FIN-02-002 |
NYU Stern School of Business |
January 2002
Roman Inderst and Holger M. Mueller
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. Moreover, dierent market structures involve dierent 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 aects incentives. Consequently, the net value created, the success probability, the market (or IPO) value, and the performance of venture-capital backed investments all depend on the supply and demand for capital. Similarly, venture capitalists face dierent incentives to screen projects ex ante 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.
Roman Inderst
Institution: Department of Economics & Department of Accounting and Finance, London School of Economics, Houghton Street, London WC2A 2AE.
Email: r.inderst@lse.ac.uk
Holger H. Mueller
Institution: Stern School of Business, New York University, 44th West 4th Street, New York, NY 10012
Telephone: (212) 998-0279
Fax: (212) 995-4233
Email: hmueller@stern.nyu.edu
Homepage:http://www.stern.nyu.edu/~hmueller
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