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Trust network sclerosis: the hazard of trust in innovation investment communities

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Abstract

This article considers the role of trust in structuring and sustaining entrepreneurial networks in Anglo-American entrepreneurial communities. Interviews with stakeholders involved in innovation investment demonstrate how shared identity and experience serve as proxies for trust in influencing decisions, and subsequently how trust can serve as a proxy for thorough due diligence. Where relationship plays a role vital to the venture capital investment process, close dialogue reveals the ways nascent business develop- ment is affected by excessive reliance on trustworthiness, thereby introducing a form of lock-in labeled “trust network sclerosis.” Qualitative data informs this analysis of how opinion-leaders shape high-risk, information-asymmetric investment decisions with ultimate community accumulation and effect. The paper concludes with a discussion of implications for entrepreneurial communities, other high-trust networks, and economic geography broadly.

Suggested Citation

  • Babcock-Lumish, Terry, 2010. "Trust network sclerosis: the hazard of trust in innovation investment communities," Journal of Financial Transformation, Capco Institute, vol. 29, pages 163-172.
  • Handle: RePEc:ris:jofitr:1425
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    Keywords

    decision-making; innovation; venture capital; trust; networks;

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General

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