Investors and Entrepreneurs: A Study in Indonesian Start-Ups The Love Stories of “Love Money”

(1)

i

The Love Stories of “Love Money”

Investors and Entrepreneurs: A Study in

Indonesian Start-Ups

Master Thesis

MscBA in Small Business and Entrepreneurship

MUCHAMMAD GUMILANG

Student number: S2436507

Word count: 46.985 words

Supervisor:

Dr. Haibo Zhou - University of Groningen

Co-supervisor:

Dr. C.H.M. Lutz – University of Groningen

Faculty of Economics and Business

University of Groningen

(2)

ii

The Love Stories of “Love Money” Investors and Entrepreneurs: A

Study in Indonesian Start-Ups

ABSTRACT

“Love money” investment, which is an investment made by a family member, friend, or spouse, is known to have a considerable role in start-up ventures. However, it is not extensively researched in small business and entrepreneurship literature. This study tries to provide a big picture of “love money” investment relationship in individual level from several aspects, such as investors’ roles, determinants to invest “love money”, determinants to seek “love money, cooperation between “love money” investor-entrepreneur, relationship quality, relationship development, and conflict. In the methodological aspect, this study incorporates literature review and case studies to depict “love money” investment phenomenon. Further, in order to gain new insights in a different context, this study was done in emerging country context, which took place in Bandung City, Indonesia. The study uses seven cases from Indonesian small businesses that include both the investors and the entrepreneurs. The key findings of this study explain that “love money” investment relationship involves the altruistic motives from the investor to help the entrepreneur in establishing a venture and social norms bind the relationship in “love money” investment. Finally, the result of this study serves to extend the literature regarding “love money” investment and investor-entrepreneur relationship in a different culture context.

(3)

iii

6.1 Relationship Quality ... 67 6.2 Relationship Development ... 72 6.3 Investor Roles ... 77 6.4 Cooperative Behavior ... 82 6.4.1 Time pressure ... 83 6.4.2 Payoff to cooperation ... 84 6.4.3 Information transfer ... 100 6.4.4 Personal similarity ... 107 6.4.5 Transaction procedure ... 112 6.5 Conflict ... 117 7. Discussion ... 123

7.1 “Love Money” Investors: Definition and Characterization ... 123

7.2 Determinants to Invest “Love Money” ... 124

7.3 Determinants to Seek “Love Money” ... 126

7.4 “Love Money” Investor-Entrepreneur Relationship ... 128

8. Conclusion ... 130

8.1 Practical implications ... 130

8.2 Theoretical implications ... 131

8.3 Limitations and Recommendations ... 131

References ... 132

Appendix ... 136

Appendix 1: Creating questionnaire ... 136

(5)

v

(6)

1

List of Tables

Table 1 Distinguishing characteristics of the investor clusters (Sullivan and Miller, 1996) ... 8

Table 2 List of case studies ... 24

Table 3 Investment profile ... 29

Table 4 Demographic context as determinants to invest “love money” ... 36

Table 5 Personal context on determinants to invest “love money" ... 44

Table 6 Pattern in seeking “love money” investment ... 51

Table 7 Demographic context on determinant to seek “love money” investment ... 54

Table 8 Personal context on determinants to seek “love money” ... 61

Table 9 Relationship quality ... 68

Table 10 Relationship development ... 74

Table 11 Investor roles ... 79

Table 12 Cooperative behavior between “love money” investors and entrepreneurs ... 85

Table 13 Conflicts between “love money” investors and entrepreneurs ... 119

(7)

2

1. Introduction

1.1 Overview

Small business has been known as a major economic development source by giving contribution to employment generation, innovation, and GDP growth (Van Praag and Versloot, 2007). Based on those mentioned important roles in the economic development, many topics with regards to small business have attracted attention from both policy makers and researchers. An option to achieve the desired economic development is by increasing the number of start-ups to emerge into the market. However, a study found many small businesses cannot survive beyond start-up phase (Walker, 1989). Some small business owners consider financial capital as a constraint that hinders the survival of start-up businesses (Walker, 1989). Further, small businesses face financing problems at every stage of their development (Walker, 1989). Besides, financial capital is also mentioned as an essential factor that drives companies. Thus, financial support is an important aspect of starting a company (Bygrave et al., 2002; Riding, 2008). Based on the importance of financing in the start-up stage of a venture, research in regards to this aspect is critically needed.

(8)

3

funding from their family members and friends at the beginning of the venture (Berger and Udell, 1998; Bygrave, Hay, and Reynolds, 2003).

Even though family members and friends (i.e. “love money” investors) may only contribute to a small amount of financial capital, several authors argued them as major sources of financing for small businesses (Berger and Udell, 1998; Bygrave et al., 2003; Bygrave and Quill, 2007; Avdeitchikova, Landstrom, and Mansson, 2008). The definition of “love money” investor is “investors making investments in start-ups not founded by the investor him/herself (i.e. including family investments, investments by friends, colleagues, etc), but excluding investments in stocks and mutual funds” (Avedeitchikova et al., 2008). In addition, Global Entrepreneurship Monitor study found that “love money” investment is a crucial funding for both micro-companies, as well as high-tech companies (Bygrave et al., 2003).

Despite the critical importance of “love money” investment in SME financing, there is a little information published regarding “love money” investors compared to business angels (Riding, 2008). Most studies with regards to “love money” investment mainly focus on the determinants to make an investment (Maula, Autio, and Arenius, 2005; Wong and Ho, 2007; Szerb, Rappai, Makra, and Terjesen, 2007a; Szerb et al., 2007b; Nofsinger and Wang, 2011) and on the entrepreneurs’ determinants to seek “love money” investment (Honig, 1998; Cassar, 2004; Manolova, Manev, Carter, and Gyishev, 2006; Zhang, Souitaris, Soh, and Wong, 2008; Gartner, Frid, and Alexander, 2012). However, there is still a literature gap in “love money” investment research, which is the “love money”-entrepreneur relationship. This condition calls for additional studies regarding “love money” investment to add more information both academically and practically.

(9)

4

this study will extend the theory regarding “love money” investment that becomes the added values of this research.

