What Do Entrepreneurs Pay for Venture Capital Affiliation?
Article first published online: 27 NOV 2005
The Journal of Finance
Volume 59, Issue 4, pages 1805–1844, August 2004
How to Cite
Hsu, D. H. (2004), What Do Entrepreneurs Pay for Venture Capital Affiliation?. The Journal of Finance, 59: 1805–1844. doi: 10.1111/j.1540-6261.2004.00680.x
- Issue published online: 27 NOV 2005
- Article first published online: 27 NOV 2005
This study empirically evaluates the certification and value-added roles of reputable venture capitalists (VCs). Using a novel sample of entrepreneurial start-ups with multiple financing offers, I analyze financing offers made by competing VCs at the first professional round of start-up funding, holding characteristics of the start-up fixed. Offers made by VCs with a high reputation are three times more likely to be accepted, and high-reputation VCs acquire start-up equity at a 10–14% discount. The evidence suggests that VCs' “extra-financial” value may be more distinctive than their functionally equivalent financial capital. These extra-financial services can have financial consequences.