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An entrepreneur's choice of venture capitalist or angel-financing: A behavioral game-theoretic approach

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  • Fairchild, Richard
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    Abstract

    We develop a game-theoretic model that analyzes the effects of economic and behavioral characteristics on an entrepreneur's choice of financier (venture capitalist or angel). After the entrepreneur has chosen his financier, the dyad faces double-sided moral hazard problems in the form of ex ante effort-shirking, and ex post project-expropriation. In making his choice of financier, the entrepreneur trades-off the following factors. The venture capitalist has higher value-creating abilities than the angel. However, the entrepreneur anticipates a closer, more empathetic and trusting relationship with the angel. Entrepreneur/angel empathy and trust mitigates the double-sided shirking and expropriation threats. Our model contributes to two strands of venture capitalist research; the entrepreneur's choice of financier in the face of double-sided moral hazard problems, and the effect of behavioral factors, such as empathy and trust, on the creation of 'relational rents'.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Business Venturing.

    Volume (Year): 26 (2011)
    Issue (Month): 3 (May)
    Pages: 359-374

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    Handle: RePEc:eee:jbvent:v:26:y:2011:i:3:p:359-374

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    Web page: http://www.elsevier.com/locate/jbusvent

    Related research

    Keywords: Venture capital Angel financing Double-sided moral hazard Value-adding abilities Empathy Trust Relational rents;

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    Cited by:
    1. Urbig, Diemo & Weitzel, Utz & Rosenkranz, Stephanie & Witteloostuijn, Arjen van, 2012. "Exploiting opportunities at all cost? Entrepreneurial intent and externalities," Journal of Economic Psychology, Elsevier, vol. 33(2), pages 379-393.
    2. Arcot, Sridhar, 2014. "Participating convertible preferred stock in venture capital exits," Journal of Business Venturing, Elsevier, vol. 29(1), pages 72-87.
    3. Schwienbacher, Armin, 2013. "The entrepreneur's investor choice: The impact on later-stage firm development," Journal of Business Venturing, Elsevier, vol. 28(4), pages 528-545.

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