Econ 483_Lecture 24_Venture Capital

Venture capital venture capital why is vc better

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Unformatted text preview: tal Venture capital - Why is VC better? Venture capital …rms typically comprise small teams with technology backgrounds (scientists, researchers) or with business training or signi…cant industry experience. Small group of investors increases incentive to monitor e¤ectively. Often, incentive contracts for managers are heavily tied to performance, with ample scope for control and disciplining by investors. Lecture 24: Venture capital, Econ483: Econ of Innovation & Technology, Evangelia Chalioti c A ll rights reserved. Venture capital Venture capital - Why is VC better? The contracts often hand control to investors when performance is poor and hand control to the innovator when things go well. “Control” refers to rights to decide what actions can be taken outside of those speci…ed in the original contract. Lecture 24: Venture capital, Econ483: Econ of Innovation & Technology, Evangelia Chalioti c A ll rights reserved. Venture capital Venture capital - Many empirical studies …nd that US venture capital shows a signi…cantly higher performance on average than European VC. - European allocation of venture capital to new …rms was less than 10% in 1996 versus 27% in the US. Rather, European venture capital is allocated more towards …nancing buyouts. Lecture 24: Venture capital, Econ483: Econ of Innovation & Technology, Evangelia Chalioti c A ll rights reserved. Venture capital Venture capital While venture capital …nancing tends to be pro-cyclical, the causation is unclear: it may be either that VC by allowing innovations to get to market fuels a boom or that booms generate excess funds to invest which generates...
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