By Charlotte Butterfield ’24 Associate
Managing relationships between cultures is often at the forefront of an international investor’s mind. Without considering the ways people give and receive information, view power structures, or structure their days would lead to less successful relationships and ultimately failed deals. This set of ideals, also known as cultural dimensions, was outlined by Geert Hofstede and helped to form the framework of cross-cultural relations.
Hofstede’s cultural dimensions have six subsets of values, which include individualism-collectivism, power distance, uncertainty avoidance, femininity-masculinity, short- versus long-term orientation, and indulgence-restraint. With these six value sets, Hofstede explains the scales in which cultures fall in their collective values, and through the use of the six values, entrepreneurs or other individuals engaging in cross-cultural relations can better prepare for the ways to conduct themselves and react to the behaviors of those they are working with.
While this structure was primarily designed for international relations, communications, and investment, the principles of Hofstede’s cultural dimensions are a useful tool when participating in any type of intercultural communication. Specifically, individualism-collectivism, uncertainty avoidance, and short- versus long-term orientation are useful values to consider in investment decisions.
Individualism-collectivism considers how people think and make their decisions, and is often considered one of the more complex concepts included in Hofstede’s values. Individualistic groups often act in accordance with their own self-interest. They prioritize individuality, independence, and self-sufficiency. In collectivist settings, the group is the priority. Members act more selflessly and in the best interest of the larger group or the bigger picture.
In translating this set of values to entrepreneurship, specifically in seed-stage investments, the individualism-collectivism values play a large role in the behaviors of the CEO and the operation of the team. If the entrepreneur is more collectivist, but the CEO and team of the company in which they are investing are more individualistic, this could lead to conflict. The difference in prioritization of self-interest versus the interest of the greater good will lead to a disconnect in the expectations versus the reality of the operation of the leadership team in accordance with furthering the company.
Uncertainty avoidance explains the way cultures, groups, or individuals perceive and react to rules, standards, and structure. Groups that have a high uncertainty avoidance often feel as though they need structure and regulation to be successful. They often avoid conflict and see straying from expectations as unnecessary and disrespectful. Low uncertainty avoidant groups are the opposite, they are more comfortable in situations without structure and view ambiguity as necessary and neutral.
When conducting business or making an investment decision, the uncertainty-avoidant spectrum has the potential to play a vital role in the venture’s success. In research conducted by Marco S. Giarratana and Anna Torres, two professors based in Spain, they suggested that “low levels of uncertainty avoidance facilitate the initiation phase of new product development through risk taking and minimal planning and control.” They then conclude the research by determining that higher levels of uncertainty avoidance translate to increased life of the business, as it positively impacts the marketing and planning of the business.
Hofstede’s short- and long-term orientation virtues explain how cultures interpret the importance of time. Groups that are short-term orientated focus more on the past and present, often preferring stability and respecting tradition. Long-term-orientated groups are more focused on the future. They often make efforts to preserve resources and may have negative reactions if they are unable to meet the expectations they set for themselves.
These tendencies have the potential to impact the relationships formed between founders and investors if they do not align. From an investment point of view, it would likely be preferred to invest in a company run by a long-term-oriented entrepreneur, as they would act in ways to preserve the company’s life. In contrast, if an entrepreneur is too oriented in the long-term, they may make choices for the company that are too conservative and ultimately cost the company present success.
While Hofstede’s theory of cultural dimensions was initially formed to help foster stronger relationships between international cultures, these ideals can be translated into all relationships. In the world of seed-stage investing, it is important to know both who and what you are investing in, so considering the ways culture can impact these elements can allow investors to make more informed investment decisions.
Charlotte is a junior from East Greenwich, Rhode Island, pursuing a Business Administration major and Spanish minor. She is actively involved in UNH’s professional business fraternity, Alpha Kappa Psi, as well as the Rutman Leadership Fellows program, in which she focuses on advancing women’s leadership alongside her peers in the program. Charlotte is looking forward to learning more about the world of private equity investment alongside a talented group of individuals.