Public or Private Venture Capital?

Abstract

The United States has an unparalled entrepreneurial ecosystem. Silicon Valley startups commercialize cutting-edge science, create plentiful jobs, and spur economic growth. Without angel investors and venture capital funds (VCs) willing to gamble on these high-risk, high-tech companies, none of this would be possible. From a law-and-economics perspective, startup investing is incredibly risky. Information asymmetry and agency costs abound. In the U.S., angels and VCs successfully mitigate these problems through private ordering and informal means. Countries without our robust private venture capital system have attempted to fund startups publicly by creating junior stock exchanges. These exchanges have been largely failures, however, in part because they have unsuccessfully relied on mandatory disclosure and other tools better suited to mitigating investment risks in established public companies. The U.S.’s relative success in supplying private venture capital makes our recent infatuation with crowdfunding curious. Fortunately, while crowdfunding was originally designed to resemble public venture capital, with “funding portals” acting as the junior stock exchanges, its final implementing rules took important steps back toward the private venture capital model.