In order to gain a focus in this study, the first thing needs to do is setting the level of analysis. In “love money” investment, personal context is the most significant determinant factor that drives a person to invest “love money”, followed by the demographic and environmental context (Maula et al., 2005; Wong and Ho, 2007; Szerb et al., 2007b). Thus, this study will set the unit of analysis on the individual level in order to gain significant magnitude from this study.

For the context of this research, this research was done in an emerging country with collectivist culture that has a different context compared to most of the studies in informal investment. Shepherd and Arzakachis (2001) argue a study of the relationship between investors and entrepreneurs in a different culture will give benefit to the generalization of the theory and is useful to increase the understanding of investor-entrepreneur relationship. In this research, Indonesia as an emerging country has been chosen to study the research gap.

1.2 Research Questions

Based on the research gap as well as the recent studies mentioned in the introduction part, this study comes with the following research question:

How is the phenomenon of “love money” investment by looking at the “love money” investors and the entrepreneurs in an emerging country?

The research question is divided into four sub-questions that try to answer the research question. The first three sub-questions are developed as the basis of the literature review which will be explained by the case studies. The fourth sub-question is developed from the gap of the literature review and as a basis for the explorative study in this research.

(10)

5

Sub-question 1: How is “love money” investors defined and characterized in informal venture capital research?

The second sub-question has a purpose to explain the determinants of “love money” investment. Several studies had identified the determinants to invest “love money” investment based on the demographic and personal context of a person (Maula et al., 2005; Wong and Ho, 2007; Szerb et al., 2007a; Szerb et al., 2007b; Nofsinger and Wang, 2011). An additional research by Sulivan and Miller (1996) also gives us insights into the informal investment motives that may relate to the “love money” investment’s motivations. The collection of these empirical studies can help us to draw a picture of the “love money” investor’s side in the whole relationship model. Thus, the second sub-question is:

Sub-question 2: Why do family members, spouse, or friends decide to make “love money” investment?

The third sub-question has a purpose to explain the determinants of entrepreneurs who seek for “love money”. Several studies used to explain the reasons entrepreneurs seek “love money” investment seen from the determinants of entrepreneurs to use “love money” (Honig, 1998; Cassar, 2004; Manolova et al., 2006; Zhang et al., 2008; Gartner et al., 2012), pecking order theory (Paul et al., 2007), and bootstrapping method (Jones and Jayawarna, 2010; Winborg and Landstrom, 2001).Thus, the third sub-question is:

Sub-question 3: Why do entrepreneurs seek “love money” investment?

The fourth sub-question has a purpose to explore the literature gap in “love money” investor-entrepreneur relationship research. Several studies served grounded theories that are relevant to explain the relationship such as the determinants of cooperative behavior in entrepreneur-investor relationship (Cable and Shane, 1997) and conflicts between entrepreneur and entrepreneur-investor (Collewaert and Fassin, 2013). Further, this research also tries to explore topics regarding the relationship quality and the relationship development. After all, empirical evidence has to be served to extend the argument on entrepreneur-“love money” investor relationship. Thus, the fourth sub-question is:

(11)

6

1.3 Research Objectives

This research aims to contribute both academically and practically in several ways. First, this study tries to give in-depth information on the determinants that influence a person to invest “love money” and the determinants that influence entrepreneurs to seek “love money”. Second, this study tries to explore the literature gap on “love money” investor-entrepreneur relationship to extend the literatures regarding “love money” investment. Third, this study tries to give information to practitioners regarding the entrepreneur-“love money” investor relationship. Fourth, showing which determinant that mostly influence the decision to make “love money” investment, to seek “love money”, and to behave cooperatively.

1.4 Overview of The Study

(12)

7

2. Literature Review

2.1 “Love Money” Investors

There are several typologies for “love money” investors based on the investors’ activity and business ownership experience (Riding, 2008; Szerb et al., 2007b). For instance, “love money” investors can be categorized based on the investors’ activity (Riding, 2008), such as:

 Passive love money investors: “love money” investors (family members and friends) who do not act as operators in the business in which they invest in

 Active love money investors: “love money” investors (family members and friends) who act as operators of the businesses in which they invest in

While, Szerb et al. (2007b) make two categories of “love money” investors only for family members based on whether they have business ownership experience or not:

 Classic love money investors: an individual without any business ownership experience who invests in family members’ businesses

 Kin owner investors: an individual with business ownership experience who invests in family members’ businesses

The typologies made by Szerb et al. (2007b) are difficult to use because they do not include entrepreneur’s friend who used by the definition in this study. Contrary, the typologies made by Riding (2008) have a general definition and include entrepreneurs’ family members as well as friends. Thus, Riding’s “love money” investors typologies are more appropriate to be used in “love money” research. Further, Riding’s typologies are in line with the “love money” investors definition by Avdeitchikova et al. (2008). For this reason, this research uses the typologies of “love money” investors by Riding (2008).

2.2 Determinants of “Love Money” Investment

(13)

8

2.2.1 Motivations for investment

Sullivan and Miller (1996) made a study to explore the reasons why people invest informal capital in new ventures. They argue that not all investors are homo economicus, which means other motives such as hedonistic and altruistic motives may influence the decision to invest (Sullivan and Miller, 1996). The study distinguishes the characteristics of informal investors based on their motivation as seen on Table 1. For the economic motive, the motive assumes a person’s willingness to invest only to receive financial outcome (Sullivan and Miller, 1996). For the hedonistic motive, the motive assumes a person’s willingness to invest is to get happiness as well as consider both financial and nonfinancial benefit from the investment (Sullivan and Miller, 1996). Lastly, for the altruistic motive, the motive assumes a person’s willingness to invest is based on altruism (Sullivan and Miller, 1996). In addition, investments in family members’ business often involve different motives, such as altruistic motive, social obligation, kinship, and reciprocity (Maula et al., 2005; Avdeitchikova, 2009).

