ZHANG Wei and Steven White

How Venture Capitalists Foster or Destroy Relational Rents: The Entrepreneur's Perspective

ZHANG Wei and Steven White

Abstract:
objective of this study was to gain a deeper understanding of the dynamics that drive the creation or destruction of relational rents as venture capitalists and entrepreneurs interact in pursuit of a venture’s performance. Unlike prior empirical work that relies primarily on constructs borrowed from other contexts and correlational methods to test relationships among variables, we used a causal mapping methodology to generate variables grounded in the entrepreneur-VC relationship context and link them using causal loop diagrams. We find honest and frank communication—fundamental to generating relational rents—to be central in this model, related in positive feedback loops with three affect variables: the entrepreneur’s perception of the VC’s intentions, fairness, and respect.  These, in turn, are strongly and negatively impacted by two behaviors that are typical governance mechanisms: the VC’s involvement in management and the VC’s use of the contract to resolve disputes.   As a whole, the system model provides insights into how entrepreneurs may interpret venture capitalist behaviors and how the feedback loops can generate positive or negative relationship spirals.  We extend our findings to suggest that successfully generating relational rents could have significant value for a VC beyond the focal investment or knowledge creation, in the form of goodwill represented by positive reputation, referrals and other discretionary behaviors by the entrepreneur.