Skill versus Reliability in Venture Capital
60 Pages Posted: 14 Jan 2021 Last revised: 2 Nov 2022
Date Written: August 20, 2020
We study competition for startups among VCs with heterogeneous skill. VCs 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 higher cost on established VCs because they have better outside options. As a result, startups “over-experiment” by excessively partnering with less established VCs, which crowds out established skill and reduces social welfare. Established VCs are hurt because they need to pay more to attract startups, lose profitable opportunities, and face increased competition from newly established VCs.
Keywords: Skill, reputation, reliability, venture capital
JEL Classification: G00, G24
Suggested Citation: Suggested Citation