resources and relationships in entrepreneurship: an exchange theory of the development and effects...

Q Academy of Management Review2017, Vol. 42, No. 1, 80–102.http://dx.doi.org/10.5465/amr.2014.0397

RESOURCES AND RELATIONSHIPS IN ENTREPRENEURSHIP: ANEXCHANGE THEORY OF THE DEVELOPMENT AND EFFECTS OF

THE ENTREPRENEUR-INVESTOR RELATIONSHIP

LAURA HUANGUniversity of Pennsylvania

ANDREW P. KNIGHTWashington University in St. Louis

We develop a theoretical model, grounded in exchange theory, about the processthrough which relationships between entrepreneurs and investors develop and influ-ence the growth of new ventures. Our theory highlights the multifaceted relationshipsthat entrepreneurs and investors share—comprising both affective and instrumentaldimensions—and the bidirectional exchanges of social and financial resources thatbuild these relationships over time. An exchange theory perspective sheds light on theemergence of different patterns of relationship development over time and how differentkinds of resource exchange contribute to new venture growth, contingent on the coreproblems that a venture faces at a given stage of development. We discuss implicationsof an exchange perspective on resources and relationships in entrepreneurship fortheory, research, and practice.

When you ask people what investors need to makean investment decision, people will inevitably saythat they look for the business plan, or a pitch pre-sentation. But, there are actually all these other“events” that occur outside of talking through thebusiness plan or watching a pitch presentation.Investors will meet the entrepreneur for dinner,they’ll go on a trip to a conference together, they’llmeet for impromptu coffee discussions. . . . Thereare all these “dates,” and these events are an im-portant part of the investment decision process(O. Ammar, entrepreneur and angel investor, per-sonal communication).

The life of an entrepreneurial venture is un-predictable, with at least half of new venturesfailing within five years (Aldrich & Ruef, 2006).To reduce the likelihood of failure and succeedin building a new business, entrepreneurs mustacquire a diverse set of resources (Van de Ven,Polley,Garud, &Venkataraman, 1999). Financialresources enable entrepreneurs to fund productdevelopment, deploymarketing campaigns, andrecruit and hire talented employees. Financialresources alone, however, are insufficient for

building a business. Entrepreneurs also must ac-quire social resources, such as access to partnersand advice to help hone the strategic position ofthe venture (Coase, 1937; Connor & Prahalad, 1996;Grant, 1996; Kogut & Zander, 1992).Entrepreneurship scholars have long under-

scored the importance of relationships betweenentrepreneurs and investors for enabling thetransfer of resources (Aldrich & Zimmer, 1986).Relationships are conduits through which finan-cial and social resources flow, promoting thegrowth of new ventures and aiding investors inprofiting from their investments (e.g., Ehrlich,De Noble, Moore, & Weaver, 1994; Sapienza &Korsgaard, 1996; Shane & Cable, 2002; Steiner &Greenwood, 1995). When a match of opportunityand resources occurs, an entrepreneurial ventureis likely to thrive, yielding a return for investorsand entrepreneurs alike (Kerr, Lerner, & Schoar,2011). Without relationships between investorsand entrepreneurs, however, ventures lack ac-cess to the resources they need, increasing theodds of failure (Shepherd & Zacharakis, 2001).Despite the importance of the entrepreneur-

investor relationship for facilitating resource ex-change, there has been limited theorizing aboutthe process through which relationships developin the entrepreneurial context or about the con-ditions under which relationships help or hinderanewventure’sprogress. Existing researchon the

Both authors contributed equally to this article; our namesare listed alphabetically. We are grateful to associate editorJoep Cornelissen and three anonymous reviewers for theirhelpful feedback throughout the reviewprocess.Wealso thankRay Sparrowe and the members of the Wharton School’sM-Squaredgroup for theirguidanceonpreviousversionsof themanuscript.

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http://dx.doi.org/10.5465/amr.2014.0397

entrepreneur-investor relationship (e.g., Ehrlichet al., 1994; Sapienza & Korsgaard, 1996; Shane &Cable, 2002; Steiner & Greenwood, 1995) providesa useful foundation, but a lack of theory aboutthe process of relationship development limitsscholars’ understanding in several ways. First,existing work primarily emphasizes the instru-mental bonds that connect an investor and anentrepreneur, such as how an investor evaluatesthe potential return of an investment in a ventureor how an entrepreneur navigates the terms ofa financial investment (e.g., MacMillan, Zemann,& Subbanarasimha, 1987; Robinson, 1987; Tyebjee& Bruno, 1984). This focus on the instrumental di-mension is not surprising, given that the transferof financial resources between investors and en-trepreneurs is an impactful andwell-documentedevent. Yet instrumental expectations and com-mitments likely make up just one facet of themultidimensional bond that can connect an in-vestor and an entrepreneur. Because affectivephenomena play an important role in entrepre-neurshipmoregenerally (e.g., Baron, 2008;Cardon,Wincent, Singh, & Drnovsek, 2009; Chen, Yao, &Kotha, 2009; Huang & Pearce, 2015; Mitteness,Sudek, & Cardon, 2012) and in the development ofinterpersonal relationships specifically (e.g., Byrne,1971; Krackhardt, 1992; Lawler, 2001), theory isneededtoexplainhowaffective relationalelementsmight also influence the flow of resources betweenentrepreneurs and investors. Further, because af-fective and instrumental relational dimensions areoften intertwined in theworkplace (e.g., Casciaro &Lobo, 2008; Joshi & Knight, 2015), it is importantto explore how the interplay of affective and in-strumental concerns influences the development ofthe entrepreneur-investor relationship.

Second, existing research typically depicts theentrepreneur-investor relationship from one oftwo perspectives. From the first perspective, theentrepreneur is the protagonist, seeking the at-tention and support of potential investors. Thisresearch stream (e.g., Kirsch, Goldfarb, & Gera,2009; Zacharakis, Erikson, & George, 2010; Zott &Huy, 2007) provides insights into how entrepre-neurs signal the value of their ventures. From thesecond perspective, the investor is the protagonist,seeking to make accurate decisions about whichnew ventures warrant investment. This researchstream (e.g., Higashide & Birley, 2002; Navis &Glynn, 2011; Parhankangas & Landstrom, 2004)providesanunderstandingofhowinvestors interpretinformation about ventures. Each perspective sheds

light on one side of the entrepreneur-investor re-lationship, yet neither perspectivealone canaddressthe intrinsically bidirectional dynamics of relation-ship development (Blau, 1964; Emerson, 1976; Kenny,1994).Theory isneededtoconnect theseperspectives,explaining how entrepreneurs and investors act inconcert to jointly shape their relationship over time.Third, researchers, to date, have focused on two

discrete stages—the beginning and the end—ofthe relationship between entrepreneurs and in-vestors. In research on the beginning of the re-lationship, scholars have identified factors thatlead investors and entrepreneurs to becomeaware of one another (e.g., Burton, Sorensen, &Beckman, 2002; Chong & Gibbons, 1997; Walker,Kogut, & Shan, 1997). In research on the end stage,scholars have highlighted factors that predict theformalization of the relationship through an in-vestment round (e.g., Florin, Lubatkin, & Schulze,2003; Shane & Cable, 2002; Venkataraman, 1997).Missing in the literature, however, is theory aboutthe developmental process that unfolds betweenthese stages. Accounting for this process is es-sential for understanding why and when entre-preneurs and investors exchange differentresources and how resource exchange contrib-utes to growth across different stages of the life ofa new venture.In this article we seek to advance understand-

ing of entrepreneurship by developing a theo-retical model, grounded in exchange theory(e.g., Blau, 1964; Cropanzano & Mitchell, 2005;Emerson, 1976; Homans, 1958), of the develop-ment and effects of the entrepreneur-investorrelationship. We propose that the exchangeprocess through which relationships develophas important implications for the growth ofa new venture. Our article provides a novelframework for studying relationships in entre-preneurship and contributes to the literaturein three ways.First, our theory accounts for both the instru-

mental and affective dimensions that characterizethe relationship between an entrepreneur and aninvestor. Accounting for both dimensions, and theirinterplay, helps explain the flow and effects ofdifferent kinds of resources—financial andsocial—between an entrepreneur and an investor.Our model thus builds on growing interest in therole of affect in entrepreneurship (e.g., Baron, 2008;Cardon et al., 2009) and complements traditionallyrational models of entrepreneur and investorrelationships.

2017 81Huang and Knight

Second, with its grounding in exchange theory,our model enriches existing theory by accountingfor the bidirectional nature of this important tie.Consideration of different forms of reciprocalexchange as building blocks of relationshipsreveals how entrepreneurs and investors enacttheir relationship in concert, thus extendingexisting unidirectional perspectives that focuseither on the entrepreneur or on the investor, butnot on the interaction between the two.

Third, our theory extends existing research byexplaining the process of relationship develop-ment that occurs between initiation and formal-izationand,perhaps,beyond.Ourmodel isprocessfocused, depicting a relationship as somethingthat strengthens over time through resource ex-change and feedback loops. A process-focusedperspective sheds light on how a relationship canbe strengthened or weakened over time throughthe dynamics of resource exchange.

