1. Financing Risky R&D Projects under Asymmetric
Information
Research Thesis
Submitted in Partial Fulfillment of the Requirements for the
Degree of Master of Science in Economics
Submitted to the Senate of the Technion
Israel Institute of Technology
University of Haifa – The Graduate School
Tevet 5777 Haifa January 2007

2. Financing Risky R&D Projects under Asymmetric
Information
Research Thesis
Submitted in Partial Fulfillment of the Requirements for the
Degree of Master of Science in Economics
Lev Noppe
Submitted to the Senate of the Technion
Israel Institute of Technology
University of Haifa – The Graduate School
Tevet 5777 Haifa January 2007
Approved By ________________________________ Date ____________
Supervisor
Approved By ________________________________ Date ____________
Dean Of Graduate School Technion
Approved By ________________________________ Date ____________
Dean Of Graduate School
University Of Haifa
Approved By ________________________________ Date ____________
Chairman Of M.A / Doctorate
Committee Department Of Economics

3. The Research Theses Were Carried Out
Within The Framework
Of The Joint Program In Economics
Of The Technion – Israel Institute Of Technology
And The University Of Haifa
Under The Supervision of
Professor Dan Peled

4. Table Of Contents
Chapter 1: Introduction ............................................................................................ 1
1.1 Goals and purposes of the work.......................................................................... 1
1.2 Venture capital................................................................................................... 2
1.2.1 VC in financing R&D...................................................................................... 2
1.2.2 Organizational aspects of VC activity.............................................................. 4
1.3 Informational asymmetry in the VC market........................................................ 6
1.4 Description of the work...................................................................................... 8
1.5 Results of the work........................................................................................... 10
Chapter 2. A Model with Endogenous Investments ................................................ 14
2.1 The Market Environment.................................................................................. 14
2.2 Benchmark case: Equilibrium with single project type...................................... 15
2.3. Equilibrium with heterogeneous projects ......................................................... 17
2.3.1 Full information case..................................................................................... 17
2.3.2 Asymmetric information case ........................................................................ 17
2.3.3 Uniqueness and existence conditions of the separating equilibrium................ 20
2.4. Results of the Chapter...................................................................................... 21
Chapter 3: Entrepreneurial Effort ........................................................................... 22
3.1. Modelling entrepreneurial effort...................................................................... 22
3.2. Equilibrium contracting with homogenous projects ......................................... 24
3.2.1. Observable effort.......................................................................................... 24
3.2.2 Unobservable effort....................................................................................... 25
3.3 Two types of project......................................................................................... 28
3.3.1 Observable type............................................................................................. 29
3.3.2 Unobservable type and effort......................................................................... 31
3.4 Numerical example........................................................................................... 33
3.4.1. Equilibrium contracts in case of observable type and effort........................... 33
3.4.2. ZPIC contract set.......................................................................................... 34
3.4.3 Equilibrium contracts in case of observable type........................................... 34
3.4.4 Equilibrium contracts in case of unobservable types ..................................... 36
3.5 Results of the Chapter ...................................................................................... 38

5. Table Of Contents (Continued)
Chapter 4: Venture Capital Effort........................................................................... 39
4.1. Modeling the impact of VC effort.................................................................... 39
4.2 Single Project Type .......................................................................................... 40
4.2.1. Observable VC effort.................................................................................... 40
4.2.2. Unobservable VC effort................................................................................ 42
4.3 Two types of project......................................................................................... 43
4.3.1. Observable VC effort.................................................................................... 43
4.3.2. Unobservable VC effort................................................................................ 46
4.4 Numerical example........................................................................................... 49
4.5 Results of the Chapter ...................................................................................... 56
Conclusions............................................................................................................57
Bibliography .......................................................................................................... 58

6. List of Tables
Table 3.1 Functions used in the model……………………………………………….. 23
Table 3.2 Functions used in the numerical example…………………………………. 33
Table 3.3 Calculated equilibrium values for full information case…………………... 34
Table 3.4 Calculated equilibrium values for observable type case…………………... 36
Table 3.5 Utilities from the contracts C and D……………………………………….. 37
Table 3.6 Utilities from the contracts F and D……………………………………….. 37
Table 3.7 Equilibrium contracts for the unobservable type case……………………... 38
Table 3.8 Equilibrium contracts for all cases…………………..…………………….. 38
Table 4.1 Functions and parameters used in the numerical example………………… 49
Table 4.2 Calculated equilibrium contracts…………………………………………... 50

7. List of Figures
Figure 2.1: Single Type Equilibrium………………………………………………………. 16
Figure 2.2: The non-existence of pooling equilibrium…………………………………….. 18
Figure 2.3: Separating Equilibrium………………………………………………………… 19
Figure 3.1: The contracting process with unobservable effort……………………………... 27
Figure 3.2: The separating equilibrium with observable type and effort…………………... 29
Figure 3.3: The separating equilibrium with observable type and unobservable effort…… 30
Figure 3.4: ZPIC lines for G and B………………………………………………………… 34
Figure 3.5: Utility value as function of CH
and CL
along ZPIC lines for G and B………… 35
Figure 3.6: Utility value along the ZPIC line………………………………………………. 35
Figure 3.7: The finding of contract set that satisfies ASC constraints……………………... 36
Figure 4.1: Calculated values for three cases………………………………………………. 51
Figure 4.2. Case 2: Choosing effort level………………………………………………...... 51
Figure 4.3. Case 2: Possible G payoff sets (CHG
, CLG
) for different VC effort levels…….. 52
Figure 4.4. Case 3: Choosing effort level.…………………………………………………. 53
Figure 4.5. Case 3: Possible G payoff sets (CHG
, CLG
) for different VC effort levels…….. 54

8. List of Symbols and Abbreviations
GDP - Gross Domestic Product
ICT - information and communications technology
OECD - Organisation for Economic Co-Operation and Development
R&D - research and development
R-S - the model of Rothschild and Stiglitz (1979)
ASC - adverse selection constraint
B - low quality project
CH
- payoff to entrepreneur in case of high outcome of the project
CL
- payoff to entrepreneur in case of low outcome of the project
Cˆ - payoff to entrepreneur in case of unobservable effort
d(e) - effort cost function of venture capitalist
E - entrepreneur
e - effort level exerted by entrepreneur
e*
- equilibrium effort level in case of observable effort
eˆ - equilibrium effort level in case of unobservable effort
e0
- minimal effort level
e1
- maximal possible effort level
G - high quality project
h(e) - disutility of entrepreneur from effort
I*
- entrepreneur's choice of investment size
I0 - initial endowment
I - fixed level of investment
K - set of alternative contracts
MHC - moral hazard constraint

9. List of Symbols and Abbreviations (Continued)
N - venture capitalist’s profits in case of observable effort
Nˆ - venture capitalist’s profits in case of unobservable effort
p - probability of project’s high outcome
p(e) - probability function of the project’s high outcome
q - proportion of high quality projects in the market
RH
- high outcome of the project
RL
- low outcome of the project
s - state of nature, },{ LHs ∈
U(⋅) - utility function of the entrepreneur
VC - venture capitalist
VE
- expected utility of entrepreneur
W - venture capitalist’s profits if he does not fund any risky project
w - part of calculated expected venture capitalist’s profits over W
Y - venture capitalist’s expected net profits
Y-line - venture capitalist’s zero expected profits line
Z(I,R) - outcome function
Z
~ - project gross profit
ZPIC - zero profit incentive compatible contracts set
ψ - equilibrium contract set
∆ - proportion of w that keeps the incentive compatibility constraint

10. Financing Risky R&D Projects under Asymmetric Information
Noppe Lev
Abstract
We develop a model of competitive venture capital market for R&D projects financing
and analyze the conflicts of interest and contracting process in the presence of informational
asymmetry. We consider the effects of different types of informational asymmetries on
equilibrium in these markets. The informational asymmetries can be single and two-sided, and
can include the project’s innate quality, as well as the effort exerted by the inventor and
venture capitalist. Assuming away monitoring of inventors during the R&D process, we study
the equilibrium screening and funding of projects when the only instruments available are ex-
ante self-selection by inventors among funding contracts, which specify investment levels in
the project and ex-post distribution of project’s random returns between the inventor and the
financier. We find that investment levels can be optimal even when the project types are
unobservable to the venture capitalist. The informational asymmetry about both the quality of
project and entrepreneur actions reduces the utility of entrepreneurs with better projects but
increases their efforts and consequently the chances of project success. The informational
asymmetry about venture capitalist’s actions leads to the further decrease of entrepreneurial
utility and to an equilibrium level of effort by the venture capitalist which is lower than the
level that both parties prefer.

11. ‫מו‬ ‫פרויקטי‬ ‫מימון‬"‫פ‬‫תחת‬‫סימטרית‬ ‫לא‬ ‫אינפורמציה‬
‫חיבור‬‫על‬‫מחקר‬
‫לשם‬‫מילוי‬‫חלקי‬‫של‬‫הדרישות‬‫לקבלת‬‫התואר‬
‫מגיסטר‬‫למדעים‬‫בכלכלה‬
‫הוגש‬‫לסנט‬‫הטכניון‬-‫מכון‬‫טכנולוגי‬‫לישראל‬
‫טבת‬‫תשס‬"‫ז‬‫חיפה‬‫ינואר‬2007

12. ‫מו‬ ‫פרויקטי‬ ‫מימון‬"‫פ‬‫תחת‬‫סימטרית‬ ‫לא‬ ‫אינפורמציה‬
‫חיבור‬‫על‬‫מחקר‬
‫לשם‬‫מילוי‬‫חלקי‬‫של‬‫הדרישות‬‫לקבלת‬‫התואר‬
‫מגיסטר‬‫למדעים‬‫בכלכלה‬
‫נופה‬ ‫לב‬
‫הוגש‬‫לסנט‬‫הטכניון‬-‫מכון‬‫טכנולוגי‬‫לישראל‬
‫ט‬‫ב‬‫ת‬‫תשס‬"‫ז‬‫חיפה‬‫ינואר‬2007

13. ‫המחקר‬‫בהנחיית‬ ‫נעשה‬
‫פלד‬ ‫דן‬ ‫פרופסור‬
‫התוכנית‬ ‫במסגרת‬‫לכלכלה‬ ‫המשותפת‬
‫חיפ‬ ‫ובאוניברסיטת‬ ‫בטכניון‬‫ה‬

