How Managers’ Compensation, Strategy, and Institutional Environment Motivate Entrepreneurial Financing Choices: Some Evidence from Venture Capital Firms

Abstract

Using a database combining survey responses and archival data on 32 venture capital (VC) firms, the authors test whether professional compensation, strategy, and institutional environment affect entrepreneurial financing practices, such as contractual term choice and deal source choice. The results suggest that contract design fundamentally depends on the VC manager’s compensation system (particularly, carried interest compensation), the investor’s leadership in investment syndications, and the institutional environment. VC firms significantly tend to require control rights and liquidation rights in country’s with poor investor protection. The results also show that selection of deal sources depends on co-investment options, investment stage preference, leadership in investment syndications, and industry expertise.

TOPICS: Private equity, portfolio construction, manager selection, statistical methods