Below we first provide an overview of the keyprinciples of exchange theory. We then introduceand describe our conceptual model, which com-prises propositions about (1) the initial inputs toa relationship, (2) the process of relationship de-velopment through resource exchange, and (3) theways relationships relate to new venture growth.We conclude by discussing implications of ourmodel for theory and research on entrepreneurship.

THE DEVELOPMENT OF THEENTREPRENEUR-INVESTOR RELATIONSHIP

To develop new theory about the entrepreneur-investor relationship, we draw from exchangetheory, which is considered one of “the most in-fluential conceptual paradigms for understandingworkplace behavior” (Cropanzano & Mitchell,2005: 874). The term exchange theory refers to sev-eral perspectives (e.g., Blau 1964; Emerson, 1976;Homans, 1958; Thibaut & Kelley, 1959) that haveroots in different disciplines (e.g., economics, so-ciology, psychology) but share a “frame of refer-ence that takes the movement of valued things(resources) through social processes as its focus”(Emerson, 1976: 359). Although exchange theoryhas not played a prominent role in the entrepre-neurship literature to date, it provides a strongfoundation for understanding the role of relation-ships in this context because the movement ofresources is a fundamental aspect of interactionsbetween investors and entrepreneurs (Shane &Cable, 2002).

Central to exchange theory is the transfer ofresources between two people, with a resourcebeing something that another person values(Cropanzano & Mitchell, 2005). Because the valueof a resource is determined by how much it re-wards another person, its value is inherently tiedto a relationship (Emerson, 1976). This relationalconceptualization of resources is powerful be-cause it encompasses a wide range of differ-ent kinds of objects, abilities, and behaviors(e.g., Foa & Foa, 1980). Exchange theory differenti-ates between two umbrella categories of resources(Cropanzano & Mitchell, 2005). The first, which weterm financial resources, includes resources thathave a relatively direct and measurable financialvalue. In the context of entrepreneurship, peoplemost commonly exchange financial capital (i.e.,financial investment in a new venture) and newventure equity (i.e., share of the value of a new ven-ture). The second umbrella category, which weterm social resources, includes those resourcesthat, although lacking a clear financial valuation,are rewarding to a given exchange partner. In re-fining social capital theory, Adler and Kwon (2002)described three subcategories of social resources:information, influence, and solidarity (cf. Sandefur& Laumann, 1998). Each of these is relevant in thecontext of entrepreneurship. For example, entre-preneurs and investors value market knowledgeand strategic advice (information); referrals, rec-ommendations, and enhanced reputations (influ-ence); and feelings of being a part of “the next bigthing” (solidarity; e.g., Cohen & Dean, 2005; Rose,2014; Schurmann, 2006; Shepherd & Zacharakis,2001). An exchange is a bidirectional transfer offinancial or social resources that is, to some de-gree, reciprocal—eachparty expects to give and toreceive (Emerson, 1976). As we discuss in moredetail below, this reciprocity may or may not be inkind (i.e., parties give and receive the same type ofresource) or in temporal proximity (i.e., partiesgiveand receive simultaneously). To constitute anexchange, however, there must be a bidirectionaltransfer of value (Blau, 1964).Whereas an exchange is the discrete transfer of

resources between two people, a relationship isthe bond of commitments and expectations thattwo people have toward one another. Exchangescan be thought of as discrete events nestedwithincontinuous relationships that are developingand changing over the course of time, partly asa function of exchanges (Cropanzano &Mitchell,2005; Sahlins, 1965). Exchange theorists—like

82 JanuaryAcademy of Management Review

those who study social networks (e.g., Casciaro &Lobo, 2008; Ibarra, 1992) and trust (e.g., McAllister,1995)—acknowledge that relationships comprisetwo core dimensions. The instrumental dimensionof a relationship reflects task-relevant commit-ments and expectations—the extent to which twopeople are committed to and expect to benefit fromadvancing one another’s task-relevant goals.The affective dimension of a relationship reflectspersonal and socioemotional commitments andexpectations—the degree to which two people arecommitted to one another’s personal and emotionalwelfare and hold one another in positive regard.These dimensions—the instrumental and theaffective—are conceptually distinct but can beintertwined. For example, close friends who starta new venture together could simultaneously havea strong affective and instrumental relationship.Because relationships provide governance forresource exchange (Sahlins, 1965), the degree towhich entrepreneurs and investors share in-strumental and affective expectations has impor-tant implications for the exchange of resourcesbetween the two.

Building on these foundations of exchange the-ory, we develop a model of how relationships be-tween entrepreneurs and investors develop andinfluence new venture growth. Figure 1 presentsan overview of our theory, which comprises threecomponents. First, our model explains how theconditions that characterize early encounters be-tween investors andentrepreneurs serve as inputsto the process of relational development. Second,our model explains how the affective and in-strumental dimensions of a relationship developover time through the dynamics of resource ex-change.Third,ourmodelexplains the implicationsof these relational dynamics for the growth ofa new venture.

The Seeds of a Relationship: EntrepreneurSignaling Behavior in Context

We begin by describing the behaviors andcontext of early encounters between entrepre-neurs and investors, which seed a relationshipwith initial affective and instrumental expecta-tions. Given that attracting the attention of in-vestors is a major challenge for entrepreneurs,scholars (e.g., Stinchcombe, 1965) have tradi-tionally addressed early interactions from theperspective of the entrepreneur. Specifically,existing research highlights that entrepreneurs

engage in two kinds of impression managementand signaling behavior—interpersonal signal-ing and informational signaling (Chen et al.,2009; Kirsch et al., 2009; Zott & Huy, 2007)—in theirattempts to attract the attention of investors whoare generally reluctant to commit their limitedresources (Hellmann, 2002; Schoonhoven &Romanelli, 2001). Interpersonal signals provideinsight into the entrepreneur’s behavioral styleand how the entrepreneur might work with others.Positive interpersonal signals include demonstrat-ing a communicative stance and openly engagingwith questions,mirroring an investor’s views, andexpressing similar implicit theories about entre-preneurship (Kim & Aldrich, 2005; Sapienza &Korsgaard, 1996; Vissa, 2011). Informational sig-nals address the quality of the venture and thelikelihood that it will advance. Informationalsignals can focus on the venture itself, such asdata about customer acquisition, financial in-formation, or technology demonstrations (Tyebjee& Bruno, 1984; Zott & Huy, 2007), or on the entre-preneur’s abilities, such as education, credentials,or evidence of past entrepreneurial success(MacMillan, Siegel, & Narasimha, 1986).The degree to which an entrepreneur engages

in interpersonal and informational signaling likelyhasimplications for the initialstrengthof theaffectiveand instrumental dimensions of the entrepreneur-investor relationship. By influencing the attributionsthat entrepreneurs and investors make about oneanother’s personal characteristics, the degree towhich early interactions between the two compriseinterpersonal signaling likely shapes the degree towhich their initial relationship is ladenwith affectivecontent. When an entrepreneur signals warmth,friendliness, and cooperativeness, an investor islikely to form initial expectations that workingwiththe entrepreneur will be emotionally rewarding(McAllister, 1995). Research suggests that feelingsof attraction form quickly when two people interact(Ambady, Hallahan, & Rosenthal, 1995; Casciaro &Lobo, 2008). Friendly and warm behaviors maycontribute to initial perceptions by an investor thatthe entrepreneur will be a source of positive affect,which is central to attraction (Byrne, 1971).In addition to these direct effects that contribute

to initial positive affect, interpersonal signalingbehavior also has important symbolic content(Zott & Huy, 2007) that can trigger different re-lational prototypes—expectations about how twopeople will interact and work with one another(Elsbach & Kramer, 2003). In their inductive study


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of signaling behavior during Hollywood screen-writing pitch meetings, Elsbach and Kramer (2003)found that creativeworkers’behavior, in conjunctionwith producers’ reactions, signaled to producers thecollaborativepotential of a relationship between thetwo. In a similar way, an entrepreneur’s use of in-terpersonal signals during early encounters maycontribute to an investor’s initial expectations foraffective benefits from interacting with an entrepre-neur. Importantly,wearenot suggesting that theuseof interpersonal signals renders instrumental con-cerns irrelevant, norarewesuggesting immutabilityof these concerns over time. Rather, the early use ofinterpersonal signals strengthens the initial affec-tive relationship between the two.

Proposition 1: During initial encounters,the use of interpersonal signals by anentrepreneur is positively related to theinitial strengthof theaffectivedimensionof a relationship with an investor.

Whereas interpersonal signaling primes theinitial affective dimension of a relationship, in-formational signaling likely influences the initialinstrumental dimension. Informational signalsaddress one of the foremost questions in an in-vestor’s mind: How financially rewarding mighta partnership with this particular entrepreneurbe? Signals of the viability of the venture and ofthe promise of the entrepreneur aid an investor inmaking an informed decision about the risk andpossible return of placing valuable resources inthe hands of a given entrepreneur. As above, inaddition to substantive content, informationalsignaling behavior also has symbolic content(Zott & Huy, 2007) that can shift an investor’s focusto instrumental concerns. Informational signalsmay trigger a prototype of an entrepreneur-investorrelationship that is heavily instrumental and cen-tered on the financial viability of the venture.Subsequent advancement in the relationship iscontingent on further assessments of the qualityof the venture. However, at this juncture, initialinformational signals strengthen the initialinstrumental dimension.

