Reciprocity and interorganizational governance—A multicase analysis of exchange systems

Scandinavian Journal of Management (2010) 26, 134—150

a v a i l a b l e a t w w w. s c i e n c e d i r e c t . c o m

j o u r n a l h o m e p a g e : h t t p : / / w w w. e l s e v i e r. c o m / l o c a t e / s c a m a n

Reciprocity and interorganizational governance–—A multicase analysis of exchange systems ¨bel b Christiana Weber a,*, Markus Go a b

University, Hamburg, Von Melle Park 5-9, 20146 Hamburg, Germany Hochschule Fresenius — University of Applied Sciences, Hamburg, Alte Rabenstraße 1, 20146 Hamburg, Germany

KEYWORDS Reciprocity; Governance; Multicase analysis; Neo institutionalism; Exchange theories; Venture capital

Summary Exchange is regarded as the fundamental activity in every economic context. Seeking a, theoretical conceptualization of interorganizational exchange, we conduct interpretative analysis of, venture capital organizations in Germany and their portfolio companies to develop an exchangerelated, perspective centered on reciprocity in interorganizational relations. We identify two types of, exchange–—economic exchange reciprocity and social obligation reciprocity which differ, considerably in their exchange cultures, modes, structures, and resources. The theoretical perspective, might help make the rediscovered concept of reciprocity useful in other organizational and, interorganizational relations. # 2010 Elsevier Ltd. All rights reserved.

Reciprocity is a norm of action fundamental to all social orders. According to modern management research, it operates not only in emerging social systems but also in organized ones. Numerous studies on the function of psychological contracts, organizational citizenship behavior (OCB), joint ventures, and corporate networks show that reciprocity plays a key role as a control mechanism in both intra- and interorganizational interaction (Dabos & Rousseau, 2004; Larson, 1992; Muthusamy & White, 2005; Robinson & Morrison, 1995). Yet despite this relevance, the attention that reciprocity has received in current management research has been predominantly from the perspective of economic theory. Generally, reciprocity is equated with individualistic and utility-maximizing exchange (Go ¨bel, Ortmann, & Weber, 2007). This tendency is particularly evident in the purely financially driven finance sector, a prime example of the neoclassical market model. The sector of venture capital is one such case. Venture capitalists (VCs) provide their portfolio

* Corresponding author. Tel.: +49 172 3831409. E-mail addresses: [email protected] (C. Weber), [email protected] (M. Go ¨bel).

companies (PCs) not only equity financing but also specialized knowledge, experience, and social capital (networks). In return, the VCs receive a share of the new venture, acquiring the potential for extraordinary profit increase that they can influence, depending on their particular added value.1 It is on this basis that the entrepreneur tries to increase the value of the new venture, whose financial success is ultimately intended to benefit both parties. Because the underlying interaction in these instances is usually interpreted as utility-driven exchange, agency theory and game theory usually figure in their analysis. Agency theoreticians focus on the potential risks that incomplete contracts with the utilitymaximizing PC entail for the investing VC. Agency theorists have therefore been a source of useful guidance on shaping

1

The capital to be distributed is collected by VCs on the capital market of institutional investors, who likewise seek above-average returns. For this service, the VCs receive from the capital-supplying institutions negotiated compensation consisting of a fixed management fee and a variable cut of the earnings. The crux of the VC relationship is thus the market exchange that is controlled by a price system through the monetary governance of the resources invested.

0956-5221/$ — see front matter # 2010 Elsevier Ltd. All rights reserved. doi:10.1016/j.scaman.2010.01.004

Reciprocity and interorganizational governance agreements (Sahlman, 1990) and implementing control mechanisms (Sheperd & Zacharakis, 2001). As with agency theory, game theory concentrates on the relevance that norms of fairness have in forging cooperative relations (Kondo, 1990). By framing fairness as relevant to shaping such cooperative interaction, game theory expands agency theory, which centers rigidly on reducing the danger of opportunism. Although game theory, too, is a variant of rational choice theory, it integrates ‘‘the dynamic process of cooperative relationship building in a way that the more static agency theory approach cannot’’ (Cable & Shane, 1997:147). Game theory emphasizes on the relevance that communication, social relations, value congruency, generosity, power relations, and other aspects have in the inception and stability of VC—PC relations. It attempts to cast light on the social conditions of utilitarian cooperative relations (e.g., Nalebuff & Brandenburger, 1996). This approach has two serious flaws in its analysis of actual exchange relations. First, the axiomatic assumption that action is rooted in benefit-oriented motives seems unduly narrow for real exchange processes. Empirical studies on interorganizational cooperative relations show that moral motives also always underlie the behavior of parties to an exchange (e.g., Browning, Bayer, & Shetler, 1995; Larson, 1992; Muthusamy & White, 2005).2 Second, the axiomatic assumption that real exchange processes are a product of unambiguous information or valid signals seems illusory. Game theorists stress that the ‘‘noisier’’ the environment is, the more uncertain and contradictory the signals in exchange relationships are (Bendor, Kramer & Stout, 1991; Wu & Axelrod, 1995). In the absence of clear signals about likely action strategies, the exchange parties use ‘‘preexisting theories or stereotypes about the other party’’ (Bendor et al., 1991:715). In terms of the interpretive connectability between information and signals, this view means that the parties to the exchange are simply required to have a common understanding and interpretation of the situation, the respective roles, the motives, and alternatives for action. With this shortcoming in mind, we treat the key question of how reciprocal behavior in interorganizational exchange systems — particularly those of the venture capital industry — is linked with the governance functions of institutional (i.e., symbolic and moral) contextual conditions. Following Powell (1990),3 we tap into the institutionalist side of thought about

2

Speaking of exchange processes in networks, Powell (1990) refers to Mauss (1967), pointing out ‘‘that the obligation to give, to receive, and to return was not to be understood simply with respect to rational calculations, but fundamentally in terms of underlying cultural tenets that provide objects with their meaning and significance, and provide a basis for understanding the implications of their passage from one person to another’’ (Powell, 1990:305). 3 Embracing a collectivist tradition of exchange, anthropologists Malinowski (1922) and Mauss (1967) reject the idea that utilitarian motives are the only significant reason for social exchange. They emphasize instead the function of social exchange in building collective solidarity. In Mauss’s analysis the theoretical focus is thus on the morality particular to gift-exchange systems, which builds solidarity and lends stability to those systems (Le ´vi-Strauss, 1969; Mauss, 1967). With respect to the functionality of gift systems, Mauss underlines the interaction between individual motives and sociocultural context.

135 reciprocity in interaction relations, which has largely vanished from public discussion, and we base our approach on Mauss’s (1967) understanding of reciprocity. We attempt to reveal and discuss the prerequisites of the VC—PC relationship by describing the cultural and normative dimensions that shape it. Contravening the assumptions of the previous economic theories on this subject mentioned above, we find that the VC—PC relationship proves to have no underlying unified system of cultural symbols and standards. Starting from different macrocultures,4 different modes, structures, and resources of exchange seem to form and then give rise to various types of exchange. We address the following four research questions to elucidate the nature and effects of contractual conditions: 1. In which sociocultural context do exchange processes between VCs and PCs occur? 2. What effects does this context have on the behavior or motives of the exchange parties? 3. Beyond those individualistic and benefit-maximizing motives predominantly described in the economic literature, are there any ‘‘pro-social’’ (Bowles & Gintis, 1998:3) and moral motives for action that determine the actors’ behavior within the exchange relationship? If so, what are they? 4. Can different types of exchange be inferred from the interactions we have empirically observed? The answers to these questions not only challenge the literature’s preoccupation with interorganizational interactions by questioning the dominant application of economic approaches. They also permit a more nuanced perspective on the VC—PC relation and an insight into the actors’ contextually shaped motives for action. Our study contributes to research in three ways: 1. It expands the VC literature by moving the theoretical discussion of microlevel VC—PC dyads beyond the narrow confines of economics. It introduces institutionalist argumentation that empirically explains the importance of sociocultural conditions shaping VC— PC dyads. 2. It enriches the research on reciprocity in interorganizational relations by complementing the dominant, disembedded view of rational choice theory. This completion is carried out by drawing on institutional logics focusing on an additional type of theoretical exchange not previously depicted in this manner, one that goes beyond the behavior of mere exchange and utility maximization. We develop an independent theoretical position on reciprocity in exchange relations. 3. It adds to current discussion about the action perspective in institutionalist theory by describing the relevance that individual actions have on the modification and persistence of institutional settings and by explaining how the actors reproduce or change their sociocultural institutions through mutual interaction.

