Font Size: a A A

The Efficiency Of The Venture Capital Fund

Posted on:2002-08-17Degree:MasterType:Thesis
Country:ChinaCandidate:H Q TianFull Text:PDF
Abstract/Summary:PDF Full Text Request
Venture capital is equity capital,which is invested in start-up firms of high growth potentiality. Venture investment,first appeared in the U.S.,is essential for the U. S. to maintain its leading edge in high-tech sector as well as fast growing national economy with relatively lower inflation and unemployment rates in the past decade. Venture investment has been growing rapidly in recent years in China owing to the encouragement from both the central and local governments. Government-controlled venture capital's operating mechanism and efficiency,however,are far from mature compared with industrialized nations' venture capital funds. This immaturity,to some extent,is hindering the development of venture investment in China.Since venture capital invests mainly in start-up firms whose products or services are innovative and operation history is short,the problem of information asymmetry and efficiency loss is striking. In order to minimize the loss,an investor must solve the sorting and incentive problems in the process of investment The most effective way is to entrust said tasks to an investment agent. In practice,venture capital funds,which are gathered by outside investors and managed professionally by venture capitalists,act as the investment agent. As a result,the sorting and incentive problems between investors and enterprises are divided into two levels. One level is between investors and venture capitalists and the other is between venture capitalists and start-ups. The efficiency of venture capital fund (investment agent) is thus determined by its effectiveness to solve the sorting and incentive problems. Agency theory is applied to analyze the efficiency of venture capital funds in the U.S. when solving sorting and incentive problems. On the basis of comparison,the efficiency loss in Chinese venture investment as well as its causes are discussed. A conclusion is reached that institutional innovation is essential to improve the efficiency. Several suggestions are provided for the Chinese venture capital funds to develop and improve their efficiency.There are four parts in this paper. The first part introduces the history,basic concepts and characteristics of venture investment. It focuses on the typical institution format of venture capital fund:limited partnership.The second part analyzes the efficiency loss caused by adverse selection and moral hazard resulting from asymmetric information. Because of this asymmetry,the equilibrium of game between an investor and an entrepreneur usually is that the entrepreneur is apt to report false information. Therefore,the investor's final selection might be the one that is farthest from the real efficiency. Besides,an entrepreneur may lower his effort or seek his own profit at the cost of investors' benefits. Both adverse selection and moral hazard will lower the expected benefits of investor and cause loss of efficiency.Agency theory is applied to discuss the institutional arrangements and efficiency of overseas venture capital funds in solving the sorting and incentive problems which isnecessary for eliminating adverse selection and moral hazard caused by information asymmetry. The venture capital funds introduces a set of innovative institutional arrangements such as signaling mechanism,incentive reward,reputation restriction,use of convertible securities,staged capital infusion and direct management supervision,etc.The fourth part discusses the cause of low efficiency of present state-controlled venture capital corporations. Noting that the low efficiency of government in solving the agency problem in the investment process is the main reason,a conclusion is reached that institutional innovation is essential to improve the efficiency. Several suggestions are provided next for the Chinese to develop venture capital funds and improve its efficiency. After Comparing the different influences on venture capital fund's efficiency by different offering ways,capital sources and institution formats,in consideration of both advantages of limited part...
Keywords/Search Tags:venture capital fund, efficiency, sorting, incentive
PDF Full Text Request
Related items