Excessive Risk-Taking and Founder Friendly VCs

44 Pages Posted: 2 Sep 2020 Last revised: 4 Aug 2022

See all articles by Snehal Banerjee

Snehal Banerjee

University of California, San Diego (UCSD) - Rady School of Management

Martin Szydlowski

University of Minnesota - Twin Cities - Carlson School of Management

Date Written: February 1, 2021

Abstract

We provide a theory of excessive risk-taking in startups. An informed entrepreneur, who enjoys private benefits of control, proposes either a safe or risky project. The VC chooses which project to finance and can intervene to fire the entrepreneur in the interim. In equilibrium, the entrepreneur seeks to minimize the likelihood of intervention and recommends the risky project even if she knows it will fail. Stricter monitoring by the VC exacerbates risk-taking, whereas lax monitoring mitigates it. We characterize implications for information acquisition, control rights, outside directors, and stage financing.

Keywords: Venture Capital, Cheap Talk, Delegation, Governance

JEL Classification: G24, G32, G34, D83

Suggested Citation

Banerjee, Snehal and Szydlowski, Martin, Excessive Risk-Taking and Founder Friendly VCs (February 1, 2021). Available at SSRN: https://ssrn.com/abstract=3660043 or http://dx.doi.org/10.2139/ssrn.3660043

Snehal Banerjee

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

Martin Szydlowski (Contact Author)

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

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