4

In line with Jones et al. (1997:929) we define macroculture as ‘‘a system of widely shared assumptions and values, comprising industry-specific, occupational, or professional knowledge, that guide actions and create typical behaviour patterns among independent entities’’.

136 To place the VC—PC exchange relation into a sociocultural context, we first briefly describe our study’s theoretical neoinstitutional underpinnings then present our data base, methodology, and results. Using a multicase analysis, we derive two dominant VC—PC types of exchange, ‘‘economic exchange reciprocity’’ and ‘‘social obligation reciprocity,’’ from categories empirically generated by our grounded theory analysis. These results are summarized and interpreted in the subsequent discussion. We conclude with a few implications that our results have for further research, theory development, and practice.

Theoretical overview This study focuses on the interdependencies of individual motives for action and on the sociocultural context of action. It therefore builds on institutionalist studies addressing the question of agency in institutional contexts (see especially Friedland & Alford, 1991; Swidler, 1986; Thornton, 2002, 2004) to develop a model of organizations, decisions, and action that articulates the mechanisms connecting the decisions of actors inside organizations to cultural beliefs in contexts outside organizations. According to game theory, exchange partners lacking clear signals about each other’s strategy base their actions on ‘‘preexisting theories or stereotypes about the other party’’ (Bendor et al., 1991:715). These cognitive schemata ultimately serve to organize and focus attention; they are both informationprocessing mechanisms and representations of new and old knowledge (March & Olsen, 1976; Simon, 1947). They enable the actors to make decisions in a complex world. Recent research has found that variations in cognitive schemata are historically and culturally contingent (Thornton, 2004). As noted above, the second focus of this study is the sociocultural background of cognitive schemata. Institutions that affect the decision-making and behavior of persons and organizations are embedded in a superordinate social order (Friedland & Alford, 1991). Within that order, individuals, organizations, and society constitute three levels at which institutions determine progressively higher levels of opportunity for and constraint on the action of the individual. The main institutional domains of society — the family, religion, the professions, the state, the corporation, and the market — provide a distinct set of conflicting or complementary logics. According to Thornton (2002, 2004) and Friedland and Alford (1991), institutional logics are both material and symbolic: ‘‘Institutional logics define the norms, values, and beliefs that structure the cognition of actors in organizations and provide a collective understanding of how strategic interests and decisions are formulated.’’ (Thornton, 2002:82). Such institutional logics are extremely important in processes of organizational transformation, particularly in new ventures. When research laboratories or software developers draw up a business plan, adopt standard accounting practices, or hire through assessment centers, the actors come to be perceived differently. In their own eyes and in those of others, they are no longer just a bunch of biologists, computer scientists, or physicists. They become seen as professionalized and socially accepted biotech or software companies. This social recognition is ultimately tied to a

C. Weber, M. Go ¨bel process of cultural transformation. When scientific laboratories or software developers, for example, use institutionalized practices and procedures of the corporate domain, a cultural transformation occurs. The laboratory becomes a marketable biotech company that adopts socially accepted motives as it engages with the environment at hand (Weber & Go ¨bel, 2005). This process of cultural transformation is especially important when the situation involves cooperation between organizations belonging to different institutional domains. For other market actors such as venture capital organizations will perceive a new venture as a viable contractual partner only if it follows established corporate and market procedures and practices. However, this mutual perception as adequate partners for cooperation requires the emergence of an interorganizational macroculture of shared conventions, values, and role ascriptions. When organizations undergo such processes of cultural transformation, the frequently contentious relationship between the institutional logics of professions and markets proves especially relevant in modern service societies (Ruef & Scott, 1998). Using publishing companies of specialized material as an example of organizational structures and the shaping of strategy, Thornton (2004) illustrates the conflict ‘‘between compliance with the profit seeking administrative procedures of the corporation and the adherence to professional standards in the performance of work’’ (pp. 105—106). However, conflicts exist between the various characteristics even within individual institutional logics, as Suddaby and Greenwood (2005) empirically show. These contradictions between and within institutional logics opens a fair degree of latitude for action and interpretation to individual and organizational actors. ‘‘A culture is not a unified system that pushes action in a consistent direction. Rather, it is more like a tool kit or repertoire from which actors select different pieces for constructing lines of action’’ (Swidler, 1986:277). On one hand, VC companies can be categorized under the institutional logic of the market in the sense that they always focus on improving their market position, maximizing benefit, and pursuing their strategies as cost efficiently as possible (Fried & Hisrich, 1995). On the other hand, VC companies use components of other institutional logics in that they position themselves as ‘‘relationship investors’’ who give their PCs moral support and seek fair and trusting cooperation (Sapienza & Korsgaard, 1996:561). In order to use the institutional logics to their own advantage, the actors must be able ‘‘to sample a variety of logics of action at the intersection of societal sectors’’ (Thornton, 2004:48). At the individual level, actors’ tool kits contain multiple schemata to shape the focus of attention. As Friedland and Alford (1991) point out, these schemata may or may not be consistent with the organizational principles of the sector, be they those of the particular profession, the market, the family, or the corporation. As with the components of a tool kit, key organizational principles from various institutional domains can be connected and disconnected by individual and organizational actors who can function as change agents by borrowing logics from one sector and using them to interpret and solve resource problems in another (Thornton, 2004). Having elaborated on this institutional contextualization, we now call attention to the interdependence of the calculi underlying individual rationality and the sociality that

Reciprocity and interorganizational governance exchange systems entail in general (Ekeh, 1974; Malinowski, 1922; Mauss, 1967) and the VC—PC exchange system in particular. This coevolutionary perspective is in line with Mauss (1967) and Ekeh (1974) in that it complements the rationalist view (bottom-up emergence) with that of normative control (overriding normative determinants). We propose that an exchange system understood in this way is both normatively self-controlling as a dynamic system of disequilibrium and — driven by the rational strategies of action pursued by the system’s members — self-changing. Consequently, exchange relationships can be regarded as results of actions that the participating actors take to pursue their interests and as interaction constituted by a systems-wide context of exchange. These interdependencies between individual and institutional context, along with the multivarious logics of action that individuals can choose from, are the focus of the following analysis of VC—PC dyads in Germany.

Sociocultural context

The sociocultural and economic circumstances prevailing in the period during which the study was conducted in Germany has gone down in recent economic history as the ‘‘New Economy.’’ Characterized by extreme dynamics and obscurity, the sociocultural context called into question the institutionalized strategies of action, problem-solving patterns, and rituals of the economic actors and is outlined in this box. From the mid- to the late-1990s, the creation of new businesses was favored by a set of unprecedented dynamics known as Internet hype. This New Economy hype was politically encouraged and readily stoked by the financial markets. Through the media it was embedded in unprecedented societal acceptance accompanied by the illusion on the financial markets that anyone could participate in this boom either actively as a founder or at least indirectly as a purchaser of stocks. The attendant spiral of mutual reinforcement led to the creation of the ‘‘New Market’’ (a NASDAQ-like German stock exchange). This market opened a wholly new and highly attractive exit option for the investors. As a result, the willingness of banks and particularly VCs to enter into new ventures was greater in the late 1990s than it had been at almost any other time. The difficulty, however, was that familiar, time-tested measures of a firm’s profitability, such as return on investment (ROI), return on sales (ROS), and earnings before income and tax (EBIT), were virtually impossible to use on the Internet economy. They were applicable only if the value of the Internet and its associated new information technologies were first established through the interaction of supply and demand on the emerging

137

markets. Founders, managers, and policymakers unexpectedly found themselves to be a part of this social phenomenon, but ultimately they could neither soundly comprehend its impacts nor adequately forecast and assess its potential. Given the boom-and-bust attributions propagated through the media, many VCs resorting to quick exits fetched irrational prices for unsustainable Internet companies on the ‘‘New Market’’. Earlier business models and technologies that were once traded as promising were no longer marketable. This socioeconomic dynamic put new ventures and established VCs alike under increased pressure. For in order to cope with the institutionalized expectations attached to growth and professionalization, the new ventures needed a steady influx of financial, nonmaterial, and personnel resources, some of which they covered through venture capitalists. At the same time, the hitherto relatively small German VC market boomed, with many new German VCs took their places alongside a few established and successful investors (mainly foreign ones) and profiting from these unexpected and promising exit options. However, the existence of many young VCs staffed mostly by inexperienced employees led many VCs to lapse into unprofessional, diffident interaction with potential PCs, and to orient themselves particularly to the vision of the successful, established, usually Anglo-American VCs. When it came to financing and managing ventures and personnel, the professionalism of Anglo-American VCs was a benchmark in the German VC industry.

