The impact of perceived unethical behaviour on conflicts between entrepreneurs and investors

This paper* examines the impact of perceived unethical behaviour by entrepreneurs, angel investors and venture capitalists on their conflict process.

Business angel and venture capital investments are the life-blood of entrepreneurial ventures – so ongoing cooperative relationships between investors and entrepreneurs are highly desirable. However, previous research indicates that investor-entrepreneur conflicts are rather common and that cooperation is far from self-evident.
Using 11 case studies, authors Veroniek Collewaert (Maastricht University) and Yves Fassin (Ghent University and Vlerick Leuven Gent Management School) have analysed conflict situations and the perception of unethical behaviour by the different parties involved.

The perception of unethical behaviour in conflict situations between venture capitalists, business angels and entrepreneurs increases the likelihood of conflict escalation, which can bring the collaboration – and, in many cases, the venture – to an end.

Noted examples of perceived unethical behaviour include: perceived unfair competition (when entrepreneurs feel unfairly treated by VCs investing in competitors without informing them, or when (other) investors try to sidestep the entrepreneurs and angel investors) and perceived unfair communication (when parties provide overly optimistic information or withhold crucial information for reasons of hidden agenda). The authors also provide examples of situations of power abuse, parties privileging their own interests, and outright fraud.

The role of ethical issues in conflicts

The authors propose a model to help highlight the effects of conflict on investor-entrepreneur partnerships and the role of perceived unethical behaviour in conflict emergence, conflict management and conflict escalation between angel investors, venture capitalists and entrepreneurs.
The study’s key finding is that the perception of unethical behaviour in conflict situations between venture capitalists, business angels and entrepreneurs increases the likelihood of conflict escalation, which can result in the end of the collaboration – and, in many cases, the termination of the venture.
The authors conclude that venture capitalists, business angels and entrepreneurs should enforce the application of their codes of conduct and ameliorate governance and fair play in their interactions.

* “Conflicts between entrepreneurs and investors: the impact of perceived unethical behavior” by Veroniek Collewaert (Maastricht Centre for Entrepreneurship, Maastricht University; and Vlerick Leuven Gent Management School as of 1 September 2012) and Yves Fassin (Department of Management, Innovation and Entrepreneurship, Ghent University; and Vlerick Leuven Gent Management School).

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