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PERFORMANCE FEEDBACK, DECISION MAKING PROCESSES,
AND VENTURE CAPITALISTS SUPPORT OF NEW VENTURES
Harry J. Sapienza, University of South Carolina
M. Audrey Korsgaard, University of South Carolina
This study examines whether the way entrepreneurs share information with their venture capitalists impacts these investors' propensity to 1) trust the entrepreneur, 2) support strategic decisions, 3) closely monitor the venture, and 4) provide additional funds to the venture. Further, we examine whether the amount of influence that the venture capitalist has in the venture's decision making and strategy affects the strength of these relationships. The fundamental dilemma for entrepreneur-venture capitalist pairs is how to satisfy both the investor's need for timely information upon which future commitments of resources can be based and the entrepreneur's need for autonomy and operating control. Consistent with our predictions, we found that timely feedback was related to greater trust in the entrepreneur, greater commitment to his/her decisions, and less monitoring by the venture capitalist. Contrary to expectations, the timeliness of feedback had no significant impact on intention to re-invest.
Among the most critical and most difficult of challenges facing entrepreneurs seeking to launch and build high potential ventures is that of financing the ongoing needs of the venture (Bygrave & Timmons, 1985). The high "burn rates" of fast growing new ventures requires periodic infusions of capital, infusions whose magnitude and timing cannot be fully anticipated in advance. If an entrepreneur wishes to actually run a business rather than spend all his/her time securing funding, these requirements imply that successful entrepreneurs will be those who locate and nurture reliable sources of outside funding.
Although considerable research has examined entrepreneurs' search for and uses of various sources of funding (Bruno & Tyebjee, 1985), little is known about how entrepreneurs sustain or manage their relationships with investors (Sapienza, 1989). From an investor's point of view, the primary requirement of the relationship is that it provide the investor ongoing information to ensure that the current investment is protected and to allow an evaluation of the prospects for additional commitments of capital (Bruno & Tyebjee, 1985). However, entrepreneurs' desire for autonomy and control over decisions can make them reluctant to share fully all information or to share it in a timely manner (Sapienza, 1989). In essence, the relationship will be most effective if the entrepreneur can secure investors' trust and support for their strategic decisions without incurring the costs and bother of excessive monitoring (Van de Ven & Walker, 1984).
Developing a trusting relationship with a provider of outside capital is likely to greatly enhance an entrepreneur's chances of sustaining his/her new business. If an entrepreneur has not gained the trust of his/her investors, the investors are likely to withdraw support at the first opportunity. Not only will this terminate an important source of funds, but it may also spoil other sources of funding when word spreads that the entrepreneur is not trustworthy. For example, Bygrave (1988) found networks of venture capitalists to be highly efficient in disseminating information on investment prospects. Larson (1992) also found that long-term alliances for new firms depended upon both common economic interests and the development of mutual trust. Trust, then, enhances both how exchanges are conducted in the short-term and the probability that interaction and exchange will be sustained into the future.
When an investor is a member of the entrepreneur's board of directors, the entrepreneur must secure support for the strategic direction that the entrepreneur wishes to pursue. Gaining commitment to her/his strategic decisions will benefit the entrepreneur in several ways. First, having the support of an influential investor will enhance the entrepreneur's reputation, an advantage of potential use in establishing other important exchanges such as with suppliers or buyers (Birley, 1985; MacMillan, Kulow, & Khoylian, 1989). Further, the decision commitment of an investor will help secure timely and adequate funding from the current set of financial backers. Finally, lack of commitment may constrain the range of options the entrepreneurial CEO can consider and leave the entrepreneur vulnerable to the indecision and resistance of the board of directors.
