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New report documents changing nature in VC selections

A new study by Rich Mathews, an Associate Professor at the University of Maryland’s Robert H. Smith School, and co-author Naveen Khanna of Michigan State University finds a changing way that new entrepreneurs are selecting venture capital (VC) firms.

Titled “Skill Versus Reliability in Venture Capital,” finds that start-ups straight out of the gate are often deciding to work with new venture capitalists rather than established ones. This new way of doing things in the venture capitalist orbit results in the crowding out of skill, a decrease in the value of reputation, and a loss in social welfare.

Their research identified two important qualities entrepreneurs are seeking in a venture capitalist. The first is skill at providing services like mentoring, and the second is reliability, which refers to the VCs sticking with the start-up through several rounds of financing.

“Even though the expertise of new VCs is unknown, their stronger incentives to stay committed and their willingness to provide good terms to attract entrepreneurs – to in some sense share the value of the reputation they (the VCs) are trying to build – makes them attractive,” says Mathews.

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