23 - Summary and Concluding Remarks

Abstract

This chapter summarizes and concludes the main issues covered in this book. This book is the first of its kind in the literature on venture capital and private equity to focus its theme specifically on the financial contracting between parties in venture capital and private equity. One of the primary reasons for the existence of specialized venture capital and private equity funds is the occurrence of information asymmetries and agency costs. If idiosyncratic risks could be diversified away and/or information asymmetries and agency costs were not present, there would be little scope for venture capital and private equity fund managers to provide value in ways that extend beyond that which banks or other sources of capital do for private and entrepreneurial firms. Part I of this book provided an extended review of agency theory in the context of financial contracting with a focus on security design. With the empirical and international focus of this book, Chapter 3 reviewed institutional and legal differences across the countries considered, and reviewed the empirical methods used in the data analyses in each of the chapters of this book. In Part II of this book, we showed that contracts are extremely important for limited partnership funds that act as financial intermediaries between institutional investors and their investee entrepreneurial firms. Part III of this book focused on the relationship between fund managers and investee entrepreneurial firms. Part IV of this book considered the impact of financial contracts on the advice and monitoring provided by venture capital fund managers, as well as scope of disagreement with the investee. Finally, in Part V we explained the central role of divestment or “exit” to the venture capital and private equity investment process. We also showed the ways in which valuations of unexited investments are reported to institutional investors depends significantly on contractual structures between the fund and its investee entrepreneurial firms.