Indulgent angels or stingy venture capitalists? The entrepreneurs' choice

Dima Leshchinskii ()

No 769, HEC Research Papers Series from HEC Paris

Abstract: This paper studies entrepreneurs' choice of investors, who must provide financial capital and effort for projects with externalities. Venture capitalists (VCs) and individual investors (angels) compete to finance the projects. VCs seek to invest into a portfolio of projects, while angels have more slack in how much they invest into one project. In the presence of externalities between projects, VCs can potentially increase the total value of their investment portfolio through better coordination of investment, while some angels behave indulgently and give more financial investment than necessary, earning zero profits in equilibrium. Surprisingly, externalities do not give VCs as much of an advantage as one would expect. Quite often VCs lose out to angels even when this means that some projects will not receive an optimal amount of effort. In the projects they invest in, VCs always make strictly positive profits despite the competition.

Keywords: investment choice; venture capitalist; angel; project financing (search for similar items in EconPapers)
JEL-codes: G24 G32 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2002-11-01
New Economics Papers: this item is included in nep-cfn and nep-ent
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:ebg:heccah:0769

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