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Business Management Advice

Business management advice concerns VC recommendations about a venture's direction. The most common form concerns strategic issues (Perry, 1988; Ehrlich et al, 1994). In their treatment of VC involvement, Gorman and Sahlman (1989) found the most prevalent types of advice concern financial and/or strategic planning issues. Fiet (1995) reported that investors typically focus on those issues that they think pose the greatest risks to them. It may also involve policy direction, or management team advice to resolve inter-organizational conflict. It focuses on positioning the venture to compete based upon its competitive strengths (Barney, 1991).

Sapienza (1992) reported that new venture managers often rely upon their VCs as sounding boards when they make key decisions. VCs are very willing to act as sounding boards because they are convinced that their advice can improve a venture's long-term performance, and in hindsight, often wish that they could have provided more input (MacMillan et al, 1989). To the extent that VC advice is useful in helping a venture to compete where it enjoys a
competitive advantage, we would expect that it would improve long-term venture performance, which leads to the next hypothesis:

H2: Business management advice received by the NVT from their VCs will be positively related to long-term venture performance.

New Venture Team Dismissals

Agency theory examines relationships between those with authority over resources (principals) and those to whom operational control of these resources is delegated (agents) by viewing the relationship as an economic contract. Agency theory has been used to explore a variety of phenomena including entrepreneurship related issues in the VC/NVT relationship (Fiet, 1995; Fiet, Busenitz, Moesel, & Barney, in press). After first round funding, the agency problem facing VCs becomes one of moral hazard. This implies that the system of monitoring and incentives put into place by the principal to govern the agent will determine the degree of effort and the amount of opportunistic behavior which the average manager will exhibit. This approach assumes that even the most honest and nonopportunistic managers are likely to exhibit greater effort and more effective behavior under some governance systems than under others. More effective combinations of incentives and monitoring should result in greater effort and less tendency toward opportunism by the entrepreneur.

Because of the need to separate out more competent members of the managerial team from less competent members to preserve the long-term viability of the venture, the ability of board outsiders to quickly detect a relative performance problem and then to act quickly on this information to try to discern the relative competence of each venture team member for his/her respective role is critical to the long-term exit options that will be available to the financier. The chief tool available to the entrepreneurial firm board in this process is the threat of dismissal (Rosenstein, 1988; Rosenstein et al., 1993). The involuntary replacement of one or more members of the NVT serves to signal the board's best judgment to stakeholders concerning the root cause of the performance problems facing the firm and provides clear evidence of action expected to provide some immediate remedy. It also signals to the surviving NVT members that the negative personal wealth effects they have been experiencing may soon be reversed, hopefully resulting in the retaining of the most competent members of the team.

In summary, a pure agency theory approach would predict that dismissal should be a powerful and effective tool for selective use by outside board members, such as the representatives of VCs placed on the board at the time of first round funding, to preserve and extend the value initially perceived in a new venture concept beyond the limitations of the initial NVT. We adopt this agency argument here-that financier exit outcomes are actually enhanced by the presence of dismissals arising from the active intervention of effective monitors. This suggests that dismissals brought about by credible and reputable fiduciaries such as VCs are a positive signal that the venture is headed in the right direction. Although this is a very conservative test of the value of VC involvement, supportive results would provide powerful
evidence of the benefits of VC intervention.

H3: Dismissal of one or more new venture management team members by the VCs funding the new venture will be positively related to financier exit outcome attractiveness.

Effects of Fairness in the VCs-NVT Relationship

Initial research in the VC-NVT relationship tended to focus on content aspects of the relationship such as the time commitment and forms of involvement of the VCs in the venture (Ehrlich, DeNoble, Moore, & Weaver, 1994). More recently, research has focused on the key aspects of the process of the relationship such as the learning processes involved (Barney, Busenitz, Fiet, & Moesel, 1996) and the perceived fairness of joint decision making and conflict resolution processes (Sapienza & Korsgaard, 1994; Busenitz, Moesel, Fiet, & Barney, in press). Indications are that how the relationship is perceived to be progressing may be as important as the actual resources and information that flows between VCs and the NVT.

One of the theoretical frameworks that appears to hold the most promise in the study of key processes that form the basis for relationships is called procedural justice theory (Greenberg, 1990). This theoretical approach can be further divided into two areas. First, the proactive process approach to organizational justice emphasizes how policies and procedures are defined as being fair or just. From this perspective, Busenitz et al., (in press) found that initial contractual terms (earnout arrangements) and the nature of past NVT member experiences impacted perceptions of fairness by the NVT to their VCs. Sapienza and Korsgaard (1994) also found that the influence in decisions made by the owners and the timeliness of feedback from owners were jointly important in determining justice judgments.

The second approach is referred to as the reactive process approach, which focuses on reactions to the perceived fairness of policies and procedures used to structure a relationship (Greenberg, 1990). In support of this approach, Moesel, Fiet, Busenitz, and Barney (1996) found that procedural justice perceptions, learning assistance, and early venture performance were all three jointly influential in predicting the change in average investment per VC firm, the operationalization used to tap the change in VC risk perception construct.

While some evidence is emerging for the efficacy of procedural justice in the VC-NVT relationship, further empirical support is needed to establish the longer-term implications, if any, of fairness perceptions. This study proposes a test of this type. The primary reasons to anticipate positive long-term benefits for the venture are motivational in character. That is, the perceptions of the NVT that the VCs, including those that are limited partners, are acting fairly. Feelings of satisfaction, trust, respect, friendship and commitment to the VCs are likely to arise from fairness perceptions and will in turn lead to greater effort by the NVT to share information with the VCs and to solve problems. Fairness perceptions are expected to increase satisfaction of the NVT with the relationship. Greater satisfaction with VCs is likely to increase the spontaneity and adaptability of the relationship through contextual changes for the venture that can either be viewed as opportunities or as threats.

H4: Fair treatment of new venture management team members by their VCs will be positively related to financier exit outcome attractiveness.

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