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Cherry-picking or frog-kissing? A theoretical analysis of how investors select entrepreneurial ventures in thin venture capital markets

Listed author(s):
  • Fabio Bertoni

    ()

    (EMLYON Business School)

  • Diego D’Adda

    ()

    (Università Politecnica delle Marche)

  • Luca Grilli

    ()

    (Politecnico di Milano)

Abstract We propose a formal model that analyzes which entrepreneurial ventures actively seek and subsequently obtain venture capital (VC) financing in thin VC markets. The model shows that in thin VC markets, (1) VC investors will invest in companies in need (frog-kissing) rather than in best performers (cherry-picking), and (2) the best performing ventures will self-select out of the market for VC. These conclusions are in line with the results from the literature, which note that in Europe many entrepreneurial firms do not actively seek VC investment and that VC investors do not appear to possess the same cherry-picking ability that they have in the US.

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File URL: http://link.springer.com/10.1007/s11187-015-9690-9
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Article provided by Springer in its journal Small Business Economics.

Volume (Year): 46 (2016)
Issue (Month): 3 (March)
Pages: 391-405

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Handle: RePEc:kap:sbusec:v:46:y:2016:i:3:d:10.1007_s11187-015-9690-9
DOI: 10.1007/s11187-015-9690-9
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