Abstract

We develop a market equilibrium model that captures the dynamics of venture financing in the presence of imperfections in the venture capital market. Specifically, we study the effects of frictions associated with search, bargaining, and segmentation from other asset classes on (i) fund size, (ii) pre-money valuation, and (iii) average returns to investors. By solving the model, we provide closed-form predictions about which ventures will receive funding and about how ownership shares will be divided between the Venture Capitalist (VC) and the entrepreneur. Using numerical simulations to perform parametric analyses, we find the following: If the VC can more easily find investment opportunities, pre-money valuations will decline, while fund size and returns will increase. Secondly, if the pool of potential investees improves in terms of the return prospects, fund size and average returns will also increase despite an increase in pre-money valuations. Third, over the long run, more VCs will enter the industry, and because of competition, industry returns will shrink to a point where a no-arbitrage condition holds.

Abstract

We propose a model of venture capital markets, characterized by the following cycle: (i) capitalists raise funds; (ii) capitalists and entrepreneurs match; (iii) after matching both parties take active roles in implementation; (iv) when ventures mature capitalists leave to start a new cycle. We analyze entry by capitalists, the flow of funds into the market, the decisions to start a venture, the duration of each phase in the cycle, and the returns to the parties.

Abstract

We study markets where innovators can sell ideas to entrepreneurs, who may be better at implementing them. These markets are decentralized, liquid assets lest potentially profitable opportunities may be lost. We extend existing models of the demand for liquidity along several dimensions, including allowing agents to put deals on hold while they try to raise funds. We determine which ideas get traded in equilibrium, compare this to the efficient outcome, and discuss policy implications. We also discuss several special aspects of ideas, as opposed to generic consumption goods: e.g. they are intermediate inputs; they are indivisible; and they are at least partially public (nonrivalous) goods.

Abstract

In an industry where two regulated upstream firms sell local network interconnection to long distance downstream firms, we answer the question of how access should be priced and how market variables influence this price. Unlike much of the literature on vertical integration, this study does not assume that local access is a natural monopoly. Instead we assume that there are two upstream regulated firms, both with private information about their own costs. The regulatory agency solves a multiagent-principal problem in which it chooses the optimum access price. The results obtained under this assumption are compared to the ones obtained when the upstream firms are prohibited to compete in the downstream market. The access price in such case is lower than one in the original problem, where these firms participate in the downstream market.