The dynamics of switching between governmental and independent venture capitalists: theory and evidence

In this paper, we study the switching dynamics between independent VCs (IVCs) and governmental VCs (GVCs) by means of a theoretical model and an empirical analysis. By assuming that (i) VCs of higher reputation are more selective in terms of venture quality and (ii) IVCs are mainly motivated by the desire to maximize the economic return of a venture, while GVCs also care about the social repercussions, we have obtained two results. First, low economic return ventures are more likely to be adopted by a new lead GVC that is more reputable than the IVC that drops them. Second, when switches from a GVC to an IVC are considered, a low economic return increases the likelihood that the venture dropped by the incumbent GVC will be re-matched with a less-reputable IVC. Our theoretical predictions match evidence that has emerged from a sample of 9610 rounds of VC financing in the USA between 1998 and 2010. Overall, our analysis sheds light on the puzzling evidence that GVCs seem to be more inclined to drop low return ventures than IVCs, but, at the same time, they are also more willing to adopt them.