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Dealing With Venture Capitalists: Shopping Around Or Exclusive Negotiation

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  • Catherine Casamatta
  • Carole Haritchabalet

    (CATT - Centre d'Analyse Théorique et de Traitement des données économiques - UPPA - Université de Pau et des Pays de l'Adour)

Abstract

We study the optimal negotiation strategy of an entrepreneur who faces two investors with pri-vate information about his project's profitability. The entrepreneur derives a private benefit ofcontrol so that he cares not only about expected monetary profits, but also about the probabilityto obtain financing. If he contacts both venture capitalists simultaneously, the entrepreneur ob-tains high expected monetary profits. If he commits to a period of exclusive negotiation with oneventure capitalist, he can increase the probability to obtain financing for riskier projects, but dealterms deteriorate. The optimal negotiation strategy results from this trade-off. We also solve forthe equilibrium financial contracts and obtain implications for venture capitalists' portfolios andentrepreneurs' deals. The model predicts in particular that venture capitalists are more likely tofinance projects with equity-like claims when projects are riskier and venture capitalists are moreexperienced. Also, high private benefit entrepreneurs are more likely to receive a single offer andto be financed by less experienced venture capitalists.

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  • Catherine Casamatta & Carole Haritchabalet, 2013. "Dealing With Venture Capitalists: Shopping Around Or Exclusive Negotiation," Working Papers hal-02938912, HAL.
    • Handle: RePEc:hal:wpaper:hal-02938912
    Note: View the original document on HAL open archive server: https://univ-pau.hal.science/hal-02938912
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    Cited by:

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    2. van Rijnsoever, Frank J., 2020. "Meeting, mating, and intermediating: How incubators can overcome weak network problems in entrepreneurial ecosystems," Research Policy, Elsevier, vol. 49(1).
    3. Volodymyr Babich & Simone Marinesi & Gerry Tsoukalas, 2021. "Does Crowdfunding Benefit Entrepreneurs and Venture Capital Investors?," Manufacturing & Service Operations Management, INFORMS, vol. 23(2), pages 508-524, March.
    4. Caroline Tarillon & Han Yu & Ludivine Adla & Elodie Manthé & Geoffroy Enjolras, 2023. "Similarity is not everything: the influence of personal characteristics of entrepreneurs and investors on their fit," International Entrepreneurship and Management Journal, Springer, vol. 19(2), pages 709-732, June.
    5. Suting Hong & Konstantinos Serfes & Veikko Thiele, 2020. "Competition in the venture capital market and the success of startup companies: Theory and evidence," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 29(4), pages 741-791, October.
    6. Chun-Yueh Lin & Yi-Hsien Wang, 2021. "Evaluating the Optimal External Equity Financing Strategy and Critical Factors for the Startup of Lending Company in Taiwan: An Application of Expert Network Decision Model," Mathematics, MDPI, vol. 9(18), pages 1-15, September.
    7. Simona Fabrizi & Steffen Lippert & Pehr-Johan Norbäck & Lars Persson, 2013. "Venture Capitalists and the Patenting of Innovations," Journal of Industrial Economics, Wiley Blackwell, vol. 61(3), pages 623-659, September.
    8. Mella-Barral, Pierre, 2020. "Strategic decertification in venture capital," Journal of Corporate Finance, Elsevier, vol. 65(C).
    9. Hwang, Ilwoo, 2018. "A theory of bargaining deadlock," Games and Economic Behavior, Elsevier, vol. 109(C), pages 501-522.
    10. BELLEFLAMME, Paul & LAMBERT, Thomas & SCHWIENBACHER, Armin, 2011. "Crowdfunding: tapping the right crowd," LIDAM Discussion Papers CORE 2011032, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).

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    More about this item

    Keywords

    deal flow; exclusive negotiation; venture capital; start-up financing; informed investors;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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