Screening and Advising by a Venture Capitalist With a Time Constraint

Topics:
Commercial Lending,
Product Development and Design,
Venture Capital
Tags:
Finance,
Financing Startups,
Intensity,
Investment,
Screening,
University Of St. Gallen,
Venture Capital
Source:
University of St. Gallen

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Overview: This paper proposes an intertemporal model of venture capital investment with screening and advising where the venture capitalist's time endowment is the scarce input factor. Screening improves the selection of firms receiving finance, advising allows firms to develop a marketable product, both have a variable intensity. In this setup, optimal linear contracts solve the moral hazard problem. Screening however asks for an entrepreneur wage and does not allow for upfront payments which would cause severe adverse selection. Project characteristics have implications for screening and advising intensity and the distribution of profits.

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Format: PDF | Size: 255KB | Date: Nov 2003 | Pages: 28

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