Entrepreneurs will also be strongly affected by investors' monitoring of and investing in the venture. Entrepreneurial CEOs are likely to find monitoring oppressive and costly. Van de Ven and Walker (1984) pointed out that heavy monitoring is likely to lead to conflict and dissensus in interorganizational relations. Besides causing conflict, heavy monitoring may also be costly and time-consuming. Extra monitoring implies additional time put into data production, presentation, and analysis. These activities draw the entrepreneur from her/his productive activities and slow decision making. Finally, if investors decide not to put these additional funds into the venture, the entrepreneur may be in the unenviable position of convincing a new set of investors that her/his venture is worthwhile, despite the fact that its current set of backers will no longer support it.
In short, entrepreneurs and investors join forces to create new wealth through the blending of the distinctive competencies and resources they bring to each other. It is critical for the entrepreneur to manage this relationship effectively. Recent studies employing procedural justice theory to intrafirm decision making (Kim & Mauborgne, 1993; Korsgaard, Schweiger, & Sapienza, 1995) show that perceptions of the fairness of decision-making procedures strongly affect the relationships among decision makers. If applicable across organization boundaries, these findings suggest a way that entrepreneurs may effectively manage relations with their investors.
Procedural justice is concerned with individuals' reactions to decisions in which they are personally invested but not able to directly or fully control. The basic principle of this theory is that, regardless of the outcome of decisions, individuals react more favorably to decisions when they feel the procedure used to make them was fair (Lind & Tyler, 1988). Even when individuals are adversely affected by decisions, they are more accepting of those decisions if they were treated fairly in the process (Thibaut & Walker, 1975). Research in this area has focused on identifying the types of procedures deemed fair and examining the impact of procedural fairness on the quality of exchange relationships and acceptance of decisions reached (for a review, see Lind & Tyler, 1988).
Procedural justice theory offers a potentially useful framework for studying entrepreneur-investor relations for two reasons. First, procedural justice is concerned with exchange relationships in which one party does not have direct control over decisions, a situation that is similar to the indirect role investors often play in the day-to-day operations of new ventures (Gorman & Sahlman, 1989). Regardless of how much equity an outside owner may have in the venture, the entrepreneurial CEO controls the day-to-day decisions and the implementation of the strategies intended to secure the venture's success. Second, procedural justice is an important determinant of the quality of relations in exchange relationships; specifically, perceptions of fairness help to build trust and commitment (Korsgaard & Roberson, In press; Korsgaard, et al., 1995). Given the need to sustain a positive relationship between the entrepreneur and critical outside constituencies, building trust and commitment is an issue of central importance to the success of new ventures (Birley, 1985; Larson, 1992).
The Impact of Timely Feedback
Procedural justice theory has identified a number of key aspects of procedures that promote the perception of fairness; one factor that is pertinent to entrepreneur-investor relations is the extent to which timely feedback concerning decisions is provided. Justice theorists have long argued that providing timely feedback on the results of decisions is an important factor in creating a sense of fairness or due process (Folger & Bies, 1989; Tyler & Bies, 1989). In various decision contexts, such as performance evaluations and hiring decisions, timely feedback enhances perceptions of fairness, even when the decision is unfavorable (Folger & Konovsky, 1989).
Feedback is particularly important in the context of entrepreneur-investor relations. Although the existing research on the impact of entrepreneur-investor relations has focused on the entrepreneur's responses to the process, Sapienza and colleagues (Sapienza, 1989; Sapienza & Gupta, 1994) have shown that the decision making context and process impact the investor as well as the entrepreneur. Indeed, one of the most common complaints from venture capital investors is that entrepreneurs are reluctant to share information (Rock, 1987; Sapienza, 1989), especially news of poor performance. Because delayed feedback may hamper the investor's ability to evaluate or aid the venture in times of crisis, investors who receive no feedback or significantly delayed feedback are likely to be dissatisfied with the manner in which the entrepreneur is managing the flow of information.
