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On the return to venture capital

Author: Boyan Jovanovic; Balazs Szentes; National Bureau of Economic Research.
Publisher: Cambridge, Mass. : National Bureau of Economic Research, 2007.
Series: Working paper series (National Bureau of Economic Research), no. 12874.
Edition/Format:   eBook : Document : EnglishView all editions and formats
Summary:
"This paper provides a theory that explains the sizeable excess return to venture equity, and ties it to the high VC discount rates, i.e., to VC impatience. The theory is based on the shortage of venture capitalists (VCs). Since the VC's opportunity cost of dealing with a company is supporting a new profitable project, he is less patient with maturing firms than an ordinary entrepreneur would be. This may explain  Read more...
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Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Boyan Jovanovic; Balazs Szentes; National Bureau of Economic Research.
OCLC Number: 81153693
Description: 1 online resource (1 volume).
Series Title: Working paper series (National Bureau of Economic Research), no. 12874.
Responsibility: Boyan Jovanovic, Balazs Szentes.

Abstract:

"This paper provides a theory that explains the sizeable excess return to venture equity, and ties it to the high VC discount rates, i.e., to VC impatience. The theory is based on the shortage of venture capitalists (VCs). Since the VC's opportunity cost of dealing with a company is supporting a new profitable project, he is less patient with maturing firms than an ordinary entrepreneur would be. This may explain why VC-backed firms reach IPOs earlier than other start-ups and why they are worth more at IPO. The scarcity of VCs enables them to internalize their social value, so that 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 on venture equity. The model that we fit to data targets a VC ALPHA of five percent. We find that an ALPHA of ten percent would induce the VC to terminate too many projects"--NBER website.

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