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Theft and Syndication in Venture Capital Finance

36 Pages Posted: 18 Apr 2006  

Ralph Bachmann

Nanyang Technological University (NTU) - Division of Banking & Finance

Ibolya Schindele

BI Norwegian Business School; Central Bank of Hungary

Date Written: April 10, 2006

Abstract

We analyze the incentive problems that arise from the possibility for idea theft in the venture capital context, where the success of a start-up firm hinges on the unobservable efforts of both an entrepreneur, and a venture capitalist. The risk of idea theft is shown to destroy the entrepreneur's research effort incentives, thereby reducing the likelihood of innovation, and the value of the start-up firm ex ante. When idea theft is potentially verifiable ex post, the threat of litigation can solve the incentive problems for some projects. However, it is insufficient whenever a project's profit potential is sufficiently large, and whenever the ex ante probability that theft will be verifiable ex post is too small. Investment syndication is shown to offer a potential solution for the latter type of projects. The model's novel empirical predictions pertain to the relationship between the project characteristics, the size and the structure of a VC syndicate, and the probability of successful innovation.

Keywords: Venture Capital, Innovation, Idea Theft, Moral Hazard, Syndication

JEL Classification: G24, G32

Suggested Citation

Bachmann, Ralph and Schindele, Ibolya, Theft and Syndication in Venture Capital Finance (April 10, 2006). Available at SSRN: https://ssrn.com/abstract=896025 or http://dx.doi.org/10.2139/ssrn.896025

Ralph Bachmann (Contact Author)

Nanyang Technological University (NTU) - Division of Banking & Finance ( email )

Nanyang Avenue, S3-B1A-14
Singapore 639798
Singapore
+65 6790 5000 (Phone)
+65 6794 6321 (Fax)

Ibolya Schindele

BI Norwegian Business School ( email )

Oslo, 0442
Norway
+47 46 41 05 17 (Phone)
+47 46 41 08 01 (Fax)

Central Bank of Hungary ( email )

Szabadság tér 9.
Budapest, 1054
Hungary

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