Self-Selection and Advice in Venture Capital Finance
34 Pages Posted: 15 Feb 2007
Date Written: February 2007
In financing start-up firms, venture capitalists carefully select among alternative projects, design incentive compatible financial contracts and support portfolio companies with value enhancing managerial advice. This paper considers how venture capitalists can induce self-selection among entrepreneurial firms with different qualities by designing appropriate contracts and offering commercial support. We study the efficiency of the competitive market equilibrium with respect to the level and quality of entrepreneurship and the level of effort by entrepreneurs and venture capitalists. We also provide comparative statics results with respect to basic preference and technology parameters.
Keywords: venture capital, entrepreneurship, self-selection, moral hazard
JEL Classification: D82, G24, M13
Suggested Citation: Suggested Citation