Abstract
In this paper we explore the matching process between entrepreneurs and investors in thin venture capital (VC) markets. We develop a simple theoretical model of the two-step matching process between entrepreneurs and investors in which VC is in extremely scarce supply and firms have to incur an entry cost to actively seek it. The model explains why in thin VC markets: (i) VC might not be attracted by the best-performing companies (“cherry picking”) but by the companies that need it most (“frog kissing”), and (ii) even if the number of companies that could potentially benefit from VC is very high, the actual deal flow for VC could be meager. We empirically test the predictions of the “frog kissing” equilibrium through survey-based data (RITA directory) collected in 2004 on a sample of 202 New Technology-Based Firms (NTBFs) that operate in Italy. The empirical evidence supports the “frog kissing” argument. First, entry costs and the degree of development of the VC market are both found to substantially affect the likelihood of a NTBF to actively seek VC. Second, NTBFs financed by VC are the least endowed with complementary assets.