Proposition 2: During initial encounters,the use of informational signals by an en-trepreneur is positively related to the ini-tialstrengthof theinstrumentaldimensionof a relationship with an investor.

Reflecting the bidirectional nature of re-lationships, it is important to consider how an

entrepreneur’s behavior fits with the concernsthat are most salient for a given investor. Ourmodel thus explains how two contextual charac-teristics of early encounters—the type of investorand the typeof relational structure—moderate theeffects of entrepreneurial behavior.Investor type.We have used “investor” so far to

refer to any person or group of people intending toprovide an early-stage venture with resources inexchange for a return of valued resources. It isimportant, however, to distinguish between twotypes of external investors (e.g., Sohl, 2003). Angelinvestors are wealthy individuals or groups ofwealthy individualsworking togetherwhoprovidetheir own financial capital to early-stage ventures.Venture capitalists (VCs) are institutional investorswho manage other people’s financial capital,investing it in new ventures to earn a return fortheir clients and to claim a share of the profit forthemselves. This intermediation aspect is the keydistinction between VCs and angel investors(Brander, Amit, & Antweiler, 2002). VCs obtaincapital from investors and, like bankers, are theintermediaries between these other investors andan entrepreneur, whereas angel investors directlyinvest their owncapital (Amit,Brander,&Zott, 1998;Brander et al., 2002; Sohl, 2003).The difference between angel investors and VCs

likely has implications for the initial entrepreneur-investor relationship.Becauseangel investors investtheir own financial capital, they have greater free-dom than VCs to consider interpersonal fit with anentrepreneur (Amit et al., 1998). VCs, who are be-holden to external stakeholders, have less latitudethan angel investors to seek affectively rewardingexperiences (Aernoudt, 1999). While there are ex-ceptions, andwhilemany VCs do consider personalfit with entrepreneurs, researchers (e.g., Aernoudt,1999; McKaskill, 2009) have shown that angel in-vestors in particular cite affective rewards as a rea-son to participate in entrepreneurship. Because oftheir interest in not just achieving an instrumentalend but also having a rewarding affective experi-ence, angel investors are likely to bemore receptiveto interpersonal signals than are VCs. The effect ofanentrepreneur’s interpersonal signalsmay thusbestronger within an emerging bond with an angelinvestor than a VC, whose instrumental obligationstrump affective concerns.

Proposition 3: The type of investor mod-erates the effect of interpersonal signal-ing on the initial strength of the affective


dimension of the entrepreneur-investorrelationship; the effect is stronger forrelationships involving angel investorsthan relationships involving VCs.

In contrast, becauseVCs are stewards of others’financial capital, they are more likely to viewentrepreneurs, foremost, as an investment vehi-cle. VCs have an explicit charge to maximizea return on their financial investments, and, thus,initial interactions with entrepreneurs are likelyto be heavily laden with instrumental concerns.Irrespective of any idiosyncratic preferences, allVCs are responsible for others’ capital and haveaduty to return profit. As such, VCsare likely to beparticularly receptive to informational signalsthat can help validate their decisions to clients.While informational signaling will also influenceangel investors, VCs’ relatively greater need toscreen and evaluate the instrumental potential ofnew ventures increases their sensitivity to informa-tional signals. An entrepreneur’s informational sig-nals may therefore have a stronger effect on theinstrumental relationship during initial interactionswith VCs than angel investors.

Proposition 4: The type of investor mod-erates theeffectof informationalsignalingon the initial strength of the instrumentaldimension of the entrepreneur-investorrelationship; the effect is stronger for re-lationships involving VCs than relation-ships involving angel investors.

Relational structure. The salience of affectiveand instrumental concerns and, hence, the po-tency of interpersonal and informational signalsalso depend on the structural configuration of theemerging relationship between the entrepreneurand the investor (angel or VC). We differentiate be-tween two configurations—dyadic and group—thatare prevalent and that may moderate the effects ofentrepreneurial signaling behavior. A dyadic struc-ture is one inwhicha relationship emerges betweentwo individuals—a one-to-one relationship betweenanentrepreneurandan investor. Inmanysituations,encounters between a solo entrepreneur and an in-dividual investor prompt a relationship betweena new venture and an investment source. Consider,for example, Ingvar Kamprad, the founder of furni-ture retailer IKEA, who gained initial support andbuy-in for his venture through dyadic interactionswith an investor who shared his passion, vision,and work ethic (Torekull & Kamprad, 1998). A group

structure, in contrast, is one in which the connectionbetween a new venture and an investment sourceemerges through interactions amongmore than twopeople, such as between one entrepreneur and aninvestor group or between multiple cofounders andinvestment partners. Consider the case of the socialmedia company Twitter, in which cofounders BizStone, Evan Williams, and Jack Dorsey developeda relationship with Chris Sacca, one of the earliestangel investors in the company. Or considerGooglecofounders Sergey Brin and Larry Page, who re-ceived an early $100,000 investment from an in-vestment teamcomposedofAndyBechtolsheimandDavid Cheriton. Both Twitter and Google are exam-ples of group-based structures, in which the initiallinkage between a new venture and an investmentsource is spread across several dyadic connections.Thedegree towhich interpersonal signals initiate

an affective relationship is likely to be heightenedwithin the context of a dyadic structure compared toa group structure. A dyadic structure is inherentlyinterpersonal in that the entities—the new ventureand the investment source—are the same as theindividual people—the entrepreneur and the in-vestor.1 Accordingly, relative to a group structure,the interpersonal affective fit of the parties in a dy-adic structure is a more salient concern; for the en-tities to be a goodmatch, the peoplemust be a goodmatch. An investor in a dyadic structure is likely tobe especially receptive to interpersonal signaling,which directly addresses whether the individual isinterpersonally compatible with the entrepreneurand whether working with the entrepreneur wouldbe a positive or negative experience.

Proposition 5: The type of relationalstructure moderates the effect of in-terpersonal signaling on the initialstrength of the affective dimension of theentrepreneur-investor relationship; theeffect is stronger in dyadic structuresthan in group structures of investors andentrepreneurs.

Whereas interpersonal signaling addressesquestions about interpersonal compatibility that

1 For convenience, we use the terms entrepreneur and in-vestor to refer to the new venture and the investment source,respectively, as entities, recognizing that entrepreneur canrefer to one person or a cofounding team and that investor canrefer to onepersonoran investment team.Our level of analysisis the relationship between two entities—a new venture andan investment source—both of which could take on a singularor plural form.


are more salient within a dyadic structure, in-formational signaling addresses the instrumentalconcerns that are likely to be more predominantin a group structure. A group structure comprisesmany possible relationships among the mem-bers of the new venture and the members of aninvestment entity. In contrast to a dyadic struc-ture, where there is only one tie, the presence ofmultiple relationships in a group structure cre-ates the potential for varying degrees of in-terpersonal attraction across the members of theentities. With potentially varying degrees of in-terpersonal attraction, attention likely shifts toinformation that is less subject to idiosyncraticpreferences. As social psychologists have sug-gested, affective attraction is less likely toemerge if group consensus is needed, which canlead to a form of group-induced dissonance(e.g., Festinger, 1957; Matz & Wood, 2005). To re-duce dissonance, members’ attention may shiftto the commonalities that unite them—the in-strumental goals that brought them together inthe first place. For a cofounding team, this mightbe a shared vision to address an important needor a goal to secure the next round of venturecapital. For a group of investors, this is likely toinvolve agreed upon criteria for investment ora shared goal to realize profitable financialreturns on their investments. This shift in focusto shared instrumental goals, rather than idio-syncratic feelings of interpersonal attraction,may increase the potency of informationalsignals, which speak directly to the viability ofthe entity as an investment vehicle.

Proposition 6: The type of relationalstructure moderates the effect of in-formational signaling on the initialstrength of the instrumental dimensionof the entrepreneur-investor relationship;the effect is stronger in group structuresthan in dyadic structures of investors andentrepreneurs.

Before moving to the next part of our model, weshould note that the output of initial encountersis a preliminary bond that is neither purely af-fective nor purely instrumental. Rather, the bondis multidimensional and entails some degree ofinitial affective attraction and some degree ofinitial instrumental expectation. Our proposi-tions therefore do not specify that a categorical“instrumental relationship” or “affective re-lationship” results from early interactions but,

instead, that the initial relationship is charac-terized by degrees of affective and instrumentalcommitment. Indeed, although the affective andinstrumental dimensions of interpersonal re-lationshipsareconceptuallydistinct (e.g.,Casciaro& Lobo, 2008), research suggests that these di-mensions are oftenpositively related. In particular,research suggests that interpersonal feelings ofwarmth and positive regard—the affective di-mension of a relationship—can spill over and in-fluence the degree to which two people view oneanother as capable of contributing to task-relevantgoals—the instrumental dimension of their re-lationship. Research on exchange relationshipsbetween supervisors and subordinates, for exam-ple, indicates that initial affective bonds spill overto influence task-relevant perceptions and evalu-ations (e.g., Sparrowe & Liden, 1997). A burgeoningbody of research in entrepreneurship suggeststhat positive affective displays by entrepre-neurs can influence investors’ evaluations ofbusiness viability (e.g., Baron, 2008; Cardonet al., 2009; Cardon, Zietsma, Saparito, Davis, &Matherne, 2005; Huang&Pearce, 2015;Mittenesset al., 2012). The feelings of interpersonal posi-tivity that an entrepreneur and an investor holdfor one another, thus, are likely to directly in-fluence their initial instrumental bond.

