Venture capitalists (VC) obviously provide startups with finance, but they also provide experience and expertise to help the startup grow. Research from Michigan State University highlights how startups are increasingly willing to accept funding from less-experienced investors.

The study suggests that new startups are so keen on investment that they’re willing to accept it from new VCs rather than more established ones.

More than investment

The research highlights that VCs provide not only finance but also a range of additional services, such as reliability and mentoring so that it becomes a long-term relationship that endures through the trials and tribulations of startup life.

“Even though the expertise of new VCs is unknown, their stronger incentives to stay committed and their willingness to provide good terms to attract entrepreneurs—to in some sense share the value of the reputation they (the VCs) are trying to build—makes them attractive,” the researchers explain.

Just as new startups are trying to establish a reputation, so too are new VCs as they too face competition from more established investors. This can encourage them to drop their equity requirements in order to secure the deal. They can also provide a degree of immediacy, with the authors arguing that more established firms often have a surplus of interest that can create quite a queue for investment. This can result in decreasing the value of reputation and a loss in social welfare.

“A good startup ecosystem is essential to the culture of innovation that leads to the types of breakthrough products that change people’s lives for the better,” the researchers explain. “Our research hints at a potential threat to this ecosystem that could reduce the pace of innovation if the traditional long-term VC/startup relationship cycle is disrupted.”

Suffice it to say, there is still considerable value to be offered by established VCs, but the authors argue that they might not be able to find terms quite as attractive as they might like, and an adjustment in strategy might be required in order to maintain their advantage.