Skill versus Reliability in Venture Capital

66 Pages Posted: 14 Jan 2021

See all articles by Naveen Khanna

Naveen Khanna

Michigan State University

Richmond D. Mathews

University of Maryland - Department of Finance

Date Written: August 20, 2020

Abstract

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

Suggested Citation

Khanna, Naveen and Mathews, Richmond D., Skill versus Reliability in Venture Capital (August 20, 2020). Available at SSRN: https://ssrn.com/abstract=3746690 or http://dx.doi.org/10.2139/ssrn.3746690

Naveen Khanna (Contact Author)

Michigan State University ( email )

East Lansing, MI 48824-1121
United States
517-353-1853 (Phone)
517-432-1080 (Fax)

Richmond D. Mathews

University of Maryland - Department of Finance ( email )

Robert H. Smith School of Business
Van Munching Hall
College Park, MD 20742
United States

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