The role of smart money: What drives venture capital support and interference within biotechnology ventures?

Abstract

It is a well established fact that venture capitalists become actively involved with their portfolio firms in order to encourage a start-up's successful development. Thereby, the involvement consists of two very distinct activities: first, Vcs support the entrepreneurs, for example by providing contacts to potential customers. But second, Vcs also monitor the management's actions and if necessary actively interfere with the management's decisions. The aim of this paper is to disentangle the overall involvement of Vcs into support and interference and separately investigate the individual drivers for both activities.• An analysis of modern finance-theoretical predictions does not yield any significant results as long as only the overall involvement of the Vcs is considered. only a separation of the involvement into the dimensions of support and interference allows conclusions based on principal-agent and control rights theory. • The derived results of the separate analysis are largely in line with the agency-theory and the signalling approach of Dessein (2005). • government co-financing schemes that provide funds in the form of debt-like instruments clearly decrease the Vcs' incentives to monitor the activities of their portfolio companies while they have no effect on the extent of support provided.

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