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Essays in entrepreneurial finance

Sannino, Francesco (2018) Essays in entrepreneurial finance. PhD thesis, London School of Economics and Political Science.

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Identification Number: 10.21953/lse.jrcr82eulijx


In Chapter 1, a theory of optimal fund size in venture capital is developed. Fund managers - the VCs - add value to the projects they finance, but their human capital is scarce. A matching model is proposed where VCs span their nurturing activity over more projects, and entrepreneurs, who own the projects, direct their search to VCs based on their projects’ quality. The work provides necessary and sufficient conditions for positive and negative assortative matching over VC attention and project quality to emerge and shows when VCs fundraising decision is distorted by selection considerations. The chapter ends with an investigation of the effects of entry of less skilled intermediaries. By attracting the worse entrepreneurs, these new agents alleviate the adverse selection problem associated to managing a larger fund. This offers a new angle to think about policies encouraging entry in the venture capital industry. In Chapter 2, the model developed in Chapter 1 is extended to a dynamic setting, where projects need time to develop and produce returns. VCs can choose to enter in a short-term contract with investors, giving them access to investors liquidity for a given period of time, and an open credit relationship that allows them to raise investors money at any point in time. The model illustrates a novel advantage of closed, finite-horizon funds, which emerge in equilibrium even when they are socially undesirable: they attract the best entrepreneurs, who value the most the exclusive relationship that only a closed-end fund can guarantee. The interpretation is that VCs benefit from committing to a size in the first place. In Chapter 3, the focus moves to the study of the distortions in fund managers’ behavior that may occur within a fund’s life. A setting is introduced where information about a manager’s ability is imperfect and managers are interested in their reputation. Given the application to investments in young firms, managers in the model are agents that create value because they can experiment and learn about a projects potential. Their incentive to take on risk is distorted by career concerns, and can result in under or over risk-taking. The result contrasts with Holmstrom (1999) where managers directly affect the project’s success rate, and career concerns can only produce inefficiently low risk-taking. It is shown that the inefficiency is reduced when the market can also observe the outcome of projects with the same fundamental.

Item Type: Thesis (PhD)
Additional Information: © 2018 Francesco Sannino
Library of Congress subject classification: H Social Sciences > HB Economic Theory
Sets: Departments > Economics
Supervisor: Szentes, Balázs and Nava, Francesco

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