Forming early relationships increases entrepreneurial ventures’ chances of survival and success by allowing access to critical resources from partners. However, since not all ventures achieve their desired goals through collaboration due to uncertainty, such relationships are sometimes abandoned. This paper investigates the costs of ties that have gone awry in the context of venture capital investments. We conjecture that the adverse perceptions of signals associated with tie discontinuation reduce an investee venture’s valuation in the follow-on round of financing by partially deterring prospective investors, particularly higher-quality ones, from joining the syndicate. By examining large-sample evidence that supports our theory, we suggest that early entrepreneurial ties to venture capitalists may be a double-edged sword, especially in light of the costs of tie discontinuation.
We are grateful to Associate Editor Balagopal Vissa and three anonymous reviewers for their constructive and insightful feedback. We also thank the participants at the 2014 Annual Meeting of Academy of Management, Philadelphia, Department of Business and Management research seminar, LUISS Universita Guido Carli, Rome, Stockholm School of Economics, Second ZEW International Conference on the Dynamics of Entrepreneurship, Mannheim, the 36th DRUID Conference, Copenhagen, as well as Massimo Colombo, Luca Grilli, Jun Huang, Pooyan Khashabi, Rafaelle Oriani, Chris Rider, Dean Shepherd, Kulwant Singh, Olav Sorenson, Per Strömberg, and Karl Wennberg for helpful comments and discussions. Ali Mohammadi partly conducted this research at the College of Management of Technology, Swiss Federal Institute of Technology in Lausanne (EPFL), and the Swedish House of Finance (Stockholm School of Economics).
- INITIAL NETWORK
- SIGNALING THEORY
- VENTURE CAPITALISTS DECISION