Investment Ties Gone Awry

Forming early relationships increases entrepreneurial ventures’ chances of survival and success by allowing access to critical resources from partners. However, since not all ventures achieve their desired goals through collaboration due to uncertainty, such relationships are sometimes abandoned. This paper investigates the costs of ties that have gone awry in the context of venture capital investments. We conjecture that the adverse perceptions of signals associated with tie discontinuation reduce an investee venture’s valuation in the follow-on round of financing by partially deterring prospective investors, particularly higher-quality ones, from joining the syndicate. By examining large-sample evidence that supports our theory, we suggest that early entrepreneurial ties to venture capitalists may be a double-edged sword, especially in light of the costs of tie discontinuation.