Taylor & Francis Publishers Award for Excellence in Research on the Topic of Venture Capital—Joint Award 

RESPONSES TO PSYCHOLOGICAL CONTRACT VIOLATIONS IN THE VENTURE CAPITALIST-ENTREPRENEUR RELATIONSHIP: AN EXPLORATORY STUDY 

Annaleena Parhankangas, Helsinki University of Technology
Hans Landström, Lund University School of Economics and Management 

CHAPTER MENU 

ABSTRACT
INTRODUCTION
PSYCHOLOGICAL CONTRACT VIOLATIONS IN THE VENTURE CAPITALIST ENTREPRENEUR RELATIONSHIP
HYPOTHESES DEVELOPMENT
METHOD
RESULTS
CONCLUSIONS, DISCUSSION AND AVENUES FOR FUTURE RESEARCH
NOTES
CONTACT
REFERENCES
TABLE 1
TABLE 2
TABLE 3
TABLE 4 

ABSTRACT 

The purpose of our paper is to describe venture capitalists’ responses to psychological contract violations in their relationship with entrepreneurs. In addition, we seek to establish a link between the characteristics of a psychological contract violation and the venture capitalist’s behavior. We are concerned with three forms of psychological contract violations: (i) a disagreement over the goals or strategies of a portfolio company, (ii) incompetence of the entrepreneur, and (iii) shirking and opportunistic behavior of the entrepreneur. Our results show that venture capitalists prefer active behaviors to passive approaches. Also, voluntariness of the psychological contract violation, possibilities to improve the impaired relationship, and the performance implications for the portfolio company play a key role in determining the venture capitalist’s reaction.¹  

INTRODUCTION 

Open and frequent communication between a venture capitalist and an entrepreneur is a prerequisite for the “value-added” services provided by the venture capitalist, deemed of outmost importance for the success of the portfolio company. However, prior research indicates that cooperation between venture capitalists and entrepreneurs is far from frictionless (Sahlman, 1990), and that tensions and conflicts often arise in this relationship—conflicts that, if not solved in a proper manner, could be disastrous for the success of the venture. In our paper, we are concerned with three forms of psychological contract violations in the relationship between venture capitalists and entrepreneurs: (i) a disagreement over the goals or strategies of a portfolio company, (ii) incompetence of the entrepreneur, and (iii) shirking and opportunistic behavior of the entrepreneur. 

The aim of our paper is two-fold. Given the fact that this is one of the very first studies focusing on conflict management in the venture capital context, our paper sets out to describe venture capitalists’ responses to disappointments emanating from their relationship to the entrepreneur. Second, we seek to analyze the impact exerted by the type of the psychological contract violation on the venture capitalist’s behavior. We use the typology developed by Hirschman (1970) and Farrel (1983) to classify the responses of the venture capitalist, including exit, voice, loyalty and neglect.  

The study is based on a survey sent out to 294 individual venture capitalists in Finland and Sweden, with a response rate of 27 percent. Our results show that venture capitalists prefer active behaviors to passive approaches. Also, voluntariness of the psychological contract violation, possibilities to improve the impaired relationship, and the performance implications for the portfolio company play a key role in determining the venture capitalist’s reaction. 

PSYCHOLOGICAL CONTRACT VIOLATIONS IN THE VENTURE CAPITALIST ENTREPRENEUR RELATIONSHIP 

Prior research on the venture capitalist-entrepreneur relationship focuses on the positive implications of this interaction, such as the value-added services provided by the venture capitalists to the entrepreneurs (see, for instance, Gorman & Sahlman, 1986; MacMillan et al., 1988; Sapienza & Timmons, 1989; Ehrlich et al., 1994). Studies addressing the dark side of this relationship are relatively few in number. In this relatively unexplored territory, there are studies focusing on the role of legal contracts as a means of preventing and resolving problems emanating from this relationship (Isaksson et al., 1999; Sahlman, 1990; Smith & Parhankangas, 2000; Suchman and Cahill 1996; Kaplan & Strömberg, 2001, 2000). In the non-contractual side, Higashide & Birley (2002) investigate the consequences of conflicts for the post-investment performance of a portfolio company. To our knowledge, no study to this date has attempted to shed light on how venture capitalists react to the failure of the entrepreneur to live up to the expectations. 

