Venture Capital Reputation and Loan Contracts

Abstract

High-quality venture capital (VC) investment dampens adverse selection between lenders and borrowers through two channels: short-term reputational benefits from screening and long-term benefits from ongoing monitoring. We find that high-quality VC shareholder monitoring at loan initiation is associated with decreased loan spreads, increased performance pricing, and reduced covenant use. Startups where high-quality VCs remain post-IPO receive better loan terms for at least five years after IPO; in contrast, the effect attenuates after two years if the VCs exit at IPO. These results persist after controlling for endogenous VC investment. Our evidence is consistent with high-quality VC monitoring providing benefits to startups incremental to VC certification and screening at IPO. Our paper has managerial implications about early reputational benefits and long-term performance effects for entrepreneurs and venture capitalists.