues)


APPENDIX A(Continued)

Venture andStage

Approach to Casual Datingand/or Use of Strong Direct Ties

StrongDirectTiea

Weak orIndirect

TiebCasualDatingc


Efficiency

Seed Strong direct tie: Founder focused on a VC whohad backed him previously.

� Œ Œ High

Series A Strong direct tie: Founder focused on a VC whohad backed him previously.

� Œ Œ High

Series B Strong direct tie: Founder approached by VC whohad worked for founder.

� Œ Œ Abandoned

Series B Strong direct tie: Target VC backed CEO at priorstart-up.

� Œ Œ High

Series C Casual dating: CEO and founder met with threepotential investors multiple times for a fewmonths before seeking tie. Described: “Casual.You’ll talk about the business and stuff, but youwon’t pitch.” (CEO)

Œ � � High

Mammoth/HSeries A Strong direct tie declined, then approached other

investors at time of round: VC with strongdirect tie had invested in founder’s prior start-up, but did not invest in this one.

� � Œ Low

Series B Casual dating: CEO casually dated VCs met inseries A (but who had not made offers).

Œ � � High

Series C Casual dating: CEO casually dated previouslyinterested VCs (who had not made offers).

Œ � � High

Donner/LSeries A Approached investors at time of round Œ � Œ AbandonedSeries A Approached investors at time of round Œ � Œ Moderate

Group BAspen/HSeed Approached investors at time of round Œ � Œ AbandonedSeed Casual dating: One VC had originally been

approached in prior round and had expressedmoderate interest. Executive casually dated himand another potential investor.

Œ � � High

Series A Casual dating: Founder casually dated one VC. Œ � � HighSeries B Casual dating: Founder casually dated two VCs

under pretext that he wanted help finding aCEO but did not need money.

Œ � � High

Keystone/HSeries A Approached investors at time of round Œ � Œ ModerateSeries B Approached by investor at time of round Œ Œ Œ ModerateMonarch/LSeries A Approached investors at time of round Œ � Œ AbandonedSeries A Approached investors at time of round Œ � Œ ModerateSeries B Approached investors at time of round Œ � Œ LowSeries C Casual dating: CEO casually dated a VC who

submitted (nonselected) offer in prior round.Œ � � Low

Buttermilk/LSeries A Approached investors at time of round Œ � Œ LowPurgatory/LSeed Approached investors at time of round Œ � Œ LowSeries A Approached investors at time of round Œ � Œ AbandonedSeries A Approached investors at time of round Œ � Œ AbandonedSeries A Approached investors at time of round Œ � Œ Moderate

a� � prior substantial, personal working relationships with VC; Œ � no such relationship.

b� � weak tie (i.e., acquaintances who had not worked together) or indirect tie; Œ � no such relationship.

c� � meetings with aim of gaining potential investors; neither social nor discussions of investment; Œ � no casual dating.


APPENDIX BTiming around Proofpointsa

Venture andStage Signals at Start of Round

Approaches to Timing ofSeeking Tie

StrongDirect

Tie

Timedaround

Proofpoint


Efficiency

Group AHeavenly/HSeed Had spoken with potential customers,

but none were using product orprototype: “[We] went to talk somepeople who might be customers.Then we formed.” (Founder)

Founders ready to begin buildingventure: “[6 months afterfounding] we got around abusiness plan and a pitch thatwe felt highlighted what wethought could become thecompany.” (Founder)

� Œ High

Series A A potential customer used the productand felt it was complete: “We wereable to build a real 1.0 product . . .and we were getting feedback [fromnon-paying users].” (Founder)

Preemptive structuring tosynchronize w/futureproofpoints: “We raised the[seed] knowing we’d doanother round here [when wehad a non-paying customersusing the product].” (Founder)

� � High

Series B A customer purchased the product:Had $700,000 in revenue from salesof first product. “We had proven themarket concept.” (Seed investor)

Preemptive structuring tosynchronize w/futureproofpoint: “the objective [ofpreviously raising $4M] was tofinish off the product, launchthe company, and begin to getcustomers in a real way.”(Founder)