We argue here that the timeliness of feedback will affect how fairly investors feel they are being treated by entrepreneurs in the decision making process. Perceptions of fairness will, in turn, strengthen investors' feelings about the honesty of the entrepreneur and commitment to the entrepreneur's decisions. Further, timely feedback is expected to affect investors' behavior; specifically, it should result in investors' monitoring the venture less frequently and in being inclined to invest more in the venture. Higher quality relationships allow exchange partners to rely less heavily on formal mechanisms for managing exchanges. Agency theory (Jensen & Meckling, 1976) and transaction cost theory (Williamson, 1975) both suggest that greater trust between partners to an exchange reduces the need for costly monitoring mechanisms to control the behavior of the exchange partner. Sapienza and Gupta (1994) provided empirical support for this view in the venture capitalist-entrepreneur context. In summary, it is hypothesized that:
Hypothesis 1: The timeliness of feedback on company performance affects investors':
(a) Perceptions of procedural fairness, such that the more timely the feedback, the more fair the procedure.
(b) Trust in the entrepreneur, such that the more timely the feedback, the greater the trust in the entrepreneur.
(c) Commitment to entrepreneurs' decisions, such that the more timely the feedback, the greater the decision commitment.
(d) Frequency of monitoring, such that the more timely the feedback, the less frequent the monitoring.
(e) Willingness to invest in the venture, such that the more timely the feedback, the more willing the investor is to commit funds to the venture.
The Moderating Impact of Investor Influence
Procedural justice is an important means of indirect control; a means by which individuals can ensure that their interests are protected when they cannot directly control the situation (Thibaut & Walker, 1975). Even when a particular decision is unfavorable to individuals, if people believe that the way the decision was made is fair and unbiased, they will feel that their interests are protected in the long run. Research shows that individuals respond favorably to fair procedures particularly when they lack direct control or influence over the situation (Lind & Tyler, 1988). Procedural justice researchers assert that when individuals are unable to influence the decision in their favor, they are more apt to carefully assess the procedures used to make the decision (Leung & Li, 1990). Greater attentiveness to how decisions are made increases the importance of perceptions of procedural fairness. That is, the impact of timely feedback is likely to be stronger when investors have less direct influence over the entrepreneur's decisions.
Both Rock (1987) and Sapienza (1989) emphasize that outside investors with significant stakes in their investments expect to materially impact the strategic direction of their investments. Rosenstein (1988) showed that venture capitalists are actively involved in the strategic decisions made by the CEOs managing their portfolio companies. Justice theory suggests that when such investors believe their advice is being ignored, they will be particularly attentive to other signals regarding the entrepreneur's competence and reliability. One such signal is the timeliness of the entrepreneur's feedback regarding the state of the venture. We therefore hypothesize:
Hypothesis 2: The impact of feedback on (a) perceived fairness, (b) trust in the entrepreneur, (c) decision commitment, (d) frequency of monitoring, and (e) propensity to invest is moderated by influence such that the impact is stronger when influence is low.
The Mediating Role of Perceived Fairness
The previous arguments suggest that the effect of timely feedback on entrepreneur-investor relations is due to perceptions of procedural fairness. When investors feel they are treated fairly, they trust the entrepreneur more, are more committed to their decisions, monitor the venture less frequently and are more inclined to invest more capital. Thus, the impact of timely feedback and influence on entrepreneur-investor relations should be mediated by perceptions of fairness. Indeed, Korsgaard et al. (1995) found that perceptions of procedural fairness partially mediated the impact of decision procedures on decision commitment and trust. It is therefore hypothesized:
Hypothesis 3: The effects of feedback and influence on (a) trust in the entrepreneur (b) decision commitment, (c) frequency of monitoring, and (d) propensity to invest are mediated by perceptions of procedural fairness.
