Constraints on the Control Benefits of Brokerage: A Study of Placement Agents in U.S. Venture Capital Fundraising

Abstract

This paper theorizes about constraints on brokers' control benefits. I propose that brokers prefer to represent high-quality actors and that the value an actor places on representation is inversely related to the actor's perceived quality. But matching of more reputable brokers with higher-quality actors should mitigate these quality constraints. Empirical analyses of 1,028 venture capital funds raised by 745 firms from 2001 to 2006 support the theory. The likelihood that a firm's venture fund is represented by a placement agent first increases and then decreases with firm quality, measured as size, experience, and status. Neither those that value representation most (i.e., funds of low perceived quality) nor those that placement agents would most like to represent (i.e., funds of high perceived quality) are most likely to be represented by a placement agent. Results also show that more reputable placement agents represent funds raised by higher-quality firms, which indicates that a broker's reputation mitigates constraints on the control benefits of brokerage.