Narcissistic Entrepreneurs and Venture Capital Investment and Contracting

Abstract

We study how entrepreneur narcissism influences venture capital firms’ (VCs) investment decisions and contract design. We find that VCs prefer to invest in companies with narcissistic entrepreneurs to take advantage of the bright side of narcissistic entrepreneurs, but they are also more likely to impose contingent contracts on narcissistic entrepreneurs to mitigate the dark side of entrepreneur narcissism. However, we find no evidence that VCs are more likely to monitor narcissistic entrepreneurs directly by demanding the right to sit on the boards of entrepreneurial companies. Furthermore, to mitigate the dark side of narcissistic entrepreneurs, VC firms are more likely to employ contingent contract provisions that are customized to the circumstances of entrepreneurial companies, more stringent in future performance targeting, and more explicit in prohibiting managerial misconduct. There is weak evidence that VC-imposed contingent contracts help mitigate the negative impact of entrepreneur narcissism on entrepreneurial company success.

Keywords: narcissism; venture capital; entrepreneur; investment; contracting

JEL Classification: G24; G32; K12; M13; M41