Extant entrepreneurship research notes the positive effects on firm performance that might be generated by network relations and social capital. It does not, however, consider how social relationships may constrain a firm’s choices and possibly impair its performance. Raising the issue of ideological biases inherent in many discussions of social networks and social capital, Portes and Sensenbrenner note that “it is our sociological bias to see good things emerging out of social embeddedness: bad things are more commonly associated with the behavior of homo economicus.”(1993, p. 1338). We propose that high levels of closure and embedded ties negatively influence firm performance because of the enforcement of group norms that are counterproductive to any individual firm. In other words, embedded ties and high levels of closure may constrain a new firm’s options and subsequent performance, because of adherence to group norms.

We examine this relationship using start-up venture capital (VC) firms and their co-investing relationships with other VCs. New VC firms are an ideal population to study the examination of the relationship between social capital, firm resources and performance, without the confounding effect of other resources, such as technologies or brand equity.