A Model of Venture Capital Screening Academic Article uri icon

abstract

  • With asymmetric information, the VC can only judge an entrepreneur by the stage of development which in a separating equilibrium also reveals the quality of the new technology. With limited capital the VC just finances the best project. Thus, having too many entrepreneurs can cause underinvestment by entrepreneurs since effort by losers is wasted. We then give characterization of when more entrepreneurs are better and show how it depends on the shape of the distribution of types. The model also demonstrates that VCs could possibly increase their payoff if they avoid focus on a small number of industries.

publication date

  • January 1, 2006