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Venture Capital Contracting and Syndication: An Experiment in Computational Corporate Finance

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  • Zsuzsanna Fluck
  • Kedran Garrison
  • Stewart C. Myers
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    Abstract

    This paper develops a model to study how entrepreneurs and venture-capital investors deal with moral hazard, effort provision, asymmetric information and hold-up problems. We explore several financing scenarios, including first-best, monopolistic, syndicated and fully competitive financing. We solve numerically for the entrepreneur's effort, the terms of financing, the venture capitalist's investment decision and NPV. We find significant value losses due to holdup problems and under-provision of effort that can outweigh the benefits of staged financing and investment. We show that a commitment to later-stage syndicate financing increases effort and NPV and preserves the option value of staged investment. This commitment benefits initial venture capital investors as well as the entrepreneur.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11624.

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    Date of creation: Sep 2005
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    Handle: RePEc:nbr:nberwo:11624

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    Cited by:
    1. Da Rin, M. & Hellmann, T. & Puri, M.L., 2011. "A Survey of Venture Capital Research," Discussion Paper, Tilburg University, Tilburg Law and Economic Center 2011-044, Tilburg University, Tilburg Law and Economic Center.
    2. Tian, Xuan, 2011. "The causes and consequences of venture capital stage financing," Journal of Financial Economics, Elsevier, Elsevier, vol. 101(1), pages 132-159, July.
    3. Broughman, Brian J. & Fried, Jesse M., 2012. "Do VCs use inside rounds to dilute founders? Some evidence from Silicon Valley," Journal of Corporate Finance, Elsevier, Elsevier, vol. 18(5), pages 1104-1120.
    4. Krohmer, Philipp & Lauterbach, Rainer & Calanog, Victor, 2009. "The bright and dark side of staging: Investment performance and the varying motivations of private equity firms," Journal of Banking & Finance, Elsevier, Elsevier, vol. 33(9), pages 1597-1609, September.
    5. Paul Gompers & Anna Kovner & Josh Lerner, 2009. "Specialization and Success: Evidence from Venture Capital," Journal of Economics & Management Strategy, Wiley Blackwell, Wiley Blackwell, vol. 18(3), pages 817-844, 09.
    6. Aleksandar Bradic, 2012. "The Role of Social Feedback in Financing of Technology Ventures," Papers 1301.2196, arXiv.org.
    7. Christian Hopp, 2010. "When do venture capitalists collaborate? Evidence on the driving forces of venture capital syndication," Small Business Economics, Springer, Springer, vol. 35(4), pages 417-431, November.

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