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Does Reputation Limit Opportunistic Behavior in the VC Industry? Evidence from Litigation against VCs





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    • Atanasov is with the College of William and Mary, Ivanov is with the U.S. Securities and Exchange Commission, and Litvak is from Northwestern University. We would like to thank the Kaufmann Foundation and the Center for Research in Entrepreneurial Activity at the University of Kansas for their generous financial support for this project, Jack O'Reilly for providing back issues of the Venture Capital Litigation Reporter, an anonymous referee and Associate Editor for very detailed and constructive feedback that greatly improved the paper, and Ola Bengtsson, Carsten Bienz, Bernard Black, Hugh Colaco, Douglas Cumming, Jorge Farinha, Eliezer Fich, Zsuzsanna Fluck, Vladimir Gatchev, Thomas Hellmann, Yael Hochberg, Cliff Holderness, Guido Imbens, Josh Lerner, Craig Lewis, Mike Long, Ron Masulis, Ramana Nanda, Øyvind Norli, Eric Nowak, Charlotte Ostergaard, Diana Pop, Scott Stern, David Stolin, Masako Ueda, Christopher Vizas, Rosemarie Ziedonis, and participants at the 2007 NBER Entrepreneurship Conference, Annual Meetings of the Canadian Law and Economics Association, Batten Young Scholar Conference, Northwestern University Symposium on Economics and Law of the Entrepreneur, Washington Area Finance Conference, FMA and FMA-European meetings, Stanford-Yale junior faculty forum, CCGR Conference on the Corporate Finance and Governance of Privately-Held Firms, Second Canadian Conference on the Economics of Entrepreneurship and Innovation, American Law and Economics meetings, Second ESSEC Private Equity Conference, 2011 Summer Research Conference in Finance (Hyderabad, India), and seminars at the U.S. Securities and Exchange Commission, Toulouse Business School, Villanova University, and the University of Kansas for helpful comments and suggestions. The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement of any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission or of the author's colleagues upon the staff of the Commission.


We examine the role of reputation in limiting opportunistic behavior by venture capitalists towards four types of counterparties: entrepreneurs, investors, other VCs, and buyers of VC-backed startups. Using a hand-collected database of lawsuits, we document that more reputable VCs (i.e., VCs that are older, have more deals and funds under management, and syndicate with larger networks of VCs) are less likely to be litigated. We also find that litigated VCs suffer declines in future business relative to matched peers. These declines are larger for more reputable VCs, and for VCs that are defendants to multiple lawsuits or sued by entrepreneurs.

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