Why Do Entrepreneurs Switch Venture Capitalists?
43 Pages Posted: 26 Jun 2009 Last revised: 18 Mar 2010
Date Written: March 15, 2010
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: Suggested Citation