This paper investigates how a variety of conditions in place at the time of first-round funding can frame a new venture team's (NVT) perception of the fairness of its relations with its venture capitalists (VC). It assumes that a team's perception of whether its treatment by its VC is procedurally just will affect a team's receptivity to VC advice. An analysis of data from 116 firms funded by venture capitalists indicated that some governance mechanisms and the background of the venture team significantly framed perceptions of fairness in their relationship. A major finding of this research is that the indiscriminant use of contractual covenants can adversely frame a NVT's perception of how fairly it is treated by its VC, which ultimately could inhibit the former's receptivity to advice. Directions for future research are indicated.
Get full access to this article
View all access options for this article.
References
1.
AndersonJ., & NarusJ. (1990). A model of distributor firm and manufacturer firm working partnerships.Journal of Marketing, 54(1), 42–58.
2.
BallG., TrevinoL., & SimsH. (1994). Just and unjust punishment: Influence and citizenship.Academy of Management Journal, 37(2), 299–322.
3.
BarneyJ. B., BusenitzL., FietJ. O., & MoeselD. (1994). The relationship between venture capitalists and managers in new ventures: Determinants of contractual covenants.Managerial Finance, 20(1), 19–30.
4.
BarneyJ. B., BusenitzL., FietJ. O., & MoeselD. (1996). New venture teams’ assessment of learning assistance from venture capital firms.Journal of Business Venturing, 11(4), 257–272.
5.
BarneyJ. B., FietJ. O., BusenitzL., & MoeselD. (1996). The substitution of bonding for monitoring in venture capitalist relations with high technology enterprises.Journal of High Technology Management Research, 7(1), 91–105.
6.
BatemanT., & ZeithamlC. (1989). The psychological context of strategic decisions: A model of convergent experimental findings.Strategic Management Journal, 10(1), 59–74.
7.
BiesR. J., & MoagJ. S. (1986). Interactional justice: Communication criteria of fairness.Research on Negotiation in Organizations, 1, 43–55.
8.
BiesR. J., & ShapiroD. L. (1988). Voice and justification: Their influence on procedural fairness judgments.Academy of Management Journal, 31(3), 676–685.
9.
BusenitzL. W., & BarneyJ. B. (1996). Differences between entrepreneurs and managers in large organizations: Biases and heuristics in strategic decision making.Journal of Business Venturing, 12(1), 9–30.
10.
BygraveW. D. (1987). Syndicated investments by venture capital firms: A networking perspective.Journal of Business Venturing, 2(2), 139–154.
11.
BygraveW. D., & TimmonsJ. A. (1992). Venture capital at the crossroads.Boston: Harvard Business School Press.
12.
ChanY. (1983). On the positive role of financial intermediation in allocation of venture capital in a market with imperfect information.Journal of Finance, 38(5), 1543–1568.
13.
CherinA. C., & HergertM. (1988). Do venture capitalists create value? A test from the computer industry. Paper presented at the Babson Entrepreneurship Conference, Calgary.
14.
CooperA. C., DunkelbergW. C., & WooC. Y. (1988). Entrepreneurs’ perceived chances for success.Journal of Business Venturing, 3(2), 97–108.
15.
DillmanD. A. (1978). Mail and telephone surveys: The total design method.New York: Wiley-Interscience.
16.
EhrlichS., De NobleA., MooreT., & WeaverR. (1994). After the cash arrives: A comparative study of venture capital and private investor involvement in entrepreneurial firms.Journal of Business Venturing, 9(1), 67–82.
17.
FamaE. F., & JensenM. C. (1983). Separation of ownership and control.Journal of Law and Economics, 26, 327–349.
18.
FietJ. O. (1995a). Reliance upon informants in the venture capital industry.Journal of Business Venturing, 10(3), 195–223.
19.
FietJ. O. (1995b). Risk avoidance strategies in venture capital markets.Journal of Management Studies, 32(4), 551–573.
