Drifting to the top? The effects of category erraticism on status mobility in the U.S. venture capital industry

Abstract Research Summary We examine the effects of category erraticism, that is, having moved across socio‐cognitively distant industry categories over time, on status mobility. We argue that it is not the breadth of the categories that a firm spans or the overall distance among those categories, but whether its movement across categories forms a coherent or incoherent trajectory, that hinders upward status mobility by creating commitment and capability concerns among external audiences. We further argue that these concerns are more problematic for higher status firms and more experienced firms because they are subjected to stricter expectations of trajectory coherence. Using a comprehensive longitudinal sample of 1413 venture capital firms (VCs) in the U.S. VC industry from 1980 to 2012, we find that category erraticism reduces upward status mobility. This effect is partly mediated by the extent to which external audiences are concerned about the commitment and capability of the VCs, and is stronger for higher‐status and more experienced VCs. Managerial Summary This study shows that how venture capital firms (VCs) move across industries over time shapes their status position in the VC industry. VCs that move across distant sectors in ways that appear incoherent, often described in the industry as thesis drift, strategy drift, or tourist VC behavior, raise concerns about their long‐term commitment and ability to add value to the firms in which they invest. These concerns make it harder for such firms to form syndication relationships with high‐status partners, limiting their ability to improve their status position. In contrast, VCs that expand across industries in a more consistent way, where moves build on prior experience and reflect a clear investment thesis, are more likely to be viewed as committed and capable, which facilitates upward status mobility. Using three decades of data on U.S. VC investments, we find that the downsides of erratic investment paths are especially pronounced for higher‐status and more experienced VCs, which are held to stronger expectations of strategic coherence over time.