14. ‫ת‬‫העניינים‬ ‫וכן‬:
‫פרק‬1.‫מבוא‬.................................................................................................................1
1.1‫העבודה‬ ‫מטרות‬.......................................................................................................1
1.2‫סיכון‬ ‫הון‬...............................................................................................................2
1.2.1‫סיכון‬ ‫הון‬‫ל‬‫מו‬ ‫פרויקטי‬ ‫מימון‬"‫פ‬................................................................................2
1.2.2‫סיכון‬ ‫הון‬ ‫קרנות‬ ‫של‬ ‫פעילות‬ ‫של‬ ‫ארגוניים‬ ‫היבטים‬.........................................................4
1.3‫המידע‬ ‫אסימטריות‬‫סיכו‬ ‫הון‬ ‫בשוק‬‫ן‬...............................................................................6
1.4‫המחקר‬ ‫תיאור‬.........................................................................................................8
1.5‫המקר‬ ‫תוצאות‬.......................................................................................................10
‫פרק‬2.‫מודל‬‫עם‬‫השקעו‬‫אנדוגניות‬ ‫ת‬..................................................................................41
2.1‫השוק‬ ‫סביבת‬........................................................................................................41
2.2‫סוג‬ ‫עם‬ ‫משקל‬ ‫שווי‬‫של‬ ‫אחד‬‫פרויקטים‬........................................................................15
2.3‫הטרוגניים‬ ‫פרויקטים‬ ‫עם‬ ‫משקל‬ ‫שווי‬...........................................................................17
2.3.1‫מיד‬‫ע‬‫מלא‬.........................................................................................................71
2.3.2‫א‬ ‫מידע‬‫י‬-‫סימטרי‬.................................................................................................71
2.3.3‫מפריד‬ ‫משקל‬ ‫שווי‬:‫קיום‬ ‫ותנאי‬ ‫מיוחדות‬...................................................................20
2.4‫הפרק‬ ‫תוצאות‬.......................................................................................................21
‫פרק‬3.‫היזם‬ ‫מאמצי‬......................................................................................................22
3.1‫בניית‬‫מודל‬‫עם‬‫היזם‬ ‫מאמצי‬......................................................................................22
3.2‫חוז‬‫י‬‫הומוגניים‬ ‫פרויקטים‬ ‫עם‬ ‫משקל‬ ‫שיווי‬....................................................................24
3.2.1‫מאמ‬‫ץ‬‫נצפ‬‫היזם‬ ‫של‬ ‫ה‬...........................................................................................24
3.2.2‫מאמ‬‫ץ‬‫נצפ‬ ‫לא‬‫היזם‬ ‫של‬ ‫ה‬.......................................................................................25
3.3‫ש‬‫נ‬‫י‬‫סוגי‬‫פרויקט‬‫ים‬.................................................................................................28
3.3.1‫איכות‬ ‫עם‬ ‫משקל‬ ‫שווי‬‫ה‬ ‫של‬ ‫ידועה‬‫פרויקט‬‫ים‬..............................................................29
3.3.2‫איכות‬‫הפרויקט‬‫ומאמ‬‫ץ‬‫היזם‬‫לא‬‫ידועים‬....................................................................31
3.4‫דוגמ‬‫מספרית‬ ‫ה‬......................................................................................................33
3.4.1‫משקל‬ ‫שווי‬ ‫חוזי‬‫כאשר‬‫ומאמ‬ ‫הפרויקט‬ ‫סוג‬‫ץ‬‫היזם‬‫נצפ‬‫ים‬...............................................33
3.4.2‫החוזים‬ ‫קבוצת‬ZPIC.........................................................................................34
3.4.3‫המשקל‬ ‫שווי‬ ‫חוזי‬‫כאשר‬‫סוג‬‫ה‬‫פרויקט‬‫ידוע‬................................................................34
3.4.4‫המשקל‬ ‫שווי‬ ‫חוזי‬‫כאשר‬‫הפרויקט‬ ‫סוג‬‫ידוע‬ ‫לא‬...........................................................36
3.5‫הפרק‬ ‫תוצאות‬.......................................................................................................38

15. ‫העניינים‬ ‫תוכן‬)‫המשך‬(
‫פרק‬4.‫מאמצי‬‫המשקיע‬.................................................................................................39
4.1‫מודל‬ ‫בניית‬‫עם‬‫השפע‬‫ה‬‫של‬‫המשקיע‬ ‫מאמצי‬..................................................................39
4.2‫מ‬ ‫פרויקטים‬‫סוג‬‫א‬‫חד‬...............................................................................................40
4.2.1‫מאמ‬‫ץ‬‫נצפ‬‫ה‬ ‫של‬ ‫ה‬‫משקיע‬......................................................................................40
4.2.2‫מאמ‬‫ץ‬‫נצפ‬ ‫לא‬‫של‬ ‫ה‬‫המשקיע‬..................................................................................42
4.3‫פרויק‬ ‫סוגי‬ ‫שני‬‫טים‬.................................................................................................43
4.3.1‫מאמ‬‫ץ‬‫נצפ‬‫ה‬‫של‬‫המשקיע‬......................................................................................43
4.3.2‫מאמ‬‫ץ‬‫נצפ‬ ‫לא‬‫ה‬‫של‬‫המשקיע‬..................................................................................46
4.4‫מספרית‬ ‫דוגמה‬.....................................................................................................49
4.5‫הפרק‬ ‫תוצאות‬.......................................................................................................56
‫ומסקנות‬ ‫סיכום‬............................................................................................................57
‫מקורות‬ ‫רשימת‬............................................................................................................58

16. ‫טבלאות‬ ‫רשימת‬
‫טבלת‬3.1‫במודל‬ ‫המשמשות‬ ‫הפונקציות‬................................................................................23
‫טבלת‬3.2‫הפונקציות‬‫המשמשות‬‫בדוגמה‬‫המספרית‬.................................................................33
‫טבלת‬3.3‫ב‬ ‫מימון‬ ‫חוזי‬‫שווי‬‫משקל‬‫מלא‬ ‫מידע‬ ‫עם‬....................................................................34
‫טבלת‬3.4‫חוזי‬‫שווי‬‫משקל‬‫כאשר‬‫איכות‬‫הפרויקט‬‫ידועה‬..........................................................36
‫טבלת‬3.5‫תועלות‬‫מחוזים‬C‫ו‬-D........................................................................................37
‫טבלת‬3.6‫תועלות‬‫מחוזים‬F‫ו‬-D........................................................................................37
‫ט‬‫בלת‬3.7‫חוזי‬‫שווי‬‫משקל‬‫במקרה‬‫של‬‫של‬ ‫ידועות‬ ‫לא‬ ‫איכויות‬‫ה‬‫פרויקט‬‫ים‬..................................38
‫טבלת‬3.8‫חוזי‬‫שווי‬‫משקל‬:‫מסכמת‬ ‫טבלה‬.............................................................................38
‫טבלת‬4.1‫הפונקציות‬‫והפרמטרים‬‫המשמשים‬‫בדוגמה‬‫המספרית‬‫למודל‬‫זה‬..................................49
‫טבלת‬4.2‫חוזי‬‫שווי‬‫משקל‬.................................................................................................50

17. ‫רשימת‬‫ציורים‬
‫ציור‬2.1‫שווי‬‫משקל‬‫עם‬‫פרויקט‬‫זהים‬ ‫ים‬..............................................................................16
‫ציור‬2.2‫אי‬-‫קיום‬‫שווי‬‫משקל‬‫מאחד‬....................................................................................18
‫ציור‬2.3‫מפריד‬ ‫משקל‬ ‫שווי‬...............................................................................................19
‫ציור‬3.1‫כריתת‬‫חוזה‬‫במקרה‬‫של‬‫מאמצים‬‫לא‬‫נצפים‬..............................................................27
‫ציור‬3.2‫שווי‬‫משקל‬‫מפריד‬‫איכ‬ ‫כאשר‬‫ו‬‫הפרויקט‬ ‫ת‬‫ומאמצי‬‫היזם‬‫ידועים‬....................................29
‫ציור‬3.3‫שווי‬‫משקל‬‫מפריד‬‫הפרויקט‬ ‫איכות‬ ‫כאשר‬‫ידוע‬‫ומאמ‬‫ץ‬‫היזם‬‫לא‬‫נצפ‬‫ה‬............................30
‫ציור‬3.4‫קווי‬‫קבוצות‬ZPIC‫לסוגי‬‫הפרויקט‬G‫ו‬-B..............................................................34
‫ציור‬3.5‫תועלת‬‫היזמים‬‫כפונ‬‫קציה‬‫של‬CH
‫ו‬-CL
‫בקבוצות‬ZPIC‫פרויקט‬ ‫לסוגי‬G‫ו‬-B.................35
‫ציור‬3.6‫תועלת‬‫היזמים‬‫בקבוצות‬ZPIC‫פרויקט‬ ‫לסוגי‬G‫ו‬-B.................................................35
‫ציור‬3.7‫מציאת‬‫קבוצ‬‫ו‬‫ת‬‫החוזים‬‫מגבלת‬ ‫המקיימים‬‫שלילית‬ ‫בחירה‬ ‫אילוץ‬....................................36
‫ציור‬4.1‫החישוב‬ ‫תוצאות‬‫ל‬‫שלושה‬‫המקרים‬.........................................................................51
‫ציור‬4.2‫מקרה‬2:‫בחירת‬‫רמת‬‫המאמץ‬................................................................................51
‫ציור‬4.3‫מקרה‬2:‫צירופי‬‫התשלומים‬‫האפשריים‬(CHG
, CLG
)‫למאמצים‬‫שונים‬.........................52
‫ציור‬4.4‫מקרה‬3:‫בחירת‬‫רמת‬‫המאמ‬‫ץ‬...............................................................................53
‫ציור‬4.5‫מקרה‬3:‫צירופי‬‫התשלומים‬‫האפשר‬‫יים‬(CHG
, CLG
)‫למאמצים‬‫שונים‬.........................54