To fulfill this gap in the existing knowledge, we take the concept of psychological contract violation as our point of departure. The concept of a psychological contract has mainly been employed to describe the relationship between an organization and its employees. However, it has been recently argued that the concept generalizes to a wide variety of exchange relationships between individuals, individuals and organizations, as well as between organizations (for a review, see Roehling (1997) or Ngo et al. (2002). A psychological contract has been defined as expectations about reciprocal obligations that compose an exchange relationship between the focal party and another party (Levinson et al., 1962; Schein, 1965). Psychological contracts are perceptual and idiosyncratic in nature in the sense that the expectations held by one party may or may not be shared by the other party. Also, psychological contracts are based on perceived promises defined as any communication of the future intent, such as such as written document, oral discussion, or organizational practices and policies (Rousseau, 1989; Rousseau & Greller, 1994; Morrison & Robinson, 1997). 

In a venture capitalist-entrepreneur relationship, we may perceive the psychological contract as a set of expectations about what each party is entitled to receive, and obligated to give, in exchange for another party’s contributions. A common goal for both the venture capitalist and the entrepreneur is to work together to maximize the value of the portfolio company. In an ideal entrepreneur-venture capitalist relationship, both parties exert themselves fully and perform competently on behalf of the firm. In reality, either the venture capitalist or the entrepreneur may fail to live up to the expectations of the other party to the relationship, giving rise to a psychological contract violation so characteristic to all human relationships (Robinson & Rousseau, 1994).² 

Psychological contract violation may take different forms. First, inadvertent violation occurs when the parties to the psychological contract are willing to keep their promises, but fail to honor their commitments because of divergent interpretations. An example of an inadvertent violation in the venture capitalist entrepreneur relationship might be a disagreement over the goals or strategies of a portfolio company. In such situations, both the venture capitalist and entrepreneur work toward the maximization the value of the portfolio company, but their means for achieving this common goal differ. Second, disruption refers, broadly speaking, to situations where the venture capitalists and the entrepreneurs are willing to contribute their share, but are unable to do. In the context of our study, an example of disruption would be the perceived incompetence of the entrepreneur. Third, reneging or violation of contract occurs when one party refuses to fulfill the contract, albeit of being capable of doing so (Rousseau, 1995). Venture capitalists or entrepreneurs involved in reneging might be either shirking or acting opportunistically. Shirking refers to one party not exercising sufficient effort to carry out the task assigned to him. Acting opportunistically denotes seeking one’s own self-interest at the expense of the other party and contrary to other party’s reasonable expectations (Smith & Parhankangas, 2000). 

What responses can we then expect from a venture capitalist to these violations of the psychological contracts? In general, we may refer to four types of responses (Hirschman, 1970; Farrell, 1983):  

According to the psychological contract literature, the exit, loyalty, voice and neglect options differ from one another along two dimensions. The first dimension may be referred to as constructiveness vs. destructiveness. Constructive responses, i.e. loyalty and considerate voice, are intended to revive or at least maintain the problematic relationship. Destructive responses, such as neglect, exit, and aggressive voice serve to end or destroy the relationship. With respect to the second dimension, activity is defined as dealing directly with the problematic situation, whereas passivity denotes ignoring the problem all together. Exit and voice are, therefore, considered active responses, whereas loyalty and neglect are passive responses (Rousseau, 1995; Rusbult, 1987; Hagedoorn et al., 1999).  

HYPOTHESES DEVELOPMENT 

In our paper, we will explore the relationship between the type of the psychological contract violation and the type of the behavioral response by the venture capitalist. We expect that the type of the psychological contract violation is an important determinant of how helpful or costly various behaviors are perceived to be from the venture capitalist’s point of view (Withey & Cooper, 1989). 

In this paper, we consider three characteristics of the psychological contract violation: its voluntariness, the degree to which it is possible to improve the impaired situation, and the perceived size of the loss suffered by the venture capitalist. First, prior research suggests that individuals pay attention to the voluntariness of the psychological contract violation, when deciding how to respond to unfavorable events (Greenberg, 1990; Turnley & Feldman, 1999). Perceived voluntariness refers to the degree to which the violation of the psychological contract depends on the ability of the violator to fulfill the contract (Rousseau, 1995). When one party is fully capable of living up to his promises, but deliberately chooses not to do so, we are speaking of a voluntary violation of a psychological contract.  

