In the last decades venture capital has emerged as the major source of financing for young and innovative firms, replacing more and more bank credits, but also creating a new market niche for start-ups with a high risk of failure that may create substantial returns. With success stories of companies like Apple Computer, Intel, Federal Express, Microsoft, Sun Mircosystem, Compaq or SAP, this form of funding is meanwhile widely accepted. In the late 1970s the venture capital industry increased dramatically in the United States. In contrast, the venture capital sector in continental Europe used to be a very small market up to 1990. Figure 1 in the appendix shows the development of funds committed to independent US and European venture capital funds.1Today the venture fund market in Germany has reached a managed fund size of US$ 43 billion, an increase of 13.2 percent in regard to the previous year.2Therefore venture capital plays a crucial role in respect to innovation of an economy and has significant positive effects on society and a country’s economy.
According to Sahlmann (1990) the term “venture capital” is defined as a “professional managed pool of capital that is invested in equity linked securities of private ventures at various stages in their development”. Gompers and Lerner (2001a) limit the definition to investments in privately held, high growth companies. Originally, the intent of venture capital is to finance young innovative companies. The term private equity describes the investment of equity in companies that are already established, e.g. companies in later stages of their life cycle. Today the two terms are often used as synonyms.
In this paper we keep focusing on companies in early stages of life and thus use the term venture capital only. It should be mentioned that the focus of venture capital firms can be quite different. First venture capitalists can concentrate on different stages of companies (seed, start-up, first, second, third, fourth stage, bridge stage and liquidity stage financing) and second, venture capitalist can finance different industries or focus on a special group. The specialization has the advantage to gather deepened technological knowledge about an industry that can be used within the “venture cycle”. The innovative high-tech sectors, such as biotech or nanotech, would be good examples.
Table of Contents
- Introduction
- Multiple-Agent relationship of a venture capitalist
- Structure of Venture-Capital Firms
- Theoretical Background
- Relationship between Venture Capitalist and Entrepreneurs
- Relationship between Venture Capitalist and Investors
- THE INVESTMENT PROCESS OF A VENTURE CAPITALIST
- Mitigation of Venture Capitalist-Entrepreneur Relationship
- Mitigation of Relationship Problems between Investors and Venture Capital Firms Exit Decisions & Returns
- Conclusion
Objectives and Key Themes
This paper aims to provide an overview of financing young growth companies by venture capital firms, focusing on the relationship between the investor, venture capitalist, and the entrepreneur. It examines the economic transaction, primarily the relational problems, and demonstrates mechanisms to mitigate these issues. The main objectives are to understand the structure of venture capital investments, analyze the theoretical background of venture capital financing, and explore incentives and control mechanisms to address agency and effort problems in venture capital relationships.
- Structure and organization of venture capital firms
- Relationship dynamics between venture capitalists, investors, and entrepreneurs
- Challenges and problems within the venture capital financing process
- Incentive and control mechanisms to mitigate agency and effort problems
- Strategies for successful venture capital investments
Chapter Summaries
- Introduction: This chapter sets the stage by introducing the concept of venture capital as a key source of funding for innovative startups. It discusses the historical growth of the venture capital industry, highlighting the significance of venture capital in driving innovation and economic development.
- Multiple-Agent Relationship of a Venture Capitalist: This chapter delves into the intricate relationship between the three major players in venture capital: the investor, the venture capitalist, and the entrepreneur. It outlines the structure of venture capital firms, explaining the roles and responsibilities of each player. The chapter also lays the theoretical foundation for understanding the potential conflicts and challenges that can arise within this multi-party relationship.
- THE INVESTMENT PROCESS OF A VENTURE CAPITALIST: This chapter explores the practical aspects of venture capital investments, focusing on strategies for mitigating potential problems within both the venture capitalist-entrepreneur relationship and the venture capitalist-investor relationship. It examines specific mechanisms and incentives designed to ensure alignment of interests and promote effective collaboration.
Keywords
This paper examines venture capital, a crucial source of funding for young, high-growth companies. It delves into the intricate relationship between investors, venture capitalists, and entrepreneurs, focusing on the challenges and opportunities within this complex financing ecosystem. Key themes include the structure of venture capital firms, agency problems, incentive mechanisms, and strategies for mitigating risks and optimizing returns in venture capital investments.
- Arbeit zitieren
- Steffen Schupp (Autor:in), Elias Gansel (Autor:in), 2005, Principal Agents in Venture Capital and Private Equity Contracting, München, GRIN Verlag, https://www.grin.com/document/62951
