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On the Return to Venture Capital

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  • Boyan Jovanovic
  • Balàzs Szentes

Abstract

We provide a model that links the high return to venture equity to the impatience of the VCs. VCs are scarce, and hence, they have market power and a high return on their investments. As a result, VCs are eager to terminate non-performing ventures so they can move on to new ones. The scarcity of VCs enables them to internalize their social value, and the competitive equilibrium is socially optimal. We estimate the model and back out the return of solo entrepreneurs which is always below that of the return of VCs.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12874.

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Date of creation: Jan 2007
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Handle: RePEc:nbr:nberwo:12874

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Cited by:
  1. Tinn, K & Vourvachaki, E, 2013. "Can overpricing of technology stocks be good for welfare? Positive spillovers vs. equity market losses," Working Papers, Imperial College, London, Imperial College Business School 12192, Imperial College, London, Imperial College Business School.
  2. Alperovych, Yan & Hübner, Georges, 2011. "Explaining returns on venture capital backed companies: Evidence from Belgium," Research in International Business and Finance, Elsevier, Elsevier, vol. 25(3), pages 277-295, September.
  3. Johannes Horner & Larry Samuelson, 2009. "Incentives for Experimenting Agents," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1726RR, Cowles Foundation for Research in Economics, Yale University, revised Mar 2013.
  4. Dirk Bergemann & Ulrich Hege & Liang Peng, 2009. "Venture Capital and Sequential Investments," Levine's Working Paper Archive 814577000000000046, David K. Levine.
  5. Michael Peneder, 2010. "The Impact of Venture Capital on Innovation Behaviour and Firm Growth," WIFO Working Papers, WIFO 363, WIFO.
  6. Johannes Horner & Larry Samuelson, 2013. "Incentives for Experimenting Agents," Levine's Working Paper Archive 786969000000000671, David K. Levine.
  7. Sau Lino, 2007. "New Pecking Order Financing for Innovative Firms: an Overview," Department of Economics and Statistics Cognetti de Martiis. Working Papers, University of Turin 200702, University of Turin.
  8. Knockaert, M. & Clarysse, B. & Wright, M. & Lockett, A., 2008. "Agency and similarity effects and the VC's attitude towards academic spin-out investing," Vlerick Leuven Gent Management School Working Paper Series, Vlerick Leuven Gent Management School 2008-22, Vlerick Leuven Gent Management School.
  9. Johannes Horner & Larry Samuelson, 2009. "Incentives for Experimenting Agents," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1726RRR, Cowles Foundation for Research in Economics, Yale University, revised Jun 2013.
  10. Hakki Yazici, 2008. "Business start-ups and productive efficiency," Working Papers, Federal Reserve Bank of Minneapolis 665, Federal Reserve Bank of Minneapolis.

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