ENTREPRENEURIAL NARCISSISM AND VENTURE CAPITAL INVESTMENT AND CONTRACT DESIGN

Abstract

This study examines how entrepreneurial narcissism affects venture capital (VC) investment and contracting. Narcissistic leaders exhibit both positive and negative personality traits. Hence, it is interesting to examine how VCs take advantage of the positive aspects of narcissistic entrepreneurs while minimizing the negative aspects. I find that VCs prefer to invest in firms with narcissistic entrepreneurs. Conditional on VC investments, VCs also provide more funding to narcissistic founders. On the other hand, I find that VCs are more likely to impose contingent contracts on narcissistic leaders to protect themselves from the dark side of entrepreneurial narcissism. In addition, the restrictiveness levels of contingencies are also positively associated with the level of entrepreneurial narcissism. Overall, these results suggest that entrepreneurial narcissism is an important factor influencing VC investments. Moreover, VCs have developed contractual provisions to deal with the downside resulting from the negative aspects of entrepreneurial narcissism.