18. ‫פרויקט‬ ‫מימון‬‫י‬‫מו‬"‫פ‬‫תחת‬‫סימטרית‬ ‫לא‬ ‫אינפורמציה‬
‫המחבר‬ ‫שם‬:‫נופה‬ ‫לב‬
‫תקציר‬
‫מנ‬ ‫אנחנו‬‫ת‬‫מו‬ ‫פרויקטי‬ ‫למימון‬ ‫תחרותי‬ ‫סיכון‬ ‫הון‬ ‫שוק‬ ‫של‬ ‫מודל‬ ‫חים‬"‫את‬ ‫ובוחנים‬ ‫פ‬‫ניגוד‬‫ה‬‫אינטרסים‬
‫ותהליך‬‫חתימת‬‫החוזה‬‫אי‬ ‫בתנאי‬-‫סימטרי‬‫המיד‬ ‫ות‬‫ע‬‫שונים‬ ‫מסוגים‬.‫המידע‬ ‫אסימטריות‬‫להיות‬ ‫יכולה‬
‫חד‬-‫א‬‫ו‬‫דו‬-‫צדדי‬‫ת‬,‫ו‬‫בא‬‫ה‬‫יש‬ ‫הצדדים‬ ‫לשני‬ ‫או‬ ‫לאחד‬ ‫שבהם‬ ‫במצבים‬ ‫ביטוי‬ ‫לידי‬‫מידע‬‫איכות‬ ‫על‬ ‫פרטי‬
‫פעולות‬ ‫על‬ ‫או‬ ‫הפרויקט‬‫ידו‬ ‫על‬ ‫הננקטות‬‫אינ‬ ‫אשר‬‫ן‬‫ידוע‬‫ות‬‫אחר‬ ‫לצד‬.
‫הפרויקטים‬ ‫מימון‬ ‫של‬ ‫מוקדמים‬ ‫בשלבים‬ ‫מתמחות‬ ‫סיכון‬ ‫הון‬ ‫קרנות‬.‫שונה‬ ‫האלה‬ ‫פרויקטים‬ ‫של‬ ‫מימון‬
‫אי‬ ‫עקב‬ ‫המימון‬ ‫פעילויות‬ ‫של‬ ‫אחרים‬ ‫מסוגים‬ ‫משמעותי‬-‫ודאות‬‫התחלית‬‫וקשיי‬ ‫הפרויקט‬ ‫תוצאות‬ ‫לגבי‬
‫שלו‬ ‫המסחרי‬ ‫הפוטנציאל‬ ‫הערכת‬.‫כן‬ ‫על‬ ‫יתר‬,‫על‬ ‫ההשפעה‬ ‫בין‬ ‫להפריד‬ ‫קשה‬ ‫מעשה‬ ‫לאחר‬ ‫גם‬
‫מחד‬ ‫המקורית‬ ‫איכותו‬ ‫של‬ ‫הפרוייקט‬ ‫תוצאות‬,‫ניתנים‬ ‫הבלתי‬ ‫המאמצים‬ ‫ושל‬‫לצפיי‬‫ה‬‫ושל‬ ‫היזם‬ ‫של‬
‫מאידך‬ ‫הפרוייקט‬ ‫במהלך‬ ‫המסייע‬ ‫המממן‬.‫יוצרים‬ ‫אלה‬ ‫גורמים‬‫אי‬-‫סימטריות‬‫ההתקשרות‬ ‫על‬ ‫המקשה‬
‫הצדדים‬ ‫בין‬ ‫החוזית‬.
‫על‬ ‫להתגבר‬ ‫להן‬ ‫שמאפשרות‬ ‫סיכון‬ ‫הון‬ ‫קרנות‬ ‫של‬ ‫המיוחדות‬ ‫התכונות‬ ‫מהן‬‫ה‬‫ולהתחרות‬ ‫האלה‬ ‫בעיות‬
‫אחרים‬ ‫פיננסיים‬ ‫ארגונים‬ ‫עם‬ ‫בהצלחה‬‫מ‬ ‫פרויקטי‬ ‫במימון‬‫ו‬"‫פ‬?‫זה‬ ‫בתחום‬ ‫אמפיריים‬ ‫מחקרים‬
‫מדו‬‫ו‬‫על‬ ‫חים‬‫ה‬‫סיכון‬ ‫הון‬ ‫קרנות‬ ‫של‬ ‫הבאות‬ ‫דרכים‬‫מ‬ ‫הנובעות‬ ‫בעיות‬ ‫לפתרון‬‫אי‬-‫סימטריות‬‫במידע‬:
‫תהליך‬‫כתיבת‬ ‫של‬ ‫מיוחד‬‫ה‬‫חוז‬‫ה‬,‫מימון‬ ‫לפני‬ ‫סינון‬,‫בניהול‬ ‫והשתתפות‬ ‫המימון‬ ‫בשלבי‬ ‫ניטור‬
‫הפרויקט‬.‫לבדוק‬ ‫מיועדת‬ ‫שלנו‬ ‫העבודה‬‫ה‬ ‫את‬‫סיכו‬ ‫הון‬ ‫קרנות‬ ‫של‬ ‫יכולת‬‫שונים‬ ‫סוגים‬ ‫על‬ ‫להתגבר‬ ‫ן‬
‫של‬ ‫המוקדמים‬ ‫בשלבים‬ ‫המידע‬ ‫בעיות‬ ‫של‬‫ה‬‫מימון‬.
‫בעבודה‬‫זו‬‫מידע‬ ‫עם‬ ‫סיכון‬ ‫הון‬ ‫קרנות‬ ‫של‬ ‫תחרותי‬ ‫שוק‬ ‫מודל‬ ‫מנתחים‬ ‫אנחנו‬‫בין‬ ‫סימטרי‬ ‫לא‬
‫הצדדים‬.‫פרויקטים‬ ‫של‬ ‫מוקדם‬ ‫סינון‬ ‫בוחנים‬ ‫אנחנו‬‫ומאפייני‬‫החוז‬‫ים‬,‫התעלמות‬ ‫תוך‬‫מניטור‬‫או‬
‫מימון‬‫ה‬‫בשלבים‬ ‫פרויקט‬‫בה‬‫ביניים‬ ‫בתוצאות‬ ‫תלוי‬ ‫הפרויקט‬ ‫מימון‬ ‫המשך‬ ‫ם‬.‫דבר‬‫זה‬‫מאפשר‬‫לנו‬
‫להדגיש‬‫את‬‫חלוקת‬‫ה‬‫סיכו‬‫נים‬‫בין‬ ‫להבחנה‬ ‫כמכשיר‬ ‫למשקיע‬ ‫היזם‬ ‫בין‬‫בעלי‬ ‫פרויקטים‬‫איכו‬‫יו‬‫ת‬
‫שונות‬.‫לאי‬ ‫מתייחסים‬ ‫אנחנו‬ ‫זאת‬ ‫בעבודה‬-‫סימ‬‫טרי‬‫ו‬‫דו‬ ‫ת‬-‫צדדית‬,‫כלומר‬‫בנוסף‬‫של‬ ‫הפרטי‬ ‫למידע‬
‫ה‬‫יזם‬‫על‬‫הפרויקט‬ ‫איכות‬,‫והמאמצים‬‫בהצלחתו‬ ‫משקיע‬ ‫שהוא‬‫בוחנים‬ ‫אנחנו‬‫גם‬‫את‬‫ה‬‫מאמצים‬
‫הבלתי‬‫סיכון‬ ‫הון‬ ‫קרנות‬ ‫של‬ ‫נצפים‬.
‫שלא‬ ‫מעניינת‬ ‫בעיה‬ ‫מעלה‬ ‫זאת‬ ‫גישה‬‫כה‬ ‫עד‬ ‫טופלה‬‫סיכון‬ ‫הון‬ ‫קרנות‬ ‫על‬ ‫בספרות‬:‫מלא‬ ‫מידע‬ ‫חוסר‬
‫המאמץ‬ ‫מידת‬ ‫על‬‫של‬‫המממן‬ ‫הגורם‬)‫סיכון‬ ‫הון‬ ‫קרנות‬(‫וחשיבותה‬‫להצלחת‬‫הפרויקט‬.‫החוקרים‬ ‫רוב‬
‫שאי‬ ‫מניחים‬‫אי‬ ‫ן‬-‫סימטריות‬‫ב‬‫הסיכון‬ ‫הון‬ ‫קרן‬ ‫מצד‬ ‫מידע‬‫עצם‬ ‫שכן‬‫ה‬‫לה‬ ‫גורמת‬ ‫בפרויקט‬ ‫שקעתה‬
‫ל‬‫עש‬‫ות‬‫יכולת‬ ‫כמיטב‬‫ה‬‫להצלחתו‬.‫יעיל‬ ‫לא‬ ‫באופן‬ ‫לפעול‬ ‫עלולה‬ ‫סיכון‬ ‫הון‬ ‫שקרן‬ ‫אפשרות‬ ‫קיימת‬ ‫אבל‬

19. ‫נסיבות‬ ‫עקב‬‫כגון‬ ‫שונות‬‫על‬ ‫מגבלות‬‫משאבים‬‫ניהוליים‬‫ו‬‫פיננסיים‬‫פעולותיה‬ ‫שאר‬ ‫בהינתן‬.‫העובדה‬
‫שת‬‫י‬‫פק‬‫ו‬‫ד‬‫ן‬‫סיכון‬ ‫הון‬ ‫קרנות‬ ‫של‬‫קריטי‬‫למידע‬ ‫רבה‬ ‫חשיבות‬ ‫נותנת‬ ‫הפרויקט‬ ‫להצלחת‬‫ה‬‫של‬ ‫פרטי‬‫הן‬.
‫מראות‬ ‫העבודה‬ ‫תוצאות‬‫ל‬ ‫גם‬ ‫רגיש‬ ‫המשקל‬ ‫ששווי‬‫לגבי‬ ‫היזם‬ ‫ציפיות‬‫ה‬‫פעילויות‬‫הבלתי‬‫של‬ ‫נצפות‬
‫הון‬ ‫קרן‬‫ה‬‫סיכון‬.‫מצב‬ ‫מתארים‬ ‫אנחנו‬‫בו‬‫ולשפר‬ ‫נוספים‬ ‫מאמצים‬ ‫לספק‬ ‫מעונינת‬ ‫סיכון‬ ‫הון‬ ‫קרן‬‫את‬
‫הצלח‬ ‫סיכויי‬‫הפרויקט‬ ‫ת‬,‫משקל‬ ‫בשווי‬ ‫מכך‬ ‫נמנעת‬ ‫אך‬‫לא‬ ‫שלה‬ ‫הכוונות‬ ‫לגבי‬ ‫היזם‬ ‫ציפיות‬ ‫כי‬
‫תומכות‬‫כזו‬ ‫בפעולה‬.
‫את‬ ‫מנתחים‬ ‫אנו‬‫המשקל‬ ‫שווי‬‫ב‬‫שוק‬‫בו‬‫הסיכון‬ ‫הון‬ ‫קרנות‬)VC(‫פרויקטים‬ ‫על‬ ‫מתחרות‬‫בעלי‬
‫איכו‬‫יו‬‫ת‬‫השונ‬‫ות‬‫ידי‬ ‫על‬ ‫שהומצאו‬‫היזמים‬(E).‫פרויקט‬ ‫כל‬,‫להתבצע‬ ‫מנת‬ ‫על‬,‫בהשקעות‬ ‫חייב‬(I)
‫ומ‬‫אמצים‬)e.(‫כל‬‫פרויקט‬‫מפיק‬‫אקראי‬ ‫באופן‬‫אח‬‫ת‬‫התוצאות‬ ‫משתי‬:‫וכשלון‬ ‫הצלחה‬,‫כאשר‬
‫התוצאות‬ ‫התפלגות‬‫תלויה‬ ‫להיות‬ ‫יכולה‬‫ב‬‫ה‬ ‫היקף‬‫השקעה‬‫ההונית‬,‫הפרויקט‬ ‫בסוג‬,‫שהיזם‬ ‫ובמאמצים‬
‫לפרוייקט‬ ‫מקדישים‬ ‫והקרן‬.‫סוגים‬ ‫משני‬ ‫אחד‬ ‫להיות‬ ‫יכול‬ ‫פרויקט‬:G)good(‫או‬B)bad(‫ה‬‫שונים‬
‫ההצ‬ ‫בהסתברות‬‫לחה‬‫ה‬‫תלויה‬‫גם‬‫הצדדים‬ ‫שני‬ ‫של‬ ‫במאמצים‬.‫כל‬VC‫ו‬ ‫לסיכון‬ ‫אדיש‬ ‫הוא‬‫מטפל‬
‫ב‬‫התחרותי‬ ‫בשוק‬ ‫יזמים‬ ‫של‬ ‫גדולה‬ ‫כמות‬,‫ואין‬‫מ‬‫גבלות‬‫ויציאה‬ ‫כניסה‬‫סיכון‬ ‫בהון‬ ‫לעיסוק‬.‫כלומר‬,
‫ה‬‫כל‬ ‫של‬ ‫רווח‬VC‫לרווח‬ ‫שווה‬‫סף‬W)‫אם‬ ‫שלו‬ ‫לרווחים‬ ‫שווה‬‫לשוק‬ ‫ייכנס‬ ‫לא‬ ‫הוא‬(.‫לפי‬‫החוזה‬,
VC‫ה‬ ‫תוצאות‬ ‫כל‬ ‫את‬ ‫מקבל‬‫תשלומים‬ ‫ליזם‬ ‫ומשלם‬ ‫פרויקט‬‫בתוצאות‬ ‫תלויים‬ ‫להיות‬ ‫היכולים‬
‫הפרויקט‬,‫ש‬ ‫כפי‬‫במועד‬ ‫הוגדרו‬‫חתימת‬‫החוזה‬.‫יזם‬ ‫כל‬‫נחשב‬‫ל‬‫סיכון‬ ‫שונא‬,‫פרויקט‬ ‫לו‬ ‫יש‬‫יחי‬‫ד‬‫אשר‬
‫להפעלתו‬ ‫הונית‬ ‫השקעה‬ ‫דרושה‬,‫ל‬ ‫יכול‬ ‫והוא‬‫חוזה‬ ‫חתום‬‫עם‬VC‫בלבד‬ ‫אחד‬.‫כל‬ ‫את‬ ‫מוכר‬ ‫הוא‬
‫ב‬ ‫התלוי‬ ‫התשלום‬ ‫תמורת‬ ‫הפרויקט‬ ‫תוצאות‬‫הצלחת‬‫הפרויקט‬.‫על‬ ‫הצדדים‬ ‫בין‬ ‫ההסכם‬ ‫הוא‬ ‫החוזה‬
‫ה‬‫לבדיקה‬ ‫הניתנים‬ ‫תנאים‬,‫אח‬ ‫בכל‬ ‫התשלומים‬ ‫כלומר‬‫ת‬‫הפרויקט‬ ‫מתוצאות‬,‫וכמות‬ ‫ההשקעות‬ ‫סכום‬
‫צד‬ ‫כל‬ ‫של‬ ‫המאמצים‬)‫ניתנ‬ ‫שהינה‬ ‫בתנאי‬‫ת‬‫לבדיקה‬(.
‫רוטשילד‬ ‫של‬ ‫משקל‬ ‫שווי‬ ‫בניסוח‬ ‫משתמשים‬ ‫אנחנו‬ ‫במודל‬-‫סטיגליץ‬)1976:(‫שיווי‬‫ה‬‫משקל‬‫המפריד‬
‫ה‬‫וא‬‫השקעות‬ ‫חוזי‬ ‫קבוצת‬K*‫ש‬ ‫כך‬:1(‫ב‬ ‫חוזה‬ ‫כל‬-K*‫פחות‬ ‫לא‬ ‫רווחים‬ ‫מפיק‬‫ים‬‫מ‬‫סף‬‫רווח‬W,
‫כש‬‫ה‬‫לבחור‬ ‫יכולים‬ ‫יזמים‬‫באופן‬‫בקבוצה‬ ‫החוזים‬ ‫בין‬ ‫חופשי‬;2(‫חוזה‬ ‫קיים‬ ‫לא‬‫לקבוצה‬ ‫מחוץ‬K*
‫ה‬‫מ‬ ‫פחות‬ ‫לא‬ ‫רווח‬ ‫ומפיק‬ ‫כלשהו‬ ‫ליזם‬ ‫תועלת‬ ‫יותר‬ ‫מפיק‬-W‫למשקיע‬.‫ב‬‫זה‬ ‫מודל‬‫רק‬ ‫קיימים‬‫שני‬
‫מ‬ ‫שווי‬ ‫סוגי‬‫שקל‬‫אפשריים‬.‫וב‬ ‫אחיד‬ ‫חוזה‬ ‫מקבלים‬ ‫היזמים‬ ‫כל‬ ‫משותף‬ ‫משקל‬ ‫בשווי‬‫משקל‬ ‫שיווי‬
‫שונים‬ ‫יזמים‬ ‫מפריד‬‫בוחרים‬‫ב‬‫שונים‬ ‫חוזים‬.
‫סיכון‬ ‫הון‬ ‫שוקי‬ ‫לתיאור‬ ‫מוקדש‬ ‫העבודה‬ ‫של‬ ‫הראשון‬ ‫הפרק‬,‫סקירת‬‫ה‬‫על‬ ‫ספרות‬‫לא‬ ‫מידע‬ ‫השפעת‬
‫מו‬ ‫במימון‬ ‫סימטרי‬"‫פ‬‫המחקר‬ ‫ותוצאות‬ ‫המודל‬ ‫של‬ ‫כללי‬ ‫ותיאור‬.‫השני‬ ‫בפרק‬‫את‬ ‫בוחנים‬ ‫אנחנו‬
‫הבסיסי‬ ‫המודל‬‫הצלחת‬ ‫בו‬‫הצדדים‬ ‫במאמצי‬ ‫תלויה‬ ‫לא‬ ‫הפרויקט‬‫רק‬ ‫אלא‬‫ובהיקף‬ ‫הפרויקט‬ ‫בסוג‬
‫ההשקעה‬‫בו‬ ‫ההונית‬.‫משקל‬ ‫שווי‬ ‫להשיג‬ ‫השוק‬ ‫יכולת‬ ‫את‬ ‫בוחנים‬ ‫אנחנו‬‫איכות‬ ‫כאשר‬‫לא‬ ‫הפרויקט‬
‫ידועה‬‫ל‬-VC‫ההשקעות‬ ‫סכום‬ ‫את‬ ‫חופשי‬ ‫באופן‬ ‫לבחור‬ ‫יכולים‬ ‫והיזמים‬.‫קיימת‬ ‫זה‬ ‫במצב‬‫בע‬‫יי‬‫ת‬
‫שלילית‬ ‫בחירה‬)‫אי‬ ‫כשקיום‬ ‫המצב‬-‫סימטרי‬‫ו‬‫המיד‬ ‫ת‬‫ע‬‫בעלי‬ ‫ביזמים‬ ‫פוגע‬ ‫הפרויקט‬ ‫איכות‬ ‫לגבי‬
‫הטובים‬ ‫הפרויקטים‬.(‫מפריד‬ ‫משקל‬ ‫שווי‬ ‫קיים‬ ‫זה‬ ‫שבשוק‬ ‫מראים‬ ‫אנחנו‬‫בלבד‬,‫לשנות‬ ‫היכולת‬ ‫אך‬
‫שונות‬ ‫באיכויות‬ ‫פרויקטים‬ ‫בעלי‬ ‫היזמים‬ ‫בין‬ ‫בהפרדה‬ ‫מסייעת‬ ‫איננה‬ ‫בפרויקט‬ ‫ההשקעה‬ ‫גודל‬ ‫את‬.