Methodology and data The unit of analysis of the present study is the exchange relationship between VCs and their PCs. We draw on qualitative research methods and on interpretive analyses of qualitative data to capture the richness and complexity of the interpersonal dimensions of VC—PC dyads and to understand the nature of the interaction and exchange they involve. Our case studies are multimethodological. The research design has two foundations: (a) knowledge of both the literature on venture capital and the relevant social and organizational theories and (b) participant observation. This methodological approach allows us to eliminate methodological mistakes, define interim research questions for semistructured guided interviews, and develop an interim theoretical concept. The subsequent research design borrows heavily from Yin’s (2003b) case-study method and from Eisenhardt’s (1989) process of theory-building through casestudy research, the final product of which ‘‘may be concepts, a conceptual framework, or propositions or possibly mid-

2000 (") Dyad 2 1999 (#) Dyad 3 2000 (#) 1999 (") Dyad 2 2000 (#) Dyad 3 1998 (")

An upward arrow in parentheses after the year in which the dyad was created indicates that the VC considered the PC successful. A downward arrow indicates that the VC did consider the PC not successful.

1999 (") Dyad 2 2000 (#) Dyad 3 1999 (") 1999 (") Dyad 2 1998 (#) Dyad 3 2000 (") 1999 (") Dyad 2 1999 (#) 2000 (") Dyad 2 1999 (#) Dyad 3 2000 (") 2000 (") Dyad 2 1999 (#) Dyad 3 2000 (#) 2000 (") Dyad 2 1999 (#) Dyad 3 1998 (#)

1998 s400 million Formalized Broad Dyad 1 1984 s350 million Formalized Broad Dyad 1

2000 (") Dyad 2 1999 (#)

1983 s300 million Discourse Narrow Dyad 1 1998 s430 million Discourse Narrow Dyad 1 1991 s240 million Formalized Narrow Dyad 1 1996 s130 million Formalized Broad Dyad 1 1997 s250 million Formalized Broad Dyad 1

3 2 2 2 2 2

VC 6 VC 5 VC 4 VC 3 VC 2

2

VC 7 VC 1

VC 8

Social obligation reciprocity

2

Number of interviews with investment managers In business in Germany since Fund size Means of governance Investment focus (industry) Dyad founded/PC performance

This is, ‘‘each case must be carefully selected so that it either (a) predicts similar results (a literal replication) or (b) predicts contrasting results but for predictable reasons (a theoretical replication)’’ (Yin, 2003b:47). If the results of the case analysis are contradictory, the original assumptions must be changed and tested with new cases. The objective of the replication is to develop a comprehensive and theoretical framework that contains statements about when a particular phenomenon occurs and under what conditions it does not (Yin, 2003a).

Key facts about the portfolio companies (PCs) funded by venture capital (VC) units.

5

Table 1

We conducted longitudinal case studies of 25 VC—PC dyads from nine distinctive VCs that we selected out of 195 VCs in Germany. In each VC we investigated at least two separate VC—PC dyads–—one successful and one unsuccessful. We selected the 25 dyads by means of a theoretical sampling procedure (explained below) based on Glaser and Strauss (1979; see also Eisenhardt, 1989) and on Eisenhardt and Graebner (2007), who refer to the logic of replication5 mentioned by Yin (2003a, 2003b). To generate insights on the sociocultural context of VC— PC exchange relations and its impact on motives and behavior of the exchange parties, we chose VCs that operated under similar conditions in particular respects but that differed considerably in investment experience (years in business), industry focus (broad or narrow), PC performance, and means of governance (formalized vs. discourse). Our sample of nine VCs consisted of five organizations that had a broad range regarding the industry in which they had invested and four that had a rather narrow focus, mostly specialized in IT and communications and/or life science and biotechnology (see Table 1). The investigated VCs varied distinctly in the number of years they have been active in Germany. The year in which they commenced business operations ranged from 1983 to 1999. The sizes of the funds also varied considerably, though most of the respondents either did not or could not itemize the information and named the total sum of their respective funds for all their local VC offices. Six VCs used what may be called formalized means of governance; three tended toward what we call a discourse form of governance understood as meaning notions about the form and content of interorganizational governance that are, for the most part, consensually generated in mutual communication processes. In order to compare the nine cases and ‘‘to control environmental variation,’’ (Eisenhardt, 1989:537), we controlled for three selected contextual factors that could have a moderating effect on the VC—PC exchange relationship and its impact on motives and behavior of the exchange parties. They were (a) the investment phase (we selected only VC—PC dyads where the investment was made in the seed, start-up, or early stage phase of the venture firm), (b) the percentage share of the company purchased (we selected only VC—PC dyads where the VC bought minority positions), and (c) the year in which the VC—PC dyad was founded. All dyads investigated were created in 1998, 1999, or 2000.

Economic exchange reciprocity

Sample

1999 s100 million Formalized Narrow Dyad 1

VC 9

range theory’’ (545). By concentrating on fewer cases and studying them in detail, one can achieve a holistic understanding of complex matters and of their embedding in a context of action (Eisenhardt, 1989)

1992 s280 million Discourse Narrow Dyad 1

C. Weber, M. Go ¨bel

3

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Reciprocity and interorganizational governance In keeping with qualitative research methods, overlapping data collection and analysis were used (Glaser & Strauss, 1979). That is, no hypotheses were formulated in advance and later tested. Instead, the collection and simultaneous evaluation of the data served the purpose of building theory that might be tested in a second study. Data collection took place from March through October 2002. Following Yin’s (2003b) call for multiple sources of evidence, we collected data from interviews, site visits, and archival records. The primary sources were 46 largely guided and sometimes highly narrative interviews, each lasting from 40 to 120 min (totaling 51 h of material). The interviewees were initially 20 investment professionals of the nine VCs. We asked the managers of these VCs to point us to PCs that they had followed personally. (In sum we received information on 25 PCs.) In a second step, additional interviews were conducted with either the founder(s)/founding entrepreneur(s) or the CEO of each PC. In our interviews we covered the formation and development of each VC—PC dyad and its emerging and changing exchange relationship over time. More precisely, our data collection covered developments from each dyad’s creation through 2002. Basically, we asked all informants the same questions. We gathered information on the individual respondent; the corresponding organization; and the dyad’s history. We also inquired about the sociocultural context of the parties involved and about their relationship. Interviewees were asked about such things as their initial motivation and intention to enter that particular partnership, resources exchanged, the manner in which incipient conflicts were handled, the use of power and trust, and the means of governance. In addition, we explored whether the initial expectations were met in terms of the resources exchanged that were connected with this partnership. The items were adapted or expanded as we gained new insights through analysis of the responses to the open-alternative questions.

Data analysis For our data analysis, we followed procedures recommended by Miles and Huberman (1994), Strauss and Corbin (1990), and Yin (2003b), primarily using our own interview data as sources. Observational data, survey data from previous years, and additional documents were also used to help obtain reliable and justifiable results to verify and contextualize the statements of the interviewees. The 25 dyads from our nine VCs were first analyzed individually (Miles & Huberman, 1994; Yin, 2003b). We coded the transcribed interviews by using a constant, comparative, interpretive analysis in which each event was assigned to an emerging open coding system (Strauss & Corbin, 1990) until all the interviews were completely coded. We generated 47 codes and successively reduced them by means of axial coding to increasingly abstract categories (Strauss & Corbin, 1990). This analytical phase produced 17 categories, which were ultimately condensed to 8 categories through selective coding (Strauss & Corbin, 1990). We compiled a timeline of critical incidents and corresponding exchange relations and changes. Our individual case descriptions produced an overview of each dyad. We then contrasted the separate cases and typified them in a com-

139 parative case analysis relating to the relevant ‘‘mode of governance’’ (formalized vs. discourse) and the subsequent types of reciprocity (Miles & Huberman, 1994; Yin, 2003b). We noted similarities and differences within each group, gradually expanding cross-case analyses. Comparing the cases across different variables, we identified specific patterns of how the dyads’ exchange relationships came about and developed. We also ascertained the institutional settings in which the respective relationships were embedded and the ways in which these relationships influenced the motives and behavior of the exchange parties.

