Venture capital budgeting — Carry and correlation

Christian Flor and Kevin Berg Grell

Journal of Corporate Finance, 2013, vol. 21, issue C, 216-234

Abstract: We analyze venture capital budgeting in a model with agency conflicts among entrepreneurs, venture capitalists, and investors. Our three-player setting is crucial for the analysis of compensation to venture capitalists. We focus on the venture capitalist's decision to invest in correlated enterprises, and we emphasize the importance of information and the venture capitalist's role in resolving adverse selection on the entrepreneurial side. The importance of information increases the minimum carried interest offered to the venture capitalist, whereas correlated projects decrease it. The carried interest is determined by the size and level of correlation in his portfolio. Our analysis provides predictions in line with a number of empirical observations, e.g. that venture capitalists typically receive a carried interest which is “sticky” around a 20% level.

Keywords: Venture capital; Carry; Staging; Moral hazard; Adverse selection (search for similar items in EconPapers)
JEL-codes: D82 G24 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:21:y:2013:i:c:p:216-234

DOI: 10.1016/j.jcorpfin.2013.02.004

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