Gordon Smith and Annaleena Parhankangas
Over the past two decades, substantial research has documented the myriad ways in which entrepreneurs and venture capitalists work cooperatively to create value The need for cooperation, however, also produces the potential for conflict, which in turn encourages entrepreneurs and venture capitalists to seek mechanisms for managing conflict. Efforts to understand conflict management in the venture capital context are limited, focusing largely on the contractual framework erected at the time of investment. Moreover, most studies view the issue exclusively through the lens of agency costs, defining the problem in a way that focuses on how venture capitalists control entrepreneurs. In this study, we are striving for a broader view of conflict management in the entrepreneur-venture capitalist relationship by considering the interaction of legal, social, cultural, and economic incentives that regulate the relationship for the benefit of both parties.
Our principal objectives are to identify strategies used by entrepreneurs and venture capitalists for dealing with tension in their relationship, and to describe how the various mechanisms for managing conflict interact to protect the interests of each side. In addition, we investigate the nature and the sources of differences in conflict management strategies between the United States and Finland.
We adopt a case study research design to provide the rich set of data necessary to capture the interaction of various conflict management mechanisms. We have selected four venture-backed firms —- two in the United States and two in Finland—as subjects for the case studies.
This study illuminates the antecedents and the outcomes of a set of legal and non-legal conflict management mechanisms employed by entrepreneurs and venture capitalists. Differences in the mix of mechanisms employed by the participants may be understandable by various contextual factors, such as the level of uncertainty concerning the outcome of the venture or differences in culture and legal systems. From the practical point of view, insights into conflict management in this setting could lead directly to improved relations between entrepreneurs and venture capitalists, with obvious benefits to the venture.
[click here for the abstract at Babson College]
Gordon Smith and Annaleena Parhankangas, "Conflict Management in the Entrepreneur-Venture Capitalist Relationship: An International Comparative Study", Proceedings of the 20th Annual Entrepreneurship Research Conference, (2000), Babson College.
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