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Studies based on longitudinal data have been far to rare in the management literature, particularly when a question cannot be studied with archival data. With regard to learning theory and procedural justice, this study provides a rare longitudinal look at these theories in the VC-NVT context. Significant support was found for procedural justice theory. When NVTs perceive that they are being treated fairly by their VCs, the probability of an unsuccessful closure to the venture is significantly reduced.

As for learning assistance, anecdotal evidence indicates that VCs do indeed add value. However, cross-sectional results probing the value-added component of VC involvement have been mixed (e.g., Gomez-Mejia et al., 1990; MacMillan et al., 1989; Sapienza, 1992). Unfortunately, prior research has done little to determine if VC involvement in the post first round funding era actually adds value to the ventures in which they invest. Steier and Greenwood's (1995) in-depth case study is an exception to the cross-sectional trend, but they found that VCs sometimes hinder the development of the venture. The present study also took a longitudinal approach and failed to find consistent support for VCs adding value based on the advice and assistance received by entrepreneurs from VCs in the 196 firms we studied. The findings hold even after controlling for the size of the VC firms. While the relationship may be positive, such input received by NVTs apparently does not significantly impact the long term status of the venture.

However, these results should not be taken as definitive evidence of the learning assistance offered by VCs. It may be that VCs add value in other ways such as by their financial advice. Future research should also consider investigating other distinguishing characteristics of VC firms and the differential impact they may have on the ventures they fund. For example, VCs may vary by the type of VC firm they are, their own experience, the amount of non-financial expertise they have at their disposal, or in the way which they communicate their knowledge.

One of the most surprising findings of this study is the negative impact that dismissal has on long-term venture outcomes. This finding is counter to what agency theory would predict and what is commonly found in large firms following dismissal of top management team members. Thus, we infer that agency problems are not normal reasons for dismissal. Given the critical juncture these VC-backed, high growth potential firms are typically at, it may be that the disruption of a NVT dismissal is so great on the venture that it overwhelms other effects and adversely impacts overall venture performance. Also, these findings suggest that the dismissal of NVT members does not speak well for this type of VC intervention (Rosenstein, 1988). In addition they further underscore the importance of VCs funding top quality NVTs (MacMillan, Zemann & SubbaNarisimha, 1985). Attempts to fix NVTs in the post-funding era appear to rarely work.

Finally, this study found solid support for the positive effects of a sense of fairness within the VC-NVT team relationship. It is apparent that ventures perform better when the venture managers feel as thought their VC(s) support and trust them. We suspect that when the VC-NVT relationship is characterized by a sense of fairness, they are better able to adapt to their problems. This finding also provides the first known support for the positive relationship between procedural justice and organizational performance.

It may also be that VCs add value in other ways such as through their involvement in financial affairs. For example, VC investments in firms in the post IPO era have been found to send a positive signal regarding the quality of the firm (Lam, 1991; Barry et al., 1990). Future research should explicitly investigate financial assistance such as financial analysis, the timing of staged funding, and assistance in attracting other types of financing that VCs offer after first-round financing. In other words, it may be that VCs should stick closer to their knitting.

This research also has practical implications for entrepreneurs because they need to know if VC advice should be closely followed. If it does not add value, then it may be more appropriate for them to rely upon professional consultants when they need assistance or to develop their own expertise, capabilities and resources. VCs on average spend about half their time monitoring their investment portfolio (Gorman and Sahlman, 1989). Given the amount of time they spend, they need to know if their investment of time is worth the effort. These data indicate that, on average, VCs do not add much in the way of value via their non-financial contributions to the ventures they fund. However, it should also be noted that these findings do not preclude VCs from adding value. It is entirely possible that the non-financial contributions from VCs may be a major way for some VCs to differentiate themselves from their competitors (Barney, 1991; Sapienza, 1992). This would be consistent with those who have noted that the top 20 VC firms do add value.

MacMillan et al. (1989) noted that, in hindsight, VCs sometimes wished they would have spent more time on such issues as formulating strategy or marketing plans, and serving as a sounding board to the entrepreneur. However, the results reported in this study indicate that, on average, VCs do not increase the probability of venture success by their operational assistance and business management advice. Perhaps VCs would better there own cause by spending more time picking the best ventures to fund and concentrating on the financial aspects of the venture.

Given this study's findings regarding dismissal and procedural justice, it is becoming increasingly apparent that VCs should only fund NVTs in which they can place their confidence. Funding a venture and then afterwards attempting to correct perceived management problems does not apparently work very well. The overall findings of this study suggest that VCs need to largely let the NVTs take care of the business and operational side of the venture and that VCs should generally not tamper with the makeup of the NVT. Furthermore, those NVT teams that feel fairly treated and trusted on average perform better.


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