Sample and Procedure
The sample consisted of one partner from each of 118 venture capital firms (VCFs) geographically dispersed across the U.S. The mean age of these VCFs was 11 years, the average capital under management was $89 million, and the average number of partners/top managers per VCF was four. We used Pratt's Guide to Venture Capital Sources (1994) to obtain the names and addresses of venture capitalists (VCs) in the 48 contiguous states in the U.S. In order to control for possible effects of differences in involvement, monitoring, and investment purposes, we employed several sampling constraints. First, we chose only firms listed as private VCFs investing their own funds; thus, we excluded corporate subsidiaries and government sponsored investment companies such as Small Business Investment Corporations (SBICs). Second, in order to ensure that time for a relationship to develop existed, we excluded all firms less than two years old. These constraints yielded 408 VCFs. We then sent a survey to a randomly selected member of top management of each of these VCFs. To further ensure comparability across the sample, in the letter to VCs, we asked them to respond on a venture that fulfilled the two following conditions: the VC was on its board of directors and had been so for at least two but not more than five years.
Four surveys were undeliverable and were returned; two others were not completed by VCs because they had no ventures that fulfilled our criteria. The resulting sampling population was 402; we received complete questionnaires from 118 VCFs for a response rate of 29%. Our response rate is rather high for this sample--e.g., MacMillan et al. (1989) had a response rate of 18%. Nonetheless, we conducted tests of respondents to non-respondents on capital under management and VCF age and found no significant differences; thus, we have no reason to believe that non-response bias poses a problem in this study.
The six variables in this study were all constructed from multiple-item responses of VCs to our survey; all responses were on five point Likert-type scales. Table 1 presents the means, standard deviations, correlations, and reliabilities for all measures.
Independent variables: VCs were asked to assess feedback from the CEO and their own level of influence on the venture for the prior 12-month period. Feedback was measured by four items developed by the authors assessing the extent to which the entrepreneurial CEO provided the VC with timely feedback on strategic decisions and venture performance over the prior 12-month period. Influence was measured by four items assessing the extent to which the VC could influence the strategic direction and decisions of the CEO.
Dependent variables: Perceived fairness was measured by four items adapted from Lind, et al. (1980) assessing the fairness of the procedures used by the CEO to conduct board meetings and make strategic decisions. The measure for trust is constructed from VCs' assessment of the extent to which they believe the CEO to be honest, sincere, and trustworthy. Commitment to decisions was measured by three items assessing the extent to which the VC supports the strategic decisions and strategic direction taken by the CEO. Frequency of monitoring is measured by two items developed by the authors assessing the extent to which the VC requests additional reports and documentation from the CEO about venture performance. Finally, investing was measured by four items developed for this study assessing the extent to which VCs' have taken or will take every opportunity to invest in the venture.
Control Variable: Because most VCFs cash out within 3-5 years (Bygrave & Timmons, 1992), the length of the investment relationship will place restrictions on re-investment. Consequently, the years since initial investment began was used as a control variable.
Hierarchical moderator regression, reported in Table 2, was conducted to assess the effects of feedback and influence on attitudes and behavior. The main effects of feedback and influence were entered at the first step, and the interaction of feedback and influence was entered at the second step. If the interaction was significant, all effects were interpreted at the last step; however, if the interaction was not significant, the main effect of feedback was interpreted at the first step (Cohen & Cohen, 1983).
The first set of hypotheses, Hypothesis 1a-1e, predicted that timely feedback would affect investors' perceptions of fairness, trust in the entrepreneur, commitment to decisions, frequency of monitoring, and investing. As indicated in Table 2, this relationship was observed for all variables except investing. Supporting Hypotheses 1a, 1b, and 1c respectively, timely feedback was positively related to perceptions of fair treatment (squared semi-partial correlation [sr2] = .33), trust (sr2 = .05), and commitment to the entrepreneurs' decisions (sr2 = .19). Further, as hypothesized (H1d), a significant negative relationship between the timeliness of feedback and the frequency of monitoring was observed (sr2 = .03). However, Hypothesis 1e was not supported in that the feedback was not significantly related to investing. In sum, with the exception of investing, all hypothesized relationships with timely feedback were supported.
