A Restrainer of Success: Information Asymmetry in the Agent-Principal Relationship Between Investors and Entrepreneurs

The definition of startup is much debated. For some, a startup is defined by the early stage of its operations, while for others it is mostly defined by the inception of a new technology and the need of a swift scale up to be viable and profitable. What is commonly accepted, though, is the definition of a startup as an intrinsically uncertain organism: since its possibilities of success are statistically lower than those of mature businesses, this company tend to seek exponentially higher amounts of funding to perpetuate operations and development, thus increasing the risks bore by the stakeholders with the objective of creating huge returns. But there is a major flaw in this trend: even though the general “cash is king” rule applies, it is also true that the king is useless without a country to manage. Analogously, a number of these startups gets so obsessed with financing that forget to focus on what that money should finance: a fully working company with a marketable and replicable product or service. This research tries to investigate the correlation between the Agency Theory and the Information asymmetry between investors and startups to discover if this factor may influence a priori the possibilities of success of a company, using as a thermometer the impact of the amount of financing in its internal decision-making and functioning.