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Comparative Venture Capital Governance. Private versus Labour Sponsored Venture Capital Funds

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  • Douglas J. Cumming
  • Jeffrey G. MacIntosh

Abstract

Private independent limited partnership venture capital funds receive capital from institutional investors, without tax incentives. Limited partnership investment activities are governed by restrictive covenants that are determined by negotiated contract between the fund managers (general partners) and the institutional investors (limited partners). By contrast, Canadian Labour Sponsored Venture Capital Corporations (LSVCCs) receive capital only from individual investors who receive tax breaks on capital contributions of up to CAN$5,000. LSVCC investment activities are governed by statutory restrictions. This chapter contrasts the governance of LSVCCs to limited partnerships. We also summarize Canadian evidence on the impact of LSVCC governance and tax incentives: (1) on the distribution of venture capital funding between private and LSVCC funds; (2) on the unusually large overhang of uninvested capital in the Canadian venture capital industry; (3) the portfolio size (i.e. number of investee firms per fund) of private funds versus LSVCCs; and (4) the performance of LSVCCs relative to other types of venture capital organiziations and other comparable investments for individual investors.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 853.

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Date of creation: 2003
Date of revision:
Handle: RePEc:ces:ceswps:_853

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Related research

Keywords: venture capital; Canada; tax; government; crowding out; portfolio size; governance;

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References

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  1. James A. Brander & Raphael Amit & Werner Antweiler, 2002. "Venture-Capital Syndication: Improved Venture Selection vs. The Value-Added Hypothesis," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 11(3), pages 423-452, 09.
  2. Gompers, Paul & Lerner, Josh, 1996. "The Use of Covenants: An Empirical Analysis of Venture Partnership Agreements," Journal of Law and Economics, University of Chicago Press, vol. 39(2), pages 463-98, October.
  3. Keuschnigg, Christian & Nielsen, Soren Bo, 2002. "Start-ups, Venture Capitalists and the Capital Gains Tax," CEPR Discussion Papers 3263, C.E.P.R. Discussion Papers.
  4. Cumming, Douglas J. & MacIntosh, Jeffrey G., 2006. "Crowding out private equity: Canadian evidence," Journal of Business Venturing, Elsevier, vol. 21(5), pages 569-609, September.
  5. Cumming, Douglas J. & MacIntosh, Jeffrey G., 2001. "Venture capital investment duration in Canada and the United States," Journal of Multinational Financial Management, Elsevier, vol. 11(4-5), pages 445-463, December.
  6. Josh Lerner, 2002. "When Bureaucrats Meet Entrepreneurs: The Design of Effective "Public Venture Capital" Programmes," Economic Journal, Royal Economic Society, vol. 112(477), pages F73-F84, February.
  7. Christian Keuschnigg, 2002. "Start-Up Investment With Scarce Venture Capital Support," University of St. Gallen Department of Economics working paper series 2002 2002-03, Department of Economics, University of St. Gallen.
  8. Josh Lerner, 1996. "The Government as Venture Capitalist: The Long-Run Effects of the SBIR Program," NBER Working Papers 5753, National Bureau of Economic Research, Inc.
  9. Vesa Kanniainen & Christian Keuschnigg, 2000. "The Optimal Portfolio of Start-Up Firms in Venture Capital Finance," CESifo Working Paper Series 381, CESifo Group Munich.
  10. Christian Keuschnigg & Søren Bo Nielsen, 2001. "Public Policy for Venture Capital," CESifo Working Paper Series 486, CESifo Group Munich.
  11. Sahlman, William A., 1990. "The structure and governance of venture-capital organizations," Journal of Financial Economics, Elsevier, vol. 27(2), pages 473-521, October.
  12. Cumming, Douglas J. & MacIntosh, Jeffrey G., 2003. "A cross-country comparison of full and partial venture capital exits," Journal of Banking & Finance, Elsevier, vol. 27(3), pages 511-548, March.
  13. Christian Keuschnigg, 2002. "Taxation of a Venture Capitalist with a Portfolio of Firms," CESifo Working Paper Series 813, CESifo Group Munich.
  14. Amit, Raphael & Brander, James & Zott, Christoph, 1998. "Why do venture capital firms exist? theory and canadian evidence," Journal of Business Venturing, Elsevier, vol. 13(6), pages 441-466, November.
  15. Gompers, Paul & Lerner, Josh, 2000. "Money chasing deals? The impact of fund inflows on private equity valuation," Journal of Financial Economics, Elsevier, vol. 55(2), pages 281-325, February.
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Cited by:
  1. Cécile Carpentier & Jean-Marc Suret, 2005. "On the Usefulness of Tax Incentives for Business Angels and SME Owners: An Empirical Analysis," CIRANO Working Papers 2005s-13, CIRANO.

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