The Effects of Venture Capitalists' Characteristics on the Structure of the Venture Capital Deal*

Abstract

If venture capitalists possess different specializations and management philosophies, the same may be true regarding preferences for investment vehicles. The characteristics of debt which give investors extra safety and protection will make it unpalatable in many venture capital deals. Debt may only be appropriate for venture capital firms requiring steady cash flows from their portfolio firms or for venture capitalists investing in deals with characteristics conducive to debt finance. An investment in common stock places investors on the same level as the management team and thus will emphasize the partnership relationship between the venture capitalist and entrepreneurial team. Deal pricing, financing structure, covenants, and the degree of control exercised over the portfolio firm by the venture capitalist are areas in which casual empirical evidence presently dominates empirical research, hypothesis testing, and careful case study analysis. A survey instrument to examine venture capital investment structure was designed and pretested among eight venture capitalists.

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