Who Will Stay When Crisis Strikes? VC Projected Event Schemas on Ventures in Crisis

Abstract

We explore how organizational cognition based on knowledge structures or schemas determines how organizations respond to adverse events that they encounter in their partners. Specifically, we develop the concept of a projected event schema to study how organizations make decisions related to crises affecting their partners. We theorize that in order to make decisions as to a partner’s crisis event, the focal organization will project its event schema onto the partner. That projected event schema includes the focal organization’s general experience, specific experience with the partner, and experience with similar crises. We test this concept through a study of how venture capitalists (VCs) project their event schemas on entrepreneurial ventures experiencing a lawsuit in the VCs’ decision whether to continue to invest in the ventures. The context is particularly relevant given the limited resources that entrepreneurial ventures have and the advice, legitimacy, and financial resources that VCs provide to those ventures, especially when the ventures face a crisis. In our empirical study incorporating 528 VC investment decisions, we find support for VCs’ projected event schemas on ventures involved in lawsuits. Our work contributes to the literature on cognition, entrepreneurship, and crisis management.