Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/94132
Authors: 
Gebhardt, Georg
Year of Publication: 
2006
Series/Report no.: 
SFB/TR 15 Discussion Paper 173
Abstract: 
We explore why venture capital funds limit the amount of capital they raise and do not reinvest the proceeds. This structure is puzzling because it leads to a succession of several funds financing each new venture which multiplies the well known agency problems. We argue that an inside investor cannot provide a hard budget constraint while a less well informed outsider can. Therefore, the venture capitalist delegates the continuation decision to the outsider by ex ante restricting the amount of capital he has under management. The soft budget constraint problem becomes the more important the higher the entrepreneur's private benefits are and the higher the probability of failure of a project is.
Subjects: 
Contract Theory
Corporate Finance
Venture Capital
JEL: 
G24
G31
D82
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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