Proposition 7: Theaffective relationshipbetween an entrepreneur and an in-vestor strengthens the instrumentaldimension of their relationship.

As we describe below, our model also sug-gests that the instrumental dimension can in-fluence the affective dimension. However,whereas we posit that the affective dimensioninfluences the instrumental dimension directly,our model specifies that the instrumental di-mension shapes the affective dimension in-directly by contributing to the dynamics of socialexchange, which feed back into the affectivedimension.

Resource Exchange and the Development of theEntrepreneur-Investor Relationship

Exchange theorists make an important distinc-tion between relationships and exchanges (e.g.,Blau, 1964; Emerson, 1976; Sahlins, 1965). Yet thedirectionality of the link between relationshipsand exchanges has been ambiguous historically.In developing predictions about the interpersonal


dynamics that deepen relationships betweenentrepreneurs and investors, we draw fromCropanzano and Mitchell’s (2005) perspective onexchange theory, which describes two ways re-lationships and discrete resource exchanges arerelated. First, relationships (i.e., commitments toand expectations about one another that two peo-ple hold) motivate exchanges between parties(i.e., bidirectional transfers of resources) wheneach person believes that the other can providevaluable resources through the exchange. Second,the outcomes of discrete exchanges flow back intoa relationship and update the expectations thateach person has for the other, refining their feel-ings of commitment. Because of these reciprocaldynamics, with relationships precipitating ex-changes and exchanges feeding back into re-lationships, an exchange-based model can beginwith relationships or exchanges. Our model re-flects this interplay between relationships andresource exchange. As we explain below, ourmodel begins with relationships and positions re-source exchange as most proximal to new venturegrowth because it is, ultimately, the transfer andeffective use of resources that influences growth.However, our model explains how instrumentaland affective relationships, whichmay beweak orstrong at the outset, further weaken or strengthenover time via the outcomes of exchange.

Financial resource exchange. We begin withthe most studied aspect of the entrepreneur-investor relationship: the exchange of financialresources. Traditionally, scholars have examinedthis exchange—especially the valuation processand how investors estimate the risks and rewardsof an investment—from an economic perspective(e.g.,Gompers& Lerner, 2001; Kaplan&Stromberg,2001; Kerr et al., 2011; for a reviewseeDalton,Daily,Certo, & Roengpitya, 2003). An exchange theorylens, which delineates the relational context inwhich different kinds of resources are transferred,helps to further explain why transactions proceedin theways they do and how the outcomes of theseexchanges might strengthen or weaken the re-lationshipbetweenanentrepreneurandaninvestor.Specifically, the unique properties of financial re-sources elucidate why an instrumental relationshipis necessary for financial resource exchange to oc-cur between an entrepreneur and an investor.

Using an exchange theory perspective, Foa andFoa (1980) delineated six classes of resources(i.e., money, information, status, love, services,goods) and used a two-dimensional circumplex

model to account for the differences that underliethese resources. Concreteness describes the de-gree towhicha resource isa tangibleobject versusan abstract concept. Highly concrete resources,such as a piece of equipment, can be physicallytransferred. Less concrete resources, such as feel-ings of solidarity or status, are abstract. Particu-larism describes how attached the value of aresource is to the context of a given exchangebetween parties. Highly particularistic resourcesare those—like solidarity or personal careeradvice—for which value is contextually definedand derived from the specific relationship inwhich they are exchanged. The value of advice,for example, depends on the idiosyncratic needsof a given person. Less particularistic resources,like money, have value irrespective of who theexchange partner is. The degree to which a re-source is concrete (versus abstract) and particular(versus universal) has implications for exchangedynamics.The primary financial resources that entrepre-

neurs and investors exchange—equity in a ven-ture and financial investment capital—are bothlow in particularism and relatively low in con-creteness. Financial capital, which retains itsvalue regardless of the exchange partner, is theprototypical universal (as opposed to particularistic)resource. Further, concrete objects (e.g., currency,stock certificates) represent financial resources, giv-ing a tangible object to exchange. Because of theseproperties, the transfer of financial resources gener-ally occurs througha process of economic exchange,oneof the twodominant formsofexchange (theother,social exchange, is described below; Cropanzano &Mitchell, 2005).Aneconomicexchangeprocess is onewhere resource transfers are governed by formal,negotiated terms (Blau, 1964; Molm, Peterson, &Takahashi, 1999). Terms are specified upfront andclearly establish expectations for what each partywill give and receive, as well as the time frame forresource transfer (Molm et al., 1999).Because the value of financial resources is less

attached to a specific exchange partner, entre-preneurs and investors can exchange them withany partner. However, suitable partners—that is,partners likely to be mutually beneficial—arescarce in entrepreneurship and, as such, in highdemand by many competing parties (Bhide, 2000;Hellmann, 2002; Schoonhoven & Romanelli, 2001),which creates opportunity costs for exchang-ing financial resources with one partner versusanother. For an investor, entrusting limited


financial capital to one entrepreneur entails for-going investing that capital in another whomightbemore likely to generate a return on investment.For an entrepreneur, entrusting equity—regardedas an early-stage entrepreneur’s most precious re-source (Eckhardt, Shane, & Delmar, 2006; Gompers&Lerner, 2001)—toan investor entails relinquishingsome control of the venture (Wasserman, 2006) andsacrificing downstream value. Owing to the uni-versalistic and scarce nature of these resources,entrepreneurs and investors likely only exchangethemwithpartnersexpected todeliver instrumentalvalue in return. The degree to which an entrepre-neur and an investor are willing to exchange fi-nancial resources with one another is, thus,a function of their instrumental relationship—theextent to which they share expectations that re-source exchange will advance their instrumentalgoals.

Proposition 8: The instrumental rela-tionship between an entrepreneur andan investor is positively related to finan-cial resource exchange; the strongertheir instrumental bond, the more likelythey will exchange financial resources.

Social resource exchange. The relationaldriversand dynamics of exchange are different when theresources that entrepreneurs and investors ex-changeare social—that is, resources lacking a clearfinancial valuation, such as information, influ-ence, and solidarity. From Foa and Foa’s (1980)perspective, social resources are relatively moreparticularistic and less concrete than financialresources. Consider, for example, the transfer ofstrategic advice (from an investor to an entre-preneur) in return for being and feeling involvedin growing an impactful new business (from anentrepreneur to an investor). The value of ad-vice inherently depends on the challenges thata specific entrepreneur faces. Similarly, the re-ciprocated value of being and feeling involved ina venture inherently depends on the preferencesand values of a given investor. It is unlikely thatsuch an exchange of social resources would occurthrough the carefully negotiated and explicitly de-fined process of economic exchange describedabove. Instead, exchange theory suggests that so-cial resources are typically transferred througha process of social exchange, where trust and nor-mative expectations of reciprocity serve as gover-nance mechanisms (Blau, 1964; Molm et al., 1999).The indeterminate nature of social resources—in

which it may not even be immediately evident toboth parties that a resource was transferred—renders a priori formally negotiated terms forgoverning the exchange impractical. Further-more, the social resources given by one party(e.g., information) may be very different fromthosegivenby theotherparty (e.g., solidarity). Theprocess of social exchange, which guides trans-actions through the assumption that valuewill bereciprocated in some way and at some time, en-ables the flow of these ill-defined resources. AsMolm et al. noted, social exchange can only occur“if actors are willing to accept some temporaryand short-term costs and uncertainty” (1999: 888).Because trust is needed for the process of social

exchange (Blau, 1964), the affective dimension of anentrepreneur-investor relationship—the degree towhich the two are mutually committed to one an-other’s personal and emotional welfare—may playan important role in motivating social resource ex-change. In interpersonal contexts, positive feelingstoward a counterpart lead to cooperative, prosocial,and helping behavior (George & Brief, 1992;Lyubomirsky, King, & Diener, 2005). Integrating re-search on positive affect with theories of informalexchange, Lawler (2001) theorized that affect playsa key role in sustaining processes of social ex-change. Positive feelings toward others activatenormative obligations to help those with whom oneshares a positive relationship (Collins, 1990; Lawler,2001; Niedenthal & Brauer, 2012). Further, interper-sonal positivity provides a safe context in whichpartners can disclose problems, needs, or desires;disclosure can be a stimulus for the other partner tooffer advice, guidance, andassistance. Supportingthese ideas, in their research on how differentrelational dimensions shape the flow of advice,Casciaro and Lobo (2008) found that interpersonalaffect is critical for the flowof social resources.Wetherefore propose that the affective dimension ofthe entrepreneur-investor relationship providesthe trust needed for social exchange.

Proposition 9: Theaffective relationshipbetween an entrepreneur and an in-vestor is positively related to social re-source exchange; the stronger theiraffective bond, themore likely theywillexchange social resources.

