Start-Up Investment with Scarce Venture Capital Support

33 Pages Posted: 12 Mar 2001

See all articles by Vesa Kanniainen

Vesa Kanniainen

University of Helsinki - Department of Political and Economic Studies; CESifo (Center for Economic Studies and Ifo Institute)

Christian Keuschnigg

University of St. Gallen – Department of Economics (FGN-HSG); CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Date Written: March 2001

Abstract

Start-up entrepreneurs are often commercially inexperienced. In giving managerial advice, venture capitalists can importantly enhance the success of innovative but highly risky ventures. The supply of experienced venture capitalists is not easily increased, however. When the rate of business formation accelerates, the incumbent venture capitalists tend to include more firms in their portfolio which dilutes the quality of advice, making project risks excessively high in the short-run. The supply of advisory capacity eventually becomes more elastic as new venture capitalists are attracted to the industry. Company portfolios then tend to become more focused again, the quality of advice is restored and the risk of business failure declines.

Keywords: Venture Capital, Company Portfolio, Managerial Advice, Economic Rents

JEL Classification: D82, G24, G32, L19

Suggested Citation

Kanniainen, Vesa and Keuschnigg, Christian, Start-Up Investment with Scarce Venture Capital Support (March 2001). CESifo Working Paper Series No. 439, University of St. Gallen Dept. of Econ Discussion Paper No. 2001-04, EFMA 2001 Lugano Meetings. Available at SSRN: https://ssrn.com/abstract=263052

Vesa Kanniainen (Contact Author)

University of Helsinki - Department of Political and Economic Studies ( email )

P.O. Box 54
FIN-00014 Helsinki
Finland
+358-0-9-1911 (Phone)
+358-0-191-8877 (Fax)

HOME PAGE: http://www.cesifo.de

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Christian Keuschnigg

University of St. Gallen – Department of Economics (FGN-HSG) ( email )

Varnbuelstrasse 19
St. Gallen, 9000
Switzerland

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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