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Strategic decertification in venture capital

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  • Mella-Barral, Pierre

Abstract

An early-round investment delivers information about the quality of a project before more funds are needed. To obtain the best early-round financing offer, the entrepreneur should then approach a venture capitalist with highest screening ability. Going for the most accurate venture capitalist can however backfire in a follow-on round of financing. He could extract advantageous terms by threatening not to reinvest: the more accurate the incumbent, the more the signal sent by his non-participation to alternative financiers would be negative. Then, the most attractive early-round venture capitalist has only intermediate screening ability. The threat of strategic decertification enhances credit rationing.

Suggested Citation

  • Mella-Barral, Pierre, 2020. "Strategic decertification in venture capital," Journal of Corporate Finance, Elsevier, vol. 65(C).
    • Handle: RePEc:eee:corfin:v:65:y:2020:i:c:s0929119920301681
    DOI: 10.1016/j.jcorpfin.2020.101724
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    References listed on IDEAS

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