Working Paper: NBER ID: w12874
Authors: Boyan Jovanovic; Balzs Szentes
Abstract: We provide a model that links the high return to venture equity to the impatience of the VCs. VCs are scarce, and hence, they have market power and a high return on their investments. As a result, VCs are eager to terminate non-performing ventures so they can move on to new ones. The scarcity of VCs enables them to internalize their social value, and the competitive equilibrium is socially optimal. We estimate the model and back out the return of solo entrepreneurs which is always below that of the return of VCs.
Keywords: Venture Capital; Returns; Impatience; Market Power
JEL Codes: G24; L26
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Scarcity of VCs (G24) | Increased Market Power (D49) |
| Increased Market Power (D49) | Higher Returns (G19) |
| Impatient VCs (G24) | Higher Quality Hurdle (L15) |
| Higher Quality Hurdle (L15) | Increased IPO Values for VC-backed firms (G24) |
| VCs' Deeper Pockets + Impatience (G40) | Ambiguous Termination Decisions (J63) |
| Solo Entrepreneurs' Returns (L26) | VCs' Returns (G24) |