The Effects of Social Networks

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Hypothesis 1

“Direct ties between a VC and an entrepreneur will (a) increase the advice given by the VC to the entrepreneur and (b) decrease the level of disagreement between the VC and entrepreneur” (Lim & Cu, 2010, p. 5).

Through secondary research Lim & Cu (2010) found that members of a social network face social obligation and therefore abstain braking rules and norms and taking advantage of the existing ties to the detriment of the other network members, as this would lead to sanctions and might destroy the value from future transactions (p. 5). Affiliates linked through direct (also called strong) ties, face particularly strong social obligation. In addition, direct ties imply thorough knowledge about each other, which reduces uncertainty and costs, as the formal systems become unnecessary (Ibid.). Larson’s (1992) research supports this statement, as she found that reciprocity, personal relations, trust and moral obligations offer control and coordination in a network (p. 77) weakens the status of a legal contract as the main governing mechanism (Ibid., p. 95), improves information flow (Ibid., p. 77) and prevent opportunistic behavior (Ibid. p. 83). Further, this degree of knowledge enables the venture capitalist (VC) to better understand the entrepreneur and give correct advice (Lim & Cu, 2010, p. 5). Therefore the prospect of receiving advice would be higher, while the degree of disagreement between the parties would be lower.

Larson (1992) found that directly tied partners continue to exchange information due to the principle of mutual gain (p. 92). Strategic cooperation for instance has an impact on long-term competitiveness (Ibid. p. 93). This means that venture capitalists have an incentive to give advice to their entrepreneurial partners because of the prospect of shared benefits. This would support the assumption that the stronger the tie between VC and entrepreneur, the more information will be exchanged and the higher...
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