� � High

Series C Many customers purchased theproduct: “we have around 30companies, all the top financialservices companies, our averageselling price is well north of $100K,and overall its gone very well.”(Founder)

Accelerated attempt based onrecent proofpoint. �We hadenough proofpoints to showwe had a market . . . I’m notsure that we could’ve gotten abetter price two quarters fromnow. Maybe a year, but wewould’ve needed the capital[earlier]� (Seed investor)

Œ � High

Squaw/HSeed Had spoken with potential customers,

but none were using product orprototype: “I talked to 15 majorenterprises.” (Founder)

Founders ready to begin buildingventure: “Finally, [after 4months of conferring withcustomers] I was ready.”(Founder)

� Œ High

Series A Signals similar to last round: Thoughan initial team had been hired, noadditional proofpoints wereavailable. Used strong direct tie.

Timing around resource needs:Raised to support developmentteam, hire CEO, and growventure.

� Œ High

Series B Interested customers, but none hadpurchased the product yet: “We haddeveloped a pipeline of 6 veryinteresting customers . . . we werevery confident we were going to getsome of them [to sign contracts].”(Founder). Used strong direct tie.

Initiated by VC, but venturelacked proofpoint: “The issuewas that [the VC] tried to dothe preemptive when we justweren’t far enough along [aswe didn’t have payingcustomers]. It was the wrongtiming” (CEO)

� Œ Abandoned

Series B A customer purchased the product:“30 days [after the prior attempt fellthrough] we signed [a large top-tiercustomer].” (Founder)

Accelerated attempt based onrecent proofpoint: “We hadcustomer data andreferences . . . we [would haveneeded] to raise within fivemonths.” (CEO)

� � High

(Continues)(Continues)


APPENDIX B(Continued)



StrongDirect

Tie

Timedaround

Proofpoint


Efficiency

Series C Many customers purchased theproduct: “We were a revenuecompany with a large marquee ofreference-able accounts, growingquarter over quarter.” (Founder)

Accelerated attempt based onrecent proofpoint: “the marketwas growing aggressively . . .[also had] rosy financialprojections and prettycompelling accomplishments.”(Founder)

Œ � High

Mammoth/HSeries A Product in development, but no users:

Had hired engineers (who were paidin IOUs) and had built an earlytechnology demo.

Timing around resource needs:Started round with strongdirect tie almost immediatelyafter founding in order to stoppaying employees in IOUs.

� Œ Low

Series B A customer purchased the product: “Afew months after introducing [ourenterprise product], we had 5customers.” (Founder)

Accelerated attempt based onrecent proofpoint. CEO wantedto “leverage momentum” ofaccomplishments.

Œ � High

Series C Many customers purchased theproduct: Most recent quarter hadover 1.5 m in sales.

Accelerated attempt based onrecent proofpoint. “Market wasgetting taken up quickly andwe wanted to step on thegas . . . we were doing reallywell.” (Founder)

Œ � High

Donner/LSeries A A few early users, but users felt key

features were missing: Prototypeswere being used as “pilots,” butthey lacked “an actual deployment.”(CEO)

Timing around resource needs:“We kind of knew we were tooearly to raise money, but itwas kind of a temperaturegauge at that time.” (CEO)

Œ Œ Abandoned

Series A A customer purchased the product:“They had the proofpoints. Theyhad a product and the product wasselling.” (Investor)

Delayed until proofpoint: “Wedecided to delay until wedeveloped 5 or 6 realreferenceable customers.”(CEO)

Œ � Moderate

Group BAspen/HSeed No proofpoint yet: “We had started to

validate with companies.” (Founder)Timing around resource needs:

“[I brought in a] well-respectedmanagement team and tried toraise as these guys wanted bigbucks.” (Founder)

Œ Œ Abandoned

Seed A few potential customers said theywould purchase the product: “Fiveearly adopters that were good nameswere starting to use the [alpha]product.” (Founder)

Delayed until proofpoint: Despiteresource needs, had delayedbecause “we just needed tomove the product forward.”Once beta users were willingto use the product, beganattempt.