The instrumental dimension of a relationshipmay also play a role in motivating social re-source exchange between an entrepreneur andan investor. If two people share task-relevant


commitments and objectives, exchanging socialresources may indirectly be instrumentally advan-tageous. For example, itmightbenefit an investor togive an entrepreneur advice if the investor believesthe entrepreneur would be better able to generatehigh returns with the benefit of that advice. If theentrepreneurneeds thesesocial resources—or if theinvestor believes that the entrepreneur would ben-efit from them—sharing them could increase thelikelihood the investor will realize the instrumentalgains he or she believes could result from thepartnership.

Thedegree towhich the instrumental dimensionenables the flow of social resources, however,likely depends on the degree to which the entre-preneur and investor also share an affective bond.The affective relationship provides a minimal in-terpersonal context to govern the exchange of so-cial resources through reciprocity. In the absenceof anaffectivebond, eachpartymaybe reluctant toexpend the cost (e.g., in time and energy) of pro-viding a social resource when uncertain aboutwhether this value would be reciprocated by theother (Molmet al., 1999). Furthermore, as describedabove, an affective relationship provides a safecontext in which entrepreneurs and investors candisclose their unique needs and desires to oneanother. An investor is most likely to provide anentrepreneur with a valuable social connection ifthe entrepreneur has disclosed a need or desirethat could be met by the tie. This idea—that theaffective dimension of a relationship moderatesthe effect of the instrumental dimension on socialresource exchange—also fits with Casciaro andLobo’s (2008) findings regarding the provision ofadvice in the workplace. Two people are mostlikely to exchange advice, they found, in the con-text ofa relationshipcomprisingbothaffectiveandinstrumental elements.

Proposition 10: The effect of the in-strumentaldimensionof theentrepreneur-investor relationship on social resourceexchange is moderated by the affectiverelationship; the greater the shared affec-tive bond, the more likely a shared in-strumental bond will lead to socialresource exchange.

Exchange dynamics and change in relation-ships over time. We now turn to the processesthrough which the outcomes of resource exchangeinfluence how the entrepreneur-investor relation-ship changes over time. As previewed above,

exchange theory describes a reciprocal interplaybetween relationships and discrete instances of re-source exchange, with relationships precipitatingexchanges and the outcomes of exchanges feedingback into relationships. If mutual expectations aremet, instances of resource exchange can strengthena relationship over time, serving as a foundation fordurable and long-standing mutual obligations be-tween parties (e.g., Blau, 1964). Ifmutual expectationsarenotmet,however, instancesof resourceexchangecan weaken a relationship, possibly degrading in-dividuals’ feelingsof commitment andobligation toone another. In describing the reciprocal interplayof exchanges and relationships, Cropanzano andMitchell (2005) used the analogy of a ladder. Eachrungof the ladder representsasuccessfulexchangebetween two people, and the height of the ladderrepresents the strength of their relationship. Witheach successful exchange, each partner in the re-lationship develops more strongly held expecta-tions about and commitments to the other.The dynamics of exchange and relationship de-

velopment, however, may be unique within thecontext of entrepreneurship. In entrepreneurship,adapting Cropanzano and Mitchell’s (2005) ladderanalogy, the spacing between successive rungson the ladder may be different for the affective andinstrumental dimensions of the entrepreneur-investor relationship. Given the relative ease andfrequencyof social resourceexchangecompared tofinancial resource exchange, there are more op-portunities to advance and deepen the affectivedimension than the instrumental dimensionthrough small, incremental steps. Financial re-source exchange, in contrast, occurs less frequentlyand under more carefully negotiated conditions.We explain here how repeated instances of socialresource exchange can steadily strengthen the af-fective dimension of the entrepreneur-investor re-lationship over time. Later we address the processof change in the instrumental dimension, whichweposit occurs through new venture growth.Theories about personal relationships (e.g.,

romantic relationships, friendships) emphasizeinterpersonal disclosure as a key mechanism ofrelationship development (e.g., Altman & Taylor,1973; Knapp, 1978; Lewis, 1972). Altman andTaylor’s (1973) social penetration model, for ex-ample, portrays disclosure as the single mostimportant mechanism for strengthening in-terpersonal relationships. Developing close re-lationships, according to this model, is likepeeling away the layers of an onion. The outer


layers—the onion’s skin—contain information thatis publicly available about a person. The innerlayers contain personal information, such as pref-erences, goals, and aspirations. To strengthena relationship, each person must feel increasingcomfort in taking interpersonal risksandcandidlysharing sensitive information with the other(Altman & Taylor, 1973; Knapp, 1978).

For an entrepreneur and an investor, theiraffective relationship likely strengthenswhen eachdiscloses needs to the other andwhen, in response,each plays a role in fulfilling the other’s needs byexchanging valued social resources (Blau, 1964).The exchange of valued social resources providesa reinforcing feedback loop for the affective di-mension of the relationship, with each person at-tributing the positive feelings associated withreceiving valued resources to their interactionpartner (Collins, 1990; Lawler, 2001). By reinforcingthe interactionandthecollaborativerelationshipasthe drivers of such positive feelings, successful ex-changes lead each person to perceive the relation-shipasaneffectivemeansof fulfilling futureneeds.Over timeandacross interactions, reciprocal socialresourceexchanges,aswell as thepositive feelingsthey engender, strengthen expectations about andcommitments to the personal regard and emotionalwelfare of the other.

The ambiguity of social resource exchange—inwhich expectations are often ambiguous—opensthe door, of course, to aweakening in the affectiverelationship between an entrepreneur and an in-vestor. If the social ledger becomes asymmetricalbecause one party’s expectations are not ulti-mately met, social exchange is incomplete, oneparty’s commitment weakens, and the affectiverelationship between the two likely degrades.Relationship development is thus a dynamicprocess. An affective relationship contributes todisclosure and the bidirectional exchange ofvaluable social resources, and reciprocal and bi-directional social resource exchange strengthensmutual feelings of interpersonal affect.

Proposition 11: The exchange of socialresources between an entrepreneur andan investor strengthens the affectiverelationship between them.

Note that, together, Propositions 10 and 11 in-dicate that the instrumental dimension can in-directly influence the affective dimension of theentrepreneur-investor relationship. Along withProposition 7, regarding the spillover from the

affective to the instrumental dimension, this il-lustrates the potential crossover effects that canemerge between more affective interpersonalconcerns and more instrumental concerns. Fur-ther, as we discuss in greater detail below, thisinterplay of the affective and instrumental di-mensions can create reinforcing cycles—positiveor negative—of relationship development throughthe mechanism of new venture growth.

Resource Exchange and New Venture Growth

We have suggested that entrepreneurs andinvestors form relationships with one another,in part, to fill resource needs, and we have sug-gested that different dimensions of their re-lationship motivate the exchange of differentkinds of resources. We now explain how thesedifferent kinds of resource exchange contribute tonew venture growth, positing that different kindsof resources may be most beneficial at differentstages of new venture development and thatventure growth is a mechanism connecting re-source exchange to relationship development.New venture growth. As a focal outcome, we

consider new venture growth—a firm’s progres-sion across fundamental stages of development(e.g., Eisenhardt & Schoonhoven, 1990; Hambrick,MacMillan, &Day, 1982; Porter, 1980). Newventuregrowth, above and beyond survival or firm per-formance (for a review see Ireland, Reutzel, &Webb, 2005), is one of the most important out-comes in entrepreneurship research (Cooper &Gimeno-Gascon, 1992; Kazanjian & Drazin, 1990;Quinn & Cameron, 1983). We draw specificallyfrom scholars (e.g., Kazanjian & Drazin, 1990;Sapienza & Amason, 1993) who have conceptual-ized growth as a venture’s progression from (1) anearly stage of exploring ideas and formulatingbusiness plans to (2) an intermediate stage of re-fining ideas and implementing business plansand, finally, to (3) a late stage of expanding oper-ations and scaling a business. In this tradition,growth is a venture’s metamorphosis across de-velopmental stages (e.g., Bygrave & Hofer, 1991;Quinn & Cameron, 1983; Shane & Delmar, 2004),rather than the rate of change in any one metric(e.g., sales growth). Progression across thesethree coarse stages is marked as a new ventureencounters different clusters of problems (e.g.,idea generation, idea implementation, businessexpansion) that must be resolved (Kazanjian &Drazin, 1990; Starbuck, 1971). Accordingly, the


progression of a venture across developmentalstages is a useful way to understand the value ofdifferent types of resources and relationships fornew venture growth.

Considering new venture growth as a progres-sion across developmental stages is useful fora number of reasons (e.g., Sapienza & Amason,1993; Zimmerman& Zeitz, 2002). First, new venturegrowth is of interest for both an entrepreneur andan investor,making growth an attractive outcometo consider for understanding the bidirectionaldynamics underlying relationship development.Second, conceptualizing new venture growth inthis way enables examination of the effects of theentrepreneur-investor relationship for ventures atdifferent stages of development. Progression tothe next stage is as relevant for a fledgling ven-ture seeking to hone an idea and move to an in-termediate stageofdevelopmentas it is for amoremature venture seeking to scale operations and,perhaps, exit. A narrower outcome, suchas growthin sales volumeor in profit,might bemore relevantfor ventures at one stage of development thananother (Eisenhardt & Schoonhoven, 1990). Third,a conceptualization of new venture growth as a pro-gression throughdevelopmental stages, rather than,forexample,aprogression through financingrounds(e.g., seed stage, Series A, Series B), allows consid-eration of whether some ventures may benefit morefrom financial resources or social resources(e.g., Bygrave & Hofer, 1991; Quinn& Cameron, 1983;Shane & Delmar, 2004). Finally, this conceptualiza-tion accommodates building and testing theoryaboutventuresas theycycle throughstagesmultipletimes,which is likelygiventhatventuresoftenrevisecore ideas or business propositions many times.

