We conjecture that venture capitalists and their investors often fall prey to what is known as ?collective conservatism.? We investigate this conjecture by analyzing boilerplate provisions in limited partnership agreements.
When investors accept suboptimal boilerplate provisions it is not because they believe that the standardized terms and conditions sufficiently align the interests of investors and fund managers, but merely because they think their peers, including their competitors, prefer to include them in the limited partnership agreement. We find that the financial crisis has facilitated some notable deviations in the boilerplate provisions that are aimed at returning confidence in the venture capital industry. We argue that a gradual shift may be taking place towards more investor-favorable limited partnership agreements or separate accounts and pledge funds arrangements. These shifts - which do not lead to significant changes in the limited partnership agreements - appear to be particularly effective for bigger funds that increasingly focus on later stage investments. We show that early stage funds are more inclined to enter into innovative collaborative agreements. Collaborative agreements differ from the traditional limited partnership agreements in that they focus less on curtailing principal agent problems and more on joint development and value creation.
Derivatives are the ‘bad boys’ of modern finance: exciting, dangerous, and fundamentally misunderstood. These misunderstandings stem from the failure of scholars and policymakers to fully appreciate the unique legal and economic structure of...Read more
We draw on new data and theory to examine how private market contracts adapt to serve multiple goals, particularly the social-benefit goals that impact funds add to their financial goals. Counter to the intuition from multitasking models (...Read more
The past decade saw the rise of both “founder-friendly” venture financings and non-traditional investors, frequently with liquidity constraints. Using detailed contract data, we study open-end mutual funds investing in private venture-backed...Read more
The digital transformation is disrupting the financial sector. Venture capital, private equity and hedge funds are also affected. We see more and more firms implement emerging technologies in their investment process. There are several common...Read more