Working Paper: CEPR ID: DP3243
Authors: Steven Kaplan; Per Johan Strömberg
Abstract: We study the investment analyses of 67 portfolio investments by 11 venture capital (VC) firms. VCs consider the attractiveness and risks of the business, management, and deal terms as well as expected post-investment monitoring. We then consider the relation of the analyses to the contractual terms. Greater internal and external risks are associated with more VC cash flow rights, VC control rights; greater internal risk, also with more contingencies for the entrepreneur; and greater complexity, with less contingent compensation. Finally, expected VC monitoring and support are related to the contracts. We interpret these results in relation to financial contracting theories.
Keywords: Brokerage; Capital and Ownership Structure; Financing Policy; Investment Banking; Venture Capital
JEL Codes: G24; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Greater internal and external risks (D81) | Increased VC cash flow rights (G32) |
| Greater internal risk (D81) | More contingencies for the entrepreneur (L26) |
| Greater internal risk (D81) | More complexity in contract terms (D86) |
| Greater internal risk (D81) | Reduced compensation flexibility for the entrepreneur (M52) |
| Expected VC monitoring and support (G24) | Contractual terms (L14) |