On the Return to Venture Capital
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NBER Working Paper No. 12874
Issued in January 2007
NBER Program(s): PR CF
We provide a model that links the high return to venture equity to the impatience of the VCs. VCs are scarce, and hence, they have market power and a high return on their investments. As a result, VCs are eager to terminate non-performing ventures so 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. We estimate the model and back out the return of solo entrepreneurs which is always below that of the return of VCs.
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This paper was revised on September 26, 2007 Acknowledgments
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