Characteristics, Contracts, and Actions: Evidence from Venture Capitalist Analyses




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    • University of Chicago Graduate School of Business and National Bureau of Economic Research. A previous version of this paper was titled “How Do Venture Capitalists Choose and Monitor Investments?” We appreciate comments from Ulf Axelson, Douglas Baird, Francesca Cornelli, Mathias Dewatripont, Douglas Diamond, Paul Gompers, Felda Hardymon, Josh Lerner, Frederic Martel, Bob McDonald (the editor), Kjell Nyborg, David Scharfstein, Jean Tirole, Lucy White, Luigi Zingales, an anonymous referee, and seminar participants at Amsterdam, Chicago, Columbia, ECARE, the 2001 European Finance Association meetings, Harvard Business School, HEC, INSEAD, London Business School, McGill, Michigan, New York University, North Carolina, Notre Dame, Ohio State, Purdue, Rochester, Stockholm School of Economics, Toulouse, Washington University, and Yale. This research has been supported by the Kauffman Foundation, the Lynde and Harry Bradley Foundation, and the Olin Foundation through grants to the Center for the Study of the Economy and the State, and by the Center for Research in Security Prices. Alejandro Hajdenberg provided outstanding research assistance. We are grateful to the venture capital partnerships for providing data. Any errors are our own.


We study the investment analyses of 67 portfolio investments by 11 venture capital (VC) firms. VCs describe the strengths and risks of the investments as well as expected postinvestment actions. We classify the risks into three categories and relate them to the allocation of cash flow rights, contingencies, control rights, and liquidation rights between VCs and entrepreneurs. The risk results suggest that agency and hold-up problems are important to contract design and monitoring, but that risk sharing is not. Greater VC control is associated with increased management intervention, while greater VC equity incentives are associated with increased value-added support.