Syndication, Ability, and Price Equilibriums within Venture Capital Markets
67 Pages Posted: 11 Apr 2017 Last revised: 3 Mar 2019
Date Written: March 1, 2019
Suppose entrepreneurs within venture capital markets accept 'lower than reservation prices' from reputable venture capitalists (VCs). This study shows negative relations between project prices and VCs' reputation ('reputation price discounts') are best explained by presence of an ability measure within populations of VCs. In presence of an ability measure, acceptance of financing from higher ability VCs induces return increments that always are larger than any opportunity costs implicit in lower than reservation prices. We have then that acceptance of reputation price discounts that violate entrepreneurs' reservation prices always are rational. Formal predictions show a negative relation between project prices and VCs' reputation is a general equilibrium property of venture capital markets, a property which ensures reputation is a function of portfolio performance, and a VC's demonstrated capacity for bringing of new innovations to exit markets. Consistent with the general equilibrium property, and the prediction that project innovativeness increases with demand for syndication, formal predictions and accompanying preliminary evidence obtain attenuation of reputation price discounts in context of syndicated financing of innovative projects.
Keywords: Venture Capital, Market Reputation, Intrinsic Ability, Syndication, Innovation, Innovativeness, Entrepreneurs
JEL Classification: G24, L10
Suggested Citation: Suggested Citation