Abstract
We explore the central role that top venture capitalists play in the IPO underwriting market. We argue that underwriters curry favor with Top VCs, not necessarily issuing firms, because Top VCs have the ability to direct the most business in a repeated game sense to banks that treat them well. The relationship between VC firms and investment banks extends through time and therefore incentives extend beyond the current IPO. Consistent with this view, we find that Top VC-backed IPOs are more likely to get all-star coverage regardless of analyst bank affiliation. In turn, banks providing all-star coverage are more likely to be chosen to lead the next VC-backed deal. We find a positive relationship between underpricing and all-star coverage for Top VCs, but not non-Top VCs. Top VCs tolerate higher levels of underpricing because the information momentum generated by underpricing allows them to cash out at higher prices when the lockup expires.
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