The structure and governance of venture capital finance in developing countries

The research herein reports on the structure and governance of venture capital finance in developing countries. Chapter 2 presents and analyses data on venture capital in developing countries assembled as part of the research. The data is gathered from two main sources. First, data was gathered from regional venture capital industry associations. This data covers the venture capital industry in 19 developing countries in mainly the East Asian and Central European regions and details sources and uses of venture financing flows by industry, type of investing institution, and stage of venture investment. Second, a survey was administered for this research under the auspices of the World Bank - IFC on the portfolio structure of some 300 investments made by 50 venture capital funds in 15 developing countries. The survey data comprises details on fund organization, deal screening, capital structure, agency cost characteristics of asset structure, measures of entrepreneur human capital and investment monitoring and control. An appendix to chapter 2 describes the survey design and implementation.; In Chapter 3 several of the contract theoretic models of venture capital are tested empirically. First, the predictions of Jensen and Meckling's (1976) agency theory of capital structure and agency theories dealing with measures of human capital are tested in a simultaneous equations framework. Next, simple tests of the prediction of an incomplete contracting model of venture capital finance are performed. This model holds that venture capitalists' control rights should co-vary negatively with their equity share in cross section. Finally, the implications of Holmstrom and Milgrom's (1994) multi-tasking agency model in the venture capital context are tested with both standard and novel methods.; Finally, Chapter 4 presents a theoretical model of a two staged venture investment process. The model explores the relative merits of different organizational forms in venture capital finance within an incomplete contracting framework. Under incomplete contracts, the ex-ante NPV of the venture is reduced because agents are unable to commit to efficient ex-post continuation decisions and the allocation of control matters. A corporate investor that receives strategic benefits from the venture investment may be preferred since these benefits serve to align interests in the continuation decision and improve project viability.