Funding Source Intimacy Bias: Examining the Impact of Strong Ties on Entrepreneurial Decision Making

Abstract

Due to the ease of accessing individuals in entrepreneurs’ social networks, raising money from friends and family is one of the most common forms of startup funding. Despite this being a significant form of financing, we know relatively little about how accepting funds from these individuals influences an entrepreneur’s decision making. Drawing on sociological research on strength of relational ties, this study investigates how entrepreneurs’ relationships with investors influence their risk-taking preferences, and consequently, their decision making. Using quasi-experimental methods, this study found that as the strength of a relationship with an investor increases, the entrepreneur is more likely to pursue a more conservative growth choice for his or her venture. This effect is mediated by greater feelings of anticipated guilt if the entrepreneur’s venture is not successful. Narcissism was investigated as a potential moderator of this mediation effect. In line with the results of this study, I introduce the notion of “funding source intimacy bias”, which is the tendency for an entrepreneur to become more risk averse after accepting funds from a strong tie.