CONCLUSIONS AND IMPLICATIONS

These results provide initial empirical validation to a model that many risk investors would label as highly intuitive. When assessing changes in levels of risk associated with a new venture over the first round of VC funding, the VCs utilize multiple dimensions of potential risk and reflect on the full range of experiences they have had with the NVT. At this early stage, evaluation of changes in risk appears more complex than simple monitoring of levels attained on one or two key performance measures. Information on the quality of such performance measures and their ability to forecast longer-term trends is needed by VCs. We conclude that scholars need to take a holistic view of contracting in risk-filled environments. Ongoing performance outcomes, reactions by the NVT to each type of VC assistance, and the distinct forms of fairness reactions of the NVT to the interaction process with the VCs all appear to be closely interwoven in impacting the VCs’ perceived riskiness of further reinvestment in a venture. The nature of the interdependence of these factors in influencing the change in the risk perception of the VCs suggests that all three factors need to be understood jointly. High procedural justice reactions by the NVT to VCs, reflecting a sound and open relationship between these parties, sets the primary context for VCs to be willing to provide active assistance to the NVT but does not guarantee high levels of assistance. High assistance will tend to occur when procedural justice perceptions are high and when above average performance level benefits coincides with such assistance. Another way to view the same phenomenon is that VCs use subjective information gained through interactions in the VC-NVT relationship to help themselves assess the quality of the performance information of the new venture. Where NVT reactions to differing types of VC assistance are positive and the NVT visibly perceives different aspects of the VC-NVT relationship to be procedurally fair, VCs are likely to place more confidence in the value of performance information flowing from the venture.

This research has potential implications for the NVT as well. NVTs seeking first round funding are wise to openly explore the nature of the assistance approach desired by the VCs as well as the range of interaction approaches which these investors have utilized with other venture firms. This should help reinforce the need for mutual flexibility in the working relationship to adapt to unanticipated changes in venture context. Such a realistic preview of involvement philosophies of the VCs should assist the NVT in better tracking their investment partners' signals of risk perception change. Rather than waiting until reinvestment decisions are finalized by VCs or formal accounting figures are derived for the period, members of the NVT can be recognizing and influencing risk perceptions of VCs through all aspects of their working relationships with VCs. Each interaction is a mutual learning opportunity. Even with below average performance, VCs may lower risk perceptions if the VCs-NVT relationship features open and honest communication.

 

 

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Last Updated 4/5/97 by Cheryl Ann Lopez

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