A Soft Budget Constraint Explanation for the Venture Capital Cycle

Arbeitspapier

We explore why venture capital funds limit the amount of capital they raise and do not reinvest the proceeds. This structure is puzzling because it leads to a succession of several funds financing each new venture which multiplies the well known agency problems. We argue that an inside investor cannot provide a hard budget constraint while a less well informed outsider can. Therefore, the venture capitalist delegates the continuation decision to the outsider by ex ante restricting the amount of capital he has under management. The soft budget constraint problem becomes the more important the higher the entrepreneur's private benefits are and the higher the probability of failure of a project is.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: SFB/TR 15 Discussion Paper ; No. 173

Classification and Topics

• Classification: Wirtschaft ; Investment Banking; Venture Capital; Brokerage; Ratings and Ratings Agencies ; Capital Budgeting; Fixed Investment and Inventory Studies; Capacity ; Asymmetric and Private Information; Mechanism Design
• Subject: Contract Theory ; Corporate Finance ; Venture Capital

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Gebhardt, Georg
• Event: Veröffentlichung
• (who): Sonderforschungsbereich/Transregio 15 - Governance and the Efficiency of Economic Systems (GESY)
• (where): München
• (when): 2006

Further information

• DOI: doi:10.5282/ubm/epub.13378
• Handle: http://hdl.handle.net/10419/94132
• URN: urn:nbn:de:bvb:19-epub-13378-8
• Last update: 10.03.2025, 11:45 AM CET