20. ‫המסקנ‬‫זה‬ ‫מודל‬ ‫של‬ ‫העיקרית‬ ‫ה‬:‫כל‬‫ה‬‫יז‬‫מים‬‫בוחר‬‫ים‬‫סכום‬‫רווחי‬ ‫עודף‬ ‫את‬ ‫שממקסמת‬ ‫ההשקעות‬
‫הפרויקט‬.‫מסוג‬ ‫היזמים‬ ‫של‬ ‫התועלת‬ ‫את‬ ‫מורידה‬ ‫שלילית‬ ‫בחירה‬ ‫בעיית‬ ‫כצפוי‬G.
‫את‬ ‫בוחנים‬ ‫אנחנו‬ ‫השלישי‬ ‫בפרק‬‫כאשר‬ ‫המשקל‬ ‫שווי‬‫הצלחת‬ ‫הסתברות‬ ‫על‬ ‫משפיעים‬ ‫היזם‬ ‫מאמצי‬
‫הפרויקט‬‫והם‬,‫לאיכות‬ ‫בנוסף‬‫הפרויקט‬,‫לא‬‫ידועים‬‫ל‬-VC.‫כלומר‬,‫קיימ‬ ‫בשוק‬‫ות‬‫המיד‬ ‫בעיות‬‫ע‬
‫הסוגים‬ ‫משני‬:‫שלילית‬ ‫בחירה‬)‫בע‬ ‫פרויקטים‬ ‫בין‬‫ל‬‫שונות‬ ‫איכויות‬ ‫י‬(,‫ו‬‫מוסרי‬ ‫סיכון‬)‫כ‬ ‫המצב‬‫אשר‬
‫פע‬‫ו‬‫היזם‬ ‫לות‬‫החוזה‬ ‫חתימת‬ ‫לאחר‬‫נצפ‬ ‫לא‬‫ות‬‫ע‬"‫המשקיע‬ ‫י‬.(‫העיקריות‬ ‫הפרק‬ ‫מסקנות‬‫הן‬:‫סוגים‬
‫אי‬ ‫של‬ ‫שונים‬-‫המיד‬ ‫סימטריות‬‫ע‬‫רו‬ ‫על‬ ‫משפיעים‬‫באופן‬ ‫הפרויקטים‬ ‫והצלחת‬ ‫היזמים‬ ‫וחי‬‫שונ‬‫ה‬:‫בעיית‬
‫ה‬‫סיכון‬‫ה‬‫התועלת‬ ‫את‬ ‫מורידה‬ ‫מוסרי‬‫סו‬ ‫כל‬ ‫של‬ ‫המאמצים‬ ‫וכמות‬‫היזמים‬ ‫גי‬.‫בעיית‬‫ה‬‫בחירה‬‫ה‬‫שלילית‬
‫ה‬ ‫של‬ ‫בתועלת‬ ‫פוגעת‬‫מסוג‬ ‫יזמים‬G‫שלהם‬ ‫המאמצים‬ ‫רמת‬ ‫את‬ ‫ומעלה‬.
‫בוחנים‬ ‫אנחנו‬ ‫הרביעי‬ ‫בפרק‬‫את‬‫תחת‬ ‫המשקל‬ ‫שווי‬‫אי‬-‫המיד‬ ‫סימטריות‬‫ע‬‫ה‬ ‫משני‬‫צדדים‬:‫בחירה‬
‫ה‬ ‫מצד‬ ‫מוסרי‬ ‫וסיכון‬ ‫היזמים‬ ‫מצד‬ ‫שלילית‬-VC,‫זמני‬ ‫בו‬‫ת‬.‫כי‬ ‫מניחים‬ ‫אנחנו‬‫איכות‬‫לא‬ ‫הפרויקט‬
‫ידועה‬‫ל‬-VC‫של‬ ‫במאמצים‬ ‫תלויה‬ ‫הפרויקט‬ ‫הצלחת‬ ‫והסתברות‬VC‫שאינם‬‫נצפים‬‫ע‬"‫היזמים‬ ‫י‬.
‫הבאות‬ ‫למסקנות‬ ‫מגיעים‬ ‫אנחנו‬:‫ל‬ ‫גורמת‬ ‫שלילית‬ ‫בחירה‬-VC‫לרמה‬ ‫מעל‬ ‫מאמצים‬ ‫להשקיע‬
‫שממקסמ‬‫הפרויקט‬ ‫רווחי‬ ‫עודף‬ ‫את‬ ‫ת‬.‫ההוצאות‬ ‫את‬ ‫גם‬ ‫אך‬ ‫הפרויקט‬ ‫הצלחת‬ ‫ההסתברות‬ ‫את‬ ‫מעלה‬ ‫זה‬
‫עקב‬‫ה‬‫מאמצים‬‫ה‬‫נוספים‬.‫כ‬‫א‬‫ש‬‫ר‬‫ה‬‫מאמצים‬‫של‬VC‫אינם‬‫נצפים‬‫הוא‬‫הטוב‬ ‫בפרויקט‬ ‫משקיע‬(G)
‫הרע‬ ‫בפרויקט‬ ‫מאשר‬ ‫מאמצים‬ ‫פחות‬)B(‫ו‬‫רווחי‬‫ו‬‫עולים‬‫לרווח‬ ‫מעל‬‫ה‬‫סף‬‫התחרות‬ ‫למרות‬‫בין‬
‫המשקיעים‬‫בשוק‬.‫ז‬‫ה‬‫אומר‬‫שאי‬-‫המיד‬ ‫סימטריות‬‫ע‬‫מצד‬VC‫מ‬ ‫מונעת‬-VC‫המש‬ ‫בכל‬ ‫להשתמש‬‫א‬‫בים‬
‫שלרשותו‬‫בתחרות‬ ‫לנצח‬ ‫כדי‬.
‫העבודה‬ ‫של‬ ‫העיקריות‬ ‫המסקנות‬:
1.‫משקל‬ ‫שווי‬‫תחרותי‬ ‫סיכון‬ ‫הון‬ ‫בשוק‬‫מ‬ ‫הנובעים‬ ‫קשיים‬ ‫חרף‬ ‫להתקיים‬ ‫יכול‬‫מידע‬‫לא‬
‫סימטרי‬.
2.‫מידע‬ ‫של‬ ‫העיקרית‬ ‫ההשפעה‬‫לא‬‫סימטרי‬‫ה‬‫יא‬‫ה‬ ‫בהקטנת‬‫יזמים‬ ‫של‬ ‫הכנסות‬‫בעלי‬‫פרויקטים‬
‫טובים‬,‫בגלל‬‫של‬ ‫קיומם‬‫איכותיים‬ ‫הלא‬ ‫פרויקטים‬.
3.‫המיד‬ ‫בעיות‬‫ע‬‫משפיעות‬‫ב‬‫הפוכות‬ ‫צורות‬‫על‬‫רמ‬‫ו‬‫של‬ ‫המאמצים‬ ‫ת‬‫שני‬‫הצדדים‬.
4.‫מידע‬‫של‬ ‫המאמצים‬ ‫רמת‬ ‫את‬ ‫מעלה‬ ‫סימטרי‬ ‫לא‬VC‫את‬ ‫ולכן‬‫הפרויקט‬ ‫הצלחת‬ ‫הסתברות‬
‫לרמ‬ ‫מעל‬‫ה‬‫ב‬‫מלא‬ ‫מידע‬ ‫של‬ ‫מקרה‬.
5.‫מידע‬‫דו‬ ‫סימטרי‬ ‫לא‬-‫ל‬ ‫מאפשר‬ ‫לא‬ ‫צדדי‬-VC‫לה‬‫ולכן‬ ‫התחרות‬ ‫לצורך‬ ‫המשאבים‬ ‫בכל‬ ‫שתמש‬
‫הוא‬‫לרווח‬ ‫מעל‬ ‫רווחים‬ ‫מפיק‬‫סף‬.
‫המיד‬ ‫אסימטריות‬ ‫השפעת‬ ‫שנושא‬ ‫לטעון‬ ‫אפשר‬ ‫העבודה‬ ‫תוצאות‬ ‫סמך‬ ‫על‬‫ע‬‫דורש‬ ‫סיכון‬ ‫הון‬ ‫שוקי‬ ‫על‬
‫נוס‬ ‫מחקר‬‫ף‬.‫ל‬ ‫האפשריים‬ ‫הכיוונים‬‫כ‬ ‫מחקר‬‫זה‬:1(‫המיד‬ ‫בעיות‬ ‫השפעת‬ ‫לבחון‬‫ע‬‫בשווקי‬‫ם‬‫תחרותיים‬ ‫לא‬
‫על‬‫של‬ ‫היעילות‬‫שווקים‬‫שונים‬‫לפרו‬ ‫הון‬ ‫בהקצאת‬‫י‬‫מו‬ ‫קטי‬"‫פ‬.‫אפשר‬ ‫מכך‬‫יהיה‬‫לגבי‬ ‫להסיק‬‫כדאיות‬
‫ה‬ ‫התערבות‬‫ממשל‬‫ה‬‫סיכון‬ ‫הון‬ ‫בשוקי‬.2(‫להרחיב‬‫עם‬ ‫המודל‬ ‫את‬‫מספר‬‫הפרויקטים‬ ‫סוגי‬ ‫של‬ ‫גדול‬.

