Skill versus Reliability in Venture Capital
66 Pages Posted: 14 Jan 2021
Date Written: August 20, 2020
We study competition for startups among VCs with heterogeneous skill. Those with established skill face two impediments. First, less established VCs compete aggressively for new startups in order to establish a reputation. Second, startups also value reliability in their VCs, which imposes a high cost on established VCs because they have better outside options. As a result, startups sometimes "over-experiment" by excessively partnering with less established VCs, which crowds out established skill and reduces social welfare. Established VCs are hurt because they pay more for relationships they form, lose profitable startups, and face competition from more newly established VCs.
Keywords: Skill, reputation, reliability, venture capital
JEL Classification: G00, G24
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