The first step of the capital flow from institutions to entrepreneurs: the criteria for sorting venture capital funds

Alexander Groh () and Heinrich Von Liechtenstein
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Alexander Groh: EM - EMLyon Business School
Heinrich Von Liechtenstein: UPNA - Universidad Pública de Navarra [Espagne] = Public University of Navarra

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Abstract: We contribute to the knowledge of the capital flow from institutional investors via venture capital (VC) funds as intermediaries to their final destination, entrepreneurial ventures. To this end, we conduct a world-wide survey among limited partners to determine the importance of several criteria when they select VC funds. We find the top criteria to be the expected deal flow and access to transactions, a VC fund's historic track record, his local market experience, the match of the experience of team members with the proposed investment strategy, the team's reputation, and the mechanisms proposed to align interest between the investors and the VC funds. A principal component analysis reveals three latent drivers in the selection process: ‘Local Expertise and Incentive Structure', ‘Investment Strategy and Expected Implementation', and ‘Prestige/Standing vs. Cost'. It becomes evident that limited partners search for teams which are able to implement a certain strategy at a given cost. Thereby, they focus on an incentive structure that limits agency costs.

Keywords: asset allocation; institutional investor; entrepreneurial finance; venture capital; G23; G24 (search for similar items in EconPapers)
Date: 2011-06-01
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Citations: View citations in EconPapers (10)

Published in European Financial Management, 2011, 17 (3), 532-559 p. ⟨10.1111/j.1468-036X.2010.00583.x⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-02312606

DOI: 10.1111/j.1468-036X.2010.00583.x

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