The role of trust in interactions between VC investors and founders in Finnish startup companies

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Journal Title

Journal ISSN

Volume Title

School of Business | Master's thesis

Authors

Date

2023

Department

Laskentatoimen laitos

Major/Subject

Mcode

Degree programme

Accounting

Language

en

Pages

78 + 8

Series

Abstract

The world of early-stage venture capital (VC) is often considered unstructured, and the typical theories of governance, such as agency theory, are not perhaps able to capture the essence of the governance structures. For this reason, the role of softer aspects is relevant in this context. Startups rely on soft information in the early stages, where there is little hard information such as numbers. The relationship with the early-stage venture capital investor and the portfolio company founder/CEO is transparent and honest at its best. This creates an environment where problems and mistakes can be openly shared and discussed together with the board of directors, investors, and the management team. There are different types and directions of trust and it is built between different stakeholders. Finland is still a nascent market for venture capital and startups, but both have become increasingly important for the economy and continue to do so. Therefore, it is fruitful to explore the role of trust in the interactions in this industry. In Finland, this has been explored less, but in the context of venture capital in a broader geographical scope, the role of trust has been examined. This research contributes to better understanding of trust in three aspects: making venture capital investments, in the interactions between the venture capital investors and portfolio company founders or CEOs, and in the board work. The research is qualitative, and empirical material is gathered through semi-structured interviews with the most prominent VC investors and early-stage founders or CEOs in Finland. Through an identified framework, I explore trust and connect it with agency theory, information, soft aspects, and risk & control. I find evidence that while the control function described in the agency theory is somewhat used in mitigating information asymmetry and incomplete contracts, the focus is more on sharing information in an emotionally secure environment, where trust is present. Social control is one example of the soft aspects and contribute to open dialogue and joint decision-making. Trust is found to diminish risk in relation to whether the investment is made, but control is found not to diminish risk. Also the types and directions of trust are explored, and it is found that the trust between VC investor and startup founder/CEO is the strongest and mutual trust is essential for good collaboration. The purpose of venture capital is, in monetary terms, to create profits i.e. successful exits for the fund investors. Nevertheless, the ways to create value differ from traditional settings, ranging from investor being on the founder’s side, sharing access to networks, signaling to the market with the VC fund’s reputation and potentially having industry expertise. Hence, the VC investor’s value-added is deeply rooted in trust.

Description

Thesis advisor

Ikäheimo, Seppo

Keywords

venture capital, trust, board of directors, early-stage startups

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Citation

Permanent link to this item

https://urn.fi/URN:NBN:fi:aalto-202301221436

Collections

[gradu] Kauppakorkeakoulu / BIZ