Table 1Distinguishing characteristics of the investor clusters (Sullivan and Miller, 1996)

Economic investor Hedonistic investor Altruistic investor

 Only financial motivations are important

 Demand highest return compare to other types of investors

 Perceives highest level of risk among the clusters

 Prefer straight equity participation

 Has shortest holding period

 Tends to make larger investments

 Least satisfied with investments

 Most likely to depend on the recommendation of a knowledgeable investor

 Perceives lowest level of risk

 More likely to invest with a group

 More likely to hold a combination of debt and equity

 Considers both financial and nonfinancial motives important

 Enjoys the opportunity to play a part in an

entrepreneurial process

 Most satisfied with investments

 Considers socially beneficial motivations important

 Less interested in financial returns

 Make smaller investments

 Patient in expectations for cashing out the investment

 Self-reliant

2.2.2 Personal context

(14)

9

Personal relationship. Having a friendship, a spousal, or a familial relationship between an investor and an entrepreneur means that an investor knows the entrepreneur personally. Having a personal relationship with an entrepreneur is related to the lower mental barrier to invest in new start-up companies, because personal relationship endows investors with prior knowledge regarding the characteristics and the capabilities of entrepreneurs (Wall, 2007). Further, several authors also found that knowing an entrepreneur personally highly influences the propensity to invest (Maula et al., 2005; Wong et al., 2004; Szerb et al., 2007a; Wong and Ho, 2007). In addition, having a personal relationship with an entrepreneur is found to be the most important aspect that influences the decision to invest for the investors who has no or little entrepreneurial experience (Szerb et al., 2007a). However, a close relationship with an entrepreneur may drive the investors to make a decision to support the entrepreneurs' ventures reactively (Maula et al., 2005). In other words, “love money” investment may be based on the altruistic motives that make the investors overlook other important aspects before deciding to make an investment (Maula et al., 2005). Overall, a close relationship with an entrepreneur is likely to improve the perceived behavioral control over an investment and to influence subjective norms in relation to the informal investment (Maula et al., 2005).

Entrepreneurial and managerial experience. Entrepreneurial and managerial experience are important aspects that determine the decision to make an informal investment, particularly “love money” (Maula et al., 2005; Wong et al., 2004; Wong and Ho, 2007; Szerb et al., 2007a). Entrepreneurial experience increases an individual’s propensity to make an informal investment four times higher than a person without any business ownership experience (Bygrave and Hunt, 2005; Szerb et al., 2007a). Further, entrepreneurial experience increases individuals’ confidence in their abilities to seek valuable investments opportunity and to control the outcomes (Maula et al., 2005; Wong and Ho, 2007; Szerb et al., 2007b).

(15)

10

makes differences in the career capital among the investors. Consequently, the variation in career capital among individuals makes differences in a person’s risk perception, opportunity assessment, and personal contribution and advice (Szerb et al., 2007a). In contrast, investors with no or limited on these types of experiences (i.e. “lotto investors”) may only rely on media to identify information about business opportunities (Sorheim and Landstrom, 2001).

Start-up skills. Investors who have start-up skills means that the investors have knowledge, skills, and experiences required to start a new business. Several authors argued that start-up skills determine the propensity to invest “love money”, because it increases the investors’ belief in their abilities to give added values to a new venture (Szerb et al., 2007a; Wong et al., 2004; Wong and Ho, 2007). Further, having start-up skills influences highly the decision to make an informal investment for the investors who are business owners or have entrepreneurial experience (Szerb et al., 2007a).

Majority proportions of informal investors are value-added investors who help ventures in the start-up phase by giving their personal skills (Freear and Wetzel, 1989; Freear, Sohl, and Wetzel, 1994; Mason and Harrison, 1996). For some investors, giving added values is an incentive for becoming an investor (Van Osnabrugge and Robinson, 2000). Having start-up skills also make investors able to provide both financing and advice for new start-ups, which are essential for the survival and growth of the start-ups (Szerb et al., 2007a). For this reason, start-up skills can be considered as the factor that can influence a person to make an investment.

(16)

11

did not include opportunity perception in their study because they said that this factor has no direct relevance to the potential informal investors, but potential entrepreneurs. In family investment, a business does not have to be promising to get a funding because several factors, such as social obligation, kinship, or altruistic motive may influence the investment decision (Maula et al., 2005). However, altruistic motive is not always the only motive that influence the decision to invest “love money”. There should be other “love money” investors who seek for other motives (i.e. economic and hedonistic motives), so they still need to analyze the business opportunity. Thus, opportunity perception is included in this study.

Risk aversion/fear of failure. Investing in small businesses is a risky investment as the nature of small business involves high external uncertainty (Storey and Greene, 2010). The risk factor may make individuals who fear of failure not motivated to make the investment. But, Szerb et al. (2007a) found that the fear of failure can work differently in motivating individuals, whether to make an investment or not. Fear of failure itself can be described as a fear to fail in starting a business (Reynolds et al., 2001). Szerb et al. (2007a) found that the fear of failure decreases the likely to make an informal investment for the individuals who have entrepreneurial experience, on the contrary the opposite effect happens for non-owner investors. It may be that the investors who are business owners have made many decisions about risk while non-owner investors impose more trust in entrepreneurs’ capabilities to start the business successfully (Szerb et al., 2007b).

2.2.3 Demographics context

This part consists of several aspects in demographics context that have been researched to be the determinants to make “love money” investment, such as age, gender, education, income, and work status.

(17)

12

have low perceived behavioral control. It is because younger people may perceive that they are not prepared yet to make investment decisions or to add values to the business development process (Wong and Ho, 2007). On the other hand, older individuals are more likely to offer an investment than younger individuals. It may be because older individuals tend to have more financial capital and have more managerial experience than the younger ones (Szerb et al., 2007b).

Gender. In the context of “love money” investment, gender is found to have different level of influences among several researchers. Maula et al. (2005) found that females are more likely to make family investments than males’ counterpart. However, Wong et al. (2004) found that males are more likely to make family investment. While, Szerb et al. (2007b) found that both genders determine the propensity in “love money” investment, but with different characteristics. Differ from those studies that found the influence of gender in determining to make a “love money” investment, the study by Wong and Ho (2007) found no evidence from both of the genders. The explanation of different results may be related to the type of industry whether it is male or female dominated industry or different culture as there may be different gender gap within different cultures. Relating gender to the cultural context may give better sights into the influence of gender in determining the decision to make “love money” investment.

