Why Do Entrepreneurs Switch Venture Capitalists?

43 Pages Posted: 26 Jun 2009 Last revised: 18 Mar 2010

See all articles by Douglas J. Cumming

Douglas J. Cumming

Florida Atlantic University

Na Dai

SUNY at Albany - School of Business

Date Written: March 15, 2010

Abstract

We examine the dynamics of the positive sorting in the venture capital industry. We empirically show that there is considerable re-balancing of the VC-company matches. We further find that higher-quality companies associated with less reputable VCs are more likely to switch to more reputable ones. Conversely, lower-quality companies are more likely to switch to less reputable VCs when all the existing VCs stop investing in them. Companies that switch to more reputable VCs obtain smaller investment size and lower pre-money valuation in follow-on rounds. It takes significantly more time for lower-quality switchers to obtain subsequent financing.

Keywords: Venture Capital, Switching

JEL Classification: G24, G32

Suggested Citation

Cumming, Douglas J. and Dai, Na, Why Do Entrepreneurs Switch Venture Capitalists? (March 15, 2010). 22nd Australasian Finance and Banking Conference 2009, Available at SSRN: https://ssrn.com/abstract=1425620 or http://dx.doi.org/10.2139/ssrn.1425620

Douglas J. Cumming

Florida Atlantic University ( email )

777 Glades Rd
Boca Raton, FL 33431
United States

HOME PAGE: http://booksite.elsevier.com/9780124095373/

Na Dai (Contact Author)

SUNY at Albany - School of Business ( email )

1400 Washington Ave.
Albany, NY 12222
United States

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