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Exploration-exploitation dilemmas of venture capital companies

The role of organizational slack and time horizon is examined in this article, and finds that VC management must understand the forces driving the entrepreneurs in their exploratory behaviors, while the entrepreneurs must understand the predicaments of the VCs’ exploitative strategy.

Researchers in the fields of business strategy and organization studies have identified “exploration” and “exploitation” as two behavioral categories that represent an organisation’s propensity for taking specific strategic actions. The exploration characteristic is associated with search, innovation, variation, risk taking, flexibility and experimentation. In contrast, behaviors reflecting the exploitation characteristic are associated with risk aversion, systematic thinking, choice, selection, implementation and execution.

Whereas the common denominator of exploration behaviors is an organization’s long-term survival, the common denominator of exploitation behaviors is short-term thinking, stability and motivation to achieve immediate returns on investment. For example, a new enterprise would channel its exploratory behaviors toward developing its particular products or markets, which implies knowledge seeking, learning or high investment in R&D. In contrast, the goal of a VC’s exploration behavior is twofold: firstly, to improve its current portfolio and secondly, to explore for new investment ideas in other promising companies.

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The IVC Research Centre is Israel's leading research centre specialising in analysis and monitoring of Israel's high-tech and venture capital industries. IVC's publications are used by major financial entities and government organizations in Israel and abroad. A comprehensive quarterly report based on survey results is available to IVC clients. For more details about VCs & High-Tech industry in Israel, please visit our website www.ivc-online.com or contact Koby Simana Tel: 972-3-640-2306. koby@ivc-online.com