We study the fund-raising strategy of an entrepreneur when investors have private information about his project’s profitability. The entrepreneur cares about monetary profits and about the probability to obtain financing. If he contacts both venture capitalists (VCs) simultaneously, he obtains high monetary profits. If he commits to a period of exclusive negotiation with one VC, he increases the probability to obtain financing but deal terms deteriorate. The optimal negotiation strategy results from this tradeoff. We also solve for the equilibrium financial contracts and obtain implications for VCs’ portfolios and entrepreneurs’ deals.
- D82: Asymmetric and Private Information • Mechanism Design
- G24: Investment Banking • Venture Capital • Brokerage • Ratings and Ratings Agencies
- G32: Financing Policy • Financial Risk and Risk Management • Capital and Ownership Structure • Value of Firms • Goodwill
Catherine Casamatta, and Carole Haritchabalet, “Dealing with Venture Capitalists: Shopping Around or Exclusive Negotiation”, IDEI Working Paper, n. 444, January 2007, revised July 2011.
Review of Finance, vol. 18, n. 5, 2014, pp. 1743–1773