Œ � High

Series A A few potential customers used theproduct and felt it was complete: “It[went] from an alpha product into a1.0 version that enterprises coulduse. We were getting it installed at afew companies.” (Founder)

Delayed until proofpoint: “Ididn’t take a paycheck thisentire period . . . we neededthis product to be a usableenterprise product so [we’d] beable to raise some moremoney.” (Founder)

Œ � High






StrongDirect

Tie

Timedaround

Proofpoint


Efficiency

Series B A customer purchased the product:“We did $300K in Q1 and we wereshowing good ramp with bigcustomers talking of buying 6 to 7figures of the product.” (Founder)

Delayed until proofpoint: “Wehad missed a couple ofmilestones, and we hadlimited options withoutmaking the market feel like wewere behind, so we delayed”(Founder).

Œ � High

Keystone/HSeries A Had spoken with potential customers,

but none were using product orprototype: “A few potentialcustomers had expressed interest inpurchasing such a product.”

Founders ready to begin buildingventure. Waited about7 months to seek investmenttie as patented technology anddeveloped initial prototypes.

Œ Œ Moderate

Series B Signals similar to last round: “Hadthere been that much value creationin 2–3 months [since the lastround]? Of course, the answer wasno.” (Founder)

Initiated by VC, but venturelacked proofpoint: Founderpursued because “they offeredtomorrow’s price today andwere very strong in internetsecurity”

Œ Œ Moderate

Monarch/LSeries A Product in development, with no

users: “We had written a firstprototype and we were going tomaybe start driving revenue in shortorder.” (Founder)

Timing around resource needs.“We weren’t sure what wasgoing to happen with theventure community.”(Founder)

Œ Œ Abandoned

Series A A customer purchased the product:“We received our firstrevenue . . . [after 3 months], wewere ready for prime time.”(Founder)

Delayed until proofpoint: “Wejust kept our head down andgot to the first revenue check.”(Founder)

Œ � Moderate

Series B Many customers purchased theproduct: Sales totaling about $350Kin recurring revenue had been madeto many customers.

Accelerated attempt based onrecent proofpoint. “I spent alot of time convincing myboard to not change thetrajectory and to raise a fairlysignificant round.” (Founder)

Œ � Low

Series C More customers purchased theproduct: Venture had more revenue,but not a recent proofpoint.

Timing around resource needs.Founder tried preemptivestructuring with prior round,but missed the timing.

Œ Œ Low

Buttermilk/LSeries A Product in development, with no

users: Product was at the alpha (pre-usage) stage.

Timing around resource needs:Wanted capital to pay existingengineers and hire new ones.

Œ Œ Low

Purgatory/LSeed Had an idea for a product, but no

potential customers said they woulduse the product: “It was not welldeveloped . . . just a general idea.”(CEO)

Timing around resource needs.Founders sought investmenttie when they had an idea andneeded funds to develop it.

Œ Œ Low

Series A A few early users, but users felt keyfeatures were missing: “we learnedfrom the early [users] what wouldbe necessary for a product.”

Timing around resource needs:“We needed to boost thecompany to where it was readyfor a market launch. So wewere looking to get funding.”(CEO)

Œ Œ Abandoned






StrongDirect

Tie

Timedaround

Proofpoint


Efficiency

Series A A few early users, but users felt keyfeatures were missing:“Development was slipping.” (CEO)

Timing around resource needs:Venture had only a fewmonths of cash remaining.

Œ Œ Abandoned

Series A A customer purchased the product:“this time we actually had somerevenue and sales.” (CEO)

Delayed until proofpoint: “theindicators were turningpositive with referenceablecustomers . . . and somemodest revenues.” (CEO)

Œ � Moderate

a� indicates that executives explicitly used an approach to ensure that formal start of the tie attempt occurred soon after a recent

proofpoint; Œ indicates that executives did not time around a proofpoint.

APPENDIX CScrutinizing Interesta

Venture andStage Approaches to Scrutinizing Interest

StrongDirect

TieScrutinizing

Interest


Efficiency

Group AHeavenly/HSeed Strong direct tie: Founders had previously worked with target VC. � Œ HighSeries A Strong direct tie: Founders had previously worked with target VCs. � Œ HighSeries B Strong direct tie and direct analysis: Focused on a short list of 10

VCs some of whom had a strong direct relationship with thefounders or CEO, and who were likely to be interested and wereconsidered savvy Internet security investors. Tracked VC followup and focused: “[it was clear] it was a great opportunity. Somewere calling me more than I was calling them” (CEO).