Education. Individuals’ education level is found to have different influences to determine the decision in “love money” investment. Maula et al. (2005) found the propensity to make a family investment decreases in the individuals with a higher level of education. However, Wong et al. (2004) and Wong and Ho (2007) did not find any evidence to support that education determines the decision to make an informal investment. In addition, Szerb et al. (2007a) found education level has an insignificant role to determine the decision to make an informal investment. Education level may determine the investment decision because it relates to individuals’ perception of their capabilities to make a successful investment (Maula et al., 2005). For example, persons with higher education level may have more confidence to make a riskier investment with a stranger rather than family investment that has a lower risk (Maula et al., 2005).

(18)

13

a person must possess adequate financial resources to be spared on the investment (Casson, 1982).

Work status. It is found that full-time employment has a positive relationship with propensity to make an investment (Szerb et al., 2007a). Working a full-time job provides a stable stream of income that can be allocated to making investments (Szerb et al., 2007b). In addition, Honig (1998) also found that families that have resources due to high career status are in a better position to lend the money.

2.3 The Determinants of Entrepreneurs to Seek “Love Money” Investment

There are several factors that influence entrepreneur’s decision to seek “love money” investment that can be explained by pecking order theory, bootstrapping method, and several determinants in a personal context.

2.3.1 Pecking order theory view in the seeking of “love money” investment

Pecking order theory of capital provides the explanation of capital structure in a venture that capital structure is influenced by information asymmetries between entrepreneurs and its potential financiers (Myers and Majluf, 1984). Based on the previous definition, Myers and Majluf (1984) stated that entrepreneurs prefer to use internal finance rather than external finance, and when external funds are necessary, entrepreneurs prefer financing in debt type than equity. From this theory, the order of small business in obtaining finance may have an order, such as internal fund, riskless debt, risky debt, mezzanine financing, and equity (Schlotens, 1999).

(19)

14

their financing sequence. Further, the theory will also help to explain the reason entrepreneurs seek “love money” with selected investment scheme.

2.3.2 Personal context

There are two determinants from the personal context of entrepreneurs that can be considered as the determinants to seek “love money”: industry experience and managerial experience.

Industry experience. An entrepreneur who has entrepreneurial or working experience in related industry can be perceived to have a lower risk in the eyes of the investors. As the result, it will attract outside financiers to invest in the entrepreneur’s business. It is because industry experience give signals that the entrepreneur has better human capital by having skills required for the business (Cassar, 2004; Gartner et al., 2012). Zhang, Souitaris, Soh, and Wong (2008) found that industry experience relates to the propensity of entrepreneurs to use their existing networks who have similar industry experience to seek for an investment. According to the community of practice theory, a person who has industry experience tend to have networks with people who have similar knowledge, experience or industry background (Wenger, 1998; Zhang et al., 2008). In the context of “love money”, individuals who have friends or work colleagues in a similar industry are more likely to use their existing networks to find an investment. Thus, entrepreneurs may not only get funding, but also knowledge and advice from their investor (Baum and Silverman, 2004; Megginson and Weiss, 1991; Zhang et al. 2008). In another study, Gartner et al. (2012) did not found industry experience to determine entrepreneurs to seek external funding (e.g. family member or friend), instead the study found that having industry experience makes a person more likely to use personal sources.

(20)

15

One of the social competencies is interpersonal skills defined as individuals’ abilities to get acquainted, to communicate or to negotiate with persons in their inner circle (e.g. family members or friends) as well as outsiders or strangers (Badawy, 1995; Zhang et al., 2008). A research found individuals who have nontechnical position (i.e. marketing and business management), have better interpersonal skills than individuals who work in technical position (e.g. engineer or scientist) (Thompson, Warhusrst, and Callaghan, 2001; Zhang et al., 2008). To conclude, having managerial experience will increase the propensity to seek “love money” investment as it enhances individuals’ interpersonal skills.

A long managerial experience is also found to accumulate entrepreneurs’ knowledge and provides skills to entrepreneurs (Manolova, Manev, Carter, and Gyishev, 2006). Further, having long managerial experience makes individuals have better abilities in seeking, gathering and analyzing information about financing opportunities (Manolova et al., 2006). The finding from Manolova et al. (2006) found that having managerial experience determine entrepreneur to seek funding from entrepreneurs’ family and friend circle. However, the authors explain that the research context, which is Bulgaria, still have poor financial system at the time of their research. Thus, it makes even entrepreneurs with long managerial experience have difficulties to receive funding from financial institutions and rather to seek from family members or friends.

2.3.3 Demographic context

There are several determinants to seek “love money” based on the demographic context of entrepreneurs, such as gender, education, net worth (Honig, 1998; Cassar, 2004; Manolova et al., 2006; Gartner et al., 2012).

(21)

16

bank or other financial institutions. In contrast, Honig (1998), by using samples from Jamaican entrepreneurs, found that women have more chance to get funding from non-governmental organizations (NGOs), which means that women are less likely to seek “love money”. Further, Honig (1998) explained that women are more likely to get NGO’s funding, because there are many NGO’s which has a vision of gender equality. Hence, women are preferable to get financing from NGOs. Gartner et al. (2012), however, did not find any evidence that gender affect the decision to use either personal sources or external financing. From these findings, women are more likely to find “love money” than men.

Education. Education is a part of human capital that provides entrepreneurs with skills and knowledge necessary for seeking, gathering, and analyzing information about financial opportunities (Honig, 1998; Manolova et al., 2006). Honig (1998) found that individuals with a higher level of education have more credibility to financiers, so it makes a person seek for another type external financing rather than “love money”. Gartner et al. (2012) found that entrepreneurs who have lower education level (i.e. high school) tend to use external financing (e.g. family members, friends, and bank loans). Thus, an individual with lower education level is more likely to seek “love money”.

Net worth. Net worth measures the individuals’ wealth. Lower level of net worth is found to influence the entrepreneurs to seek for external financing from family members, friends, and bank loans (Gartner et al., 2012). It may be that individuals with low level of net worth do not possess sufficient financial capital to fund their business that makes them find other sources of financing rather than to risk their personal resources.

