17 Palmer & Weiss (2022)

study focus

entrepreneurial ventures that are…

• nascent, less than 10 years old

• primarily owned and controlled by their founders, who typically occupy the positions of CEO and chairperson of the board of directors

• for-profit enterprises, although they may generate no revenue or operate at a loss

• risk-capital financed, with the objective of “giong public” or becoming acquired

• innovative in regards to technologies they commercialize or the business model they adopt

factors making entrepreneurial venture prone to misconduct

• performance strain

• flawed administrative systems

• perverse incentives

• misaligned cultures

• skewed power structures

• social influence and group dynamics

• escalating commitment dynamics

• normative aspects

performance strain

• founders highly committed to bold/unrealistic goals

• operating under extreme uncertainty and intense growth pressure

• when progress fall short, likely to fake success by manipulating test results, substituting procedured or inflating sales figures

perverse incentives

• founders and investors face payoff structures that reward hype, speed, valuation growth and exits more than long-term integrity

  • pressure from venture capitalists

• serial founders: especially prone to extract value and move on

flawed administrative systems

• start-ups lack resources/are usually small, centralized and lightly structured

• lack compliance, HR, auditing and disclosure controls

misaligned cultures

• startup cultures may explicitly or implicitly celebrate disobedience/rule-breaking, blurring the line between acceptable experimentation and deception

• “bro culture” especially conducive to sexual harassment

skewed power structures

• concentrated informal power: founders often possess charistmatic authority and informal leverage over scarce resources, may hold super-voting control

• can weaken board oversight, encourage self-dealing and founders demanding obedience beyond boundaries

social influence and group dynamics

strong in-group dynamics, bad behaviour goes unchallenged

• investors may be blinded by personal affinity, shared background and “gut feel”

• founding teams may become insulated by friendship, family ties and groupthink

escalating commitment

• becoming tied to overstated goals

• misconduct driven by sunk commitments, public claims and rationalization

• no clear exit option

normative aspects

• weak normative environment: “not a profession”