The Equilibrium Size and Value-Added of Venture Capital |
| |
| Authors: | FRANCESCO SANNINO |
| |
| Institution: | Francesco Sannino is at Frankfurt School of Finance & Management. I am indebted to Francesco Nava and Balázs Szentes for their guidance and for many stimulating discussions. This paper has greatly benefited from comments and suggestions by Philip Bond (Editor), an anonymous associate editor, two anonymous referees, Daniel Ferreira, Peter Kondor, Marco Pagnozzi, and Francesco Sangiorgi. I warmly thank for their input Ulf Axelson, Michel Azulai, Matteo Benetton, Alberto Bennardo, Tobias Berg, Gianpaolo Caramellino, Daniele Condorelli, Amil Dasgupta, Alexia Delfino, Andrew Ellis, Juanita Gonzalez-Uribe, Wouter den Haan, Gilat Levy, Marco Pagano, Nicola Persico, Giorgia Piacentino, Ronny Razin, Markus Reisinger, Antonio Rosato, Andrea Rossi, Emanuele Tarantino, Anjan Thakor, Deniz Yavuz (discussant), and audiences at various conferences and seminars. Maximilian Voigt provided excellent research assistance. All errors are my own. I have read The Journal of Finance disclosure policy and have nothing to disclose. |
| |
| Abstract: | I model positive sorting of entrepreneurs across the high and low value-added segments of the venture capital market. Aiming to attract high-quality entrepreneurs, inefficiently many venture capitalists (VCs) commit to provide high value-added by forming small portfolios. This draws the marginal entrepreneur away from the low value-added segment, reducing match quality in the high value-added segment too. There is underinvestment. Multiple equilibria may emerge, and they differ in aggregate investment. The model rationalizes evidence on VC returns and value-added along fundraising “waves” and when the cost of entrepreneurship falls, and generates untested predictions on the size and value-added of venture capital. |
| |
| Keywords: | |
|
|
