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VC Funds: Aging Brings Myopia

Eugene Kandel (), Dima Leshchinskii and Harry Yuklea

Journal of Financial and Quantitative Analysis, 2011, vol. 46, issue 2, 431-457

Abstract: 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 project’s quality and the estimated time to exit. The fund’s limited time horizon and the GP’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.

Date: 2011
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