Matching resources and problems. The ideathat resource acquisition promotes new venturegrowth is not novel (Westhead, 1995; Westhead,Wright, & Ucbasaran, 2001). Researchers haveshown that ventures benefit from both financial(e.g.,Gompers& Lerner, 2001; Kaplan&Stromberg,2001; Kerr et al., 2011) and social (e.g., Connor &Prahalad, 1996; Kogut & Zander, 1992) resources.Yet ambiguity abounds regarding which kinds ofresources are most likely to accelerate new ven-ture growth (e.g., Brush, Greene, & Hart, 2001;Greene & Brown, 1997; Lichtenstein & Brush, 2001).Our model helps to resolve this ambiguity byexplaining how the benefits of different kinds ofresources depend on how well those resourceshelp address the distinct strategic problems aventure faces at a given developmental stage.

Although both financial and social resources, tosome degree, can aid new venture growth acrossstages of development, the strategic problems thatventures at different stages of development facemay amplify the value of different resources. Ourpropositionsare reflected in the bottomof Figure 1,which depicts the relationships between socialand financial resource exchange, respectively,and new venture growth across developmentalstages.Ventures at any stage of development in-

herently face uncertainty and ambiguity. How-ever, the kinds of problems that mark differentdevelopmental stages bring different levelsof ambiguity. As a venture progresses froman early to a late developmental stage, theknowledge-to-assumption ratio increases, thusreducing ambiguity. In the early stage of a ven-ture, there is often only the basis of an idea—nota working prototype of a product or service.Ventures at an early stage of development—described as the searching and planning stage(Kazanjian & Drazin, 1990)—face significantambiguity about the business idea, the degreeto which one or more markets might be viable,and whether the business can be profitable. Inthe intermediate stage of a venture, entrepre-neurs face problems of increasing precision. Ven-tures at this stagemust further refine the businessidea and test core assumptions by, for example,finding customers and suppliers and beginning toestablish the credibility of the venture with rele-vant stakeholders (Lam, 1991; MacMillan et al.,1987; Sahlman, 1990). In the late stage of a venture,entrepreneurs face even less ambiguity as theywrestle with more well-defined problems. Late-stage ventures focus on ramping up existing opera-tions and moving the venture into a significantposition in the industry (Eisenhardt & Schoonhoven,1990). Although late-stage ventures still face chal-lenges, and although success is not certain, ofcourse, the problems these ventures face arerelatively clearer than those that early- andintermediate-stage ventures face.The value of social resources, such as strate-

gic advice and referrals, may be amplified forventures currently at an early developmentalstage. The relational context and exchangeprocess that underlie andgovern theprovision ofsocial resources—the affective dimension ofa relationship—are likely particularly helpfulfor new ventures that face significant ambigu-ity in products and uncertainty in strategic


positioning, and that have yet to establisha reputation as a viable business (Sapienza &Amason, 1993). Indeed, ambiguity is so great foran early-stage venture that it may not even beclear what specific problems exist or what de-cisionsaremost important tomake. For instance,an entrepreneur may think that a product is theright solution for a subset of the target market,but it may not be clear how to demonstrate de-mand within a larger market. Neither the prob-lem (is it an issue with the product, with thecustomer proposition, with market segmenta-tion?) nor the solution (redesign the product orconduct more focus group interviews?) is clear.

The frequent, personal, and disclosing conver-sations central to a strong affective relationshipprovide the foundation for the frequent and in-formal exchange of social resources that can helpto identify and devise solutions to importantproblems (Block & MacMillan, 1985; Churchill &Lewis, 1983).Rather than justemerging in responseto specific requests, social exchange can happenthrough informal conversations and a “learning-through-interaction” form of engagement (Gertler,2003) that occurs when there is a strong affectiveattachment between two people. In short, the af-fective dimension and the social resources ex-changed through the relationship provide therequisite variety that an early-stageventureneedsto resolve high levels of ambiguity (Ashby, 1956;Weick, 1979).

The value of financial resources, on the otherhand, may be amplified for late-stage venturesseeking to dramatically scale their footprints.Rather than having pressing needs to diagnosemarket- or product-related issues, late-stage ven-tures need financial capital to establish marketshare and maintain momentum and market posi-tion (Delmar & Davidson, 2000; Sapienza &Amason, 1993). Indeed, a substantial body of re-search suggests that acquiring financial capital isa major focus for entrepreneurs striving to dra-matically grow their ventures (e.g., Casson, 1982;Cooper, Gimeno-Gascon, & Woo, 1994; Evans &Leighton, 1989; Lee, Lee, & Pennings, 2001). Finan-cial resourcesareparticularlyuseful foraddressingrelatively specific, structured, and well-formulatedproblems. Consider, for example, an investor pro-viding financial capital specifically to hire a newhead of operations or purchase a new warehouse.An entrepreneur can directly assign capital toaddress such problems and show accountabilityfor the use of resources.

Although they still face uncertainty, late-stageventures encounter relatively more well-definedproblems than do early-stage ventures. Becausethe transfer of financial resources typically occursthrough the defined process of economic ex-change, late-stage ventures seeking to solvewell-defined problems can do so relatively efficiently,with less interpersonal interaction than wouldbe required for the process of social exchange(McFadyen&Cannella, 2004). Late-stage venturesthus benefit disproportionately from access to fi-nancial resources.To be clear,we are not suggesting that late-stage

ventures do not benefit from strategic advice,referrals, and other social resources. Theseresources—especially from knowledgeableinvestors—are helpful even for well-establishedcompanies. Yet compared to a fledgling ventureentering an unknown market with an untestedproduct, social resources are likely to be lessindispensable for late-stage ventures. Similarly,we are not suggesting that early-stage venturesdo not benefit from financial resources. Rather,we are suggesting that late-stage ventures ben-efit relatively more than do early-stage venturesfrom an infusion of financial capital, given itsimportance for scaling a business. To use ananalogy, our argument that a venture’s current de-velopmental stage moderates the effects of re-source exchange on venture growth is similar instructure to models that guide the design of dif-ferent business school programs for students atdifferent career stages. According to thesemodels,early-careerstudents (e.g.,undergraduates)benefit most from programs that provide func-tional training, helping them to master the skillsthat are needed to solve technical problems inwell-structured roles. Later-career students (e.g., ex-ecutive MBAs) benefit most from programs that cul-tivate interpersonal skills, which are needed tonavigate ambiguous corporate politics and influ-enceavarietyofstakeholders.Similar to thisgenerallogic, our theory suggests that an early-stage ven-ture needs a different set of resources than doesa later-stage venture because the problems that theventures encounter are different.

Proposition 12: Therelationshipbetweensocial resource exchange and venturegrowth is moderated by current venturestage; social resource exchange is rela-tively more valuable for early-stageventures than it is for late-stageventures.


Proposition 13: The relationship be-tween financial resource exchangeandventure growth ismoderated by currentventure stage; financial resource ex-change is relatively more valuable forlate-stage ventures than it is for early-stage ventures.

New venture growth and relational development.The advancement of a new venture through de-velopmental stages can provide evidence thatvalidates the expected instrumental value of theventure for entrepreneur and investor alike.Above we argued that the process of social re-source exchange—provided that resource transfersare bidirectional and reciprocal—strengthens theaffective dimension of the entrepreneur-investor re-lationship. How financial resource exchangestrengthens instrumental relationships, however, islikely to be unique within the context of entrepre-neurship. It is not the immediate transfer of financialresources (i.e., capital and equity) per se thatstrengthens the instrumental relationship. Becauseinvestors provide entrepreneurs with a highlyuniversal and specific resource (i.e., financialcapital) upfront but receive a less certain andas-yet-unrealized resource (i.e., equity) in return,there is an intrinsic asymmetry in the economicexchange process in entrepreneurship. An entre-preneur receives convertiblevalueat theoutset, butfor an investor to secure the expected value of theexchange, a venture must meet or exceed expecta-tions for growth andadvancement. If it does not, theultimate convertible value of the equity received bythe investor in the transaction is misaligned withthe value of the financial capital given by the in-vestor, violating the terms of the exchange. Sucha violation would likely precipitate a downwardrevision of the instrumental expectations thatan entrepreneur and an investor have for oneanother.

The termsofaneconomicexchangeare typicallyclearly specified, providing a firm grounding forexpectations regarding new venture growth.Nonetheless, it is possible that the investor and theentrepreneur hold instrumental expectations be-yond those in the negotiated terms of a given eco-nomic exchange or prize different indicators ofgrowth (e.g., revenue growth, customer acquisitiongrowth, personnel growth, website traffic growth).Hence, there is the potential—even in a well-negotiated economic agreement—for one party’sassessment of growth to differ from the other’s

assessment. For an exchange to be complete andto strengthen a relationship, the two must believethatvaluewas reciprocated.Accordingly, it iseachparty’s perceptions of growth thatmost proximallystrengthen their instrumental relationship. Theseperceptions will be shaped by the economic ex-change process, during which the two specifyterms, identify milestones, and agree on metricsfor assessing new venture growth.

