Abstract

Venture capital seed investments seem not to foster the most promising entrepreneurial firms. The venture capitalist's difficulty in assessing an entrepreneur's ability to develop a successful venture is the key to explaining what type of entrepreneur will choose to involve a venture capitalist in the seed stage. The authors find that venture capital backed firms are not initiated by the most capable entrepreneurs because the most able entrepreneurs will not find the prices offered by venture capitalists sufficiently attractive and will seek other sources of financing. Under the current institutional structure of the venture capital industry, a higher failure rate can be expected among venture capital backed firms than in the population of new firms in general.