Validation This continuous comparative method included internal validity checks of the data (Kirk & Miller, 1986). During the overlapping collection, analysis, and coding of data, which were undertaken independently of each other and checked continually for disagreement, the interviewers developed a common set of conceptual categories. The latter were compared for possible overlaps, inconsistencies, and contradictions. This process helped assure that the coders interpreted the data in like fashion and did not overlook relevant information. An external professional participated in the selective coding stage, playing the role of questioner and devil’s advocate. We continually generated data, and data were recoded when necessary. When new data led to new or inconsistent information, the categories, the emerging theories, or both were modified to take account of it. This procedure allowed the study to cover new aspects, clarify contradictions, and solidify theoretical considerations that were coalescing. The process continued until we could find no new information inconsistent with the existing categories. Our conceptualization had thereby achieved ‘‘theoretical saturation’’ (Kirk & Miller, 1986:40), the point at which this method of constant comparison may end (Eisenhardt & Graebner, 2007). In qualitative research, the primary checks for validity occur among informants. Only data that were consistent across informants and other sources are reported below. The results section is based on the final categories.

Results To provide a general picture first, we present the final results successively deduced from our data: Two modes of exchange among VCs crystallized into dominant types. We call the one mode ‘‘economic exchange reciprocity’’; the other, ‘‘social obligation reciprocity.’’6 The key to understanding the modes of reciprocity is each mode’s specific interpenetration of (a) individual calculations of utility and (b) the governing moral order. Reciprocity based on economic exchange revolves around utilitarianism, with morality being peripheral. Reciprocity based on social obligation is marked by the dominance of morality, with considerations of benefit and use

6

These names are not intended to imply that either of the two modes has a logical, theoretical, or factual priority in an exchange system or that either of them is subordinate to the other. We use the terms to denote the empirical derivation and analysis of actual exchange systems.

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C. Weber, M. Go ¨bel

Table 2

Core dimensions and coding categories.

Coding categories

Core dimensions of reciprocity I macrocultures

I.1 Cognitive synchronization I.2 Shared cognitive order I.3 Normative order II.1 Structure of exchange system II.2 Exchange position II.3 Exchange resources III.1 Trust III.2 Power a b

Xa X X

III modes xb x

X X X x

x

x X X

X = central for core dimension. x = informs core dimension.

being marginal. Neither type of reciprocity denotes an endpoint of a continuum, as would an ideal type by Weber (1978). Instead, these types of reciprocity are empirically observable phenomena in which, as stated in our theoretical position, utilitarian and morally oriented motives for action always appear in various ratios. That is, the two types consist of the same components but differ in their respective ratios of morality and utility. The importance of cultural and normative aspects was not the only feature guiding our research. We also took into consideration eight categories that fit and complemented the facets, concepts, and items we found in the literature in the course of data analysis. These categories can be subdivided into three areas of reciprocity (perspective, resources, and mode7) that coalesced and proved helpful as we proceeded with our selected research approach (see Table 2). The individual categories are not mutually exclusive. As Fig. 1 illustrates, they represent a complex pattern of effects in which the interdependence of cultural, resource oriented, and action-guiding factors constitutes an exchange system. In the following section we discuss the reciprocity of cultures and show how a relationship is shaped by basic institutional assumptions, in particular the societal and industry-specific assumptions.

Macrocultures Cognitive synchronization Like all newly created forms of organization, VC—PC relationships are highly equivocal and uncertain at first (Browning et al., 1995). The mutual expectations and motives of the parties involved are usually diffuse and ambiguous. ‘‘Our expectations have changed in the course of time because we did not recognize his agenda until later’’ (venture capitalist 1). As stressed by Jones, Hesterly, and Borgatti (1997:929), however, ‘‘a system of widely shared assumptions and values’’ encompassing all the parties involved is needed for cooperation between companies. This macroculture should be shared not only by the top managers but by all

7

II relationship

Modes are various behaviors that develop in the context of the given macroculture and that are consequently either more poweroriented or trust-oriented or vice versa.

the people contributing to cooperation between given companies. As cultural homogenization progresses, the different perceptions of all the participants should become synchronized in a way that interrelates the different perspectives at the end of that process (Schu ¨tz, 1967). ‘‘That is decisive in cooperation, that is, when people know what they have in each other and what they can — and can’t — expect from each other’’ (entrepreneur 1). To make it possible for people to interpret each other’s perspectives, generalized structures of expectation must constantly be taken into account (DiMaggio & Powell, 1991). The entrepreneur’s self-portrayal will be understandable to the VC manager only when the entrepreneur can assume that the VC manager knows what behavior to expect. But such understanding is possible only if there is institutionalized knowledge about the other party; about that party’s ability to take on roles; about his or her possible behaviors, and orientations to action.8 Various forms of cognitive synchronization in VC—PC relationships are empirically distinguishable in the mode of synchronization (see Table 3 for additional quotations). The first type, cultural adaptation, can be classified as economic exchange reciprocity. The mutual expectations of the actors are oriented chiefly to their institutionalized roles. In keeping with the given roles — VC and PC — the two parties each assume that the motives of the other are oriented to the primacy of maximizing personal benefit. ‘‘I have to defend my interests and he, his interests as the founder, for he is being diluted through and through and is getting hit with a 1.5-fold liquidation preference to boot. As a VC, though, I can’t simply surrender equity to him just because I’m a nice guy’’ (venture capitalist 2). Depending on the distribution of power, the more influential party attempts to define his or her understanding (one of many possible notions) universally as the ‘‘truth,’’ hence ‘‘dictating institutional meaning by offering one official

8

According to Montada (1998), realization of the self-interest postulate is an institutionalized expectation of social actors’ orientation to action: ‘‘Together with others, these observations suggest that self-interest is quite commonly considered the dominant, normal, legitimate motive, adequate for self-presentation in public contexts. This understanding of self-interest is obviously socially shared. In its descriptive part, however, it is a myth’’ (p. 82).

Reciprocity and interorganizational governance

Figure 1

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The interaction of the core dimensions in the VC—PC exchange system.

account of institutional structures and practices’’ (Zilber, 2002:237). To enter the ‘‘reality’’ of business plans, management meetings, profit margins on sales, and leadership techniques, a scientist becomes an entrepreneur in a process of cultural adaptation. ‘‘These people come from the universities and have laboratory-scale management experience at best, nothing else, especially if the place is growing relatively well. They’re then catapulted into the role of a manager’’ (venture capitalist 7). With the second type of cognitive synchronization in VC— PC relationships — cognitive reflexivity — reciprocal perception and the resulting formation of expectation tend to be oriented to the individuality of the other party. ‘‘At company A the CEO is a very young, unseasoned scientist with outstanding qualities and aptitudes, but he has a very strong polarizing effect. Of course, you need to interact with him differently than with a staid industrial man who has twenty years of experience’’ (venture capitalist 7). VC managers are thoroughly aware of the industry’s specific rules, role typing, and scripts, and they also try to perceive the entrepreneurs in their specific motivation, socialization, and profession so as to make these aspects the foundation of a common construct of reality. It is not so much that the institutional expectations are processed reflexively but rather that they are perceived and reflexively

processed in their ambiguity (Zilber, 2002). The actors ‘‘are creating and applying these symbols, interpreting these meanings, and formulating, conforming to, disobeying, and modifying these rules’’ (Scott, 1994:60). In this manner, a largely symmetrical reciprocity of perspectives comes about, a cognitive order that is credibly maintainable vis-a `-vis other parties even in critical situations. ‘‘For example, if you have to acquire new capital and attract new investors, then you have to create and maintain a shared view beforehand’’ (venture capitalist 4). Shared cognitive order Self-stylization as a rational maximizer of benefit is a sign of cultural adaptation. Actors, by orienting their behavior to reciprocal typing, perceive themselves and the other party less as protagonists shaped by these relationships than as benefit maximizers processing institutional expectations. ‘‘They are not our friends, they are our investors’’ (entrepreneur 2). Ultimately, venture capitalists and entrepreneurs remain strangers to each other in their mutual specific individuality. ‘‘We were strangers to the end because he came from a world that was really alien to me and I from a world really alien to him’’ (venture capitalist 5). Conversely, cognitive reflexivity is apparent when the actors position each other as empathetic exchange partners. ‘‘Our

142

Table 3

Empirical evidence of exchange types. Economic exchange reciprocity

Social obligation reciprocity

Cognitive synchronization

The founder is an experienced, technologically brilliant man who operates like a small businessman. But because he has no experience in working with investors, he generally views them with mistrust. At first, he probably thought we were finance sharks. As a result, there were a lot of misunderstandings that complicated the relation for a long time. . . . You had to tell him everything three times. He was initially not prepared to acknowledge our experience. Everything always had to be proved first. It’s different today. We work together well now, and he’s gotten used to our demands and ideas. (VC 1)

