VC Funds: Aging Brings Myopia
Eugene Kandel (),
Dima Leshchinskii and
Journal of Financial and Quantitative Analysis, 2011, vol. 46, issue 2, 431-457
We study the conflict of interests between the limited partners (LPs) and the general partner (GP) in a venture capital (VC) fund with a limited life span. LPs commit money, while the GP selects and monitors projects. Midway into the project, the GP privately observes the projectâ€™s quality and the estimated time to exit. The fundâ€™s limited time horizon and the GPâ€™s informational advantage lead to inefficient decisions at this stage. First, the GP continues bad projects. Second, he may stop monitoring good, but delay-prone projects. We provide empirical predictions and illustrative evidence that the magnitude of the effect is significant.
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