20.
FietJ. O., MoeselD., BusenitzL., & BarneyJ. B. (1997). Complementary theoretical perspectives on the dismissal of new venture team members.Journal of Business Venturing, 12(5), 347–366.
21.
FolgerR., & KonovskyM. (1989). Effects of procedural and distributive justice on reactions to pay raise decisions.Academy of Management Journal, 32(1), 115–130.
22.
GillilandS. W. (1993). The perceived fairness of selection systems: An organizational justice perspective.Academy of Management Review, 18(4), 694–734.
23.
Gomez-MejiaL. R., BalkinD. B., & WelbourneT. M. (1990). Influence on venture capitalists on high tech management.The Journal of High Technology Management Research, 1(1), 103–118.
24.
GoodsteinJ., GautamK., & BoekerW. (1994). The effects of board size and diversity on strategic change.Strategic Management Journal, 15(3), 241–250.
25.
GranovetterM. S. (1985). Economic action, social structure, and embeddedness.American Journal of Sociology, 78, 1360–1380.
26.
GreenbergJ. (1986). Determinants of perceived fairness of performance evaluations.Journal of Applied Psychology, 71, 340–342.
27.
GreenbergJ. (1990). Organizational justice: Yesterday, today, and tomorrow.Journal of Management, 16(2), 399–432.
28.
HaleblianJ., & FinkelsteinS. (1993). Top management team size, CEO dominance, and firm performance: The moderating roles of environmental turbulence and discretion.Academy of Management Journal, 36(4), 844–863.
29.
JudgeW., & ZeithamlC. (1992). Institutional and strategic choice perspective on board involvement in the strategic decision process.Academy of Management Journal, 35(4), 766–794.
30.
KahnemanD., & TverskyA. (1979). Prospect theory: An analysis of decisions under risk.Econometrica, 47, 263–291.
31.
KatzellR. (1994). Contemporary meta-trends in industrial and organizational psychology. In TriandisH. C., DunnetteM. D., & HoughL. M. (Eds.), Handbook of industrial and organizational psychology, vol 4, pp. 1–89. Palo Alto, CA: Consulting Psychologists Press, Inc.
32.
KimW. Chan, & MauborgneR. (1991). Implementing global strategies: The role of procedural justice.Strategic Management Journal, 12(Summer), 125–143.
33.
KimW. Chan, & MauborgneR. (1993). Procedural justice, attitudes, and subsidiary top management compliance with multinationals’ corporate strategic decisions.Academy of Management Journal, 36(3), 502–526.
34.
KorsgaardM. A., SchweigerD., & SapienzaH. (1995). Building commitment, attachment, and trust in strategic decision-making teams: The role of procedural justice.Academy of Management Journal, 38(1), 60–84.
35.
LeventhalG. S. (1980). What should be done with equity theory? In GergenK. J., GreensbergM. S., & WillisR. H. (Eds.), Social exchange: Advances in theory and research, pp. 27–55. New York: Plenum.
36.
LindE. A., KulikC., AmbroseM., & de Vera ParkM. (1993). Individual and corporate dispute resolution: Using procedural fairness as a decision heuristic.Administrative Science Quarterly, 38(2), 224–251.
37.
LindE. A., & TylerT. (1988). The social psychology of procedural justice.New York: Plenum.
38.
MacMillanI. C., KulowD. M., & KhoylianR. (1989). Venture capitalists’ involvement in their investments: Extent and performance.Journal of Business Venturing, 4(1), 27–47.
39.
MacMillanI. C., SiegelR., & SubbaNarisimhaP. N. (1985). Criteria used by venture capitalists to evaluate new venture proposals.Journal of Business Venturing, 1(1), 119–128.
40.
MoormanC., DeshpandeR., & ZaltmanG. (1993). Factors affecting trust in market research relationships.Journal of Marketing, 57(1), 81–101.
41.