� � High

Series C Direct analysis and network verification: Focused on target VC. Anexisting investor probed target VC about actual interest. Alsotracked behavioral cues of interest.

Œ � High

Squaw/HSeed Strong direct tie: Founder focused on a VC who had backed him

previously.� Œ High

Series A Strong direct tie: Founder focused on a VC who had backed himpreviously.

� Œ High

Series B Strong direct tie: Once VC with strong direct tie quickly declined,founder abandoned the round.

� Œ Abandoned

Series B Strong direct tie: Founder focused on a VC with whom CEO hadpreviously worked, liked, and thought would be interested.

� Œ High

Series C Network verification and direct analysis: CEO focused on “peoplethat had expressed interest and that we kind of knew. Wequalified some folks and we started working on thoserelationships.” The CEO then used VC behavioral cues toscrutinize interest, noting that: “VCs were scheduling a singlepartner meeting and a full partnership meeting with mutuallyinterested VCs” (CEO).

Œ � High

Mammoth/HSeries A Strong direct tie quickly declined, then network verification and

direct analysis: After the VC from the CEO’s prior venturedeclined to invest, approached VCs whom her lawyer believedwould be both interested and likely to have good rapport withthe founder. CEO then monitored how quickly VCs followed upafter initial meetings and focused accordingly.

� � Low



APPENDIX C(Continued)


StrongDirect

TieScrutinizing

Interest


Efficiency

Series B Network verification and direct analysis: Approached VCs whohad introduced themselves to the CEO at a conference. Alsoapproached VCs whom the lawyer believed would be interestedand who were actively investing at the time. Then CEO allocatedattention to VCs where the partners (and not the associates) werefollowing up.

Œ � High

Series C Direct analysis: Focused on VCs who had been calling the CEO tofind out about the venture and whom the CEO had been casuallydating.

Œ � High

Donner/LSeries A Indiscriminate optimism: The CEO approached 10 VCs whom he

knew (though they had not previously invested in his priorventure). After numerous meetings and presentations, heabandoned the round. “If they were excited, they would havesaid “this looks good, I want to take it to the next level” [butthat didn’t happen]” (CEO).

Œ Œ Abandoned

Series A Direct analysis: The CEO sought VCs whom he knew had recentlyinvested in internet security ventures. But many of theseinvestors did not want to make additional investments. The CEOthen allocated attention based on: “the level of engagement thatwas happening. You can lead a horse to water but you can’tmake them drink” (CEO).

Œ � Moderate

Group BAspen/HSeed Network verification. From a list of 50 VCs to whom he could be

introduced, founding CEO approached 10 whom his networkcontacts said were actively investing in Internet security.

Œ � Abandoned

Seed Direct analysis: Discerned interest, noting one VC’s rapidscheduling of follow-up meetings with a second partner.

Œ � High

Series A Network verification and direct analysis: Approached VCsrecommended by a VP at a more mature internet securityventure as being active and interested in similar ventures.Prereferenced VCs to determine likely rapport. Also trackedbehavioral cues like looking at whom he would be meeting withat each (VC) “you don’t talk to anyone who is not a partner”(Founding CEO).

Œ � High

Series B Direct analysis: Focused on 1 VC who had begun informal duediligence.

Œ � High

Keystone/HSeries A Network verification and direct analysis: After initially meeting

with five local VCs (who were not interested), the founderfiltered possible VCs using his network: “I would call [someonewell-connected] and ask them if they had knowledge or couldfish around about whether or not a firm was still doing deals.”The founder also assessed interest on basis of: “the way they aretalking, body language, stuff like that.”

Œ � Moderate

Series B Direct analysis: Focused on behavioral cues of VC (whopreemptively approached venture) to move forward.

Œ � Moderate

Monarch/LSeries A Indiscriminate optimism: Approached all VCs in his local

metropolitan area who were known to make early-stageinvestments. After meetings and presentations, the founder gaveup. He said: “There was no real appetite.” (Founder).

