The Market for Venture Capital: Entry, Competition, and the Survival of New Firms

Economics

Speaker:Konstantinos Serfes, Drexel University
Date: Wednesday 14 December 2011
Time: 4.15
Location: STC/D

Further details

We develop a general equilibrium model of the venture capital market with heterogenous entrepreneurs and venture capital firms (VCs). Each VC matches endogenously with an entrepreneur, offering capital in exchange for an equity stake. We analyze how competition among VCs for investment opportunities affect equilibrium contracts and the survival of new firms. We show that more competitive pressure forces VCs to offer their entrepreneurs more capital while accepting lower equity stakes. This reduces the profitability of VC investments, but enhances the equilibrium survival rate of new ventures. Moreover, we show that entry of new VCs has a ripple effect throughout the entire market: All start-ups then receive more capital and become more likely to survive. However, the VC market will never converge to the efficient outcome, even when allowing for free entry.