The application of principal-agent methods to investor-investee relations in the UK venture capital industry
This paper appeals to UK evidence on venture capital. The investor is regarded as the principal, and the investee as the agent. Relations between the two are analysed in terms of risk management, information handling, and the trading of risk and information. In the data analysed, investors and investees are paired in 'dyads'. The evidence on their behaviour and interaction was obtained by face-to-face interviews. A principal-agent model is developed to deal with incentives for entrepreneurial effort. From this, issues of information and monitoring naturally arise. Then the seeking of contract optimality in real contexts is examined, applying this framework to qualitative data. It is argued that evidence viewed in this way supports the application of principal-agent modelling to the financing of mature small firms by venture capitalists. The feature of contract optimality that was perceived to be most important was capital structure. There were several reasons for this: establishing ownership entitlement; creating incentives for effort; and apportioning risk efficiently. Often the observed relations between investor and investee were perceived to be at or close to optimality. It was found that these optima were specific to time and place, and strongly reflected the house-styles of individual investors and their reputations.
Volume (Year): 1 (1999)
Issue (Month): 4 (October)
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