MorganR. M., & HuntS. D. (1994). The commitment-trust theory of relationship marketing.Journal of Marketing, 58(3), 20–38.
42.
MorrisJ. (1991). An overview of the venture capital industry. In Pratt's guide to venture capital sources, pp. 7–9. Needham, MA: Venture Economics, Inc.
43.
NelsonR., & WinterS. (1982). An evolutionary theory of economic change.Cambridge, MA: Harvard University Press.
44.
PerryL. T. (1988). Venture capital connection: How relationships between founders and venture capitalists affect innovation in new ventures.Academy of Management Executive, 2(3), 205–212.
45.
PintoM. B., PintoJ. K., & PrescottJ. E. (1993). Antecedents and consequences of project team cross-functional cooperation.Management Science, 39(10), 1281–1297.
46.
RockA. (1991). Strategy vs. tactics from a venture capitalist. In SahlmanW., & StevensonH. (Eds.), The entrepreneurial venture.Boston: Harvard Business School.
47.
RoureJ. B., & KeeleyR. H. (1990). Predictors of success in new technology based ventures.Journal of Business Venturing, 5, 201–220.
48.
RoureJ. B., & MaidiqueM. A. (1986). Linking prefunding factors and high-technology venture success: An exploratory study.Journal of Business Venturing, 1(3), 295–306.
49.
RosensteinJ. (1988). The board and strategy: Venture capital and high technology.Journal of Business Venturing, 3(12), 159–170.
50.
RosensteinJ., BrunoA. V., BygraveW. D., & TaylorN. (1993). The CEO, venture capitalists, and the board.Journal of Business Venturing, 8(2), 99–113.
51.
RuhnkaJ. C., FeldmanH. D., & DeanT. J. (1992). The “living dead” phenomenon in venture capital investments.Journal of Business Venturing, 7(2), 137–155.
52.
SapienzaH. J. (1992). When do venture capitalists add value?Journal of Business Venturing, 7(1), 9–27.
53.
SapienzaH. J., & AmasonA. (1993). Effects of innovativeness and venture stage on venture capitalist-entrepreneur relations.Interfaces, 23(6), 38–51.
54.
SapienzaH. J., & GuptaA. (1994). Impact of agency risks and task uncertainty on venture capitalists — CEO interaction.Academy of Management Journal, 37(6), 1618–1632.
55.
SapienzaH. J., & TimmonsJ. A. (1989). Launching and building entrepreneurial companies: Do venture capitalists add value? In BrockhausR. H.Sr. (Eds.), Frontiers of entrepreneurship research.Wellesley, MA: Babson College.
56.
SheppardB. H., & LewickiR. J. (1987). Toward general principles of managerial fairness.Social Justice Research, 1, 161–176.
57.
SteierL., & GreenwoodR. (1995). Venture capitalist relationships in the deal structuring and post-investment stages of new firm creation.Journal of Management Studies, 32(3), 337–357.
58.
TajfelH. (1982). Social psychology of intergroup relations.Annual Review of Psychology, 33, 1–40.
59.
ThibautJ., & WalkerL. (1975). Procedural justice: A psychological analysis.Hillsdale, NJ: Lawrence Erlbaum Associates.
60.
TimmonsJ. A., & BygraveW. D. (1986). Venture capital's role in financing innovation for economic growth.Journal of Business Venturing, 1(2), 161–176.
61.
TyebjeeT. T., & BrunoA. V. (1984). A model of venture capital investment activity.Management Science, 30(9), 1051–1066
62.
TylerT. R., & BiesR. J. (1990). Beyond formal procedures: The interpersonal context of procedural justice. In CarrollJ. S. (Ed.), Applied social psychology in business settings, pp. 77–98. Hillsdale, NJ: Erlbaum.
63.
WilliamsonO. E. (1975). Markets and hierarchies.New York: Free Press.
64.
WilliamsonO. E. (1985). The institutions of capitalism.New York: Free Press.
