On the market for venture capital

Boyan Jovanovic, Balázs Szentes

    Research output: Contribution to journalArticle

    Abstract

    We propose a theory of the market for venture capital that links the excess return to venture equity to the scarcity of venture capitalists (VCs). High returns make the VCs more selective and eager to terminate nonperforming ventures because they can move on to new ones. The scarcity of VCs enables them to internalize their social value, and the competitive equilibrium is socially optimal. Moreover, the bilaterally efficient contract is a simple equity contract. We estimate the model for the period 1989-2001 and compute the excess return to venture capital, which turns out to be 8.6 percent. Finally, we back out the return of solo entrepreneurs, which is increasing in their wealth and ranges between zero and 3.5 percent.

    Original languageEnglish (US)
    Pages (from-to)493-527
    Number of pages35
    JournalJournal of Political Economy
    Volume121
    Issue number3
    DOIs
    StatePublished - Jun 2013

    Fingerprint

    Venture capital
    Venture capitalists
    Equity
    Venture
    Excess returns
    Scarcity
    Competitive equilibrium
    Wealth
    Social values
    Entrepreneurs
    Efficient contract

    ASJC Scopus subject areas

    • Economics and Econometrics

    Cite this

    On the market for venture capital. / Jovanovic, Boyan; Szentes, Balázs.

    In: Journal of Political Economy, Vol. 121, No. 3, 06.2013, p. 493-527.

    Research output: Contribution to journalArticle

    Jovanovic, B & Szentes, B 2013, 'On the market for venture capital', Journal of Political Economy, vol. 121, no. 3, pp. 493-527. https://doi.org/10.1086/670359
    Jovanovic, Boyan ; Szentes, Balázs. / On the market for venture capital. In: Journal of Political Economy. 2013 ; Vol. 121, No. 3. pp. 493-527.
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