For more than 12 years I myself went through what’s happening at the firms in which I invest today. I know what it means to internationalize or to deal with analysts. I made every conceivable mistake doing it. Now you sit at the table with an inexperienced CEO who is presenting his business plan. You know from experience that it can’t work like that. But he does it anyway, and after 6 weeks your forecast comes true. Although this situation makes me nervous, I can only try to persuade him. If he then does it differently, it’s his decision. I ultimately have to accept him because it’s his capital. (VC 3) The founder was provincial his entire life. He came from a different world than I. At first there was a huge, immediately obvious gap. . . . At such moments, it is important to meet the founder where he is. In the course of the necessary intensive cooperation we developed a rapport that is fundamental to the solid relationship of trust we presently have. (VC 17)

Shared cognitive order

I have to understand the agenda he has, and maybe he won’t always tell me what it is. But we don’t always tell him our agenda, either. (VC 14) Of course, a VC doesn’t much like giving money to finance losses; the money doesn’t lead to increases in corporate value. If you know that, you don’t make that kind of proposal in the first place as a founder. (PC 6) There are always diverging interests between the founder and the investor. Interests are never completely congruent. You can only try to make them as congruent as possible. But there are always things I don’t know about the founders, and there are always situations in which they don’t know how we’re thinking. (VC 5)

We’re currently planning the management development for the next 3 years with the management team and the other investors. That’s not something they can determine. Right from the start they have to bring everyone together [and] listen to every opinion in order to come to a common understanding of where the management stands today, where it sees itself in the future, and how it is to get there. (VC 4) The relations between founder and investor are much simpler if they really understand and trust each other so much that they don’t start sounding all the alarms if the one says to the other ‘‘We haven’t met the budget this month, but we will next month. Don’t worry.’’ (VC 9)

Normative order

Now if you’ve really been roughed up by someone once, or if someone has exploited his position to the extreme, there’s nothing wrong with that. I can’t blame him, for businessmen don’t give anything away. If we cross paths again, I remember his behavior and think closely about how I’m now behaving. (VC 20) One mustn’t ever forget that the VC and the founder can never be friends. After all, the two sides have different goals. (VC 16)

As is proper for a regular small businessman, the company was his life. My father was no different. Mr. X took me home with him every afternoon to eat together with his wife and children. I did not feel this extremely personal attention as bribing. It was simply the way he saw himself — as an entrepreneur with his feet on the ground — a self-concept I gladly agreed with. It was important to the proprietor to work together with an investor who was serious, who understood him, and whose word he could rely on. (VC 18)

C. Weber, M. Go ¨bel

Coding categories

The entrepreneur would like to receive further money, and the financial backer expects in return a profitable investment. (VC 20) We certainly don’t interact as acquaintances. I have my interest and he his. Although we get along well together, each has his own area and he mustn’t forget it. (VC 10) This is where one becomes acquainted with the darker sides of human behavior. If an entrepreneur has his back to the wall, he changes. One no longer gets any information. He doesn’t answer the telephone. He starts playing you off against someone. What I think you have to try is to consider what the other guy could still do to shore up his own position, even if it means damaging others. Then one has to think up opposing strategies to protect ones interests. (VC 20)

Although the company went bankrupt and we lost a lot of money, they remained part our family. A certain solidarity does remain. We support each other. (VC 8) Maintaining a broad network is certainly an important part of the VC work. We actually begin even before the investment by bringing the companies together with experts we know from Siemens, Cisco, or German Telekom. They are then supposed to make a thematic appraisal. Such contract definitely helps this company, regardless of whether we finally investment in it. That kind of involvement makes sense for us, too, because the company feels obliged to return the favor when the time comes. (VC 9)

Exchange position

Because of the costly set-up, they could not attract any financing, either. Our continuation of the funding was contingent on various conditions. The money was to be granted only if they replaced their head of sales, adapted the personnel in the supervisory board, and repositioned the enterprise. (VC 19) If we put in equity capital in this phase, we can force through almost any point we want, because we’ll be acting from a position of strength. (VC 6)

From time to time we did indeed have a couple of matters on which I probably could have negotiated harder against him but did not, things I just let go. In the end, we are both basically convinced that we want this cooperation to succeed and that we both have to show we’re cooperative. (VC 13) To that extent we accommodated them. We could have insisted on compliance with the contractually stipulated milestones. But we didn’t do that. Maintaining good relations was more important to us. (VC 18)

Exchange resources

We added value in many different ways to the company. First of all, we helped build the board of directors, which is very important. The second thing is that the company really needed to change its strategy because it wasn’t going anywhere with the former strategy. So we worked very hard to think about the strategy. We would also bring in complementary technology, complementary companies, [and] potential customers. We spent a lot of time and energy on this company, because we were sure that it was a shooting star and that we could earn a lot of money. . . . Things worked out, we brought it very successfully onto the stock market, and our return on investment is not bad at all. (VC 7)

Sometimes I get the impression that the relationship has solidified through our initially extreme involvement in this company and that the founders today feel a kind of obligation to reciprocate. (VC 3) I would be mortally insulted if any of my portfolio companies were to say, ‘XXX is in my supervisory board because he invested.’’ I want them to say, ‘XXX is in my supervisory board because he can really help. I can bother him at any time with problems that are important to me. He is always there for me.’’ (VC 4)

Reciprocity and interorganizational governance

Structure of exchange system

143

The entrepreneur doesn’t have to like me. As long as I can trust him to behave reasonably, everything is fine. (VC 12) The numbers that were presented were actually OK. But the experience getting there left me with no confidence in him and his numbers. One got the impression that he told every investor what that person wanted to hear. (VC 5)

I know every step the CEO takes, and even today he would not longer take a step I wouldn’t support. He knows the consequences. But it is important in such a situation that the CEO can safe face. If you put on too much pressure, he blocks, and that doesn’t help anybody. (VC 19) The founder is on the defensive because he can’t deliver the numbers he promised. Because he knows what position he’s in, he cooperates. This really simplifies our collaboration. (VC 6)

Trust

Power

One can influence a company in two ways. The first is through created laws, that is, statutes, written regulations, and so forth. The second is through personal relations with the company. If you try to control a company by law, you’re doomed to failure. You can do it successfully only if you build a relationship in which the entrepreneur seeks to talk with you, regardless of what would be legally or statutorily appropriate. (VC 4) I believe that if a company wants to cheat someone, it can no matter how great the signed contracts are and how elaborate the reporting is. Ultimately, both sides have to come across as reliable and have to accept each other. (VC 18)

Economic exchange reciprocity Coding categories

Table 3 (Continued )

That’s what I by trust. You really has to have the feeling that you can rely on each other, that the other guy will stick to his word even when it is sometimes uncomfortable to do so. (VC 3) You can’t resolve conflicts with force, unless you want to lose the relationship altogether. In X’s case, the relationship was very valuable to us because it was characterized by deep trust. We then jointly worked out a solution to the conflict over a period of a few weeks. The matter was entirely cleared up. Interestingly, the process of conflict resolution made the relationship even deeper. It was more trusting afterwards than before. (VC 9)

C. Weber, M. Go ¨bel

Social obligation reciprocity

144

investment manager had himself also founded a company, had had VCs, had had a huge fight with them, had sold the company, and had become a VC. In the current crisis he gives us the feeling that he understands our position as entrepreneurs’’ (entrepreneur 7). By mutually assuming the ability to see things from the other party’s standpoint, VC managers and entrepreneurs transcend typed role attributions and see the other party in his or her specific individuality. This form of reciprocal perspectives goes substantially beyond the hermeneutic and empathetic level of utilitarian calculations of benefit. A successful VC—PC dyad is less about the fit between autonomous maximizers of benefit than it is about an interest-guided exchange community that is aware of its societal interdependence. ‘‘We all have a very personal relationship with our companies, and that goes to the heart of the company but also to the heart of our lives. The intimacy of the relationship calls for accommodation on both sides’’ (venture capitalist 7). In individual cases this bond between the management of the VC organization and the portfolio company can be seen as approaching the intensity and affinity of a family relationship. Normative order–—utilitarian rule system versus holistic moral order The cognitive order that takes shape in the course of cognitive synchronization subsequently forms the symbolic foil for the subjective interests of the actors and the normative order channeling them. Two normative orders are empirically distinguishable, the utilitarian rule system and the holistic moral order. As concerns the utilitarian rule system, many VCs leave no doubt about the objective of maximizing returns, making it the core of their corporate identity and philosophy. ‘‘From my point of view, we are a craft shop that sells money. The product is called money’’ (venture capitalist 6). In the pursuit of this goal, the strategic way of dealing with each other — even against the interests of the other party if necessary — is recognized as a legitimate motive for action. ‘‘We know that he is a really good guy, but he also has his own agenda. Our goal, however, is to get as much of our line through as possible’’ (venture capitalist 1). To minimize the risks resulting from the temporal disparity between gift and reciprocation, the parties to the exchange rely on the stabilizing function of rules. As the participants ‘‘carefully monitor their own initiatives on the basis of their own evaluation of the reciprocating action taken by the other side’’ (Osgood, 1962:88), a flexible, self-regulating system of reciprocal observation and formation of expectations develops (Bendor et al., 1991). ‘‘In each investment they have a kind of storming and norming phase that they must undergo until each [participant] knows the interests of the other, knows where the other’s strengths and weaknesses lie, and can assess his contribution accordingly’’ (venture capitalist 3). Utilitarian behavioral reciprocity appears under the assumption ‘‘that the others follow the same rules and motives’’ (Montada, 1998:90) as a normative binder of disparate motives. Rationally, the other party cannot be expected to reciprocate unless the initiator himself has proven reliable and fair in the course of the exchange relationship. ‘‘If you treat people properly and are a reliable partner, I think they will treat you the same way: The way you treat people on your way up is how they treat you on your way down’’ (venture capitalist 6).

