On The Principal - Agent Problems Of Venture Capital

The contribution of modern economics research lies in applying the principle and method of economics to analyze, interpret and suggest the novelty in the economic field, thereby further enhancing the welfare of human beings. In the last 10 years, nothing could be more appealing than the rise of new information technology represented by the Internet, which is and will be comprehensively changing the life style of human beings. To examine from the financial perspective, the key to effect information economy tide is the operation and maturation of venture capital utilization, which perfectly adapts to the development laws of high-tech enterprises. Increasingly standardized operation process, developed financial market, as well as abundant financial tools ensure that investors are able to have the stable expectance on the repayment of venture capital, therefore combine the venture capital with the capital-short entrepreneurs, who own the new technology or operating creation, under such circumstances, lots of prestigious enterprises have come in to being by market screening. The mam problem of venture capital mechanism is how to solve the highly asymmetrical information between the investors and entrepreneurs, and the high market risk that they all confront. This dissertation applies the modem enterprise theory and financial theory to detailed analysis the principal-agency problem among the venture capital firms, hoping for explaining the rationality and effectiveness of the theory of the venture capital firm operation style; and putting forward the corporate structure problem which should put forth effort to be solved as developing venture capital in China.This dissertation firstly introduces the origin and current situation of capital venture and gives a minute description of operating process and mechanism of capital venture. It advances principal-agency problem as introducing organizational makeup of venture capital. Because of the highly asymmetrical information between the investors and venture capitalists as well as between venture capitalists and entrepreneurs, how to use the contract design and system arrangement to solve the principal-agency relations so as to avoid the opportunism of agent has become the core issue in the venture capital field.The second chapter of this dissertation summarizes the economical organization theory in the new institutional economics. Michael Jensen & William Mechling have defined the principal-agency problem as an explicit or implicit contract. According to it, one or more subjects assign or employ the other subjects to supply services, and in due course, entrust the decision rights to the latter, and give appropriate reward according to the quantities and qualities of the services. Among the three parties in the venture capital, both the relationships between the investor & venture capitalist and the relationship between the venture capitalist & entrepreneur are principal-agency relationship. What counts to solve the principal-agency problem is supervision and incentive. Then, this dissertation introduces theory of incentive compatibility and theory of entrepreneurs' market, as well as an explicit and implicit contract theory. Any mature market is a repeated game playing market, hi the company divorce of management from the ownership, the manager is restrained by the enterprise inside and by the managers market outside. Because the reputation plays very important role in this market, it is difficult for a poor-performance manager to find anotherposition. Considering long-term reputation, venture capitalists will restrain their behaviors to avoid short-term act.Then, this dissertation analyzes the principal-agent problem between the investors & venture capitalists, and between the venture capitalists & entrepreneurs. As to the investors, reputation market and exit mechanism are the core for judging the credibility of venture capitalists. The implicit contract between the investor and venture capitalist based on reputation and the explicit contract, which dema...