Venture capitalists love to say that if you’re only coming to them for money then you’re coming to the wrong place. Their point: a good VC, you know, Kleiner Perkins, or Sequoia — or, of course, ahem, the firm you’re talking to — has more to offer than merely check-writing prowess. For example, so this self-serving argument goes, they can offer the people that only such marquee investors know, and they can offer oodles of experience with fast-growing companies just like yours, and so on.
Entepreneurs buy that, to a degree, but it has always been an open question how much entrepreneurs were (or should be) willing to pay for it. Now, however, we have a partial answer. According to a paper that will soon appear in the Journal of Finance, entrepreneurs with competing financing offers, at least one of which is from a “high reputation” VC, will generally choose the marquee VC. No surprise so far, but here is the interesting bit: they’ll generally give that winning VC firm a 10-14% better price (i.e., the venture firm gets more equity for the same price, or the same equity for a lower price) than they were offering less notable venture firms.
It sure makes life easier as a VC getting higher returns if you can get a cut-rate price on the way in.
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