Characteristics, Contracts, and Actions: Evidence from Venture Capitalist Analyses

We study the investment analyses of 67 portfolio investments by 11 venture capital (VC) firms. VCs describe the strengths and risks of the investments as well as expected postinvestment actions. We classify the risks into three categories and relate them to the allocation of cash flow rights, contin...

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Bibliographic Details
Published in:The Journal of finance (New York) 2004-10, Vol.59 (5), p.2177-2210
Main Authors: KAPLAN, STEVEN N., STRÖMBERG, PER
Format: Article
Language:English
Subjects:
Advantages
Business risks
Business structures
Cash flow
Contracts
Entrepreneurs
Finance
Financial investments
Investment analysis
Investment companies
Investment portfolios
Investment risk
Investors
Portfolio analysis
Portfolio investments
Risk
Studies
Venture capital
Venture capital companies
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Summary:We study the investment analyses of 67 portfolio investments by 11 venture capital (VC) firms. VCs describe the strengths and risks of the investments as well as expected postinvestment actions. We classify the risks into three categories and relate them to the allocation of cash flow rights, contingencies, control rights, and liquidation rights between VCs and entrepreneurs. The risk results suggest that agency and hold-up problems are important to contract design and monitoring, but that risk sharing is not. Greater VC control is associated with increased management intervention, while greater VC equity incentives are associated with increased value-added support.
ISSN:0022-1082
1540-6261
DOI:10.1111/j.1540-6261.2004.00696.x