Trust and Success in Venture Capital Financing - An Empirical Analysis with German Survey Data

29 Pages Posted: 19 Jan 2009

See all articles by Stefan Duffner

Stefan Duffner

Goldman Sachs Group, Inc.

Markus Schmid

University of St. Gallen - Swiss Institute of Banking and Finance; University of St. Gallen - School of Finance

Heinz Zimmermann

University of Basel - Center for Economic Science (WWZ) - Department of Finance

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Abstract

This paper presents an empirical analysis of the role of trust in the relationship between venture capitalist and entrepreneur. Following the social sciences literature, we try to differentiate between trust as an affective, value-based category from confidence which is understood as a backward-looking, evidence-based mechanism. Using data from a survey among German venture capitalists conducted in 2003, we analyze 111 financing relationships from 75 respondents. We find a significant reciprocal positive relationship between trust and success. Other significant determinants of trust include the perceived quality of the entrepreneur and credibility of information (two proxy variables for measuring confidence), the perceived importance of reputation and the stage of the entrepreneur's venture. The level of monitoring and control is identified as a substitute for trust. We address a potential endogeneity of trust and success by estimating a system of two simultaneous equations by 3SLS and find the results to be robust. Finally, we use data from a second survey conducted in 2006 to assess whether trust predicts success. In fact, our results indicate that a higher level of trust in 2003 is associated with a higher success rate in 2006.

Suggested Citation

Duffner, Stefan and Schmid, Markus and Zimmermann, Heinz, Trust and Success in Venture Capital Financing - An Empirical Analysis with German Survey Data. Kyklos, Vol. 62, No. 1, pp. 15-43, February 2009. Available at SSRN: https://ssrn.com/abstract=1329778 or http://dx.doi.org/10.1111/j.1467-6435.2009.00426.x

Stefan Duffner (Contact Author)

Goldman Sachs Group, Inc. ( email )

Friedrich-Ebert-Anlage 49
Frankfurt am Main, D-60308
Germany

Markus Schmid

University of St. Gallen - Swiss Institute of Banking and Finance ( email )

Rosenbergstrasse 52
St. Gallen, 9000
Switzerland

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Heinz Zimmermann

University of Basel - Center for Economic Science (WWZ) - Department of Finance ( email )

Peter Merian Weg 6
Basel, 4002
Switzerland
+41 61 267 33 16 (Phone)
+41 61 267 08 98 (Fax)

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