WHO WILL STAY WHEN CRISIS STRIKES? VENTURE CAPITALIST THREAT-DEFIANT LEARNING RESPONSE TO VENTURES IN CRISIS

Abstract

Firms often depend on relationships with other firms to access important resources. When a crisis strikes a firm, the continuation of those relationships can be jeopardized, as many indirectly affected firms will leave the relationship. This abandonment can be particularly harmful if the crisis-struck firm is dependent on the relationship for valuable resources. However, some firms choose to continue their relationship with the crisis-struck firm. We consider what makes those firms resist the temptation to respond rigidly and abandon the crisis-struck firm. We contend that firms that defy such indirect threats do so as a result of threat-defiant learning, which stems from confidence gained from their prior relational experiences. We test this concept in the context of venture capital firms’ (VCs) investments after venture crises in the form of venture involvement in a lawsuit. Studying 435 VCs’ decisions on whether to continue to invest in 105 ventures experiencing lawsuits, we find support for threat-defiant learning. This study contributes to the literature on crisis, threat rigidity, and entrepreneurship by showing how firms can resist threat rigidity in interfirm relationships, specifically how VCs learn from experience to defy threats posed by venture lawsuits and make post-lawsuit follow-on investments.