Œ Œ Abandoned

Series A Indiscriminate optimism: E-mailed very many VCs on an e-maillist provided by an investment broker.

Œ Œ Moderate

Series B Indiscriminate optimism. Approached about 25 VCs whom theexisting investors knew and thought were likely to be interested.

Œ Œ Low



APPENDIX C(Continued)


StrongDirect

TieScrutinizing

Interest


Efficiency

Series C Indiscriminate optimism: Continued discussions with one focal VCeven after the VC repeatedly demanded substantial last-minutechanges to the terms. Eventually approached four lower-tier VCs,one of whom invested.

Œ Œ Low

Buttermilk/LSeries A Indiscriminate optimism: Approached all local VCs known to

make early stage investments. Then approached high-status VCswho had recently invested in Internet security ventures butdid not verify interest in future investments in the sector. Nonemoved forward.

Œ Œ Low

Purgatory/LSeed Indiscriminate optimism: Approached all three local, early-stage

VCs.Œ Œ Low

Series A Indiscriminate optimism: Approached all VCs to whom founder’sexisting investor could introduce him.

Œ Œ Abandoned

Series A Indiscriminate optimism: Approached any VCs that he could getintroduced to (around 30 total). Introductions typically camefrom VCs who had decided not to invest. Also went toinvestment conferences to attempt to meet VCs.

Œ Œ Abandoned

Series A Indiscriminate optimism: Began to get introductions from technicalexperts who had done due diligence on the company for otherVCs. Also continued to approach any VCs that he could getintroductions to (many of these introductions were made byother VCs who were not interested). Continued to attendindustry conferences to meet VCs.

Œ Œ Moderate

a� � scrutinized professions of interest using either network verification or direct analysis of actions of investors; Œ � executives

indiscriminately “shopped for ties,” meeting with investors based on simplistic indicators of interest.

APPENDIX DCrafting Alternativesa

Venture andStage Approach to Crafting Alternatives

StrongDirect

TieCrafted

Alternatives


Efficiency

Group AHeavenly/HSeed VC with strong direct tie committed. � Œ HighSeries A VC with strong direct tie committed. � Œ HighSeries B Strong direct tie and structured competition: Informed 5 VCs

(some with strong direct ties) doing due diligence ofothers’ progress and set deadline.

� � High

Series C Different resource path: CEO developed financial plan toenable seeking investment tie later if target VC did notimmediately invest, and told VC of this plan.

Œ � High

Squaw/HSeed VC with strong direct tie committed. � Œ HighSeries A VC with strong direct tie committed. � Œ HighSeries B Once VC with strong direct quickly declined, founder

abandoned round.� Œ Abandoned

Series B Less-desired partners: After focusing on a VC who backedhim in a prior venture, CEO approached 2 lower-tier VCsknown to evaluate rapidly and they began due diligence.CEO told first VC about this.

� � High



APPENDIX D(Continued)


StrongDirect

TieCrafted

Alternatives


Efficiency

Series C Structured competition: After due diligence from 10 of the15 approached VCs, CEO announced a deadline forsubmitting offers.

Œ � High

Mammoth/HSeries A None: Strong direct tie quickly declined. Although interest

from 15 target VCs after VC with strong direct tie declined,all moved slowly and delayed until 1 made offer that wasaccepted. No crafted alternatives.

� Œ Low

Series B Structured competition: Due diligence from 5 of 15approached VCs. Founder informed each of interest andindicated likely to accept first offer. Two offers submittedsimultaneously.

Œ � High

Series C Less-desired partners: Approached 3 lower-tier VCs. Afterthey expressed interest, went to target VCs.

Œ � High

Donner/LSeries A None: Although some interest from approached VCs,

executive did not craft alternatives.Œ Œ Abandoned

Series A Initially none, eventually different resource path. Eventuallycreated and announced bootstrap path if not funded byspecific date.

Œ �b Moderate

Group BAspen/HSeed None: 5 of 10 approached VCs had follow-up meetings and

began technical due diligence, but executive did not craftalternatives.

Œ Œ Abandoned

Seed Different resource path: Announced path of familyinvestment to be pursued after a specific date.

