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Advice and monitoring in venture finance

  • Political Science


TILEC disc paper TILEC Discussion Paper TILEC 1 ADVICE AND MONITORING IN VENTURE FINANCE * Douglas Cumming School of Banking and Finance University of New South Wales Sydney, NSW 2052 Australia Tel: +61 (0)2 9385 5709 Fax: +61 (0)2 9385 6347 Email: [email protected] Web: Sofia Atiqah binti Johan Universiteit van Tilburg Privaatrecht, Faculty of Law Postbus 90153 5000 LE Tilburg The Netherlands Tel: +31(0)13 466 3607 Fax: +31(0)13 466 2323 Email: [email protected] This draft: 4 February 2005 * We owe special thanks to the venture capital funds for providing the data, and to the seminar participants at the University of Amsterdam, the University of British Columbia Sauder School of Business, and the University of Cambridge Judge Institute of Management for comments and suggestions. This paper is scheduled for presentation at the Rensselaer Lally School of Management and Technology (February 2005) and the Singapore Management University EDGE Conference on Entrepreneurship (July 2005). Any errors and/or omissions are our own. ADVICE AND MONITORING IN VENTURE FINANCE Abstract This paper studies the advising and monitoring activities of 14 European venture capitalists (VCs) in 74 entrepreneurial firms. We distinguish between VC advising versus monitoring activities based on the congruence versus dissonance with entrepreneurial interests. The data indicate that the allocation of greater cash flow and control rights to the VCs gives rise to more intensive VC advice, but not more intensive monitoring. VC monitoring is attributable to the need for monitoring due to entrepreneurial firm-specific characteristics. The data further indicate a strong effect of portfolio size on both advice and monitoring, consistent with recent theoretical work on the optimal siz

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