A Portfolio Approach to Venture Capital Financing
38 Pages Posted: 1 Dec 2009 Last revised: 2 May 2013
Date Written: May 2, 2013
This paper studies the contracting choices between an entrepreneur and different kinds of venture capitalists in a portfolio context. The optimal contract for the entrepreneur features investor choice, share of investment, and equity dilution as a function of her bargaining power. In our portfolio approach, the choice of investor type is dictated by project size and risk, entrepreneur's risk aversion and investor's funding characteristics. A panel analysis of VC fund flows for five European countries provides strong support for the portfolio approach and establishes it as a new rationale for venture capital contracting along with other existing theories.
Keywords: Venture capital, portfolio theory, financial contracting, entrepreneur's risk aversion, cost of capital
JEL Classification: L26, G32, G24
Suggested Citation: Suggested Citation