Reciprocity and interorganizational governance However, the controlling function of emergent rule-setting must always serve the benefit-maximizing calculations of the exchange parties. For although conformity to the rules is regarded as completely rational for long-term common wellbeing, there are always incentives for individual violations of the rules. Other parties respond to those violations with corresponding strategies. ‘‘Experience shows that what he says is not what he’s going to do. Accordingly, one sometimes has to resort to control measures and sanctions to ensure that words are followed by appropriate action’’ (venture capitalist 1). Unlike the utilitarian rule system, the holistic moral order is based upon reciprocity in the sense of a social norm. As active ‘‘interpreters’’ (Zilber, 2002:249) of sectorially specific systems of symbols and rules, some VCs take the latitude inherent in the ambiguity of institutional expectations and use it for a kind of symbolic differentiation. ‘‘I believe that we differ from other VC companies in deals. There are no quick wins with us. There is a lot of substance here. Often, you have hardcore scientists who have created patentable ideas and things for 30 years in the laboratory in order to commercialize them. It is important to them to shake hands with people who are really serious. And we are’’ (venture capitalist 8). At the personal level, this differentiation consists in a binary identity of the VC managers. By seeing or defining themselves as businesspeople as well as pharmacists, medical specialists, or biologists, they transcend purely utilitarian calculations of exchange and adopt an empathydriven morality of action. ‘‘I have twelve years of experience in the pharmaceutical industry. I worked in oncology and dealt with HIV patients for eight years. I am keenly aware of the necessity for close cooperation between science and business for these people and [know] what it means to people to really have an impact’’ (venture capitalist 9). The exchange system’s linkage back to a pro-social norm, in this case the moral duty to relieve human suffering, puts the norms of reciprocity in a different light. If reciprocity in utilitarian exchange systems is characterized by a primarily individualistic, calculating set of rules, it tends to be a generalized norm in the sense of a moral imperative of social life (Ekeh, 1974; Montada, 1998). In essence, the interpenetration of exchange morality and the maximization of benefit characterizes an exchange context in which a system of exchange based on strategic interdependence of action is rooted in an independent moral dimension. Such exchange systems buttressed by morality preserve their staying power by constantly reproducing their guiding exchange morality through their successful functioning and thereby ensure their own viability. The inevitable consequence is that exchange systems must offer opportunities for moral action if they want to preserve a corresponding exchange morality (Weber & Go ¨bel, 2005). ‘‘Our understanding of a VC-entrepreneur relationship is essentially shaped by reciprocity. We achieve the best results where our additional involvement is accepted and acted upon. We’re the wrong partner for founders who want only our capital’’ (venture capitalist 4). The following section explores the structure of the exchange systems, the exchange position, and the resources. Taken together, these aspects clarify how the VC—PC dyad is structurally embedded in the systems; how the partners, or actors, are positioned; and what their resources and gifts are.

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Relationship The venture capitalist and the entrepreneur have a complex exchange relationship encompassing the mutual transfer of resources or gifts. The individual transaction, however, is integrated into a social context that is meaningful and recognizable to outsiders only in its entirety. There is an interdependent relationship between (a) the structure of the exchange relationship itself, (b) the positions of the actors within that system, and (c) the gifts exchanged in the system (Sahlins, 1996). Structure of the exchange system As already mentioned above, our data allow us to explain two types of exchanges. The first type, economic exchange reciprocity, is characterized by a relative balance of power and a mutual control of resources. If the VC and the entrepreneur see each other as opportunistic maximizers of benefit, there arises a social exchange relationship that partly follows the ‘‘balanced reciprocity’’ described by Sahlins (1996:32). It is based on the direct exchange of like values. The exchange parties approach each other with different economic and social interests. ‘‘It is simply a professional relationship. We do our job; they do theirs. We have our interests; they have theirs’’ (entrepreneur 4). Because of the disparity of interests, forms of balanced reciprocity are characterized less by a cooperative understanding of the relationship than by an antagonistic one. In the most favorable case, this arrangement can lead to a deal where there is no relationship at all and where ‘‘the entrepreneur earns a huge amount of money for us’’ (venture capitalist 1). The dynamic intrinsic in these disparities of interest, however, can also assume the character of a ‘‘cold war, always this flexible response that leaves one never knowing when the other side is firing its nuclear weapons’’ (venture capitalist 2) or a ‘‘love—hate relationship in which we feel mutual contempt in principle but both know we need each other’’ (venture capitalist 3). Whereas in the type 1 exchange the VC and entrepreneur are primarily in a direct reciprocal exchange relationship, the type 2 exchange, the social obligation reciprocity, describes a VC—PC dyad involving a broadened exchange network in which a willingness to cooperate and an exchange solidarity are important, too. In this case, reciprocity is manifested as a generalized norm to which all participants feel a degree of commitment in their actions (Gouldner, 1960). The obligation to reciprocate does not exist directly between the resource taker and resource provider but rather through the exchange network itself and its members (Ekeh, 1974). The risk for the individual remains limited to the extent that this open/ closed system of exchange cycles facilitates indirect, typically delayed compensation. Each resource provider is also a resource receiver in a different, equally one-sided exchange relationship. The VC providers and entrepreneurs regard each other as autonomous partners in an exchange community bonded by solidarity. The essential ingredient for its functioning is the moral support that pro-social norms afford the resource flows. ‘‘We are a big pivot point for knowledge involving experts from different regions. There is a great deal of give and take, with people giving on one side and taking again somewhere else. It always balances out somehow, so I really gain from dedicating my time to other people’’ (venture capitalist 6).

146 Exchange position Specific positions and power constellations between the VC and the entrepreneur form as a function of disparities of interests and resource dependence (Cable & Shane, 1997). Exchange positions that form on the basis of balanced reciprocity are configured primarily by observable stocks and flows of resources. The more important actor B finds certain resources controlled by actor A, the greater B’s dependence on A is, and the less B has the chance to acquire these resources outside the A—B relationship (Emerson, 1962). ‘‘I sat there and thought, ‘the only good thing is that they’ll come back and have to play our game because they won’t get money anywhere else’’’ (venture capitalist 3). The more the power constellation shifts in A’s favor, that is, the greater B’s dependence on A is, the more A can overcome B’s potential resistance, compel cooperation, and achieve results advantageous to himself (Emerson, 1962). ‘‘The founders had a choice: either they file for bankruptcy, or they agree to the investors’ proposal to dilute the shares and replace the management board’’ (entrepreneur 5). The thinking in the second type of exchange relationship is different. The exchange partners realize that reciprocity often develops only over the long term. Balanced results, if there are any, lead to an objectively, socially, and temporally highly complex structure of transactions. Because the optimization of the individual exchange position is necessarily tied to the staying power of the overall system, mutual obligations are met through every kind of cooperative action. ‘‘We would like to keep our old CEOs in our network. Because they are credible, honest, and successful, they have higher authority than I do with the companies. Besides, we get a lot of good business plans from them. They feel obligated to play things back to us’’ (venture capitalist 7). By virtue of honor, duty, and trustworthiness, action strategies become relevant in these exchange relationships, whose nature in terms of societal domain is more like that of a family than of an economic sector. One VC manager with this kind of relationship in mind was not speaking idly when he stated, ‘‘we’re all one big family’’ (VC 8). Exchange resources In keeping with the interdependencies described in the previous section, Sahlins (1996) explained that the way in which reciprocation is expected says something about the spirit governing the exchange. In this context the distinction between the types of reciprocity is thus ‘‘more than formal’’ (Sahlins, 1996:30). Social relationships in type 1 depend on the flow of resources–—‘‘If they don’t wind up passing on the great contacts they said they would, I don’t know why we got together with them. We would have obtained money elsewhere’’ (entrepreneur 6). In type 2, by contrast, ‘‘the material flow is sustained by prevailing social relations’’ (Sahlins, 1996:32). ‘‘You know and trust each other a bit and know that if I give of my knowledge about the subject today, I’ll get someone else’s knowledge back tomorrow’’ (venture capitalist 3). Direct reciprocation relationships (type 1) mostly involve easily quantifiable resources, which enable the exchange parties to balance their resource flows precisely at all times. The empirical evidence shows that both parties try to monetarize their respective contributions, for the solidarity between the exchange partners exists only on the basis of

