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Why Do Entrepreneurs Switch Lead Venture Capitalists?

Authors

  • Douglas Cumming,

    Corresponding author
    1. Schulich School of Business, York University
      Douglas Cumming, e-mail: dcumming.etp@gmail.com, to Na Dai, tel.: 518-442-4962; e-mail: ndai@albany.edu.
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  • Na Dai

    Corresponding author
    1. School of Business, SUNY-Albany
      Douglas Cumming, e-mail: dcumming.etp@gmail.com, to Na Dai, tel.: 518-442-4962; e-mail: ndai@albany.edu.
    Search for more papers by this author

Douglas Cumming, e-mail: dcumming.etp@gmail.com, to Na Dai, tel.: 518-442-4962; e-mail: ndai@albany.edu.

Abstract

We examine the dynamics of the positive sorting in the venture capital industry. Our findings indicate that switching lead venture capitalists (VCs) is not uncommon during the course of entrepreneurial firms' development. Companies with upwardly revised perceived quality are more likely to switch to more reputable VCs. Further, companies that switch lead VCs obtain larger capital infusion and higher pre-money valuation. However, companies that switch to more reputable VCs accept smaller investment size and lower pre-money valuation in follow-on rounds. In addition, it takes significantly more time for switchers with downwardly revised perceived quality to obtain subsequent financing.

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