2.4 The “Love Money” Investor-Entrepreneur Relationship

In this section, there are two parts will be discussed: conflicts and cooperative behavior. These two parts serve as grounded theories to find new findings within entrepreneur-“love money” investor relationship.

2.4.1 Conflicts between investor and entrepreneur

(22)

17

2013). The effect of conflicts can increase the willingness to exit or to end a relationship for both investor and entrepreneur (Collewaert, 2012). Conflicts do not come by themselves. Instead, conflicts come from perceived unethical behavior within latent conditions that are processed in individuals’ sense making (Collewaert and Fassin, 2013). There are several types of latent conditions that responsible to create conflicts, such as goal incompatibilities, scarce resources, personal differences, interference in reaching goals, inefficient communication, interdependency (Bartos and Wehr, 2002; Collewaert and Fassin, 2013). The unethical behavior is defined as behavior that is illegal or morally unacceptable to the larger community (Jones, 1991; Collewaert and Fassin, 2013). The unethical behavior can be different for every person depends on an individual’s values or culture. For this reason, it is suggested that using entrepreneurs’ or investors’ perception would help to define unethical behavior that causes conflict in a relationship within individual (Collewaert and Fassin, 2013).

2.4.2 Cooperative behavior

Cooperative behavior viewed from prisoners’ dilemma perspective, developed by Cable and Shane (1997), used in this study to adjust to the context of investor-entrepreneur relationship. Overall, the prisoners’ dilemma perspective sees that although there is a better payoff for both parties to cooperate, each actor has their incentive to act according to their self-interest. Cable and Shane (1997) propose several determinants of cooperative behavior for venture capitalist and entrepreneur, such as time pressure, payoff to cooperation, information (communication and social relationship), personal similarity (relational demography, work values congruence, and relative power), and transaction procedures (bonding mechanism, staging capital payouts, generosity, and penalties for noncooperation).

(23)

18

the projects and the ideas (Cable and Shane, 1997). Further, being a first-mover will give an advantage to an innovation-based venture before the idea replicated by other ventures (Schoonhoven, Eisenhardt, and Lyman, 1990; Cable and Shane, 1997). Thus, entrepreneurs perceive the time pressure to get the capital and to be the first mover as soon as possible will increase the needs to cooperate with the investor. For investors, as the party who offers the capital, also face time pressure to receive returns on investment as soon as possible (Cable and Shane, 1997). In addition, investors may feel pressure to make an investment quickly due to competition from other investors and other financing options (Bygrave and Timmons, 1991; Cable and Shane, 1997).

Payoff to cooperation. Increasing payoffs for cooperation is found to enhance the cooperation between investor and entrepreneur (Dawes, 1980; Cable and Shane, 1997). In contrast, decreasing payoffs for cooperation will result in investor and entrepreneur stop the cooperation at all (Parkhe, 1993; Cable and Shane, 1997). Payoffs are not always in the form of money. For instance, entrepreneurs also perceive many nonfinancial payoffs from cooperating with their investors, such as industry knowledge, business advice, networks, signal of stability, and legitimacy to the market (Cable and Shane, 1997). While for investors, learning about an industry also becomes a payoff in cooperating with entrepreneur (Sapienza, 1989; Cable and Shane, 1997). However, it is assumed that the financial return is the most important in the investor-entrepreneur relationship (Cable and Shane, 1997). But, the value of financial payoffs depends on the size of investment and the total net worth of investor or entrepreneur (Cable and Shane, 1997).

Information. Cooperation will likely happen if there are good flow information and comprehension regarding the willingness to be cooperative of the entrepreneur, as well as the investor (Cable and Shane, 1997). There are two factors that affect information transfer between both parties: communication and social relationships.

(24)

19

likelihood to give misinformation (Lindskold and Han, 1988; Cable and Shane, 1997). Communication will result in more cooperative relationship if there are more frequent and open communication. Frequent communication is measured by the frequency or intensity of the interaction between both parties. Frequent communication ensures that any problem encountered is overcome and helps both parties to understand the update on the industry in which they are operating in to keep one side of the parties from uncooperative behavior due to information ignorance (Sapienza and Gupta; Cable and Shane, 1997). Open communication measures the quality of the information transfer. Open communication makes sure that both parties hear all of the information. Overall, communication is very important to do when there is high uncertainty surrounding a venture in order to cooperate with each other (Sapienza, 1989; Cable and Shane, 1997). Uncertain condition that mostly occurs in the early stage of a venture affects the probability that each party will have different expectations about the future of a venture (Cable and Shane, 1997). Thus, communication will help both parties to understand each other expectations that in the end will lead to cooperative solutions.

The second factor that will enhance information transfer is a social relationship. Individuals who know each other will exchange more high-quality information and more willing to cooperate than if the individuals do not know about each other (Cable and Shane, 1997). In addition, a direct relationship between entrepreneur and investor will greatly enhance a cooperative relationship. Individuals who are close to each other may know each others’ skill, personality, knowledge, and behavior for a long time. Thus, social relationship helps information transfer goes smoothly as both parties already know how to communicate with each other. However, in the decision-making process, social relationship can influence the decision that can be different from the initial thinking due to the close relationship between both parties (Cable and Shane, 1997).

(25)

20

Relational demography means that the individuals have demographic similarity. Demographic similarity covers the attributes of an individual, for instance, age, gender, socio-economic status, race, etc. Individuals who have demographic similarity were found to have a better relationship (Cable and Shane, 1997). In addition, individuals who share demographic similarity enjoy a better relationship and obtain greater organizational rewards compared to the individuals who are less similar (Jackson, Brett, Sessa, Cooper, Julin, and Peyronnin, 1991; Cable and Shane, 1997).

A good relationship is also found in individuals who have similar values. Individuals are more likely to sustain a relationship with people who share similar values (Cable and Shane, 1997). Having similar values can make an efficient communication between investor and entrepreneur (Cable and Shane, 1997). In addition, individuals with similar mindsets can respond each other quickly, thus will lead to a cooperative relationship (Cable and Shane, 1997).

