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

Author

Listed:
  • Fabio Bertoni

    (EM - EMLyon Business School)

  • Diego d'Adda

    (UNIVPM - Polytechnic University of Marche / Università Politecnica delle Marche)

  • Luca Grilli

    (POLIMI - Politecnico di Milano [Milan])

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.

Suggested Citation

  • Fabio Bertoni & Diego d'Adda & Luca Grilli, 2016. "Cherry-picking or frog-kissing? A theoretical analysis of how investors select entrepreneurial ventures in thin venture capital markets," Post-Print hal-02313340, HAL.
    • Handle: RePEc:hal:journl:hal-02313340
    DOI: 10.1007/s11187-015-9690-9
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    Cited by:

    1. Laura Abrardi & Annalisa Croce & Elisa Ughetto, 2019. "The dynamics of switching between governmental and independent venture capitalists: theory and evidence," Small Business Economics, Springer, vol. 53(1), pages 165-188, June.
    2. Kraemer-Eis, Helmut & Botsari, Antonia & Gvetadze, Salome & Lang, Frank & Torfs, Wouter, 2017. "European Small Business Finance Outlook: December 2017," EIF Working Paper Series 2017/46, European Investment Fund (EIF).
    3. Kraemer-Eis, Helmut & Botsari, Antonia & Gvetadze, Salome & Lang, Frank & Torfs, Wouter, 2019. "European Small Business Finance Outlook: December 2019," EIF Working Paper Series 2019/61, European Investment Fund (EIF).
    4. Laura Toschi & Elisa Ughetto & Andrea Fronzetti Colladon, 2023. "The identity of social impact venture capitalists: exploring social linguistic positioning and linguistic distinctiveness through text mining," Small Business Economics, Springer, vol. 60(3), pages 1249-1280, March.
    5. Elisa Ughetto & Marc Cowling & Neil Lee, 2019. "Regional and spatial issues in the financing of small and medium-sized enterprises and new ventures," Regional Studies, Taylor & Francis Journals, vol. 53(5), pages 617-619, May.
    6. Kraemer-Eis, Helmut & Botsari, Antonia & Gvetadze, Salome & Lang, Frank & Torfs, Wouter, 2018. "European Small Business Finance Outlook: June 2018," EIF Working Paper Series 2018/50, European Investment Fund (EIF).
    7. Kraemer-Eis, Helmut & Botsari, Antonia & Gvetadze, Salome & Lang, Frank & Torfs, Wouter, 2021. "European Small Business Finance Outlook 2021," EIF Working Paper Series 2021/75, European Investment Fund (EIF).
    8. Kraemer-Eis, Helmut & Lang, Frank & Torfs, Wouter & Gvetadze, Salome, 2016. "European Small Business Finance Outlook: December 2016," EIF Working Paper Series 2016/37, European Investment Fund (EIF).
    9. Nadine Levratto & Luc Tessier & Cecile Fonrouge, 2018. "Business performance and angels presence: a fresh look from France 2008–2011," Small Business Economics, Springer, vol. 50(2), pages 339-356, February.
    10. Colombo, Massimo G. & D’Adda, Diego & Quas, Anita, 2019. "The geography of venture capital and entrepreneurial ventures’ demand for external equity," Research Policy, Elsevier, vol. 48(5), pages 1150-1170.
    11. Kraemer-Eis, Helmut & Botsari, Antonia & Gvetadze, Salome & Lang, Frank & Torfs, Wouter, 2018. "European Small Business Finance Outlook: December 2018," EIF Working Paper Series 2018/53, European Investment Fund (EIF).
    12. Kraemer-Eis, Helmut & Botsari, Antonia & Gvetadze, Salome & Lang, Frank & Torfs, Wouter, 2019. "European Small Business Finance Outlook: June 2019," EIF Working Paper Series 2019/57, European Investment Fund (EIF).
    13. Thomas Standaert & Sophie Manigart, 2018. "Government as fund-of-fund and VC fund sponsors: effect on employment in portfolio companies," Small Business Economics, Springer, vol. 50(2), pages 357-373, February.
    14. Kraemer-Eis, Helmut & Lang, Frank & Torfs, Wouter & Gvetadze, Salome, 2017. "European Small Business Finance Outlook: June 2017," EIF Working Paper Series 2017/43, European Investment Fund (EIF).
    15. Laurence Cohen & Peter Wirtz, 2018. "Caractéristiques des entrepreneurs, finance entrepreneuriale et trajectoires de croissance," Working Papers hal-01723858, HAL.
    16. Anita Quas & Diego D’Adda, 2018. "High-tech entrepreneurial ventures seeking external equity: whether, when, where… and why not?," Economia e Politica Industriale: Journal of Industrial and Business Economics, Springer;Associazione Amici di Economia e Politica Industriale, vol. 45(3), pages 311-334, September.
    17. Giancarlo Giudici & Massimiliano Guerini & Cristina Rossi-Lamastra, 2018. "Reward-based crowdfunding of entrepreneurial projects: the effect of local altruism and localized social capital on proponents’ success," Small Business Economics, Springer, vol. 50(2), pages 307-324, February.
    18. Pavlova, Elitsa & Signore, Simone, 2019. "The European venture capital landscape: an EIF perspective. Volume V: The economic impact of VC investments supported by the EIF," EIF Working Paper Series 2019/55, European Investment Fund (EIF).
    19. Krämer-Eis, Helmut & Botsari, Antonia & Gvetadze, Salome & Lang, Frank & Torfs, Wouter, 2023. "The European Small Business Finance Outlook 2023," EIF Working Paper Series 2023/96, European Investment Fund (EIF).
    20. Kraemer-Eis, Helmut & Botsari, Antonia & Gvetadze, Salome & Lang, Frank & Torfs, Wouter, 2022. "European Small Business Finance Outlook 2022," EIF Working Paper Series 2022/84, European Investment Fund (EIF).
    21. Annalisa Croce & Elisa Ughetto, 2019. "The role of venture quality and investor reputation in the switching phenomenon to different types of venture capitalists," Economia e Politica Industriale: Journal of Industrial and Business Economics, Springer;Associazione Amici di Economia e Politica Industriale, vol. 46(2), pages 191-227, June.

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