Entrepreneur–venture capitalist relationships: mitigating post-investment dyadic tensions

Abstract

This paper addresses the notion of goal alignment in venture-backed firms. Aligning the goals of entrepreneurs to VCs" goals, and vice versa, may be the first step towards building strong mutual relationships between the two. Yet, little is know about the long-term outcomes of the aspects of these relationships as the literature todate has considered to a great extent the relationship between VC and entrepreneur as a "black box". This paper makes an attempt to half-open this "black box" by exploring the dyadic tensions between VCs and entrepreneurs in the course of de-internationalisation that is perceived as a negative deviation from what is normal or expected. The data emerged from a case study research that used critical incident technique to data collection, analysis, and interpretation. Grounded in data, the paper proposes the typology of goal alignment that was generated by crosstabulating entrepreneurs" and VCs" agendas. Four types of alignment emerged: life changing opportunity, enslavement, no marriage, and illusive alignment. The concept of goal alignment is unidirectional; it is geared towards the VCs" agenda of a quick exit.

Divergent views of venture capitalists and entrepreneurs on strategic change in new ventures

“…Th e dyadic tensions between VCs and entrepreneurs tend to a unidirectional alignment; they are geared towards the VC's agenda of a quick exit (Turcan, 2008). Th us, in venture-capital backed fi rms, the diff erent attitudes of entrepreneurs and VCs have the potential for confl ict of interest (Cable and Shane, 1997).…”

“…Th us, in venture-capital backed fi rms, the diff erent attitudes of entrepreneurs and VCs have the potential for confl ict of interest (Cable and Shane, 1997). While the literature to date has considered the relationship between VCs and entrepreneurs as a 'black box' (Turcan, 2008), an empirical testing of the relationships between these groups has practical importance and is likely to make a contribution (Shepherd and Zacharakis, 2001).…”

International New Venture Legitimation: An Exploratory Study

“…This could be achieved, inter alia, by registering a legal entity, establishing an office, hiring employees, developing internal policy and operating procedures (including incentives mechanisms), fostering business education among entrepreneur-owners and top management, and completing a business plan [9]. Given that these INVs emerge in an uncertain environment (quadrant I, Figure 1), the key challenge entrepreneurs face in this endeavor is to set up and commit to long-term outcome goals, respectively, and to develop performance benchmarks that, however, may lead to goal misalignment between entrepreneurs and their backers [51,63]. Entrepreneurs may mitigate such issues in uncertain decision-making settings by developing and pursuing just procedures that are valued by VCs and other key stakeholders that are associated with long-term venture performance [64,65].…”

“…In such uncertain decision-making settings, values and norms, and binding expectations are also in the process of emergence, and entrepreneurs and their key stakeholders (e.g., VCs) learn as they go. Moreover, such an emerging environment dominated by information asymmetry is conducive to mistrust and goal misalignment between entrepreneurs and VCs [51]. Having the right management team becomes critical to the success of the venture, as the venture capitalist reiterated: -In the round one VCs are looking for pre-product; round two is the product, and some reference customers; round three is you've got revenue of millions of pounds.…”

“…This is due to the fact that decisions related to starting an INV, or investing in such a venture, were made under conditions of technology and market uncertainty, that is, when the possible outcomes of such decisions and the probability of those outcomes were unknown [23], and market signals were not reliable [24][25][26]. Such uncertain decision-making settings have a snowball, most of the time negative, effect on the process of developing congruence between entrepreneurs' and new business partners' goals [51]. This is how entrepreneurs described their experiences in the pursuit of market legitimacy: gut feeling, loss of control, loss of agility, stifle the growth, imposed their agenda [of rapid internationalization] on us, possible collision between advisors and investors, to name a few.…”