Venture Capital Budgeting
46 Pages Posted: 3 Nov 2011
Date Written: November 2, 2011
Venture capital firms typically invest in portfolios of only a few highly correlated enterprises. From a diversification perspective this seems suboptimal. We analyze venture capital budgeting focusing on the venture capitalist's decision to invest in correlated enterprises. We provide equilibrium conditions that emphasize the importance of information and the venture capitalist's role in resolving adverse selection on the entrepreneurial side. The importance of information increases the minimum carried interest offered to the venture capitalist. In particular, the carried interests received by venture capitalists are, by and large, determined by the size and level of correlation in their portfolios.
Keywords: venture capital, staging, moral hazard, adverse selection
JEL Classification: G24, D82
Suggested Citation: Suggested Citation