A General Equilibrium Study of Venture Capitalists' Effort on Entrepreneurship

TL;DR

This paper develops a general equilibrium model to analyze how venture capitalists' effort influences entrepreneurship, highlighting the limited effectiveness of policy incentives without increasing expert supply.

Contribution

It introduces a new model linking venture capitalist effort, entry costs, and policy impacts on startup dynamics, emphasizing the role of expert supply.

Findings

Subsidies alone have limited impact on startup growth.

Increasing expert supply enhances policy effectiveness.

Entry costs significantly influence venture capitalist effort.

Abstract

In this paper, I propose a new general equilibrium model that explains stylized facts about venture capitalists' impact on their portfolio firms. Venture capitalists can help increase firms' productivity, yet they face increasing entry costs to enter. I characterize steady state effort choice, entry threshold, and mass of venture capitalists, and show how they are affected by change in upfront investment, interest rate, and entry costs. The key contribution is that public policy to stimulate startups by subsidizing upfront investments or reducing interest cost have limited success if not accompanied by an increasing supply of experts who can improve business ideas.