Cherry Picking or Frog Kissing? The Matching Process between Investors and Entrepreneurial Ventures in Thin Venture Capital Markets

42 Pages Posted: 30 Aug 2012

See all articles by Fabio Bertoni

Fabio Bertoni

EM Lyon (Ecole de Management de Lyon) - Department of Economics, Finance, Control

Diego D'Adda

Polytechnic University of Marche

Luca Grilli

Polytechnic University of Milan - Department of Management, Economics and Industrial Engineering

Date Written: March 7, 2012

Abstract

In this paper we explore the matching process between entrepreneurs and investors in thin venture capital (VC) markets. We develop a simple theoretical model of the two-step matching process between entrepreneurs and investors in which VC is in extremely scarce supply and firms have to incur an entry cost to actively seek it. The model explains why in thin VC markets: (i) VC might not be attracted by the best-performing companies (“cherry picking”) but by the companies that need it most (“frog kissing”), and (ii) even if the number of companies that could potentially benefit from VC is very high, the actual deal flow for VC could be meager. We empirically test the predictions of the “frog kissing” equilibrium through survey-based data (RITA directory) collected in 2004 on a sample of 202 New Technology-Based Firms (NTBFs) that operate in Italy. The empirical evidence supports the “frog kissing” argument. First, entry costs and the degree of development of the VC market are both found to substantially affect the likelihood of a NTBF to actively seek VC. Second, NTBFs financed by VC are the least endowed with complementary assets.

Keywords: High-tech Entrepreneurship, Venture Capital, Selection, Matching

JEL Classification: L26, G24, M13

Suggested Citation

Bertoni, Fabio and D'Adda, Diego and Grilli, Luca, Cherry Picking or Frog Kissing? The Matching Process between Investors and Entrepreneurial Ventures in Thin Venture Capital Markets (March 7, 2012). Available at SSRN: https://ssrn.com/abstract=2138247 or http://dx.doi.org/10.2139/ssrn.2138247

Fabio Bertoni (Contact Author)

EM Lyon (Ecole de Management de Lyon) - Department of Economics, Finance, Control ( email )

23, av. Guy de Collongue BP 174
69132 Ecully Cedex
France

Diego D'Adda

Polytechnic University of Marche ( email )

P.zza Roma 22
Ancona, 60121
Italy

Luca Grilli

Polytechnic University of Milan - Department of Management, Economics and Industrial Engineering ( email )

Via Lambruschini 4C - building 26/A
Milano, 20156
Italy

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