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

TLDR

The study examines how 11 venture capital firms analyze 67 portfolio investments. VCs assess investment strengths and risks, categorizing risks into three types and linking them to the distribution of cash flow, control, contingency, and liquidation rights. Agency and hold‑up problems shape contract design and monitoring, while risk sharing is less influential; higher VC control leads to more management intervention and higher equity incentives drive greater value‑added support.

Abstract

ABSTRACT 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.