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Risk Management in Venture Capital Investor-Investee Relations

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  • Gavin C Reid
  • Nicholas G Terry
  • Julia A Smith

Abstract

This paper provides an empirical analysis of risk handling arrangements adopted in the relationship between the venture capital investor and his investee. The theoretical framework adopted is principal-agent analysis, which views the investee as a risk averse agent entering into a risk sharing contract with the investor, a risk neutral (fully diversified) principal. The sample analysed is made up of twenty venture capital investors in the UK over the period 1992-93, and (where available) their corresponding investee(s). These investors accounted for about three quarters of venture capital activity in the UK over this period. The paper reports on evidence gathered by semi-structured interviews with investors and investees, on expected returns, portfolio balance, screening and risk sharing.

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Bibliographic Info

Paper provided by Centre for Research into Industry, Enterprise, Finance and the Firm in its series CRIEFF Discussion Papers with number 9505.

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Date of creation: Oct 1995
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Handle: RePEc:san:crieff:9505

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Keywords: venture capital; risk management; information asymmetry; investor-investee relations;

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References

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  1. Blanchflower, D.G. & Oswald, A., 1991. "What Makes an Entrepreneur?," Economics Series Working Papers 99125, University of Oxford, Department of Economics.
  2. David E. M. Sappington, 1991. "Incentives in Principal-Agent Relationships," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 5(2), pages 45-66, Spring.
  3. Armstrong, Peter, 1991. "Contradiction and social dynamics in the capitalist agency relationship," Accounting, Organizations and Society, Elsevier, vol. 16(1), pages 1-25.
  4. Admati, Anat R & Pfleiderer, Paul, 1994. " Robust Financial Contracting and the Role of Venture Capitalists," Journal of Finance, American Finance Association, American Finance Association, vol. 49(2), pages 371-402, June.
  5. Chan, Yuk-Shee & Siegel, Daniel R & Thakor, Anjan V, 1990. "Learning, Corporate Control and Performance Requirements in Venture Capital Contracts," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(2), pages 365-81, May.
  6. Sahlman, William A., 1990. "The structure and governance of venture-capital organizations," Journal of Financial Economics, Elsevier, Elsevier, vol. 27(2), pages 473-521, October.
  7. Chan, Yuk-Shee, 1983. " On the Positive Role of Financial Intermediation in Allocation of Venture Capital in a Market with Imperfect Information," Journal of Finance, American Finance Association, American Finance Association, vol. 38(5), pages 1543-68, December.
  8. Falconer Mitchell & Gavin C Reid & Nicholas G Terry, 1994. "Post Investment Demand for Accounting Information by Venture Capitalists," CRIEFF Discussion Papers, Centre for Research into Industry, Enterprise, Finance and the Firm 9424, Centre for Research into Industry, Enterprise, Finance and the Firm.
  9. Richard A. Lambert, 1986. "Executive Effort and Selection of Risky Projects," RAND Journal of Economics, The RAND Corporation, vol. 17(1), pages 77-88, Spring.
  10. Dixon, R, 1991. "Venture capitalists and the appraisal of investments," Omega, Elsevier, Elsevier, vol. 19(5), pages 333-344.
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Citations

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Cited by:
  1. Kanniainen, Vesa & Keuschnigg, Christian, 2004. "Start-up investment with scarce venture capital support," Journal of Banking & Finance, Elsevier, Elsevier, vol. 28(8), pages 1935-1959, August.
  2. Jan Smolarski & Neil Wilner & Weifang Yang, 2011. "The use of financial information by private equity funds in evaluating new investments," Review of Accounting and Finance, Emerald Group Publishing, Emerald Group Publishing, vol. 10(1), pages 46 - 68, February.
  3. Hanna Silvola, 2008. "Design of MACS in growth and revival stages of the organizational life-cycle," Qualitative Research in Accounting & Management, Emerald Group Publishing, Emerald Group Publishing, vol. 5(1), pages 27-47, April.
  4. Kanniainen, V. & Keuschnigg, C., 2000. "The Optimal Portfolio of Start-up Firms in Venture Capital Finance," University of Helsinki, Department of Economics, Department of Economics 486, Department of Economics.
  5. Kaserer, Christoph & Wagner, Niklas & Achleitner, Ann-Kristin, 2003. "Managing investment risks of institutional private equity investors: The challenge of illiquidity," CEFS Working Paper Series 2003-01, Center for Entrepreneurial and Financial Studies (CEFS), Technische Universität München.
  6. Gavin C Reid & Julia A Smith, 1999. "Accounting for Risk: developing a new research agenda for risk appraisal in high-technology ventures," CRIEFF Discussion Papers, Centre for Research into Industry, Enterprise, Finance and the Firm 9915, Centre for Research into Industry, Enterprise, Finance and the Firm.
  7. Gavin C. Reid & Julia A. Smith, 2001. "How do Venture Capitalists Handle Risk in High-Technology Ventures? - some preliminary results," CRIEFF Discussion Papers, Centre for Research into Industry, Enterprise, Finance and the Firm 0107, Centre for Research into Industry, Enterprise, Finance and the Firm.

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