The Entrepreneur's Initial Contact with a Venture Capitalist: Why Good Projects May Choose to Wait

13 Pages Posted: 21 Dec 1999

See all articles by Tom Berglund

Tom Berglund

Hanken School of Economics - Department of Economics

Edvard Johansson

ETLA, Research Institute of the Finnish Economy

Date Written: August 3, 1999

Abstract

We show that a profit-maximizing entrepreneur may deliberately shun approaching a venture capitalist in the very first stages of a project's life. To avoid a potential moral hazard problem the entrepreneur will instead develop the project on his own up to a certain stage. By doing so, the entrepreneur will enhance his bargaining position, and capture a larger share of the total surplus. In this paper we construct a highly stylized model for the decision problem faced by the entrepreneur. With this model we derive the condition for the optimal delay from the birth of the project until a contact with a venture capitalist is established. This delay will depend on the competitive pressure in the market, and on the skill of the entrepreneur. Our model implies that the market for a venture capitalist's services at the start-up stage of a project is likely to fail due to adverse selection.

JEL Classification: G24

Suggested Citation

Berglund, Tom Patrik and Johansson, Edvard, The Entrepreneur's Initial Contact with a Venture Capitalist: Why Good Projects May Choose to Wait (August 3, 1999). Available at SSRN: https://ssrn.com/abstract=173348 or http://dx.doi.org/10.2139/ssrn.173348

Tom Patrik Berglund (Contact Author)

Hanken School of Economics - Department of Economics ( email )

PO Box 479
FI-00101 Helsinki
Finland
+358-9-43133 345 (Phone)
+358-9-43133 382 (Fax)

Edvard Johansson

ETLA, Research Institute of the Finnish Economy ( email )

Lonnrotink. 4 B
FIN-00120 Helsinki, 00120
Finland

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