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Risk Management in Venture Capital Investor-Investee Relations

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

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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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
Date of revision:
Handle: RePEc:san:crieff:9505
Contact details of provider: Postal: School of Economics and Finance, University of St. Andrews, Fife KY16 9AL
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  1. Falconer Mitchell & Gavin C Reid & Nicholas G Terry, 1994. "Post Investment Demand for Accounting Information by Venture Capitalists," CRIEFF Discussion Papers 9424, Centre for Research into Industry, Enterprise, Finance and the Firm.
  2. 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.
  3. Blanchflower, D.G. & Oswald, A., 1991. "What Makes an Entrepreneur?," Economics Series Working Papers 99125, University of Oxford, Department of Economics.
  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. David E. M. Sappington, 1991. "Incentives in Principal-Agent Relationships," Journal of Economic Perspectives, American Economic Association, vol. 5(2), pages 45-66, Spring.
  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 1543-68, December.
  7. Sahlman, William A., 1990. "The structure and governance of venture-capital organizations," Journal of Financial Economics, Elsevier, vol. 27(2), pages 473-521, October.
  8. Dixon, R, 1991. "Venture capitalists and the appraisal of investments," Omega, Elsevier, vol. 19(5), pages 333-344.
  9. 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, vol. 31(2), pages 365-81, May.
  10. Armstrong, Peter, 1991. "Contradiction and social dynamics in the capitalist agency relationship," Accounting, Organizations and Society, Elsevier, vol. 16(1), pages 1-25.
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