We expect venture capitalists to grow extremely impatient toward entrepreneurs who voluntarily and deliberately refuse to fulfill their obligations. The violation of the psychological contract is likely to be perceived as voluntary in the case of shirking and opportunism, resulting from the lack of effort or integrity from the part of the entrepreneur. This will, in its turn, make any efforts to continue or restore the impaired relationship less desirable in the eyes of the venture capitalist. If, however, the contract violation is perceived to be beyond the control of the entrepreneur, the attitude of the venture capitalist is likely to be more sympathetic. This would apply to situations where the disappointment of the venture capitalist stems from the incompetence or a difference of opinion. In such situations, the venture capitalist may feel he is sharing a common goal with the entrepreneur, which makes him more optimistic about finding a mutually satisfactory solution to the problem. Thus, we expect venture capitalists to react to opportunism and shirking with the use of destructive responses, whereas differences of opinion and incompetence should prompt the use of more constructive responses. 

H1: Voluntariness of the psychological contract violation promotes the use of destructive approaches, and discourages the use of constructive approaches. 

The second characteristic of the psychological contract violation refers to the extent to which it is possible to improve the unsatisfactory state of affairs. People who believe that improvement is possible will be more likely to work at (considerate) voice or loyalty. People who do not share this optimism might be more likely to choose neglect, aggressive voice or exit (Whithey & Cooper, 1989). It seems to us that it would be easier for the venture capitalist to improve the unsatisfactory state of affairs, when dealing with disagreeing or shirking entrepreneurs. Disagreements over the strategy of a portfolio company may be solved through a series of negotiations. In a similar vein, venture capitalists may be able to persuade shirking entrepreneurs to exert more effort on the behalf of the firm. However, incompetence and opportunism may be perceived as rather permanent traits of the entrepreneur, thus acting as a potential barrier for a mutually satisfactory relationship. Therefore, we would expect that venture capitalists would resort more often to active and constructive behaviors with shirking and disagreeing entrepreneurs. In a similar vein, we predict that the opportunism and incompetence scenarios are associated with a more frequent use of destructive or passive behaviors, such as exit, aggressive voice, neglect, and loyalty. 

H2: Possibilities of improvement are positively associated with the use of active and constructive approaches and negatively associated with the use of destructive or passive approaches. 

Finally, we expect the perceived size of the loss to be an important factor explaining the responses of the venture capitalists to psychological contract violations committed by the entrepreneur (Rousseau, 1995). We divide the perceived size of the loss into three dimensions: implications for the portfolio company, average investment size, and the number of portfolio companies managed by a venture capitalist. 

First, we anticipate that the performance implications of the psychological contract violation will affect whether the venture capitalist chooses to actively to deal with the problem or remain passive in his troubled relationship with the entrepreneur. If the implications of the disagreement, incompetence, shirking or opportunism are of major significance to the portfolio firm, we expect the venture capitalist to resort to active approaches, such as exit, considerate voice or aggressive voice. If, however, the psychological contract violation is not likely to exert a major impact on the performance of the portfolio firm, we expect venture capitalists remain passive. 

H3a: Performance implications of the psychological contract violation are positively associated with the use of active approaches and negatively associated with the use of passive approaches. 

Second, we anticipate that the average investment size plays a significant role when a venture capitalist decides how to respond to unmet expectations. Venture capitalists with relative large investments in their portfolio companies have much more to lose if the relationship suffers or ends, and so should they be more likely to enact constructive responses intended to maintain or revive their relationship to the entrepreneur (Rusbult, 1987; Ping, 1993). Venture capitalists with relatively small average investment size have little to lose if their involvements deteriorate further or end. Therefore, we expect that investment size is positively associated with the use of considerate voice and loyalty and negatively associated with the use of aggressive voice, exit or neglect. 

H3b: Investment size is positively associated with the use of constructive approaches and negatively associated with the use of destructive approaches.  

Besides the absolute investment size, we expect that the relative importance of the troubled portfolio company matters when the venture capitalist decides how to respond to problems in his or her relationship with the entrepreneur. A small number of investments indicates a relatively high importance of each portfolio company for the venture capitalist. The consequences of disagreements, incompetence, shirking and opportunism are likely to be more severe for a venture capitalist with a small investment portfolio than for his colleague with a larger investment portfolio. In addition, a venture capitalist with relatively few portfolio firms is likely to have more time to spend with each venture, thus increasing his or her tendency to use active approaches. Thus, 

H3c: The number of portfolio companies is positively associated with the use of passive approaches and negatively associated with the use of active approaches. 

