Venture capital contracts and market structure

Roman Inderst and Holger M. Müller

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We examine the relation between optimal venture capital contracts and the supply and demand for venture capital. Both the composition and type of financial claims held by the venture capitalist and entrepreneur depend on the market structure. Beside, different market structures involve different optimal forms of transferring utility: sometimes it is optimal to transfer utility via equity stakes, sometimes it is optimal to use debt. Transferring utility via equity stakes affects incentives. Consequently, the net value created, the success probability, the market value, and the performance of venture-capital backed investments depend on the supply and demand for capital. Similarly, venture capitalists face different incentives to screen projects if the capital supply is low or high. We then endogenize the capital supply and study the relation between venture capital contracts and entry costs, public policy, investment profitability, and market transparency. Finally, we show that entry by inexperienced investors creates a negative externality for the value creation in ventures financed by (regular) venture capitalists.

JEL-codes: G10 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2002-03-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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http://eprints.lse.ac.uk/24931/ Open access version. (application/pdf)

Related works:
Working Paper: Venture Capital Contracts and Market Structure (2002)
Working Paper: Venture Capital Contracts and Market Structure (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:24931

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