Entrepreneurs are not always willing to take funding from just anyone with deep pockets, new research suggests.
When it comes to working with venture capitalists, entrepreneurs are looking for partners who have a reputation for behaving ethically, according to a study recently published in the Journal of Business Venturing.
"Given the rise of online investor feedback communities, one's ethical reputation is becoming more transparent and, thus, venture capitalists, as well as other investors, should be aware that the sins of the past may influence their ability to partner with high-quality entrepreneurs in the future," Matthew Wood, one of the study's authors and an assistant professor of entrepreneurship at Baylor University, said in a statement.
The research, based on an analysis of more than 550 decisions and responses from 144 experienced entrepreneurs, reveals that ethical reputation can trump the key resources venture capitalists bring to the table, such as "value-added services" and "investment track record."[4 Things Investors Really Want to Know ]
While past research has focused on how venture capitalists select entrepreneurs, this is one of the first studies to examine the other side of the coin.
"To date, researchers have not sufficiently investigated why this might be the case and our study introduces ‘ethical reputation’ as one reason why an entrepreneur might reject a venture capitalist’s offer," Wood said.
Not all entrepreneurs, however, will shun the chance to take funding from those whose reputation isn't so squeaky-clean. Business owners who are facing serious consequences, such as bankruptcy, or have a high fear of failure are more likely to overlook poor ethical reputation.
Wood said this is a major concern for entrepreneurs, because it suggests they need to be especially vigilant when they are in situations where there are severe negative consequences for rejecting funding offers.
"In these situations they will be more willing to partner with unethical investors," Wood said. "This is likely trading short-term gain for a long-term loss, and one must carefully consider the future costs of opportunistic behavior on part of the investor that will eventually have to be paid."
The study was co-authored by Will Drover, an assistant professor of strategy and entrepreneurship at the University of Oklahoma, and Yves Fassin, a professor of management innovation and entrepreneurship at Ghent University in Belgium.