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A Probabilistic Theory Of Entrepreneurial Financing

Author

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  • Edmund H. Mantell

    (Department of Finance, Lubin School of Business, Pace University)

Abstract

This paper develops a theory of the entrepreneurial financing by venture capitalists. It focuses on the activities of the entrepreneur at the incipiency of the investment process: namely the solicitation event. The temporal series of financial commitments elicited from venture capitalists are assumed to have the characteristics of random variables. It is shown that the aggregate capital commitment secured by an entrepreneur in a finite time has stochastic properties corresponding to those of a statistical renewal process. The paper derives limiting conditions on the probability that entrepreneur¡¯s project will be aborted because of his failure to secure adequate funding commitments in a finite time. The entrepreneur¡¯s attitude towards risk determines the tradeoff between the expected aggregate capital commitment and the risk of abortion of the project.

Suggested Citation

  • Edmund H. Mantell, 2008. "A Probabilistic Theory Of Entrepreneurial Financing," Annals of Economics and Finance, Society for AEF, vol. 9(1), pages 177-197, May.
  • Handle: RePEc:cuf:journl:y:2008:v:9:i:1:p:177-197
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    References listed on IDEAS

    as
    1. Gavin C. Reid, 1999. "The application of principal-agent methods to investor-investee relations in the UK venture capital industry," Venture Capital, Taylor & Francis Journals, vol. 1(4), pages 285-302, October.
    2. Oliver Hart, 2001. "Financial Contracting," Journal of Economic Literature, American Economic Association, vol. 39(4), pages 1079-1100, December.
    3. Mason, Colin M & Harrison, Richard T, 1995. "Closing the Regional Equity Capital Gap: The Role of Informal Venture Capital," Small Business Economics, Springer, vol. 7(2), pages 153-172, April.
    4. Admati, Anat R & Pfleiderer, Paul, 1994. " Robust Financial Contracting and the Role of Venture Capitalists," Journal of Finance, American Finance Association, vol. 49(2), pages 371-402, June.
    5. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-291, March.
    6. 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, vol. 38(5), pages 1543-1568, December.
    7. Barry, Christopher B. & Muscarella, Chris J. & Peavy, John III & Vetsuypens, Michael R., 1990. "The role of venture capital in the creation of public companies*1: Evidence from the going-public process," Journal of Financial Economics, Elsevier, vol. 27(2), pages 447-471, October.
    8. Joshua Lerner, 1994. "The Syndication of Venture Capital Investments," Financial Management, Financial Management Association, vol. 23(3), Fall.
    9. Maier, John II & Walker, David A., 1987. "The role of venture capital in financing small business," Journal of Business Venturing, Elsevier, vol. 2(3), pages 207-214.
    10. Ehrlich, Sanford B. & De Noble, Alex F. & Moore, Tracy & Weaver, Richard R., 1994. "After the cash arrives: A comparative study of venture capital and private investor involvement in entrepreneurial firms," Journal of Business Venturing, Elsevier, vol. 9(1), pages 67-82, January.
    11. Gorman, Michael & Sahlman, William A., 1989. "What do venture capitalists do?," Journal of Business Venturing, Elsevier, vol. 4(4), pages 231-248, July.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Entrepreneurial solicitations; Venture capital financing; Stochastic processes; Probability of entrepreneurial insolvency;

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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