METHOD 

Data Collection and Sample 

Due to the relatively small size of the Swedish and Finnish venture capital markets, it was possible to include all the existing venture capital firms in our study. The questionnaire was sent to the investment managers of the venture capital firms, since the investment managers are assumed to have a closer contact to the entrepreneurs than the CEOs and thus a better knowledge of the venture capitalist-entrepreneur relationship. We used the listings of the venture capitalists published on the homepages of Swedish Venture Capital Association (SVCA) and Finnish Venture Capital Association (FVCA), an existing database of Swedish venture capitalists (see Karaömerlioxlu & Jacobsson, 2000) and interviews of industry experts to identify venture capitalists to be included in our study. 

The process of data gathering in Sweden and Finland took place in Spring 2001. A total of 294 investment managers were included in the study. After several waves of mailings, we received responses from 78 investment managers in 50 venture capital firms, adding up to a response rate of 27 percent.  

In our questionnaire, we asked the venture capitalist to describe their most likely behavior in four hypothetical situations. The first scenario involves a situation where the venture capitalist disagrees with the entrepreneur in one of the portfolio companies. In the second scenario, the venture capitalist finds out after the investment that the entrepreneur is simply not able to perform up to the expectations. The third scenario has to do with a situation where the entrepreneur is fully capable of meeting the expectations of the venture capitalist, but fails to exert sufficient effort. In the fourth scenario, we assume that the entrepreneur is fully capable of meeting with the expectations of the venture capitalist, but falls short because he acts opportunistically. In each of these scenarios, we asked the venture capitalist to distinguish between the situations where the behavior of the entrepreneur is likely to be very damaging for the success of the firm and the situations where the entrepreneur’s behavior is only of minor importance for the success of the firm. 

In our questionnaire, we asked the respondents to indicate their tendency to use the neglect, exit, loyalty, and voice options. In line with prior literature, we decided not to restrict their choice to only one behavioral response. The most recent studies suggest that rather than using a single conflict management strategy independently, people tend to adopt configurations of conflict management strategies (Van de Vliert et al., 1995: 272; Van de Vliert, 1997; Munduate et al., 1999). In addition, psychological contract literature suggests that the Exit-Voice-Loyalty-Neglect options are in fact continuous and overlapping to some degree. Thus, an individual’s response to problematic situations may be a blend of two or more categories (Ping, 1995, Rosse 1988; Dowding et al., 2000). 

Measures 

The operationalization of our independent, dependent and control variables is shown in Table 1. The measurement of the dependent variables is derived from the psychological contract literature (Hagedoorn et al., 1999; Rusbult et al., 1988). In order to investigate whether the five responses to psychological contract violations are not only theoretically, but also empirically separable, we carried out factor analyses using a principal component method. Based on the theoretical assumptions and a scree test, we settled for a five-factor solution using Quartimax with Kaiser Normalization as a rotation method. Following the theoretical assumptions, the five factors could be labeled neglect, exit, loyalty, considerate voice and aggressive voice. For more information on the exclusion of certain items and the final factor solutions, please contact the authors of this paper. 

Control Variables 

Prior literature on psychological contracts and venture capital investments gives us reason to believe that it is necessary to control for several aspects of the venture capitalist-entrepreneur relationship when testing the afore-mentioned hypotheses. First, prior research suggests it is necessary to control for the satisfaction level, or the absence of prior conflicts, when predicting an individual’s response to psychological contract violations (Rusbult, 1987; Rusbult et al., 1988; Ping, 1993; 1999; Withey & Cooper, 1989). Second, the psychological contract literature suggests that the availability of attractive alternatives is likely to affect the venture capitalist’s motivation to work to improve the impaired relationship (Rusbult et al., 1988; Withey & Cooper, 1989; Turnley & Feldman, 1999). We controlled for the availability of alternatives using the venture capitalist’s rejection rate of the business plans as a proxy. Third, we decided to control for the respondent’s experience as a venture capitalist, assuming that the behavior of a newcomer may differ from the reactions from an old-timer in the industry. Fourth, we felt that it was important to control for the cross-border investments made by the venture capitalist. In here, we make an assumption that foreign investments are associated with less intense venture capitalist–entrepreneur interaction than domestic investments, thus encouraging the use of passive or destructive approaches (Hirschman, 1970; Maula & Mäkelä, 2002). Finally, we make an assumption that national venture capital markets differ from one another in terms of the costs of the behaviors and the availability of attractive investment alternatives.  

RESULTS 

A typical respondent works in a venture capitalist firm founded in the early 1990’s. He or she has been working as venture capitalist for approximately six years and managed a total of 14 portfolio companies during his or her career. These results give reason to believe that we are dealing with relatively experienced venture capitalists capable for assessing their behavior in the face of disappointments caused by the entrepreneurs. 

