The Long-Run Supply and Demand for Venture Capital Funds: Information and Endogenous Entry
59 Pages Posted: 13 Dec 2008 Last revised: 29 Dec 2009
Date Written: December 12, 2008
The characteristics of both entrepreneurs and venture capitalists are jointly determined by the set of real investment opportunities. An improvement in these opportunities has two effects: 1) it encourages marginal, low-quality entrepreneurs to pool with high-quality entrepreneurs, and 2) it induces the entry of venture capitalists that are less efficient at screening new investments. The market for venture capital financing is therefore plagued by a double-sided asymmetric information problem. The severity of both frictions severities is increasing but concave in market heat, and this is shown to imply that supply and demand are more elastic in cold markets. The paradigm makes predictions regarding the evolution of venture capital partnership quality.
Keywords: venture capital, private equity
JEL Classification: G23, G11
Suggested Citation: Suggested Citation