Department of Economics
University of Chicago
1126 E. 59th St.
Chicago, IL 60637
NBER Working Papers and Publications
|January 2007||On the Return to Venture Capital|
with Boyan Jovanovic: w12874
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.