Funding-source-induced bias: How social ties influence entrepreneurs' anticipated guilt and risk-taking preferences

Abstract

Raising money from family and friends is a common form of startup funding. However, we know little about how accepting funds from these individuals influences an entrepreneur's risk-taking preferences. We theorize that as an entrepreneur's relationship with an investor strengthens, the entrepreneur is more likely to anticipate guilt that could emerge from a potential venture failure, which prompts the entrepreneur to make more conservative venture growth decisions. We test our model using a quasi-experimental vignette-based approach. Based on the results, we argue that the tendency for an entrepreneur to become more risk averse in their entrepreneurial decision making due to feelings of anticipated guilt after receiving funding from strong ties demonstrates a funding-source-induced bias.