Based On The Empirical Study Of Bilateral Moral Hazard, Venture Capital Portfolio Size

As a new investing and financing system, venture capital plays an important role in promoting rapid development of new high-tech enterprises. Unlike regular investors, except providing funds, venture capitalists (VCs) are actively involved in the management of their portfolio companies. VCs also provide assistance with strategic and operating planning, management recruitment, market, and obtaining additional capital. The success of an enterprise needs the efforts of both VCs and entrepreneurs, however, in most cases, the parties'effort levels are unobservable/nonverifiable and noncontractible, and thus, the relationship between VCs and entrepreneurs are characterized by double-sided moral hazard. Moreover, VCs'time and energy are limited, so they could not invest too many enterprises. Thus,it is impartment for VCs to determine an optimal portfolio size to maximize their expected net income. This paper, we try to analyze VCs'optimal portfolio size.The main contexts contain three parts: firstly, we introduce the basic concepts,characteristics, main participation bodies and the decision process of venture capital; then we review related theory researches for venture capital based on double-side moral hazard between VCs and entrepreneurs. Secondly, we introduce the theoretical model on VCs'portfolio size and the profit sharing rules which is proposed by Bernile, Cumming and Lyandres (2007). According to the first-hand data we received through three rounds of total coverage survey on VC funds registered in Mainland China. Then we analyze the impact of different fund sources and different countries on the portfolio, we empirically test the conclusions of the model.Thirdly, according to the comparative and empirical research, based on practical situation in China, we make some suggestions on VC's operating mechanism and operative environment.There are three main conclusions in our paper:(1) VC's portfolio size significantly varies non-monotonically with entrepreneurs'profit shares. VC's portfolio size is first increasing when entrepreneurs'profit share is low and then decreasing when it is high;(2) entrepreneurs'profit share is significantly positive related with VC's portfolio size; (3) the government-sponsored VCs invest more venture firms but retain less profit shares ,but they invested less seeds.