Does A Fault Line Bias Exist?: When and How Investor Perceptions of Start-Up Team Divisions Influence Funding Decisions

This study investigates how faultlines affect firm outcomes for start-up companies in the United States. We study how faultlines, human capital and social capital-based, shape a start-up team’s ability to attract venture capital and its ability to grow. We expect to find that human capital-based faultlines, divisions based on education and experience, will be negatively associated with external investor funding as these divisions will signal to investors a lack of internal cohesion. Whereas, we propose that social capital-based faultlines, divisions based on affiliations, will be positively associated with external investor funding as these divisions will signal to investors a wider possibility of potential markets. We expect our findings to suggest that alignment of team member characteristics along similar characteristics are important for bringing new insights to firm, such as ability to assess firm’s quality via cohesiveness. Based on our findings, we provide practical implications and propose avenues for future research.