Who Needs Contracts? Generalized Exchange within Investment Accelerators

Abstract

This Article investigates why an expert volunteers on behalf of startups that participate in a novel type of small venture capital (“VC”) fund known as a mentor-driven investment accelerator (“MDIA”). A MDIA organizes a pool of seasoned individuals – called “mentors” – to help new companies. An obvious organizational strategy would be to contract with mentors. Mentors instead voluntarily assist. Legal studies of norm-based exchanges do not explain what this Article calls the “mentorship conundrum” – i.e., the puzzling motivation of a mentor to volunteer within otherwise for-profit environments. This Article is the first to bridge the insights of generalized exchange theory with law and entrepreneurship. Generalized exchange, which describes systems when benefits are not directly returned by a recipient but by another member of a group, best explains how MDIAs induce volunteerism. Original research reveals that the absence of contract promotes a feeling of altruism while facilitating economically valuable aspects of mentor / startup interaction. Mentors realize indirect benefits that function as a consideration surrogate. Mentor rewards include reputation gains, learning benefits, and enhanced professional connections. The MDIA provides a study of how pro-social information sharing occurs in a commercial setting.

Keywords: Silicon Flatiron, Silicon Flatirons