21. ‫וקיצורים‬ ‫סמלים‬ ‫רשימת‬
‫גולמי‬ ‫לאומי‬ ‫תוצר‬ - GDP
‫והתקשורת‬ ‫המידע‬ ‫טכנולוגיות‬ - ICT
‫ופיתו‬ ‫פעולה‬ ‫לשיתוף‬ ‫הארגון‬‫כלכלי‬ ‫ח‬ - OECD
‫ופיתוח‬ ‫מחקר‬ - R&D
‫רוטשילד‬ ‫של‬ ‫המודל‬-‫סטיגליץ‬)1979( - R-S
‫שלילית‬ ‫בחירה‬ ‫אילוץ‬ - ASC
‫נמוכה‬ ‫איכות‬ ‫בעל‬ ‫פרויקט‬ - B
‫הפרויקט‬ ‫הצלחת‬ ‫של‬ ‫במקרה‬ ‫ליזם‬ ‫תשלום‬ - CH
‫הפרויקט‬ ‫כשלון‬ ‫של‬ ‫במקרה‬ ‫ליזם‬ ‫תשלום‬ - CL
‫נצפים‬ ‫לא‬ ‫מאמצים‬ ‫של‬ ‫במקרה‬ ‫ליזם‬ ‫תשלום‬ - Cˆ
‫סיכון‬ ‫הון‬ ‫קרן‬ ‫של‬ ‫מאמצים‬ ‫על‬ ‫ההוצאות‬ ‫פונקציות‬ - d(e)
‫היזם‬ - E
‫היזם‬ ‫מאמצי‬ - e
‫נצפים‬ ‫מאמצים‬ ‫של‬ ‫במקרה‬ ‫מאמצים‬ ‫של‬ ‫משקל‬ ‫שווי‬ ‫רמת‬ - e*
‫נצפים‬ ‫לא‬ ‫מאמצים‬ ‫של‬ ‫במקרה‬ ‫מאמצים‬ ‫של‬ ‫משקל‬ ‫שווי‬ ‫רמת‬ - eˆ
‫מינימאל‬ ‫רמה‬‫י‬‫מאמצים‬ ‫של‬ ‫ת‬ - e0
‫רמ‬‫מקסימאל‬ ‫ה‬‫י‬‫מאמצים‬ ‫של‬ ‫ת‬ - e1
‫גבוהה‬ ‫איכות‬ ‫בעל‬ ‫פרויקט‬ - G
‫היזם‬ ‫של‬ ‫מאמץ‬ ‫סבל‬ - h(e)
‫בפרויקט‬ ‫ההשקעות‬ ‫רמת‬ ‫של‬ ‫היזם‬ ‫בחירת‬ - I*
‫הראשונ‬ ‫השקעה‬‫י‬‫היזם‬ ‫שברשות‬ ‫ת‬ - I0
‫הקבועה‬ ‫ההשקעות‬ ‫רמת‬ - I
‫החוזים‬ ‫קבוצת‬ - K
‫מוסרי‬ ‫סיכון‬ ‫אילוץ‬ - MHC

22. ‫סמל‬ ‫רשימת‬‫וקיצורים‬ ‫ים‬)‫המשך‬(
‫סיכון‬ ‫הון‬ ‫קרן‬ ‫רווחי‬‫נצפים‬ ‫מאמצים‬ ‫של‬ ‫במקרה‬ - N
‫סיכון‬ ‫הון‬ ‫קרן‬ ‫רווחי‬‫נצפים‬ ‫לא‬ ‫מאמצים‬ ‫של‬ ‫במקרה‬ - Nˆ
‫הפרויקט‬ ‫הצלחת‬ ‫הסתברות‬ - p
‫הפרויקט‬ ‫הצלחת‬ ‫הסתברות‬ ‫פונקצית‬ - p(e)
‫הפרויקטים‬ ‫של‬ ‫פרופורציה‬‫האיכותיים‬‫בשוק‬ - q
‫מקרה‬‫הצ‬‫הפרויקט‬ ‫לחת‬ - RH
‫מקרה‬‫הפרויקט‬ ‫כשלון‬ - RL
‫הטבע‬ ‫מצב‬},{ LHs ∈ - s
‫היזם‬ ‫של‬ ‫התועלת‬ ‫פונקצית‬ - U(⋅)
‫סיכון‬ ‫הון‬ ‫קרן‬ - VC
‫היזם‬ ‫של‬ ‫התועלת‬ ‫תוחלת‬ - VE
‫של‬ ‫סף‬ ‫רווח‬‫סיכון‬ ‫הון‬ ‫קרן‬ - W
‫רווחי‬ ‫של‬ ‫חלק‬‫סיכון‬ ‫הון‬ ‫קרן‬‫סף‬ ‫לרווח‬ ‫מעבר‬ - w
‫של‬ ‫הרווחים‬ ‫תועלת‬‫קרן‬‫סיכון‬ ‫הון‬ - Y
‫של‬ ‫סף‬ ‫רווחי‬ ‫קו‬‫סיכון‬ ‫הון‬ ‫קרן‬ - Y-line
‫הפרויקט‬ ‫תוצאות‬ ‫פונקצית‬ - Z(I,R)
‫הפרויקט‬ ‫של‬ ‫גולמיים‬ ‫רווחים‬ - Z
~
‫והתאמת‬ ‫סף‬ ‫רווח‬ ‫עם‬ ‫החוזים‬ ‫קבוצת‬‫ה‬‫תמריצים‬ - ZPIC
‫משקל‬ ‫שווי‬ ‫חוזי‬ ‫קבוצת‬ - ψ
‫של‬ ‫פרופורציה‬w‫ש‬‫התאמת‬ ‫אילוץ‬ ‫מקיימת‬‫ה‬‫תמריצים‬ - ∆

23. Chapter 1: Introduction
1.1 Goals and purposes of the work
The role of venture capital in innovation process financing has been examined
extensively by researchers in economics and finance. Venture capital firms (VC) specialize in
the early stage financing of entrepreneurial projects. The financing process of such projects
differs significantly from other kinds of investment activity because of the high uncertainty
about the results of research process and the inherent difficulties in evaluating the progress of
the project and its commercial success. These features lead to high level of informational
asymmetry concerning the project quality and exerted efforts.
What are the particular features of venture capital contracts that can overcome these
problems to compete successfully with other financial structures? The empirical studies in this
field report the following ways used by venture capital firms to circumvent the informational
asymmetry: special structured contracting, pre-investment screening, post-investment
monitoring and participation in project management (Kaplan and Stromberg, 2001). Our work
is dedicated to analysis of venture capitalist’s responses to various kinds of informational
problems in the early stages of the investing process.
We propose a model of competitive venture capital market with informational
imperfections. We consider initial project screening and contracting, abstracting from
monitoring or staging of capital infusion, which are sometimes used in actual VC contracts.
This allows us to emphasize the trade-off between risk allocation and project quality in the
investment contract. In this work we address the venture market reaction to the different
forms of informational asymmetry including single and double-sided informational
asymmetry. We consider not only entrepreneurial hidden information, such as project quality
or entrepreneurial effort, but also unobservable actions by the venture capitalist.
Our approach underscores the interesting problem that was not developed in the venture
capital literature – the observability of venture capitalist actions and its importance for the
project success. Most of the authors assumed that there is no informational asymmetry from
venture capitalist’s side because he is an organizer and is interested to do his best to promote
the project. But this point of view does not take into consideration that venture capitalist could
act inefficiently because of lack of resources, management problems, improper use of
investments or other circumstances. The fact that venture capitalist actions play crucial role

24. 2
for project success makes the hidden information concerning his actions very important. Our
results reveal the importance of entrepreneur’s belief about the real actions of venture
capitalist. In particular, we show a situation where in equilibrium the venture capitalist avoids
providing additional efforts that improve the project success chances because such action is
not supported by entrepreneur’s beliefs about these unobservable actions.
The results that we got by means of this model let us conclude that the influence of
informational imperfections on the different parameters of competitive venture capital market
can be ambivalent. The analysis shows the particular market inefficiencies concerning this
influence. To evaluate this we consider several key parameters of the market: efforts by
participants, their final wealth, investment size and probability of the project success. The
results may help answering the question of how the presence of VC market affects the
entrepreneurs’ incentives to innovate, thus clarifying some of the economic growth effects of
venture capital.
In the following sections of this chapter we give a brief overview of the venture capital
market and its role in financing of the innovation process. After that we turn to the general
concepts of the informational theory that we will use in the work. In the end of the chapter we
characterize the model framework and list the main results of this work.
1.2 Venture capital
Venture capital organizations raise money from individuals and institutions for
investment in early stage businesses that offer high potential but high risk. Venture capital is
provided by specialized financial firms acting as intermediaries between primary sources of
finance (such as pension funds or banks) and entrepreneurs. In this section we briefly consider
what are the venture capital firms and their role in financing of R&D.
1.2.1 VC in financing R&D
The distinctive feature of the venture capital is financing high-risk, high-return projects
which have small probability of success but when are successful, bring extremely high
returns. Sahlman (1990) notes the significant disparities in the venture projects’ outcomes.
From the group of 383 companies (13 venture capital partnerships) about one third of the
projects ended up with partial or total loss, 30% showed profits from 0 up to 200%, 19.8% -

25. 3
up to 500%, 8.9% - up to 1000% and 6.8% resulted in payoffs greater than ten times cost and
yielded 49.4% of the ending value of the aggregate portfolio.
The compensation for such risks is the impressive profits from the successful projects that
could cover the losses from the large number of faults. Sahlman (1990) wrote that the total
market value of the 579 venture capital backed companies, which went public during the 11
years ending in 1988, exceeded 30% of the total market value of all comparable companies
that went public during the same period. The list of such companies includes Apple
Computer, Microsoft, Intel, Sun Microsystems and many other names that are now associated
with worldwide success.
Venture capital investment is quite small and varies from about 1% of GDP in Israel to
0.01% in Japan. Nevertheless, it is a major source of funding for new technology-based firms
that attracted 60% of OECD venture capital investments. It plays a crucial role in promoting
the radical innovations often developed by such firms. VC investments in high-technology
sectors vary from 93% in Ireland to only a quarter or less in Portugal. In Israel, ICT sector
share of VC investments increased from 50% in 1990s to 70% in 2005.
Another aspect of venture capital investment is the specialization on the early stages of
firms’ life-time. Over 2000-2003 early-stage investments on average were about half the size
of investments in expanding firms (SourceOECD).
Israel had a higher level of venture capital as a share of GDP in the period 1998-2001
than any OECD country. Growing rapidly in the 1990s, venture capital investments (domestic
and international) reached over 1% of GDP in 2000, but then declined with the downturn in
technology markets. Most Israeli venture capital is channelled to early stage companies,
particularly start-ups in sectors based on ICT technology and biotechnology (Baygan 2003).
For the mentioned sectors venture capital has an advantage over other financial sources.
A number of studies have identified reluctance by banks and other large financial institutions
to finance high-technology start-ups. For example Moore (1994) finds that a sample of 89
high-tech companies raised only 7% of the start-up finance from banks, compared with a
figure close to 40% for small and medium-sized enterprises generally. What is special about
venture capital that distinguishes it from other financing structures? We will review this in the
following subsection.

