Take the money or run? Investors' ethical reputation and entrepreneurs' willingness to partner

• Published in: Journal of business venturing Vol. 29; no. 6; pp. 723 - 740
• Main Authors: Drover, Will, Wood, Matthew S., Fassin, Yves
• Format: Journal Article
• Language: English
• Published: New York Elsevier Inc 01.11.2014; Elsevier Sequoia S.A
• Subjects: Agency theory; Business Ethics; Conjoint Analysis; Decision making models; Entrepreneurs; Ethics; Explicit knowledge; Investor Reputation; Investor Selection; Partnering; Reputations; Studies; Venture Capital; Investor Reputation; Business Ethics; Conjoint Analysis; Venture Capital; Investor Selection
• ISSN: 0883-9026; 1873-2003
• DOI: 10.1016/j.jbusvent.2013.08.004

Drawing on the multi-principal–agent perspective, this research models the influence of venture capitalists' reputation for ethical behavior on entrepreneurs' willingness to partner decisions. We test our model using a two-study design. Study one, a conjoint experiment, revealed that explicit knowledge of past unethical behavior negatively affects entrepreneurs' willingness to partner. Interaction effects revealed that factors previously shown to influence the entrepreneurs' evaluations—investor value-add and investment track record—become largely contingent upon and often subjugated by investors' ethical reputation. Study two, a traditional between-subjects scenario experiment, revealed that when entrepreneurs develop their own perceptions about the ethicality of an investor's prior behaviors, the ethical dimension remains highly influential. Further, we find that as the consequences of rejecting funding become more severe (e.g., possible bankruptcy), entrepreneurs become increasingly willing to partner with unethical investors. We also find that high fear of failure entrepreneurs are less willing to partner with unethical investors than their low fear of failure counterparts. •Ethics in venture capital stands as an important, yet overlooked area of inquiry.•The ethical reputation of a VC profoundly influences the entrepreneur's willingness to partner.•An investor's ethical reputation also plays a key interaction role in the entrepreneurs' evaluation.•Contextual and individual-level variables impact how entrepreneurs view unethical investors.•As their need for funding increases, entrepreneurs become increasingly tolerant of unethical VCs.