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How Are Venture Capitalists Rewarded? The Economics of Venture Capital Partnerships

43 Pages Posted: 16 Mar 2010 Last revised: 13 Jan 2015

Murillo Campello

Cornell University; National Bureau of Economic Research (NBER)

Rafael Matta

University of Amsterdam - Finance Group

Date Written: April 7, 2010

Abstract

We develop a model showing how investors, venture capitalists (VCs), and entrepreneurs integrate into a venture capital fund (VCF). Investors' demand for VC services will depend on their beliefs about the accuracy of VC screening and their expected revenue without a VC. The quality of screening will depend on VCs' information, incentives, and expected profits. The model characterizes equilibrium prices that VCs charge for their services and the individual payoff schedules of VCs and investors as function of project cash flows. We calibrate the model using data from existing empirical studies and find results that match the management fees charged by real-world VCs and the industry returns. Our analysis provides new insights into the formation of VC-investor partnerships and suggests that the services provided by VCs improve capital market efficiency.

Keywords: Venture capitalists, project screening, capital markets efficiency, model calibration

JEL Classification: G32

Suggested Citation

Campello, Murillo and Matta, Rafael, How Are Venture Capitalists Rewarded? The Economics of Venture Capital Partnerships (April 7, 2010). Available at SSRN: https://ssrn.com/abstract=1571663 or http://dx.doi.org/10.2139/ssrn.1571663

Murillo Campello

Cornell University ( email )

114 East Avenue
369 Sage Hall
Ithaca, NY 14853
United States

HOME PAGE: http://www.johnson.cornell.edu/Faculty-And-Research/Profile.aspx?id=mnc35

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138

Rafael Matta (Contact Author)

University of Amsterdam - Finance Group ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

HOME PAGE: http://www1.fee.uva.nl/pp/rmatta/

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