Entrepreneurs and adolescents have a lot in common.
Both are bounding with energy, navigating rapid changes, still learning the world around them—and, yes, brimming with overconfidence. So entrepreneurs, like teenagers, need a protective mother-figure to help them navigate the risks they probably don’t even recognize.
That’s the crux of a new study by Benjamin Hallen, an assistant professor of management at the University of Washington Foster School of Business.
“Like teenagers, entrepreneurs see the world full of possibilities and are eager to make their mark on the world around them,” writes Hallen in a recent post at Forbes online. “And this is a good thing, especially for those of us who benefit from the new products and services that they bring to market.
“On the other hand, the combination of overconfidence and the new situations in which they often find themselves can also create a lot of risks…”
To assess the social defenses against these inherent risks, Hallen and co-authors Riitta Katila of Stanford University and Jeff Rosenberger of Wealthfront examined 700 high-tech startups which raised more than 18,000 investments from 1979 to 2003.
Specifically, they studied the decisions of entrepreneurs accept corporate venture capital—investment from established companies that often comes fraught with mixed motives.
Hallen explains that corporate “sharks” often invest in startups to test the water in a new technology or market, or with other motivations that conflict with the aspirations of founders and independent investors (such as traditional venture capitalists, or VCs).
Surviving the shark tank
The researchers found that independent VCs can play the role of big brother or protective mother, depending on their proximity to the startup.
Like an older sibling, distant VCs tend to use their existing relationships, reputations and clout to open doors to future corporate venture investment. This third-party involvement may also help deter corporate investors from actions that may not be in the entrepreneur’s best interests (though Hallen’s study suggests that such reputational deterrence may be less effective than previously thought).
When experienced VCs are located nearer to the startup, however, they tend to act as a protective mother, identifying long-term risks—especially those associated with raising corporate funding—and suggesting safer alternatives. Accordingly, Hallen finds that such entrepreneurs are less likely to raise capital from corporate investors, instead preferring other independent venture capitalists whose interests are more aligned with their own.
The research emphasizes the value of guidance and accountability to a new venture. “While entrepreneurs can go it alone,” Hallen writes, “they may want to consider finding a protective mother in the form of either an investor or an advisor who can help keep them from unnecessary risks along their journey.”
“How Do Social Defenses Work? A Resource-Dependence Lens on Technology Ventures, Venture Capital Investors, and Corporate Relationships” is published in the August 2014 Academy of Management Journal.
Read Hallen’s article at Forbes online.