Venture Capital and Agency Theory: An Empirical and Contemporary Study Identifying the Difference in Agency Costs of Founder-CEOs and Professional CEOs in Technology Startups

Daniel Jonas Bertelsen & Alexander Pazdecki Clarke

Student thesis: Master thesis

Abstract

In the recent decade, technology startups have been at the center of everyone’s attention. However, little academic attention has been paid towards research of how these firms react to financial theory.
In this paper, the authors aim to shed light upon a relatively untouched subject in modern academics. Their endeavor is to investigate whether or not potential differences in agency costs between professional CEOs and founder CEOs within technology startups, exists – and if so, how do they differ?
Not only is the paper of a highly unique nature since very little, contemporary research has been carried out on the subject; the paper also manages to uncover numerous noteworthy findings which lays the foundation from where additional research can be conducted. The research carried out shows consistent and sound indication which culminates in the following findings: 1) Consistent difference in agency costs between professional CEOs and founder CEOs. 2) Consistent differences in agency costs between US and European technology startups and 3) Tobin’s Q a more sound measurement than exit valuation.
The paper manage to demonstrates substantial evidence suggesting that professional CEOs yield a higher level of agency costs when compared to founder CEOs. The research takes multiple views and approaches where it first crafts a multiple regression model to test whether or not some chosen variables have a significant effect on exit valuation. Secondly, the model then tests for potential differences between professional CEOs and founder CEOs by incorporating the dummy variable methodology. Lastly, the authors suggest a new model which replaces the static size of “exit valuation” as the dependent variable, with the more dynamic and representative “Tobin’s Q” as the dependent variable. Although the research carries some shortcomings, it offers valuable insight from which further research can be conducted.
Additionally, the paper aims to contribute not only to the world of academia, but likewise to the world of practitioners within venture capital. From the research and findings, the paper offers valuable insight to venture capital investors on what potential factors to consider when investing in a US-based or European-based technology startup.
Finally, from the research the authors can observe a consistent pattern, which make up strong evidence that professional CEOs do yield a higher level of agency costs within technology startups.

EducationsMSc in International Business, (Graduate Programme) Final ThesisMSc in Finance and Investments, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2016
Number of pages145