The role of ethical reputation in the evaluation of VC investors: The entrepreneurs'view

Abstract

The intersection of ethics and entrepreneurship has received limited research attention to date (Harris et al., 2009), leaving the ethical dimension of venture capital (VC) investment activity understudied. Leveraging agency theory, we respond to numerous calls for research by modeling and empirically examining how a venture capitalist’s (VC) reputation for ethical behavior impacts the entrepreneurs’ willingness to partner. After putting forward a discussion of ethics in VC, we utilize conjoint analysis alongside post hoc questionnaires to investigate how ethical reputations influence the entrepreneurs’ willingness to partner. We find that—in practice—a considerable proportion of entrepreneurs have encountered unethical investors and that knowledge of such actions profoundly shapes the entrepreneurs’ willingness to partner. Analysis of interaction effects indicate that factors previously shown to drive entrepreneurial evaluations (e.g., value-added capabilities) become largely contingent upon and in many cases subjugated by an investor’s ethical reputation. Collectively, this research underscores the importance of including the ethical dimension in both VC and broader research on entrepreneurship; a number of areas for future research are suggested.