Trust in Entrepreneur — Venture Capitalist Relationships: A Bilateral Perspective

Abstract

For new ventures, acquiring venture capital (VC) investments is crucial in order to grow successfully. Using a two-study mixed-methods design, we detail and empirically test a conceptual framework about the development of cognition- and affect-based trust between ventures and VC-investors, and the influence of trust on resource transfer and new venture growth. Grounded in exchange-theory and based on interviews with 18 VC-investors and venture-founders in Germany (Study 1), our framework posits that informational and interpersonal signals, send out by the entrepreneur during first negotiations, help overcome initial information asymmetries and build trust. Trust then lays the foundation for the transfer of the financial and non-financial resources required for venture growth. We test this framework using structural equation modeling with empirical data on 119 out of 500 (23.8%) German technology-based ventures (Study 2). Our data indicates that entrepreneur interpersonal signaling is decisive in building initial affect-based trust. This leap of faith, however, then needs to be substantiated by the ventures performance, underscoring the development of cognition-based trust. In sum, both dimensions of trust are important preconditions for resource transfer, whereby we find that new venture growth is most significantly driven by financial support. Implications of our findings for theory and practice are discussed.