C. Weber, M. Go ¨bel mutually realized benefit, which is based on the assessed input of resources. If push comes to shove, the actors’ individual maximization of benefit ranks above the social dictum of fair exchange (Ekeh, 1974). In forms of generalized reciprocity (type 2; Sahlins, 1996), social function — the creation and continuity of long-term relationships — plays a key role in addition to the exchange value of the gift. ‘‘We don’t invest in business plans; we build companies from the outset or little by little’’ (venture capitalist 7). Because a long-term perspective on relations is taken as the built-in norm, different kinds of gifts are exchanged at different intervals and intensity, depending on corporate development. During the early formative stages of the relationship and the company, there is a need for regular and intense support, including elaborate measures for management development and coaching, the establishment of customer contacts, cooperation, and operational assistance. As the company develops and the management becomes more professional, ‘‘the support becomes more case-by-case and its intensity declines, but the thematic range ultimately remains comparable’’ (venture capitalist 8).

Modes Reflecting on the VC—PC interactions in this study, we find that trust and power were relevant and that they stood out to different degrees. VC—PC dyads are by nature risky and complex. ‘‘The situation is often that they do make an honest impression but that I can’t attest to their integrity in the end. You just have to believe the statements of the investors and vice versa’’ (venture capitalist 6). Our observations make three things clear. First, decisions — in this case, in favor of trust — are based less on precise data than on sound reasons (Luhmann, 1979). Second, if A wants to take the lead in establishing an exchange relationship, that is, if A offers B a gift for exchange, then A must transcend rational calculations and make the initial step unilaterally. Third, in doing so, A pretends that B’s behavior is somewhat predictable (Luhmann, 1979). This fiction of the predictability of B’s action rests on institutionalized patterns of perception that postulate a ‘‘world in common’’ (Garfinkel, 1967:67). Depending on the degree to which the role typing apparent in the predicted behavior is oriented to benefit-seeking or to solidarity-seeking, the giver will resort to power or to trust, respectively, as a mechanism of coordination. Because trust and power follow the same functional principle — ‘‘they influence the selection of actions in the face of other possibilities’’ (Luhmann, 1979:112) — they can be used as functional equivalents in VC relationships. Trust If VC managers and entrepreneurs assume benefit-maximizing behavior from each other, trust turns out to be a kind of ‘‘calculus-based trust’’ (Rousseau, Sitkin, Burt, & Camerer, 1998:399),9 a secure expectation of the other party’s economic rationality. ‘‘If you have a basis of trust, it also has to do with predictability. You know the other’s decision-making

9 It rests ‘‘on rational choice-characteristics of interactions based upon economic exchange’’ (Rousseau et al., 1998:399).

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Power As a result of utilitarian role constellations, the parties to an exchange increasingly rely on the use of power to reduce the complexity of exchange. ‘‘Many callous investors take the standpoint: ‘They want my money, so they should explain to me for a start what they’re up to’. For founders, though, that is not always nice and simple’’ (venture capitalist 4). If trust works with the positive assumption that party B is willing and

able to cooperate, then power is based on a negative forecast of behavior (Luhmann, 1979) and implies a relatively high control density. Formally, this high control density comes about especially in conflict situations, as one VC manager noted: ‘‘In conflict situations, an enormous amount of paper is produced in the form of analyses, explanations, and reports. The files explode in order to make everything watertight’’ (venture capitalist 5). The capacity to control depends in this case on the potential for sanctions (Kogut, 1989) that is ascribed to the powerful party. If the distribution of resources makes the social attribution as a power holder likely, the perceived risk of deciding in favor of the control mechanism ‘‘power’’ is low. ‘‘It is simplest if they have power. Then you can decide: ‘Only that, if that!’’’ (venture capitalist 1). But the greater the doubt about possibilities of sanctions and the ultimate willingness to use them against those subjugated to that power, the weaker the position of the power holder (Bachmann, 2001). ‘‘In the worst case, the other side knows there is no position of power and simply does not behave cooperatively’’ (venture capitalist 4). The limits of sanctioning — as our data revealed — ultimately lie in the individual benefit gained. Because the exchange parties depend on each other by virtue of their reciprocal transfer of resources, sanctions felt to be excessively harsh undermine the other party’s interest in cooperation, jeopardizing the sanctioner’s own returns on the project. ‘‘At the end of the day, they had a financial investment that had to be optimized without the management running away. Our means of bringing pressure to bear was to threaten to close our company, and then the investment would have been completely lost’’ (entrepreneur 2). Although the coordination that trust inspires in holistic moral orders proves to be comparatively pronounced and steady, it still has to be flanked by appropriate possibilities for sanctions. The reason is that the sense of solidarity innate to an exchange system is not the only factor determining the action of the VC and the PC; the maximization of the individual’s benefit is always involved as well. Violation of prosocial norms can have adverse implications for the trust relationship (Montada, 1998). ‘‘When he broke our agreement, it forced a difficult and bitter confrontation in which we also lost trust in him’’ (venture capitalist 6). Because the exercise of power to sanction breaches of norms is limited by universally accepted norms of exchange and fairness, the policing of norms increasingly requires indirect, social forms of control. In keeping with the social mode of control, sanctioning practice becomes socialized when all members, not just those directly affected, punish violations of group norms and thereby restore justice.11 This response strengthens trust in the viability of the exchange system. The element that works both to limit and facilitate sanctions in such cases is ‘‘a context for generalized reciprocal retaliation, defined broadly as the repayment of injurious or otherwise undesired acts’’ (Westphal & Zajac, 1997:164). The litmus test for the functioning of such control over contextual governance is the way in which conflicts are dealt with. If the VC in this

10 ‘‘[Relational trust] derives from repeated interactions over time between trustor and trustee. Information available to the trustor from within the relationship itself forms the basis of relational trust’’ (Rousseau et al., 1998:399).

11 With respect to social obligation reciprocity, trust and power are less based on the attributed personal traits of the exchange partners involved. Structurally, they derive predominantly from the exchange system itself (Bachmann, 2001).

parameters with relative precision’’ (entrepreneur 6). When the VC and the entrepreneur have a comparatively long-term tie, repeated exchanges are likely. This ‘‘shadow of the future’’ (Axelrod, 1984:72) facilitates trust-building, provided that the actors defer short-term benefit maximization in favor of longer-term returns on cooperation (Cable & Shane, 1997). The primacy of balanced reciprocity (Sahlins, 1996) states that advance inputs made in the course of repeated interactions oblige the acceptor of trust to respond adequately in kind. ‘‘It works quite simply. You get money only if you have hired the people’’ (entrepreneur 7). The parties balance their accounts after each round of exchange and decide accordingly on a strategy of cooperation or defection. ‘‘At the moment we are relatively even in terms of where we have yielded and where the founder has accommodated us’’ (venture capitalist 2). In exchange systems based on a holistic moral order, forms of ‘‘relational trust’’ dominate.10 Because the actors’ actions always also meet pro-social norms, the other party can justifiably show good faith by making an advance input. ‘‘Complying with verbal contracts is a matter of trust. If I treat someone professionally and have concluded an agreement on future procedure, then I expect from him a maturity and reliability that he will keep to our arrangement’’ (venture capitalist 9). It is clear that trust shown in this situation grows from a self-imposed obligation. Because consideration of each other’s interests and of what each has in mind is treated by both exchange partners as an inherent norm of their own objectives, trust acquires a cohesive and coordinating effect that goes beyond utilitarian calculations of benefit (Larson, 1992). ‘‘I believe we both have this trust, so we don’t take advantage of each other. We do fight, but we actually always fight fairly and relatively straightforwardly’’ (venture capitalist 8). If trust is not seen primarily in the sense of a capitalizing good but rather as a gift in the context of what one could call a morally driven gift culture, then the relational aspect comes more to the fore. Although unilateral exchange cycles invite the parties to free riding, they also offer the opportunity for the development of long-term trust relations that, in turn, keep the exchange of gifts free of disillusionment. ‘‘You often deal with complete strangers. But after a year in the role of management or the supervisory board, they have had many hard and good times. That promotes the growth of basic trust that makes a lot of things easier’’ (venture capitalist 7).

