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Trust and Success in Venture Capital Financing—an Empirical Analysis with German Survey Data

Authors

  • Stefan Duffner,

    1. Goldman, Sachs & Co., 85 Broad Street, New York, NY 10004, USA,
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  • Markus M. Schmid,

    1. Lecturer of finance, Swiss Institute of Banking and Finance, University of St. Gallen, Rosenbergstrasse 52, CH-9000 St. Gallen, Switzerland,
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  • Heinz Zimmermann

    1. Professor of finance, Department of Finance, University of Basel, Holbeinstrasse 12, CH-4051 Basel, Switzerland
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    • * Stefan Duffner: Goldman, Sachs & Co., 85 Broad Street, New York, NY 10004, USA, Email: stefan.duffner@gs.com; Markus Schmid: Lecturer of finance, Swiss Institute of Banking and Finance, University of St. Gallen, Rosenbergstrasse 52, CH-9000 St. Gallen, Switzerland, Email: markus.schmid@unisg.ch; Heinz Zimmermann: Professor of finance, Department of Finance, University of Basel, Holbeinstrasse 12, CH-4051 Basel, Switzerland, Email: heinz.zimmermann@unibas.ch. We thank Wolfgang Drobetz, Reiner Eichenberger and René Frey (the editors), Daniel Hoechle, an anonymous referee, and the seminar audience at the University of Basel for helpful comments and Erica Martinez and Christian Stein for research assistance. We are also grateful to all the venture capital firms that provided us with data. Parts of this research were undertaken while Duffner and Schmid were visiting scholars at the Leonard N. Stern School of Business at New York University. We acknowledge financial support from the Freiwillige Akademische Gesellschaft (FAG), the Swiss National Science Foundation (SNF), and ECOSCIENTIA Foundation. All errors are our own.


SUMMARY

This paper presents an empirical analysis of the role of trust in the relationship between venture capitalist and entrepreneur. Following the social sciences literature, we try to differentiate between trust as an affective, value-based category from confidence which is understood as a backward-looking, evidence-based mechanism. Using data from a survey among German venture capitalists conducted in 2003, we analyze 111 financing relationships from 75 respondents. We find a significant reciprocal positive relationship between trust and success. Other significant determinants of trust include the perceived quality of the entrepreneur and credibility of information (two proxy variables for measuring confidence), the perceived importance of reputation and the stage of the entrepreneur's venture. The level of monitoring and control is identified as a substitute for trust. We address a potential endogeneity of trust and success by estimating a system of two simultaneous equations by 3SLS and find the results to be robust. Finally, we use data from a second survey conducted in 2006 to assess whether trust predicts success. In fact, our results indicate that a higher level of trust in 2003 is associated with a higher success rate in 2006.

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