By Abigail Loop
A Baylor professor published a study this semester suggesting that entrepreneurs look at more than just the bottom line when deciding whether or not to partner with other venture capitalists. Ethical behavior displayed by potential investors plays an even bigger role in the decision making process, the study found.
Dr. Matthew Wood, assistant professor of entrepreneurship at the Hankamer School of Business, co-authored the study with two other professors from The University of Oklahoma and Ghent University. The study was published in last month’s issue of Journal of Business Venturing.
Wood said the main focus was to look at the relationship between entrepreneurs and investors from the entrepreneur’s point of view, and see the perceptions of unethical behavior.
“Business people say that integrity matters,” Wood said. “The study shows how it exactly matters. We found that ethical representation matters a lot.”
Wood and his colleagues devised two experiments where they put together a group of 144 experienced entrepreneurs. In the first experiment, the entrepreneurs were told whether or not a venture capitalist’s business practices were unethical, and were asked to give their opinion on it. In the second experiment, the entrepreneurs were just told of their behaviors, and had to decide if it was unethical or ethical and give their decision.
“We got almost identical results in both decisions. They were much less likely to partner with an investor if they showed signs of unethical behavior,” Wood said. “Investors and venture capitalists play a big role in the partnership because they have the power over what happens. There are severe consequences if you’re with an unethical partner.”
Dr. Mitchell Neubert, Chavannes Chair of Christian ethics in the Hankamer School of Business, agreed with Wood and said trust is fundamental when forming and maintaining partnerships.
“Trust is essential in ethics, whether it’s legally or with relationships,” Neubert said. “Some entrepreneurs might be desperate to form unethical relationships if they’re desperate, but the mistake is long-term. In the future it will just damage or hurt the entrepreneur.”
According to the Institute of Business Ethics, 100,000 people were interviewed about working at an ethical company. Almost 90 percent of respondents said they were more likely to work for a company that is considered ethically and socially responsible. Roughly a quarter of respondents would even take a lesser role or salary to work for a company that has a community conscience.
Wood said prior research shows there are some great advantages to partnering with venture capitalists. Positive factors that an investor has, such as prior investment success, value adds or an extensive network are what draws in entrepreneurs. However, the harm unethical behavior can do to entrepreneurs overshadows the advantages.
“As an entrepreneur, you’re married to investors,” Wood said. “There can be some real costs because of that. It all depends on how desperate the entrepreneur is when dealing with an unethical partner.”