A Working Paper (A Co-work with Baruch, Shmuel and Yung, Chris)
“Innovations and the Ownership Structure of VC-Backed Startups ”
Abstract
We demonstrate an irrelevance result akin to Modigliani and Miller’s seminal work in the context of a non-public startup. The startup is jointly owned by two entities, an entrepreneur and a venture capitalist (VC), with varying interests and bargaining power. Remarkably, our findings reveal that the division of ownership does not impact the startup’s ability to maximize innovation efficiency. Regardless of how ownership is initially allocated, the startup consistently achieves optimal outcomes in terms of innovation.
A Working Paper (A Co-work with Baruch, Shmuel and Yung, Chris)
“Skills and Bargaining Power in Venture Capital Markets”
Abstract
The venture capital literature reports fluctuations in bargaining power, as market conditions sometimes favor entrepreneurs (“money chasing deals”) and other times favor VCs. We model the determinants of bargaining power as a function of i) project characteristics, ii) public market valuations, and iii) distribution of skills in the economy (i.e., the extent to which it is difficult to imitate incumbents). Our model provides novel predictions about the risk and return of incumbents and new entrants, the timing of project success or failure, and the differences between short-run and long-term venture fund return dynamics.
A Working Paper (A Co-work with Ryu, Doojin)
“Dynamic Model of Government-Backed Venture Capital”
Abstract
The literature lacks a unified stance on the efficiency and performance of government investments in venture capital industries compared to private investments. We present a theoretical framework to elucidate the divergent empirical results concerning the effectiveness of government-backed venture capital (GVC) investments. The dynamic negotiations over ownership allocation between the startup’s entrepreneur and the venture capitalist (VC) serve as a pivotal mechanism through which a VC’s incentives influence the startup’s operations. Within this equilibrium, the structure of the public-private partnership within a startup shapes its investment decisions and outcomes. When a GVC investor assumes an active role as a general partner during the project's growth, the startup internalizes social welfare considerations, resulting in outcomes that align with societal objectives but may fall short of economic optimality. Conversely, when a GVC investor adopts a relatively passive role as a non-dilutive limited partner and collaborates with a private VC investor (syndication), the startup attains economic optimality as decisions are guided solely by consensus among private entities. These insights are instrumental in reconciling the conflicting observations regarding the impact of GVC participation on the crowding in or out of private investors.
A Working Paper (A Co-work with Baruch, Shmuel and Yung, Chris)
“Creative Destruction in Cold Markets: A Theory of Radical Innovation and Market Cycles”
Abstract
We model how market conditions influence entrepreneurial decision making, focusing on the hidden action problems of tenacity and ambition. Tenacity reflects the lower boundary at which entrepreneurs terminate failing projects, while ambition represents the upper boundary at which they continue pushing for exceptional outcomes, even after achieving success. The model demonstrates that in cold markets, entrepreneurs adjust these thresholds to generate skewed outcomes, characterized by more frequent failures but rare transformative successes. These results provide a framework for understanding how information frictions shape innovation dynamics and explain the emergence of radical innovations, particularly in early-stage startups during economic downturns.
A Work in Progress (A Co-work with Li, Fan and Yang, Hisan)
“On Exploitative Homophily in Venture Capital Markets”
Abstract
In a venture capital-backed startup, a collaboration between entities with similar ethnic or cultural backgrounds (co-ethnicity) accompanying low transaction costs can drive an exploitative relationship and contract terms arising from low expenses to fix potential frictions of interests. This paper uses theoretical and empirical methods to study how the ethnic and cultural closeness between VC market participants affects their contract terms and generates exploitative relations, amplifying hold-ups.