Proposition 14: New venture growththat meets or exceeds expectationsstrengthens the instrumental relation-ship between an entrepreneur andinvestor.

Relationships in Motion: DevelopmentalTrajectories and New Venture Outcomes

The feedback loops in our model—Propositions11 and 14—explicate a process of relationshipdevelopment driven by bidirectional resourceexchange that is potentially reinforcing over time.These loops indicate that when entrepreneursand investors exchange valuable resources withone another, their relationship strengthens. Suc-cessful social resource exchange strengthenstheir affectivebond. Successful financial resourceexchange, which occurs when venture growthmeets or exceeds expectations, strengthens theirinstrumental bond. Our model thus suggests thatthe entrepreneur-investor relationship developsthrough a process of reinforcing loops in whichthe rich (in relationships) can get richer (in valu-able resources, new venture growth, and, in turn,stronger relationships).Yet themoderators in ourmodel—investor type,

relational structure, and current stage of venturedevelopment—indicate that entrepreneurs andinvestors can fall into different developmentaltrajectories. The “rich get richer” trajectory ex-emplifies one extreme—a virtuous cycle whereentrepreneurs and investors receive reciprocalvalue from resource exchange, leading to stron-ger affective and instrumental bonds over time. Avirtuous cycle likely begins, our model suggests,when an early-stage entrepreneur and an in-vestor form an initial positive affective bond. Thisaffectivebondmotivates the informal exchangeofsocial resources. Provided the entrepreneur andinvestor reciprocate valueandmeet oneanother’sexpectations, social resource exchange steadilystrengthens the bonds of affective commitment


and trust between the two. By drawing on an in-vestor’s strategic advice and social connections,the entrepreneur is better equipped to resolve thehigh ambiguity and uncertainty that mark anearly stage of development, and, accordingly, theentrepreneur has a better chance of progressingto the intermediate stage. Our model (per Propo-sition 7) suggests that a strong affective relation-ship between the entrepreneur and investor canstrengthen their instrumental bond aswell, and itindirectly increases the likelihood that the two—both believing the other can help advance theirinstrumental objectives—will exchange financialresources. Having access to the social and finan-cial resources that flow through a multiplexrelationship, the venture is well equipped toaddress the challenges of the intermediate stageof development and grow. Growth, provided itmeets or exceeds expectations, reinforces the in-strumental relationship, further increasing theflow of resources between the two and increasingthe likelihood the venture will continue to grow.

Not all entrepreneur-investor relationships willfollow this virtuous cycle.At the opposite extreme,our model suggests that mismatches betweenentrepreneur behavior and the initial context, orbetween a venture’s current developmental stageand resource exchange, can open the door to a vi-cious cycle. Consider an early-stage entrepreneurwho aggressively pursues financial resourcesfrom an investor with whom the entrepreneur hasonly a weak affective tie. Although the venturemay hold great promise, this entrepreneur facessignificant ambiguity. The idea is unrefined oruntested, the market is poorly understood and notvalidated, and it may not even be clear what as-sumptions need to be tested. Through savvy in-formational signaling, however, this entrepreneurmight attract the instrumental interest of an in-vestor willing to take a risk on a nascent ven-ture and to engage in financial resourceexchange, trading financial capital for equitythrough a negotiated economic exchange process.Without a strong affective relationship, however, itis unlikely the two will frequently exchange socialresources. The investor is less likely to spend timeand effort providing strategic advice or lending in-fluence to the venture; doing so would forfeit op-portunities to exchange these resources with otherentrepreneurs with whom the investor has a stron-ger affective bond. With less access to adviceand influence, the entrepreneur lacks thoseresources most needed for addressing the high

uncertainty and ambiguity of the early stage ofventure development, making it less likely theventure will progress. Failing to meet or exceedthe investor’s expectations for growth can createanegative reinforcing loop inwhichdownwardlyrevised instrumental expectations further de-crease the likelihood the two will exchange theresources needed for the venture to grow.The virtuous and vicious cycles describedabove

depict two extreme trajectories of development.Given the uncertainty of entrepreneurship, anyspecific trajectory will fall between these two ex-tremes. For example, an early-stage entrepreneurwho has a strong affective relationship with aninvestor, and thus access to valuable strategicadvice, might repeatedly fail to produce de-monstrable new venture growth. Repeated set-backs would, our model indicates, reduce socialresource exchange and weaken the affective re-lationship between the two. Nonetheless, becauseof the moderators in our model—and the reinforc-ing loops connecting reciprocal exchange withrelational dimensions—an entrepreneur and in-vestor can fall into a positive or negative reinforc-ing cycle.

IMPLICATIONS FOR ENTREPRENEURSHIPTHEORY AND RESEARCH

Our theoretical model, grounded in exchangetheory, makes several contributions to the entre-preneurship literature and suggests a number ofcorresponding directions for future research. A firstkeycontributionofourmodel is itsconceptualizationof the entrepreneur-investor relationship as amulti-plex tie comprising both affective and instrumen-tal dimensions. Consideration of the affectivedimension of the entrepreneur investor relationship,alongside the instrumental dimension, illuminatesnew directions for research on interpersonal andcollective forms of affect in entrepreneurship and onthe role of relationships within new models offinancial investment in entrepreneurship.Our theorizing builds on and extends the recent

“affective turn” in entrepreneurship research(Baron, 2008) that has, to date, focused mostheavily on individual feelings, particularly en-trepreneur passion (e.g., Cardon et al., 2009; Chenet al., 2009). Some empirical findings from thisperspective suggest that compared toperceptionsof an entrepreneur’s preparedness, perceptions ofan entrepreneur’s passion play a limited role inshaping investor decision making (Chen et al.,


2009). However, our model’s interpersonal per-spective on the role of affect in theentrepreneurialprocess presents an alternative view of how en-trepreneur passion might influence investor de-cision making. Our model suggests that ratherthan simply being a part of a short-term persua-sion process—in which entrepreneurs seek to per-suade investors through a pitch of the viability oftheir ventures (Chen et al., 2009)—entrepreneurialdisplays of passion may be an important part ofa longer-term relationship development process.Through emotional contagion (Barsade, 2002;Hatfield, Cacioppo, & Rapson, 1994), an entre-preneur’s displays of passion—a high-energy,pleasant emotion—may spark shared feelings ofpositivity that help to foster interpersonal bondsand social integration (Knight & Eisenkraft, 2015).A positive relational bond, in turn, precipitatesthe exchange of valuable resources that contrib-ute to the growth of the venture in the long termand an even stronger relationship. Testing thisalternative relational perspective—in whichaffect influences the entrepreneurial processthrough relationships and resource exchangeover time, rather than as part of single instancesof persuasion—would require a longitudinal andfield-based research approach.

Consideration of the affective dimension of theentrepreneur-investor relationship also illumi-nates intriguing questions about the efficacy ofnew models and sources of financial capital inentrepreneurship, such as crowdfunding, peer-to-peer platforms, and one-to-many pitch com-petitions. These emerging models are oftentrumpeted as being attractive for early-stageventures because they enable fledgling entre-preneurs who may have good ideas but littleexperience and limited access to traditional in-vestors to secure the financial capital presumablyneeded to actualize their ideas. Our model raisesquestions, however, about whether these newmodels are able to provide early-stage ventureswith the resources they need, given the highlyambiguous and uncertain strategic problemsthey face. These models, exemplified by the pop-ular crowdfunding platform Kickstarter, providea marketplace for exchanging financial resourcesthrough arm’s-length and transactional rela-tionships. However, these models are largelydevoid of the interpersonal interactions thatcharacterize traditional encounters between entre-preneurs and investors. Without such encountersand without opportunities for reciprocal disclosure,

these new investment models may cultivate in-strumental relationships that lack bonds of af-fective commitment between entrepreneurs andinvestors. As a result, although they enable theexchange of financial resources, these modelsmay be deficient in providing early-stage en-trepreneurs with the social resources they mostneed to advance their ventures.Research is needed to understand the condi-

tions under which these new investment modelsare most effective. For example, are they mosteffective for entrepreneurs who are alreadyembedded within traditional investment net-works and, thus, already can access social re-sources? Might these models be most effectivefor a small subset of consumer products andservices that can benefit from the type of finan-cial capital and arm’s-length social attentionthese platforms allow? Are new relationalmodels emerging alongside these new invest-ment models to provide early-stage entrepre-neurs with social resources? These are allquestions our theory provokes.A second key contribution of our theory is its

explication of relationship development and re-source exchange as a bidirectional process. Aview of relationship development as a bi-directional process extends existing theory andresearch, in which scholars have considered howentrepreneurs and investors perceive and ap-proach one another but have neglected the bi-directional interplayof entrepreneurs’and investors’expectations and actions that comprise exchange.The bidirectional conceptualization we offer opensnew avenues for research on how entrepreneursestablish the legitimacy of their ventures throughimpression management and on the affective ex-pectations that investors might have when workingwith entrepreneurs.Several scholars (e.g., Cornelissen & Clarke,

