Take the money or run?

Investors’ ethical reputation and entrepreneurs’ willingness to partner

Entrepreneurship research has largely focused on how venture capital (VC) investors evaluate entrepreneurs and their ventures in order to make effective investment decisions. Vlerick Professor Yves Fassin and colleagues Will Drover (Southern Illinois University and Babson College) and Matthew Wood (Baylor University) have conducted a study that considers VC investment from the entrepreneur’s perspective: specifically, how the investor’s ethical reputation influences the entrepreneur’s willingness to accept funding.

The few previous studies from the entrepreneur’s perspective focus on two main dimensions in the entrepreneur’s evaluation of potential investors: namely, the added value the investor delivers and the investor’s track record of success. The important role of the ethical dimension in venture capital investment has been an under-researched area of inquiry – even though VC investors often have a power advantage over entrepreneurs and can act opportunistically or unethically.

The profound impact of the VC’s ethical reputation

The authors analysed 550 entrepreneur decisions concerning whether or not to partner with venture capitalists. Their findings reveal that the VC’s ethical reputation profoundly influences the entrepreneur's willingness to partner. Thus, in addition to the investor’s value-added services and investment track record, his/her ethical reputation plays a key role in the entrepreneur’s evaluation.

The authors also conducted a second study, which shows that when entrepreneurs develop their own perceptions about a VC’s behaviour – that is, when they are not overtly told that a VC is ethical or unethical – the ethical dimension is still a highly influential factor.

Furthermore, the researchers found that, as an entrepreneur’s need for funding increases, and as the consequences of rejecting the funding offer become more severe, the entrepreneur becomes increasingly more tolerant of partnering with an unethical investor.

Sins of the past haunt the present

This study helps bridge the fields of ethics and entrepreneurship and adds to our understanding of the dynamics of the investor-entrepreneur relationship. The findings of this study set the stage for important avenues of future research while offering insights into this area of business practice:

  • In particular, VCs and other investors should be aware that ‘sins of the past’ may influence their ability to partner with high-quality entrepreneurs in the future.
  • The rise of online investor feedback communities (such as ‘TheFunded.com’) is making information on ethical reputation much more transparent.
  • Entrepreneurs should do their homework on this important aspect of their investor evaluation.

Source: 'Take the money or run? Investors’ ethical reputation and entrepreneurs’ willingness to partner' by Will Drover, Matthew S. Wood and Yves Fassin, Journal of Business Venturing, 2013.

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