Œ � High

Series A Different resource path: Informed 4 VCs conducting duediligence of commitment from existing VCs to fund if offernot forthcoming immediately and at acceptable terms.

Œ � High

Series B Less-desired partners. After casually dating 2 desired VCsand focusing on 1, approached 3 lower-status VCs knownfor quick investment processes and told target VC.

Œ � High

Keystone/HSeries A Structured competition: 4 approached VCs conducted due

diligence. Founder conveyed status of due diligenceactivities, and set a deadline for offers.

Œ � Moderate

Series B None: Waited for VC to make an offer. Œ Œ ModerateMonarch/LSeries A None: Waited for approached investors. Œ Œ AbandonedSeries A None: Waited for 5 VCs who conducted due diligence to

make an offer.Œ Œ Moderate

Series B None: Waited for 2 VCs who conducted due diligence tomake an offer.

Œ Œ Low

Series C Initially none, eventually less-desired partners: Waited fordesired VC (of unclear interest) to commit, then went to 4less-desired VCs. Desired VC was not induced, but a less-desired VC made an offer.

Œ �b Low

Buttermilk/LSeries A None: Waited for 1 interested VC to evaluate venture and

make an offer.Œ Œ Low

Purgatory/LSeed None: Waited for 1 interested VC to make an offer. Œ Œ LowSeries A None, although misused creating alternatives: Founder “tried

to create impression of scarcity but did not mentionexplicitly who was interested.” Potential investorswere not induced.

Œ Œ Abandoned



APPENDIX D(Continued)


StrongDirect

TieCrafted

Alternatives


Efficiency

Series A None: Several investors continued to meet with the CEO, butCEO did not craft alternatives.

Œ Œ Abandoned

Series A Initially none, eventually structured competition: Eventuallytold 6 interested investors of competition.

Œ �b Moderate

a� � executive developed multiple routes to end tie formation process; Œ � multiple routes not developed or not developed early.

b Venture executives could have used crafting alternatives much sooner in the tie formation process than they did.

APPENDIX ERole of Initial and Other Early Investors

Venture andStage

Role of ExistingInvestors in Current Round

MaximumStatus of

PriorInvestorsa

Due Diligence ofTargeted Investor(s)b Outcome Summary

Group AHeavenly/HSeed No prior VC investors Accepted offer from 1 VC.Series A Initial VC not actively involved;

Founders used own strong direct tiesto approach 2 target VCs

Top 5% All VCs had begun initial meetings. Accepted offer from 1 VC;others still doing duediligence.

Series B Initial VC provided introductions to 4of 10 targeted VCs. Founders andCEO had strong direct ties to others.

Top 5% All VCs had a handful of meetings. Accepted offer from 1 VCwith strong direct tie toCEO; 4 other offers.

Series C Initial VC provided introduction to thetarget VC.

Top 5% Introduced VC had a series ofmeetings and conductedtechnical due diligence.

Accepted offer from 1introduced VC.

Squaw/HSeed No prior VC investors Accepted offer from 1 VC.Series A Founders used own strong direct tie to

approach target VC. First investor notactively involved.

Top 25% VC had a series of meetings withexecutives.

Accepted offer from 1 VC.

Series B Founder had a strong direct tie with VCwho had approached Founder. EarlyVCs not actively involved.

Top 5% VC had a series of meetings andconducted technical andcustomer due diligence.

Abandoned as VC backedout.

Series B CEO had strong direct tie to primarytarget VC. Later approached 3 backupVCs. Early VCs not actively involved.

Top 5% Target VC had a series of meetingsand conducted due diligence. Allbackup VCs had a few meetings.

Accepted offer from 1target VC; others stilldoing due diligence.

Series C Early VCs provided introductions tohandful of 15 target VCs. Founderand CEO had weak ties to others.

Top 5% Many VCs (including introducedVCs) had a series of meetings andconducted customer duediligence.

Accepted offer from 1introduced VC; 5 otheroffers.

Mammoth/HSeries A No prior VC investors Accepted offer of 1 VC.Series B Initial VC provided introduction to 1 of

9 target VCs. Founder had weak tiesto others.

Top 5% Several VCs (including introducedVC) had a series of meetings andconducted sales pipeline andcustomer due diligence.