2010; Lounsbury&Glynn, 2001;Martens, Jennings,& Jennings, 2007; Zott & Huy, 2007) have positedthat it is through the skillful use of impressionmanagement tactics—telling stories and posi-tioning their ventures within a given institutionalmilieu—that entrepreneurs acquire legitimacyand obtain resources from investors. Our modelincorporates these ideas but also implies thatthere may be limitations to the efficacy of savvyimpression management behavior. In our modelthis behavior, which we refer to as informationalsignaling, establishes an investor’s initial expec-tations for theviabilityofaventureand, thus, shapes


the instrumental dimension of the entrepreneur-investor relationship. Our model aligns with thepredictions of existing theory in suggesting that theinstrumental relationship motivates resource ex-change. However, our model further considers howthe outcomes of an exchangewill feed back into therelationship, either strengthening or weakening it.Through these feedback loops, exaggerated im-pression management behavior may, in effect, berisky for entrepreneurs. While an entrepreneur’sstories and signals may form much needed earlyperceptions of legitimacy, these same stories andsignals may set inflated and unattainable expecta-tions for the near-term instrumental value of theventure. If the venture fails to meet or exceed theseexpectations, the instrumental relationship betweenthe entrepreneur and the investor could be weak-ened. Moreover, if the investor suspects that theentrepreneur intentionally and knowingly createdfalse expectations, there could be irreparabledamage to the relationship between the two. Theoryand research suggest that perceived integrityviolations—where one party believes the other wasintentionally misleading or deceiving—may beespecially challenging to redress (Kim, Dirks, &Cooper, 2009).

Viewed through the lens of our theoreticalmodel, research is needed to understand thelonger-term effects of impression managementbehavior on venture outcomes through relationalmechanisms. For example, perhaps there isa curvilinear relationship between impressionmanagement behavior and venture outcomes;entrepreneursmust establish legitimacybutmustavoid setting unattainable expectations. Or per-haps effective long-term impression manage-ment requires establishing legitimacy on somedimensions while signaling awareness of vul-nerability on other dimensions. Our model anddiscussion of the role of disclosure suggest thata balanced approach might stimulate a fruitfulexchange process between an entrepreneur andan investor.

Our conceptualization of relationship develop-ment as a bidirectional exchange process alsosuggests that in addition to establishing thelegitimacy of a venture within a particular in-stitutional milieu, an entrepreneur’s signalingbehavior must address the idiosyncratic and af-fective expectations that a given investor holds.Although research exists on the negotiated pro-cess of economic exchange guiding financialresource exchange in entrepreneurship, the social

exchangeprocess in entrepreneurship—particularlythe affective expectations investors have—is rela-tively poorly understood. Because reciprocity isneeded to strengthen relationships through a two-way flow of value, entrepreneurs who receive valu-able strategic advice or social connections frominvestors must, in turn, provide investors with socialresources, such as solidarity with a venture seen as“the next big thing” (Prowse, 1998). Yet little is knownabout the degree to which investors value differentkinds of social resources or about howentrepreneurscan transfer social resources to an investor. Forexample, if an investor values being attached toa prominent venture, an entrepreneur may need toname the investor to a governance or advisoryboard—an action that would publicly attach the in-vestor to theventure.Orperhapsanentrepreneurcandeliver this value to an investor through informalactions, such as using “we” rather than “I” in dis-cussions with the investor about the venture. Quali-tative research would be especially useful formapping the range of affective expectations in-vestors have. Such research could provide valuablepractical implications for entrepreneurs seeking in-vestors and for delineating the different kinds of ac-tions that meet investors’ idiosyncratic expectations.In embarking on such an effort, entrepreneurshipscholars might consider the literature on mentor-protege relationships (e.g., Ragins & Scandura, 1999;Young & Perrewe, 2000). The range of social benefitsand costs described in this research might providea rich starting point for thinking about the affectiveexpectations that exist in entrepreneurship.A third key contribution of our theory is its por-

trayal of relationship development as a continuousprocess, potentially comprising many discrete in-stances of reciprocal resource exchange over time.Our theorizing enriches existing work that has fo-cused on the initiation of relationships between en-trepreneursandinvestorsandontheformalizationofrelationships through financial investment. Consid-eration of relationship development as a continuousprocess, of which initiation and formalization areapart, suggestsdirections for future researchonhowrelationships between entrepreneurs and investorschange over time.Central to our theorizing about the process

of relational development are the ideas that (1)different kinds of resources (i.e., social or fi-nancial) are especially valuable for venturesat different stages of development, and (2)feedback loops from successful resource ex-change strengthen the entrepreneur-investor


relationship. Consideration of the various de-velopmental cycles that can emerge as a result ofthese components of ourmodel sheds light onwhysome partnerships strengthen over time, whereasothers weaken and eventually fall apart. For in-stance, consider entrepreneurship during thedotcom boom (and bust) of the 1990s, as exempli-fied by the grocery delivery companyWebvan. Atan early stage of development, Webvan attractedsignificant instrumental interest from VCs,who poured financial resources—nearly $400million—into the company. By emphasizing theinstrumental side of the entrepreneur-investorrelationship, however,Webvanhad less access tothe social resources needed to resolve the highambiguity associated with operating at the in-tersection of the established grocery market andthe nascentweb-based deliverymarket. Strategicmissteps, which might have been avoided withgreater access to social resources, contributed toWebvan’s eventual bankruptcy. The example ofWebvan illustrates that instrumental setbackscan weaken the instrumental relationship andalso spill over to the affective relationship, how-ever tenuous or strong these relationshipsmay be.

As another example, consider a scenario wherean investor and an entrepreneur develop differ-ences in their beliefs about the strategic directionof a new venture. These disagreements mightarise, for instance, from differing opinions onmonetization strategies, personnel decisions, orexit strategies. An investor who provides valu-able social resources to address such issues(e.g., strategic advice or referrals) would likelyexpect the entrepreneur to take and use these re-sources. If the entrepreneur does not implementthe investor’s ideas, however, the investor’s af-fective expectations could be violated, damagingthe affective relationship. A subsequent setbackin the perceived growth of the venture could proveespecially damaging. A primary implication ofour model, which helps to understand these dy-namics, is that it is critical to know when, in thedevelopmental trajectory of a venture, differentforms of resource exchange occur and the degreeto which parties are meeting one another’s ex-pectations for exchange.

In a related vein, consideration of the full pro-cess of relational development suggests avenuesfor future research on how relationships betweenentrepreneurs and investors change over thecourse of time. Our explanation of the different

motivations that VCs have, compared to angelinvestors, sheds light on one reason why, in ad-dition to business motivations, angels may preferinvesting in earlier-stage ventures. However, therelative valueof theaffectivebondand instrumentalbond with an investor changes as a venture grows,progressing across developmental stages. Thissuggests that the relationships that a venture needsmay change over time in terms of the relative em-phasis on affective and instrumental components.Research is needed to clarify whether successfulventures accomplish these changes best by rede-fining a given relationship or by selecting into andout of different relationships over time. Can entre-preneurs and investors maintain effective andvaluable working relationships over time, shiftingtheir focus on social and economic exchanges asaventuregrows?Or is it better forentrepreneursandinvestors todevelop relationshipswithnewpartnerswho have the relational grounding—affective orinstrumental—that facilitate the kind of resourceexchange needed? As research on mentoring hassuggested (Cotton, Shen, & Livne-Tarandach, 2011),entrepreneurs might consider maintaining a port-folio of connections to investors, each of whomprovides access to unique resources. Research isneeded to understand how relationships betweenentrepreneurs and investors change throughout thelife of anewventureandwhether this changeoccursthrough selection,with old relationships endingandnew relationships forming, or through redefinition,with old relationships shifting in their focus overtime.

CONCLUSION

In a review of resource needs in the entrepre-neurial process, Burggraaf, Floren, and Kunst wrote,“The entrepreneur and investor are bound to eachother . . . the ‘click factor’ is essential: the right type ofchemistry is needed between entrepreneur and in-vestor” (2008: 69). Our theoreticalmodel, grounded inexchange theory, explains the dual dimensions thatcharacterize the entrepreneur-investor relationship,the different kinds of resource exchange that thesedimensions motivate, and the process throughwhich reciprocal exchange can—when expec-tations are met—contribute to relationship de-velopment over time. By considering resourcesand relationships, as well as processes of ex-change, our theory can help guide future re-search and provide a better understanding ofthe entrepreneurial process.


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Laura Huang ([email protected]) is an assistant professor of management attheWharton School, University of Pennsylvania. She received her Ph.D. from theMerageSchool of Business, University of California, Irvine. Her research focuses on the micro-foundations of entrepreneurship, including the influence of perceptions, cues, and non-conscious bias in funding decisions.

Andrew P. Knight ([email protected]) is an associate professor of organizational be-havior at the Olin Business School, Washington University in St. Louis. He received hisPh.D. from theUniversity of Pennsylvania’sWharton School. His current research interestsinclude group dynamics, affect, interpersonal relationships, and entrepreneurship.


mailto:[email protected]

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