Personal similarity is also related to the relative power between individuals. Equal power will likely to increase cooperative behavior between parties (Pruitt and Kimmel, 1977; Cable and Shane, 1997). It may be because both parties feel that cooperation cannot be established by force when the power is in a balanced state (Pruitt and Kimmel, 1977; Cable and Shane, 1997). In the context of investor-entrepreneur relationship, each party can increase its power in several aspects. For entrepreneurs, they can increase their power with their product knowledge, industry experience, business track record, personal capital to develop a business, or multiple investment source options (Cable and Shane, 1997). For investors, they can increase their power with investment track record, relationships with bank or potential customers, majority ownership, industry knowledge, or involvement in a company management (Cable and Shane, 1997).

Transaction procedure. When there is doubt for a party to act cooperatively, several procedures can be undertaken to enhance the probability to have a cooperative relationship such as bonding mechanism, staging capital payouts, generosity, and non-cooperation penalties.

(26)

21

Repeated interactions between investors and entrepreneurs will enhance cooperation (Pruitt and Kimmel, 1977; Cable and Shane, 1997). Sometimes the capital is not come out once but in several stages. In the relationship between entrepreneur and investor, the decisions to cooperate sometimes made, considered, and revised in several stages (Sapienza, 1992; Cable and Shane, 1997).

Generosity will enhance cooperation in a relationship by showing compassion and understanding both parties’ needs (Cable and Shane, 1997). Generosity is an act of individual, not to avenge against counterpart’s defections (Cable and Shane, 1997). In fact, generosity can turn defective actions to cooperative acts if one side defects (Cable and Shane, 1997). Further, generosity can eliminate negative feelings in an individual (Cable and Shane, 1997). Generosity in investor-entrepreneur relationship helps both parties not to misinterpret others action that lead to wrong reaction (Cable and Shane, 1997).

(27)

22

Figure 1 “Love money” investment relationship

 Entrepreneurial and managerial experience

 Personal acquiantance with an entrepreneur

 Have start-up skills

 Opportunity perception  Fear of failure Personal Context  Age  Gender  Education  Household income  Work status Individual demographics  Economic  Hedonistic  Altruistic Motives of investment

Determinants of “love money” investment decision

Determinants of entrepreneur to use “love

money”  Education  Net worth  Gender Demographics  Industry experience  Managerial experience Personal context Owner-related bootstrapping method

Pecking order theory ROI, loan payment

Entrepreneur

Capital, added values

(28)

23

3. Research Method

3.1 Methodology

This research uses qualitative study, especially in explorative study. An exploratory study in this research has a purpose to get insights about the “love money” investor-entrepreneur relationship that becomes a research gap in this research. The research gap is presented in sub-question number four which uses “how” question. In addition, case study is also needed when the nature of the research has these following conditions: little control over the events and real-life phenomena case (Yin, 2009). For this reason, case study is an appropriate method to answer the sub-question with “how” question (Yin, 2009).

Eisendhart (1989) states that case studies can be used for several purposes, such as to provide a description, test theory, or generate theory. As the research was done in an emerging country rather than in developed countries like mostly researches were done, different context makes this research to check the existing literatures used in this case with findings from the cases. In addition, this research also tries to generate theory by getting new insights. Gaining insights from case studies was done by using interviews that give qualitative data result. In terms of exploring a new area in a theory, qualitative data are the most appropriate to be used in this research (Miles and Huberman, 1994). For this reason, using a qualitative study is appropriate for this research.

3.2 Literature Review

(29)

24

3.3 Research Design

The research design for this research is embedded multiple cases in order to get the replication logic from the result (Yin, 2009). Yin (2009) states that a complete research design should consist a research question, a proposition, and a unit of analysis. This study focuses on an explorative study, so the need to use proposition in this research is not necessary. For the question, sub-question four is based on the calling on further research to fill a research gap in term of relationship between investor and entrepreneur that taken from literature. And for the unit of analysis part, this research focuses at individual level, specifically “love money” investors and entrepreneurs.

This research incorporates seven cases that are described in Table 2. The cases serve different industry context. Four of the cases have a family relationship while the rest have relationship as friends. From seven cases, this research got five interviews with “love money” investors and six interviews with entrepreneurs. For this reason, this research has 11 interviews in total. In details, respondents in this research are entrepreneurs who are funded by “love money” investors. Another group of respondents is “love money” investors who finance their family members or friends ventures. In the context of the relationship between them, this research involves case studies in which the entrepreneurs and the investors still has a business relationship and who do not have any business relationship anymore. Thus, the cases can serve fair insights for any possibilities that can happen in “love money” investment relationship. In order to get the respondents, this research used snowball method. The respondent candidates were texted and emailed to see if the respondents meet the requirements and agree to be interviewed for this research. Respondent candidates were taken from the author’s personal networks that include family members, colleagues, friends, and university student.

Table 2 List of case studies

Case Industrial sector Investor

(family/friend)

Interview

Investor (I) Entrepreneur (E)

1 Case 1 Fashion Family v v

2 Case 2 Horeca Family v -

(30)

25

4 Case 4 Fashion Family v v

5 Case 5 E-commerce Friend - v

6 Case 6 Art Friend v v

7 Case 7 Agriculture Friend - v

*V= interviewed

3.4 Data Collection

This research combined two methods to collect the data: questionnaire and interview. Both questionnaire (see Appendix 1) and interview guide (see Appendix 3) are presented in the Appendix. First, the day before the interview, the respondents had to fill the questionnaire. The questionnaire has purposes to seek prior information (e.g. profile of the investor/entrepreneur, determinants of cooperative behavior). The profile of the investor/entrepreneur will help to shorten the time, so the interview does not need to have a long introduction beforehand. In the “cooperative behavior”, the respondents were asked to scale to what extent each of the variables influences either their cooperative behavior using nine Likert scale. The likert scales have added values to the interview because the scales will help the respondents to stick to their answer that had been given in the questionnaire. In addition, the likert scale will contribute to quantitative findings in this research. The questionnaire both for the entrepreneur and the investor have similar sections but adapting to the type of respondent. Further, the description of each variable is taken from the definition made from the literature reviewed in this research. Thus, the questionnaire helped the interviewer to prior insights to help make probing question within the interview.

