Diverse managerial experience attracts investors

The composition of an entrepreneurial firm's top management team (TMT) can signal organisational legitimacy, or a generalised perception or assumption that the actions of an entity are desirable, which in turn influences the decisions of investors.

by Strategic Management Journal 27, 2006
Last Updated: 23 Jul 2013

The TMT has a symbolic role at the time of the initial public offering (IPO) besides the more concrete operational activities it carries out.

Young firms can influence investor decisions in three areas. They can deal with investor concerns over resources by pointing to the composition of the TMT; they can indicate that they have appropriately filled key leadership roles through information about the backgrounds of top managers; and they can show that the firm has the endorsement of the investment community through information about its lead underwriter.

Analysis of the career histories of TMTs in young biotechnology firms shows that the extent of their employment links with downstream organisations - the pharmaceutical companies - is more important for attracting quality institutional investors than upstream or horizontal employment affiliations. And the greater the diversity of the senior managers' employment histories in these three categories, the greater the number and the higher the quality of institutional investors.

When it comes to role legitimacy in the eyes of would-be investors, the study indicates that the background of one key officer - the chief scientific officer - is especially important. Having such an executive who has carried out a similar role before is particularly attractive to institutional investors.

Endorsement through a partnership for the IPO with a prestigious underwriter is also important in attracting further funds. However, the study indicates that it is not as important as has been previously thought. Institutional investors active in financing young firms look at information about top managers' backgrounds and about their partnerships with underwriters.

As well as providing fresh insights into the significance of the make-up of top teams and organisational structure, the research shows that young firms need to realise that while attracting a reputable bank to underwrite their IPO is a significant part of the process, attracting an impressive team of senior managers is also highly important.

Source: Stacking the deck: the effects of top management backgrounds on investor decisions 
Monica C Higgins, Harvard Business School, and Ranjay Gulati, Kellogg School of Management, Northwestern University
Strategic Management Journal 27, 2006

Review by Roger Trapp

Strategic Management Journal 27, 2006 recommends

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