Electronic copy available at: http://ssrn.com/abstract=1455483
As a contrast to capital markets that build on arms-length dealings between investors andborrowers, the venture capital market is characterized by venture capitalists engaging in personalinteractions with entrepreneurs and being actively involved in start-up companies (Gorman &Sahlman, 1989; Sapienza, 1992). This involvement is believed to be valuable because venturecapitalist firms (VCs) not only supply financing but can also provide screening, corporate governance,monitoring, operational assistance and strategic advice.
A growing body of literature in finance investigates how various characteristics of the VC,such as organizational type and investment experience, relate to its ability to successfully conductvalue adding tasks.
For entrepreneurs, understanding these differences between VCs is importantsince selecting the right investor can significantly improve the success chances of a venture-backedcompany. Common for almost all existing empirical studies is the use of data on actual venture capitalinvestments. Although such studies are informative, they suffer from noisy empirical measures of performance and face the conceptual difficulty of separating out the role of different value addingtasks.In this paper we follow a different empirical strategy to answer the question of which investorcharacteristics matter in the venture capital market: we analyze a large sample of entrepreneurs’ statedpreferences on VCs. We use data from an online community of entrepreneurs called
thatcomprise multi-dimensional rankings and comments made by 1,472 unique entrepreneurs on 526unique U.S. VCs. Our analysis is straightforward – we begin by analyzing which VC characteristics
For empirical evidence on the importance of non-monetary tasks provided by VCs, see Lerner (1995), Hellman& Puri (2000, 2002), Cumming, Fleming and Suchard (2005), Sorensen (2007), Ivanov and Xie (2008),Hochberg (2008), Chemmanur, Krishnan and Nandy (2008), and Bottazzi, Da Rin & Hellman (2009). Thetheoretical argument that VCs can provide value to companies is modeled by Casamatta (2003), Schmidt (2003),and Repullo & Suarez (2004).
The object of study in this paper is a venture capital firm (and not individual partners or executives at theventure capital firm). The abbreviation “VC” will henceforth refer to “venture capital firm”.
Section II reviews this literature in detail.