Description of the Venture Capitalists’ Behavioral Responses 

Table 2 shows the frequency of the use of various behavioral responses in the total sample of Swedish and Finnish venture capitalist firms.  Based on our data, venture capitalists seem to rely on considerate voice, aggressive voice, and exit when faced with psychological contract violations in their relationship with the entrepreneur. This result applies to all four scenarios with major performance implications for the portfolio firm and to the scenarios where the incompetence, shirking and opportunism are of minor significance for the portfolio firm. The most drastic deviation from the observed behavioral pattern is the disagreement scenario with minor implications for the portfolio firm. This is when the venture capitalists are most likely to use considerate voice, aggressive voice, and somewhat surprisingly loyalty, as their response to unmet expectations. 

At least two conclusions may be drawn from the results above. First, it seems that venture capitalists prefer active behaviors to passive approaches. This result gives reason to suspect that most Nordic venture capitalists have chosen to be active participants rather than passive by-standers relative to the management of their portfolio companies. 

Secondly, it seems that the venture capitalists resort to a bundle of behavioral responses as opposed to using only one of them. We used correlation analysis to shed more light on the interrelations between the behavioral responses (see Table 3). Only the correlation analysis for the disagreement scenario with major implications for the portfolio firm is shown in Table 3 due to space limitations. However, the results reported here reflect data from all four scenarios. This information will be made available upon the request from the authors. 

As expected, we detected a significant positive correlation between the use of the neglect and exit strategies. It seems only logical that venture capitalists thinking that there is no way out from the present situation (venture capitalists using the neglect option) might as well decide to discontinue the doomed relationship with the entrepreneur. In addition, there is a significant positive correlation between the neglect and the loyalty options, suggesting that these passive responses may also be interrelated. Finally, there was a significant positive correlation between the use of aggressive voice and exit options, giving us a reason to believe that aggressive voice might serve as the last resort for the venture capitalist before exiting the relationship. 

We found negative significant correlations between the use of neglect and considerate voice, and considerate voice and loyalty (in all four scenarios where the performance of the portfolio company was not at stake). In a similar vein, the exit and considerate voice options, as well as exit and loyalty options were negatively correlated. All of these relationships appeared as would be expected and help support the general validity of the data. 

Tests of Hypotheses 

Hypotheses 1 and 2 suggest that the voluntariness of and the possibility to improve the impaired relationship play a key role when a venture capitalist decides how to deal with the problem at hand. We tested these hypotheses in two ways. First, we wanted to find out the ranking among the five behavioral responses within each scenario. As reported above, the most frequently used behavioral responses in all four scenarios are considerate voice, aggressive voice, and exit. It seems that the ranking of the behavioral responses within the scenarios is rather uniform regardless of the voluntariness of the contract violation or prospects for improvements in the future. The Friedman test was significant for each scenario. These results contradict Hypotheses 1 and 2. 

An alternative way of testing Hypotheses 1 and 2 is comparing the frequency of various behavioral responses across the four scenarios to find out, for instance, in which scenario the exit option was most commonly used. We found that venture capitalists use most often the exit and aggressive voice options when dealing with opportunistic and incompetent entrepreneurs, and least commonly when confronted with the lack of effort and disagreements by the entrepreneur. This is in line with Hypothesis 2 stating that venture capitalists will use destructive approaches when they feel they cannot do much to remedy the situation. Also, our results show that considerate voice is the most commonly used strategy in the disagreement and incompetence scenarios. This seems to conform to Hypothesis 1 suggesting that venture capitalists adopt a constructive approach when the violation of the psychological contract is not under the control of the entrepreneur. The Friedman test was significant for each behavioral response. All these results were obtained using the data on scenarios where the implications of the psychological contract violation were of major significance for the portfolio company. The results of scenarios with minor implications for the portfolio companies show a similar pattern, and will be made available upon the request from the authors. 

Hypothesis 3a states that the greater the perceived size of the loss, the more venture capitalists will favor active approaches over the passive approaches. We used the Paired Samples T-test to compare the means of various behavioral responses in situations where the psychological contract violation was either of major or minor significance for the portfolio firm. In line with Hypothesis 3a, we found that if the performance of the portfolio company was not in danger, the venture capitalists reacted in a more passive way using more often the loyalty and neglect options. However, when the venture capitalists perceived that the misbehavior of the entrepreneur risks the future of the portfolio company, they adopted a more active role using more the considerate voice, aggressive voice and exit options. 

