Responses to Psychological Contract Violations in the Venture Capitalist-Entrepreneur Relationship: An Exploratory Study

Abstract

The purpose of our paper is to describe venture capitalists’ responses to psychological contract violations in their relationship with entrepreneurs. In addition, we seek to establish a link between the characteristics of a psychological contract violation and the venture capitalist’s behavior. We are concerned with three forms of psychological contract violations: (i) a disagreement over the goals or strategies of a portfolio company, (ii) incompetence of the entrepreneur, and (iii) shirking and opportunistic behavior of the entrepreneur. Our results show that venture capitalists prefer active behaviors to passive approaches. Also, voluntariness of the psychological contract violation, possibilities to improve the impaired relationship, and the performance implications for the portfolio company play a key role in determining the venture capitalist’s reaction.

Keywords: Entrepreneurship

JEL Classification: M13