The second set of hypotheses, Hypotheses 2a-2e, predicted that feedback would have a stronger impact on all five dependent variables when influence was low. No significant interactions were observed for perceived fairness (H2a), decision commitment (H2c), or investing (H2e). A significant interaction was observed for trust (sr2 = .01). To interpret this effect, a median split was performed on influence and the correlation between feedback and trust was computed for investors with high influence and for investors with low influence (Cohen & Cohen, 1983). The pattern of subgroup correlations supported the hypothesized relationship, in that the positive impact of feedback on trust was stronger when influence was low (r = .76) than when influence was high (r = .65). The interaction of feedback and influence was also significantly related to the frequency of monitoring (sr2 = .02). To interpret this effect, subgroup correlations were computed between feedback and monitoring for investors with high versus low influence. As hypothesized, timely feedback was more strongly associated with reduced monitoring when influence was low (r = -.40) than when influence was high (r = .04). Thus, the hypothesized interaction of feedback and influence received partial support.
The final set of hypotheses, Hypotheses 3a-3d, predicted that perceptions of procedural fairness would mediate the impact of feedback and influence on trust, commitment, monitoring, and investing. To demonstrate mediation, we tested the three conditions required for mediation to be present: (1) the independent variables must be significantly related to the mediator; (2) the mediator must be significantly related to the dependent variable; and (3) the relationship between independent variables and dependent variables must be substantially reduced when the impact of the mediator is taken into account (Baron & Kenny, 1986). The previously reported regression results support the first condition, that the independent variables were related to the mediator, perceived fairness. The significant correlations between perceived fairness and trust, commitment, and monitoring reported in Table 2 provide support for the second condition, that the mediator is related to the dependent variables.
The third condition of mediation, that the relationship between the independent variables and the dependent variables should be eliminated or substantially reduced when the mediator is accounted for, was tested in a series of regression equations in which perceived fairness was included as a covariate. These results were then compared to the regression results reported in Table 2. Previously, without fairness as a covariate, trust was predicted by both the main effect of feedback and the interaction of feedback and influence. With fairness added to the equation, feedback still had a significant effect, but the magnitude of this effect was smaller (without fairness, sr2 = .05; with fairness as a covariate, sr2 = .01). This finding indicates that the impact of feedback on trust is partially mediated by fairness. The interactive effect was also significant, with no real change in the magnitude of the relationship (without fairness, sr2 = .01; with fairness, sr2 = .01).
Without fairness as a covariate, timely feedback had a main effect on commitment. With perceived fairness included in the equation, feedback still had a significant relationship with commitment, but the magnitude of the relationship was substantially smaller (without fairness as a covariate, sr2 = .19; with fairness as a covariate, sr2 = .06). This finding suggests that perceptions of fairness partially mediate the impact of feedback on decision commitment.
Previously, monitoring was predicted by both the main effect of feedback and the interaction of feedback and influence. With fairness added to the equation, feedback still had a significant effect, but the magnitude of this effect was slightly smaller (without fairness, sr2 = .03; with fairness as a covariate, sr2 = .02). This finding indicates that the impact of feedback on monitoring is partially mediated by fairness. The interactive effect also remained significant when fairness perceptions were added, and there was no real change in the magnitude of the relationship (without fairness, sr2 = .02; with fairness, sr2 = .02). Because neither fairness nor the interaction of feedback and influence were significantly related to investing, the hypothesized mediating role of perceived fairness could not be tested. In summary, which the exception of investing, these findings provide support for the proposition that the impact of feedback on attitudes and behaviors is partially mediated by perceptions of fairness; however, fairness did not mediate the impact of the interaction of feedback and influence.
