Can Venture Capital Be a Curse?

Abstract

We show that partnering with venture capitalists may be a curse to entrepreneurs in that it reduces their profits in the commercialization phase. Agents rationally infer that a likely reason an entrepreneur who has received managerial assistance (from a venture capitalist) refrains from a lucrative IPO and instead opts for an acquisition may be the low quality of his technology (which is unfixable), rather than of his management (which may be fixable). This leads to lower acquisition prices and greater IPO underpricing. From a social welfare standpoint, venture capital services are under-utilized and technologies are under-commercialized.