Conflict is not always bad. It’s not always good either.
Research literature is awash with studies that describe how angel investors are involved in their portfolio ventures and the various value-adding roles they take on. But how the very nature of their involvement actually influences ventures’ performance, particularly their innovativeness, has so far not been addressed. A research paper by Vlerick professor Veroniek Collewaert and Harry J. Sapienza, professor at the Carlson School of Management, fills this gap. It examines how task conflicts between angel investors and entrepreneurs are related to the innovativeness of the portfolio companies in question and how this relationship is moderated by the level of agreement on priorities, diversity of entrepreneurial experience, and communication frequency.
Innovation and conflict
Why this focus on innovativeness and conflict? “Research has shown that the performance of high-potential ventures is greatly determined by their innovation and innovativeness and that angel financing helps ventures to achieve higher innovation levels,” Veroniek says. “But exactly how angels and entrepreneurs work together to foster innovativeness is not yet known.”
As for the role of conflict: usually a distinction is made between task conflict – arguments about who should do what and how – and relationship conflict – interpersonal or emotional conflict. Prior research by, among others, Veroniek, has argued that conflicts are inherent to the daily functioning of investor-entrepreneur teams. Their effects, however, are more controversial. Veroniek: “So, we assumed that whether or not and how much conflicts between angels and entrepreneurs disrupt innovation depends on the circumstances surrounding these conflicts.”
Therefore they set out to investigate the impact of task conflict on a venture’s innovation, but also the potentially moderating effect of three factors that characterise the circumstances of the conflict.
Task conflict has a moderate negative effect
They expected to find a direct negative effect of task conflict on venture innovation. “Most studies agree that relationship conflict is detrimental, but research on the effect of task conflict so far had not been conclusive. Some have argued that task conflicts, by increasing information sharing, lead to new and insightful ideas and may therefore be beneficial,” explains Veroniek. “But we assumed that, on balance, task conflict would do more harm than good. After all, the innovation process requires resources, freedom, and coordination of thought and the delays and misdirection resulting from disagreements over who should do what and how would disrupt this process. Our results showed a negative, though not significant, effect on innovativeness. But this still suggests that in entrepreneurial settings, requiring both speed and coordination, the negatives of task conflict may outweigh the benefits.”
Low priority agreement exacerbates the effect of task conflict
Analysis of the results revealed that when there is a high level of agreement on priorities between angel investors and entrepreneurs, task conflict does not affect innovativeness. When there is a low level of agreement, however, increases in task conflict are associated with significant decreases in innovativeness. Veroniek: “So, we observed that when priority agreement is low, task conflict is an increasingly negative force.”
The composition of venture teams may alter how they function
As expected, marked differences in entrepreneurial experience in investor-entrepreneur teams were found to have a moderating effect on task conflicts. “Our reasoning was that the hierarchy or authority implicit in these differences in entrepreneurial experience would work as a mechanism to resolve disputes more quickly,” Veroniek explains. “Our results indicate that when there is only little diversity of experience, increases in task conflict are associated with increasingly negative innovation outcomes. But when there is high diversity, meaning someone on the team clearly outranks all others in terms of entrepreneurial experience, innovativeness is unaffected or even slightly improved by increases in task conflict.” She adds: “Put in a broader perspective, these findings confirm the thesis that group diversity serves as a conflict moderator. And we’ve also shown that a flat organisation structure is not always superior (smiles).”
Frequent communication can have its downsides
Finally, the results of this study indicate that in low communication teams, increases in task conflict correspond with increases in innovativeness, whereas in high communication teams, these are associated with ever-decreasing levels of innovativeness. “In the literature frequent communication is generally considered an unqualified positive,” says Veroniek. “But our results reveal that there may be downsides to frequent communication as well. Still, one shouldn’t expect conflicts to resolve themselves without team members talking to each other.”
As well as contributing to the existing literature on investor involvement and conflict, the findings of this study can be readily translated into practical advice for both angel investors and entrepreneurs:
- Make sure your priorities are aligned. Take sufficient time to agree on priorities before finalising the deal.
- Don’t be afraid of an experience gap. Prior to investment, seek out either an angel or an entrepreneur who outranks the others in terms of his or her entrepreneurial experience to serve as the decision-making authority.
- As soon as you begin to experience significantly different views about how to proceed, try to find ways to sort through task-related disputes by working independently (e.g. using Delphi or nominal group techniques) with less frequent direct exchange or contention of ideas. This way you avoid the negative effects associated with frequent communication, i.e. the vicious circle of discussions prompting ever more discussion.
Harmony as well as direction
In conclusion, Veroniek compares successful angel-entrepreneur teams to well-honed orchestras: “Venture teams must be in sync with one another, like a finely-tuned orchestra. Yet there must be a conductor or coordinator. Someone must take the lead in deciding when to change, when to persist, and when to desist.”
Ventures teams from Belgium and the USA
Primary data for this study were collected through questionnaires from ventures in Belgium and California (USA) that had
(1) at least one angel investor actively involved in strategic decision-making or on the Board of Directors; and
(2) received angel financing more than one year and less than five years before data collection.
Angel investors were defined as external individual investors who invest some of their own wealth in unlisted companies in exchange for shares and who have no family or friend connection to the entrepreneurs with the venture team being defined as those entrepreneurs and angel investors who, at the time of the study, had an equity stake and were actively involved or played a key role in the venture’s strategic decision-making.
The final sample included those eligible ventures from which completed questionnaires were received from at least (1) 50% of the venture team, (2) one angle investor and (3) one entrepreneur. These additional criteria resulted in a final sample of 54 ventures (28 from Belgium and 26 from the USA) and 137 venture team members. The reason for sampling at two different locations was twofold, as Veroniek explains: “First, given our strict selection criteria, we found that one setting alone would not yield a sample large enough for some statistical tests. And second, choosing two very different settings allowed us to understand the role of the specific context in interpreting our data and results as well as providing some insight into the generalizability of our theorising.”
Source: The full paper ‘How Does Angel Investor–Entrepreneur Conflict Affect Venture Innovation? It Depends’ was published in Entrepreneurship Theory and Practice, 2014. A version can be obtained from the authors.
About the authors
Veroniek Collewaert is Associate Professor of Entrepreneurship at Vlerick. Harry J. Sapienza is a Curtis L. Carlson Chair in Entrepreneurship, Strategic Management and Entrepreneurship in the Carlson School of Management at the University of Minnesota (USA).