26. 4
1.2.2 Organizational aspects of VC activity
VCs are the financial intermediaries that act as agents for investors in entrepreneurial
projects. Their relationships can be divided into two groups: agent relationships with investors
and principal towards entrepreneurs. The first group is defined by the legal form of venture
capital firm that typically is a limited partnership between two types of partners: Limited
Partners that are several investors and General Partner – VC manager (Sahlman 1990, Kandel
2004). Limited Partners do not participate in the active management and their liabilities are
limited to the amount of their commitment. The General Partner makes the investment
decisions. The VC partnership has a limited life span - usually 5-10 years, during which the
withdrawal of partners is prohibited. After the date of termination all projects must be closed
and the partnership is dissolved. This limited life span allows Limited Partners to control the
General Partner’s management results, limits the risk and prevents the retaining of profits
within the fund by infinitely postponing the project maturity (Kandel 2004).
The second type of relationships involves the contracts between the VC fund itself and
the entrepreneurs. Venture capitalist manages the processes of selecting potentially successful
projects, contracting, financing and monitoring. He takes on all the relationships with the
entrepreneurs and can even participate in the entrepreneurial management by entering his
representatives in the Board of Directors.
The development of a venture-backed company has three basic financing stages:
• Seed capital is provided to research, assess and develop an initial
concept.
• Start-up financing is provided for product development and initial
marketing. Companies may be being set up or may have been in
business for a short time, but have not yet sold their product
commercially.
• Expansion financing is provided for the growth and expansion of a
company that is breaking even or trading profitably. Capital may be
used to finance increased production capacity, market or product
development and/or to provide additional working capital.
Venture capitalist’s participation in the project can begin in every stage and ends by
selling or closing in accordance with participation plan or in case of predefined dissolution.

27. 5
What sets VC financing apart from other types of financing is the potential ability of VC
to increase the likelihood of successful project outcome by active involvement in project
organizing and promoting. Casamatta (2002) emphasizes that VCs provides value-added
support activities. According to the empirical study of Kaplan and Stromberg (2002) in more
than one third of the investments, the VC expects to provide value-added services such as
strategic advice or customer introductions. Casamatta's results confirm the conclusion that
VCs assist founders in running and professionalizing the business.
The success of the project depends on both the efforts put forth by the entrepreneur as
well as by the VC. However, neither effort by both parties can be fully observed by the other,
though the relationships between venture capitalist and entrepreneur are characterized by
considerable degree of informational asymmetry about the success prospects of the project.
The informational problems from entrepreneurial side were recognized by most of the studies.
For example, Brierly (2001) emphasized that at the time of consideration of an investment,
the venture capitalist is faced with a potential adverse selection problem because of the
difficulty of assessing the entrepreneur’s performance. In the same time there was not much
researchers’ attention towards VC’s private information.
Most researchers, (for overview see Lumma 2001), note the following common practices
for solving the informational problems concerning projects quality and entrepreneurial team
skills and effort:
1. Staging the infusion of capital
2. Monitoring of project execution and involving in project management
3. Compensation schemes that provide entrepreneurs with appropriate
incentives
The first two ways amount to reducing of the contract uncertainty by dividing the
investment risks by using the option to exit. These methods can be applied only to the part of
informational asymmetry that is actually available for costly revelation. But venture projects
usually contain part of uncertainty that cannot be resolved even by costly monitoring. At the
same time also the staging of financing is not a panacea from financial losses because even a
good project start does not guarantee the success in the long run when the stakes are higher
(Sahlman 1990). Then we cannot describe the relations between VC and entrepreneur only by
referring to first two methods and ignoring the incentive mechanisms of risky project
contracting.

28. 6
In this work we focus exclusively on the incentive effects of funding contracts under
asymmetric information. The reason why we do so is that this process emphasizes the very
nature of the investor-entrepreneur relations. The analysis of the incentive schemes provides
us with a measure of the parties’ ability to reach the agreement as well a measure of its costs.
This view does not contradict the importance of costly monitoring because the inefficiencies
caused by risk allocation based contract can be also presented as alternative costs for costly
monitoring constructions.
An example of using of the incentive schemes in the venture project financing can be the
wide use of convertible preferred stock as financing instrument. Kaplan and Stromberg (2000)
provide evidence which shows that convertible preferred stock is by far the most commonly
used financing instrument, appearing in 189 out of the total of 200 financing rounds. Such
instruments generally ensure that the cash flow rights, voting rights and control rights of the
venture capitalists and entrepreneurs are contingent on observable measures of financial and
non-financial performance. State-contingent provisions not only motivate entrepreneurs to
provide effort, but also discourage entrepreneurs with poor projects from accepting the
contract (Prendergast 1999).
1.3 Informational asymmetry in the VC market
The venture capitalist – entrepreneur contracting attracted significant attention both in
theoretical and empirical literature. In the wild range of aspects analysed in these works the
most developed subjects are:
1. The optimal debt/equity financing of venture projects (Tresler 1998, Admati and
Pfleiderer 1994)
2. The conflicts of interests between venture capitalists and entrepreneur as a
principal-agent relations (Guesnerie et al 1989)
3. The role of venture capital in innovation process (Kortum and Lerner 2000)
4. Organizational structure of venture financing (Teece 1996)
5. The impact of government subsidies on the venture capital market (Ber 2002)
All these studies emphasize the role of informational asymmetry in this market as one of
the main determinants of the equilibrium. The theoretical basis of these applications to
financial contracting under informational problems is the series of works built for various

29. 7
markets including insurance markets, labour markets, banking and even lawyer services. In
our work we use the appropriate constructions from the relevant literature.
Next we bring a brief review of the works that provide the theoretical foundation of
models of financing activity under asymmetric information.
The concept of asymmetric information was first introduced in the paper of Akerlof
(1970). Akerlof argues that the information asymmetry about the good’s quality leads to
adverse selection that is the process of the worse individuals starting to dominate the market.
Stiglitz (1975) explores whether this informational disadvantage can be rectified by the
seller (employer) by screening the applicants (potential employees) into categories that
reflect their productivity or some other capability.
Rothschild and Stiglitz (1976) study the effects of imperfect information using insurance
market as an example. They define a competitive equilibrium in the insurance market of their
model as a set of contracts chosen by the customers to maximize their expected utility such
that: (i) no contract in the set makes negative expected profits to insurance companies, (ii)
there is no contract outside the equilibrium set that would make a nonnegative profit if
offered. They found that under asymmetric information no pooling equilibrium is possible and
if equilibrium is found it is always a separating equilibrium. In the equilibrium the high-risk
individuals cause a negative externality by their being on the market so that the low-risk
individuals cannot get their preferred insurance policy, which they would get in a symmetric
information market.
The disputable feature of R-S equilibrium concept is the situation when there is no
equilibrium in case of existence of profitable pooling contract, which “skims” only low-risk
individuals. Alternative variation of the screening equilibrium that proposes a way to avoid
this non-existence was developed in the works of Wilson (1977) and Miyasaki (1977). They
weakened the Nash equilibrium concept by requiring that any new offer remains profitable
after the withdrawal of loss-making offers. Riley (1979) introduces the “reactive equilibrium”
where firms anticipate further entries when they consider offering deviating contracts. It
results in the original R-S equilibrium pair being sustained even when the R-S equilibrium
does not exist. Further development of this branch of theory was made by the works of
Dasgupta and Maskin (1986), Dubey and Geanakoplos (2002), Ania, Troger and Wambach
(2002) and others. The other developments of the theory are the dynamic models of the
screening equilibrium and multi-entrepreneurial models.

30. 8
The moral hazard concept was first introduced by Bengt Holmstrom (1979). The
problem arises when actions of the agent are not observable or not verifiable for the principal.
The solution to this problem is the optimal incentive scheme that forces the agent to perform
in appropriate manner. This approach is very popular for the various financial contracting
models because it gives an instrument to describe the relationships about agent’s
unobservable actions. Later, there were series of works that analysed models with
simultaneous adverse selection and moral hazard.
Much less researched direction of the information theory is the bi-directional information
asymmetry models that assume the existence of the private information for both contracting
parties. Rubinfeld and Scotchmer (1993) present such approach as an extension of the model
of the market for attorney services. In this work there was considered the case of moral hazard
from the attorney side versus unknown type of client. The model based on the concept of M-
reactive equilibrium (Judd 1984) that allowed authors to describe the equilibrium with cross
subsidization of contracts. Emmons (2004) expands the approach of Rubinfeld and
Scotchmer. He also pointed out the direct analogy between his model of attorney services
market and models of the financial markets with incomplete information.
Our work deals with a combination of different informational problems and accordingly
we rely on many of the reviewed concepts for building the model. In the next part we describe
briefly the model framework.
1.4 Description of the work
In our work we analyze the model of the market with large number of venture capital
firms that are competing in the market for financing risky projects. We examine the
contracting equilibria between venture capital firms and entrepreneurs that arise under
different types of informational asymmetry due to:
• unobservable quality of projects
• unobservable actions of entrepreneurs
• unobservable actions of the venture capitalist
The informational asymmetry in the market can be also double-sided when both parties of
the contract have private information on some relevant aspect of their relationship.

31. 9
Within this environment we examine the existence of equilibrium contracts and its
properties, hoping that the analysis sheds some light on the interplay between conflicting
incentives involved in venture capital financing. What kinds of equilibria can be reached in
such markets under different informational complications? How efficient is the competitive
venture capital financing process?
The model we use for our analysis is based on the insurance market model of Rothschild-
Stiglitz (1979), modified to suit markets for financing risky projects. This basic model has
many useful features and is suitable for the modelling competitive market with informational
asymmetries. Like every other model it has shortcomings that will be discussed later.
Here we discuss the general description of the market environment: Assume a market of
venture capital where capitalists (VC) are competing for entrepreneurial projects. The projects
need the investment for execution and also can potentially benefit from the efforts of the
entrepreneur and the venture capitalist. The project yields only two types of outcomes with
different probabilities given by a probability function that includes effort as input. The project
(and accordingly the entrepreneur) can be of two types: “good” and “bad” (G and B) with
different success (or high outcome) probability functions.
Assume also that each entrepreneur is a risk-averse utility maximizer, has only one project
and can deal with one investor only. He agrees to exchange his property rights on the project
with an investment by the VC and a lump sum payoff that can be contingent on the project
outcome. A risk neutral venture capitalist deals with a large number of entrepreneurs in a
competitive market with free entry and exit, so his expected profits should be at least as large
as some alternative profit rate available elsewhere for his funds. Through funding the project
he becomes the owner of project results and pays to the entrepreneur the agreed upon payment
in the contract.
Consequently, the venture contract between the parties is the agreement about payoffs in
every state of nature and other observable conditions, such as investment size or verifiable
effort. Contracts can be pooling (i.e. same contract for all types of entrepreneurs) or
separating (different contracts are offered for self-selection by each type). VC has only one
way to influence on the entrepreneurial actions: He can vary the riskiness of the
entrepreneurial contract conditions by using the contingency of the payoff.
Our analysis is organized as follows: In Chapter 2 we present the basic environment that
serves as a foundation for our analysis. In this environment all projects have the same possible

32. 10
outcomes support, and differ only the probability distribution of these outcomes. Project
types, in the sense of this probability distribution over outcomes, can be observable or can be
private information of the entrepreneur who owns the project. We focus on examining the
ability of the market to keep Rothschild-Stiglitz-like contracting equilibria when the level of
investment is endogenous, that is the entrepreneurs can freely choose the funding level in the
contract.
After proving that endogenizing the funding level does not influence the resulting
equilibrium, we turn in subsequent chapters to other complications and forms of asymmetric
information and examine how they affect the ensuing equilibrium. In Chapter 3 we study the
contracting process when entrepreneurial actions can affect the probability of project
outcomes and these actions as well as project types are unobservable. This generates adverse
selection and moral hazard problems and obviously affects the equilibrium shape of contracts.
Finally, in Chapter 4 we study an environment with bi-directional informational
asymmetry with both adverse selection problem from the entrepreneurial side and moral
hazard from the side of venture capitalist, simultaneously. Numerical examples in Chapters 3
and 4 will help us to concretize the model results and to see their magnitudes for some
plausible parameter set.
1.5 Results of the work
1. Equilibrium
We show that only separating equilibrium can exist. That is, entrepreneurs of different
types choose different contracts, characterized by different payoff sets. We then show that the
separating equilibrium can be reached under different combinations of adverse selection and
moral hazard problems.
VC applies the separation policy that makes entrepreneurs of different types choose
particular contracts and exert unobservable effort in accordance with VC’s expectations. The
separating equilibrium is reached by applying two types of incentive compatibility
constraints. The first type makes every contract preferable only for particular entrepreneur’s
type that solves adverse selection problem. The second type of constraints ensures that
particular effort level will be chosen by contractor that solves an appropriate moral hazard
problem.

