Optimal Investment, Monitoring, and the Staging of Venture Capital

Posted: 17 Nov 2009

See all articles by Paul A. Gompers

Paul A. Gompers

Harvard Business School - Finance Unit; Harvard University - Entrepreneurial Management Unit; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Multiple version iconThere are 2 versions of this paper

Date Written: 1995

Abstract

Examines the factors affecting the structure of periodic investment by venture capitalists. Predictions regarding factors that should affect the duration and size of financing rounds are discussed, including the notion that expected agency costs rise as growth options and asset specificity increase. Data gathered from a random sample of 794 venture capital-financed firms in the United States is used to test the agency and monitoring cost predictions. Data included number of investments, firm age and stage of development at first financing, total funding received, and outcome, segmented by industry. Results support the presented predictions. Agency costs were found to increase with declining asset tangibility, increasing growth options, and greater asset specificity. Entrepreneurs are monitored with increasing frequency as expected agency costs rise. The evidence shows that venture capitalists use industry knowledge and monitoring skills to finance projects with significant uncertainty. Also venture capitalists' investments are concentrated in startups and high-technology industries - in which the information and monitoring they provide are perceived as valuable for these firms. The duration of financing is shown to be related to the nature of the firm's assets--i.e., higher industry ratios of tangible assets to total assets, lower market-to-book ratios, and lower R&D intensities are associated with longer funding duration. Finally, firms that go public have received much more financing than firms that are acquired or liquidated (as predicted by the effect of monitoring on further investment). (SFL)

Keywords: Agency costs, Monitoring, Firm financing, Early stage financing, Startups, Financial strategies, Firm control, Assets, Agency theory, Investment criteria, High-technology firms, Return on investment, Venture capitalists, Information seeking

Suggested Citation

Gompers, Paul A., Optimal Investment, Monitoring, and the Staging of Venture Capital (1995). The Journal of Finance, Vol. 50, Issue 5, p. 1461-14 1995. Available at SSRN: https://ssrn.com/abstract=1505214

Paul A. Gompers (Contact Author)

Harvard Business School - Finance Unit ( email )

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Harvard University - Entrepreneurial Management Unit ( email )

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National Bureau of Economic Research (NBER)

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European Corporate Governance Institute (ECGI)

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