A software services company looking for an early-stage round of investment from venture capital funds gets four offers. Two of them value the company at $10 million, one at $12.5 million and one at $20 million. Any of the offers would net the software company approximately $8 million in cash inflows. It would seem to be a no-brainer. Accept the investment at the highest so-called “pre-money” valuation. So why did the company pick the $12.5 million offer? It’s a question that Wharton management professor David Hsu explores in a recent paper measuring the impact of “intangibles” – such as reputation and access to networks – on VC relationships with entrepreneurs.
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