Advice and Monitoring in Venture Finance
Financial Markets and Portfolio Management, Vol. 21, pp. 3-43, 2007
Posted: 23 Oct 2006 Last revised: 15 Sep 2008
This paper provides empirical insights into the role of contracts and legal systems for managing investor-investee relationships along two dimensions: providing advice and addressing conflict. We examine a new detailed dataset from European venture capital (VC) funds. We match very specific contractual terms in VC contracts with the effort (total time spent) and advice that VCs provide to their entrepreneurial investee firms. We also analyze VC-entrepreneur conflicts. We compare the importance of contractual versus non-contractual governance mechanisms, as well as the role of legal systems in different countries for facilitating VC-entrepreneur relationships. The data indicate VC cash flow and control rights significantly facilitate effort and advice that VCs provide to entrepreneurs. VC-entrepreneur conflicts are closely tied to the quality of laws in which the entrepreneur resides: higher quality legal systems mitigate VC-entrepreneur conflicts. The data further indicate non-contractual governance mechanisms significantly facilitate VC advice and mitigate VC-entrepreneur conflicts. The results provide a unique unifying look into the role of actual VC contracts and legal settings versus non-contractual governance mechanisms, risk and success potential on VC-entrepreneur relationships in an international context.
Keywords: Venture Capital, Conflict, Advice
JEL Classification: G24, G28, G31, G32
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