33. 11
2. Investment level
We found that in the competitive environment equilibrium investment level maximizes
project surplus for both project types. Initially we expected deviation from optimality, but the
analysis shows that both parties are interested in optimal funding levels. The reason for this is
that in the competitive market the entrepreneur gets the entire project surplus, and deviations
from optimal investment level will only lower this payoff. Therefore entrepreneurs are
interested in project efficiency and choose optimal investment level.
Nevertheless for non-competitive environment we can predict non-optimality of
investment demanded by entrepreneurs.
3. Entrepreneurial effort
In the full information environment the entrepreneurial choice of effort maximizes
project surplus because the VC gives the entrepreneur a full range of possible effort levels to
choose from. In the market where both project types and effort levels exerted by
entrepreneurs are private information, the VC is forced to offer entrepreneurs more restrictive
contract conditions to ensure both self-selection of types and resource compatible payments.
This circumstance, in turn, makes entrepreneurs exert effort in accordance with proposed
payoffs allocation. This choice can be non-optimal, but it is the only feasible form of
contracting that lead to equilibrium. In the numerical example the "bad" entrepreneur's effort
is optimal but the "good" one is forced to exert more effort than he would have chosen for his
expected payoff.
4. Venture capitalist’s effort
In the full information environment contractors are interested to exert effort that
maximizes project surplus for both types. When the project type is unobservable the “good”
entrepreneur gets risky contract and is interested in the additional efforts form VC’s side.
Therefore in this case VC can exert more efforts than in the full information case.
When VC’s effort level is unobservable he cannot ensure the entrepreneur that he will
exert the proposed effort. Therefore he offers in the contract only the effort level that would
maximize his profits given the contract payoffs allocation. So VC’s effort level will be lower
in this environment even if both contractors would prefer higher effort.

34. 12
5. Payoff allocation and entrepreneurial wealth
As we have already mentioned, the competition between VCs increases entrepreneurial
expected profit share to 100% of project surplus net of investment. In our model VC
distributes all the profits from the project to the entrepreneur, he also can make payoff
contingent on the project outcome, that’s to pay entrepreneur more in case of high project
outcome and less for low one.
The separating equilibrium which can be reached allows “good” entrepreneur to obtain
significantly higher expected profits than “bad” one. But the presence of adverse selection can
sufficiently reduce profits of “good”. In addition, the existence of entrepreneurial moral
hazard hurts the wealth of both entrepreneur types. The reason for this is the project risks are
loaded on the entrepreneurs in equilibrium and this lowers their utility.
Due to entrepreneurs' risk aversion, the best payoff allocation is a non-contingent one.
For the full information environment this is the equilibrium allocation. But in presence of
asymmetric information problems the results of the model show that under incentive
compatibility constraints the allocation of payoffs must be dependent on the project outcome.
Particularly, adverse selection problems make the equilibrium payments to “good”
entrepreneur risky, while entrepreneurial moral hazard problem implies that payments to both
types are risky. This lowers entrepreneurial expected utility.
The second factor that can reduce entrepreneurial utility in the presence of informational
asymmetry is the influence over entrepreneur's effort levels. In order to reach a separating
equilibrium, VC offers restrictive contract conditions that can cause entrepreneur effort level
to be different from the one they would have chosen given their payoffs. This in turn lowers
the project overall profits and accordingly the final wealth of entrepreneur.
In case of VC’s moral hazard, effort level is lowered that fact also influences negatively
on the entrepreneurial wealth.
6. VC’s wealth
In the competitive market the expected profits of VC are reduced to his reservation
level. The model shows that in the case of VC’s moral hazard this result can be violated. The
reason for this fact is VC's inability to commit to a particular effort level. Therefore, VC
proposes to entrepreneur the effort level that would maximize profits for himself given
contract payoff scheme. The combination of type separating contracts and effort levels chosen

35. 13
without pre-commitment device creates the possibility that VC’s expected profits will exceed
his reservation level.
It is important to note that these profits are characteristic of all competitive VC markets
and cannot be transferred to entrepreneurs through contract payoffs to gain advantages over
competing VCs. An attempt to exploit this higher than minimally acceptable profits will
change the ex-post effort choice of VC, and will result in lower expected utility to
entrepreneurs. Hence, this VC advantage is not wiped off by the competition among VCs.

36. 14
Chapter 2: A Model with Endogenous Investments
2.1 The Market Environment
The first model we consider is the market of capital to be invested in risky projects,
where investors compete for risky R&D projects. We want to check the optimality of projects
funding in different informational environment.
We assume that all projects in the market have the same outcome function. The outcome
of any project can be either favorable or not. High outcome is indexed by RH
and occurs with
probability p. Low outcome, RL
occurs with probability (1-p). The resulting project results
with outcome R, implemented with capital level I, is given by Z(I,R). The outcome function
Z(·,·) has the usual properties: increasing in I and R, differentiable and concave in investment:
0,0,0 2
2
<
∂
∂
>
∂
∂
>
∂
∂
I
Z
R
Z
I
Z
.
Entrepreneurs (E-s), which are the initial owners of the inventions and the executors of
the project, have some initial endowment I0 that is not enough to execute the project. They are
forming the projects, defining the investment needed and searching for the investors to give
up all property rights to the project in exchange of the lump sum payoff. Each E has one
project and can deal with one investor only. All E-s are risk averse with utility function
denoted by U(⋅), U’>0, U’’<0.
Venture capitalist (VC) is the risk neutral investor. The market for venture capital is
competitive, with free entry and exit, so in equilibrium VC’s expected profits are equal to
some reservation value that, as we assume, here is equal to zero. VC offers to E-s an
investment contract or a set of contracts that consist of the sum to be invested in the project
and the division of project profits. Investment sum is declared by E. VC controls all the
project profits and transfers to E his share. We define the contract as following:
An investment contract for an R&D project is defined as {I*
, CH*
, CL*
}, which specify:
1. Payoff to E in each state of nature {CH*
, CL*
}, with the residual output of the project
going to VC in each state of nature
2. The E’s choice of investment size {I*
}

37. 15
The sequencing of events of contracting is as follows:
Let Y be the VC’s expected net profits from investing I in a project under a contract that
pays off CS
to E in state },{ LHs ∈ . In a competitive equilibrium VC’s expected profits are:
0))1((),()1(),( 00 =−−+−+−++= ICppCRIIZpRIIpZY LHLH (2.1)
so that the entrepreneur's expected compensation is:
IRIIZpRIIpZCppC LHLH
−+−++=−+ ),()1(),()1( 00
(2.2)
All E-s are risk averse with utility function denoted by U(⋅), U’>0, U’’<0. Given a set K
of alternative contracts, say, },,{ **
KkCCI L
k
H
kk ∈ , E chooses the contract from that set
which maximizes his expected utility:
)()1()( LHE
CUpCpUV −+= (2.3)
A competitive equilibrium in funding R&D projects is a set of contracts that maximize
E’s expected utility subject to yielding non-negative expected profits to the VC. Accordingly
VC’s problem is:
)()1()(max
,
LHE
CC
CUpCpUVLH
−+= (2.4)
s.t. IRIIZpRIIpZCppC LHLH
−+−++=−+ ),()1(),()1( 00
2.2 Benchmark case: Equilibrium with single project type
We first consider the case when in the market there is only one type of projects. VC’s
equilibrium contract offer maximizes E’s expected utility and just break even. On the Figure
2.1 this is the tangency point A of E’s indifference curve (defined by (2.3)) and the VC’s zero
expected profits line (Y-line, defined by (2.2)). This contract satisfies the two conditions of
equilibrium – its breaks even and no better contract will bring VC non-negative expected
profits.
VC designs
a menu of
contracts
E-s choose
contracts from
the menu
The realization
of the state of
nature
Outcome
and
payoffs
E-s form the projects
and define the
investment needed

38. 16
Figure 2.1: Single Type Equilibrium
Since E-s are risk averse, the equilibrium contract brings to E the equal payoff in both
states (CH
=CL
). The contract point is located at the intersection of the Y-line and the 45°-line
(representing the equal payoff to E for both outcomes of the project). To see this note that the
marginal rate of substitution for E is equal to the slope of the Y-line only when CH
= CL
and
accordingly )()( LH
CUCU ′=′ :
p
p
CUp
CpU
CC
C
C
L
H
LH
VH
L
−
=
−
=
∂
∂
1)(')1(
)('
),( (2.5)
Hence, E will choose )()()( *
ICICIC LH
== , such that:
IRIIZpRIIpZIC LH
−+−++= ),()1(),()( 00
* (2.6)
In the equilibrium E will choose the investment level I*
, that yields him the highest
expected utility (highest right-hand side of (2.2)) and satisfies:
01)*,()1()*,( 00 =−+
∂
∂
−++
∂
∂ LH
RII
I
Z
pRII
I
Z
p
(2.7)
As we see the equilibrium contract for single project type {I*
, C*
} consists of the fixed
payoff and the investment level that provides maximal project productivity. The explanation
for this is that E gets all the profits in the competition and is interested to maximize them.
A
p/(1-p) CH
CL
CH
=CL
VE
Y*

39. 17
2.3. Equilibrium with heterogeneous projects
Assume now that there are two types of projects in the market: G, “good probability
project” (with probability of getting RH
is pG
) and “bad” project (B) with pB
<pG
.
Entrepreneurs are marked in accordance with their project types: G and B.
2.3.1 Full information case
Here we assume that the type of E is fully observable by VC. Because of the full
information assumption VC can recognize the type of E and knows his probability of getting
“high” outcome. Therefore VC can offer to each E a contract that maximizes that type’s
expected payoffs. For each E, the equilibrium contract is in the tangency point of the
indifference curve and the corresponding Y-line for that type. This condition for entrepreneur
of type i is formulated as:
},{,
1)(')1(
)('
),( BGi
p
p
CUp
CUp
CC
C
C
i
i
iLi
iHi
iLiH
V
H
L
i
∈
−
=
−
=
∂
∂ (2.8)
Therefore the equilibrium set of contracts is { }),,(),,,( BBLBHGGLGH
ICCICC where:
),(],)
~
,([)( 0~
*
BGiIRIIZEICCC i
i
i
R
iiiLiH
i
∈−+=== (2.9)
),(,1))
~
,((: 0
*
BGiRIIZ
I
EI i
ii
∈=+
∂
∂ (2.10)
Clearly IG*
>IB*
, that leads to CG*
>CB*
. Consequently, B prefers the allocation {CG*
} to
the allocation {CB*
}, but he can not improve his position because his real type is observable
for VC.
2.3.2 Asymmetric information case
Consider the case when participants of the market have different information about the
subject of contracting. Assume that all the parameters of the project are public information
except the type of the particular E’s project. Venture capitalist cannot verify it at the time of
contracting. The proportions of the G and B project types are also unobservable. In this
environment the market is subject to adverse selection problem that makes the full
information equilibrium unreachable, since both entrepreneurs would choose the contract
{CG*
}, that implies negative VC profits for B projects.

