Strategic decertification in venture capital

Pierre Mella-Barral

Journal of Corporate Finance, 2020, vol. 65, issue C

Abstract: An early-round investment delivers information about the quality of a project before more funds are needed. To obtain the best early-round financing offer, the entrepreneur should then approach a venture capitalist with highest screening ability. Going for the most accurate venture capitalist can however backfire in a follow-on round of financing. He could extract advantageous terms by threatening not to reinvest: the more accurate the incumbent, the more the signal sent by his non-participation to alternative financiers would be negative. Then, the most attractive early-round venture capitalist has only intermediate screening ability. The threat of strategic decertification enhances credit rationing.

Keywords: Venture capital; Screening ability; Certification; Staged investment (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:65:y:2020:i:c:s0929119920301681

DOI: 10.1016/j.jcorpfin.2020.101724

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