How Do Higher Quality Entrepreneurs Choose Venture Capitalists?

Obrimah, Oghenovo A.

doi:10.2139/ssrn.641681

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How Do Higher Quality Entrepreneurs Choose Venture Capitalists?

37 Pages Posted: 4 Jan 2005

See all articles by Oghenovo A. Obrimah

Oghenovo A. Obrimah

FISK University

Date Written: November 17, 2004

Abstract

This paper finds that higher quality entrepreneurs time their entry into the venture capital market to minimize the cost of equity financing, and as part of an IPO market timing strategy. Specifically, higher quality entrepreneurs are more likely to enter the venture capital market when average monthly initial returns to IPOs are low and they are more likely to go public in months when average initial returns to IPOs are high. In addition, they are more likely to obtain financing from venture capitalists that are younger, lack deal screening expertise, located outside of California, and not concentrated in risky ventures. They are also more likely to obtain financing from bank affiliated venture capitalists. However, higher quality entrepreneurs that obtain financing from venture capitalists with greater reputation capital, are more likely to end up with higher IPO prices. Hence, the opportunity cost of minimizing the cost of equity financing is likely to translate into smaller certification benefits at the IPO. Nevertheless, relative to expectations prior to the IPO, higher quality entrepreneurs that obtain financing from venture capitalists with smaller reputation capital fare no worse with respect to the IPO offer price.

Keywords: Venture Capital, Entrepreneurship, IPOs, Certification, Adverse Selection

JEL Classification: G24, G28, F39, O10

Suggested Citation: Suggested Citation

Obrimah, Oghenovo A., How Do Higher Quality Entrepreneurs Choose Venture Capitalists? (November 17, 2004). Available at SSRN: https://ssrn.com/abstract=641681 or http://dx.doi.org/10.2139/ssrn.641681