The aim of this study is to understand how venture capitalists (VCs) evaluate an entrepreneur with a track record of conflict with previous investors when making an initial investment decision.
This study draws on a conjoint experiment design with 2,064 observations from 129 participants. The data was analyzed using Hierarchical Linear Modeling.
This study finds that VCs evaluate entrepreneurs’ track records of conflicts conjointly to minimize adverse selection and agency risk. Specifically, different types of conflicts have different effects on VCs’ perception of agency risk. Notably, VCs placed significant value on an entrepreneur’s track record of task conflict (TC) when the entrepreneur’s record of relationship conflict (RC) was low. Moreover, an entrepreneur’s TC track record gains prominence when coupled with a successful past venture outcome and a high ethical reputation, as opposed to instances of failure or ethical lapses. Additionally, authors find that VCs’ perception of agency risk associated with an entrepreneur with a track record of RC can be mitigated when the entrepreneur has a record of past venture success and ethical behavior.
This study only focused on one specific aspect of the entrepreneur’s track record in past ventures: the effect of their track record of conflict with previous investors. By no means do the authors imply that the entrepreneur’s track record of conflict is the only important track record that VCs consider when evaluating entrepreneurs for potential partnerships.
Although conflicts between investors and investees are perceived to be a normal venture event, entrepreneurs should be aware that their track record of conflict with previous investors may be favorable or unfavorable to other investors. Potential investors will scrutinize the entrepreneurs’ track record of conflict when making investment decisions. Entrepreneurs should be particularly careful about RC and strive to always maintain a high ethical reputation with investors. Also, entrepreneurs should note that past success in ventures can mitigate the investors’ negative perception of the entrepreneurs’ track record of conflict.
Before this study, little was known about whether an entrepreneur’s track record of conflict positively or negatively influences VCs’ investment decisions. The analysis revealed for the first time how VCs perceive and evaluate an entrepreneur with such a track record. This study shows the conditions under which TC is perceived as functional and dysfunctional, as well as how the negative perception of RC can be mitigated.
