Optimizing Entrepreneurial Ventures: A theoretical approach

Nicklas Baaring Herstal

Student thesis: Master thesis


Venture Capital is a concept of specialization within young fast growing firms with large up-side potential. Entrepreneurs with unique skills conceptualized in a promising idea find support in professionalized capital firms offering managerial advice and finance in order for the venture to overcome obstacles in a journey towards success. The past decades have shown extensive improvements in the venture capital firms’ (VCs) ability to create value but whether these results are entitled to value creation or wealth transferring skills is ambiguous. Nevertheless, VC-backed firms are less risky, more successful and more promising. I investigate how current and prospective entrepreneurs can optimally engage in such relationships to acquire requested needs of finance and managerial advice. This is because of the possibility to enlighten the entrepreneurs on how to prepare for crucial transitions and become agile in the changing stages of a venture. Further, I intend to educate prospective entrepreneurs on the relevant mechanisms of a VC-backed venture as their possible future investors are highly professionals on this matter. The conclusions made origin from a thorough theoretical analysis on a specific part of the venture capital field. Based on the analysis of three closely linked mathematical models, I present advice of academic character on how to establish an optimal venture. By applying the relevant underlying theories of agency theory and game theory, I analyze the mathematical models and reach the results with the use of contracting theory. I find that in a cash flow right approach, the entrepreneur must establish a long-term relationship with a VC instead of asking for advisors and pure financiers. Combining the request of external capabilities in one actor mitigates moral hazard and increases the NPV of the entrepreneur. The optimal financial contract imply convertible securities on underlying time-varying shares. The entrepreneur must maximize in global optimums and look ahead of time to establish the proper present solution. Contingent and stage financing decides the possibilities on this matter. I find that this paper provides insightful knowledge on crucial parts of optimizing current and prospective entrepreneurs’ future development, although aware that there is a need for further research before the findings can be generalized. In connection with recommended literature, this paper can provide a thorough understanding of the mechanisms in place and what to focus on in the long-term perspective, when engaging with venture capitalists.

EducationsMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
Publication date2015
Number of pages125