40. 18
This market can have only two kinds of equilibrium:
• Pooling equilibrium – different E-s select the same contract and getting the same
investment from VCs;
• Separating equilibrium – different E-s select different contracts with different
investment levels and repayment schedules.
Proposition 2.1: The equilibrium in this market cannot be pooling equilibrium.
Proof: Suppose that there is a pooling equilibrium in some point A. Consider the average
probability of getting high outcome in the market: LH
pqqpp )1( −+= , where q is the
proportion of G projects in the market. Assume VC offers to both types the pooling contract.
His profits from the pooling contract must be zero otherwise it contradicts the definition of
equilibrium; hence the point A must lie on some YM
-line with the slope p . In this point the
slopes of G and B indifference curves are differ by:
)1(
)1(
HH
LL
pp
pp
−
−
. The curves intersect at A,
therefore there exists some contract D that will be preferable only for G (it lies below B
indifference curve and above G indifference curve). VC that will offer this contract will earn
strictly positive profits. The existence of contract D contradicts to the definition of
equilibrium. Q.E.D.
Figure 2.2: The non-existence of pooling equilibrium
We have shown that if the equilibrium exists in the market it must be separating. Now
consider the contracting process. In the Figure 2.3 is shown the separating equilibrium in the
D
A
p/(1-p)
CH
CL
CH
=CL
VB
YM
VG

41. 19
market with adverse selection. At the first step each E chooses the investment level that
maximizes her utility level by (2.10). The curve ZG
ZB
is the upper border of all possible
project output combination with different probabilities of high outcome. Points ZG
and ZB
are
maximum project profit points for each project type. These are the tangency points of project
profitability upper border and Y-lines with according slopes (defined by the probability for
each type).
Because of risk aversion of both entrepreneurs, the maximum utility contract for every
E’s type is in the intersection of according Y-line and “certainty line”. The equilibrium
contract for B (point B) indeed is situated in the intersection of YB
line with “certainty line”
where Y-line is tangent to the indifference curve. But if the equilibrium contract for G, {IG
,
CGH
, CGL
}, would be in the point C, it would be both preferable and reachable for both types
and therefore cannot be offered. The payoff allocations must keep the incentive compatibility
constraint (every entrepreneur must prefer the contract of his type). We will use the non-
strict form of this constraint by allowing that B will be at least indifferent between the two
contracts and assume that in this case he will stay with his type’s contract.
To maximize the utility for each type VC will offer to B the full insured contract (point
B) and to G the best contract that can be offered without attracting B type. This occurs at the
intersection of VB
indifference curve and YG
zero expected profit line (point A). G therefore
will get allocation with high investment level but risky enough to be non-preferable for B.
Figure 2.3: Separating Equilibrium
CL
CH
=CL
VB
YG
YB
B
A
ZB
ZG
C
VG
CH

42. 20
Proposition 2.2: The separating equilibrium in the asymmetric information case provides full
risk protection to B and loads some of the risks on G. The separating equilibrium is the set
{ }),,(),,,( BBLBHGGLGH
ICCICC such that:
**
0
*
0
**
),()1(),()( BLBBHBBBBLBH
IRIIZpRIIZpICCC −+−++=== (2.11)
)()()1()( *BBLGBBGHBB
CUCUpCUp =−+ (2.12)
**
0
*
0 ),()1(),()1( GLGGHGGGLGGHG
IRIIZpRIIZpCpCp −+−++=−+ (2.13)
The investment levels are defined by:
1))
~
,((: 0
*
=+
∂
∂
G
GG
RIIZ
I
EI ; 1))
~
,((: 0
*
=+
∂
∂
B
BB
RIIZ
I
EI
(2.14)
In the equilibrium B gets the same non contingent payoffs allocation as in the full
information case and G gets risky allocation that causes a decline in his expected profit
because of his risk-averse utility. In the equilibrium the investment levels, demanded by both
types of E, maximize total project surplus.
2.3.3 Uniqueness and existence conditions of the separating equilibrium
1. Uniqueness. First, B gets optimal allocation on the Y-line. All allocations above or
below Y-line will provide non-zero expected profits to VC. Reducing B utility along
the Y-line will also hurt the allocation for G because of incentive compatibility
constraint. The allocation for G also can not be changed because it is constrained by
both YG
-line and incentive compatibility constraint.
2. Existence conditions. If the proportion of “good” projects (q) is large enough, then
the market can have no equilibrium. The reason is that when q is large the incentive to
attract all the agents increases despite the risk of attracting “bad” projects. Hence the
pooling contract can offer greater utility for both type of E-s then the separating one,
but, as it was shown in Proposition 2.1, there is no pooling equilibrium in the market,
so equilibrium in the market does not exist. Another possible reason for non-existence
of equilibrium is the small difference in probabilities of high outcome for different
project types. The result in this case is just the same.

43. 21
2.4. Results of the Chapter
1. Only separating equilibrium exists in the market.
2. In the full information environment every project type gets the contract with non-
contingent payoffs and investment level, which are different for different project
types.
3. In the adverse selection environment G gets contingent payoff allocation and his
expected profits are lower than in the full information case.
4. Every entrepreneur’s type chooses investment level that maximizes project’s
expected surplus.

44. 22
Chapter 3: Entrepreneurial Effort
3.1. Modelling entrepreneurial effort
In the Chapter 2 we introduced the model of venture capital with adverse selection
problem concerning unobservable quality of the project. Here we consider more complicated
problem: an entrepreneur with the project of unobservable quality must accomplish the
research works or the developing of the final product and his diligence of work is also
unobservable by the VC. Possible disincentives for the agent in exerting optimal effort, when
his conduct cannot be observed directly or inferred from the outcome, fall under the class of
Moral Hazard problems (Holmstrom 1967). Introducing this problem here increases the
asymmetry of information between parties and can have adverse effect on the equilibrium
allocation of profits. In this section we consider the contracting environment with both
Adverse Selection and Moral Hazard stemming from the entrepreneurial side.1
Entrepreneurial effort can affect the profitability of the project in various ways. If that
effort can be observed directly or can be inferred from the outcome, entrepreneurial effort can
be rewarded in a manner that depends on the effort exerted, thus providing incentives that will
induce the entrepreneur to behave in accord with the VC’s interests. However, if this inference
or direct observation is not available, the equilibrium contracts must confront this
complication. This complication can occur when the project outcome is determined by both
the entrepreneurial effort and some exogenous event, and these cannot be untangled.
We consider here a version of this problem, where the effort of the entrepreneur has a
positive effect on the probability of the project’s good outcome. If the effort exerted is
unobservable by the VC, he can not control it by final project outcome because this is just one
realization of the probabilistic distribution and can not be traced to the effort exerted. At the
same time effort is costly to entrepreneur that makes him reluctant to make effort without
being compensated for it.
1
In Chapter 4 we consider a variant of the environment where the venture capitalist can affect the outcome with
his effort, which cannot be observed by the entrepreneur.

45. 23
The time-schedule of the project is:
Probability is presented now as continuous monotonic differentiable function,
]1,0[],[: 10 →eep , where e is the effort level exerted by E, and )(ep is the probability of the
project’s good outcome. The entrepreneur’s utility is a special case of Bernoulli utility
function which has been often used in the literature: )()(),( ehCUeCV −= , where U(C) is the
utility from the project’s payoffs, and h(e) is a disutility from effort. We summarize our
assumptions about the function properties in the following assumption:
Assumption 3.1: We assume that the functions used are of the following properties:
Table 3.1 Functions used in the model
Function name )(xf ′ )(xf ′′ )( 0xf ′ )( maxxf ′
Utility, U(C) 0)( >′ CU 0)( <′′ CU 1)0( =′U
Probability, p(e) 0)( >′ ep 0)( <′′ ep 1)( 0
=′ ep 1)( 1
≤′ ep
Effort cost, h(e) 0)( >′ eh 0)( >′′ eh 0)( 0
=′ eh ∞ →′ → 1)( ee
eh
In this Chapter we will talk about cases of observable and unobservable effort level. For
this purpose we introduce the contract definition in the following way:
1. The contract for observable effort case is ),,( eCC LH
, that specify payoffs for
possible project outcomes and the effort level to be exerted by E.
2. The contract for unobservable effort case is ),( LH
CC , that specify payoffs for
possible project outcomes only because the effort level cannot be included in the
contract.
In the previous Chapter we established that the entrepreneur is interested in the
investment level which maximizes the expected outcome of the project, regardless of payoffs
allocation. Thus we can relax the assumption about variable investment level and simplify the
VC designs a
menu of
contracts
E chooses a
contract from
the menu
E chooses and
supplies particular
level of effort
The realization of
the state of nature
Outcome
and
payoffs

46. 24
analysis by assuming that a fixed level of investment I is required for any project.
Consequently the project gross profit Z
~
is a random variable defined as:
ZH
with probability p(e)
ZL
with probability (1-p(e)), ZL
<ZH
3.2. Equilibrium contracting with homogenous projects
Starting from the single project type case we put off the adverse selection problem
focusing only on the moral hazard of entrepreneur. Assume that E can choose every level of
effort from the interval ],[ 10
eee∈ such that: 1)()(0 10
<<< epep . Because E’s effort choice
may be different for the non-contingent and risky payoff allocations, we define *
e as the
equilibrium effort level in case of fully insured allocation, and eˆ as equilibrium effort level
for all other allocations.
3.2.1. Observable effort
First we consider the equilibrium when there is no informational asymmetry in the
market. VC observes the effort level made by E and uses it as contract condition. Here we
keep our assumption that the reservation value of the profits in the competitive market still
zero. For each effort level ],[ 10
eee∈ VC’s problem is to maximize E’s utility subject to no
expected loss:
)}()())(1()()({max
,
ehCUepCUepV LHE
CC LH
−−+= (3.1)
s.t. IZepZepCepCep LHLH
−−+≤−+ ))(1()())(1()( (3.2)
In the competitive environment all payoff allocations that will bring positive profits to VC
are non-optimal because in this case he can provide to E better allocation. Hence equilibrium
solutions will always satisfy inequality constraint (3.2) as equality:
IZepZepCepCep LHLH
−−+=−+ ))(1()())(1()( (3.3)
The solution for this problem is the payoff schedule: )}(),({ **
eCeC LH
for each level of effort.
As we have shown in Subchapter 2.2, relying on E’s risk aversion, the best solution for
this problem provides equal payoff to E under both outcomes of the project:

47. 25
IZepZepeCeC LHLH
−−+== ))(1()()()( ** (3.4)
Given this set of available contracts E’s choice of effort level will be:
)}()))(1()(({maxarg)}())(({maxarg **
ehIZepZepUeheCUe LH
ee
−−−+=−= (3.5)
Proposition 3.1: In case of single entrepreneur and observable effort, the optimal
equilibrium contract is )}(),(,{ *****
eCeCe LH
such that:
1. IZepZepeCeC LHLH
−−+== ))(1()()()( **
2. )}()))(1()((max{arg*
ehIZepZepUe LH
e
−−−+=
When in the market there is a single project type and the effort level is observable, in the
equilibrium E gets fixed payment and exerts effort level that maximizes project’s profits. This
state we will name the benchmark first-best allocation.
3.2.2 Unobservable effort
Now we assume that VC cannot observe the effort chosen by the entrepreneur.
Accordingly, it is impossible to include the effort in the contract directly. However, VC must
offer a compensation schedule (CH
,CL
) that will not result in expected losses given that the
effort is eventually set by the entrepreneur. We will use the term “project budget” proposed
by VC to name the right side of (3.3) that can be also defined as the project expected net
profits. If the entrepreneur exerts lower effort than was assumed in (3.3), VC will suffer
expected loss, while expected profits will occur if actual effort exceeds the level assumed in
(3.3). An equilibrium contract induces the entrepreneur to exert the effort level
anticipated VC.
If 0*
ee = then the best compensation schedule that VC can offer the entrepreneur without
sustaining expected losses is the “full insurance” allocation associated with the lowest
possible effort, as in (3.4). For any 0*
ee > , when effort is unobservable, VC cannot offer the
non-contingent contract defined in (3.4) because given that contract the entrepreneur will
always prefer to exert the lowest possible effort, thus producing negative profits to VC:
0*0*
)())(()())(( eeeheCUeheCU >∀−>− (3.6)