Consistent with our predictions, we found that timely feedback was related to greater trust in the entrepreneur, greater commitment to his/her decisions, and less monitoring by the venture capitalist. Contrary to expectations, the timeliness of feedback had no significant impact on intention to re-invest. Further, while the venture capitalist's level of influence did not affect the impact of feedback on decision commitment or intention to invest, it did moderate the relationships of feedback with trust and monitoring. Specifically, the less influence the venture capitalist had, the more timely feedback increased trust and decreased monitoring. Finally, our analyses show that the impact of feedback and influence on trust, commitment, and monitoring is partially mediated by the venture capitalist's perception of the fairness of the decision-making processes used by the CEO.
One of the purposes of this study was to replicate in the field findings we had observed in an experiment we had conducted earlier in the year. In general, the two studies produced results highly consistent with one another and with expectations derived from procedural justice theory. As in the experiment, timely feedback on the part of the entrepreneur led investors to feel the entrepreneur was more fair, to trust the entrepreneur more, to be more supportive of the entrepreneur's strategic decisions, and to monitor the venture less frequently. Further, as predicted, feedback and influence affected trust, commitment and monitoring to some extent through their creation of perceptions of fairness.
In this study, venture capitalists' influence did not moderate the impact of feedback on perceptions to the extent that it had in the experiment (Study 1). The current findings (Study 2) indicated that feedback has a stronger impact on trust and monitoring when the investor has relatively less influence on decisions. As in the earlier experiment, the current study found that the impact of feedback on decision commitment was strong regardless of the investor's level of influence. In contrast to the first study, here, the joint effect of influence and feedback was not significantly related to fairness perceptions or to investing. Given the increased statistical power necessary to detect interactive effects with correlated variables (Cohen & Cohen, 1983), these results are not surprising.
The principal difference between the two studies concerned the joint effect of influence and feedback on investor behavior. In Study 1, the interaction affected investing but not monitoring, whereas in Study 2, the interaction predicted monitoring. Thus, although both studies found that timely feedback more strongly affected investor behavior when influence was low, the particular behavior affected differed across studies. This inconsistency may be explained by the degree of discretion and control investors in each context had over these two behaviors. As noted earlier, subjects in the first study did not need to exercise great discretion over the frequency of monitoring. Because of its relative low cost and ease, subjects did not need to reserve such action for dire cases (i.e., when they received infrequent feedback and had little influence). Monitoring in the real world setting of the second study, however, is quite costly in terms of time and effort (Sapienza & Gupta, 1994); thus, VCs need to use discretion in monitoring ventures. The studies also differed in investors' control over investing. In Study 1, the subjects themselves were the sole arbiters of money invested in ventures. In contrast, VCs' actual discretion over investing may be considerably constrained. For example, VCs may not be able to act completely independently of other partners in the VCF or even other investors in the syndicate of VCFs (Bygrave, 1988). Further, the amount of money currently invested in the venture places limits on the future investment . Given these constraints on their behavior, VCs' pattern of investing may not be significantly governed by perceptions of timely feedback. In sum, both studies show that procedural fairness can affect the quality of entrepreneur-investor relations, but such perceptions are more likely to affect behaviors such as monitoring, over which the VC exercises a high degree of discretion and control.
Though not hypothesized, influence had a significant main effect on decision commitment, trust, and investing, such that investors trusted entrepreneurs more, were more committed to their decisions, and intended to invest more in the venture when they felt they influenced the entrepreneur's decision making. Again, these findings reflect one of the basic motivations underlying justice concerns: the protection of self-interest (Lind & Tyler, 1988). Since influence allows for more direct control, VCs with greater influence were likely to feel that they were able to protect their own interests in the venture.
The purpose of this study was to examine how the entrepreneur's management of information flows in the form of feedback and influence affect entrepreneur-investor relations. The findings revealed the importance of timely feedback in promoting positive relations between investor and entrepreneur. This study provides strong evidence of the relevance of procedural justice to inter-organizational relations involving new ventures and thus provides a needed framework for understanding the evolution and management of such relationships.
