How Smart is Smart Money? A Two-Sided Matching Model of Venture Capital

Posted: 13 Mar 2007

See all articles by Morten Sorensen

Morten Sorensen

Copenhagen Business School; Columbia Business School; Centre for Economic Policy Research (CEPR)

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Abstract

I find that companies funded by more experienced VCs are more likely to go public. This follows both from the direct influence of more experienced VCs and from sorting in the market, which leads experienced VCs to invest in better companies. Sorting creates an endogeneity problem, but a structural model based on a Two-Sided Matching model is able to exploit the characteristics of the other agents in the market to separately identify and estimate influence and sorting. Both effects are found to be significant, but sorting is almost twice as important as influence for the difference in IPO rates.

Keywords: Venture Capital, Selection Problem, Two-Sided Matching, Bayesian Estimation, MCMC

JEL Classification: C12, C39, C79, G39

Suggested Citation

Sørensen, Morten, How Smart is Smart Money? A Two-Sided Matching Model of Venture Capital. Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=888926

Morten Sørensen (Contact Author)

Copenhagen Business School ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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