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Indulgent angels or stingy venture capitalists? The entrepreneurs' choice

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  • LESHCHINSKII, Dima

Abstract

This paper studies entrepreneurs' choice of investors, who must provide financial capital and effort for projects with externalities. Venture capitalists (VCs) and individual investors (angels) compete to finance the projects. VCs seek to invest into a portfolio of projects, while angels have more slack in how much they invest into one project. In the presence of externalities between projects, VCs can potentially increase the total value of their investment portfolio through better coordination of investment, while some angels behave indulgently and give more financial investment than necessary, earning zero profits in equilibrium. Surprisingly, externalities do not give VCs as much of an advantage as one would expect. Quite often VCs lose out to angels even when this means that some projects will not receive an optimal amount of effort. In the projects they invest in, VCs always make strictly positive profits despite the competition.

Suggested Citation

  • LESHCHINSKII, Dima, 2002. "Indulgent angels or stingy venture capitalists? The entrepreneurs' choice," HEC Research Papers Series 769, HEC Paris.
    • Handle: RePEc:ebg:heccah:0769
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    References listed on IDEAS

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    Cited by:

    1. Heukamp, Franz & Liechtenstein, Heinrich & Wakeling, Nick, 2006. "Do business angels alter the risk-return equation in early stage investments? Business angels as seen by venture capitalists in the German speaking countries," IESE Research Papers D/655, IESE Business School.

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    More about this item

    Keywords

    investment choice; venture capitalist; angel; project financing;
    All these keywords.

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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