From a theoretical perspective, this study helps clarify the mechanisms of control and information sharing in the venture building process. Consistent with Sapienza and Gupta (1994), this study demonstrates the importance of the decision-making process in the governance of the new venture. The long time horizons and the extreme uncertainty of the future in the high-growth, new venture context make it extremely important for entrepreneurs and investors to create conditions through which trust and mutual commitment may be used to mitigate fears of opportunism (Williamson, 1975), reduce the costs of joint or delegated decision-making (Jensen & Meckling, 1976), and create effective information sharing.
Additionally, this paper represents an important extension of procedural justice theory to examine inter- as well as intracompany decision making. Research and theory on organizational justice has primarily concerned relatively simple, discrete decisions, such as pay raises and hiring decisions (Folger & Greenberg, 1985). By focusing on strategic decision making, this study adds to our understanding of how justice functions for more complex, organization-wide decisions. Further, research in this area has primarily explored intraorganizational, hierarchical relationships (Folger & Greenberg, 1985) in which the distribution of power and influence is relatively clear. The findings of this study underscore the importance of justice in building relationships that extend beyond the organization and clear hierarchical authority.
Implications For Practice
This research holds several implications for practice. The findings suggest that the way entrepreneurs and investors conduct business exchanges materially impacts the quality of the relations and the propensity to engage in future transactions. Perhaps the most significant implication is that entrepreneurs may be able to consciously manage their relations with investors in ways that provide positive outcomes for both parties. By providing timely feedback, entrepreneurs create in investors a favorable impression that may lead to actions of value to both parties. The findings suggest an apparent paradox for entrepreneurs: in order to maintain control of the venture, the entrepreneur must give up a level of control. That is, the more entrepreneurs share information and allow investors a certain level of influence in decisions, the more apt investors are to eschew monitoring, to trust that the entrepreneur will be honest and forthright, and to support the entrepreneur's decisions.
Other potential benefits are also likely to accrue from relations managed in this fashion. Venture capitalists and other investors will expend less time and energy in monitoring; they will be able instead to provide needed assistance (Birley, 1985) and they will be more apt to know when such assistance is indeed critical. Entrepreneurs will feel less "controlled" by their investors because monitoring is minimized (Sapienza, 1989; Van de Ven & Walker, 1984) and because they will spend less energy looking elsewhere for new or additional funding partners.
Limitations and Future Directions
The key limitations of a field survey are its reliance on self-reported measure and its inability to control for critical factors. However, these limitations are somewhat mitigated for us because this study is a replication of relationships observed in a controlled experimental setting. The consistency of results between the two studies increases our confidence that feedback and influence have causal impacts on investor behavior and attitudes, but further study is clearly necessary to reconcile the few inconsistencies between the studies' findings.
This research also suggests other potentially important areas for future study. Other variables pertinent to the context and to the procedural justice framework should be studied systematically. For example, future research should how venture performance might interact with or moderate the effects of feedback on attitudes and behavior. Moreover, although this study looked at the impact of the entrepreneur's handling of information on the investor, in reality both parties control resources and/or information of critical importance to their investment partners. It is therefore also important to examine the impact of the investor's style of decision making on the entrepreneur and the reciprocal effects of the exchange partners on one another over time. Further, other relationships affecting strategic decisions are also important to the health and success of new ventures (e.g., investor-investor relations or CEO-management team relations) and should be examined. Finally, this research approached investor governance from a procedural justice perspective, whereas other recent studies of this phenomenon used agency theory as the investigative lens (Sapienza & Gupta, 1994). The success of both approaches suggests that they might be productively conjoined to further reveal the nuances of interorganizational relations. Such knowledge will be especially important in relations in which exit is difficult and costly as is often the case with outside investment.
In summary, this study demonstrated that the manner in which entrepreneurs share information with and are influenced by advice from investors has a significant impact on both the quality of investor-entrepreneur relations and investors' propensity to monitor and invest in the venture. These findings highlight the importance of social relations to the venture building process and the usefulness of procedural justice theory in understanding the establishment of desired relations.
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