The Effects of Social Networks on Venture Capitalist Advice and Monitoring

Kwanghui Lim, Melbourne Business School
Brian Cu, Boston Consulting Group

Abstract

We show how contractual factors and social ties shape the relationship between entrepreneurs and venture capitalists. While direct ties result in the VC offering more advice to the entrepreneur, indirect ties result in greater monitoring by the VC. We also find that contractual favorableness is associated with more advice and less monitoring by the VC, but that contractual flexibility is surprisingly not significant. The results vary by type of advice and monitoring. Our results suggest that scholars and practitioners must integrate contractual and social network perspectives to better understand the VC-entrepreneur relationship.