For Some Startups, an Investor with a Bad Rep Isn’t a Dealbreaker

New research shows that some fledgling companies will overlook bad investor behavior in exchange for more control.

Illustration by II

Illustration by II

According to a recent study, new companies looking for capital aren’t always deterred by an investor with a less than stellar reputation — that is, as long as the investor stays out of the startup’s business.

A paper published on September 27 shows that contrary to popular belief, startups are willing to accept capital from corporate venture-capital firms embroiled in lawsuits.

The new paper, entitled Is a Reputation for Misconduct Always Harmful? Evidence from Corporate Venture Capital, was written by Sergey Anokhin from St. Cloud State University, Todd Morgan at Western Michigan University, and Bill Schulze and Robert Wuebker, both from the University of Utah.

“The results are intriguing,” the authors said. “[They reveal] underexplored relationships between corporate reputation(s) and the impact on performance.”

The researchers used three data sources: the SDC VentureXpert database, which includes business, geographic, and financial information on funds, firms, and portfolio companies, as well as information on individual financing rounds; the Corporate Venturing Directory and Yearbook, which is published by Asset Alternatives; and LexisNexis Academic.

The dataset focused specifically on public corporations investing in venture deals, as this ensured the availability of data necessary to test their hypotheses. The final dataset included the activity of 156 corporations from 1998 to 2001 — “a period of significant financing activity,” according to the paper.


The researchers noted that when venture capital is scarce, startups rarely receive multiple offers, making them less likely to push back on an investor who has engaged in misconduct (which they defined as involvement in lawsuits related to intellectual property). They chose the period between 1998 and 2001 because it was a time when capital was abundant and startups had options when it came to investors.

Their research found that reputations for investing experience, involvement in decision-making, and misconduct all individually benefit — or, in the case of the last quality, don’t harm — the attractiveness of a corporate venture firm as an investor in a startup.

The same holds true for an experienced firm that is involved in misconduct. However, when a firm that is perceived to be highly involved as an investor also has a reputation for misconduct, the combination could very well have a negative effect on the investment. The researchers noted that entrepreneurs don’t want to be held on a “short leash,” especially if there’s a chance that their investors could be using the startup’s intellectual property.

The authors had expected that experience and involvement would have positive effects on startup interest in an investment. But they called the misconduct finding the “biggest surprise” of the study. “Even when the corporate venture capital program also has a reputation for malfeasance and misbehavior, our results suggest that this reputation does not tarnish its luster,” they said.

However, they did provide a potential explanation for the finding: “In this sense, the data suggest that there is no such thing as bad publicity.”