Hypotheses 3b and 3c were tested using a multiple linear regression analysis as shown in Table 4. Hypothesis 3b suggests that average investment size encourages the use of constructive approaches and discourages the use of destructive approaches. Our data reveals a negative, statistically significant relationship between average investment size and the use of exit and neglect behaviors in the disagreement and incompetence scenarios, respectively. Contrary to our hypothesis, our data shows that average investment size is positively associated with aggressive voice, and negatively associated with considerate voice. Thus, Hypothesis 3b was rejected. 

According to Hypothesis 3c, venture capitalists with large investment portfolios are more tempted to remain passive. As expected, the relationship between the number of portfolio companies and the use of exit option was negative and statistically significant in disagreement, shirking and opportunism scenarios. In a similar vein, our results suggest an adverse relationship between the number of investments and the use of considerate voice in the shirking option. Thus, Hypothesis 3c receives weak support in our data.  

CONCLUSIONS, DISCUSSION AND AVENUES FOR FUTURE RESEARCH 

The main contribution of our paper is to describe venture capitalists’ reactions to disagreements, incompetence, shirking and opportunism from the part of the entrepreneur. We found that Nordic venture capitalists prefer active behaviors to passive approaches when confronted with problems in their portfolio companies. Second, our results give reason to believe that venture capitalists use most often exit and aggressive voice in situations where they feel that the psychological contract violation is caused by rather permanent flaws of the entrepreneur, i.e. lack of character or skills. Third, we suggest that the venture capitalists show more understanding and use mostly considerate voice, when the psychological contract violation is perceived to be beyond the control of the entrepreneur. Finally, our results show that venture capitalist take a more active stance when the future of the portfolio company is at stake. 

This is one of the very first studies focusing on psychological contract violations, or stated differently, conflict resolution, in the venture capitalist-entrepreneur relationship. As such, this paper takes a preliminary step toward a better understanding of how the venture capitalist-entrepreneur relationship fares the disagreements and disappointments so characteristic to most business relationships. 

To our knowledge, this is also the very first study applying Hirschman’s model of responses to psychological contract violations to the venture capital-entrepreneur relationship. This raises an interesting question of whether the venture capital context prompts different kinds of reactions to psychological contract violations than personal relationships or other types of business relationships. Our results give a reason to suspect that this might be the case. First, it seems that the use of exit option is much more commonplace relative to the other responses in the venture capital context than in the relationship between the employer and the employee (Turnley & Feldman, 1999; Withey & Cooper, 1989; Rusbult et al., 1988; Hagedoorn et al., 1999) or in marketing channel relationships (Ping, 1999; Hibbard et al., 2001). Second, we could not establish a link between the behavioral responses and the relationship quality, or the size of the investment, as prior literature would suggest (Ping, 1993; Turnley & Feldman, 1999; Rusbult et al., 1988). All these deviations hint to the possibility that the psychological contract literature, suggesting that individuals are mainly sensitive to the costs of actions, and existence of alternatives, is not sufficient in explaining the venture capitalists’ reactions to unmet expectations. 

Our study suffers from many limitations. First, prior literature suggests that human behavior in problematic situations is a process, where an individual proceeds from less to more intense responses as dissatisfaction persists or intensifies (Blau, 1985; Rosse, 1988). A future study could address a question of how intentions translate into actions in a real, as opposed to a hypothetical, venture capitalist-entrepreneur relationship. Second, we ignored the personal characteristics of venture capitalists, such as gender, age, or self-esteem, the impact of which need to be addressed by future work (Richins, 1987; Ngo et al., 2002, Rusbult, 1987). Third, many relationship-specific and context specific factors may play a key role in determining how a venture capitalist reacts to unmet expectations. For instance, a further study is called for to analyze the impact of the surrounding institutional environment on individual responses to unsatisfactory business relationships. 

NOTES 

1. We wish to thank the Foundation of Emil Aaltonen, the Ella and Georg Erhnrooth Foundation, and the Foundation of OKO Bank for their financial support.
2. According to prior literature (see, for instance Morrison & Robinson, 1997), a host of contextual factors determine whether the failure to live up to the expectations leads to a perceived unmet promise, a psychological contract breach, or a psychological contract violation. For the sake of simplicity, we assume that the preconditions for psychological contract violation are met in this study.  

CONTACT: Annaleena Parhankangas, Helsinki University of Technology, P.O. Box 5500, 02015 TKK, Finland; (T) + 358 40 510 8545; (F) + 358 9 4513 095; Annaleena.Parhankangas@hut.fi 

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