Venture Capital Budgeting

46 Pages Posted: 3 Nov 2011

See all articles by Christian Riis Flor

Christian Riis Flor

University of Southern Denmark

Kevin Berg Grell

University of Southern Denmark

Date Written: November 2, 2011

Abstract

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

Flor, Christian Riis and Grell, Kevin Berg, Venture Capital Budgeting (November 2, 2011). Available at SSRN: https://ssrn.com/abstract=1953614 or http://dx.doi.org/10.2139/ssrn.1953614

Christian Riis Flor (Contact Author)

University of Southern Denmark ( email )

Campusvej 55
Odense DK-5230
Denmark
+45 6550 3384 (Phone)
+45 6593 0726 (Fax)

Kevin Berg Grell

University of Southern Denmark ( email )

Campusvej 55
DK-5230 Odense, 5000
Denmark

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