(31)

26

The interview guides for the entrepreneur and the investor have differences in several parts. The difference is only slight change in the questioning aspect. The method used to conduct the interviews is the same for both of the respondents. Overall, both of the interview guides have four parts with three parts of them are the similar. The similar part in the interview guide is the introduction to the entrepreneur or the investor, perspective on “love money”, and relationship. In the interview guide for the entrepreneur, there is a part that consist questions on pecking order theory and bootstrapping. While in the interview guide for the investor, there is a part that focuses on motivations of investment.

3.5 Data Analysis

Based on Yin (2009), the flow of data analysis starts with within-case analysis then continued by cross-case analysis. The cross-case analysis result then used to add the extant conceptual model. Also, the results can be used to develop practical implications.

Mainly, the analysis is divided into three major parts: analysis of “love money” investors, analysis of entrepreneurs, and analysis of the relationship between “love money” investor and entrepreneur. First, the analysis of “love money” investors will include analysis on several aspects, such as motives of investment and determinants of “love money” investment. Second, the analysis of the entrepreneur will include analysis regarding motives to seek “love money” and determinants to seek “love money”. Finally, the analysis of the relationship between “love money” investor and entrepreneur will include analysis of the quality of the relationship, relationship development, investor roles, cooperative behavior, and conflict.

Based on the overall flow of the data analysis above, analyzing data by entering all transcribed responses indexed by case, interview number, respondent type, and question number should be done in the first place (Eisendhardt, 1989). Then, for the interview questions that are part of the literature review, the findings were cross-checked to the literature review presented in this research. In addition to that, findings for the research gap part are also noted. The responds are categorized based on the subject (e.g. determinants, conflicts, cooperative behavior).

(32)

27

Miles and Huberman, 1994). Comparisons are made to “love money” investors, among entrepreneurs, and among dynamic relationships between “love money investors and entrepreneurs. The analysis also incorporates the importance scale of a variable presented in the questionnaire, in order to see the magnitude of the answers.

3.6 Validity and Reliability

This study took concern on validity aspect in order to generate a good quality result. In order to present valid description of variables and interview questions, this study tries to overcome the concern on validity aspect by using a similar definition of variables based on the previous studies. Further, the interview questions were made based on the literatures that are used in this study in order to keep the validity of the question. Several cases that cover different industry context and the status of the relationship (e.g. friend or family) are presented so that the results can be applied in a broader context.

(33)

28

4. The Investment and The Determinants: “Love Money

Investors”

This part consists of the analysis and discussion regarding the investments profile and the determinants to invest “love money” based on the interviews with “love money” investors.

4.1 “Love Money” Investment Profile

This section covers several aspects, such as investment experience, amount of investment, investment scheme, and motives to invest. The summary of responses can be seen in Table 3.

4.1.1 Investment experience

This study has three investors (investors 3, 4, and 6) who had investment experience, while the other two investors (investors 1 and 2) had no investment experience. One investor (investor 3) said that she had experience to lend her money for her siblings to start a business for six times. The reason for the investor only made investments for her family members because she wants to make sure the money will only benefit her inner circle:

I only want to give my money to my close family members, by doing that I will give benefit to my inner circle.

A similar answer also came from one investor (investor 2) that she only wants to lend her money for her nuclear family members:

I only trust my nuclear family members to receive my money.

First experience to invest with the investor’s close person also became a reason for one investor (investor 1) who had no investment experience:

I do not have any investment experience. So, I think that investing in my wife’s business was a good decision for my first learning to make an investment because it is safer than investing to a stranger.

One investor (investor 4) said that he only made investments with whom he is close with, or he knows a lot:

I only want to invest in person whom I know a lot, for instance, my family and my friends.

(34)

29

Table 3 Investment profile

Investor Investing

experience Type of investment Reason to invest

Case 1 (I1)

 None  Equity (now: family business)

 5 million IDR

 50 percent of capital

 50 percent of ownership (none due to change to family business status)

“I made an equity investment because I was still her boyfriend, so there was still uncertainty between us whether we would get married in the future. However, it is not good (unethical) to take much money from your close person.”

 Hedonistic motives (1: helping friends/family member, 2: to get an opportunity to play a part in an entrepreneurial process, 3: financial motivation)

“I am here more to help and be successful together...financial motivation was my motive to have income from this business, however, it is not my motive anymore as we are married now.”

Case 2 (I2)

 None  Gift

 7 million IDR

“the money was for helping my mother to establish a business post retirement.”

 Altruistic motives (helping friends/family member)

“I gave the money so my mother can start her canteen as soon as possible.”

Case 3 (I3)

 7 (“love money”)

 Loan

 No interest and no deadline

 15 million IDR

“I want him to learn that is not easy to get the money and to motivate him to run the business seriously so that he can pay back the money...I did not set any deadline because I want my son to concentrate on his business, and then after he gets a good profit he can pay back the loan. For the interest, it is unethical and is not according to my beliefs to impose interest if we give a loan, even to our friend.”

 Altruistic motives (helping friends/family member)

“As a material support and a morale support for my son to achieve his dream to be an

entrepreneur.” Case 4 (I4)  2 (“love money”)  Gift  4 million IDR  60 percent of capital

“I gave her the money as much as I can offer to her to support her to have new activities.”

 Hedonistic motives (1: helping friends/family member, 2: to get an opportunity to play a part in an entrepreneurial process)

(35)

30 Case 5 (I5) from E5  -  Equity  5 million IDR  50 percent of capital  50 percent of ownership  - Case 6 (I6)  4 (Angel investment)  Equity  60 million IDR  100 percent of capital  60 percent of ownership

“I gave him a huge amount of money, so I consider that it is fair if I have bigger ownership here. However, I do not want take the share too much as I am more motivated to get the knowledge from this investment and to help my friend.”

 Hedonistic motives (1: to get an opportunity to play a part in an entrepreneurial process, 2: helping friends/family member, 3: financial motivation)

“I want to help my friend’s business while I can learn new things about art business and get the money from it as I am an angel investor.”

(36)

31

Investing in new ventures is my job as long as the business idea is interesting, and the person’s track record is good I will invest..

