The Color of Money: A Startup's Choice Among Venture Capitalists

Venture Capitalists (VCs) differ from one another with respect to the non-financial resources they offer their portfolio firms. We develop a theoretical model to study the economic implications of this heterogeneity among VCs. We determine the optimal VC chosen by the entrepreneur, the percentage of equity taken by the VC in return for the financial and non-financial resources, the nature of the ex-ante match between entrepreneurs and VCs, startup value and VC's share in the same. By deriving the endogenous relationship between the VC's non-financial resources and startup performance, we call into question the usual interpretation of some empirical regularities. The study also helps to rationalize the persistent heterogeneity in VC fund performance.