Optimal Investment, Monitoring, and the Staging of Venture Capital

TLDR

Agency costs rise when assets become less tangible, growth options increase, and asset specificity grows. The study investigates how staged venture capital investments are structured in the presence of agency and monitoring costs. Data from 794 VC‑backed firms confirm that VCs concentrate on early‑stage, high‑technology companies with high informational asymmetry, increase monitoring when tangible‑asset ratios decline, market‑to‑book ratios rise, or R&D intensity grows, and periodically gather information to preserve the option to discontinue low‑probability projects.

Abstract

ABSTRACT This paper examines the structure of staged venture capital investments when agency and monitoring costs exist. Expected agency costs increase as assets become less tangible, growth options increase, and asset specificity rises. Data from a random sample of 794 venture capital‐backed firms support the predictions. Venture capitalists concentrate investments in early stage and high technology companies where informational asymmetries are highest. Decreases in industry ratios of tangible assets to total assets, higher market‐to‐book ratios, and greater R&D intensities lead to more frequent monitoring. Venture capitalists periodically gather information and maintain the option to discontinue funding projects with little probability of going public.