The findings from the interviews show four types of investors based on the investment experience and preference. First, “love money” investor who only invests in its inner circle (e.g. friends and family members). Second, “love money” investor who only wants to invest in a particular group in its inner circle (e.g. either family members or friends). Third, “Love money” investor who uses “love money” investment as the first investment experience. Fourth, love money investor who is also an angel investor.

4.1.2 Amount of investment

The amount of capital invested ranged from 4 to 60 million IDR (see Table 4.1). The high gap between the quantity of money invested exists because one investor (investor 6), who is an angel investor, invested 60 million IDR to his friend. So, the investment can be in a small or a big amount, yet mostly the amount of investment is in “love money” investment is lower than angel investment. Though, the investments count for a considerable amount of capital needed that fill 50 to 100 percent of financial capital. Based on this study finding, the amount of “love money” investment has a big variation. Thus, it could be said that “love money” investment is necessary at the early stage of a venture.

4.1.3 Investment scheme

This study found three investment schemes practiced in “love money” investments, such as equity, gift, and loan.

Equity. This study has four investors who chose equity plan (investors 1, 5, 6, and 7) in their investment. Further, the interviews also found that mostly the investors take a similar or a slightly higher amount (50-60 percent) of ownership in equity investment.

One investor (investor 1) said that taking advantage by having more ownership from a close person is an unethical decision:

It is unethical to take much money from your close person.

(37)

32

I gave him a huge amount of money, so I consider that it is fair if I have a bigger ownership here.

Further, investor 6 also said that his altruistic motive to help his friend and to prioritize more on nonfinancial benefits made from the investment influenced him not to take much bigger share of ownership:

I do not want take the share too much as I am more motivated to get the knowledge from this investment and to help my friend.

To conclude, “love money” investors may take consideration of their pre-existing relationship (i.e. as a friend, family member, or spouse) before taking a preference of ownership. Further, altruistic motive and getting nonfinancial benefits from the investment may also decrease the investors’ ownership preference. In addition, for some investors, owning similar amount or slightly bigger (50-60 percent) of ownership considered as fair and ethical. In contrast, taking significantly unequal of ownership is considered as an unethical act to do to a close person.

Gift. Two investors (investors 2 and 4) said that they invested in the form of a gift. The interviews found that gift money is a symbol of support for the investors’ (investors 2 and 4) friend or family member:

The money was for helping my mother to establish a business after her retirement. (investor 2)

I gave her the money as much as I can offer to support her to have new activities. (investor 4)

Pre-existing relationship, as a husband with the entrepreneur, also became the reason to give the money as a gift for one investor (investor 4) because the wife has rights on the husband’s money:

She is my wife. So, my money is her money too...she has her rights on my money.

In conclusion, “love money” investment can be in the form of gift money. The finding is also recognized in the study by Honig (1998) that “love money” can be in the form of gift. The reasons investors give the money as a gift might be that the money as a symbol of support and due to relationship status (e.g. spousal relationship) with entrepreneur.

(38)

33

I did not set any deadline because I want my son to concentrate on his business. Then after he gets a good profit, he can pay back the loan. For the interest, for me, it is unethical, and it is not according to my beliefs to impose interest if we give a loan, even to our friend.

Further, investor 3 gave loan to her son because she wants to give him a lesson to appreciate the money as well as to give a push to him in order to run the business seriously:

I want him to learn that it is not easy to get money and to motivate him to run the business seriously so that he can pay back the money.

To conclude, loan scheme in “love money” investment has soft terms that may neither impose any interest nor deadline. Loan scheme in “love money” investment has flexible terms due to the informality of the relationship between both parties. The purpose of loan scheme in “love money” investment is to give a real experience in getting financing from the formal financial institution but in a flexible way.

In this part, this study found three different investment schemes in “love money” investments, such as equity, gift, and loan. In all investment schemes, this study found pre-existing relationship influences the terms in the investment schemes and, thus, creates more informal and more flexible terms.

4.1.4 Investment motives

This study found several motives that become the reason to invest “love money”, such as altruistic motives, hedonistic motives, and economic motives (see Table 3). Based on the questionnaire findings (see table), altruistic motives become the most frequently chosen motive to invest followed by hedonistic motives and economic motives respectively. In addition, altruistic motives become the most influential motive to invest “love money” in most cases (investors 1, 2, 3, and 4). Thus, from the questionnaire findings, the decision to invest “love money” is mainly based on altruistic motives.

Altruistic motives. Helping a close family member or a friend to establish a business became a reason to invest for most of the investors (investors 1, 2, 3, and 6):

I am here more to help...(investor 1)

I gave the money so my mother can start her canteen as soon as possible. (investor 2)

As a financial support and a moral support for my son to achieve his dream. (investor 3)

(39)

34

For one investor (investor 4) who helps his wife to run a business, his decision to invest was influenced by social kinship:

After all, she is my wife. I have to support for everything that is good for my wife.

To conclude, the interview findings show that altruistic motives are common in “love money” investment. In addition, social kinship may become a factor that influences altruistic motive in “love money” investment.

Hedonistic motives. Besides helping the entrepreneur, taking steps to into the entrepreneurial process to run a business together also became the motive to invest for three investors (investors 1, 4, and 6). One investor (investor 1) said that he wanted to create a successful business with his wife:

I am here more to help and be successful together.

While, investor 4 has a reason to contribute to the business due to having similar interest with the entrepreneur:

I have similar interest with my wife that makes me want to help making the business successful.

Getting new industry knowledge also became the motive to make a “love money” investment for one investor (investor 6):

I can learn new things about art business...

To conclude, this study found three reasons why investors have hedonistic motives to invest “love money”. First, investor may have a similar field of interest or hobby with entrepreneur. Second, investor may be interested in running an entrepreneurial venture. Third, nonfinancial benefit, for instance, industry knowledge, may motivate investor to invest to get that benefit.

Economic motives. Getting financial benefit also became a motive to make “love money” investment, yet it was not the primary reason for the respondents. Economic reason is found on two investors (investors 1 and 6) that getting financial payoff is one of the motives to invest in a business:

Financial motivation was my motive to have income from this business. However, it is not my motive anymore as we are married now. (investor 1)

Investors and Entrepreneurs: A Study in Indonesian Start-Ups The Love Stories of “Love Money”

The Love Stories of “Love Money”