148 Table 4

C. Weber, M. Go ¨bel Summary of results.

Core dimensions

Economic exchange reciprocity

Social obligation reciprocity

Macrocultures

Cultural adaption (orientation of actors related to their institutionalized roles) Utilitarianism central (economic calculation), morality peripheral

Cognitive reflexivity (orientation related to the individuality of the counterpart) Morality central (holistic moral order), utilitarianism peripheral

Relationship

Balanced power constellations and dyadic control of observable stocks and flows of resources Reciprocity based on direct exchange of like values

Exchange cycles, long-term mutuality and solidarity, delayed compensation Reciprocity as generalized norm in the broadened exchange network

Action modes

Benefit-seeking role typing for predictability of action Calculative trust and power as primary mechanism of coordination

Solidarity-seeking role typing for predictability of action Relational trust and pro-social norms (fairness and justice) as primary coordination mechanism

situation goes without resorting to formalized control procedures and engages instead in consensual conflict resolution that is perceived as fair and ‘‘mutually accommodating’’ (venture capitalist 7), the exchange system can even emerge stronger than it was beforehand. Processing norms of fairness and justice12 through conflict resolution and sanctions not only reinforces trust in the viability of the exchange system’s moral code. Unlike the purely utilitarian exercise of power, it also makes clear that the other party’s interests and position are to be taken as an intrinsic norm of sanctioning and conflict resolution. ‘‘Our highest guiding principle is always to play fair. You can, of course, also bring enormous pressure to bear in some situations. You have to be extremely cautious then because, naturally, it can easily destroy such relations’’ (venture capitalist 4). We summarize both types the two empirically generated types of reciprocity in Table 4.

Conclusions Having presented our results on the divergent types of exchange, we now return to the research questions formulated at the outset: 1. In which sociocultural context do exchange processes between VCs and PCs occur? With regard to neoinstitutionalism, it became clear that the exchange processes between VCs and PCs take place in a sociocultural context. Unlike the message implied by the literature on VCs, however, this sociocultural context was not homogeneous. As Thornton (2002, 2004) has pointed out, various institutional logics are relevant in the observed exchange processes. The manifestation of each logic is a function of the components that the actors take from their array of institutional tool kits (Swidler, 1986). In the cases we observed, the market itself, the profession, the enterprise, and the family as institutional domains seemed to influence the structure

12 As Go ¨bel et al. (2007) have exhaustively shown, norms of fairness and justice derive directly from an institutionalized moral order.

that characterized the types of VC—PC exchange. Economic exchange reciprocity predominantly appeared to reproduce the logics of the market and the profession(s) involved, whereas social obligation reciprocity encompassed a broader spectrum in which logics like those of the family are relevant as well. 2. What effects does this context have on the behavior or motives of the parties to the exchange? Between these discrete institutional logics, there obviously arose contradictions that affected the actors and gave them varying scope for interpretation and action. It was clear from our data that most of the actors either did not exploit that scope or did not even recognize it in the first place. The factors impinging on these ‘‘processors’’ can be partly surmised. For instance, a certain aversion to challenging the institutionalized assumptions, values, and rules of the VC system may have had a role. A minority of the actors, the ‘‘interpreters,’’ not only recognized the scope of interpretation and action inherent in the colliding logics but also used it to differentiate themselves from other competitors within the VC community. By taking the motives for action in other logics and integrating them into their own system, the interpreters acquired new behavior options that the processors deemed socially unacceptable and therefore unavailable to them. 3. Beyond those individualistic and benefit-maximizing motives predominantly described in the economic literature, are there any ‘‘pro-social’’ and moral motives for action that determine the actors’ behavior within the exchange relationship? If so, then what are they? The motives for action that we observed in VC—PC exchange relations based on social obligation reciprocity seemed to be coupled predominantly to the logic of the family but also to the logic of the second socialization, which is afforded by the relevant profession (e.g., the Hippocratic oath of physicians). These exchange relations entail normative expectations that derive from the logic of the market and from benefit-maximizing behavior. In addition, however, unlike economic exchange reciprocity, they exhibit pro-social motives for action (e.g., fairness and justice) and abilities like empathy. These motives and abilities all emerge from the logic of families and professions to become dominant maxims of action.

Reciprocity and interorganizational governance 4. Can different types of exchange be inferred from the interactions we have empirically observed? As evident from the presentation of our data, numerous differences between the VC—PC relations surfaced along the emerging core dimensions we have identified. These observed differences seem more than sufficient to justify recognition of a type of VC—PC exchange beyond the one customarily described in the literature. In the present study we seek to make a contribution in the field of VC research and to the more general field of interorganizational cooperation. We use qualitative data from German VCs in an attempt to inquire into the limitations in the current descriptions of VC—PC dyads when it comes to directing attention to the conditioning cultural dimensions and social constructivism of VC relations. This article thereby responds to the call by Gartner and Birley (2002:393), who point to the need of qualitative methods in entrepreneurship research to go ‘‘beyond description’’, to ‘‘provide explanations’’ and to generate theory. A new type of investment relationship is emerging whose advent and manifestation differ in key ways from those of traditional economic analysis. The present paper builds on earlier theoretical work on reciprocity in contexts of cooperation (Go ¨bel et al., 2007) by proposing eight categories with which to describe this type of exchange. We see our contribution in six points. First, this study expands the VC literature by moving the theoretical discussion of microlevel VC—PC dyads beyond the narrow confines of economics. We have shown that one cannot initially assume the VC—PC dyads to be as stable and manageable as postulated in economic theories. Second, the macrolevel we have conceptualized clearly documents that socioinstitutional contexts are relevant to the formation of VC—PC relationships. Unlike economic analyses, which abstract from the cultural and normative context of exchange relationships, our conceptualization introduces an exogenous order as a central reference point for the genesis and manifestation of such investment relationships. Third, by tapping into institutional logics, we have been able to identify an additional type of theoretical exchange never before depicted in this way. The insights gained from our data can also be fruitful in general for the literature on interorganizational relations, which seldom expressly states that a form of reciprocity underlies every cooperative interorganizational relation. Because this concept is usually only implicit, theoretical work on it is scant. Our article’s fourth contribution is thus that it enriches previous research in this field by treating the concept of reciprocity in interorganizational relations explicitly for the first time. Fifth, drawing on the understanding we gained from preliminary work, we have now developed an independent theoretical position on reciprocity in exchange relations. Lastly, we contribute to the current discussion of agency in institutionalist theory by showing how organized actors, in their interactions, reproduce or change sociocultural institutions. We believe that our findings are far more relevant to the German VC context in some ways than in others. Although we expect to find economic exchange reciprocity and social obligation reciprocity in a wide variety of

149 venture capital markets worldwide, the distribution, or frequency of occurrence, of those two types of exchange might differ depending on the sociocultural context. A prime example of where such divergence might arise is Hofstede’s (1980) third dimension of national culture — individualism versus collectivism — according to which western cultures are centered significantly more on the individual than Asian cultures are. Studies on reciprocity (e.g., Joy, 2001) show that the family context in Asian cultures, which extends to business contacts, is construed more broadly than it is in western cultures and that instrumentality plays a rather marginal role in reciprocal interaction processes. Cross-societal or crossnational comparisons of exchange relationships might therefore be a fruitful approach for further research. The limitations of these contributions obviously lie in the study’s exploratory character. It remains for further organizational research, particularly that on investment exchange systems, to show whether the new type of exchange we have generated is a special case. Another limitation is the still quite static relationship between industries, the environment, macroculture, the exchange relationship, and the individual. Although we have intermittently pointed out the interactions between the levels of emergence, the logic underlying our derivation of the relationship is linear. Future research must explore this interdependence of the levels, with their many feedback loops and disequilibria, and must study their development over time. Complexity theory may offer a promising analytical perspective in this regard. Its initial applications in management and organizational science (Browning et al., 1995) show that it can offer important insights into the dynamics of sociality.

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