Accepted offer from 1 VC;1 other offer; others(including introducedVC) still doing duediligence.

Series C Early VCs not involved. Top 5% All VCs had initial meetings. Accepted offer of 1 VC;other still doing duediligence.

Donner/LSeries A No prior VC investors Abandoned.



APPENDIX E(Continued)

Venture andStage

Role of ExistingInvestors in Current Round

MaximumStatus of

PriorInvestorsa

Due Diligence ofTargeted Investor(s)b Outcome Summary

Series A No prior VC investors Accepted offers of 3 VCs;4 other offers.

Group BAspen/HSeries A No prior VC investors Abandoned without

offers.Seed No prior VC investors Accepted offer from 1 VC;

others still doing duediligence.

Series A Initial VC provided introductions toseveral 10 targeted VCs. Founder hadweak or indirect ties to others.

Top 10% Many VCs had a series of meetings,and several (includingintroduced VCs) conductedtechnical and customer duediligence.

Accepted offer from 1introduced VC; othersstill doing duediligence.

Series B Early VCs provided introductions to 1target VC and 2 lower-tier VCs.Founder had weak ties to others, 1 ofwhom approached founder and was atarget. Founder casually dated bothtarget VCs.

Top 5% All VCs had a series of meetings,and several (including threeintroduced VCs) conducted duediligence.

Accepted offer from 1introduced VC; otherstill doing duediligence.

Keystone/HSeries A No prior VC investors Accepted offers from 3

VCs.Series B Venture approached by desirable VC. Top 5% VC had a series of meetings and

conducted technical duediligence.

Accepted offer from 1 VC.

Monarch/LSeries A No prior VC investors Abandoned.Series A No prior VC investors Accepted offers from 3

VCs; others still doingdue diligence.

Series B Initial VCs provided introductions tomany of 30 target VCs. Founder hadindirect ties to others.

Top 5% Many VCs had a series of meetings,and 2 introduced VCs conductedcustomer due diligence.

Accepted offers from 1introduced VC.

Series C Initial VCs provided introduction to 1of 5 approached VCs. Founder hadweak or indirect ties to others.

Top 5% Most VCs (including introducedVC) had a series of meetings andconducted due diligence.

Accepted offer from 1(non-introduced) VC.

Buttermilk/LSeries A No prior VC investors Accepted offer from 1 VC.Purgatory/LSeed No prior VC investors Accepted offer from 1 VC.Series A Initial VC provided introductions to

some of roughly 60 target VCs.Founder had weak or indirect ties toothers.

Top 25% Many VCs (including introducedVCs) had a series of meetings,and several conducted technicaldue diligence.

Abandoned.

Series A Initial VC provided introductions tosome of roughly 30 target VCs.Founder had weak or indirect ties toothers.

Top 25% Many VCs had a series of meetings,and several conducted technicaland industry due diligence.

Abandoned.

Series A Initial VC provided introductions tosome of roughly 30 target VCs.Founder had weak or indirect ties toothers.

Top 25% Many VCs had a series of meetings,and several conducted technicaland customer due diligence.

Accepted offers from 2VCs, others still doingdue diligence.

a Status determined on the basis of eigenvector centrality in the 2003 syndication network using data from VentureXpert. Status is listedat the following thresholds: Top 5%, Top 10%, and Top 25%.

b Unless otherwise noted, all meetings are between target VCs and the executives.


Benjamin L. Hallen ([email protected]) is an assistantprofessor of strategy and entrepreneurship at LondonBusiness School. He received his Ph.D. in managementscience and engineering from Stanford University. Hisresearch involves the study of how new actors strategi-cally embed themselves in market networks, with a par-ticular focus on how entrepreneurs obtain investmentsand resources for young ventures.

Kathleen M. Eisenhardt ([email protected]) is the Stan-ford W. Ascherman M.D. Professor at Stanford Universityand codirector of the Stanford Technology Ventures Pro-gram. She received her Ph.D. from Stanford University.Her research interests include strategic and organiza-tional issues in technology-based firms, including strat-egy as simple rules, strategic logics of opportunity, andagency and strategic action in nascent markets.


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