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VC Funds: Aging Brings Myopia

Published online by Cambridge University Press:  04 January 2011

Eugene Kandel ,
Dima Leshchinskii  and
Harry Yuklea
Eugene Kandel
Affiliation:
Department of Economics and Business School, Hebrew University of Jerusalem, Mount Scopus, Jerusalem 91905, Israel. [email protected]
Dima Leshchinskii
Affiliation:
Menlo College, 1000 El Camino Real, Atherton, CA 94027. [email protected]
Harry Yuklea
Affiliation:
Business School, Hebrew University of Jerusalem, Mount Scopus, Jerusalem 91905, Israel. [email protected]
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Abstract

We study the conflict of interests between the limited partners (LPs) and the general partner (GP) in a venture capital (VC) fund with a limited life span. LPs commit money, while the GP selects and monitors projects. Midway into the project, the GP privately observes the project’s quality and the estimated time to exit. The fund’s limited time horizon and the GP’s informational advantage lead to inefficient decisions at this stage. First, the GP continues bad projects. Second, he may stop monitoring good, but delay-prone projects. We provide empirical predictions and illustrative evidence that the magnitude of the effect is significant.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 46 , Issue 2 , April 2011 , pp. 431 - 457
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2011

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